<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 26, 1998
REGISTRATION NO. 333-44267
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO.1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
HAPPY KIDS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 5130 13-3473638
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
100 WEST 33RD STREET, SUITE 1100
NEW YORK, NEW YORK 10001
(212) 695-1151
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
JACK M. BENUN
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
HAPPY KIDS INC.
100 WEST 33RD STREET, SUITE 1100
NEW YORK, NEW YORK 10001
(212) 695-1151
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
----------------
COPIES TO:
DAVID J. SORIN, ESQ. ERIC M. LERNER, ESQ.
RICHARD S. MATTESSICH, ESQ. ROSENMAN & COLIN LLP
BUCHANAN INGERSOLL 575 MADISON AVENUE
500 COLLEGE ROAD EAST NEW YORK, NY 10022-2585
PRINCETON, NJ 08540 (212) 940-8800
(609) 987-6800 ----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 26, 1998
PROSPECTUS
2,000,000 SHARES
LOGO HAPPY KIDS
COMMON STOCK
-----------
All of the shares of Common Stock offered hereby (the "Offering") are being
issued and sold by Happy Kids Inc. ("Happy Kids" or the "Company"). Prior to
the Offering, there has been no public market for the Common Stock of the
Company. It is currently anticipated that the initial public offering price
will be between $9.00 and $11.00 per share. See "Underwriting" for information
relating to the factors considered in determining the initial public offering
price.
The Company's Common Stock has been approved for quotation, subject to notice
of effectiveness, on the Nasdaq National Market under the trading symbol
"HKID."
SEE "RISK FACTORS" COMMENCING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
UNDERWRITING
PRICE DISCOUNTS AND PROCEEDS TO
TO PUBLIC COMMISSIONS (1) COMPANY (2)
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<S> <C> <C> <C>
Per Share................................. $ $ $
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Total (3)................................. $ $ $
</TABLE>
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(1) For information regarding indemnification of the Underwriters by the
Company and certain shareholders and certain compensation payable to the
Representatives of the Underwriters, see "Underwriting."
(2) Before deducting expenses of the Offering estimated to be approximately
$800,000. Of such proceeds, the Company will use $2.0 million to make a
partial payment of amounts due to current shareholders of the Company. See
"Use of Proceeds."
(3) The Underwriters have been granted a 30-day option to purchase up to an
additional 300,000 shares of Common Stock from the Company solely to cover
over-allotments, if any, on the same terms and conditions as the shares
offered hereby. If the Underwriters exercise such option in full, the total
"Price to Public," "Underwriting Discounts and Commissions" and "Proceeds
to Company" will be $ , $ and $ , respectively. See "Underwriting."
-----------
The shares of Common Stock are offered by the several Underwriters, when, as
and if delivered to and accepted by the Underwriters, subject to their right to
reject any order in whole or in part and to certain other conditions. It is
expected that delivery of the Common Stock will be made on or about , 1998
at the offices of Ladenburg Thalmann & Co. Inc., New York, New York.
LADENBURG THALMANN & CO. INC. CRUTTENDEN ROTH
INCORPORATED
The date of this Prospectus is , 1998
<PAGE>
[The inside front cover contains a picture of a child dressed in certain of
the Company's apparel products and a bubble expression "Everyday is a Happy
Kids day!" In the lower right hand corner of the inside front cover are
pictures of the Company's clothing. The inside front cover is followed by a
two page gatefold layout containing children dressed in certain of the
Company's apparel products beneath which appear the words "We put the fun in
activewear!" and pictures of certain articles of the Company's clothing. Above
the children appear logos relating to the Company's licensing or private label
relationships with each of: Ocean Pacific, Sesame Street for KMart, B.U.M.
Equipment, Nickelodeon's Rugrats and AND 1.]
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING MAINTAINING A MARKET IN THE COMMON STOCK ON BEHALF OF THE
UNDERWRITERS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
All trade names, trademarks or service marks appearing in this Prospectus
are the property of their respective owners and are not the property of the
Company.
<PAGE>
PROSPECTUS SUMMARY
The following material is qualified in its entirety by the more detailed
information and the financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Unless otherwise indicated, all
information in this Prospectus (i) gives effect to the Reorganization (as
defined below) that will be effected immediately prior to the effectiveness of
this Offering (see "The Company," "Capitalization" and "Management --
Compensation Committee Interlocks and Insider Participation"), (ii) gives
effect to a 34,875-for-1 split of the Common Stock effected December 31, 1997
and (iii) assumes no exercise of the Underwriters' over-allotment option. In
this Prospectus, the term "Company" includes Happy Kids Inc. and its wholly-
owned subsidiaries, after giving effect to the Reorganization. This Prospectus
contains forward-looking statements that involve material risks and
uncertainties. The Company's actual results could differ materially from the
results discussed in such forward-looking statements. Factors that could cause
or contribute to such differences include, but are not limited to, those set
forth in the section entitled "Risk Factors" and elsewhere in this Prospectus.
THE COMPANY
Happy Kids is a designer and marketer of custom-designed, licensed and
branded children's apparel. The Company produces high-quality, coordinated
apparel programs, including knit tops, bottoms, overalls, shortalls, coveralls
and swimwear, for newborns, infants, toddlers, boys and girls (collectively,
"playwear"). The Company's major licenses include Nickelodeon's Rugrats, AND 1,
B.U.M. Equipment and Ocean Pacific. In late 1997, the Company acquired licenses
to Warner Brothers' Scooby Doo, ACA Joe and E.N.U.F. Internationale, and, in
early 1998, the Company agreed to acquire a license for Jim Henson's Kermit and
Friends. The Company also designs and delivers private label branded playwear
programs for leading retailers, including Sesame Street for KMart, New Legends
for Kids R Us and Canyon River Blues for Sears and recently began participating
in Nickelodeon's Nick Universe program being launched by Kids R Us. The
Company's strategy is to work closely with its customers to design and market
coordinated playwear programs resulting in gross margins that the Company
believes are higher than those typically generated from sales of non-licensed
or non-private label branded playwear.
In 1995, to leverage its customer relationships, its popular licenses and
brand names and its reputation for quality products and reliable delivery, the
Company initiated its current sales strategy under which customers order
specific quantities of goods on a fixed-price basis six to nine months in
advance of a selling season. For 1997, substantially all of the Company's
apparel was produced upon receipt of customer orders. Based on orders received
as of January 31, 1998, the Company had backlog of $107.7 million, which it
expects to fill over the following six to nine months.
Also in 1995, the Company began focusing on the development of a diversified
portfolio of popular, established and well-recognized licensed properties and
branded private label arrangements. Consequently, the Company has shifted its
product mix to higher margin licensed and private label apparel programs from
lower margin house brands. As a result of this change in product mix combined
with the implementation of the Company's sales strategy, net sales and gross
margins increased to $106.7 million and 25.2% in 1997, from $90.7 million and
23.0% in 1996, and from $79.8 million and 18.5% in 1995. Additionally, the
Company has been able to leverage the popularity and goodwill associated with
its licensed properties and brand names to promote sales, rather than
undertaking costly marketing initiatives.
The Company's playwear is designed by 42 in-house designers and graphic
artists organized in teams dedicated to each of the Company's licensed
properties and private label programs. Each team works closely with licensors,
customers and contract manufacturers, utilizing state-of-the-art CAD
3
<PAGE>
systems, to design coordinated products featuring textured fabrications and
detailed graphics. The Company believes that its customers rely on its ability
to design, have manufactured and deliver on a timely basis commercially
successful apparel programs. The Company markets its playwear primarily to
mass-market retailers, mid-tier distributors and department stores, including
KMart, Kids R Us, Price/Costco, Sears and WalMart.
The Company's products are manufactured to exacting quality standards and
specifications by over 50 unaffiliated, foreign and domestic contract
manufacturers. The Company uses third-party manufacturers to eliminate the
significant capital investment requirements associated with maintaining
manufacturing facilities. The Company has developed long-standing relationships
with many of its contract manufacturers and, in 1997, approximately 66.8% of
the Company's products were manufactured by contract manufacturers which have
been utilized by the Company for over three years. The Company's ability to
design and have manufactured high-quality playwear is evidenced by the
Company's product return rates of 1.9% and 3.3% in 1997 and 1996, respectively.
The Company's growth strategy is to continue to leverage the strength of its
diversified portfolio of licensed properties, private label relationships and
the quality of its playwear products. The key elements of this strategy
include: (i) to increase sales to existing accounts by expanding product
categories and sizes incorporating the Company's existing licensed properties
and private label relationships; (ii) to expand the Company's customer base by
selling to additional mass-market retailers, mid-tier distributors, department
stores, specialty retailers and sporting goods chains; (iii) to leverage newly
acquired licensed properties and private label relationships; and (iv) to add
new licenses and private label relationships based on established and popular
brands.
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered hereby............. 2,000,000 shares
Common Stock to be outstanding after the
Offering(1)............................ 9,750,000 shares
Use of proceeds......................... Repayment of a portion of the
Company's outstanding line of credit;
repayment of a $2.0 million portion
of promissory notes to be issued to
current shareholders in connection
with the termination of the Company's
S Corporation status.
Nasdaq National Market symbol........... HKID
</TABLE>
- --------
(1) Excludes 800,000 shares of Common Stock reserved for issuance upon the
exercise of options or stock purchase rights issuable under the Company's
1997 Stock Option Plan, none of which shares or options had been issued or
granted as of December 31, 1997. On February 24, 1998, the Company issued
options to purchase 100,000 shares of Common Stock, none of which are
presently exercisable. See "Management--1997 Stock Option Plan."
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and related Notes
thereto appearing elsewhere in this Prospectus and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The selected
financial data have been derived from the Consolidated Financial Statements of
the Company. The consolidated statements of operations for each of the three
years in the period ending December 31, 1997 have been audited by the Company's
independent auditors and are included elsewhere in this Prospectus. The
selected statement of operations data for the year ended December 31, 1994 have
been derived from the audited Consolidated Financial Statements of the Company
not included herein. The selected statement of operations data for the year
ended December 31, 1993 have been derived from the unaudited Consolidated
Financial Statements of the Company not included herein, which, in the opinion
of management, reflect all adjustments (consisting solely of normal recurring
adjustments) necessary for a fair presentation of the results for these periods
and as of such dates. The selected financial data provided below is not
necessarily indicative of the future results of operations or financial
performance of the Company.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................... $64,747 $74,520 $79,828 $90,723 $106,673
Gross profit................ 15,279 15,276 14,792 20,837 26,925
Operating expenses:
Selling, design and
shipping................. 5,765 5,962 7,986 7,686 10,058
General and
administrative........... 5,413 6,358 6,830 7,684 8,399
------- ------- ------- ------- --------
Total operating
expenses............... 11,178 12,320 14,816 15,370 18,457
------- ------- ------- ------- --------
Operating income (loss)..... 4,101 2,956 (24) 5,467 8,468
Interest expense, net....... 1,160 1,631 2,375 2,980 3,803
------- ------- ------- ------- --------
Income (loss) before pro
forma income taxes......... 2,941 1,325 (2,399) 2,487 4,665
Pro forma net income(1)..... $ 1,657 $ 703 $(1,463) $ 1,497 $ 2,704
======= ======= ======= ======= ========
Pro forma net income per
share...................... $ 0.20 $ 0.08 $ (0.18) $ 0.18 $ 0.33
======= ======= ======= ======= ========
Pro forma weighted average
shares outstanding(2)...... 8,305 8,305 8,305 8,305 8,305
Supplemental pro forma net
income per share(3)........ $ 0.42
========
Supplemental pro forma
weighted average shares
outstanding(2)(4).......... 9,885
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA(5) AS ADJUSTED(6)
------- ------------ --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................... $ 6,419 $ 5,028 $22,828
Total assets.............................. 44,952 45,561 45,561
Due to bank............................... 24,863 24,863 9,063
Due to shareholders....................... 1,400 6,954 4,954
Capital lease obligations................. 68 68 68
Shareholders' equity...................... 6,644 1,699 19,499
</TABLE>
5
<PAGE>
(1) The Company has operated as an S Corporation for federal and New York state
income tax purposes since 1988. Two of the wholly-owned subsidiaries are C
Corporations and, accordingly, have been taxed at the appropriate corporate
federal and state tax rates. The historical Consolidated Financial
Statements do not include a provision for federal and state income taxes
for such periods for those subsidiaries which have elected to be treated as
S Corporations. A provision for state income taxes has been made for those
states not recognizing S Corporation status. Pro forma net income has been
computed as if the Company had been fully subject to federal and state
income taxes based on the tax laws in effect during the respective periods.
See Notes A and P to the Consolidated Financial Statements.
(2) Reflects the weighted average shares outstanding and gives pro forma effect
to the additional shares that the Company would have to sell at the assumed
initial public offering price of $10.00 per share to repay the estimated
$5.6 million of promissory notes to be issued to the shareholders in
connection with the termination of the Company's S Corporation status. The
Company intends to repay $2.0 million of these notes with a portion of the
net proceeds of the Offering.
(3) Supplemental pro forma net income per share was computed by adjusting pro
forma net income per share to reflect a reduction in interest expense and
related fees, net of taxes, of $1.4 million in the year ended December 31,
1997, resulting from the assumed repayment of debt with a portion of the
net proceeds of the Offering as if such repayment had occurred on January
1, 1997, consisting solely of repayment of $15.8 million outstanding under
the Company's $42.0 million line-of-credit (of which $24.9 million was
outstanding at December 31, 1997).
(4) Gives pro forma effect to the additional shares that the Company would have
to sell at the assumed initial public offering price of $10.00 per share to
repay the debt referenced in footnote 3 above.
(5) Adjusted to give effect to (i) the deferred tax asset of approximately
$609,000, resulting from the termination of the Company's status as an S
Corporation and (ii) approximately $5.6 million decrease in shareholders'
equity and a corresponding increase in due to shareholders at December 31,
1997, of which $2.0 million has been classified as a current liability to
be repaid with a portion of the net proceeds of the Offering, resulting
from an issuance of promissory notes to certain shareholders related to the
termination of the Company's status as an S Corporation. See "The Company,"
"Capitalization," "Management--Compensation Committee Interlocks and
Insider Participation" and Note P to the Consolidated Financial Statements.
(6) Adjusted to reflect the sale of 2,000,000 shares of common stock at an
assumed offering price of $10.00 per share and the anticipated application
of the net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
6
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be carefully considered before investing in the
Common Stock. Except for historical information contained herein, the
information in this Prospectus contains forward-looking statements that
involve risks and uncertainties, such as statements concerning the Company's
plans, objectives, expectations and intentions. The cautionary statements made
in this Prospectus should be read as being applicable to all related forward-
looking statements wherever they appear in this Prospectus. The Company's
actual results could differ materially from those discussed in the Prospectus.
Factors that could cause or contribute to such differences include those
discussed below, as well as those discussed elsewhere herein.
DEPENDENCE ON LICENSE AGREEMENTS
A majority of the Company's net sales are derived from the sale of products
incorporating licensed properties. For 1997, B.U.M. Equipment, Nickelodeon's
Rugrats and Ocean Pacific accounted for 18.9%, 11.3% and 11.1%, respectively,
of the Company's net sales. In 1996, B.U.M. Equipment, Ocean Pacific and
Jordache accounted for 19.8%, 14.5% and 12.4%, respectively, of the Company's
net sales. No other licensed property accounted for over 10% of the Company's
net sales in 1997 or 1996. The Company's current licensing arrangements
contain initial terms of between eighteen months and five years, and typically
include multiple renewal options of between one and five years, subject to
certain conditions. The present terms of the Company's current license
arrangements will expire between December 1999 and December 2002. The
Company's license arrangements also include payment obligations and certain
covenants, the breach of which by the Company could result in the termination
of the applicable licensing arrangement. The Company believes that it is
currently in compliance with all material provisions of its existing licensing
arrangements and has no reason to believe that any events are likely to occur
that would permit any of its licensors to terminate their respective licenses.
In addition, to maintain and renew such licenses, the Company must continue to
satisfy certain conditions, including minimum sales requirements. There can be
no assurance that the Company will achieve such minimum sales requirements or
that any of its licenses will be extended beyond their current expirations on
terms acceptable to the Company, if at all. The Company has limited prior
license renewal experience. The loss of any major license could materially
adversely affect the Company's business, financial condition or results of
operations.
The Company's future success and growth is dependent, in part, upon its
diversified portfolio of licensed properties and its ability to identify
properties that will appeal to consumers, its ability to obtain licenses for
such properties and its ability to produce marketable playwear products based
upon such licenses. There can be no assurance, however, that the Company will
be able to identify suitable properties, secure additional licenses, maintain
such a portfolio or produce marketable playwear.
Apparel industry licenses typically are granted with respect to specific
product categories, sizes and channels of distribution, and may be either
exclusive or non-exclusive. Certain of the Company's licenses are non-
exclusive. The granting of licenses by any of the Company's licensors within
the Company's licensed product categories, sizes or channels of distribution
may materially adversely affect the Company's future sales generated under any
such licenses. In addition, as a result of increased competition among
children's apparel companies for licenses, the Company may, in the future, be
required to pay licensors higher royalties and higher minimum guaranteed
payments in order to obtain attractive licenses. There can be no assurance
that licenses will not be granted to the Company's competitors within
categories in which the Company has a non-exclusive license. In addition, the
Company relies upon its licensors to protect licensed properties and to
enforce trademark and tradename rights. There can be no assurance that
licensors will adequately protect the licensed properties or enforce such
rights, if at all. Failure to protect and enforce trademark and tradename
rights by such licensors
7
<PAGE>
could reduce the value of such rights and have a material adverse effect on
the Company's business, financial condition or results of operations. See
"Business--Products and Licenses."
DEPENDENCE ON PRIVATE LABEL RELATIONSHIPS
From time to time the Company enters into private label relationships for
the design and marketing of children's apparel. For 1997, 14.3% of the
Company's net sales were derived from its arrangement with KMart for the
Company's Sesame Street products. No other private label relationship
accounted for over 10% of the Company's net sales in 1997, and there were no
private label relationships accounting for over 10% of the Company's net sales
in 1996. All sales made under a private label relationship are made on a
purchase order basis, rather than pursuant to contract, and there are no long-
term contracts with respect to any private label relationships. There can be
no assurance that existing private label relationships will continue in the
future or that the Company will be able to obtain new private label
relationships on an ongoing basis, if at all.
DEPENDENCE ON CONTRACT MANUFACTURERS
Substantially all of the Company's products are manufactured by unaffiliated
foreign and domestic contract manufacturers. During 1997 and 1996, foreign
manufacturers produced approximately 93.4% and 91.2% of the Company's
products, respectively, with the remainder of products produced domestically.
The Company does not have long-term contracts or formal arrangements with any
of these manufacturers. Foreign manufacturing is subject to a number of risks,
including transportation delays and interruptions, political and economic
disruptions, tariffs, import and export controls and changes in governmental
policies. In addition, stringent controls, such as review and inspection of
fabrics, samples, specifications, fit and completed garments and factory
visits, must be undertaken to ensure the production of quality products.
Although the Company believes that it has instituted such controls, there can
be no assurance that such events will not occur in the future, resulting in
possible increases in costs and delays of product deliveries resulting in
losses of revenue and goodwill. During 1997 and 1996, various production
facilities located in Thailand accounted for an aggregate of 41.4% and 40.3%
of the Company's manufactured products, respectively, and various production
facilities in Hong Kong accounted for an aggregate of 30.7% and 37.5% of the
Company's manufactured products, respectively. No other country accounted for
10% or more of the Company's manufactured products during 1997 or 1996. In
addition, two manufacturing facilities located in Hong Kong accounted for
11.0% and 13.0%, respectively, of the Company's manufactured products during
1997 and 11.0% and 23.0%, respectively, of the Company's manufactured products
during 1996. No other single manufacturer accounted for 10% or more of the
Company's manufactured products during 1997 or 1996. There is competition for
production capacity of children's apparel manufacturers and the Company has,
in the past, temporarily lost access to the manufacturing capacity of its
preferred manufacturers to its competitors. While the Company believes that
alternate sources of manufacturing are available if the need were to arise,
there can be no assurance that the supply of such alternate facilities would
be available on commercially reasonable terms, if at all. Any substantial
delay in locating, or inability to locate, acceptable alternate sources of
manufacturing could have a material adverse affect on the Company's business,
financial condition or results of operations. See "Business--Manufacturing."
RELIANCE ON KEY CUSTOMERS
The Company's customer base has been and continues to be highly
concentrated. Sales of the Company's products to each of Price/Costco, KMart
and Kids R Us accounted for approximately 17.4%, 14.3% and 11.0% of net sales,
respectively, during 1997. In addition, sales of the Company's products to
each of Kids R Us and WalMart accounted for 21.5% and 13.4% of net sales,
respectively, during 1996, while sales of the Company's products to each of
Kids R Us, WalMart and J.C. Penney accounted for 18.3%, 12.9% and 10.0% of net
sales, respectively, during 1995. Based upon historical
8
<PAGE>
and recent results and existing relationships with customers, the Company
believes that a substantial portion of its net sales and gross profits will
continue to be derived from a small number of large customers. The Company had
backlog of $107.7 million as of January 31, 1998, which it expects to fill in
the following six to nine months; however, consistent with industry practice,
these orders are not contractual commitments by customers to purchase products
from the Company and, therefore, may be cancelled by such customers. Although
the Company has not experienced significant cancellations in the past, there
can be no assurance that some portion of these orders will not be cancelled. A
significant reduction in orders from, the cancellation of a significant
portion of orders by, or the termination of the Company's relationship with,
any of its larger customers could have a material adverse effect on the
Company's business, financial condition or results of operations. There can be
no assurance that the Company's larger customers will continue to place orders
with the Company or that orders by such customers will continue at their
previous levels. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Merchandising" and "--
Backlog."
DEPENDENCE ON ACCESS TO CREDIT FACILITIES
Historically, the Company has relied heavily on its access to credit
facilities to fund its operations. Substantially all of the Company's assets
are subject to security interests granted by the Company to its lenders.
Although the Company has never had a payment default, it has, from time to
time, been in violation of certain financial covenants under its credit
facilities. While the Company's lenders have waived such violations in the
past, there can be no assurance that such violations may not recur in the
future or that if such violations do recur, that the Company's lenders will
grant waivers in the future on terms acceptable to the Company, if at all.
Accordingly, there can be no assurance that the Company will be able to retain
its current access to credit in the future or successfully obtain alternative
sources of credit on commercially reasonable terms. In addition, the Company's
lenders have sole discretion to make or withhold advances under the Company's
existing credit line. There can be no assurance that the lenders will continue
to lend under the credit line. If the lenders were to exercise their
discretion to withhold advances, there could be a material adverse effect on
the Company's business, financial condition or results of operations.
RISKS ASSOCIATED WITH SIGNIFICANT GROWTH
The Company has enjoyed rapid growth which has placed, and could continue to
place, a significant strain on the Company's management, administrative and
operational resources. The Company remains vulnerable to a variety of business
risks generally associated with rapidly growing companies as well as risks
related to the broadening of its product offerings and the expansion of its
distribution channels. To manage growth effectively, the Company will be
required to continue to implement changes in certain aspects of its business,
expand its information systems and operations to respond to increased demands
and to develop, train and manage an increasing number of management level and
other employees. None of the Company's senior management previously has
managed a business of the Company's scale or scope or has experience managing
a publicly-held company. Accordingly, the Company's past growth cannot be
assumed to be indicative of its future operating results. In addition, failure
by the Company to continue to enhance operating control systems or the
encountering of unexpected difficulties during a continued stage of expansion
could adversely affect the Company's business, financial condition or results
of operations.
COMPETITION
The children's playwear industry is highly competitive and fragmented. The
Company competes with many companies engaged in the design, production and
distribution of children's apparel for newborns, infants, toddlers, boys and
girls. Some of the Company's competitors have longer operating histories and
financial, sales, marketing and design capabilities and other competitive
resources which
9
<PAGE>
are substantially greater than those of the Company. There can be no assurance
that other companies will not attempt to enter or expand their presence in any
of the Company's existing product categories or in new categories in which the
Company plans or may plan to develop products. The Company also faces
competition from its existing customers, who may themselves begin to produce
children's playwear directly. In addition, such customers have in the past
competed, and may continue in the future to compete, for available licensed
properties. Further, to the extent that the Company's customers or competitors
maintain or initiate private label programs, such customers or competitors
will compete with the Company's licensed and branded properties. The Company
also competes with other manufacturers of children's apparel for retail floor
space. No assurance can be given that additional floor space will be available
in retail stores to support expansion of products offered by the Company, or
that the floor space currently allocated to the Company's products will not be
reduced in the future. There can be no assurance that competition from the
foregoing sources will not adversely affect the Company's business, financial
condition or results of operations. See "Business--Products and Licenses" and
"--Industry and Competition."
SEASONALITY
Sales of children's apparel are seasonal. Consequently, the Company's
operating results have varied substantially from quarter to quarter, and the
Company expects that they will continue to do so. Generally, the Company has
experienced significantly higher net sales in the first and third quarters as
compared to the second and fourth quarters, although this may change from time
to time. The seasonality of the Company's business also affects borrowings
under the Company's lines of credit and its level of backlog, which fluctuate
in response to demand for the Company's products. Therefore, the results of
any interim period are not necessarily indicative of the results that may be
achieved for an entire year. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
CYCLICALITY AND TRENDS IN THE APPAREL INDUSTRY
The apparel industry is subject to rapidly changing consumer demands and
preferences. Although the Company focuses on what it believes to be
established and popular properties, there can be no assurance that consumers
will continue to favor the properties licensed by the Company or the products
designed and produced by the Company under private label relationships, and a
significant shift in consumer preferences could have a material adverse effect
on the Company's business, financial condition or results of operations. The
apparel industry is a cyclical industry heavily dependent upon the overall
level of consumer spending, with purchases of apparel and related goods
tending to decline during recessionary periods when disposable income is low.
A difficult retail environment could result in downward price pressure which
could adversely impact the Company's gross profit margins. Additionally, all
of the Company's customers are in the retail industry, which industry has
experienced significant changes and difficulties over the past several years,
including consolidation of ownership, increased centralization of buying
decisions, restructurings, bankruptcies and liquidations. While various
retailers, including some of the Company's customers, experienced financial
difficulties in the past few years, thereby increasing the Company's risk of
extending credit to such retailers, the Company's bad debt experience has been
immaterial. Financial problems of a retailer could cause the Company's factor
to limit the amount of credit extended to such retailer. If the Company's
factor were to impose such limitation, the Company could be required
to curtail business with such retailer or to assume additional credit risk
relating to such customer's receivables. The Company cannot predict what
effect, if any, continued or additional changes within the retail industry
will have on its business, financial condition or results of operations.
IMPORT RESTRICTIONS AND OTHER RISKS ASSOCIATED WITH INTERNATIONAL BUSINESS
During 1997 and 1996, various production facilities located in Thailand
accounted for 41.4% and 40.3% of the Company's manufactured products,
respectively, and various production facilities in Hong
10
<PAGE>
Kong accounted for 30.7% and 37.5% of the Company's manufactured products,
respectively. No other country accounted for 10% or more of the Company's
manufactured products during 1997 or 1996. The Company's products are subject
to bilateral textile agreements between the United States and a number of
foreign countries. Such agreements, which have been negotiated under the
framework established by the Arrangement Regarding International Trade in
Textiles, allow the United States to impose restraints at any time on the
importation of categories of merchandise that, under the terms of the
agreements are not currently subject to specified limits. The Company does not
own the right to import finished garments into the United States, but relies
on its contract manufacturers to obtain the necessary quotas. In the past, to
the extent that necessary import quotas have not been available with respect
to a particular source of supply, the Company has been able to find an
alternative source of supply. Accordingly, the availability of quotas has not
had a material effect upon the Company's business, financial condition or
results of operations. The Company's continued ability to source imported
products may be adversely affected by a significant decrease in available
import quotas as well as any additional bilateral agreements or unilateral
trade restrictions. In addition, a significant portion of the Company's
products are manufactured in Hong Kong. China recently resumed sovereignty
over Hong Kong. The Company cannot predict the effect, if any, this event will
have on its contract manufacturers in Hong Kong and there can be no assurance
that Hong Kong will not experience political, economic or social disruption as
a result of the resumption of Chinese sovereignty. In addition, there have
been a number of recent trade disputes between China and the United States
during which the United States has threatened to impose tariffs and duties on
some products imported from China and to withdraw China's "most favored
nation" trade status. The loss of such status for China, changes in current
tariff structures or the adoption by the United States of trade policies or
sanctions adverse to China could have a material adverse effect on the
Company's business, financial condition or results of operations. See
"Business--Manufacturing."
DEPENDENCE ON KEY PERSONNEL
The Company is substantially dependent upon the efforts and skills of its
executive officers, particularly Jack M. Benun, the Company's Chairman of the
Board, President and Chief Executive Officer, Mark J. Benun, the Company's
Executive Vice President and Secretary and Isaac Levy, the Company's Senior
Vice President. The loss of the services of any of these executive officers
could have a material adverse effect on the Company. The Company has entered
into an employment agreement with each of these three individuals and
maintains key man life insurance on Jack Benun in the amount of $3.0 million.
There can be no assurance that the departure of one or more of such key
personnel would not have a material adverse effect on the Company's results of
operations. Furthermore, there can be no assurance that the Company will be
successful in attracting and retaining the personnel it requires to conduct
its operations or to meet its future needs. See "Management--Executive
Compensation," "--Employment Agreements and Indemnification Agreements" and
"--Key Man Insurance."
CONTROL BY CURRENT SHAREHOLDERS
After consummation of the Offering, Jack Benun, Mark Benun and Isaac Levy
together will own an aggregate of approximately 79.5% of the outstanding
shares of Common Stock of the Company. As a result, such individuals will be
able to control the outcome of all matters requiring shareholder approval and
will be able to elect all of the Directors of the Company. Such control, which
may have the effect of delaying, deferring or preventing a change of control
of the Company, is likely to continue for the foreseeable future and
significantly diminishes control and influence which future shareholders may
have in the Company. See "Principal Shareholders."
Jack Benun, Mark Benun and Isaac Levy have entered into a shareholders
agreement dated January 1, 1998. Such agreement provides tag-along rights to
each of the parties thereto in the event that any of the other parties elects
to sell his Common Stock. In addition, each party is granted a right
11
<PAGE>
of first refusal to purchase any shares of Common Stock offered for sale by
any other party to the agreement. Finally, Mark Benun has granted Jack Benun
an irrevocable proxy to vote any of the Company's voting securities
beneficially owned by Mark Benun for the life of Jack Benun.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market after the
Offering, or the perception that such sales could occur, could adversely
affect the market price for the Common Stock. In addition to the 2,000,000
shares offered hereby which will be freely tradable in the public market,
3,487,500 shares of Common Stock held by the existing shareholders will be
immediately eligible for sale in the public market in the quantities and
manner permitted by Rule 144 promulgated under the Securities Act of 1933, as
amended (the "Act"). Each officer, director and current holder of the
Company's Common Stock has agreed with the Underwriters not to offer, sell,
pledge or otherwise dispose of any shares of Common Stock for 180 days after
the date of this Prospectus without the prior written consent of Ladenburg
Thalmann & Co. Inc., on behalf of the Representatives. In addition, up to
800,000 shares of Common Stock reserved for issuance pursuant to the exercise
of options or stock purchase rights will be available for sale in the public
market from time to time pursuant to exemptions from registration requirements
or upon registration. See "Management--1997 Stock Option Plan" and "Shares
Eligible for Future Sale."
NO PRIOR PUBLIC MARKET FOR COMMON STOCK; DETERMINATION OF OFFERING PRICE;
VOLATILITY
Prior to the Offering, there has been no public market for the Common Stock.
Although the Company's Common Stock has been approved for quotation, subject
to notice of effectiveness, on the Nasdaq National Market, there can be no
assurance that an active trading market for the Common Stock will develop or
be sustained. The initial public offering price of the Common Stock offered
hereby will be determined by negotiations between the Company and the
Representatives of the Underwriters. There can be no assurance that the price
at which the Common Stock will trade in the public market after the Offering
will not be lower than the initial public offering price. The market price of
the Common Stock could be subject to significant fluctuations in response to
such factors as, among others, variations in the Company's anticipated or
actual results of operations, limited trading volume in the Common Stock,
general market conditions or the children's apparel industry in general. See
"Underwriting."
DILUTION
Purchasers of Common Stock in the Offering will experience immediate
substantial dilution in net tangible book value per share of Common Stock. See
"Dilution."
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BY-LAW AND OTHER PROVISIONS
The Company's Restated Certificate of Incorporation (the "Certificate of
Incorporation") authorizes the Board of Directors to issue, without
shareholder approval, 5,000,000 shares of Preferred Stock with voting,
conversion and other rights and preferences that could adversely affect the
voting power or other rights of the holders of Common Stock. The issuance of
Preferred Stock or of rights to purchase Preferred Stock could be used to
discourage an unsolicited acquisition proposal. In addition, the possible
issuance of Preferred Stock could discourage a proxy contest, make more
difficult the acquisition of a substantial block of the Company's Common Stock
or limit the price that investors might be willing to pay in the future for
shares of the Company's Common Stock. The Certificate of Incorporation also
provides that: (i) the affirmative vote of the holders of at least 80% of the
voting power of all outstanding shares of the capital stock of the Company
shall be required to adopt, amend or repeal any provision of the bylaws of the
Company or the provisions in the Certificate of Incorporation limiting the
liability of directors and provisions relating to certain management issues;
(ii) shareholders of the Company may not take any action by written consent;
(iii) special meetings of shareholders may be called only by the President,
the Chairman of the Board or a majority of the
12
<PAGE>
Board of Directors and business transacted at any such special meeting shall
be limited to matters relating to the purposes set forth in the notice of such
special meeting; and (iv) the Board of Directors, when evaluating an offer
related to a tender or exchange offer or other business combination, is
authorized to give due consideration to any relevant factors, including the
social, legal and economic effects upon employees, suppliers, customers,
creditors, the community in which the Company conducts its business, and the
economy of the state, region and nation. The foregoing provisions of the
Certificate of Incorporation could have the effect of delaying, deterring or
preventing a change in control of the Company. In addition, the Company is
subject to Section 912 of the New York Business Corporation Law (the "New York
Act") which, subject to certain exceptions, restricts certain transactions and
business combinations between a corporation and a shareholder owning 20% or
more of the Company's outstanding voting stock (an "interested shareholder")
for a period of five years from the date the shareholder becomes an interested
shareholder. These provisions may have the effect of delaying or preventing a
change of control of the Company without action by the shareholders and,
therefore, could adversely affect the price of the Company's Common Stock. See
"Description of Capital Stock--Preferred Stock," "--Limitation of Director
Liability" and "--Anti-takeover Provisions."
ABSENCE OF DIVIDENDS
The Company does not anticipate paying any dividends on its Common Stock in
the foreseeable future. See "Dividend Policy."
13
<PAGE>
THE COMPANY
Reorganization
The Company was incorporated in 1988 in New York under the name O'Boy Inc.
and changed its name to Happy Kids Inc. in December 1997. Historically, the
Company operated as separate business entities, with the first of such
entities commencing business operations in 1979, all under the common
ownership of the shareholders of the Company. Immediately prior to the
effectiveness of this Offering, all of such separate entities shall become
wholly-owned subsidiaries of the Company. See "Management--Compensation
Committee Interlocks and Insider Participation." The Company's principal
executive office is located at 100 West 33rd Street, New York, New York,
10001, and its telephone number is (212) 695-1151.
S Corporation Distribution
Prior to the termination of its S Corporation status, the Company intends to
declare a distribution (the "S Corporation Distribution") to the shareholders
of record of the Company on such date. Such shareholders consist solely of
Jack Benun, the Company's Chairman of the Board, President and Chief Executive
Officer, Mark Benun, the Company's Executive Vice President and Secretary, and
Isaac Levy, its Senior Vice President. Such distribution (estimated at $5.6
million as of December 31, 1997) represents substantially all of the Company's
remaining undistributed S Corporation earnings and will be evidenced by four-
year 5.7% promissory notes to be issued to such shareholders in connection
with the termination of the Company's S Corporation status. The actual amount
of the S Corporation Distribution will be adjusted to include the taxable
income of the Company for the period from January 1, 1998 through the day
preceding the date on which S Corporation status is terminated, less any state
income tax payable by the Company with respect to such income and any
distributions made to the current shareholders during that time period ($3.5
million was distributed to the current shareholders in 1997 and 1998 through
the date of this Prospectus in the form of dividends to fund their 1996 and
1997 tax liabilities resulting from the Company's status as an S Corporation).
Of the total S Corporation Distribution, $2.0 million of the net proceeds from
this Offering will be used to make a partial payment of amounts due under such
notes. See "Use of Proceeds" and "Management--Compensation Committee
Interlocks and Insider Participation."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered by the Company hereby (at an assumed initial public
offering price of $10.00 per share and after deducting estimated underwriting
discounts and commissions and Offering expenses) are estimated to be
approximately $17.8 million ($20.6 million if the Underwriters' over-allotment
option is exercised in full).
The Company expects to repay approximately $15.8 million ($18.6 million if
the Underwriters' over-allotment option is exercised in full) under its $42.0
million line of credit (adjusted seasonally to $47.0 million for the period
January 1, 1998 through April 30, 1998), of which $24.9 million was
outstanding at December 31, 1997. The line of credit terminates on December
31, 1998, and currently bears interest at an effective annual rate of 15.4%,
including a base interest rate of prime plus 4.0% per annum on the first $5.0
million outstanding and prime plus 1.0% per annum on outstanding balances in
excess of $5.0 million, and related fees. The prime rate was 8.5% as of
December 31, 1997. In connection with the Offering, the Company has executed a
letter of intent with respect to an amendment of its line of credit, which
amendment will be effective upon effectiveness of the Offering, subject to
certain conditions. In connection therewith, the personal guarantees of
certain current shareholders under the present terms of the line of credit
will be terminated and the collateral pledged
14
<PAGE>
by such shareholders will be released. See "Management Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources." The Company utilizes the line of credit for working capital
purposes. The Company also plans to use $2.0 million of the net proceeds from
the Offering to make a partial payment of amounts due to current shareholders
of the Company pursuant to four-year, 5.7% promissory notes to be issued in
connection with the termination of the Company's S Corporation status. See
"Management--Compensation Committee Interlocks and Insider Participation."
DIVIDEND POLICY
The Board of Directors intends to retain any earnings of the Company to
support operations and to finance expansion and does not intend to pay cash
dividends on the Common Stock in the foreseeable future. Any future
determination as to the payment of dividends will be at the discretion of the
Board of Directors, and will depend on the Company's financial condition,
results of operations, capital requirements and such other factors as the
Board of Directors deems relevant. The Company also currently is restricted by
the terms of its credit facility from paying cash dividends on its Common
Stock. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
Because the Company has operated as an S Corporation and will continue to do
so until immediately prior to the effectiveness of this Offering, a portion of
the net income of the Company in past years has been distributed to each of
Jack Benun, Mark Benun and Isaac Levy, solely for the payment of income taxes,
and an additional aggregate distribution of approximately $5.6 million
(adjusted to include the taxable income of the Company for the period January
1, 1998 to the day preceding the day on which S Corporation status is
terminated), evidenced by four-year, 5.7% promissory notes, will be made to
such individuals upon termination of the Company's S Corporation status. See
"Management--Compensation Committee Interlocks and Insider Participation."
15
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of December 31, 1997
was approximately $1.5 million or $0.20 per share. Pro forma net tangible book
value per share represents the Company's pro forma tangible assets less total
liabilities divided by the number of shares of Common Stock outstanding as of
December 31, 1997. Dilution per share represents the difference between the
amount per share paid by purchasers of shares of Common Stock in the Offering
made hereby and the pro forma net tangible book value per share of Common
Stock immediately after completion of the Offering. Without taking into
account any changes in such pro forma net tangible book value after
December 31, 1997, other than to give effect to the sale of 2,000,000 shares
of Common Stock by the Company in this Offering at an assumed initial public
offering price of $10.00 per share (after deducting the underwriting discount
and commissions and estimated Offering expenses) and the application of the
estimated net proceeds therefrom, the pro forma as adjusted net tangible book
value of the Company as of December 31, 1997 would have been $19.5 million, or
$2.00 per share. This represents an immediate increase in pro forma net
tangible book value of $1.80 per share to existing shareholders and an
immediate dilution in pro forma as adjusted net tangible book value of $8.00
per share to new investors. The following table illustrates this dilution on a
per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $10.00
Pro forma net tangible book value per share as of December 31,
1997............................................................ $0.20
Increase per share attributable to the Offering................. 1.80
-----
Pro forma as adjusted net tangible book value per share after the
Offering........................................................ 2.00
------
Dilution per share to new investors.............................. $ 8.00
======
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1997, giving effect to the assumed distribution of the Company's previously
undistributed S Corporation earnings through that date, the difference between
the existing shareholders and new investors with respect to the number of
shares purchased from the Company, at the assumed initial public offering
price of $10.00 per share, the total consideration paid and the average price
paid per share:
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders....... 7,750,000 79.5% $ 792,000 3.8% $ 0.10
New investors............... 2,000,000 20.5% 20,000,000 96.2% $10.00
--------- ----- ----------- -----
Total..................... 9,750,000 100.0% $20,792,000 100.0%
========= ===== =========== =====
</TABLE>
16
<PAGE>
CAPITALIZATION
The following table sets forth as of December 31, 1997 (i) the actual
capitalization and short-term borrowings of the Company, (ii) the pro forma
capitalization and short-term borrowings of the Company after giving effect to
an approximately $5.6 million decrease in shareholders' equity resulting from
a distribution of four-year, 5.7 percent promissory notes to certain
shareholders related to the termination of the Company's status as an S
Corporation, but without otherwise giving effect to this Offering and (iii)
the capitalization and short-term borrowings of the Company, as adjusted, to
give effect to the foregoing pro forma adjustments and the issuance and sale
by the Company of 2,000,000 shares of Common Stock offered hereby at an
assumed initial public offering price of $10.00 per share, less Offering
expenses and the anticipated application of the estimated net proceeds
therefrom. See "Use of Proceeds," "Management--Compensation Committee
Interlocks and Insider Participation" and Notes A and P to the Consolidated
Financial Statements. This table should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto, included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------
PRO PRO FORMA
ACTUAL FORMA(1) AS ADJUSTED(2)
------------- ------------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
SHORT-TERM DEBT:(3)
Due to bank..................... $ 24,863 $ 24,863 $ 9,063
Due to shareholders............. -- 2,000 --
Capital lease obligations....... 49 49 49
------------- ------------- -------------
Total short-term debt......... $ 24,912 $ 26,912 $ 9,112
============= ============= =============
LONG-TERM DEBT, NET OF CURRENT
PORTION:(3)
Due to shareholders............. $ 1,400 $ 4,954 $ 4,954
Capital lease obligations....... 19 19 19
------------- ------------- -------------
Total long-term debt.......... 1,419 4,973 4,973
------------- ------------- -------------
SHAREHOLDERS' EQUITY:
Preferred Stock, $.01 par value,
5,000 shares authorized; none
outstanding.................... -- -- --
Common Stock, $.01 par value,
30,000 shares authorized; 7,750
shares issued and outstanding
actual and pro forma; 9,750
shares issued and outstanding
pro forma as adjusted(4)....... 78 78 98
Additional paid-in capital...... 1,119 1,119 18,899
Retained earnings............... 5,447 502 502
------------- ------------- -------------
Total shareholders' equity.. 6,644 1,699 19,499
------------- ------------- -------------
TOTAL CAPITALIZATION.............. $ 8,063 $ 6,672 $ 24,472
============= ============= =============
</TABLE>
- -------
(1) Adjusted to give effect to (i) the deferred tax asset of approximately
$609,000, resulting from the termination of the Company's status as a S
Corporation and (ii) approximately $5.6 million decrease in shareholders'
equity and a corresponding increase in due to shareholders at December 31,
1997, resulting from an issuance of four-year, 5.7% promissory notes to
certain shareholders related to the termination of the Company's status as
an S Corporation, $2.0 million of which is short-term debt and the balance
of which is long-term debt. Existing due to shareholders of $1.4 million
shall be subject to the terms of such promissory notes. See
"Capitalization," "Use of Proceeds," "Management--Compensation Committee
Interlocks and Insider Participation" and Note P to Consolidated Financial
Statements.
(2) Adjusted to reflect the sale of 2,000,000 shares of Common Stock offered
by the Company hereby at an assumed offering price of $10.00 per share and
the anticipated application of the estimated net proceeds therefrom. See
"Use of Proceeds."
(3) For information concerning the Company's short-term and long-term debt,
see Notes F and H of Notes to Consolidated Financial Statements.
(4) Excludes 800,000 shares of Common Stock reserved for issuance upon the
exercise of options or stock purchase rights issuable under the Company's
1997 Stock Option Plan, none of which shares or options had been issued or
granted as of December 31, 1997. On February 24, 1998, the Company issued
options to purchase 100,000 shares of Common Stock, none of which are
presently exercisable. See "Management--1997 Stock Option Plan."
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and related Notes
thereto appearing elsewhere in this Prospectus and "Management's Discussion
and Analysis of Financial Condition and Results of Operations." The selected
financial data have been derived from the Consolidated Financial Statements of
the Company. The consolidated statements of operations for each of the three
years in the period ending December 31, 1997 and the consolidated balance
sheets at December 31, 1996 and 1997 have been audited by the Company's
independent auditors and are included elsewhere in this Prospectus. The
selected statement of operations data for the year ended December 31, 1994
have been derived from the audited Consolidated Financial Statements of the
Company not included herein. The selected balance sheet data as of December
31, 1995 have been derived from the audited Consolidated Financial Statements
of the Company not included herein. The selected balance sheet data as of
December 31, 1993 and 1994 and the selected statement of operations data for
the year ended December 31, 1993 have been derived from the unaudited
Consolidated Financial Statements of the Company not included herein, which in
the opinion of management, reflect all adjustments (consisting solely of
normal recurring adjustments) necessary for a fair presentation of the results
for these periods and as of such dates. The selected financial data provided
below is not necessarily indicative of the future results of operations or
financial performance of the Company.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................... $64,747 $74,520 $79,828 $90,723 $106,673
Gross profit........................ 15,279 15,276 14,792 20,837 26,925
Operating expenses:
Selling, design and shipping........ 5,765 5,962 7,986 7,686 10,058
General and administrative.......... 5,413 6,358 6,830 7,684 8,399
------- ------- ------- ------- --------
Total operating expenses........... 11,178 12,320 14,816 15,370 18,457
------- ------- ------- ------- --------
Operating income (loss)............. 4,101 2,956 (24) 5,467 8,468
Interest expense, net............... 1,160 1,631 2,375 2,980 3,803
------- ------- ------- ------- --------
Income (loss) before pro forma
income taxes ...................... 2,941 1,325 (2,399) 2,487 4,665
Pro forma net income(1)............. $ 1,657 $ 703 $(1,463) $ 1,497 $ 2,704
======= ======= ======= ======= ========
Pro forma net income per share...... $ 0.20 $ 0.08 $ (0.18) $ 0.18 $ 0.33
======= ======= ======= ======= ========
Pro forma weighted average shares
outstanding(2)..................... 8,305 8,305 8,305 8,305 8,305
Supplemental pro forma net income
per share(3)....................... $ 0.42
========
Supplemental pro forma weighted
average shares outstanding(2)(4)... 9,885
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1997
-------------------------------
PRO PRO FORMA
1993 1994 1995 1996 ACTUAL FORMA(5) AS ADJUSTED(6)
------- ------- ------- ------- ------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........ $ 5,125 $ 5,942 $ 3,260 $ 5,228 $ 6,419 $ 5,028 $22,828
Total assets........... 25,413 27,570 33,568 33,986 44,952 45,561 45,561
Due to bank............ 12,050 14,435 21,340 19,732 24,863 24,863 9,063
Due to shareholders.... 900 1,200 1,500 1,560 1,400 6,954 4,954
Capital lease
obligations........... -- 14 52 123 68 68 68
Shareholders' equity... 5,474 6,135 3,848 5,573 6,644 1,699 19,499
</TABLE>
18
<PAGE>
- --------
(1) The Company has operated as an S Corporation for federal and New York
state income tax purposes since 1988. Two of the wholly-owned subsidiaries
are C Corporations and, accordingly, have been taxed at the appropriate
corporate federal and state tax rates. The historical Consolidated
Financial Statements do not include a provision for federal and state
income taxes for such periods for those subsidiaries which have elected to
be treated as S Corporations. A provision for state income taxes has been
made for those states not recognizing S Corporation status. Pro forma net
income has been computed as if the Company had been fully subject to
federal and state income taxes based on the tax laws in effect during the
respective periods. See Notes A and P to the Consolidated Financial
Statements.
(2) Reflects the weighted average shares outstanding and gives pro forma
effect to the additional shares that the Company would have to sell at the
assumed initial public offering price of $10.00 per share to repay the
estimated $5.6 million of promissory notes to be issued to the
shareholders in connection with the termination of the Company's S
Corporation status. The Company intends to repay $2.0 million of these
notes with a portion of the net proceeds of the Offering.
(3) Supplemental pro forma net income per share was computed by adjusting pro
forma net income per share to reflect a reduction in interest expense and
related fees, net of taxes, of $1.4 million in the year ended December 31,
1997, resulting from the assumed repayment of debt with a portion of the
net proceeds of the Offering as if such repayment had occurred on January
1, 1997, consisting solely of repayment of $15.8 million outstanding under
the Company's $42.0 million line-of-credit (of which $24.9 million was
outstanding at December 31, 1997).
(4) Gives pro forma effect to the additional shares that the Company would
have to sell at the assumed initial public offering price of $10.00 per
share to repay the debt referenced in footnote 3 above.
(5) Adjusted to give effect to (i) the deferred tax asset of approximately
$609,000 resulting from the termination of the Company's status as an S
Corporation and (ii) approximately $5.6 million decrease in shareholders'
equity and a corresponding increase in due to shareholders at December 31,
1997, of which $2.0 million has been classified as a current liability to
be repaid with a portion of the net proceeds of the Offering, resulting
from an issuance of promissory notes to certain shareholders related to
the termination of the Company's status as an S Corporation. See "The
Company," "Capitalization," "Management--Compensation Committee Interlocks
and Insider Participation" and Note P to the Consolidated Financial
Statements.
(6) Adjusted to reflect the sale of 2,000,000 shares of common stock in the
Offering at an assumed offering price of $10.00 per share and the
anticipated application of the net proceeds therefrom. See "Use of
Proceeds" and "Capitalization."
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Happy Kids is a designer and marketer of custom-designed, licensed and
branded children's apparel. The Company produces high-quality, coordinated
apparel programs, including knit tops, bottoms, overalls, shortalls, coveralls
and swimwear, for newborns, infants, toddlers, boys and girls. The Company's
major licenses include Nickelodeon's Rugrats, AND 1, B.U.M. Equipment and
Ocean Pacific. In late 1997, the Company acquired licenses to Warner Brothers'
Scooby Doo, ACA Joe and E.N.U.F. Internationale, and, in early 1998, the
Company agreed to acquire a license for Jim Henson's Kermit and Friends. The
Company also designs and delivers private label branded playwear programs for
leading retailers, including Sesame Street for KMart, New Legends for Kids R
Us and Canyon River Blues for Sears and recently began participating in
Nickelodeon's Nick Universe program being launched by Kids R Us.
Prior to and including much of 1995, the Company's operating strategy
primarily focused on developing and marketing its own house brands. The
Company manufactured products for inventory under the Company's brands and
often concentrated on enhancing sales volume rather than focusing on a
combination of sales volume and gross margins. The Company believes that the
loss in 1995 was primarily attributable to these factors. In 1995, to leverage
its strong customer relationships, the Company initiated its current sales
strategy under which the Company's customers order specific quantities of
goods on a fixed-priced basis six to nine months in advance of a selling
season. As a result, for 1997, substantially all of the Company's playwear was
produced upon receipt of customer orders. Also in 1995, the Company elected to
concentrate on developing a diversified portfolio of popular, established and
well-recognized licensed properties and private label relationships and de-
emphasized its reliance on house brands, which have been a declining component
of the Company's net sales in each year since 1995. Since that time, the
Company's strategy has been to work closely with its customers to design and
market high-quality coordinated apparel programs resulting in gross margins
that the Company believes are higher than those typically generated from sales
of non-licensed or non-private label branded playwear.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information
derived from the Company's Consolidated Statements of Operations expressed as
a percentage of net sales unless otherwise noted:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Net sales................................................. 100.0% 100.0% 100.0%
Cost of goods sold........................................ 81.5 77.0 74.8
----- ----- -----
Gross profit.............................................. 18.5 23.0 25.2
Operating expenses:
Selling, design and shipping............................. 10.0 8.5 9.4
General and administrative............................... 8.5 8.5 7.9
----- ----- -----
Total operating expenses................................ 18.5 17.0 17.3
----- ----- -----
Operating income (loss)................................... 0.0 6.0 7.9
Interest expense, net..................................... 3.0 3.3 3.6
----- ----- -----
Income (loss) before income taxes......................... (3.0)% 2.7% 4.3%
===== ===== =====
</TABLE>
20
<PAGE>
1997 COMPARED TO 1996
Net Sales. Net sales increased $16.0 million, or 17.6%, to $106.7 million in
1997 from $90.7 million for 1996. The increase in net sales is attributable
primarily to increased sales of playwear incorporating the properties covered
by the Company's Rugrats license with Nickelodeon and increased sales to KMart
resulting in part from the 1997 commencement of its Sesame Street private
label program. This increase was partially offset by a decrease in net sales
of products incorporating properties covered by one of the Company's former
major licenses, which license currently represents only a small percentage of
net sales.
Gross Profit. Gross profit increased by $6.1 million, or 29.2%, to $26.9
million in 1997 from $20.8 million in 1996. The gross profit margin increased
to 25.2% in 1997 from 23.0% in 1996. The increase in the gross margin is
attributable to the implementation of the Company's current sales strategy. As
part of such strategy, initiated in 1995, orders are received six to nine
months in advance of shipment resulting in finished goods being produced
according to customer order. Due to the timing of the order cycle and revenue
recognition (sales are recognized when products are shipped), the Company
first began to fully realize the benefits of such strategy in mid-1996. In
addition, during 1997, there was a decrease in the Company's product return
rates as compared to 1996. Gross profit is net of any royalties associated
with the use of licensed properties.
Selling, Design and Shipping Expenses. Selling, design and shipping expenses
increased by $2.4 million, or 30.9%, to $10.1 million in 1997 from $7.7
million in 1996. This increase is attributable primarily to higher sales
salaries and commissions for existing personnel and the hiring of additional
sales and design personnel during the year, as well as higher shipping and
freight costs associated with increased sales volumes. As a percentage of net
sales, selling, design and shipping expenses increased to 9.4% in 1997 from
8.5% in 1996.
General and Administrative Expenses. General and administrative expenses
increased $715,000, or 9.3%, to $8.4 million in 1997 from $7.7 million in
1996. This increase is primarily the result of higher factor commissions
associated with increased sales volume. The Company utilized its factoring
arrangement for the entire year in 1997 as compared to only ten months of the
corresponding period in 1996. As a percentage of net sales, general and
administrative expenses decreased to 7.9% in 1997 from 8.5% in 1996.
Interest Expense, net. Interest expense, net increased $823,000, or 27.6%,
to $3.8 million in 1997 from $3.0 million in 1996. This increase is a result
of higher sales volume resulting in an increase in borrowings, interest
expense and fees under the line of credit. As a percentage of net sales,
interest expense, net increased slightly to 3.6% in 1997 from 3.3% in 1996.
Income Before Income Taxes. Income before income taxes increased $2.2
million, or 87.6%, to $4.7 million in 1997 from $2.5 million in 1996 due to
the reasons described above. As a percentage of net sales, income before
income taxes increased to 4.3% in 1997 from 2.7% in 1996.
1996 COMPARED TO 1995
Net Sales. Net sales increased $10.9 million, or 13.6%, to $90.7 million in
1996 from $79.8 million for 1995. The increase in net sales is due primarily
to the introduction by the Company of products incorporating the properties
covered by the B.U.M. Equipment and Nickelodeon's Rugrats licenses, as well as
increases in certain private label programs. The increase in net sales was
partially offset by the reduction of sales under the Company's house brands,
evidencing the continuing shift in the Company's product mix from sales of
house brands to sales of products incorporating licensed and branded
properties.
21
<PAGE>
Gross Profit. Gross profit increased by $6.0 million, or 40.9%, to $20.8
million in 1996 from $14.8 million in 1995. The gross profit margin increased
to 23.0% in 1996 from 18.5% in 1995. The increase in gross margin is
attributable to the Company's successful implementation of its current sales
strategy and a change in product mix toward higher margin licensed and branded
properties from lower margin house brands.
Selling, Design and Shipping Expenses. Selling, design and shipping expenses
decreased $300,000, or 3.8%, to $7.7 million in 1996 from $8.0 million in
1995. This decrease is due primarily to the cost benefits associated with the
installation of an in-house CAD system early in 1996. As a percentage of net
sales, selling, design and shipping expenses decreased to 8.5% in 1996 from
10.0% in 1995.
General and Administrative Expenses. General and administrative expenses
increased $854,000, or 12.5%, to $7.7 million in 1996 from $6.8 million in
1995. This increase is due to charges associated with the Company's factoring
agreement. The Company had no factoring agreement in the comparable period of
the prior year. As a percentage of net sales, general and administrative
expenses remained constant at 8.5% in 1996 and 1995.
Interest Expense, net. Interest expense, net increased $605,000, or 25.5%,
to $3.0 million in 1996 from $2.4 million in 1995. This increase is a result
of higher sales volume resulting in an increase in borrowings, interest
expense and fees under the line of credit. As a percentage of net sales,
interest expense, net increased to 3.3% in 1996 from 3.0% in 1995.
Income (Loss) Before Income Taxes. Income before income taxes increased $4.9
million to $2.5 million in 1996 from a loss of $2.4 million in 1995 due to the
reasons described above. As a percentage of net sales, income before income
taxes was 2.7% in 1996 as compared to (3.0%) in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its cash requirements primarily through operations
and borrowings under its bank credit line. Historically, the Company's
borrowing requirements have been seasonal, with peak working capital needs
arising during the first and third quarters.
The Company's bank credit facility currently permits borrowings up to $42.0
million as a revolving credit line that expires on December 31, 1998, subject
to annual renewals (adjusted seasonally to $47.0 million from January 1, 1998
through April 30, 1998). The first $5.0 million of borrowings under this line
of credit bear interest at the prime rate plus 4.0% (12.5% at December 31,
1997). The remaining borrowings bear interest at the prime rate plus 1.0%
(9.5% at December 31, 1997). Additionally, the Company is subject to certain
fees associated with the line of credit. The amount available under this line
of credit is dependent upon levels of eligible accounts receivable and
inventory. The credit facility is collateralized by substantially all of the
assets of the Company and is guaranteed by the Company's three major
shareholders. As of December 31, 1997, the Company had $24.9 million of
outstanding direct borrowings and $15.9 million of contingent liabilities
under open letters of credit. The Company intends to use approximately $15.8
million of the net proceeds from this Offering to reduce the outstanding
balance of direct borrowings under the credit facility. In addition, the
Company's lender has sole discretion to make or withhold advances under the
credit line. There can be no assurance that the lender will continue to lend
under the credit line. If the lender exercises its discretion to withhold
advances, there would be a material adverse effect on the Company's business,
financial condition and results of operations. The Company executed a letter
of intent, dated February 10, 1998, with respect to the amendment of its
existing credit facility. Upon effectiveness of the Offering, the Company's
credit facility will be amended to provide for a discretionary one year
revolving line of credit, renewable annually, providing for advances and
letter of credit accommodations, up to the lesser of: (a) $49.0 million
through April 30, 1998, (b) $42.0 million from
22
<PAGE>
May 1, 1998 through December 31, 1998, (c) $47.0 million from January 1, 1999
through March 31, 1999, or (d) at all times the sum of (i) up to eighty-five
percent of eligible accounts receivable, plus (ii) up to fifty percent of
finished goods inventory, plus (iii) overadvances approved by the lender. The
maximum amount of revolving credit advances outstanding at any time may not
exceed $35.0 million from January 1, 1998 to April 30, 1998 and $30.0 million
thereafter, and the maximum amount of letters of credit outstanding at any
time may not exceed $35.0 million. The interest rate on amounts borrowed will
be the bank's then prevailing prime rate. Upon effectiveness of the amended
line of credit, personal guarantees of certain of the Company's present
shareholders under the Company's present line of credit will terminate, and
the collateral pledged by such shareholders will be released. See "Risk
Factors--Dependence on Access to Credit Facilities."
As of December 31, 1997 the Company's principal sources of liquidity
included cash of $374,000, amounts due from factor of $24.2 million and net
accounts receivable of $316,000. The Company had working capital of $6.4
million and long-term debt of $1.4 million as of December 31, 1997.
For the year ended December 31, 1997, operating activities used cash of $1.9
million primarily as a result of an increase in amounts due from factor of
$7.3 million due to increased sales volume, partially offset by net income of
$4.2 million. Net cash used in investing activities during the year ended
December 31, 1997 was $79,000 consisting entirely of capital expenditures,
while net cash provided by financing activities during the same period was
$1.7 million consisting primarily of net borrowings of $5.1 million under the
Company's bank credit facility offset by payments to shareholders of $3.1
million for their personal income taxes due on the earnings of the
S Corporations.
During fiscal 1996, operating activities provided cash of $3.1 million
primarily from net income of $2.4 million and a reduction in inventory levels
of $5.7 million. This cash provided by operations was partially offset by the
cash used by an increase in amounts due from factor of $16.9 million less the
cash generated by a decrease in accounts receivable of $10.5 million due to
the Company's implementation of its factoring program in 1996. Net cash used
in investing activities during fiscal 1996 was $378,000 reflecting the
purchase of certain fixed assets. Net cash used in financing activities during
1996 was $2.3 million consisting primarily of payments under the Company's
bank credit facility and distributions to shareholders for taxes on S
Corporation earnings.
Historically, the Company's business has not required significant capital
expenditures. The Company's capital expenditures were approximately $578,000,
$378,000 and $79,000 for the years ended December 31, 1995, 1996 and 1997,
respectively. The Company believes that cash flow expected to be generated
from operations, together with borrowings under its existing credit facility
and the net proceeds from this Offering, will be adequate to satisfy current
and planned operations for at least the next 12 months.
BACKLOG
The Company's customers order specific quantities of goods on a fixed-price
basis six to nine months in advance of a selling season. Such customer orders
are placed in backlog upon their receipt and acceptance by the Company.
Customer orders are generally cancellable on notice to the Company without
penalty. Although the Company has not had significant cancellations in the
past, no assurance can be given that it will not experience a significant
level of cancellations in the future or that its backlog at any point in time
will be converted to sales. Many of the Company's orders are received
significantly in advance of scheduled delivery periods. Consequently, the
Company had backlog of $107.7 million and $73.2 million at January 31, 1998
and January 31, 1997, respectively. The Company expects to fill the January
31, 1998 backlog prior to October 31, 1998.
23
<PAGE>
VARIABILITY OF RESULTS; SEASONALITY; CYCLICALITY
Sales of children's apparel are seasonal. Consequently, the Company's
operating results have varied substantially from quarter to quarter, and the
Company expects that they will continue to do so. Generally, the Company has
experienced significantly higher net sales in the first and third quarters as
compared to the second and fourth quarters, although this may change from time
to time. The seasonality of the Company's business also affects borrowings
under the Company's lines of credit and its level of backlog, which fluctuate
in response to demand for the Company's products. Therefore, the results of
any interim period are not necessarily indicative of the results that may be
achieved for an entire year. In addition, the apparel industry is a cyclical
industry heavily dependent upon the overall level of consumer spending, with
purchases of apparel and related goods tending to decline during recessionary
periods when disposable income is low. A difficult retail environment could
result in downward price pressure which could adversely impact the Company's
gross profit margins.
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table presents certain unaudited condensed consolidated
quarterly financial information for each of the eight most recent quarters in
the period ended December 31, 1997. This information is derived from unaudited
condensed Consolidated Financial Statements of the Company that include, in
the opinion of the Company, all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of results of
operations for such periods, when read in conjunction with the audited
Consolidated Financial Statements of the Company and notes thereto appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $29,260 $13,472 $27,329 $20,662 $24,811 $14,746 $37,771 $29,345
Gross profit............ 6,536 1,964 7,596 4,741 5,981 3,273 9,412 8,259
Operating income
(loss)................. 2,638 (950) 2,806 973 2,106 (529) 4,010 2,881
Income (loss) before
income taxes........... $ 1,764 $(1,676) $ 2,203 $ 196 $ 1,412 $(1,203) $ 2,856 $1,127
</TABLE>
The operating results for any quarter are not necessarily indicative of
results which may be obtained for any future period. The Company's quarterly
results may fluctuate as a result of a variety of other factors, many of which
are not within the Company's control, including patterns of spending by
customers, the timing, size and receipt of orders, and delays of shipments to
customers due to delays in delivery by suppliers.
PRO FORMA ADJUSTMENTS FOR INCOME TAXES
The Company has operated as an S Corporation for federal and New York state
income tax purposes since 1988. As a result, for such tax periods, the
Company's earnings were taxed directly to the Company's shareholders. The pro
forma adjustments for income taxes reflected in the Prospectus Summary under
the caption "Summary Consolidated Financial Data" and in the accompanying
Financial Statements were calculated as if the Company were subject to tax
under the tax laws in effect for the respective periods using the criteria
established under Statement of Financial Accounting Standards ("SFAS") No. 109
"Accounting for Income Taxes." The effective tax rate (benefit) for the years
ended December 31, 1997, 1996 and 1995 was 10.1%, 4.7% and (31.2%),
respectively. The change in the effective tax rate is the result of the
utilization of Federal net operating loss carryback claims in 1995, payments
in connection with a settlement, in 1996, of an Internal Revenue Service
examination, and State net operating loss carryforward claims in 1997 and
1996.
24
<PAGE>
RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS No. 130, "Reporting Comprehensive Income" was issued in June 1997. This
statement is effective for the Company's fiscal year ending December 31, 1998.
This statement addresses the reporting and displaying of comprehensive income
and its components. EPS will only be reported for net income and not for
comprehensive income. Adoption of SFAS No. 130 is not expected to have a
material effect on the Company's financial statement disclosures.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" was issued in June 1997. This statement is effective for the
Company's fiscal year ending December 31, 1998. This statement changes the way
public companies report information about segments of their business in their
annual financial statements and requires them to report selected segment
information in their quarterly reports. Adoption of SFAS No. 131 is not
expected to have a material effect on the Company's financial statement
disclosures.
25
<PAGE>
BUSINESS
OVERVIEW
Happy Kids is a designer and marketer of custom-designed, licensed and
branded children's apparel. The Company produces high-quality, coordinated
apparel programs, including knit tops, bottoms, overalls, shortalls, coveralls
and swimwear, for newborns, infants, toddlers, boys and girls. The Company's
major licenses include Nickelodeon's Rugrats, AND 1, B.U.M. Equipment and
Ocean Pacific. In late 1997, the Company acquired licenses to Warner Brothers'
Scooby Doo, ACA Joe and E.N.U.F. Internationale, and, in early 1998, the
Company agreed to acquire a license for Jim Henson's Kermit and Friends. The
Company also designs and delivers private label branded playwear programs for
leading retailers, including Sesame Street for KMart, New Legends for Kids R
Us and Canyon River Blues for Sears and recently began participating in
Nickelodeon's Nick Universe program being launched by Kids R Us. The Company's
strategy is to work closely with its customers to design and market
coordinated playwear programs resulting in gross margins that the Company
believes are higher than those typically generated from sales of non-licensed
or non-private label branded playwear.
BUSINESS STRATEGY
The Company's operating strategies include the following:
Focus on Licensed and Branded Products and Private Label Relationships. The
Company designs and markets licensed and branded coordinated apparel programs
at gross margins that the Company believes are higher than those typically
generated from sales of non-licensed or non-private label branded playwear.
The Company's gross margins were 25.2% in 1997, 23.0% in 1996, and 18.5% in
1995, resulting in part from this focus on licensed and branded properties
and private label relationships. The Company maintains a diversified portfolio
of popular, established and well-recognized licensed properties and
private label relationships to reduce its dependence upon any one licensed
property or private label relationship.
Emphasize Advance Sales. In 1995, the Company initiated its current sales
strategy under which customers order specific quantities of goods on a fixed-
price basis six to nine months in advance of a selling season. For 1997,
substantially all of the Company's apparel was produced upon receipt of
customer orders. Based on orders received as of January 31, 1998, the Company
had backlog of $107.7 million, which it expects to fill over the following six
to nine months. The Company intends to continue to utilize its sales strategy
to minimize its inventory risk.
Utilize Contract Manufacturers. The Company utilizes over 50 unaffiliated,
foreign and domestic contract manufacturers. The Company uses third-party
manufacturers to eliminate the significant capital investment requirements
associated with maintaining manufacturing facilities. The Company has
developed long-standing relationships with many of its contract manufacturers
and, during the year ended December 31, 1997, approximately 66.8% of the
Company's products were manufactured by contract manufacturers which have been
utilized by the Company for over three years.
Capitalize on In-House Design Capabilities. The Company's playwear is
designed by 42 in-house designers and graphic artists organized in teams
dedicated to each of the Company's licensed properties and private label
programs. The Company believes that its customers will continue to rely on its
ability to design, have manufactured and deliver on a timely basis
commercially successful apparel programs which foster long-term customer
relationships and result in a high level of customer satisfaction.
The Company's growth strategies include the following:
Increase Sales to Existing Accounts. The Company seeks to increase sales to
its current customers by expanding its product categories and sizes
incorporating the Company's existing
26
<PAGE>
licensed properties and private label relationships. The Company's customer
base includes each of the top ten childrenswear retailers. Historically,
capital constraints have limited the Company's ability to market products
broadly to all children's apparel departments within its current customer
base. Following the completion of this Offering, however, the Company expects
to have improved access to capital which the Company believes will permit it
to market, design and produce additional product categories and sizes under
its existing licenses and private label relationships. For example, the
Company successfully expanded its relationship with KMart from one to five
size categories during 1997. The Company believes there is significant
opportunity to increase sales to its existing customer base.
Expand Customer Base. The Company's customers include mass-market retailers,
mid-tier distributors and department stores, and the Company's current
customers include KMart, Kids R Us, Price/Costco, Sears and WalMart. Within
its current distribution channels, the Company seeks to generate sales from
new accounts by capitalizing on the demand for its licensed products and on
its ability to successfully execute private label programs. In addition, the
Company recently began to market certain licensed products to specialty
retailers, including sporting goods chains such as Champs, FootAction and The
Sports Authority.
Leverage Newly Acquired Licensed Properties and Private Label
Relationships. The Company recently acquired several new licenses, including
ACA Joe, E.N.U.F. Internationale and Warner Brothers' Scooby Doo, and a new
private label arrangement, Nickelodeon's Nick Universe being launched by Kids
R Us. Additionally, the Company has agreed to acquire a license for Jim
Henson's Kermit and Friends. In acquiring these new licenses, the Company has
relied on its market research and communications with its customers to assess
the marketability of these lines. The Company's design teams currently are
developing apparel programs in conjunction with its customers and licensors
and the Company expects to launch these apparel programs in late 1998,
targeting both its existing and new customers.
Pursue New Licenses and Private Label Relationships. The Company actively
pursues licensing of additional properties and new private label
relationships. The Company seeks licenses and private label arrangements that
are based on popular and established characters and brand names. The Company
believes that its reputation encourages potential licensors to seek out the
Company as a licensee of their branded properties and encourages retailers to
engage the Company to design and have manufactured coordinated apparel
programs under their own private labels. Furthermore, the Company believes
that its history of successfully executing licensed and private label
coordinated apparel programs provides it with a competitive advantage when
seeking new licenses and private label relationships. For example, the Company
acquired the Nickelodeon's Rugrats license based on a referral from one of the
Company's major customers.
27
<PAGE>
PRODUCTS AND LICENSES
The Company's playwear products are designed and marketed as coordinated
apparel programs and include knit tops, bottoms, overalls, shortalls,
coveralls and swimwear. The Company's products are marketed in a variety of
size categories including newborns, infants, toddlers (2T-4T), boys (4-7 and
8-20) and girls (4-6x and 7-16). The following is a description of the
Company's apparel programs:
<TABLE>
<CAPTION>
EXISTING CURRENT
LICENSED AND BRANDED CURRENT DISTRIBUTION PRODUCT CURRENT SIZE
APPAREL PROGRAMS DESCRIPTION CHANNELS OFFERINGS OFFERINGS
- -------------------- -------------- ------------------------ -------------- --------------
<S> <C> <C> <C> <C>
AND 1........ Basketball Top-line specialty All apparel Toddlers, boys
apparel athletic retailers, mid-
tier athletic retailers
and full-price
department stores with
athletic concept shops
B.U.M. Lifestyle Mass-market retailers, All apparel Newborns,
Equipment... activewear mid-tier distributors infants,
toddlers,
boys, girls
Canyon River Activewear Sears Overalls, Infants,
Blues for shortalls, toddlers, boys
Sears....... tops, bottoms (4-7), girls
(4-6x)
Jordache..... Lifestyle Mass-market retailers Tops, bottoms Infants,
activewear toddlers,
boys, girls
Lullaby Club Infantwear Target Coveralls, Newborns,
for Target.. tops, bottoms infants
New Legends Activewear Kids R Us Overalls, Toddlers,
for Kids R shortalls, girls
Us.......... tops, bottoms
Nickelodeon's Character- Mass-market retailers, Coveralls, Boys, girls
Rugrats..... based mid-tier distributors, overalls,
activewear department stores shortalls,
tops, bottoms,
swimwear
Ocean Surf-inspired Department stores, mid- Swimwear, Toddlers, boys
Pacific..... activewear tier distributors tops, bottoms (4-7)
Sesame Street Character- KMart Coveralls, Infants,
for KMart... based overalls, toddlers, boys
activewear shortalls, (4-7), girls
tops, bottoms, (4-6x)
swimwear
TriStar's Character- Mass-market retailers Swimwear Boys
Godzilla.... based
activewear
</TABLE>
<TABLE>
<CAPTION>
NEW LICENSED AND
BRANDED ANTICIPATED
APPAREL PROGRAMS DESCRIPTION ANTICIPATED DISTRIBUTION CHANNELS LAUNCH (1)
---------------- ------------------------ --------------------------------- ----------------
<S> <C> <C> <C>
ACA Joe.......... Lifestyle activewear Mid-tier distributors Holiday 1998
E.N.U.F. Lifestyle activewear Mid-tier distributors, Spring 1998
Internationale.. department stores
Jim Henson's
Kermit and Character-based Mid-tier distributors, Holiday 1998
Friends(2)...... activewear department stores
Nickelodeon's
Nick Universe Character-based
for Kids R Us... activewear Kids R Us Fall 1998
Warner Brothers' Character-based Mid-tier distributors, Spring 1998
Scooby Doo...... activewear mass-market retailers
</TABLE>
- -------
(1) Initial sales of such products are expected to occur subsequent to
December 31, 1997.
(2) In early 1998, the Company agreed to acquire a license for Jim Henson's
Kermit and Friends. The Company expects to execute a definitive licensing
agreement in the first quarter of 1998, although there can be no assurance
that such license arrangement will be finalized.
28
<PAGE>
The Company's current licensing arrangements contain initial terms of
between eighteen months and five years, and typically include multiple renewal
options of between one and five years, subject to certain conditions. The
present terms of the Company's current license arrangements will expire
between December 1999 and December 2002. The Company's licenses generally
require an initiation fee and/or minimum annual royalties to be recouped from
ongoing royalty payment obligations, which currently range from 5.0% to 12.0%
of the Company's net sales of products incorporating a licensed property.
Apparel industry licenses typically are granted with respect to product
categories, sizes and channels of distribution, and may be either exclusive or
non-exclusive. The Company's private label relationships are conducted on a
purchase order basis, rather than pursuant to contract. Net sales by the
Company for 1997 attributable to its licensing or private label arrangements
for B.U.M. Equipment, Nickelodeon's Rugrats, Ocean Pacific and Sesame Street
for KMart accounted for 18.9%, 11.3%, 11.1% and 14.3% of net sales,
respectively. Net sales by the Company in 1996, attributable to the B.U.M.
Equipment, Ocean Pacific and Jordache arrangements, accounted for 19.8%, 14.5%
and 12.4% of net sales, respectively. No other licensing or private label
arrangements accounted for more than 10% of the Company's net sales in either
1997 or 1996.
MERCHANDISING
Design
The Company's playwear products are designed by 42 in-house designers and
graphic artists organized in teams dedicated to each of the Company's licensed
properties and private label programs. Each team works closely with licensors,
customers and contract manufacturers, utilizing state-of-the-art CAD systems,
to design coordinated products featuring textured fabrications and detailed
graphics. The Company believes that its customers rely on its ability to
design, have manufactured and deliver on a timely basis commercially
successful apparel programs.
The design process incorporates product design, merchandising, sourcing and
production. The Company's design and merchandising teams continually monitor
and evaluate the children's playwear market for styles and trends in fabrics,
trims and accessories, as well as analyze online sales information provided by
its customers. In conjunction with its customers and licensors, the Company's
design teams identify specific design needs and develop product programs. The
Company oversees all garment production, including pattern development and
color and sample approval, through regular communication with the Company's
customers and contract manufacturers.
Sales and Marketing
The Company markets and distributes its products through three primary
channels of distribution, including mass-market retailers, mid-tier
distributors and department stores and recently has begun selling to select
specialty retailers, including sporting goods chains. All of the Company's
sales are within the United States. The Company's customers include:
<TABLE>
<CAPTION>
MASS-
MARKET MID-TIER DEPARTMENT SPECIALTY
RETAILERS DISTRIBUTORS STORES RETAILERS
--------- ------------ --------------------------- --------------------
<S> <C> <C> <C>
KMart Kids R Us Dayton Hudson Champs
Target Price/Costco Federated Department Stores FootAction
WalMart Sears JC Penney Foot Locker
The May Company The Sports Authority
</TABLE>
In 1995, to leverage its customer relationships, its popular licenses and
brand names and its reputation for quality products and reliable delivery, the
Company initiated its current sales strategy
29
<PAGE>
under which customers order specific quantities of goods on a fixed-price
basis six to nine months in advance of a selling season. For 1997,
substantially all of the Company's apparel was produced upon receipt of
customer orders. Additionally, the Company has been able to leverage the
popularity and goodwill associated with its licenses and brand names to
promote sales, rather than undertaking costly marketing initiatives.
As of December 31, 1997, the Company maintained a sales and marketing staff
of 14 people, including its senior management. The Company is organized in
account teams led by key account sales executives. Each account sales
executive reports directly to senior management and is responsible for the day
to day customer relationship management and for supervising and monitoring the
sales staff. The Company's sales staff is compensated on a salary plus
commission basis.
The Company's sales and marketing staff works closely with the Company's
designers and graphic artists throughout the design and production process.
The Company's customers often launch a new product line associated with a new
license or private label relationship in a limited number of stores. If the
product is successful, the Company's customers often market the product line
throughout their retail chains or in a significantly larger number of stores.
The Company's design team and sales staff work closely with its customers to
monitor, review and analyze product launches.
The Company's customer base has been and continues to be highly
concentrated. Sales of the Company's products to each of Price/Costco, KMart
and Kids R Us accounted for approximately 17.4%, 14.3% and 11.0% of net sales
for 1997, respectively. In addition, sales of the Company's products to each
of Kids R Us and WalMart accounted for 21.5% and 13.4% of net sales,
respectively, during 1996, while sales of the Company's products to each of
Kids R Us, WalMart and J.C. Penney accounted for 18.3%, 12.9% and 10.0% of net
sales, respectively, during 1995. Based upon historical and recent results and
existing relationships with customers, the Company believes that a substantial
portion of its net sales and gross profits will continue to be derived from a
small number of large customers. There can be no assurance that the Company's
larger customers will continue to place orders with the Company or that orders
by such customers will continue at their previous levels.
MANUFACTURING
Contract Manufacturers
The Company's products are manufactured to exacting quality standards and
specifications by over 50 unaffiliated, foreign and domestic contract
manufacturers. The Company uses third-party manufacturers to eliminate the
significant capital investment requirements associated with maintaining
manufacturing facilities. The Company has developed long-standing
relationships with many of its contract manufacturers and, during 1997,
approximately 66.8% of the Company's products were manufactured by contract
manufacturers which have been utilized by the Company for over three years.
For 1997 and 1996, foreign manufacturers produced approximately 93.4% and
91.2% of the Company's products, respectively, with the remainder of products
produced domestically.
The Company works with independent buying agents in six countries to assist
the Company in selecting a contract manufacturer. The Company and such buying
agents review, among other things, quality of merchandise produced, the
ability of such manufacturer to meet the Company's timing requirements for
delivery and price. The Company is not a party to long-term contractual or
other arrangements with any manufacturer and often uses more than one
manufacturer to produce a coordinated apparel program. The Company believes
that it has ready access to numerous contract manufacturers and that its
existing contract manufacturers have the ability to manufacture across several
product lines.
30
<PAGE>
During 1997 and 1996, various production facilities located in Thailand
accounted for an aggregate of 41.4% and 40.3% of the Company's manufactured
products, respectively, and various production facilities in Hong Kong
accounted for an aggregate of 30.7% and 37.5% of the Company's manufactured
products, respectively. No other country accounted for 10% or more of the
Company's manufactured products during 1997 or 1996. In addition, two
manufacturing facilities located in Hong Kong accounted for 11.0% and 13.0%,
respectively, of the Company's manufactured products during 1997 and 11.0% and
23.0%, respectively, of the Company's manufactured products during 1996. No
other single manufacturer accounted for 10% or more of the Company's
manufactured products during 1997 or 1996.
The Company's products are subject to bilateral textile agreements between
the United States and a number of foreign countries. Such agreements, which
have been negotiated under the framework established by the Arrangement
Regarding International Trade in Textiles, allow the United States to impose
restraints at any time on the importation of categories of merchandise that,
under the terms of the agreements are not currently subject to specified
limits. The Company does not own the right to import finished garments into
the United States, but relies on its contract manufacturers to obtain the
necessary quotas. In the past, to the extent that necessary import quotas have
not been available with respect to a particular source of supply, the Company
has been able to find an alternative source of supply. Accordingly, the
availability of quotas has not had a material effect upon the Company's
business, financial condition or results of operations. The Company's
continued ability to source products that it imports may be adversely affected
by a significant decrease in available import quotas as well as any additional
bilateral agreements or unilateral trade restrictions. In addition, a
significant portion of the Company's products are manufactured in Hong Kong.
China recently resumed sovereignty over Hong Kong. The Company cannot predict
the effect, if any, this event will have on its contract manufacturers in Hong
Kong and there can be no assurance that Hong Kong will not experience
political, economic or social disruption as a result of the resumption of
Chinese sovereignty. In addition, there have been a number of recent trade
disputes between China and the United States during which the United States
has threatened to impose tariffs and duties on some products imported from
China and to withdraw China's "most favored nation" trade status. The loss of
such status for China, changes in current tariff structures or the adoption by
the United States of trade policies or sanctions adverse to China could have a
material effect on the Company's business, financial condition or results of
operations.
The principal raw materials used in the production and sale of the Company's
products are yarn, fabric, trim, buttons and other accessories. Raw materials
are purchased by the manufacturers who deliver finished goods to the Company.
The Company believes that an adequate supply of raw materials used in the
manufacture of its products is readily available from existing and alternative
sources at reasonable prices.
Quality Control
The Company has in place comprehensive quality control procedures to ensure
that fabrics, materials and finished goods meet the Company's exacting quality
standards. The Company utilizes both internal and independent quality control
representatives to monitor contract manufacturers' production processes. In
addition, certain of the Company's buying agents engage their own personnel
who monitor compliance with the Company's quality control specifications.
The Company oversees testing of yarns and trim for colorfastness,
washability and other standards before sample garments are produced. Selected
product samples are sent to independent testing facilities which test garments
for colorfastness, washability, size specifications and other standards.
Sample garments are randomly subjected to similar quality control tests by the
Company for fit and appearance. Foreign and domestic contract manufacturers
are routinely visited on a spot check basis to ensure compliance with the
Company's quality standards. Finished garments are subject to final inspection
in the Company's warehouse for general appearance and quality prior to
31
<PAGE>
shipment to customers. Prior to shipment, inspection certificates are issued
to indicate that the products have been inspected and found to be in
conformity with the order. Products which are manufactured in foreign
countries are tested to ensure that such products meet United States customs
import requirements by the foreign manufacturers prior to shipment, and the
results of such tests, along with samples of each product style, are sent to
the Company. The Company's ability to design and have manufactured high-
quality playwear is evidenced by the Company's product return rates of 3.3%
and 1.9% in 1996 and 1997, respectively.
DISTRIBUTION
Upon completion of the manufacturing process, the Company's products are
shipped from the contract manufacturers by sea, air or land to the Company's
domestic warehouse facilities. The Company utilizes its warehouse facilities
in New Brunswick, New Jersey, or its public warehouse arrangement in Long
Beach, California prior to shipping its products directly to its customers'
stores or distribution centers via common carrier.
BACKLOG
The Company's customers order specific quantities of goods on a fixed-price
basis six to nine months in advance of a selling season. Such customer orders
are placed in backlog upon their receipt and acceptance by the Company.
Customer orders are generally cancellable on notice to the Company without
penalty. Although the Company has not had significant cancellations in the
past, no assurance can be given that it will not experience a significant
level of cancellations in the future or that its backlog at any point in time
will be converted to sales. Many of the Company's orders are received
significantly in advance of scheduled delivery periods. The Company had
backlog of $107.7 million and $73.2 million at January 31, 1998 and January
31, 1997, respectively. The Company expects to fill the January 31, 1998
backlog prior to October 31, 1998.
MANAGEMENT INFORMATION SYSTEMS
The Company believes that advanced information processing is essential to
maintaining its competitive position. The Company participates in the
electronic data interchange program maintained by many of its larger
customers, including J.C. Penney, Kids R Us, Sears, Target and WalMart. This
program allows the Company to receive customer orders, provide advanced
shipping notices, monitor store inventory and track orders on-line from the
time such orders are placed through delivery. The Company is also able to
notify certain of its client's warehouses, in advance, as to shipments. The
Company currently is upgrading its management information systems, which it
expects to complete in 1998, to ensure proper processing of transactions
relating to the year 2000 and beyond. The Company continues to evaluate
appropriate courses of corrective action, including replacement of certain
systems. The Company does not expect the costs associated with ensuring year
2000 compliance to have a material effect on its financial position or results
of operations. All costs associated with year 2000 compliance are being funded
with cash flow generated from operations and are being expensed as incurred.
Although the Company believes that the information systems of its major
customers and vendors (insofar as they relate to the Company's business)
comply with Year 2000 requirements, there can be no assurance that the Year
2000 issue will not affect the information systems of such customers and
vendors as they relate to the Company's business, or that any such impact on
such customers' and vendors' information systems would not have a material
adverse effect on the Company's business, financial condition or results of
operations.
INDUSTRY AND COMPETITION
The domestic children's apparel industry has increased in market size from
$24.7 billion in 1994 to $26.9 billion in 1996, a 4.4% annual increase, as
measured by The NPD Group, an industry trade group. For 1996, according to
Children's Business, the top ten childrenswear retailers, consisting of
WalMart, KMart, J.C. Penney (including the J.C. Penney catalog), Sears,
Federated Department Stores, Target, Kids R Us, Mervyns, May Company and TJX
Company, accounted for 56.4% of the market.
32
<PAGE>
The children's playwear industry is highly competitive and fragmented. The
Company competes with many companies engaged in the design, production and
distribution of children's apparel for newborns, infants, toddlers, boys and
girls. Some of the Company's competitors have longer operating histories and
financial, sales, marketing, design capabilities and other competitive
resources which are substantially greater than those of the Company. The
Company also faces competition from its existing customers, who may themselves
begin to produce children's playwear directly. In addition, such customers
have in the past competed, and may continue in the future to compete, for
available branded programs. Further, to the extent that the Company's
customers or competitors maintain or initiate private label programs, such
customers or competitors will compete with the Company's licensed and branded
properties. The Company also competes with other manufacturers of children's
apparel for retail floor space.
The Company believes that the principal competitive factors affecting its
business include the ability to deliver, on a timely basis, high quality
coordinated playwear apparel; the ability to successfully obtain licensing
arrangements and private label relationships based on characters and brands
that are appealing to children and parents; the ability to successfully design
coordinated apparel programs based on such licensing arrangements and
relationships; and the ability to produce playwear at competitive prices.
EMPLOYEES
As of December 31, 1997, the Company employed 133 persons, consisting of 14
in sales and marketing, 42 in design and graphic arts, 45 in warehousing and
distribution and 32 in finance, administration and management. Forty of the
Company's 45 employees at its New Brunswick, New Jersey warehouse facility are
subject to a collective bargaining agreement (the "Collective Bargaining
Agreement") between Hawk Industries, Inc. ("Hawk"), which upon consummation of
the Offering will be a wholly owned subsidiary of the Company, and
Journeymen's and Production Allied Services of America and Canada
International Union, Local No. 157 (the "Union"). The initial term of such
Collective Bargaining Agreement began on August 1, 1996 and extends to July
31, 1999, and shall continue thereafter from year to year, unless terminated
or modified by written notice within certain time periods. Pursuant to the
Collective Bargaining Agreement, the Company must, among other obligations,
recognize the Union as the exclusive representative of all of the employees
covered under the Collective Bargaining Agreement, endeavor to seek all
employment, new or otherwise, through the Union, require all employees of
Hawk, as a condition to employment, to become members of the Union within a
specified time period and maintain specified hours of work. The Collective
Bargaining Agreement also contains terms governing, among other things,
overtime, holidays, vacations, leave of absence, rest periods, safety and
health, strikes and lockouts, wages, grievance procedures and health and
welfare plans. The Company considers its relations with its employees to be
good.
FACILITIES
The Company currently leases all of its office space. The Company leases
approximately 19,000 square feet for its executive offices and showroom
located at 100 West 33rd Street, New York, New York. Such lease expires in
September 2005 and contains renewal options for an additional three and one
half years. The Company also leases approximately 130,000 square feet for
warehousing and distribution at its warehouse facility in New Brunswick, New
Jersey. Such lease expires in March 2000 and contains renewal options for two
additional five year terms. The Company also maintains a small showroom in
Bentonville, Arkansas. The Company believes that its facilities are sufficient
to meet current needs for its sales, marketing, design, administrative,
warehousing and distribution requirements.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
33
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- -----------------------------------
<C> <C> <S>
Jack M. Benun.. 56 Chairman of the Board, President
and Chief Executive Officer
Stuart Bender.. 43 Chief Financial Officer and
Treasurer
Mark J. Benun.. 31 Executive Vice President, Secretary
and Director
Isaac Levy..... 34 Senior Vice President and Director
</TABLE>
Within ninety days of the consummation of this Offering, the Company intends
to identify and elect two additional independent, unaffiliated directors.
Jack M. Benun. Mr. Benun founded the predecessor to the Company in 1979 and
is the Company's Chairman of the Board, President and Chief Executive Officer.
Mr. Benun has over 30 years experience in the apparel industry. Prior to
founding the Company, Mr. Benun managed a family domestic apparel
manufacturing business.
Mark J. Benun. Mr. Benun joined the Company in 1984 and currently oversees
all sales for the Company. He currently serves as Executive Vice President,
Secretary and as a Director.
Isaac Levy. Mr. Levy joined the Company in 1987 and is responsible for all
operations of the boys division, including buying, design and marketing. He
currently serves as the Company's Senior Vice President and as a Director.
Stuart Bender, CPA. Mr. Bender joined the Company in 1985 as Chief Financial
Officer and Treasurer. Prior to joining the Company, Mr. Bender served as the
corporate controller and divisional controller for two private companies. Mr.
Bender has four years public accounting experience at Grant Thornton LLP.
Other than Jack Benun and Mark Benun, who are father and son, there are no
family relationships among any of the Directors, executive officers and key
employees of the Company. Each of the above persons has served as an executive
officer and/or a Director since joining the Company.
All Directors hold office until the next annual meeting of shareholders and
until their successors shall be duly elected and qualified. Effective upon the
consummation of this Offering and the election of two additional independent,
unaffiliated Directors, the Board of Directors will have a Compensation
Committee, which will approve salaries and certain incentive compensation for
management and key employees of the Company; an Audit Committee, which will
review the results and scope of the audit and other services provided by the
Company's independent accountants; and an Option Committee, which will
administer the Company's 1997 Stock Option Plan. The Compensation and Audit
Committees shall be comprised of Jack Benun and the two additional
independent, unaffiliated Directors and the Option Committee shall be
comprised of the two additional independent, unaffiliated Directors.
Executive officers of the Company are elected annually by the Board of
Directors and serve until their successors are duly elected and qualified.
DIRECTORS' COMPENSATION
Each of the Company's independent, unaffiliated Directors will receive
compensation of $1,500 per meeting for each regularly-scheduled meeting in
which he or she participates. In addition, each of such members of the Board
who serve on the Audit, Option and/or Compensation Committee of the Board will
receive a $750 fee per meeting for each regularly-scheduled Committee meeting
in which
34
<PAGE>
such Committee member participates, as long as such Committee meeting or
meetings is or are held on a day or days other than the day of a regularly-
scheduled Board meeting. The Company also will provide reimbursement to
Directors for reasonable and necessary expenses incurred in connection with
attendance at meetings of the Board of Directors or its Committees. Directors
are eligible to receive stock option grants pursuant to the Company's 1997
Stock Option Plan.
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation for
services in all capacities awarded to, earned by or paid to the Company's
Chief Executive Officer and each of the other executive officers of the
Company (collectively, the "Named Executives") during the year ended December
31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------
OTHER ANNUAL ALL OTHER
SALARY BONUS COMPENSATION COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)(1) ($)
(A) (B) (C) (D) (E) (I)(2)
--------------------------- ---- ------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Jack M. Benun..................... 1997 551,064 -- 52,000 2,373
President and Chief Executive Of-
ficer
Mark J. Benun..................... 1997 590,416 -- -- 2,292
Executive Vice President,
Secretary and Director
Isaac Levy........................ 1997 400,242 -- -- 2,266
Senior Vice President and
Director
Stuart Bender..................... 1997 209,803 75,000 -- 2,114
Chief Financial Officer and
Treasurer
</TABLE>
- --------
(1) The costs of certain benefits are not included because, in the aggregate,
they did not exceed, in the case of each Named Executive, the lesser of
$50,000 or 10% of the total annual salary and bonus reported in columns
(c) and (d) of the above table. In the case of Jack M. Benun, $36,842 of
such amount represents payment for automobile allowances.
(2) Represents 401(k) contributions made by the Company on behalf of the Named
Executive.
1997 STOCK OPTION PLAN
The Company's 1997 Stock Option Plan (the "Plan") was adopted by the Board
of Directors and approved by the shareholders of the Company on December 31,
1997. A total of 800,000 shares of Common Stock are reserved for issuance upon
exercise of options and/or stock purchase rights to be granted under the Plan,
100,000 of which have been granted in 1998. No other options or rights have
been granted under the Plan. Those eligible to receive stock option grants or
stock purchase rights under the Plan include employees, non-employee Directors
and consultants. The Plan is administered by the Option Committee of the Board
of Directors of the Company, which is comprised solely of outside directors.
Subject to the provisions of the Plan, the administrator of the Plan has the
discretion to determine the optionees and/or grantees, the type of options to
be granted (incentive stock options ("ISOs") or non-qualified stock options
("NQSOs")), the vesting provisions, the terms of the option grants and such
other related provisions as are consistent with the Plan. The exercise price
of an ISO may not be less than the fair market value per share of the Common
Stock on the date of grant or, in the case of an optionee who beneficially
owns 10% or more of the outstanding capital stock of the Company, not less
than 110% of the fair market value per share on the date of grant. The
exercise price of a NQSO may not be less than 85% of the fair market value per
share of the Common Stock on the date of grant or in the case of any Optionee
who beneficially owns 10% or more of the outstanding capital stock of the
35
<PAGE>
Company, not less than 110% of the fair market value per share on the date of
grant. The purchase price of shares issued pursuant to stock purchase rights
may not be less than 50% of the fair market value of such shares as of the
offer date of such rights.
The options terminate not more than ten years from the date of grant,
subject to earlier termination on the optionee's death, disability or
termination of employment with the Company, but provide that the term of any
options granted to a holder of more than 10% of the outstanding shares of
Common Stock may be no longer than five years. Options are not assignable or
otherwise transferable except by will or the laws of descent and distribution.
In the event of a merger or consolidation of the Company with or into another
corporation or the sale of all or substantially all of the Company's assets in
which the successor corporation does not assume outstanding options or issue
equivalent options, the Board of Directors of the Company is required to
provide accelerated vesting of outstanding options. The Plan terminates on
December 31, 2007.
As of December 31, 1997, no awards have been granted by the Company under
the Plan. In February 1998, the Company granted options to purchase 100,000
shares of Common Stock to Mr. Bender. Such options will be exercisable at a
price per share equal to the Offering price, have an expiration date of
February 24, 2008, and vest at a rate of thirty-three and one-third percent
per year from the date of grant. In addition, the Company has agreed, for a
period of one year commencing on the effective date of this Offering, not to
issue any awards under the Plan at less than the fair market value of the
underlying Common Stock on the date of award.
401(K) PLAN
The Company currently maintains a 401(k) salary reduction plan (the "401(k)
Plan") which is intended to qualify under Section 401(a) and 401(k) of the
Internal Revenue Code of 1986 (the "Code"). Generally, all employees who are
not members of a collective bargaining group and who are 21 years of age or
older are eligible to participate in the 401(k) Plan after they complete 1,000
hours or twelve months of service. All eligible executive officers have
elected to participate in the 401(k) Plan.
Eligible employees electing to participate in the 401(k) Plan may defer a
portion of their compensation on a pre-tax basis, by contributing a percentage
thereof to the 401(k) Plan. There is no minimum contribution, and the maximum
contribution is prescribed in Section 401(k) of the Code. Such maximum for
1998 is $10,000. The Company makes matching contributions equal to 25% of the
first 4% of a participating employee's annual salary. Eligible employees who
elect to participate in a 401(k) Plan are generally vested in the Company's
matching contribution, according to the following schedule: less than one year
of service--0%; one year of service--20%; two years of service--40%; three
years of service--60%; four years of service--80%; and five years of service--
100%.
EMPLOYMENT AGREEMENTS AND INDEMNIFICATION AGREEMENTS
Each of the executive officers of the Company entered into a two-year
employment agreement with the Company commencing January 1, 1998. Under the
terms of the respective agreements, Messrs. Jack Benun, Mark Benun, Isaac Levy
and Stuart Bender are entitled to an annual base salary of $425,000, $300,000,
$300,000 and $225,000, respectively, and bonuses, the amounts and payments of
which are within the discretion of the Compensation Committee of the Board of
Directors. These agreements require each individual to maintain the
confidentiality of Company information. In addition, with the exception of Mr.
Bender, each of such persons has agreed that during the term of his respective
agreement and thereafter for a period of two years, he will not compete with
the Company in any state or territory of the United States where the Company
does business by engaging in any capacity in a business which is competitive
with the business of the Company. Each of the foregoing employment agreements
also provides that, for a period of two years following the termination of
employment, each such individual shall not solicit the Company's licensors,
customers or employees.
36
<PAGE>
In addition to the foregoing employment contracts, the Company has executed
indemnification agreements with each of its executive officers and Directors
pursuant to which the Company has agreed to indemnify such parties to the full
extent permitted by law, subject to certain exceptions, if such party becomes
subject to an action because such party is a Director, officer, employee,
agent or fiduciary of the Company.
KEY MAN INSURANCE
Messrs. Jack Benun, Mark Benun and Isaac Levy are key employees of the
Company and the contribution of each of them to the Company has been and will
be a significant factor in the Company's future success. The loss of any of
them could adversely affect the Company's business and results of operations.
The Company maintains, and is the beneficiary of, a life insurance policy on
the life of Jack Benun, the face amount of which is $3.0 million. The Company
does not maintain key man life insurance on the life of either Mark Benun or
Isaac Levy.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Board of Directors currently does not, and during 1997 did
not, have a Compensation Committee. Consequently, all current Directors
participated in deliberations concerning executive officer compensation,
including decisions relative to their own compensation in 1997.
The Company and certain of its subsidiaries have been treated for federal
and state income tax purposes as an S Corporation under Sub-chapter S of the
Code since 1988. As a result of the Company's status as an S Corporation, the
Company's current shareholders, rather than the Company, have been taxed
directly on earnings of the Company for federal and certain state income tax
purposes, whether or not such earnings were distributed. Immediately prior to
the effectiveness of this Offering, the Company will terminate its status as
an S Corporation and will thereafter be subject to federal and state income
taxes at applicable C corporation rates.
Prior to the termination of its S Corporation status, the Company intends to
declare the S Corporation Distribution to the shareholders of record of the
Company on such date. Such shareholders consist solely of Jack Benun, the
Company's Chairman of the Board, President and Chief Executive Officer, Mark
Benun, the Company's Executive Vice President and Secretary, and Isaac Levy,
its Senior Vice President. Such distribution (estimated at $5.6 million as of
December 31, 1997) represents substantially all of the Company's remaining
undistributed S Corporation earnings and will be evidenced by four-year 5.7%
promissory notes to be issued to such shareholders in connection with the
termination of the Company's S Corporation status. Of this amount, $2.0
million of the net proceeds from this Offering will be used to make a partial
payment of amounts due under such notes. See "Use of Proceeds." The balance of
the S Corporation Distribution will be paid in accordance with the terms and
provisions of the promissory notes referred to above and will provide for the
timely distribution of amounts necessary to pay personal income taxes of the
shareholders due on amounts earned by the S Corporations for the period
January 1, 1998 through the termination of such S Corporation status. The
actual amount of the S Corporation Distribution will be adjusted to include
the taxable income of the Company for the period from January 1, 1998 through
the day preceding the date on which S Corporation status is terminated, less
any state income tax payable by the Company with respect to such income and
any distributions made to the current shareholders during that time period
($3.5 million was distributed to the current shareholders in 1997 and 1998
through the date of this Prospectus in the form of dividends to fund their
1996 and 1997 tax liabilities resulting from the Company's status as an S
Corporation). S Corporation distributions totalled $721,000 and $3.1 million
in 1996 and 1997, respectively.
From time to time, the Company has made loans to Jack Benun, Mark Benun and
Isaac Levy and received loans from Jack Benun. All outstanding loans made to
such individuals by the Company, totalling $347,211 as of December 31, 1997
will be repaid to the Company prior to the consummation
37
<PAGE>
of the Offering. Loans received by the Company from Jack Benun will be repaid
to Mr. Benun on the same terms and conditions as those included in the four-
year 5.7% promissory notes to be issued in connection with the termination of
the Company's S Corporation status.
Immediately prior to the effectiveness of this Offering, the Company will
acquire all of the issued and outstanding shares of certain related entities
of the Company, in exchange for shares of Common Stock of the Company, from
each of Jack Benun and Mark Benun. Each of Jack Benun and Mark Benun will
receive 2,131,250 shares of the Company's Common Stock in exchange for each of
their 50.0% ownership interests in each of Happy Kids Children's Apparel,
Ltd., Talk of the Town Apparel Corp., O.P. Kids, L.L.C., H.O.T. Kidz, L.L.C.,
Hawk Industries, Inc. and J & B 18 Corp.
Jack Benun, Mark Benun and Isaac Levy have entered into a shareholders
agreement dated January 1, 1998. Such agreement provides tag-along rights to
each of the parties thereto in the event that any of the other parties elects
to sell his Common Stock. In addition, each party is granted a right of first
refusal to purchase any shares of Common Stock offered for sale by any other
party to the agreement. Finally, Mark Benun has granted Jack Benun an
irrevocable proxy to vote any of the Company's voting securities beneficially
owned by Mark Benun for the life of Jack Benun.
CERTAIN TRANSACTIONS
For transactions involving Jack Benun, Mark Benun and Isaac Levy, see
"Management--Compensation Committee Interlocks and Insider Participation."
The Board of Directors of the Company has adopted a policy requiring that
any future transactions between the Company and its officers, Directors,
principal shareholders and their affiliates be on terms no less favorable to
the Company than could be obtained from unrelated third parties and that any
such transactions be approved by a majority of the disinterested members of
the Company's Board of Directors.
38
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of December 31, 1997, and as
adjusted to reflect the sale of the shares of Common Stock offered hereby, by
(i) each person who is known to the Company to own beneficially more than 5.0%
of the outstanding shares of Common Stock, (ii) each of the Company's
Directors and Named Executives, and (iii) all Directors and executive officers
of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES BENEFICIALLY
OWNED(3)
SHARES -----------------------
DIRECTORS, NAMED EXECUTIVES AND 5% BENEFICIALLY BEFORE AFTER
SHAREHOLDERS(1) OWNED(2) OFFERING OFFERING
- ---------------------------------- ------------ ---------- ---------
<S> <C> <C> <C>
Jack M. Benun(4)...................... 6,587,500 85.0% 67.6%
Mark J. Benun......................... 3,293,750 42.5 33.8
Isaac Levy............................ 1,162,500 15.0 11.9
Stuart Bender......................... -- -- --
All Directors and executive officers
as a group (four persons)............ 7,750,000 100.0 79.5
</TABLE>
- --------
(1) The address of each beneficial owner of more than 5% of the outstanding
Common Stock is 100 West 33rd Street, Suite 1100, New York, New York
10001.
(2) Except as set forth in the footnotes to this table and subject to
applicable community property law, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by such Shareholder.
(3) Applicable ownership percentage is based on 7,750,000 shares of Common
Stock outstanding on December 31, 1997, including the shares issued in the
Reorganization, and 9,750,000 shares of Common Stock outstanding after the
completion of this Offering.
(4) Includes 3,293,750 shares of Common Stock owned of record by Mark Benun,
as to which shares Jack Benun exercises voting power.
39
<PAGE>
DESCRIPTION OF CAPITAL STOCK
As of December 31, 1997, the Company's authorized capital stock consists of
30,000,000 shares of Common Stock, $.01 par value per share, and 5,000,000
shares of undesignated Preferred Stock, $.01 par value per share. At December
31, 1997, there were 7,750,000 shares of Common Stock issued and outstanding
and held of record by three shareholders. There are no shares of Preferred
Stock designated or issued.
The following statements are brief summaries of certain provisions with
respect to the Company's capital stock contained in its Certificate of
Incorporation and By-Laws, copies of which have been filed as exhibits to the
Registration Statement. The following summary is qualified in its entirety by
reference thereto.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote for each share
held of record on matters to be voted on by the shareholders of the Company
and such holders are not entitled to cumulative voting rights. Holders of
shares of Common Stock will be entitled to receive dividends, subject to the
rights of preferred shareholders, if any, when, as and if declared by the
Board of Directors (see "Dividend Policy") and to share ratably in the assets
of the Company legally available for distribution to its shareholders in the
event of the liquidation, dissolution or winding-up of the Company. Holders of
Common Stock have no preemptive, subscription, redemption or conversion
rights. All of the issued and outstanding shares of Common Stock are, and all
shares of Common Stock to be sold in this Offering will be, duly authorized,
validly issued, fully paid and nonassessable.
PREFERRED STOCK
The Company's Board of Directors may without further action by the Company's
shareholders, from time to time, direct the issuance of shares of Preferred
Stock in series and may, at the time of issuance, determine the rights,
preferences and limitations of each series. The holders of Preferred Stock
would normally be entitled to receive a preference payment in the event of any
liquidation, dissolution or winding-up of the Company before any payment is
made to the holders of the Common Stock. The Company does not presently intend
to issue any series of Preferred Stock.
The overall effect of the ability of the Company's Board of Directors to
issue Preferred Stock may be to render more difficult the accomplishment of
mergers or other takeover or change-in-control attempts. To the extent that
this ability has this effect, removal of the Company's incumbent Board of
Directors and management may be rendered more difficult. Further, this may
have an adverse impact on the ability of shareholders of the Company to
participate in a tender or exchange offer for the Common Stock and in so doing
diminish the market value of the Common Stock. See "Risk Factors--Control by
Current Shareholders" and "--Anti-takeover Effect of Certain Charter and By-
Law and Other Provisions."
LIMITATION OF DIRECTOR LIABILITY
The Certificate of Incorporation of the Company limits the liability of
Directors of the Company to the Company or its shareholders to the fullest
extent permitted by New York law. Specifically, Directors of the Company will
not be personally liable for money damages for breach of a duty as a Director,
except that a Director shall not be relieved from liability if a judgment or
other final adjudication adverse to him establishes that his acts or omissions
were in bad faith or involved intentional misconduct or a knowing violation of
law, or that such Director personally gained in fact a financial profit or
other advantage to which such Director was not legally entitled, or that such
Director's acts violated Section 719 of the New York Act (which relates to
unlawful declarations of dividends or other distributions of assets to
shareholders or the unlawful purchase of shares of the corporation).
40
<PAGE>
ANTI-TAKEOVER PROVISIONS
The Company is governed by the provisions of Section 912 et seq., of the New
York Act, an anti-takeover law. In general, the statute prohibits a publicly-
held New York corporation from engaging in a "business combination" with an
"interested shareholder" for a period of five years after the date of the
transaction in which the person became an interested shareholder, unless the
business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset sales and other transactions resulting in
a financial benefit to the interested shareholder. An "interested shareholder"
is a person who, together with affiliates and associates, owns (or within five
years, did own) 20% or more of the corporation's voting stock. After the five-
year waiting period has elapsed, a business combination between a corporation
and an interested shareholder will be prohibited unless the business
combination is approved by the holders of at least a majority of the voting
stock not beneficially owned by the interested shareholder, or unless the
business combination otherwise satisfies the provisions of the New York Act.
The New York Act's fair price provision is intended to provide that all
shareholders (other than the interested shareholders) receive a fair price for
their shares.
The Company's Certificate of Incorporation authorizes the Board of Directors
to issue, without shareholder approval, 5,000,000 shares of Preferred Stock
with voting, conversion and other rights and preferences that could adversely
affect the voting power or other rights of the holders of Common Stock. The
issuance of Preferred Stock or of rights to purchase Preferred Stock could be
used to discourage an unsolicited acquisition proposal. In addition, the
possible issuance of Preferred Stock could discourage a proxy contest, make
more difficult the acquisition of a substantial block of the Company's Common
Stock or limit the price that investors might be willing to pay in the future
for shares of the Company's Common Stock. The Certificate of Incorporation
also provides that: (i) the affirmative vote of the holders of at least 80% of
the voting power of all outstanding shares of the capital stock of the Company
shall be required to adopt, amend or repeal any provision of the bylaws of the
Company or the provisions in the Company's Certificate of Incorporation
limiting the liability of directors and provisions relating to certain
management issues; (ii) shareholders of the Company may not take any action by
written consent; (iii) special meetings of shareholders may be called only by
the President, the Chairman of the Board or a majority of the Board of
Directors and business transacted at any such special meeting shall be limited
to matters relating to the purposes set forth in the notice of such special
meeting; and (iv) the Board of Directors, when evaluating an offer related to
a tender or exchange offer or other business combination, is authorized to
give due consideration to any relevant factors, including the social, legal
and economic effects upon employees, suppliers, customers, creditors, the
community in which the Company conducts its business, and the economy of the
state, region and nation. The foregoing provisions of the Certificate of
Incorporation could have the effect of delaying, deterring or preventing a
change in control of the Company. In the event of a merger or consolidation of
the Company with or into another corporation or the sale of all or
substantially all of the Company's assets in which the successor corporation
does not assume outstanding options or issue equivalent options, the Board of
Directors of the Company is required to provide accelerated vesting of
outstanding options.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
41
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
9,750,000 shares of Common Stock. Of these shares, the 2,000,000 shares sold
in this Offering will be freely transferable by persons other than affiliates
of the Company without restriction or further registration under the Act. The
remaining 7,750,000 shares of Common Stock outstanding are "restricted
securities" (the "Restricted Shares") within the meaning of Rule 144 under the
Act and may not be sold in the absence of registration under the Act unless an
exemption from registration is available, including an exemption afforded by
Rule 144.
The Company's current shareholders, Directors and executive officers have
entered into "lock-up" agreements with the Representatives of the
Underwriters, providing that, subject to certain exceptions, they will not
offer, sell or otherwise dispose of any shares of Common Stock for a period of
180 days after the date of this Prospectus without the prior written consent
of Ladenburg Thalmann & Co. Inc. acting as one of the Representatives of the
Underwriters. Following the expiration of the "lock-up" period, all of the
Restricted Shares will be eligible for resale in the public market pursuant to
Rule 144, subject to certain limitations described below.
Rule 144, as currently in effect, provides that an affiliate of the Company
or a person (or persons whose sales are aggregated) who has beneficially owned
Restricted Shares for at least one year, or a non-affiliate who has
beneficially owned Restricted Shares for at least one year but less than two
years, is entitled to sell, commencing 90 days after the date of this
Prospectus, within any three-month period, a number of shares that does not
exceed the greater of one percent of the then outstanding shares of Common
Stock (97,500 shares immediately after this Offering) or the average weekly
trading volume in the Common Stock during the four calendar weeks preceding
such sale. Sales under Rule 144 also are subject to certain manner-of-sale
provisions, notice requirements and the availability of current public
information about the Company. However, a person who is not an affiliate of
the Company at any time during the three months preceding a sale, and who has
beneficially owned Restricted Shares for at least two years, is entitled to
sell such shares under Rule 144 without regard to the limitations described
above.
As of the date of this Prospectus, there were outstanding options to
purchase 100,000 shares of Common Stock all of which were granted in February
1998 and none of which are presently exercisable.
Since there has been no public market for shares of the Common Stock prior
to this Offering, the Company is unable to predict the effect that sales made
pursuant to Rule 144, or otherwise, may have on the prevailing market price at
such times for shares of the Common Stock. Nevertheless, sales of a
substantial amount of the Common Stock in the public market, or the perception
that such sales could occur, could adversely affect the market prices. See
"Risk Factors--Shares Eligible for Future Sale."
42
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, a copy of
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part, the underwriters named below (the "Underwriters"), have
severally, and not jointly, agreed, through Ladenburg Thalmann & Co. Inc. and
Cruttenden Roth Incorporated, the Representatives of the Underwriters (the
"Representatives"), to purchase from the Company, and the Company has agreed
to sell to the Underwriters, the aggregate number of shares of Common Stock
set forth opposite their respective names:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Ladenburg Thalmann & Co. Inc. .....................................
Cruttenden Roth Incorporated.......................................
---------
Total.......................................................... 2,000,000
=========
</TABLE>
The Underwriters are committed to take and to pay for all of the shares of
Common Stock offered hereby (other than the shares covered by the over-
allotment option described below), if any are purchased.
The Underwriters have advised the Company that they propose to offer all or
part of the Common Stock offered directly to the public initially at the price
to the public set forth on the cover page of this Prospectus, that they may
offer shares to certain dealers at a price that represents a concession of not
more than $ per share, and that the Underwriters may allow, and such dealers
may reallow, a concession of not more than $ per share to certain other
dealers. After the Offering, the price to the public and the concessions may
be changed from time to time by the Representatives.
The Company has granted to the Underwriters an option, exercisable within 30
days after the date of this Prospectus, to purchase up to 300,000 additional
shares of Common Stock at the initial public offering price, less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriters may exercise such option solely to cover over-allotments, if any,
made in connection with the sale of the shares offered hereby. To the extent
the Underwriters exercise such option, each of the Underwriters will be
committed, subject to certain conditions, to purchase the same percentage
thereof as the percentage of the initial shares to be purchased by that
Underwriter.
The Company and certain shareholders have agreed to indemnify the
Underwriters and certain related persons against certain liabilities,
including certain liabilities under the Act, and to contribute to payments the
Underwriters may be required to make in respect thereof.
The Company and its Directors, officers and all holders of the Common Stock
have agreed that they will not, directly or indirectly, offer, sell or
otherwise dispose of any equity securities of the Company or any securities
convertible into or exchangeable for, or any rights to purchase or acquire,
43
<PAGE>
equity securities of the Company for a period of 180 days after the date of
this Prospectus, without the prior written consent of Ladenburg Thalmann & Co.
Inc.
Prior to the Offering, there has been no public market for the Common Stock.
The initial offering price was determined by negotiations between the Company
and the Representatives. Among the factors considered in such negotiations
were the Company's historical results of operations and financial condition,
prospects for the Company and for the industry in which the Company operates,
the Company's capital structure and the general condition of the securities
market.
The Representatives have informed the Company that the Underwriters do not
expect sales to discretionary accounts to exceed 5% of the total number of
shares offered hereby, and the Representatives do not intend to confirm sales
of shares to any account over which they exercise discretionary authority.
In connection with the Offering, the Underwriters may over-allot or affect
transactions which stabilize or maintain the market price of the Common Stock
at a level above that which might otherwise prevail in the open market. Such
transactions may be effected on the Nasdaq National Market or otherwise. Such
stabilizing, if commenced, may be discontinued at any time.
The Company has granted Ladenburg Thalmann & Co. Inc., one of the
Representatives of the Underwriters, a right of first refusal to act as a
manager or placement agent in connection with any public or private offering
of equity, debt or convertible securities the Company may undertake in the
period ending two years from the consummation of this Offering.
BDO Seidman has provided financial consulting services to the Company. Upon
consummation of this Offering the Company will pay to BDO Seidman a fee for
such services not to exceed 1% of the gross proceeds from this Offering, less
amounts paid to date.
The Company's Common Stock has been approved for quotation, subject to
effectiveness, on the Nasdaq National Market under the trading symbol "HKID."
LEGAL MATTERS
Certain legal matters in connection with the legality of the shares offered
by this Prospectus will be passed upon for the Company by Buchanan Ingersoll,
Princeton, New Jersey. Certain legal matters in connection with the Offering
will be passed upon for the Underwriters by Rosenman & Colin LLP, New York,
New York.
EXPERTS
The audited Consolidated Financial Statements of the Company included in
this Prospectus have been included herein and in the Registration Statement in
reliance upon the report of Grant Thornton LLP, independent certified public
accountants, appearing elsewhere herein and upon the authority of said firm as
experts in accounting and auditing.
44
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") of which this Prospectus is a part, under the Act and the rules
and regulations promulgated thereunder, with respect to the shares of Common
Stock offered pursuant to this Prospectus. This Prospectus does not contain
all of the information set forth in the Registration Statement and the
exhibits and schedules thereto, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. Statements
contained in this Prospectus as to the content of any contract, agreement or
other document referred to herein are not necessarily complete, and in each
instance reference is made to the copy of such contract, agreement or other
document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
For further information with respect to the Company and the Common Stock
offered hereby, reference is made to the Registration Statement and such
schedules and exhibits, copies of which may be examined without charge at, or
copies obtained upon payment of prescribed fees from, the Public Reference
Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington D.C. 20549, and will also be available for inspection and copying
at the regional offices of the Commission located at 7 World Trade Center,
13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Such material may also be
accessed electronically by means of the Commission's website on the Internet
at http://www.sec.gov.
The Company intends to furnish to its shareholders annual reports containing
Consolidated Financial Statements audited by its independent public
accountants and quarterly reports containing unaudited Consolidated Financial
Statements for three quarters of each fiscal year.
45
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Certified Public Accountants..................... F-2
Financial Statements
Consolidated Balance Sheets.......................................... F-3
Consolidated Statements of Operations................................ F-4
Consolidated Statement of Shareholders' Equity....................... F-5
Consolidated Statements of Cash Flows................................ F-6
Notes to Consolidated Financial Statements........................... F-7-F-16
Schedule II--Valuation and Qualifying Accounts......................... F-17
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Happy Kids Inc.
We have audited the accompanying consolidated balance sheets of Happy Kids
Inc. and Subsidiaries as of December 31, 1996 and 1997, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Happy Kids
Inc. and Subsidiaries as of December 31, 1996 and 1997, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
We have also audited Schedule II of Happy Kids Inc. and Subsidiaries as of
and for the three years ended December 31, 1997. In our opinion, this schedule
presents fairly, in all material respects, the information required to be set
forth therein.
New York, New York
January 29, 1998
The foregoing auditors' report is the form which will be signed upon
consummation of the transaction described in Note A to the financial
statements.
/s/ Grant Thornton LLP
New York, New York
February 24, 1998
F-2
<PAGE>
HAPPY KIDS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31,
DECEMBER 31, DECEMBER 31, 1997
1996 1997 (NOTE P)
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash.................................. $ 674 $ 374 $ 374
Due from factor....................... 16,925 24,232 24,232
Accounts receivable--trade (net of
allowance of $486 and $513 at
December 31, 1996 and 1997,
respectively)........................ 1,084 316 316
Inventories........................... 9,488 16,316 16,316
Due from shareholders................. 405 347 347
Other current assets.................. 2,696 1,139 1,748
------- ------- -------
Total current assets................ 31,272 42,724 43,333
FIXED ASSETS--NET....................... 1,732 1,476 1,476
OTHER ASSETS:
Due from shareholders................. 410 -- --
Other................................. 572 752 752
------- ------- -------
Total other assets.................. 982 752 752
------- ------- -------
Total assets........................ $33,986 $44,952 $45,561
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Due to bank........................... $19,732 $24,863 $24,863
Current portion--capital lease obliga-
tions................................ 55 49 49
Accounts payable and accrued liabili-
ties................................. 6,258 11,393 11,393
Due to shareholders................... -- -- 2,000
------- ------- -------
Total current liabilities........... 26,045 36,305 38,305
DEFERRED RENT PAYABLE................... 740 584 584
CAPITAL LEASE OBLIGATIONS............... 68 19 19
DUE TO SHAREHOLDERS..................... 1,560 1,400 4,954
COMMITMENTS
SHAREHOLDERS' EQUITY:
Preferred stock--5,000 shares
authorized, $.01 par value; no shares
issued and outstanding............... -- -- --
Common stock--30,000 shares
authorized, $.01 par value; 7,750
shares issued and outstanding at
December 31, 1996 and 1997,
respectively......................... 78 78 78
Additional paid-in capital............ 1,119 1,119 1,119
Retained earnings..................... 4,376 5,447 502
------- ------- -------
Total shareholders' equity.......... 5,573 6,644 1,699
------- ------- -------
Total liabilities and shareholders'
equity............................. $33,986 $44,952 $45,561
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
HAPPY KIDS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
-------- ------- --------
<S> <C> <C> <C>
Net sales........................................... $ 79,828 $90,723 $106,673
Cost of goods sold.................................. 65,036 69,886 79,748
-------- ------- --------
Gross profit...................................... 14,792 20,837 26,925
Operating expenses:
Selling, design and shipping...................... 7,986 7,686 10,058
General and administrative........................ 6,830 7,684 8,399
-------- ------- --------
Total operating expenses........................ 14,816 15,370 18,457
-------- ------- --------
Operating earnings (loss)....................... (24) 5,467 8,468
Interest expense, net............................... 2,375 2,980 3,803
-------- ------- --------
Income (loss) before income taxes............... (2,399) 2,487 4,665
Income taxes (benefit).............................. (757) 119 473
-------- ------- --------
Net income (loss)............................... $ (1,642) $ 2,368 $ 4,192
======== ======= ========
Basic and diluted income (loss) per common share.... $ (0.21) $ 0.31 $ 0.54
======== ======= ========
Weighted average common shares outstanding.......... 7,750 7,750 7,750
======== ======= ========
Pro forma data (unaudited):
Historical income (loss) before provision for
income taxes..................................... $ (2,399) $ 2,487 $ 4,665
Income taxes (benefit)............................ (936) 990 1,961
-------- ------- --------
Net income (loss)............................... $ (1,463) $ 1,497 $ 2,704
======== ======= ========
Pro forma net income (loss) per share............... $ (0.18) $ 0.18 $ 0.33
======== ======= ========
Pro forma weighted average common shares
outstanding........................................ 8,305 8,305 8,305
======== ======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
HAPPY KIDS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------- PAID--IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
------ ------ ---------- --------
<S> <C> <C> <C> <C>
Balance at January 1, 1995................... 7,750 $78 $ 976 $ 5,082
Waived payment of interest on shareholder's
note...................................... -- -- 65 --
Dividends.................................. -- -- -- (711)
Net loss................................... -- -- -- (1,642)
----- --- ------ -------
Balance at December 31, 1995................. 7,750 78 1,041 2,729
Waived payment of interest on shareholder's
note...................................... -- -- 78 --
Dividends.................................. -- -- -- (721)
Net income................................. -- -- -- 2,368
----- --- ------ -------
Balance at December 31, 1996................. 7,750 78 1,119 4,376
Dividends.................................. -- -- -- (3,121)
Net income................................. -- -- -- 4,192
----- --- ------ -------
Balance at December 31, 1997................. 7,750 $78 $1,119 $ 5,447
===== === ====== =======
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
HAPPY KIDS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss)................................. $(1,642) $ 2,368 $ 4,192
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation and amortization................... 232 388 336
Provision for losses on accounts receivable..... 112 212 354
Deferred income taxes........................... (130) (8) 164
Noncash interest expense........................ 65 78
Changes in operating assets and liabilities:
Accounts receivable........................... 335 10,521 741
Due from factor............................... -- (16,925) (7,307)
Inventories................................... (4,702) 5,669 (6,829)
Other current assets.......................... (463) (471) 857
Other assets.................................. 19 22 13
Accounts payable and accrued liabilities...... 857 919 5,083
Due from shareholders......................... (793) 308 469
------- ------- -------
Net cash (used in) provided by operating
activities....................................... (6,110) 3,081 (1,927)
------- ------- -------
Cash flows from investing activities
Acquisition of fixed assets....................... (578) (378) (79)
------- ------- -------
Cash flows from financing activities
Net borrowings under line of credit............... 6,630 (1,608) 5,131
Payments on capital lease......................... (11) (43) (56)
Borrowings from shareholders...................... 300 60 (160)
Dividends paid.................................... (711) (721) (3,121)
Payments on initial public offering costs......... -- -- (88)
------- ------- -------
Net cash provided by (used in) financing
activities..................................... 6,208 (2,312) 1,706
------- ------- -------
NET (DECREASE) INCREASE IN CASH................. (480) 391 (300)
Cash at beginning of year........................... 763 283 674
------- ------- -------
Cash at end of year................................. $ 283 $ 674 $ 374
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
HAPPY KIDS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE A--SUMMARY OF ACCOUNTING POLICIES
The Company was incorporated in 1988 in New York under the name O'Boy Inc.
and changed its name to Happy Kids Inc. (the "Company") in December 1997.
Historically, the Company operated as separate business entities, with the
first of such entities commencing operations in 1979, all under the common
ownership of the shareholders of the Company. Immediately prior to the
effectiveness of the Offering as described in Note O, all of such separate
entities shall become wholly-owned subsidiaries of the Company. The Company
will issue 4,263 shares of common stock, to the principal shareholders, in
exchange for their ownership in these separate business entities. All share
and per share amounts have been restated to retroactively reflect the
reorganization.
The accompanying consolidated financial statements include the consolidated
accounts of the Company and its wholly-owned subsidiaries to reflect the
reorganization as stated above. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The Company is a designer and marketer of custom-designed licensed and
branded children's apparel. The Company's revenues are derived from the sale
of children's apparel to mass-market retailers, mid-tier distributors and
department stores.
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows:
1. Revenue Recognition
Sales are recognized when merchandise is shipped to customers.
2. Inventories
Inventories, consisting primarily of finished goods, are stated at the lower
of cost or market. One subsidiary determines cost by the last-in, first-out
("LIFO") method which represented approximately $3,913, $1,637 and $808 of
total inventory at December 31, 1995, 1996 and 1997, respectively. The other
subsidiaries determine cost by the first-in, first-out ("FIFO") method.
3. Depreciation and Amortization
The Company depreciates fixed assets over their estimated useful lives by
the straight-line method. Leasehold improvements are depreciated over their
expected useful life or the life of the respective leases, whichever is
shorter.
The following are the estimated lives of the Company's fixed assets:
<TABLE>
<S> <C>
Furniture and fixtures 5 years to 10 years
Equipment 5 years to 10 years
Leasehold improvements up to 10 years
</TABLE>
4. Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and demand deposits.
F-7
<PAGE>
HAPPY KIDS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
-------- -------- -------
<S> <C> <C> <C>
Cash paid during the year for
Interest........................................ $ 2,311 $ 2,711 $ 2,992
Income taxes.................................... 116 280 122
</TABLE>
Noncash investing and financing activities:
For the years ended December 31, 1995 and 1996, the Company acquired
equipment totalling approximately $115 and $49, respectively, under capital
leases.
5. Income Taxes
Deferred income taxes are determined based on the difference between the tax
basis of an asset or liability and its reported amount in the financial
statements using enacted tax rates for the year in which the differences are
expected to reverse.
The principal types of differences between assets and liabilities for
financial statement and tax return purposes giving rise to deferred income
taxes are accrued expenses, accumulated depreciation, certain costs
capitalized to inventory and allowance for doubtful accounts. A deferred tax
asset has been recorded for these differences.
Through December 31, 1997, the Company filed separate income tax returns for
its subsidiaries. Two wholly-owned subsidiaries which incurred approximately
$(2,163), $(508) and $999 of pretax (loss) income for the years ended December
31, 1995, 1996 and 1997, respectively, were C Corporations and, accordingly,
were taxed or received tax benefits at the appropriate corporate Federal and
state rates. The remaining subsidiaries are S Corporations or LLCs and income
taxes on the earnings are paid personally by the shareholders of these
companies pursuant to an election for Federal income tax purposes not to be
taxed as a corporation. Accordingly, no provision has been made in the
accompanying financial statements for Federal income taxes on the net earnings
of these companies. Instead, the shareholders report their pro rata share of
corporate taxable income or loss on their respective individual tax returns. A
provision for state income taxes is made for those states not recognizing S
Corporation status.
The S Corporation and Partnership status will terminate immediately prior to
the effective date of the Initial Public Offering. (See Note O.) The Company
will convert to a C Corporation and will be subject to both Federal and state
income taxes and will file a consolidated Federal income tax return. Any
income tax adjustment required as a result of the conversion will be reflected
in the period in which it becomes effective. The effect would increase
deferred tax assets at December 31, 1997 by approximately $609 and net
earnings by the same amount. (See Note P.)
6. Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period. Actual
results could differ from those estimates.
F-8
<PAGE>
HAPPY KIDS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
7. Fair Value of Financial Instruments
Due to the short-term nature of the bank loans, the fair value of the
Company's due to bank approximates carrying value. Furthermore, the carrying
value of all other financial instruments potentially subject to valuation risk
(principally consisting of cash, accounts receivable, due from factor and
accounts payable) also approximates fair value.
8. Future Effect of Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which is effective for the Company's fiscal year ending
December 31, 1998. The statement addresses the reporting and displaying of
comprehensive income and its components. Earnings per share will only be
reported for net income and not for comprehensive income. Adoption of SFAS No.
130 is not expected to have a material effect on the Company's financial
statement disclosures.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information," which is effective for the
Company's fiscal year ending December 31, 1998. The statement changes the way
public companies report information about segments of their business in their
annual financial statements and requires them to report selected segment
information in their quarterly reports. Adoption of SFAS No. 131 is not
expected to have a material effect on the Company's financial statement
disclosures.
9. Earnings Per Share
The Company has adopted SFAS No. 128, "Earnings Per Share," which requires
public companies to present basic earnings per share and, if applicable,
diluted earnings per share. In accordance with SFAS No. 128, all comparative
periods have been restated as of December 31, 1997. Basic EPS is based on the
weighted average number of common shares outstanding without consideration of
common stock equivalents. Diluted earnings per share is based on the weighted
average number of common and common equivalent shares outstanding. There were
no common stock equivalent shares outstanding at December 31, 1997.
10. Reclassification
Certain prior year amounts have been reclassified to conform to the 1997
presentation.
NOTE B--INVENTORIES
Inventories consist of the following finished goods:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------- -------
<S> <C> <C>
Warehouse............................................... $ 5,947 $ 8,716
In-transit and overseas................................. 4,709 8,010
LIFO valuation allowance................................ (1,168) (410)
------- -------
$ 9,488 $16,316
======= =======
</TABLE>
F-9
<PAGE>
HAPPY KIDS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
For the years ended December 31, 1996 and 1997, the liquidation of LIFO
inventories decreased cost of sales and, therefore, increased income before
taxes by $521 and $390, respectively.
NOTE C--FACTORED ACCOUNTS RECEIVABLE--WITHOUT RECOURSE AS TO CREDIT RISK
The Company has an agreement with a commercial finance company which
provides for the factoring of trade accounts receivable. The factoring charge
amounts to 0.55% of the receivables assigned. Factor charges for the years
ended December 31, 1996 and 1997 were approximately $643 and $735,
respectively. The commercial finance company also guarantees the Company's
letters of credit and issues letters of guarantee to company suppliers. The
commercial finance company has a first lien on all of the Company's tangible
assets as collateral for all of its obligations under the financing agreement.
Advances and loans under the agreement bear interest at 1% above the prime
rate.
The aggregate amounts of such guarantees and advances are limited by formula
based upon the uncollected balance of 85% of eligible factored receivables,
and 50% of eligible inventory collateral, plus 50% of letters of credit
outstanding, and 25% of open letters of credit and any overadvance amount
permitted by the lender. At December 31, 1996 and 1997, the maximum amount of
guarantees and advances permitted by such formula was approximately $30,534
and $34,723, respectively.
Accounts receivable are factored without recourse as to credit risk but with
recourse for any claims by the customer for adjustments in the normal course
of business relating to price errors, shortages, etc. The uncollected balance
of receivables held by the commercial finance company amounted to
approximately $16,925 and $24,232 at December 31, 1996 and 1997, respectively.
NOTE D--OTHER CURRENT ASSETS
Included in other current assets is the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
------ ------
<S> <C> <C>
Advances to suppliers and others.............................. $1,488 $ 638
Prepaid and refundable income taxes........................... 304 43
Prepaid expenses and other.................................... 753 418
Deferred income taxes......................................... 151 40
------ ------
$2,696 $1,139
====== ======
</TABLE>
NOTE E--FIXED ASSETS
Fixed assets are recorded at cost and consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
------ ------
<S> <C> <C>
Furniture and fixtures........................................ $ 869 $ 893
Equipment..................................................... 602 657
Leasehold improvements........................................ 1,157 1,158
------ ------
2,628 2,708
Less accumulated depreciation and amortization................ 896 1,232
------ ------
$1,732 $1,476
====== ======
</TABLE>
F-10
<PAGE>
HAPPY KIDS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE F--DUE TO BANK
The Company has a $42,000 financing agreement with several banks that
expires on December 31, 1998, subject to annual renewals (adjusted seasonally
to $47,000 for the period January 1, 1998 through April 30, 1998). The first
$5,000 of borrowings under this line of credit bears interest at the prime
rate plus 4% (12.5% at December 31, 1997). The remaining borrowings bear
interest at the prime rate plus 1% (9.5% at December 31, 1997). Borrowings are
collateralized by substantially all of the assets of the Company. In addition,
the shareholders have personally guaranteed the debt. At December 31, 1996 and
1997, the Company has borrowed $19,732 and $24,863, respectively, under this
line. The agreement provides for various restrictive financial covenants,
including the requirement to maintain minimum tangible net worth and working
capital levels.
NOTE G--ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
------ -------
<S> <C> <C>
Accounts payable.............................................. $5,280 $ 9,468
Accrued liabilities........................................... 895 1,579
Income taxes payable.......................................... 83 346
------ -------
$6,258 $11,393
====== =======
</TABLE>
NOTE H--TRANSACTIONS WITH SHAREHOLDERS
Notes payable to shareholder consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
------ ------
<S> <C> <C>
7% loan payable................................................ $ 160 --
7% due to shareholder.......................................... 1,400 $1,400
------ ------
$1,560 $1,400
====== ======
</TABLE>
Interest expense on these notes for the years ended December 31, 1995, 1996
and 1997 was approximately $95, $107 and $98, respectively. Interest totalling
$65 and $78 for the years ended December 31, 1995 and 1996, respectively, was
waived and recorded as additional paid-in capital.
The three principal shareholders have entered into a shareholders' agreement
dated January 1, 1998. Such agreement provides tag--along rights to each of
the parties thereto in the event that any of the other parties elect to sell
their common stock under certain circumstances. In addition, each party is
granted a right of first refusal to purchase any shares of common stock
offered for sale by any other party to the agreement.
For the years ended December 31, 1995, 1996 and 1997, the Company
contributed $143, $127 and $180, respectively, to a charitable foundation
managed by an executive of the Company.
F-11
<PAGE>
HAPPY KIDS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE I--COMMITMENTS
The Company leases showroom, office and warehouse facilities through May 31,
2006 at the following minimum annual rentals:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ ------
<S> <C>
1998.................................. $1,013
1999.................................. 1,004
2000.................................. 766
2001.................................. 670
2002.................................. 670
Thereafter............................ 2,289
------
$6,412
======
</TABLE>
Rent expense for the years ended December 31, 1995, 1996 and 1997 was
approximately $1,385, $978 and $976, respectively.
At December 31, 1997, the Company is contingently liable under open letters
of credit in the amount of approximately $15,875.
The Company has entered into royalty agreements that provide for royalty
payments from 6% to 12% of net sales of licensed products. The Company
incurred royalty expense (included in cost of goods sold) of approximately
$2,339, $3,685 and $4,113 for the years ended December 31, 1995, 1996 and
1997, respectively. Based on minimum sales requirements, future minimum
royalty payments required under these agreements are:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ ------
<S> <C>
1998.................................. $2,429
1999.................................. 2,555
2000.................................. 1,788
2001.................................. 1,535
2002.................................. 218
Thereafter............................ 73
------
$8,598
======
</TABLE>
NOTE J--CAPITAL LEASE OBLIGATIONS
Included in fixed assets, as of December 31, 1997, is approximately $215
relating to amounts capitalized under certain equipment leases. Accumulated
depreciation under capital leases, at December 31, 1997, was approximately
$112. The present values of minimum future obligations have been calculated
based on interest rates at the inception of the lease. The following schedule
sets forth the future minimum lease payments under capital leases at December
31, 1997:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1998.................................................................. $54
1999.................................................................. 21
---
Net minimum lease payments............................................ 75
Less amount representing interest..................................... (7)
---
Present value of minimum lease obligations............................ $68
===
</TABLE>
F-12
<PAGE>
HAPPY KIDS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE K--EMPLOYEE BENEFIT PLAN
The Company has established a 401(k) Profit Sharing Plan covering
substantially all eligible employees. The plan allows employees to defer a
percentage of their annual earnings subject to limitation of Section 401(m) of
the Internal Revenue Code.
The plan provides that the Company can make discretionary contributions.
These contributions are allocated to the participant based on the
participant's compensation in proportion to the compensation of all
participants. The Company's contribution to the plan for the years ended
December 31, 1995, 1996 and 1997 was approximately $27, $31 and $34,
respectively.
NOTE L--CONCENTRATIONS
During the years ended December 31, 1995, 1996 and 1997, approximately 41%,
40% and 41%, respectively, of total purchases of the Company were made from
companies located in one overseas country. In addition, for the years ended
December 31, 1995, 1996 and 1997, 35%, 37%, and 31%, respectively, of total
purchases of the Company were made from companies located in a second overseas
country. In addition, the Company relied on two manufacturers for 10% and 18%,
11% and 23%, and 11% and 13%, of the Company's production for the years ended
December 31, 1995 and 1996 and 1997, respectively. The Company's import
operations are subject to constraints imposed by bilateral textile agreements
between the United States and a number of foreign countries. These agreements
impose quotas on the amount and types of goods which can be imported into the
United States from these countries. The Company's operations may be adversely
affected by political instability, resulting in the disruption of trade from
foreign countries in which the Company's contractors and suppliers are
located, the imposition of additional regulations relating to imports or
duties, taxes, quotas and other charges on imports. The Company is unable to
predict whether any additional regulations, duties, taxes, quotas or other
charges may be imposed on the importation of its products. The assessment of
any of these items could result in increases in the cost of such imports and
affect sales and profitability. In addition, the failure of manufacturers to
ship some or all of the Company's orders on time could impact the Company's
ability to deliver products to its customers. The Company does not have long-
term contracts with any of its contract manufacturers. The Company believes
that alternate sources of manufacturing are available if the need were to
arise, although any substantial delay in locating, or inability to locate,
acceptable alternate sources of manufacturing could have a material adverse
effect on the Company's business, financial condition and results of
operations.
The Company's sales are made principally to department stores, mid-tier
distributors and mass market retailers of children's apparel. Sales to
customers that represent more than 10% of the Company's net sales are as
follows:
<TABLE>
<S> <C>
Year ended December 30, 1997................................ 17%, 14% and 11%
Year ended December 30, 1996................................ 22% and 13%
Year ended December 30, 1995................................ 18%, 13% and 10%
</TABLE>
The Company estimates an allowance for doubtful accounts based on the
creditworthiness of their customers as well as general economic conditions.
Consequently, an adverse change in those conditions could affect the Company's
estimate.
F-13
<PAGE>
HAPPY KIDS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE M--INCOME TAXES
The components of income tax expense (benefit) are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1995 1996 1997
----- ---- ----
<S> <C> <C> <C>
Current
Federal................................................. $(686) $ 17 $347
State and city.......................................... 59 109 (38)
----- ---- ----
(627) 126 309
Deferred.................................................. (130) (7) 164
----- ---- ----
$(757) $119 $473
===== ==== ====
</TABLE>
Income tax expense does not include income taxes for those subsidiaries
which are S Corporations or LLC's. Reference is made to Note A-5.
The tax effect of temporary differences which gave rise to deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Provision for doubtful accounts.............................. $ 34 $ 72 $ 33
Accrued expenses............................................. 330 327 280
Depreciation................................................. 28 57 (1)
Costs capitalized to inventory............................... 81 36 16
Other........................................................ 13 -- --
---- ---- ----
Net deferred tax asset....................................... $486 $492 $328
==== ==== ====
</TABLE>
During the year ended December 31, 1996, the Internal Revenue Service
("IRS") completed an examination of the tax returns of Happy Kids, Ltd. for
the years ended December 31, 1991, 1992 and 1993. As a result of the
examination, Happy Kids, Ltd. recorded an additional $235 in Federal and state
income taxes and $55 in penalties and interest.
NOTE N--SHAREHOLDERS' EQUITY
1. Stock Option Plan
In December 1997, the Company approved a Stock Option Plan (the "Plan") to
officers, directors and key employees of the Company. Stock options granted
pursuant to the plan shall be authorized by the Board of Directors. The
aggregate number of shares which may be issued under the Plan shall not exceed
800 shares of common stock. As of January 1, 1998, the Company has not granted
any stock options or stock purchase rights to any person. The Company intends
to adopt only the disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation."
2. Stock Split
As of December 31, 1997, the Company effected a 34,875-for-1 stock split of
the Company's outstanding common stock. A total of 7,750 shares of common
stock will be issued and outstanding
F-14
<PAGE>
HAPPY KIDS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
after the split. All share and per share amounts have been restated to
retroactively reflect the stock splits.
NOTE O--SUBSEQUENT EVENTS
1. Initial Public Offering
The Company intends to offer 2,000 shares of common stock to the general
public through an initial public offering (the "Offering"). Effective upon
consummation of the Offering, the common stock of the Company will consist of
30,000 shares of common stock, authorized, par value $.01 per share, of which
9,750 will be issued and outstanding.
At December 31, 1997, included in other assets is approximately $162 of
deferred registration costs incurred in connection with the Offering of the
Company's common stock. These costs will be charged against paid-in capital
upon successful completion of the Offering. If the Offering is unsuccessful,
such costs will be charged to expense.
2. Employment Agreement
Effective January 1, 1998, the Company entered into employment agreements
with its executive officers for initial terms expiring in two years at initial
aggregate annual base salaries of $1,250.
NOTE P--PRO FORMA INFORMATION (UNAUDITED)
1. Pro Forma Balance Sheet
The pro forma balance sheet at December 31, 1997 has been adjusted for the
pro forma effects of: (1) additional deferred tax assets of $609 as a result
of termination of the S Corporation status which will be credited to
operations in the period in which the termination occurs and (2) the recording
of a four-year 5.7%, $5,554 note payable to the shareholders, of which $2,000
will be paid from the proceeds of the Offering, relating to undistributed
equity resulting from the termination of the S Corporation or LLC Status. The
notes will provide for the timely distribution of amounts necessary to pay
personal income taxes of the shareholders or members due on amounts earned by
the S Corporation or LLCs for the period January 1, 1998 through the
termination of the S Corporation or LLC status. The existing due to
shareholders of $1,400 (see Note H) will become subject to the same terms as
the above promissory notes.
2. Pro Forma Results of Operations and Pro Forma Income Taxes
Pro forma adjustments in the statements of operations for the year ended
December 31, 1997 reflect a provision for income taxes based upon pro forma
pretax income as if the Company had been subject to Federal and additional
state and local income taxes.
As disclosed in Note A-5, the Company has elected for certain of its
affiliates to be taxed as an S Corporation or to be treated as a partnership
pursuant to the Internal Revenue Code. In connection with the Offering hereby,
the Company will terminate its S and Partnership elections and become subject
to Federal and additional state and local income taxes. The pro forma
provision for income taxes represents the income tax provisions that would
have been reported had the Company been subject to Federal and additional
state and local income taxes. The effective pro forma tax rate of the Company
differs from the Federal rate of 34% primarily due to the effects of state
income taxes.
F-15
<PAGE>
HAPPY KIDS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The pro forma provision (benefit) for income taxes, after giving effect to
the Federal statutory rate of 34% and an approximate state tax provision of 8%
after reflecting the Federal tax benefit, consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996 1997
------- ---------------
<S> <C> <C> <C>
Federal.............................................. $ (668) $ 661 $ 1,481
State................................................ (268) 329 480
------- ------ --------
$ (936) $ 990 $ 1,961
======= ====== ========
</TABLE>
The differences between pro forma tax expense (benefit) shown in the
statements of operations and the pro forma computed income tax expense based
on the Federal statutory corporate rate are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Computed income taxes based on Federal statutory
rate of 34%...................................... $ (816) $ 845 $ 1,586
State income taxes, net of Federal benefit........ (177) 217 317
Benefit of Utilization of Net Operating Loss...... -- (160) --
Interest waived on debt........................... 25 33 --
Officer's life insurance.......................... 18 40 32
Other............................................. 14 15 26
------- ------- --------
$ (936) $ 990 $ 1,961
======= ======= ========
</TABLE>
3. Pro Forma Net Income and Net Income Per Common Share
Pro forma net income represents the historical amounts after the pro forma
adjustments discussed above.
Pro forma net income per share is based on the weighted average number of
shares outstanding during the period. The shares outstanding for the period
give retroactive effect to the reorganization and recapitalization of the
Company as well as 555 shares deemed to be outstanding, which represent the
approximate number of shares deemed to be sold by the Company (at an assumed
initial public offering price of $10.00 per share) to fund the portion of the
$5,554 pro forma distribution during the year ending December 31, 1997.
4. Supplemental Pro Forma Net Income and Net Income Per Share
The Company's supplemental pro forma net income and net income per share for
the year ended December 31, 1997 are $4,147 and $0.42, respectively. The
supplemental pro forma net income and net income per share reflect the
issuance of shares necessary to retire $15,800 of amounts due to bank and the
resulting increase in net income in the amounts of $1,441 for the year ended
December 31, 1997, respectively, as of the beginning of 1997 due to a
reduction in interest expense and related fees. The calculation is based on
the weighted average shares outstanding used in the calculation of net income
per share, adjusted for 2,000 estimated shares at $10.00 per share that would
be issued by the Company to retire these obligations.
Weighted average common shares of 9,885 outstanding represent the weighted
average number of shares of common stock outstanding adjusted for the number
of shares of common stock required to pay down $15,800 of the outstanding debt
and $5,554 of notes payable, of which $2,000 will be repaid to shareholders
from the proceeds of the offering. (See Note P-3.)
F-16
<PAGE>
HAPPY KIDS INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- --------------------- -------------- ----------
ADDITIONS
----------------------------------------------------------
(1) (2)
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS (A) PERIOD
----------- ---------- ---------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1995
Deducted from asset
accounts
Allowance for
doubtful accounts... $162 $90 $ 22 -- $274
Year ended December 31,
1996
Deducted from asset
accounts
Allowance for
doubtful accounts... $274 $13 $199 -- $486
Year ended December 31,
1997
Deducted from asset
accounts
Allowance for
doubtful accounts
and other
receivables......... $486 $31 $323 -- $840
</TABLE>
- --------
(a) Accounts written off as uncollectible.
F-17
<PAGE>
[The inside back cover contains a picture of a child dressed in certain of
the Company's apparel products and a bubble expression containing logos
relating to the Company's licensing or private label relationships with each
of: B.U.M. Equipment, AND I, Sesame Street for KMart, Nickelodeon's Rugrats,
ACA Joe (with new for 1998 sticker), New Legends for Kids R Us, Warner
Brothers Scooby Doo (with new for 1998 sticker), Nickelodeon (with new for
1998 sticker), Ocean Pacific, Lullaby Club for Target, Canyon River Blues for
Sears and E.N.U.F. Internationale (with new for 1998 sticker). Below the child
is the language "New for 1998 indicates that initial sales of such products are
expected to occur subsequent to December 31, 1997."]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE COMMON STOCK TO WHICH IT RELATES OR
AN OFFER IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE SUCH DATE.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
The Company.............................................................. 14
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 15
Dilution................................................................. 16
Capitalization........................................................... 17
Selected Consolidated Financial Data..................................... 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business................................................................. 26
Management............................................................... 34
Certain Transactions..................................................... 38
Principal Shareholders................................................... 39
Description of Capital Stock............................................. 40
Shares Eligible for Future Sale.......................................... 42
Underwriting............................................................. 43
Legal Matters............................................................ 44
Experts.................................................................. 44
Additional Information................................................... 45
Index to Consolidated Financial Statements............................... F-1
</TABLE>
---------------
UNTIL , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICI-
PATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,000,000 SHARES
LOGO HAPPY KIDS
COMMON STOCK
-------------
PROSPECTUS
-------------
LADENBURG THALMANN & CO. INC.
CRUTTENDEN ROTH
INCORPORATED
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemized estimate of fees and expenses
payable by the Company in connection with the Offering described in this
Registration Statement, other than underwriting discounts and commissions:
<TABLE>
<S> <C>
SEC registration fee............................................ $ 7,463.50
NASD filing fee................................................. 3,030.00
Nasdaq/NNM listing fee.......................................... 75,625.00
Counsel fees and expenses....................................... 180,000.00
Accounting fees and expenses.................................... 150,000.00
Financial consulting fee........................................ 200,000.00
Blue sky fees and expenses...................................... 10,000.00
Printing expenses............................................... 150,000.00
Transfer agent and registrar fees............................... 3,500.00
Miscellaneous................................................... 20,381.50
-----------
Total......................................................... $800,000.00
===========
</TABLE>
- --------
All of the above expenses will be paid by the Company.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article XI of the Company's By-laws specifies that the Company shall
indemnify its directors and officers because he or she was or is a director or
officer of the Company or was or is serving at the request of the Company as a
director or officer of another entity to the full extent that such right of
indemnity is permitted by the laws of the State of New York. This provision of
the By-laws is deemed to be a contract between the Company and each director
and officer who serves in such capacity at any time while such provision and
the relevant provisions of the New York Act are in effect, and any repeal or
modification thereof shall not offset any action, suit or proceeding
theretofore or thereafter brought or threatened based in whole or in part upon
any such state of facts. The affirmative vote of the holders of at least 80%
of the voting power of all outstanding shares of the capital stock of the
Company is required to adopt, amend or repeal such provision of the By-laws.
The Company has executed indemnification agreements with each of its
officers and directors pursuant to which the Company has agreed to indemnify
such parties to the full extent permitted by law, subject to certain
exceptions, if such party becomes subject to an action because such party is a
director, officer, employee, agent or fiduciary of the Company.
Section 402 of the New York Act enables a corporation in its certificate of
incorporation to limit the personal liability of members of its board of
directors for violation of a director's duty to the corporation. This Section
does not, however, limit the liability of a director for failing to act in
good faith, engaging in intentional misconduct or knowingly violating a law,
or from any transaction in which the director derived an improper personal
benefit. This Section also will have no effect on claims arising under the
federal securities laws. The Company's Certificate of Incorporation limits the
liability of its Directors as authorized by Section 402 of the New York Act.
The affirmative vote of the holders of at least 80% of the voting power of all
outstanding shares of the capital stock of the Company is required to amend
such provisions.
The Company intends to obtain liability insurance for the benefit of its
directors and officers which will provide coverage for losses of directors and
officers for liabilities arising out of claims against such
II-1
<PAGE>
persons acting as directors or officers of the Company (or any subsidiary
thereof) due to any breach of duty, neglect, error, misstatement, misleading
statement, omission or act done by such directors and officers, except as
prohibited by law.
At present, there is no pending litigation or proceeding involving a
director or officer of the Company as to which indemnification is being sought
nor is the Company aware of any threatened litigation that may result in
claims for indemnification by any director or officer.
Reference is made to Section 6 of the underwriting agreement, the proposed
form of which is filed as Exhibit One, in which the underwriters agree to
indemnify the directors and officers of the Company and certain other persons,
against certain civil liabilities, including certain liabilities under the
Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Immediately prior to the effectiveness of this Offering, the Company will
acquire all of the issued and outstanding shares of certain related entities
of the Company, in exchange for shares of Common Stock of the Company, from
each of Jack Benun and Mark Benun. Each of Jack Benun and Mark Benun will
receive 2,131,250 shares of the Company's Common Stock in exchange for each of
their 50.0% ownership interests in each of Happy Kids Children's Apparel,
Ltd., Talk of the Town Apparel Corp., O.P. Kids, L.L.C., H.O.T. Kidz, L.L.C.,
Hawk Industries, Inc. and J & B 18 Corp.
The Company does not expect to employ an underwriter in connection with the
issuance and sale of the securities described above. The Company claims that
the issuance and sale of the foregoing securities will be exempt from
registration under the Act pursuant to Section 4(2) thereof, no public
Offering having been involved and securities having been acquired for
investment and not with a view to distribution. Appropriate legends will be
affixed to the stock certificates issued in such transactions. All recipients
had adequate access to information about the Company.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
1 Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation.
3.2 Amended and Restated Bylaws.
4.1* Voting Agreement, dated January 1, 1998, by and between Jack Benun
and Mark Benun.
4.2* Shareholder Agreement, dated January 1, 1998, by and among Jack
Benun, Mark Benun and Isaac Levy.
5* Opinion of Buchanan Ingersoll as to validity of Common Stock.
10.1 1997 Stock Plan.
10.2 Form of Indemnification Agreement executed by each of the Company's
directors and officers.
10.3 Lease Agreement, by and between J & B 18 Corp. and SZS 33 Associates
L.P., as amended.
10.4 Lease Agreement, by and between Hawk Industries, Inc. and Triangle
Fidelco Industrial Center, as amended.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
10.5 Financing Agreement with the CIT Group/Commercial Services, Inc.,
as Agent for itself and certain other lenders, as amended.
10.6 Notification Factoring Agreement.
10.7 Employment Agreement, by and between the Company and Jack Benun.
10.8 Employment Agreement, by and between the Company and Mark Benun.
10.9 Employment Agreement, by and between the Company and Isaac Levy.
10.10 Employment Agreement, by and between the Company and Stuart
Bender.
10.11 Form of Employee-At-Will, Non-solicitation, Invention Assignment
and Non-Disclosure Agreement.
10.12 Securities Purchase Agreement, dated as of January 1, 1998, by
and among, the Company and Jack M. Benun and Mark J. Benun.
10.13+* License Agreement by and between the Company and MTV Networks,
dated June 15, 1996, as amended.
10.14.1+* License Agreement by and between the Company and B.U.M.
Equipment, dated June 1, 1995, as amended.
10.14.2+* License Agreement by and between the Company and B.U.M.
Equipment, dated October 1, 1997, as amended.
10.15+* License Agreement by and between the Company and Ocean Pacific
Apparel Corp., dated October 1997.
21 Subsidiaries of the Registrant.
23.1* Consent of Grant Thornton LLP.
23.2* Consent of Buchanan Ingersoll (contained in the opinion filed as
Exhibit 5 to the Registration Statement).
23.3 Consent of The NPD Group.
23.4 Consent of Children's Business.
24 Powers of Attorney of certain officers and directors of the
Company (contained on the signature page of this Registration
Statement).
27* Financial Data Schedule.
</TABLE>
- --------
* Filed herewith. All other exhibits previously filed.
+ Confidential treatment has been requested for a portion of this Exhibit.
(b) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts filed herewith. All other
financial statement schedules are omitted because the information is not
required, or is otherwise included in the consolidated financial statements or
the notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that:
(1) Insofar as indemnification for liabilities arising under the Act may
be permitted to directors, officers, and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling
II-3
<PAGE>
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such issue.
(2) For purpose of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(3) For the purpose of determining any liability under the Act each post-
effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein,
and the Offering of such securities at that time shall be deemed to be the
initial bona fide Offering thereof.
(4) At the closing specified in the underwriting agreement, registrant
shall provide the Underwriters certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW
YORK, STATE OF NEW YORK, ON FEBRUARY 26, 1998.
Happy Kids Inc.
/s/ Jack M. Benun
By: ____________________________
Jack M. Benun, President and Chief
Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURES TITLE DATE
/s/ Jack M. Benun President and Chief February 26,
- ------------------------------------- Executive Officer 1998
and Director
JACK M. BENUN (Principal
Executive Officer)
/s/ Stuart Bender Chief Financial February 26,
- ------------------------------------- Officer and 1998
Treasurer
STUART BENDER (Principal
Financial and
Accounting Officer)
* Executive Vice February 26,
- ------------------------------------- President, 1998
Secretary and
MARK J. BENUN Director
* Senior Vice February 26,
- ------------------------------------- President and 1998
Director
ISAAC LEVY
* By his signature set forth below the undersigned, pursuant to duly
authorized powers of attorney filed with the Securities and Exchange
Commission, has signed this Amendment to the Registration Statement on behalf
of the persons indicated.
/s/ Jack M. Benun
By: ____________________________
Jack M. Benun
(ATTORNEY-IN-FACT)
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1 Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation.
3.2 Amended and Restated Bylaws.
4.1* Voting Agreement, dated January 1, 1998, by and between Jack Benun
and Mark Benun.
4.2* Shareholder Agreement, dated January 1, 1998, by and among Jack
Benun, Mark Benun and Isaac Levy.
5* Opinion of Buchanan Ingersoll as to validity of Common Stock.
10.1 1997 Stock Plan.
10.2 Form of Indemnification Agreement executed by each of the Company's
directors and officers.
10.3 Lease Agreement, by and between J & B 18 Corp. and SZS 33
Associates L.P., as amended.
10.4 Lease Agreement, by and between Hawk Industries, Inc. and Triangle
Fidelco Industrial Center, as amended.
10.5 Financing Agreement with the CIT Group/Commercial Services, Inc.,
as Agent for itself and certain other lenders, as amended.
10.6 Notification Factoring Agreement.
10.7 Employment Agreement, by and between the Company and Jack Benun.
10.8 Employment Agreement, by and between the Company and Mark Benun.
10.9 Employment Agreement, by and between the Company and Isaac Levy.
10.10 Employment Agreement, by and between the Company and Stuart Bender.
10.11 Form of Employee-At-Will, Non-solicitation, Invention Assignment
and Non-Disclosure Agreement.
10.12 Securities Purchase Agreement, dated as of January 1, 1998, by and
among, the Company and Jack M. Benun and Mark J. Benun.
10.13+* License Agreement by and between the Company and MTV Networks,
dated June 15, 1996, as amended.
10.14.1+* License Agreement by and between the Company and B.U.M. Equipment,
dated June 1, 1995, as amended.
10.14.2+* License Agreement by and between the Company and B.U.M. Equipment,
dated October 1, 1997, as amended.
10.15+* License Agreement by and between the Company and Ocean Pacific
Apparel Corp., dated October 1997.
21 Subsidiaries of the Registrant.
23.1* Consent of Grant Thornton LLP.
23.2* Consent of Buchanan Ingersoll (contained in the opinion filed as
Exhibit 5 to the Registration Statement).
23.3 Consent of The NPD Group.
23.4 Consent of Children's Business.
24 Powers of Attorney of certain officers and directors of the Company
(contained on the signature page of this Registration Statement).
27* Financial Data Schedule.
</TABLE>
- --------
* Filed herewith. All other exhibits previously filed.
+ Confidential treatment has been requested for a portion of this Exhibit.
<PAGE>
VOTING AGREEMENT
THIS VOTING AGREEMENT dated as of the 1st day of January, 1998, by and among
Jack M. Benun ("Jack Benun") and Mark J. Benun ("Mark Benun"), and Happy Kids
Inc., a New York corporation (the "Company").
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, Mark Benun is presently the record and beneficial owner of 1,162,500
shares of the Common Stock, $.01 par value, of the Company (the "Current
Shares"); and
WHEREAS, Mark Benun desires to irrevocably constitute and appoint Jack Benun
as his lawful agent and proxy to vote all of the Current Shares, as well as any
other shares of the Common Stock of the Company which Mark Benun is now or may
hereafter become entitled to vote (all such shares, together with the Current
Shares, being referred to herein collectively as the "Shares");
NOW, THEREFORE, in consideration of the mutual covenants contained herein, and
for good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the parties hereto, intending to be legally bound hereby,
agree as follows:
1. With respect to the Shares, Mark Benun hereby irrevocably constitutes and
appoints Jack Benun his true and lawful agent and proxy, with absolute
discretion and authority to: (a) represent, vote, give consents and in all other
ways to act in his place and stead, on any matter at any meeting of the
shareholders (whether regular, general, special or otherwise) of the Company to
the same extent as Mark Benun could if personally present at any such meeting,
and (b) express consent or dissent to any and all corporate action in writing
without a meeting on behalf of Mark Benun. In furtherance of the foregoing,
Mark Benun shall execute an Irrevocable Proxy in the form attached hereto as
Exhibit A (the "Irrevocable Proxy").
- ---------
2. The Irrevocable Proxy provided for in this Agreement is a proxy only of
the right of Mark Benun to vote for or against, or consent to or dissent from,
matters submitted to a vote of shareholders, and does not and shall not be
deemed to transfer, waive or otherwise limit any of the other rights or powers
accruing to Mark Benun.
3. The Irrevocable Proxy provided for in this Agreement is coupled with an
interest.
4. The Irrevocable Proxy provided for in this Agreement shall commence on the
date hereof and terminate upon the death of Jack Benun.
5. As used herein, the term "Shares" shall include any and all shares of the
Common Stock of the Company which Mark Benun is now or may hereafter become
entitled to vote, including, without limitation, the 2,131,250 shares of the
Company's Common Stock to be
<PAGE>
acquired by Mark Benun pursuant to the terms of that certain Securities Purchase
Agreement dated as of January 1, 1998 entered into by and among Jack Benun, Mark
Benun and the Company.
6. Mark Benun hereby represents and warrants that he is the legal and
beneficial owner of the Shares as to which he is currently entitled to vote and
that he will be the legal and beneficial owner of those Shares as to which he
hereafter obtains the right to vote, and the Company represents and warrants
that its stock transfer records indicate and will indicate that Mark Benun is
and will be the registered holder of such number of Shares.
7. The parties hereto shall do and perform or cause to be done and performed
all such further acts and things and shall execute and deliver all such other
agreements, certificates, instruments or documents as shall be necessary or
desirable in order to carry out the intent and purposes of this Agreement,
including, without limitation, the execution of any such documents required to
be executed by the Company's stock transfer agent.
* * * * * * *
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the date first above written.
HAPPY KIDS INC.
By: /s/ Jack M. Benun
----------------------------
Jack M. Benun, President
/s/ Jack M. Benun
-------------------------------
Jack M. Benun
/s/ Mark J. Benun
-------------------------------
Mark J. Benun
2
<PAGE>
EXHIBIT A
---------
IRREVOCABLE PROXY
The undersigned shareholder of Happy Kids Inc., a New York corporation
(the "Company"), hereby irrevocably constitutes and appoints Jack M. Benun his
true and lawful agent and proxy, with absolute discretion and authority to: (a)
represent, vote, give consents and in all other ways to act in his place and
stead, on any matter at any meeting of the shareholders (whether regular,
general, special or otherwise) of the Company to the same extent as the
undersigned could if personally present at any such meeting, and (b) express
consent or dissent to any and all corporate action in writing without a meeting
on behalf of the undersigned, with respect to all shares of the Common Stock of
the Company which the undersigned is now or may hereafter become entitled to
vote.
This Irrevocable Proxy is issued under that certain Voting Agreement
dated as of January 1, 1998 entered into by and among Jack M. Benun, Mark J.
Benun and the Company, and shall terminate upon the death of Jack M. Benun.
Dated: January 1, 1998
/s/ Mark J. Benun
-------------------------------
Mark J. Benun
3
<PAGE>
SHAREHOLDERS AGREEMENT
----------------------
SHAREHOLDERS AGREEMENT dated as of January 1, 1998 (this "Agreement"), by
and among Jack M. Benun, Mark J. Benun and Isaac Levy (the "Shareholders").
W I T N E S S E T H:
--------------------
WHEREAS, each of the Shareholders is presently the record and beneficial
owner of that number of shares of the Common Stock, $0.01 par value, of Happy
Kids Inc. (the "Company"), as set forth on Schedule A attached hereto
(collectively, the "Restricted Stock"); and
WHEREAS, the Shareholders deem it to be in the best interests of each of
the Shareholders to restrict the transfer of all of the Restricted Stock as
herein provided.
NOW, THEREFORE, in consideration of the promises and the mutual covenants
contained herein, the parties hereby agree as follows:
A. Right of First Refusal.
----------------------
1. Whenever and as often as any of the Shareholders shall desire to
sell any of his respective shares of Restricted Stock pursuant to a bona fide
offer for the purchase thereof, such selling Shareholder (the "Selling
Shareholder") shall give notice (the "Notice") to the other Shareholders (the
"Offerees") in writing to such effect, enclosing a copy of such bona fide offer
(it being agreed that the Selling Shareholder shall cause any such offer to be
reduced to writing) and specifying the number of shares of the Selling
Shareholder's Restricted Stock which the Selling Shareholder desires to sell
(the "Shares"), the name of the person or persons to whom the Selling
Shareholder desires to make such sale and the dollar value of the consideration
which has been offered in connection therewith. Upon receipt of the Notice, the
Offerees shall have the first right and option to purchase all but not less than
all of the Shares, pro rata according to their then respective holdings of
Common Stock as compared to all Offerees (assuming the issuance of all shares of
Common Stock issuable pursuant to then outstanding warrants, options,
convertible or exchangeable securities and other rights to acquire shares of
Common Stock from the Company, whether or not such warrants, options,
convertible or exchangeable securities or other rights are at the time
exercisable, convertible or exchangeable held by all Offerees), for cash at a
purchase price equal to the dollar value of such consideration (in the event
such consideration includes noncash consideration, the dollar value of such
noncash consideration shall be determined by the Company's Board of Directors,
whose good faith determination shall be conclusive, provided that if the Selling
Shareholder or any such Offeree is a member of the Board of Directors, he or she
shall not participate in such determination, and provided further, that if the
Company's Board of Directors is unable or unwilling to make such determination
for any reason, such determination shall be made by mutual agreement of the
Shareholders, or by an independent third party mutually agreed upon by the
Shareholders), exercisable for a period of five (5) business days from the date
of receipt of the Notice. Failure of any Offeree to respond to
<PAGE>
the Notice within the five (5) business day period shall be deemed to constitute
a notification to the Selling Shareholder of such Offeree's decision not to
exercise the right and option to purchase their pro rata share of the Shares
under this Section A(1). In such event (and in the event that an Offeree shall
notify the Selling Shareholder of such Offeree's decision not to exercise its
right and option) the Selling Shareholder shall give written notice (the
"Subsequent Notice") to the other remaining Offeree who has agreed to purchase
his pro rata share of the Shares and such Offeree shall have the right,
exercisable for a period of five (5) business days from the date of receipt of
such Subsequent Notice, to purchase the remaining Shares, for cash at a purchase
price equal to the dollar value of the consideration offered for such Shares as
set forth in the Notice. Failure of such remaining Offeree to respond to any
such Subsequent Notice within the five (5) business day period shall be deemed
to constitute a notification to the Selling Shareholder of such remaining
Offeree's decision not to exercise the right and option to purchase the
remaining Shares under this Section A(1).
2. Each Offeree may exercise the rights and options provided in
Section A(1) by giving written notice to the Selling Shareholder not later than
the close of business on the date of expiration of such right and option (or if
such date is not a business day, then on or before the close of business on the
next succeeding business day), advising of the election to exercise the same and
the date (not later than five (5) business days from the date of expiration of
the notice upon which such Offeree is acting) upon which payment of the purchase
price for the Shares shall be made. The Selling Shareholder shall cause to be
delivered to each Offeree's principal office, on the payment date specified in
such written notice, the certificate or certificates representing the Shares
being purchased by each Offeree, properly endorsed for transfer, against payment
of the purchase price therefor.
3. If the Shares are not purchased by the Offerees in accordance with
this Section A, the Selling Shareholder may, during the ninety (90) day period
commencing on the expiration of the rights and options provided for in Section
A(1), and subject to the provisions of paragraph B, below, sell all, but not
less than all, of the Shares to the transferee named in the Notice for
consideration the dollar value of which is equal to or greater than the dollar
value of the consideration specified in the Notice, free of the restrictions
contained in Section A of this Agreement.
B. Right of Participation in Sales:
--------------------------------
1. If at any time a Selling Shareholder desires to sell Shares to a
proposed transferee (the "Proposed Transferee") and those Shares to be
transferred have not been purchased by the other Shareholders under Section A,
above, such other Shareholders (the "Remaining Shareholders") shall have the
right to sell to the Proposed Transferee, as a condition to such sale by the
Selling Shareholder, at the same price per share (as described below) and on the
same terms and conditions as involved in such sale by the Selling Shareholder, a
pro rata portion of the amount of Shares proposed to be sold to the Proposed
Transferee. The price per share referenced hereinabove shall include all
consideration to be received in connection with such sale (in the event such
consideration includes noncash consideration, the dollar value of such noncash
consideration shall be determined by the Company's Board of Directors, whose
good faith determination shall be conclusive, provided that if the Selling
Shareholder or any such
-2-
<PAGE>
Remaining Shareholder is a member of the Board of Directors, he or she shall not
participate in such determination, and provided further, that if the Company's
Board of Directors is unable or unwilling to make such determination for any
reason, such determination shall be made by mutual agreement of the
Shareholders, or by an independent third party mutually agreed upon by the
Shareholders). The "pro rata portion" of Shares to be sold by the Selling
Shareholder and each of the Remaining Shareholders who elects to sell his or her
Shares pursuant to this paragraph B (the Selling Shareholder and each such
Remaining Shareholder referred to collectively as the "Participating
Shareholders") shall be that proportion of Shares as shall be equal to each such
Participating Shareholders' then respective holdings of Common Stock as compared
to all of the Participating Shareholders (assuming the issuance of all shares of
Common Stock issuable pursuant to then outstanding warrants, options,
convertible or exchangeable securities and other rights to acquire shares of
Common Stock from the Company, whether or not such warrants, options,
convertible or exchangeable securities or other rights are at the time
exercisable, convertible or exchangeable held by all Participating
Shareholders).
2. Each Selling Shareholder who wishes to make a sale to a Proposed
Transferee which is subject to this Section B shall, after complying with the
provisions of Section A, give to each Remaining Shareholder notice of such
proposed sale, which shall include a statement that the Shares were not
purchased pursuant to Section A. Such notice shall be given at least five (5)
business days prior to the date of the proposed sale to the Proposed Transferee.
Each Remaining Shareholder wishing to so participate in any sale under this
Section B shall notify the Selling Shareholder in writing of such intention with
five (5) business days after such Remaining Shareholder's receipt of the notice
described in the preceding sentence.
3. The Selling Shareholder and each other Participating Shareholder
shall sell to the Proposed Transferee all or, at the option of the Proposed
Transferee, any part of the Shares proposed to be sold by them at not less than
the price and upon other terms and conditions, if any, not more favorable to the
Proposed Transferee than those in the notice provided by the Selling Shareholder
under subparagraph (2) above; provided, however, that any purchase of less than
all of such Shares by the Proposed Transferee shall be made from the Selling
Shareholder and each other Participating Shareholder pro rata based upon the
relative number of the Shares that the Selling Shareholder and each other
Participating Shareholder had otherwise committed to sell pursuant to Section
B(1) and provided further that such reduced number of Shares has first been
offered to the Offerees pursuant to Section A above.
C. Miscellaneous.
-------------
1. Shares Subject to Agreement. Each of the Shareholders agrees that
---------------------------
any and all shares of the Company's Common Stock held by such Shareholder shall
be subject to this Agreement, whether presently held or hereafter acquired,
including, but not limited to, all shares of Common Stock acquired upon the
exercise of stock options, as well as all shares of Common Stock acquired by any
of the Shareholders pursuant to the terms of that certain Securities Purchase
Agreement dated as of January 1, 1998 entered into by and among Jack M. Benun,
Mark J. Benun and the Company.
-3-
<PAGE>
2. Certain Transfers Null and Void. Any attempted transfer of
-------------------------------
Restricted Stock by a Shareholder other than in accordance with this Agreement
(other than an involuntary transfer by operation of law) shall be null and void
and the Company shall refuse to recognize any such transfer and shall not
reflect on its records any change in record ownership of Restricted Stock of the
Company pursuant to any such transfer.
3. Expiration of Agreement. This Agreement shall remain in effect
-----------------------
with respect to each Shareholder until mutually terminated in writing by all of
the Shareholders.
4. Notices. All notices required or permitted under this Agreement
-------
shall be in writing and delivered, by any method providing for proof of
delivery, to the address of the Shareholders set forth on the signature page
hereto. Any notice shall be deemed to have been given on the date of receipt.
5. Survival of Representations. Each representation, warranty,
---------------------------
covenant and agreement of the Shareholders hereto herein contained shall survive
the date hereof, notwithstanding any investigation at any time made by or on
behalf of any Shareholder hereto.
6. Entire Agreement. This Agreement and the documents referred to
----------------
herein contain the entire agreement between the Shareholders hereto with respect
to the transactions contemplated hereby, and no modification hereof shall be
effective unless in writing and signed by the Shareholder against which it is
sought to be enforced.
7. Assignment. This Agreement shall not be assignable by any of the
----------
parties hereto.
8. Invalidity, Etc. If any provision of this Agreement, or the
---------------
application of any such provision to any person or circumstance, shall be held
invalid by a court of competent jurisdiction, the remainder of this Agreement,
or the application of such provision to persons or circumstances other than
those as to which it is held invalid, shall not be affected thereby.
9. Headings. The headings of this Agreement are for convenience of
--------
reference only and are not part of the substance of this Agreement.
10. Binding Effect. This Agreement shall be binding upon and inure to
--------------
the benefit of the Shareholders and their respective heirs and assigns, if any.
11. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of New York applicable in the case of
agreements made and to be performed entirely within such State.
12. Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.
-4-
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto as of the date first above written.
/s/ Jack M. Benun /s/ Mark J. Benun
- ------------------------------- -------------------------------
Jack M. Benun Mark J. Benun
Address for notice: Address for notice:
100 West 33rd Street 100 West 33rd Street
- ------------------------------- -------------------------------
New York, New York 10001 New York, New York 10001
- ------------------------------- -------------------------------
/s/ Isaac Levy
-------------------------------
Isaac Levy
Address for notice:
100 West 33rd Street
-------------------------------
New York, New York 10001
-------------------------------
Acknowledged and Agreed for purposes
of Section C(2) of this Agreement:
Happy Kids Inc.
By: /s/ Jack M. Benun
----------------------------
Jack M. Benun, President
<PAGE>
SCHEDULE A
Shareholder Name Shares Held
---------------- -----------
Jack M. Benun 1,162,500
Mark J. Benun 1,162,500
Isaac Levy 1,162,500
<PAGE>
Exhibit 5
BUCHANAN INGERSOLL
Attorneys
500 College Road East
Princeton, NJ 08540
February 25, 1998
Happy Kids Inc.
100 West 33rd Street
Suite 1100
New York, New York 10001
Gentlemen:
In connection with the Registration Statement on Form S-1, as amended
(Registration No. 333-44267) (the "Registration Statement"), filed by Happy Kids
Inc., a New York corporation (the "Company"), under the Securities Act of 1933,
as amended, relating to the initial public offering of an aggregate of up to
2,300,000 shares of the Company's Common Stock, $.01 par value, of which (a)
2,000,000 shares will be purchased by the underwriters from the Company; and (b)
up to 300,000 shares may be purchased by the underwriters from the Company, if
the underwriters exercise the option granted to them by the Company to cover
over-allotments (collectively, the "Shares"), we, as counsel for the Company,
have examined such corporate records, other documents, and questions of law as
we have considered necessary or appropriate for the purposes of this opinion.
Upon the basis of such examination, we advise you that in our opinion, the
Shares to be issued and sold by the Company have been duly and validly
authorized and, when sold in the manner contemplated by the underwriting
agreement (the "Underwriting Agreement") filed as an exhibit to the Registration
Statement and upon receipt by the Company of payment therefor as provided in the
Underwriting Agreement, will be legally issued, fully paid and non-assessable.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and the reference to this firm under the caption "Legal Matters" in
the Prospectus contained therein.
Very truly yours,
/s/ Buchanan Ingersoll
<PAGE>
EXHIBIT 10.13
Agreement made as of the 15th day of June, 1996, by and between MTV
Networks, a division of Viacom International Inc., a Delaware corporation,
with offices at 1515 Broadway, New York, New York 10036 ("MTVN"), and HAPPY
KIDS, a New York corporation, with offices at 100 West 33rd Street, Suite 1100,
New York City, NY 10001 ("Licensee").
BASIC PROVISIONS
----------------
LICENSED PROPERTY: The "RUGRATS" name, trademark and logo used in
connection with the MTVN television series entitled
"RUGRATS" and all names, trademarks and likenesses of
characters contained within the television series
aforementioned.
LICENSED PRODUCTS: Coordinated apparel inclusive of shorts, jackets,
shirts, pants, rompers, windsuits and swimsuits in the
following sizes:
Boys: 4-20
Girls: 4-16
LICENSED TERRITORY: United States, its territories and possessions.
LICENSED CHANNELS OF During the period June 15, 1996 through February 15,
DISTRIBUTION: 1997 only through Kids-R-Us; during the period February
15, 1996 through December 31, 1997 mid-tier stores such
as JC Penney, Sears and catalogue distribution,
subject to MTVN's prior written approval, shall be
added; and during the period from January 1, 1998
through December 31, 1998 mass market merchandisers
such as Caldors, Walmart, Target and Kmart shall also be
added.
LICENSE TERM: June 15, 1996 through December 31, 1998
PRESENTATION DATE TO
LICENSEE'S RETAILERS: May 1, 1996
INITIAL SHIP DATE TO
LICENSEE'S RETAILERS: June 30, 1996
ROYALTY RATE: Ten percent (10%) DOM of Net Sales (as defined in the
annexed Additional Terms and Conditions).
<PAGE>
GUARANTEED MINIMUM
ROYALTY: The Guaranteed Minimum Royalty for the Term is ***
and shall be payable as follows:
$200,000 upon Licensee's execution hereof ("Advance");
$50,000 on or before October 15, 1996;
$50,000 on or before February 15, 1997;
$50,000 on or before June 15, 1997;
$50,000 on or before September 15, 1997;
$50,000 on or before December 15, 1997;
***
COPYRIGHT NOTICE: "(c) 19___ [Year of Publication] VIACOM
INTERNATIONAL INC. All Rights Reserved".
TRADEMARK NOTICE: With respect to the Licensed Products shorts, jackets,
pants, rompers, windsuits and swimsuits "RUGRATS(TM)"
and with respect to the Licensed Product shirts
"RUGRATS(r)".
Licensee shall also include the following notice on all
materials set forth in subparagaph 5(b) of the
ADDITIONAL TERMS AND CONDITIONS in proximity to THE
Licensed Property. "RUGRATS and all related titles,
logos and characters are trademarks of Viacom
International Inc."
ADDITIONAL TERMS: 1. A credit, on packaging shall be given to
Klasky/Csupo Inc. as follows: Created by: Klasky/Csupo
Inc.
2. Licensee acknowledges that it will consult, through
MTVN, with the creators, Klasky/Csupo Inc., with respect
to the development of the Licensed Products.
*** Confidential portion omitted and filed separately with the Securities and
Exchange Commission.
2
<PAGE>
This Agreement includes the Additional Terms and Conditions and the
Riders and Schedules, if any, annexed hereto and made a part hereof. All
capitalized terms in the Additional Terms and Conditions shall have the
respective definitions as set forth in the Basic Provisions herein.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year FIRST above written.
HAPPY KIDS MTV NETWORKS, a division of Viacom
International Inc.
/s/ Jack M. Benun /s/ Illegible
By: _____________________________ By: _____________________________
Jack M. Benun
Name:____________________________ Name:____________________________
President
Title:___________________________ Title:___________________________
3
<PAGE>
ADDITIONAL TERMS AND CONDITIONS
-------------------------------
1. LICENSE:
-------
MTVN hereby grants to Licensee the non-exclusive right to use the
Licensed Property solely for the purpose of the manufacture, distribution, sale
and advertisement of the Licensed Products through Licensee's present Licensed
Channels of Distribution in the Licensed Territory during the License Term (the
"License"). Licensee shall not have the right to sublicense the rights granted
hereunder.
2. RESERVATION OF RIGHTS:
---------------------
MTVN retains all rights not expressly granted hereunder (including but
not limited to the right to distribute and sell the Licensed Products through
premium offers, combination and give-away sales, direct response, direct mail,
home shopping type of networks, sales clubs and incentive programs, and the
rights to the Licensed Products containing The "RUGRATS" names, trademark and
logo, and all names, trademarks and likenesses of characters which are used in
connection with a motion picture or other theatrical or live stage presentation
involving the RUGRATS characters).
3. ROYALTIES, ACCOUNTING AND AUDIT:
-------------------------------
(a) COMPUTATION:
-----------
(i) Royalties shall be payable at the Royalty Rate set forth in
the Basic Provisions on Net Sales of all Licensed Products. "Net Sales" shall
mean gross sales less customary trade quantity discounts and allowances and
returns for damaged goods only, the aggregate of which shall not exceed five
percent (5%) of gross sales. Except for those expressly provided for in this
paragraph there shall be no deductions of any sort or kind, including but not
limited to deductions for returns, cash discounts, costs or expenses incurred
in the manufacture, distribution, sale or advertisement of the Licensed
Products, or for uncollected bills.
(ii) Royalty obligations shall accrue upon sale of the Licensed
Products. A Licensed Product is considered "sold" when it is invoiced, shipped,
or paid for, whichever event occurs first.
(iii) In the event that Licensed Products are sold to any party
affiliated, controlled, or in any way related to Licensee at a special price
lower than the average price charged to other parties, the royalty payable to
MTVN shall be based upon said average price.
(b) PAYMENT:
-------
Royalties shall be payable on a quarterly basis throughout the License
Term, within fifteen (15) days after the close of each respective quarter.
Quarters shall be based on a standard calendar year. All amounts past due shall
be subject to a late charge of one percent
4
<PAGE>
(1%) per month (or the highest rate allowed by law if lower), from the date such
payments were due.
(c) ACCOUNTING:
----------
Within fifteen (15) days after the close of each quarter, Licensee shall
furnish to MTVN complete and accurate statements of its sales of Licensed
Products and royalties due MTVN, in the form annexed hereto as Schedules A and B
("Quarterly Reports"). Quarterly Reports shall be furnished whether or not
Licensee has actual royalties to report for any quarter. All Quarterly Reports
shall be signed and certified as correct by an officer of Licensee. Acceptance
by MTVN of royalty payments and Quarterly Reports shall not preclude MTVN from
questioning the accuracy thereof.
(d) AUDIT:
-----
(i) Licensee shall keep accurate books of account and records at its
principal place of business of all transactions relating to or affecting this
License, during the License Term and for a period of three years thereafter.
MTVN or its representative shall have the right during reasonable business hours
to examine and verify Licensee's physical inventory of the Licensed Products as
well as Licensee's books of accounts and records, and to make copies and
extracts thereof.
(ii) In the event that an audit by MTVN discloses an underpayment
in royalties due MTVN, Licensee shall promptly pay MTVN such discrepancy plus a
late charge of one percent (1%) per month (or the highest rate allowed by law if
lower), from the day such payments were due. If such audit discloses a
discrepancy of five percent (5%) or more for any quarter, Licensee shall also
reimburse MTVN for all costs incurred by MTVN in connection with the audit.
4. QUALITY, SAMPLES, APPROVALS:
---------------------------
(a) The quality and style of all Licensed Products, and the manner in
which the Licensed Property may appear on the Licensed Product and on any
packaging, promotional materials, labels, advertising, publicity and display
materials of any kind used in connection with the Licensed Products are subject
to MTVN's prior written approval.
(b) At each stage of development or production and prior to manufacture,
Licensee shall promptly provide MTVN with two (2) samples in the form of proofs
and/or prototype for each Licensed Product and all related materials. MTVN shall
advise Licensee in writing of its approval or disapproval of such samples within
a reasonable time. No samples shall be deemed approved unless and until MTVN has
given its approval in writing. Licensee shall not proceed beyond any development
or production stage where approval is required without first securing such
approval. Once a sample has been approved, Licensee shall not depart therefrom.
Approval by MTVN shall not relieve Licensee of any of its agreements,
indemnities and warranties hereunder.
5
<PAGE>
(c) Licensee shall promptly reimburse MTVN for any and all costs of
artwork and other creative materials prepared by MTVN in connection with the
Licensed Products.
(d) Concurrently with the initial shipment of each Licensed Product,
Licensee shall furnish to MTVN, at no cost to MTVN, thirty (30) samples of each
Licensed Product and each subsequent year of the License Term, twenty-five (25)
samples of each Licensed Product. At MTVN's request, Licensee shall furnish
MTVN, at no cost to MTVN, a reasonable number of samples of the Licensed
Products. Any Licensed Products requested by MTVN in excess of the foregoing
amounts shall be made available to MTVN at Licensee's cost.
(e) Upon MTVN's request, Licensee shall provide MTVN with a list of the
names and addresses of Licensee's manufacturers and have such manufacturers fill
out MTVN's manufacturer's form.
(f) From time to time, upon MTVN's request, Licensee shall include
certain materials provided by MTVN relating to MTVN's programs, programming
services, or ancillary businesses in the packaging of the Licensed Products.
5. MARKINGS:
--------
(a) Licensee shall affix the Copyright and Trademark Notices set forth
in the Basic Provisions to all Licensed Products and to all packaging, labels,
promotional, advertising, publicity, and display materials used in connection
therewith, in accordance with instructions from MTVN. No Licensed Products or
related materials shall contain any other copyright, trademark or trade name
unless MTVN has given Licensee prior written consent thereto. MTVN may at any
time require an addition to or change of the Copyright and Trademark Notices,
effective not less than thirty (30) days after receipt by Licensee of notice
thereof, provided that Licensee shall have the right to continue to distribute
any inventory already manufactured at the time it receives such notice. Licensee
shall fully cooperate with MTVN in connection with MTVN's obtaining or
maintaining copyright and/or trademark protection for the Licensed Property in
MTVN's name.
(b) Licensee shall affix to the Licensed Products and all packaging,
labels, promotional materials, advertising, publicity, and display materials
used in connection therewith, any other legends, markings and notices required
by any law or regulation in the Licensed Territory or which MTVN reasonably may
request.
6. OWNERSHIP:
---------
(a) As between MTVN and Licensee, all right, title and interest in and
to the Licensed Property shall be and remain the sole and complete property of
MTVN. Licensee recognizes the value of the goodwill associated with the Licensed
Property, that the Licensed Property has secondary meaning in the mind of the
public, and that the trademarks and copyrights in the Licensed Property, and any
registrations therefor, are good and valid. All use by Licensee of the Licensed
Property shall inure to the benefit of MTVN. Licensee shall not, during the
License
6
<PAGE>
Term or thereafter, contest or assist others to contest, MTVN's rights or
interests in the Licensed Property or the validity of this License. Licensee
shall not seek any copyright or trademark registration for the Licensed
Property.
(b) Any copyright, trademark, or other proprietary rights owned by
Licensee and heretofore used by it, which are used in connection with the
Licensed Products as approved by MTVN pursuant to paragraph 5(a) above, shall
continue to be owned by Licensee and shall not become the property of MTVN.
(c) All right, title, or interest in or to any copyright, trademark, or
other proprietary rights that come into existence during the License Term as a
result of the exercise by Licensee of any right granted to it hereunder, shall
immediately and automatically vest in MTVN.
(d) Except as otherwise provided, all creations, including but not
limited to art work and designs, that come into existence during the License
Term, including any packaging, labels, and promotional, advertising, publicity,
and display materials used in connection with the Licensed Products shall be
deemed "works made for hire" for MTVN within the meaning of the U.S. Copyright
Law. To the extent that any such work does not so qualify, for the consideration
set forth herein, Licensee hereby irrevocably and absolutely assigns to MTVN all
rights throughout the universe in perpetuity in all media now known or hereafter
developed, including but not limited to the copyright and any extensions and
renewals thereof and the trademarks and the goodwill associated therewith.
(e) Licensee agrees to execute and deliver to MTVN any documents which
MTVN may reasonably request to confirm MTVN's ownership of its rights hereunder.
Licensee hereby irrevocably appoints MTVN as its attorney-in-fact coupled with
an interest to sign any such documents in Licensee's name.
7. INFRINGEMENTS:
-------------
Licensee shall promptly notify MTVN of any apparently unauthorized use
or infringement by third parties of any rights granted to Licensee herein, and
will cooperate fully in any action at law or in equity undertaken by MTVN, with
respect to such unauthorized use or infringement. Licensee shall not institute
any suit in connection with any apparently unauthorized use or infringement
without first obtaining the written consent of MTVN to do so, and MTVN shall
have the sole right to determine whether or not any action shall be taken on
account of any such unauthorized uses or infringements.
8. REPRESENTATIONS, WARRANTIES, AND UNDERTAKINGS:
---------------------------------------------
(a) Licensee represents, warrants, and undertakes as follows:
(i) It is free to enter into and fully perform this Agreement;
7
<PAGE>
(ii) All ideas, creations, designs, materials and intellectual
property furnished by Licensee in connection with the Licensed Products will be
Licensee's own and original creation or fully licensed by Licensee;
(iii) The Licensed Products and all materials used in connection
therewith shall be of the highest standard reasonably suitable for goods of the
type of the Licensed Products. The Licensed Products will be safe for use by
consumers and will comply with all applicable governmental rules, guidelines,
codes, regulations, and warranties (express or implied) including, without
limitation those contained in the Child Safety Protection Act and/or adopted by
the Consumer Product Safety Commission;
(iv) The Licensed Products will be manufactured, distributed,
sold and advertised in accordance with all applicable federal state and local
laws and in a manner that will not reflect adversely upon MTVN, and will not
infringe upon or violate any rights of any third parties;
(v) Licensee will use its best efforts to obtain maximum sales
in the Licensed Territory during the License Term.
(b) MTVN represents, warrants, and undertakes as follows:
(i) It is free to enter into and fully perform this Agreement;
(ii) The Licensed Property is original to and the sole property
of MTVN, and does not infringe upon or violate any copyright, trademark or
proprietary right of any third party.
9. INDEMNITIES:
-----------
(a) Licensee will at all times indemnify and hold MTVN, its officers,
directors and employees harmless from and against any and all claims, damages,
liabilities, costs and expenses, including reasonable counsel fees, arising out
of any breach or alleged breach by Licensee of any representation, warranty or
undertaking made herein or out of any defect (latent or patent) in the
Licensed Products, provided that MTVN shall give prompt written notice,
cooperation and assistance to Licensee relative to any such claim or suit, and
provided further that no settlement of any such claim or suit shall be made
without the prior written consent of MTVN.
(b) MTVN will at all times indemnify and hold Licensee, its officers,
directors and employees harmless from and against any and all claims, damages,
liabilities, costs and expenses, including reasonable counsel fees, arising out
of any breach or alleged breach by MTVN of any representation, warranty or
undertaking made herein, provided that Licensee shall give prompt written
notice, cooperation and assistance to MTVN relative to any such claim or suit,
and provided further that MTVN shall have the option to undertake and conduct
the defense and/or settlement of any such claim or suit so brought and that no
settlement of any such claim or suit is made without the prior written consent
of MTVN.
8
<PAGE>
10. INSURANCE:
---------
Licensee shall obtain and maintain at its own cost and expense from a
qualified insurance company licensed to do business in New York, standard
Product Liability Insurance naming MTVN as an additional named insured, with
respect to all Licensed Products manufactured hereunder, whether sold during the
License Term or thereafter. Such policy shall provide protection against any and
all claims, demands and causes of action arising out of any defects or failure
to perform, alleged or otherwise, of the Licensed Products or any material used
in connection therewith or any use thereof. The amount of coverage shall be Two
Million Dollars ($2,000,000) combined single limit coverage, with a deductible
amount not to exceed One Million Dollars ($1,000,000) for each single occurrence
for bodily and/or for property damage. The policy shall provide for ten (10)
days notice to MTVN from the insurer by Registered or Certified Mail return
receipt requested, in the event of any modification, cancellation or termination
thereof. Licensee agrees to furnish MTVN a certificate of insurance evidencing
same within thirty (30) days after execution of this Agreement and in no event
shall Licensee manufacture, distribute or sell the Licensed Products prior to
receipt by MTVN of such evidence of insurance.
11. DEFAULT:
-------
(a) Upon the occurrence of any of the following events (each of which is
a "Default"), then in addition and without prejudice to any rights which it may
have at law, in equity or otherwise, MTVN shall have the right to terminate this
Agreement, to delete from this Agreement any elements of the Licensed Property
or any Licensed Products and/or to require the immediate payment of any
royalties due or to become due hereunder.
(i) Licensee fails to meet the Presentation Date To Licensee's
Retailers or the Initial Ship Date To Licensee's Retailers of the Licensed
Products;
(ii) Licensee fails to actively manufacture, advertise,
distribute or sell the Licensed Products;
(iii) Licensee fails to make a payment or furnish a statement in
accordance herewith and does not cure such failure within fifteen (15) days
after notice thereof;
(iv) Licensee fails to comply with the approval quality, and
safety requirements hereunder and/or the Licensed Products do not comply with
such requirement and/or the Licensed Products are the subject matter of adverse
or negative publicity due to so such failure;
(v) Licensee fails to comply with any other of Licensee's
material obligations hereunder or breaches any warranty or representation made
by it hereunder and does not cure such failure or breach within fifteen (15)
days after notice thereof;
(vi) Licensee sells or otherwise disposes of all or substantially
all of its business or assets to a third party, or control of Licensee is
transferred and the management thereby
9
<PAGE>
changed;
(vii) Licensee sells or causes others to sell the Licensed
Products outside Licensee's Licensed Distribution Channels and/or outside the
Licensed Territory;
(viii) Licensee fails to obtain or maintain product liability
insurance in the amount of the type provided for herein; or
(ix) Licensee fails to comply with any provision of any other
agreement between Licensee and MTVN.
(b) In the event that the Licensed Products pose a safety threat to the
consumer, or are the subject of a claim or inquiry by the Consumer Product
Safety Commission or the Child Safety Protection Act or any other person, agency
or commission because of quality and/or safety concerns, and/or labeling or are
the subject of negative publicity due to poor quality and/or safety of the
Licensed Products, Licensee shall, upon MTVN's reasonable request immediately
recall such Licensed Products from the market place, and take any other
measures MTVN may reasonably demand.
(c) If a petition in bankruptcy is filed by or against Licensee, or
Licensee is adjudicated bankrupt, which is not dismissed within thirty (30)
days, or Licensee makes any assignment for the benefit of creditors or becomes
insolvent, is placed in the hands of a trustee or receiver, fails to satisfy any
judgment against it or is unable to pay its debts as they become due, whichever
is sooner, this License shall automatically terminate forthwith without any
notice whatsoever. Upon such termination for any reason under this subparagraph
1l(c) Licensee, its receiver, representatives, trustees, agents, administrators,
successors and assigns shall have no further rights hereunder, and neither this
License nor any right or interest herein shall be deemed an asset in any
insolvency, receivership, and/or bankruptcy.
12. FORCE MAJEURE:
-------------
In the event that Licensee is prevented from manufacturing, distributing
or selling the Licensed Products because of any act of God; unavoidable
accident; fire, epidemic; strike, lockout, or other labor dispute; war, riot or
civil commotion; act of public enemy; enactment of any rule, law, order or act
of government or governmental instrumentality (whether federal, state, local or
foreign); or other cause of a similar or different nature beyond Licensee's
control, and such condition continues for a period of two (2) months or more,
either party hereto shall have the right to terminate this Agreement effective
at any time during the continuation of such condition by giving the other party
at least thirty (30) days' notice to such effect. In such event, all royalties
on sales theretofore made shall become immediately due and payable and this
Agreement shall be automatically terminated.
10
<PAGE>
13. EFFECT OF EXPIRATION OR TERMINATION:
-----------------------------------
Upon expiration or termination of this Agreement, all rights granted to
Licensee herein shall forthwith revert to MTVN, with the following consequences:
(a) No portion of any prior payments shall be repayable to Licensee, and
any and all payments due or to become due, including any royalties shall be
immediately due and payable.
(b) After the expiration or termination of this Agreement, Licensee
shall not manufacture, advertise, distribute or sell the Licensed Products
containing or including the Licensed Property or any product which may infringe
upon MTVN's proprietary rights, or use any name, logo or design which is
substantially or confusingly similar to the Licensed Property on any product in
any place whatsoever. Licensee shall promptly deliver to MTVN a statement
indicating the number of Licensed Products then currently on hand or in the
process of being manufactured. MTVN shall have the right to conduct a physical
inventory in order to ascertain or verify such inventory and/or statement Except
as provided in subparagraph (c), such inventory shall at MTVN's option, be
destroyed by Licensee or purchased by MTVN at Licensee's cost of manufacture.
Disposition of any plates, moulds, forms, lithographs and other material
relating to the Licensed Products then remaining on hand shall be subject to
written instructions from MTVN to Licensee either to destroy or to deliver same
to MTVN or its designee. In the event that MTVN requests Licensee to destroy its
inventory, the Licensed Property or materials relating thereto, MTVN may require
Licensee to deliver to MTVN an affidavit by an officer of Licensee, attesting to
such destruction in such form as MTVN may in its sole discretion require.
(c) Upon expiration of this Agreement so long as Licensee is not in
default at time of expiration, Licensee may continue to sell any Licensed
Products, previously manufactured and on hand, on a non-exclusive basis during
the period of thirty (30) days thereafter subject to all of the terms and
conditions contained in this Agreement and provided that (i) the Licensed
Products are sold in the ordinary course of business at prices not lower than
the prevailing wholesale price or prices charged by Licensee during the ninety
(90) day period immediately preceding expiration; (ii) no new Licensed Products
are manufactured during such sell-off period; and (iii) MTVN is paid its then
existing Royalty Rate on all Licensed Products sold during the sell-off period.
(d) All warranties, indemnification and any other applicable obligations
of Licensee shall survive the expiration or termination of this License.
14. PAYMENTS AND NOTICES:
--------------------
All notices which either party hereto is required or may desire to give
to the other shall be given by addressing the same to the other at the address
first set forth above, or at such other address as may be designated in writing
by any such party in a notice to the other given in the manner prescribed in
this paragraph. All such notices shall be made in writing by mailing the same by
certified or registered mail, return receipt requested, and shall be effective
immediately
11
<PAGE>
upon receipt thereof. Any and all notices to MTVN shall be addressed to
Attention: Vice President, General Manager, Nickelodeon Toy and Gear Works, with
a copy to the Sr. Vice President, Business Affairs and General Counsel. All
payments and statements to MTVN hereunder shall be addressed to the Attention:
MTV Networks, Ancillary Sales, P.O. Box 13801, Newark, NJ 07188-0801 with a copy
to the Vice President, General Manager, Nickelodeon Toy and Gear Works.
15. GENERAL CLAUSES:
---------------
(a) Any attempted or purported assignment or other transfer, sublicense,
mortgage or other encumbrance of this License and the rights granted herein by
Licensee without the prior written approval of MTVN shall be void and of no
effect. This Agreement and the rights and obligations of the parties hereunder
shall be binding upon and shall insure to the benefit of MTVN and Licensee and
their respective legal representatives, successors in interest and permitted
assigns.
(b) Nothing herein contained shall be construed to constitute a
partnership or joint venture between the parties hereto, and neither Licensee
nor MTVN shall become bound by any representation, act or omission of the other.
Licensee is an independent contractor in the manufacture, advertisement, sale
and distribution of the Licensed Products, and Licensee will pay all sales taxes
and other taxes or charges imposed on Licensee or MTVN, except for MTVN's
corporate income tax, by any law, ordinance or requirement of any government or
governmental instrumentality in connection with the manufacture, advertisement,
sale and distribution of the Licensed Products.
(c) A waiver by either party of any terms or conditions of this
Agreement in any instance shall not be deemed or construed to be a waiver of
such term or condition for the future, or of any subsequent breach thereof. All
remedies, rights, undertakings, obligations and agreements contained in this
Agreement shall be cumulative, and none of them shall be in limitation of any
other remedy, right, undertaking, obligation or agreement of either party.
(d) This Agreement and all matters or issues collateral thereto shall be
governed by the laws of the State of New York applicable to contracts performed
entirely therein. In any such action or proceeding, service of process upon
Licensee may be accomplished by sending such process in the manner specified
herein for the giving of notice to Licensee. Licensee hereby consents and
submits to the jurisdiction of the federal and/or state court located in New
York.
(e) The entire understanding between the parties hereto relating to the
subject matter hereof is contained herein and no warranties, representations or
undertakings are made by the parties hereto except as expressly provided herein.
This Agreement cannot be changed except in writing signed by the parties.
(f) The paragraph titles of this Agreement are for convenience only and
shall not
12
<PAGE>
affect the interpretation of this Agreement or any paragraph thereof.
(g) The parties hereto agree to execute such other writings, documents
and instruments as may be necessary or desirable to effectuate the purposes of
this Agreement.
(h) Notwithstanding any termination, cancellation or expiration of this
Agreement, the provisions hereof that are intended to continue and survive,
shall continue and survive, including, but not limited to paragraphs: 3 (d);
6-10; 11 (b); and 13-15.
(i) This Agreement shall be interpreted as if the parties hereto jointly
prepared it.
13
<PAGE>
Schedule A
----------
(Due 15 Days After Quarter End)
MTV NETWORKS
QUARTERLY ROYALTY REPORT
Licensee (company name): _______________________________________________________
Licensed Property: _______________________________________________________
Address: _______________________________________________________
_______________________________________________________
Quarter: _______________________________________________________
_______________________________________________________
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Quantity Gross
S.K.U. and Product Description Account of Sales Royalty Total Deductions
Units Price Rate % Royalty $
Sold
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
Please submit with payment to: Sub total: ______________________________
Less Advance/
Guarantee: ______________________________
MTV Networks Plus interest: ______________________________
Ancillary Sales
Total Due ______________________________
P.O. Box 13801
Newark, NJ 07188-0801
with copy to Vice President, I hereby certify that the above information
General Manager, Nickelodeon is true and accurate:
Toy and Gear Works _____________________________________________
Submitted by: ______________________________
(Signature)
_____________________________________________
(Print name/title/date)
14
<PAGE>
Schedule B
----------
(Due 15 Days After Quarter End)
MTV NETWORKS
QUARTERLY SALES REPORT
Licensee (company name): _______________________________________________________
Licensed Property: _______________________________________________________
Address: _______________________________________________________
_______________________________________________________
Quarter: _______________________________________________________
_______________________________________________________
Quarter Actual Shipped Total 199[ ] Projection
- ---------------------- -----------------------
(Revise each quarter)
$ $
I hereby certify that the
above information is
true and accurate:
______________________________
______________________________
Please submit with payment to: Submitted by: ______________________________
(signature)
MTV Networks
Ancillary Sales
P.O. Box 13801 ______________________________
Newark, NJ 07188-0801 (Print name/title/date)
with copy to Vice President,
General Manager, Nickelodeon Toy and
Gear Works
(same address)
15
<PAGE>
MTV NETWORKS
A VIACOM COMPANY
February 25, 1998
Mr. Jack Benun, President
Happy Kids Children's Apparel, Ltd.
100 West 33rd Street, Suite 1100
New York, NY 10001
Dear Mr. Benun
Reference is made to that certain license agreement (the "License
Agreement"), dated as of June 15, 1996 between Happy Kids ("Licensee" or
"you") and MTV Networks ("MTVN" or "we"). All defined terms used without
definitions shall have the meanings provided in the License Agreement.
This letter confirms our mutual agreement to amend the terms of the License
Agreement, including the Term provided therein. In the interest of time, we
have set forth below a summary of the substantive terms to be provided in the
amended agreement.
License Term: The Term shall be extended through December 31, 2001
Licensed Property: "Rugrats" (as per the License Agreement)
Licensed Products: Coordinated apparel inclusive of shorts, jackets,
shirts, pants, rompers, and windsuits in boys sizes 4-20 and girls sizes
4-16; however, commencing January 1, 1999 and for the balance of the
amended Term, swimsuits shall be excluded
Licensed Territory: United States, its territories and possessions
Licensed Channels of Distribution: Mass market stores (e.g., Kmart and
Target), mid-tier stores (e.g, J.C. Penney and Sears), department stores
(e.g., May Company and Macy's), specialty stores, Viacom retail stores
and Nickelodeon stores
Royalty Rate; Currently * * * of domestic Net Sales and, commencing
January 1, 1999, * * * of domestic Net Sales and * * * with respect to
Licensed Products which are FOB foreign shipping point
Guaranteed Minimum Royalty: For the amended Term commencing January 1,
1999, * * * (payment schedule to follow)
License Renewal Fee: For the amended Term, Fifty Thousand Dollars
($50,000), payable upon execution of the amended License Agreement
1515 Broadway, New York, New York 10036-5797 (212) 258-8000
* * * Confidential portion omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
Special Additional Terms: For the amended Term, commencing January 1,
1999, Licensee agrees to (i) dedicate a licensing partner liaison who
will be responsible for coordinating Licensee's business relationships
with its licensing partners, (ii) assign a dedicated creative staff to
work specifically with MTVN with respect to the Licensed Property, and
(iii) maintain a showroom exclusively for the Licensed Property.
It is understood that this letter agreement, while constituting a summary
statement of our mutual intentions with respect to an amendment to the
License Agreement, shall nevertheless constitute a binding commitment of the
parties with respect to the such amendment. Except as contemplated hereby,
all other general terms and conditions of the License Agreement shall remain
in full force and effect.
Please acknowledge your agreement to our understanding by signing one copy of
this letter and returninq it to me.
Very truly yours,
/s/ Gail Stern
ACCEPTED AND AGREED TO:
HAPPY KIDS LTD.
By: /s/ Mark J. Benun
-----------------------------
Name: /s/ Mark J. Benun
---------------------------
Title: Exec. Vice Pres.
--------------------------
<PAGE>
Exhibit 10(14)(1)
LICENSE AGREEMENT
(DOMESTIC)
BETWEEN
B.U.M. INTERNATIONAL, INC.
AND
HAPPY KIDS LTD., a New York Corporation
<PAGE>
LICENSE AGREEMENT
(Domestic)
-----------------
THIS LICENSE AGREEMENT ("Agreement") is made and entered into as of the 1st
day of June, 1995 by and between B.U.M. INTERNATIONAL, INC., a Nevada
Corporation ("Licensor") and HAPPY KIDS LTD., a New York Corporation
("Licensee").
BASIC TERMS
-----------
A. Trademarks. As used in this Agreement, the "Trademarks" mean the
federally registered trademarks "b.u.m. equipment(R)" Registration Nos.
1,430,327, 1,697,485 and 1,765,172, "LI'L B.U.M.(R)", Registration No.'s
1,766,772 and 1,805,300, "Little B.U.M.(R)" Registration No. 1,823,768, "Baby
B.U.M.(R)" Registration Nos. 1,712,713 and 1,803,738 and "Mini B.U.M.(TM)". The
term "Trademarks" shall include any other trademarks which use the word "B.U.M."
which Licensor may hereafter develop relative to the Licensed Products.
B. Licensed Products. As used in this Agreement, the "Licensed Products"
means all items of apparel (excluding underwear and sleepwear) for newborns,
infants, toddlers, boys sizes 4-7 and girls sizes 4-6x, including, but not
limited to, sportswear, dresses, outerwear, swimwear and denim.
C. Territory. As used in this Agreement, the "Territory" means the United
States, its territories and possessions.
D. Term. The term of this Agreement commences on June 1, 1995 (the
"Commencement Date") and ends on December 31, 1998, subject to earlier
termination or extension as provided herein (the "Term"). As used in this
Agreement, a "Year" means a calendar year, except that the first Year of the
Term shall commence on the Commencement Date and shall end on December 31, 1996.
E. Options to Extend. Licensee is hereby granted two (2) options to
extend the Term of this Agreement for periods of three (3) Years each.
F. Guaranteed Minimum Royalties. Licensee agrees to pay to Licensor
Guaranteed Minimum Royalties ("GMR") in the following amounts for each Year of
the Term:
Year GMR
---- ---
1 ***
2 ***
3 ***
4 (Option) ***
5 (Option) ***
6 (Option) ***
7 (Option) ***
8 (Option) ***
9 (Option) ***
*** Confidential portion omitted and filed separately with the Securities and
Exchange Commission.
<PAGE>
G. Royalties. Licensee agrees to pay Royalties at the rate of *** of
Licensee's Net Sales (as defined in this Agreement) to the extent that such
amount exceeds the GMR.
H. Minimum Net Sales Requirements. During each Year of the Term of this
Agreement, Licensee must generate Net Sales equal to or in excess of the
following:
Year Minimum Net Sales
---- -----------------
1 ***
2 ***
3 ***
4 (Option) ***
5 (Option) ***
6 (Option) ***
7 (Option) ***
8 (Option) ***
9 (Option) ***
I. Advance. A non-refundable Advance in the amount of One Hundred
Seventy-Five Thousand Dollars ($175,000) shall be payable upon execution of this
Agreement.
J. Distribution Channels. Licensee agrees to sell Licensed Products only
in the following channels of distribution: specialty and department stores
(e.g., JC Penney, Sears, Kohls and any other stores to which Licensor sells its
Trademarked products). Without limiting the foregoing, Licensee agrees that it
will not sell or distribute Licensed Products (1) to any person or entity who
does not sell at retail in the territory, (2) to swap meets, flea markets,
parking lot sales, warehouse sales or similar sales or similar sellers which
maintain minimum quality standards, (3) to any person or entity who Licensee
knows or reasonably suspects will re-sell the Licensed Products outside of the
Territory or through unapproved channels of distribution.
K. Initial Marketing Date. Licensee agrees to have shipped commercially
reasonable quantities of Licensed Products no later than February 1, 1996.
L. Standard Terms and Conditions. The Standard Terms and Conditions
attached to this Agreement are a part of this Agreement and are binding upon the
parties hereto.
The Basic Terms are set forth above for ease of reference, and are
qualified by reference to the Standard Terms and Conditions. The Agreement
consists of the Basic Terms, the Standard Terms and Conditions, and any exhibits
or addenda attached hereto.
BY ITS INITIALS HEREON, LICENSEE EXPRESSLY ACKNOWLEDGES THE PROVISIONS OF
PARAGRAPH 14(g) OF THE STANDARD TERMS AND CONDITIONS AND AGREES THAT EXCEPT AS
SET FORTH IN THE AGREEMENT, NEITHER LICENSOR NOR ANY OF ITS EMPLOYEES, AGENTS OR
REPRESENTATIVES HAVE MADE ANY PROMISES OR REPRESENTATIONS TO LICENSEE CONCERNING
THE SUBJECT MATTER OF THIS AGREEMENT AND THAT ANY
*** Confidential portion omitted and filed separately with the Securities and
Exchange Commission.
- ii -
<PAGE>
PROMISES OR REPRESENTATIONS NOT EXPRESSLY SET FORTH IN THE AGREEMENT ARE OF NO
FORCE OR EFFECT.
/s/ JMB
-----------
LICENSEE'S
INITIALS
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
"LICENSOR" "LICENSEE"
B.U.M. INTERNATIONAL, INC., HAPPY KIDS LTD., a New York
a Nevada Corporation Corporation
By /s/ Morton [ILLEGIBLE] By /s/ Jack M. Benun
- ------------------------------ ----------------------------------
Its __________________________ Jack M. Benun, President
Address: Address:
20101 South Santa Fe Avenue 100 West 33rd Street, Suite 1100
Rancho Dominguez, California 90221 New York, New York 10001
Attn: Licensing Department
Fax No.: (212) 736-5839
Fax No.: (310) 764-2743
With Copy to: With Copy to:
BRUCE R. GREENE, ESQ. Neil S. Goldstein, Esq.
Richman, Lawrence, Mann, Greene, Schekter Rishty Goldstein &
Arbiter & Chizever Blumenthal, P.C.
9601 Wilshire Boulevard, 1500 Broadway, 21st Floor
Penthouse Suite New York, New York 10036
Beverly Hills, California 90210
Fax No: (212) 944-7372
Fax No.: (310) 274-2831
- iii -
<PAGE>
STANDARD TERMS AND CONDITIONS
1. GRANT OF LICENSE
----------------
(a) Licensor hereby grants to Licensee, upon the terms and conditions set
forth in this Agreement, and Licensee hereby accepts the grant of an exclusive
right (except as otherwise provided herein) to use the Trademarks in connection
with the manufacturing, wholesale sale and distribution (which includes
promotion and advertising) of Licensed Products throughout the Territory during
the Term. Notwithstanding the foregoing, Licensee is not granted the right to
use the Trademarks in connection with the manufacture, sale or distribution of
Licensed Products which are cross-licensed (i.e., which incorporate trademarks
other than the Trademarks whether or not such other trademarks are owned by
Licensor), which right is reserved to Licensor.
(b) Notwithstanding the provisions of subparagraph (a), the rights granted
under this License shall be non-exclusive with respect to any retail stores
owned or controlled by Licensor, or any affiliate or subsidiary of Licensor
("Licensor Retail Stores"). It is expressly understood and agreed that Licensor
may, at its option and at any time during the Term, manufacture, or cause third
parties to manufacture, sell and distribute (at wholesale) Licensed Products to
Licensor Retail Stores.
(c) Licensor hereby reserves all rights not expressly granted to Licensee
hereunder.
2. ROYALTIES AND REPORTING
-----------------------
(a) Guaranteed Minimum Royalties. Licensee agrees to pay to Licensor the
----------------------------
GMR set forth in the Basic Terms, in equal monthly installments, in advance on
the first day of each month during the Term, without demand, and without offset
or deduction of any nature. (It is understood that the full monthly installments
of GMR will continue to be payable by Licensee, notwithstanding that Licensee
has paid additional Royalties pursuant to Paragraph 2(c), until such time as the
sum of the installments of GMR and the Royalties paid pursuant to Paragraph 2(c)
for any Year equals the annual GMR, whereupon the payment of monthly
installments of GMR shall cease for the remainder of that Year. For example,
assume that the annual GMR is $120,000, payable in monthly installments of
$10,000 in advance on the first day of each month. Assume further that Licensee
pays the $10,000 installment of the GMR on January 1. If Licensee's sales for
the month of January result in Royalties earned in the amount of $15,000,
Licensee shall be required to pay the additional $5,000 on February 15 and will
still be required to pay the full $10,000 installments of the GMR on February 1
and March 1.) Under no circumstances will any portion of the GMR be refundable
to Licensee.
(b) Advance. The Advance set forth in the Basic Terms shall be applied
-------
against the installment of GMR due for the last month of the Term (exclusive of
options).
(c) Royalties. During the Term, Licensee shall pay to Licensor Royalties at
---------
the rate specified in the Basic Terms. As used in this Agreement, "Net Sales"
means the total number of units of Licensed Products sold by Licensee multiplied
by the gross invoice price actually charged to the purchaser, exclusive of sales
taxes, freight and insurance (the "Gross Sales"), reduced by quantity discounts
(but not cash
<PAGE>
discounts) to the extent actually reflected on the invoices and further reduced
by returns and allowances which are supported by bona fide credit memoranda,
provided, however, that the total of discounts, returns and allowances shall not
exceed fifteen percent (15%) of the Gross Sales during each Year. There shall be
no other deductions of any nature from Net Sales and, without limiting the
generality of the foregoing, there shall be no deductions for uncollectible
accounts, bad debts or for any costs incurred in the manufacturing, sale,
distribution, advertising or promotion of the Licensed Products. Any sales or
other distribution of Licensed Products made to parents, subsidiaries or any
other entity affiliated with Licensee, or which are given away for promotional
or similar purposes, will be deemed to have been sold at the established
wholesale line price for the purpose of computing Royalties. All Royalties
(including the GMR) shall be paid in U.S. currency. Royalties shall be paid
concurrently with the Statement of Royalties described herein.
(d) Statement of Royalties. No later than the fifteenth (15th) day of each
----------------------
month during the Term (commencing on the 15th day of the second month of the
first Year and ending on the 15th day of the month following the last month of
the Term), including any sell-off period subsequent to the termination of this
Agreement, Licensee shall deliver to Licensor a written report, in a form
designated by Licensor, showing, among other things, Gross Sales, Net Sales and
the computation of Royalties for the immediately preceding month (the "Statement
of Royalties"). The Statement of Royalties shall be certified as being true and
correct by an officer (or other duly authorized representative) of Licensee. The
Statement of Royalties must be furnished whether or not there are any Net Sales
for the month covered thereby, and whether or not any Royalties are due to
Licensor for such month. The receipt or acceptance by Licensor of any Statement
of Royalties shall not be deemed an acknowledgment by Licensor that such
Statement of Royalties is accurate, and Licensor shall be entitled at any time
to question the accuracy of any Statement of Royalties.
(e) Statement of Shipments by Account. Concurrently with the delivery of
---------------------------------
the Statement of Royalties, Licensee shall deliver to Licensor a written report,
in a form acceptable to Licensor, showing all shipments of Licensed Products for
the immediately preceding month by account.
(f) Interest. Any Royalties or other monetary sums which are not paid to
--------
Licensor when due shall bear interest at the highest rate allowable by law.
3. MINIMUM NET SALES REQUIREMENTS. If Licensee fails to meet the Minimum
------------------------------
Net Sales Requirements set forth in the Basic Terms during any Year of the Term
(whether or not Licensee has paid the annual GMR) Licensor shall have the right,
upon notice to Licensee, to immediately terminate this Agreement, provided that
such notice is given not later than sixty (60) days after the end of the Year in
which the Minimum Net Sales Requirements have not been met.
4. BOOKS AND RECORDS.
-----------------
(a) Licensee agrees to maintain complete and accurate books of account and
records covering all transactions related to this Agreement at Licensee's
principal place of business, during the Term and for at least three (3) years
after the expiration or termination of this Agreement. Licensor and its
-2-
<PAGE>
representatives shall have the right, upon reasonable advance notice to Licensee
and during regular business hours to inspect and audit (which includes the right
to copy at no expense to Licensor) such books of account and records. If any
audit discloses that the Royalties due to Licensor exceeded the Royalties
actually paid by Licensee by an amount greater than two percent (2%) for the
period being audited, Licensee shall pay immediately upon demand (in addition to
all unpaid Royalties plus interest) the cost of the audit.
(b) Licensee agrees to furnish to Licensor, within ninety (90) days after
the end of each Year during the Term, financial statements (current balance
sheet and profit and loss statement for the prior Year), certified by an
appropriate officer (or partner) of Licensee to be true, correct and complete
and prepared in accordance with generally accepted accounting principles,
consistently applied.
5. LICENSEE HANDBOOK. Licensee agrees to comply within all procedures
-----------------
(including forms for approvals and reporting requirements set forth herein) set
forth in the Licensee Handbook, as same may be modified and/or supplemented from
time to time and the provisions thereof are incorporated by reference into this
Agreement. Licensee acknowledges receipt of a copy of the Licensee Handbook.
6. EXPLOITATION OF LICENSE.
-----------------------
(a) Licensee agrees to use best efforts and diligence to continuously sell,
distribute, advertise and promote the Licensed Products throughout the entire
Territory. If at any time during the Term Licensee fails to ship Licensed
Products in commercially reasonable amounts for a consecutive period of more
than ninety (90) days, the Licensee shall be deemed to be material default under
this Agreement.
(b) Licensee shall at all times maintain (or contract for) facilities and
personnel adequate to fulfill its obligations under this Agreement.
(c) During each Year, Licensee shall ship not less than eighty-five percent
(85%) of Licensed Products for which Licensee has accepted and confirmed
purchased orders.
(d) Licensee shall have the exclusive right to establish prices and terms
for the sale of Licensed Products. Licensee shall provide Licensor, in advance
of each selling season, with line sheets and price lists, and Licensee shall
promptly notify Licensor of any change in pricing.
(e) Licensee shall provide Licensor, upon request, with the names and
addresses of all facilities at which the Licensed Products are manufactured and
stored, and Licensee shall make all necessary arrangements to allow Licensor or
its representatives to have reasonable access to all such facilities upon
reasonable advance notice during regular business hours for the purposes of
conducting inspections to insure that Licensee is in compliance with this
Agreement.
(f) Licensee shall not manufacture, sell or distribute any other products
which are competitive with the Licensed Products. Upon receipt of notice from
Licensor that Licensor has determined that any products being manufactured, sold
or distributed by Licensee are, in Licensor's reasonable opinion, competitive
with the Licensed Products, Licensee shall immediately discontinue the
manufacture, sale or distribution thereof. Without limiting the generality of
the foregoing, Licensee agrees that it will not copy any Licensed Products or
offer for sale any products which are similar in design to the Licensed
Products.
-3-
<PAGE>
(g) Licensee shall include in all of its written orders for the sale of
Licensed Products such language as Licensor may reasonably specify for the
purpose of preventing diversion of the Licensed Products from the approved
channels of distribution.
(h) Licensee shall include in all of its written orders for the purchase of
materials and/or finished goods from third parties such language as Licensor may
reasonably specify for the purpose of prohibiting the sale or other disposition
of any products bearing the Trademarks by such suppliers other than to Licensee.
(i) Licensee shall cut all labels and hangtags on defective merchandise
(seconds or irregulars) prior to shipment and shall disclose on any invoices
with respect thereto that such merchandise consists of seconds or irregulars.
(j) Licensee agrees, upon request of Licensor, to sell Licensed Products to
Licensor Retail Stores, on standard trade terms, at the lower of (i) Licensee's
wholesale line price less thirty-three and one-third percent (33-1/3%), or (ii)
the lowest price which Licensee has offered such Licensed Products for sale to
independent retailers. In addition, Licensee agrees to manufacture specific
Licensed Products which may be requested from time to time by Licensor for sale
to Licensor Retail Stores, whether or not Licensee is then manufacturing such
specific Licensed Products. Licensor shall be under no obligation to purchase
Licensed Products from Licensee for Licensor Retail Stores.
(k) Licensee agrees to participate (by among other things, providing an
adequate number of samples for display) in all major trade shows, utilizing
booths selected by Licensor. Licensee shall reimburse Licensor for a portion of
Licensor's costs incurred in connection with such trade shows, in an amount
which will be equitably established by Licensor.
(l) Licensee shall attend meetings called by Licensor from time to time to
discuss any matters relating to this Agreement. All such meetings will be held
at Licensor's offices and may be called by Licensor upon not less than thirty
(30) days' prior written notice to Licensee, but not more frequently than one
(1) time in each calendar quarter.
(m) Licensee shall cooperate with Licensor and other Licensees of Licensor
(domestic and international in connection with the exchange of ideas, design and
other information relative to the manufacture, sale and distribution of Licensed
Products (including, but not limited to, furnishing a reasonable quantity of
samples to be distributed among such other Licensees), but nothing shall require
Licensee to divulge any of its trade secrets or other confidential information.
(n) Licensee shall actively advertise and promote the Licensed Products in
the Territory during the entire Term. All advertising and promotion is subject
to the approval of Licensor as provided herein.
(o) Licensee shall submit to Licensor written sales projections. Such sales
projections shall be submitted to Licensor within thirty (30) days of the
Commencement Date, and quarter-annually thereafter during the Term.
-4-
<PAGE>
7. LICENSOR'S STANDARDS AND APPROVALS; SAMPLES.
-------------------------------------------
(a) Licensee agrees that the Licensed Products shall be of a high quality,
consistent with the quality of other products which include the Trademarks which
are manufactured, sold and distributed by Licensor and its other Licensees.
Accordingly, Licensee agrees to conform at all times to such standards as
Licensor may direct, from time to time, including, but not limited to, standards
relating to the design, manufacturing, packaging, advertising and promotion of
the Licensed Products. Licensee agrees to conform to all standards set forth in
the Quality Control Handbook, as same may be modified and/or supplemented from
time to time and the provisions thereof are incorporated by reference into this
Agreement. Licensee acknowledges receipt of a copy of the Quality Control
Handbook.
(b) In furtherance of maintaining Licensor's standards, it is agreed that
the following matters shall be subject to Licensor's prior written approval
(which may be given or withheld in Licensor's sole and absolute discretion):
(i) Advertising, promotional and display material;
(ii) Labels, hangtags and packaging;
(iii) Designwork (including, but not limited to, fabric, graphics,
colors and concepts);
(iv) Licensed Products (including. but not limited to , approval of all
samples).
Licensee shall strictly follow all procedures established by Licensor in
the Licensee Handbook with respect to obtaining Licensor's approvals of the
foregoing, including use of all forms as many be specified therein.
(c) Approval samples shall be provided to Licensor, at Licensee's expense,
at the times specified in the Calendar (described in the Licensee Handbook).
Additionally, Licensee shall provide Licensor, upon request, with a reasonable
number of samples, at no charge, for advertising and promotional purposes.
8. TRADEMARK AND COPYRIGHT PROTECTION.
----------------------------------
(a) Licensee recognizes the great value of the goodwill associated with the
Trademarks and acknowledges that such goodwill belongs exclusively to Licensor,
and that Licensee shall acquire no proprietary rights in the Trademarks or their
goodwill by virtue of this Agreement. Licensee further recognizes that the
Trademarks have acquired secondary meaning in the mind of the public.
Accordingly, Licensee agrees that the breach of its obligations under this
Agreement (other than breaches relating to payment of monetary sums) will cause
Licensor irreparable damages which may not be compensable by monetary damages,
and that in the event of such breach, in addition to any other rights or
remedies which Licensor may have, Licensor may seek and obtain injunctive
relief, without the necessity of posting bond (unless otherwise required by
law).
(b) Licensee shall prominently display on all Licensed Products, labels
hangtags, packing material, and in all advertising and promotional materials
using the Trademarks, such trademark and/or copyright notices as Licensor shall
designate.
-5-
<PAGE>
(c) Licensee shall not identify itself as the owner of the Trademarks or
any right or interest therein except as a licensee. Licensee shall not use the
Trademarks, or any similar mark, symbol or other designation, in connection with
its own corporate or business name, as tradename, or in any similar manner.
Licensee shall not apply for the registration of any of the Trademarks which is
confusingly similar to the Trademarks anywhere in the world. Licensee agrees
that all designwork created in connection with this Agreement shall be and
remain the property of Licensor, and that it will not use any such designwork,
or any similar designwork on any products bearing a trademark, brand, label or
similar identification other than the Trademarks.
(d) Licensee agrees that it will not attack or contest the validity or
ownership of the Trademarks by Licensor.
(e) Licensee shall promptly notify Licensor if any legal action is
instituted against Licensee relating to Licensee's use of the Trademarks.
Licensee shall also promptly notify Licensor of any counterfeiting or other
infringement of the Trademarks, or any diversion of the Licensed Products from
the approved channels of distribution, of which Licensee becomes aware. Licensor
shall have the right, but not the obligation, to institute legal action or take
any other actions which it deems necessary to protect its interest in the
Trademarks, and Licensee shall fully cooperate with Licensor in any such action,
provided that any out-of-pocket expenses of Licensee incurred in connection
therewith are paid or reimbursed by Licensor. Any monetary recovery resulting
from any such action shall belong solely to Licensor. If Licensor declines to
institute or continue any legal action, Licensee may, with the consent of
Licensor, which will not be unreasonably withheld, institute or continue same in
its name, at its sole expense, in which event any monetary recovery resulting
therefrom shall belong solely to Licensee.
(f) Licensee shall reasonably cooperate with Licensor to prevent unlawful
use of the Trademarks, including counterfeiting, and to prevent diversion of
Licensed Products outside of the Territory and/or approved distribution
channels.
(g) Licensee shall not take any action which damages the reputation of
Licensor or which reflects negatively upon Licensor, the Trademarks or the
Licensed Products.
9. TERMINATION.
-----------
(a) No Cure Period. In addition to any other termination rights which
--------------
Licensor has under this Agreement, Licensor shall have the right to terminate
this License Agreement by giving written notice to Licensee, if Licensee (i)
manufactures, sells, distributes, advertises, or promotes any Licensed Products
without having obtained all required approvals of Licensor as provided herein;
(ii) asserts any ownership or proprietary interest in the Trademarks, or
contests Licensor's ownership rights therein; (iii) breaches any of the
provisions of this Agreement prohibiting Licensee from assigning, transferring
or sublicensing this Agreement or any of its rights or obligations hereunder;
(iv) or any guarantor of Licensee's obligations hereunder files a voluntary
petition under the Federal Bankruptcy Code, or is subject to the filing of an
involuntary petition under the Federal Bankruptcy Code which is not dismissed
within thirty (30) days, or is declared insolvent, or makes an assignment for
the benefit of creditors, or dissolves, is liquidated or
-6-
<PAGE>
otherwise discontinues its business, or suffers a custodian, trustee or receiver
to be appointed for it or for it's business, which is not released or discharged
within thirty (30) days, or if substantially all of its assets or Licensee's
interest in this Agreement is subjected to any writ of attachment, execution,
garnishment or other legal process which is not released within thirty (30)
days; (v) fails to begin distributing substantial quantities of Licensed
Products by the Initial Marketing Date set forth in the Basic Provisions; or
(vi) sells or distributes any Licensed Products outside of the Territory or
outside of the approved distribution channels set forth in the Basic Provisions.
(b) Cure Period. This Agreement shall automatically terminate ten (10) days
-----------
after written notice by Licensor to Licensee of any breach or default by
Licensee in the performance of its obligations under this Agreement (other than
those set forth in subparagraph (a) unless such breach or default is cured
within such ten (10) day period; provided that if the nature of the breach or
default is such that it cannot reasonably be cured within such ten (10) day
period, then Licensee shall have an additional thirty (30) days to cure same if
Licensee commences the cure within the ten (10) day period and diligently
pursues same to completion. The additional thirty (30) day cure period shall not
apply to the breach or default by Licensee in the payment of Royalties or any
other monetary sums hereunder.
(c) Rights Upon Termination. Subject to the rights of Licensor to purchase
-----------------------
Licensee's inventory, as set forth below, upon termination (but not upon
expiration of the Term) of this Agreement, Licensee shall have the right to sell
inventory remaining on the date of termination, provided that: (i) a detailed
schedule of the inventory remaining on the date of termination and its location
is provided to Licensor within fifteen (15) days after the date of termination;
(ii) all such sales shall be duly accounted for and shall be subject to all
provisions of this Agreement, including, but not limited to, the furnishing of
Statements of Royalties and the payment of Royalties; (iii) all such inventory
is disposed of within ninety (90) days after the date of termination; and (iv)
no defective or unapproved Licensed Products may be sold. Licensee shall
immediately cease the manufacture of all Licensed Products on the date of
termination, except that any work-in-process may be completed at Licensee's
option, to fill orders taken prior to the date of termination, and such
work-in-process will be considered inventory for the purposes of this Paragraph.
Licensor shall have the option (but not the obligation) to purchase all or any
portion of the inventory of Licensed Products and/or raw materials remaining
upon termination (other than inventory necessary to fill existing orders) at
Licensee's actual cost of labor and materials. Licensor shall notify Licensee
within fifteen (15) days after receipt of the list of inventory required by this
Paragraph of its exercise of this option to purchase. Any Licensed Products
which are not disposed of in accordance with this Paragraph shall, immediately
upon expiration of the sell-off period, be turned over to Licensor, at no cost
to Licensor.
(d) At any time during the three (3) months preceding the expiration of the
Term (provided that Licensor has not duly exercised an option to renew),
Licensor or any new Licensee shall have the right to promote, advertise and take
orders for the Licensed Products.
(e) Any termination of this Agreement resulting from a breach or default by
Licensee shall not relieve Licensee from any obligations which accrued prior to
the date of termination or from the continuing obligation to pay GMR for the
balance of the Term. Notwithstanding the foregoing, the parties
-7-
<PAGE>
acknowledge that the breach by Licensee of this Agreement would cause
substantial damages to Licensor, including, but not limited to, loss of
"presence" in the marketplace while a successor or replacement Licensee is
located, and that the extent of such damages would be difficult and impractical
to ascertain. Accordingly, it is agreed that if Licensor terminates this
Agreement as a result of Licensee's breach, then Licensor shall be entitled to
recover from Licensee, as liquidated damages (in lieu of any recovery for
royalties or payments of GMR but not in limitation of any other remedies which
Licensor may have as a result of such breach) an amount equal to the greater of
(i) twelve (12) times the monthly GMR applicable on the date of termination; or
(ii) twelve (12) times the highest actual Royalties earned during any of the six
(6) months immediately preceding the month in which the Agreement is terminated.
The parties agree that under the circumstances existing on the date of this
Agreement the foregoing sum is a fair and reasonable estimate of Licensor's
damages resulting from Licensee's breach and that this sum is intended to
qualify as liquidated damages pursuant to California Civil Code ss.1671.
10. INDEMNIFICATION AND INSURANCE.
-----------------------------
(a) Licensee agrees to indemnify, defend and hold Licensor and its
shareholders, officers, directors, parents, subsidiaries and agents free and
harmless from and against any and all claims, demands, actions, causes of
action, lawsuits, judgments, costs, expenses and other liabilities of every
nature, including attorneys' fees, arising from (i) Licensee's manufacture,
sale, distribution, advertising or promotion of the Licensed Products including,
without limitation, any product liability claims or any chargebacks or credits
claimed by any customer, vendor, factor or creditor of Licensee, and (ii) the
breach or inaccuracy of any of Licensee's warranties or representations
contained in this Agreement. Licensor agrees to indemnify, defend and hold
Licensee and its shareholders, officers, directors, parents, subsidiaries and
agents free and harmless from and against any and all claims, demands, actions,
causes of action, lawsuits, judgments, costs, expenses and other liabilities of
every nature, including attorneys' fees, arising from the breach or inaccuracy
of any of Licensor's representations or warranties contained in this Agreement.
The foregoing indemnification provisions shall survive the termination of this
Agreement.
(b) Licensee shall obtain and maintain at its sole cost and expense
throughout the Term standard product liability insurance from a reputable
licensed insurance company reasonably acceptable to Licensor, naming Licensor as
additional insured, which policy shall provide protection against any and all
claims for injuries or property damage arising out of defects in the Licensed
Products. The minimum amount of coverage shall be Three Million Dollars
($3,000,000.00) combined single limit for bodily injury and/or for property
damage, plus a Two Million Dollar ($2,000,000.00) umbrella policy. The policy
shall provide for ten (10) days notice to Licensor from the insurer in the event
of any modification, cancellation or termination. Licensee agrees to furnish
Licensor with a certificate of insurance naming Licensor as additional insured
within ten (10) days after execution of this Agreement and upon each renewal of
insurance coverage.
11. REPRESENTATIONS AND WARRANTIES.
------------------------------
(a) Representations of Licensee. Licensee represents as follows:
---------------------------
-8-
<PAGE>
(i) [If Licensee is a corporation] Licensee has been duly incorporated
and organized and is validly existing in good standing under the laws of
the jurisdiction in which it was incorporated.
[If Licensee is a partnership] Licensee is a partnership (either
general or limited, as described in the Basic Provisions) duly formed
and existing under the laws of the jurisdiction in which it was
formed.
(ii) Licensee is duly qualified to do business in all jurisdictions
within the Territory which require such qualification to conduct the
business to be conducted by Licensee under this Agreement.
(iii) Licensee has corporate (or partnership, as applicable) power and
authority to enter into and perform this Agreement.
(iv) This Agreement has been duly authorized by all necessary
corporate (or partnership, as applicable) action on the part of Licensee
and has been duly executed and delivered by Licensee.
(v) Licensee has entered into no other agreement or contract, and is
not subject to any order, decree or ruling, which would prohibit Licensee
from performing its obligations under this Agreement.
(vi) Licensee has adequate capital to finance the business
contemplated by this Agreement and has adequate production resources to
fulfill its obligations hereunder.
(b) Representations of Licensor. Licensor represents as follows:
---------------------------
(i) Licensor has been duly incorporated and organized and is validly
existing in good standing under the laws of the State of Nevada.
(ii) Licensor has Corporate power and authority to enter into and
perform this Agreement.
(iii) This Agreement has been duly authorized by all necessary
corporate action on the part of Licensor and has been duly executed and
delivered by Licensor.
(iv) Licensor is the lawful owner of the Trademarks and has the right,
power and authority to grant the rights granted to Licensee hereunder.
(v) Licensor has entered into no other agreement or contract and is
not subject to any order, decree or ruling, which would prohibit Licensor
from performing its obligations under this Agreement.
12. OPTIONS TO EXTEND TERM. Licensee must exercise its options to extend
----------------------
the Term by delivering written notice thereof to Licensor not later than six (6)
months prior to the expiration of the Term, or any extension of the Term.
Notwithstanding anything herein to the contrary, Licensee shall have no right to
exercise any option to extend the Term if (a) at the time of purported exercise
of an option, Licensee is in default under this Agreement, or (b) during any
Year of the Term, including any option period, Licensee received more than two
notices of default from Licensor, regardless of whether such defaults were
cured.
-9-
<PAGE>
13. SUBLICENSING AND ASSIGNMENT.
---------------------------
(a) Licensee's rights under this Agreement may not be sublicensed without
the prior written consent of Licensor, which consent may be granted or withheld
in the sole and absolute discretion of Licensor. Approval of one sublicense
shall not be deemed an approval of any other sublicense.
(b) Licensee shall have no right or power to assign this Agreement, or any
interest therein, nor may this Agreement or any interest therein be assignable
by operation of law, or otherwise, without the prior written consent of
Licensor, which may be granted or withheld in the sole and absolute discretion
of Licensor. An assignment shall be deemed to have occurred in the event that
fifty percent (50%) or more of the ownership interests (which means shares if
Licensee is a corporation, or general partnership interests if Licensee is a
partnership) of Licensee shall be sold or otherwise transferred to any person or
entity who does not hold an ownership interest as of the date that this
Agreement is executed.
(c) Any assignment or sublicensing (or attempt to do either of the
foregoing) by Licensee without the prior written consent of Licensor shall be
null and void and of no force or effect and shall also constitute grounds for
immediate termination as provided in Paragraph 9(a) of this Agreement. No
approved assignment or sublicensing shall release Licensee from any of its
obligations hereunder, unless a release of liability is expressly agreed upon in
writing by Licensor.
14. GENERAL PROVISIONS.
------------------
(a) Disclaimer of Agency; Not a Franchise. This Agreement does not
-------------------------------------
constitute either party the agent of the other, or create a partnership or joint
venture between the parties, and neither Licensor nor Licensee shall have any
power to obligate or bind the other in any manner whatsoever. This Agreement
does not constitute a franchise.
(b) Governmental Compliance. Licensee agrees to comply, at its own expense,
-----------------------
with all laws, ordinances, rules, regulations, and other requirements of all
governmental authorities and agencies having jurisdiction over Licensee relating
to the manufacture, sale, distribution and advertising of the Licensed Products
or any of Licensee's other activities pursuant to this Agreement. Licensee
agrees that all Licensed Products shall be of good and merchantable quality,
free from all defects, and free from any materials or substances which may be
harmful or dangerous to human beings. Proof of compliance with the provisions of
this Paragraph shall be furnished by Licensee to Licensor upon demand.
(c) Notices. All notices required or permitted to be given pursuant to this
-------
Agreement shall be in writing, and shall be delivered either personally, by
overnight delivery service or by U.S. certified or registered mail, postage
prepaid, return-receipt requested and addressed to the parties at their
respective addresses as they appear below their respective signatures hereon.
Notices may also be given by facsimile transmission to the facsimile telephone
numbers which appear below the parties' respective signatures hereon, provided
that a copy of the notice is also sent by one of the other above-described
methods of service. The parties may change their addresses or facsimile
telephone numbers for notice by giving notice of such change in accordance with
this Paragraph. Notices sent by overnight delivery service shall be deemed
received on the business day following the date of deposit with the delivery
service. Mailed notices shall be deemed
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<PAGE>
received upon the earlier of the date of delivery shown on the return-receipt,
or the second business day after the date of mailing. Notices sent by facsimile
transmission shall be deemed served on the date of transmission, provided that
is during regular business hours, otherwise on the next business day.
(d) Construction; Jurisdiction. This Agreement has been executed in and is
--------------------------
to be performed in the State of California, and this Agreement shall be
interpreted in accordance with the laws of the State of California. The parties
hereby submit to the jurisdiction of all state and federal courts in the State
of California, County of Los Angeles.
(e) Benefit. This Agreement shall be binding upon and inure to the benefit
-------
of the parties hereto, and their respective heirs, assigns, successors-in-
interest, and legal representatives, subject to the restrictions on assignment
set forth herein.
(f) Amendments. This Agreement may not be amended, modified or altered
----------
except by a written instrument executed by all parties hereto.
(g) Entire Agreement. Neither of the parties has made any representations,
----------------
warranties, covenants or promises relating to the subject matter of this
Agreement except as set forth herein, and any prior agreements or understandings
not specifically set forth herein shall be of no force or effect. This Agreement
constitutes the entire agreement of the parties relative to the subject matter
hereof.
(h) Invalidity. If any provision of this Agreement is declared by a court
----------
of competent jurisdiction to be invalid or unenforceable, the remaining
provisions hereof shall nevertheless be given full force and effect.
(i) Captions and Exhibits. Captions are for convenience only and shall not
---------------------
be considered in interpreting any of the provisions hereof. All exhibits and
addenda attached hereto are incorporated herein by reference.
(j) Gender; Number. As used herein, the masculine, feminine or neuter
--------------
gender, and the singular or plural number, shall each be deemed to include the
others whenever the context so indicates.
(k) Attorneys' Fees. Should either party be required to bring legal action
---------------
(including arbitration) to enforce its rights under this Agreement, the
prevailing party in said action shall be entitled to recover from the losing
party its reasonable attorneys' fees and costs in addition to any other relief
to which he is entitled. Such recovery of attorneys' fees shall include any
attorneys' fees incurred in connection with any bankruptcy or reorganization
proceeding, including stay litigation. The parties further agree that any
attorneys' fees incurred in enforcing any judgment are recoverable as a separate
item, and that this provision is intended to be severable from the other
provisions of this Agreement, shall survive the judgment, and is not to be
deemed merged into the judgment. Licensee also agrees to reimburse Licensor in
the sum of Three Hundred Dollars ($300) for attorneys' fees incurred in
connection with the sending of any notice of breach or default, whether or not
such breach or default is cured.
(l) Arbitration. Any controversy or claim arising out of or relating to
-----------
this Agreement, or breach thereof, shall be settled by binding arbitration in
Los Angeles, California, in accordance with the Commercial Arbitration Rules of
the American Arbitration Association then in effect, and judgment upon the award
rendered by the arbitrator(s) may be entered in any court of competent
jurisdiction. Notwithstanding
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<PAGE>
the foregoing, nothing herein shall prohibit Licensor from applying to a court
of competent jurisdiction for any appropriate injunctive relief. The cost of
arbitration shall be borne by the losing party, or, if there is no losing party,
as the arbitrator(s) shall determine.
In any arbitration proceedings relative to this Agreement, or breach
thereof, all parties shall have the right to take depositions and to obtain
discovery regarding the subject matter of the arbitration pursuant to California
Code of Civil Procedure Section 1283.05, or any successor statute.
Service of any Petition to confirm or vacate the Arbitration award and
Notice of Hearing thereon may be made by certified or registered mail,
return-receipt requested, or by personal delivery.
The arbitrator'(s) award may be limited to a statement that one party pay
to the other a sum of money. The arbitrator(s) will not be deemed to exceed
their powers (per California Code of Civil Procedure Sections 1286.2 or 1286.6)
by committing an error of law or legal reasoning, it being agreed that the
decision of the arbitrator(s) shall be final and unreviewable for error of law
or legal reasoning of any kind.
(m) Counterparts. This Agreement may be executed in one (1) or more
------------
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one (1) and the same instrument.
(n) Waiver. The failure of any party, at any time, to require timely
------
performance by any other party of any provision of this Agreement shall not
affect such party's rights thereafter to enforce the same, nor shall the waiver
by any party of any breach of any provision of this Agreement, whether or not
agreed to in writing, be taken or held to be a waiver of the breach of any other
provision or a waiver of any subsequent breach of the same provision of this
Agreement. No extension of time for the performance of any obligation or act
hereunder shall be deemed to be an extension of time for the performance of any
other obligation or act hereunder.
(o) Additional Acts. The parties agree to perform such further acts and to
---------------
execute, acknowledge and deliver such documents as may be necessary to
effectuate the provisions of this Agreement.
(p) Confidentiality. The parties agree that the provisions of this
---------------
Agreement shall be and remain confidential and shall not be disclosed by either
party to any other person or entity, except (i) as may be required by court
order or other legal process, or (ii) as may be required for the legitimate
conduct of a party's business, such as a disclosure to a party's attorneys,
accountants or other representatives, but only to the extent necessary for the
foregoing purposes. Each of the parties shall take reasonable precautions to
prevent any further disclosure by such party's employees and such party's
representatives to whom disclosure is permitted pursuant to this Paragraph.
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<PAGE>
ADDENDUM TO LICENSE AGREEMENT
-----------------------------
THIS ADDENDUM TO LICENSE AGREEMENT ("Addendum") is attached to and made a
part of that certain License Agreement dated as of June 1, 1995 ("Agreement")
between B.U.M. INTERNATIONAL, INC., a Nevada Corporation ("Licensor") and HAPPY
KIDS LTD., a New York Corporation ("Licensee"). Capitalized terms used in this
Addendum shall have the same meaning as set forth in the Agreement, unless
otherwise provided herein. In the event of any conflict or inconsistency between
the provisions of the Agreement and the provisions of this Addendum, the
provisions of this Addendum shall control.
1. Paragraph 1(b): The following language is hereby inserted at the end of
--------------
the last sentence: "but not otherwise within the Territory."
2. Paragraph 2(b): The Advance shall be applied against the monthly
--------------
payments of GMR through December 31, 1995, and no additional payments of GMR
shall be due or payable during that time period. The balance of the GMR payable
for the first year of the Term *** shall be payable in twelve (12) consecutive
equal monthly installments of *** commencing on January 1, 1996 and continuing
thereafter on the first day of each succeeding calendar month through and
including December 31, 1996.
3. Paragraph 2(c): The words "(but not cash discounts)" in the second
--------------
sentence is hereby deleted.
4. Paragraph 2(d): The Statement of Royalties shall be due on the 20th day
--------------
of each month during the Term. The word "reasonably" is hereby inserted before
the word "designated" in the fourth line.
5. Paragraph 2(e): The words "Concurrently with" in the first line are
--------------
hereby deleted and replaced with the words "Within seven (7) days after the".
The word "reasonably" is hereby inserted before the word acceptable in the
second line.
6. Paragraph 3: The following sentence is added at the end of the
-----------
paragraph: "Notwithstanding the foregoing, Licensor shall not have the right to
terminate the Agreement as a result of the failure of Licensee to meet the
Minimum Net Sales Requirements during any Year if Licensee has (a) paid the full
GMR for that Year, and (b) Licensee has generated Net Sales equal to at least
eighty percent (80%) of the Minimum Net Sales Requirements."
7. Paragraph 4(a): Licensor's inspection and audit rights shall be
--------------
exercised no more frequently than one (1) time each Year. The words "two percent
(2%)" in the last sentence are hereby deleted and replaced with the words "five
percent (5%)".
*** Confidential portion omitted and filed separately with the Securities and
Exchange Commission.
<PAGE>
8. Paragraph 6(c): The words "eighty-five percent (85%)" are hereby deleted
--------------
and replaced with the words "eighty percent (80%)".
9. Paragraph 6(e): The entire Paragraph is hereby deleted and the following
--------------
is inserted in its place: "Throughout the Term, Licensee shall maintain accurate
and complete records containing the names and addresses of all facilities at
which the Licensed Products are manufactured and stored. In the event that
Licensor reasonably determines that just cause exists (i.e., as a result of
counterfeiting or other Trademark infringement, diversion of the Licensed
Products from the approved channels of distribution, quality control problems
with the License Products, or similar circumstances) Licensee shall disclose as
reasonably necessary the identity of such facilities to Licensor and shall
cooperate with Licensor to arrange for access thereto by Licensor or its
representatives for the limited purpose of remedying the problem. Any such
information disclosed to Licensor by Licensee shall be treated as confidential.
10. Paragraph 6(f): The entire Paragraph is hereby deleted and the
--------------
following is inserted in its place: "Licensee shall not manufacture, sell or
distribute any other products which are directly competitive with the Licensed
Products. Within ten (10) days of receipt of notice from Licensor that Licensor
has determined that any products being manufactured, sold or distributed by
Licensee are, in Licensor's reasonable opinion, directly competitive with the
Licensed Products, Licensee shall immediately discontinue the manufacture, sale
or distribution thereof. Without limiting the generality of the foregoing,
Licensee agrees that it will not copy the designs of any Licensed Products or
offer for sale any products which are substantially similar in design to the
Licensed Products."
11. Paragraph 6(i): The words "that bear any of the Trademarks" are hereby
--------------
inserted after the word "merchandise" in the first line.
12. Paragraph 6(j): The first sentence is hereby deleted and the following
--------------
is inserted in its place: "Licensee agrees, upon request of Licensor, and
subject to availability, to sell Licensed Products to Licensor Retail Stores, on
standard trade terms, at the lower of (i) Licensee's wholesale line price less
twenty-five percent (25%), or (ii) the lowest price at which Licensee has
offered such Licensed Products for sale to independent retailers, other than as
seconds, irregulars or close-outs.
13. Paragraph 6(k): The words "all major" in the first sentence are hereby
--------------
deleted and the words "the M.A.G.I.C." are hereby inserted in their place. The
word "direct" is hereby inserted before the word "costs" in the second sentence.
The following sentence is hereby added at the end of the Paragraph: "Licensee
shall be permitted to participate in such trade show separately from Licensor,
as long as it also participates jointly with Licensor".
14. Paragraph 6(m): The following words are added at the end of the
--------------
Paragraph: "which shall include, without limitation, its costs, pricing and
sources of new materials and/or production".
15. Paragraph 6(p): The following new Paragraph: 6(p) is added to the
--------------
Agreement: "(p) Licensor shall make available to Licensee, upon request of
Licensee, ideas, designs, and other information relative to the manufacture,
sale and distribution of Licensed Products developed by Licensor or derived from
other licensees of Licensor (domestic and international). Licensor makes no
representations that any such
- 2 -
<PAGE>
ideas, designs or information will in fact be developed and nothing herein shall
be deemed to require Licensor to create any designs for Licensee, such being the
sole responsibility of Licensee."
16. Paragraph 8(b): The word "reasonably" is hereby inserted before the
--------------
word "designate".
17. Paragraph 8(c): The following language is hereby added after the fourth
--------------
sentence: "Licensor shall notify Licensee within thirty (30) days after being
informed by Licensee of the institution of legal action against Licensee and/or
of becoming aware of any counterfeiting or infringing of the Trademarks, as to
whether Licensor will defend the legal action or institute its own action or
take such other steps to protect the Trademarks."
18. Paragraph 8(g): The following sentence is added at the end of the
--------------
Paragraph: "Licensor shall not take any action which damages the reputation of
Licensee or which reflects negatively upon the Licensee, the Trademarks or the
Licensed Products."
19. Paragraph 8(h): The following new Paragraph 8(h) is added to the
--------------
Agreement "(h) In the event that Licensor changes the marketing direction of the
Trademarks, including a material or substantive change in permitted retail
outlets, Licensor shall endeavor to give Licensee reasonable advance notice of
such change."
20. Paragraph 9(a): The words "regularly and repeatedly" are hereby
--------------
inserted before the word "manufactures" in the third line. The words "thirty
(30)", in both places where they appear in subparagraph (iv) only, are hereby
replaced with the words "sixty (60)".
21. Paragraph 9(b): The words "ten (10)", in all places which they appear,
--------------
are hereby replaced with the words "thirty (30)".
22. Paragraph 9(c): The words "(but not upon expiration of the Term)" in
--------------
the second line are hereby deleted. The words "including, without limitation,
work in process" are hereby added after the word "inventory" in the third line.
The words "fifteen (15)" in the fifth line are hereby deleted and replaced with
the words "thirty (30)". The words "ninety (90)" in the seventh line are hereby
deleted and replaced with the words "one hundred eighty (180)". The words "or
otherwise reasonably anticipated as of that date" are hereby inserted after the
word "termination" in the eleventh line.
23. Paragraph 9(e): The third sentence is hereby deleted and replaced with
--------------
the following: "Accordingly, it is agreed that if Licensor terminates this
Agreement as a result of Licensee's breach, beyond any applicable notice and/or
cure period, then Licensor shall be entitled to recover from Licensee, as
liquidated damages (in lieu of any recovery for future Royalties or payments of
GMR, but not in limitation of any other remedies which Licensor may have as a
result of such breach, including recovery of Royalties due through the
termination date) the sum of Five Hundred Thousand Dollars ($500,000).
24. Paragraph 9(f): The following new Paragraph 9(f) is hereby added to the
--------------
Agreement: "Licensee may, at any time during the Term, terminate the Agreement
by giving at least six (6) months advance notice to Licensor, accompanied by a
"termination fee" in the amount of Five Hundred Thousand Dollars ($500,000). In
such event, the Agreement shall terminate on the date set forth in the notice as
if the
-3-
<PAGE>
Term had expired on that date (it being understood that the provisions of
Paragraph 9(c) shall apply in such event and Licensee shall remain liable for
all Royalties due through the termination date)."
25. Paragraph 12: The word "two" is hereby deleted and the word "four (4)
------------
is hereby inserted in its place.
26. Paragraph 13(d): The following new Paragraph 13(d) is hereby added to
---------------
the Agreement: "Notwithstanding the foregoing, Licensee may, without Licensor's
prior consent, enter into sublicenses and/or assign this Agreement to a parent
or wholly-owned subsidiary of Licensee, or to an affiliate of Licensee which is
owned by the current shareholders of Licensee (and/or their spouses and/or their
children and/or any bona fide estate planning trust or similar device), provided
that Licensee shall notify Licensor of each such sublicense and assignment, and
provided further that such assignment or sublicense shall not release Licensee
from liability under the Agreement."
27. Paragraph 14(c): The word "second" in the next-to-last sentence is
---------------
hereby deleted and the word "third" is inserted in its place.
28. Paragraph 14(o): The word "reasonably" is hereby inserted before the
---------------
word "necessary".
29. Paragraph 14(q): The following new Paragraph 14(q) is hereby added to
---------------
the Agreement: "(q) Except as otherwise specifically provided herein, all
consents or approvals required of Licensor pursuant to this Agreement, shall not
be unreasonably withheld or delayed. If Licensor shall fail, for any reason, to
disapprove in writing (with the reason(s) for such disapproval) within ten (10)
business days after request for such consent or approval by Licensee (on forms
specified by Licensor, when applicable); then, notwithstanding any provision
herein requiring prior written approval, Licensor shall be deemed to have given
written approval or consent to such request.
30. Paragraph l4(r): The following new Paragraph 14(r) is hereby added to
---------------
the Agreement:
"(i) Neither party hereby shall be liable to the other for delay in
any performance or for the failure to render any performance under the
Agreement when such delay or failure is by reason of any cause or causes
beyond its reasonable control, including, without limitation, any present
or future statute, law, ordinance, regulation, order, judgment or decree,
government-imposed quota, act of God, earthquake, epidemic, explosion,
lockout, boycott, strike, riot, war or armed conflict (whether or not there
has been an official declaration of war or official statement as to the
existence of a state of war), or act of a public enemy. The party claiming
to be so effected shall give notice to the other party promptly after it
learns of the occurrence of said event and of the adverse results thereof.
Such notice shall set forth the nature and the extent of the event. The
delay or failure shall not be excused unless such notice is so given.
-4-
<PAGE>
(ii) Anything to the contrary contained herein notwithstanding, the
provisions of this Paragraph 14(r) shall not apply to Licensee's
obligations to make any payment of Royalties (including payments of GMR) or
any other monetary payments to Licensor required under the Agreement.
(iii) Anything to the contrary contained herein notwithstanding, in
the event that the circumstances under which Paragraph 14(r) shall apply
shall occur, to wit, there should be a condition requiring reference to
this "force majeure" provision, then, either party, on no less than sixty
(60) days' prior written notice to the other, effective as of the end of
nine (9) months from the commencement of the event of "force majeure", may
terminate this Agreement, provided that within such notice period, the
event of "force majeure" shall not have ended.
(iv) Should there be an event of "force majeure", unless this
Agreement is terminated pursuant to subparagraph (iii), then the particular
Year during which such event occurs, and each subsequent Year shall be
deemed automatically extended for the period of such "force majeure", and
the Term shall be similarly extended for a like period.
31. Licensee shall have a "right of first negotiation" with respect to
extending this Agreement to include boys sizes 7-14 and girls sizes 8-20. Before
Licensor offers any other person or entity (except for John M. Fulmer Co., which
has already been granted a "right of first negotiation" by Licensor and which is
prior and superior to Licensee's "right of first negotiation" granted herein)
the right to enter into a license for such products, it will extend such offer
to Licensee on the same terms and conditions. Licensee will have ten (10) days
after receipt of such offer to accept or reject same, and if not accepted within
such time period, then this "right of first recognition" shall terminate and
Licensor shall be free to offer such license to any other person or entity as
long as the terms and conditions are not materially more favorable to the
offeree.
32. Licensee shall reimburse Licensor for the reasonable expenses incurred
for two (2) trips to New York each Year for Licensor's Vice President of
Licensing (or comparable officer) to meet with Licensee and to verify that
Licensee is performing its obligations under the Agreement. Such reimbursable
costs include airfare (business class), lodging, local transportation, meals and
incidental expenses, and shall be reimbursed by Licensee to Licensor within ten
(10) days after demand, accompanied by appropriate documentation.
33. Licensor acknowledges that Licensee presently manufactures and
distributes products for OP, Jordache, Disney, McKids and Byoboy, which may be
similar in design to the Products to be manufactured and distributed under the
Agreement, and Licensor agrees that Licensee may continue to manufacture and
sell such products or similar products (including, without limitation, private
label products) without being deemed to have violated the "non-competition"
provisions (Paragraph 6(f)) of the Agreement.
-5-
<PAGE>
34. The Minimum Net Sales requirements shall be satisfied only if the Net
Sales in the following categories are approximately equal to the specified
percentages of total Net Sales:
CATEGORY PERCENTAGE OF NET SALES
-------- -----------------------
Infant/Newborn ***
Toddlers ***
Boys sizes 4-7/Girls sizes 4-6x ***
35. Licensee agrees that it will, upon request, fully cooperate with
Licensor's international licensees to allow such international licenses to
utilize Licensee's overseas offices to supervise or facilitate production of
Product.
36. Licensor represents to Licensee that it has applied to the U.S. Patent
and Trademark Office for registration of the Trademark "Mini B.U.M."
(application Serial No. 74/341,509) but that as of this date said Trademark has
not been registered. Licensor will use best efforts to effectuate the
registration of said Trademark, but Licensor makes no guarantee to Licensee that
said Trademark will be registered. Licensor shall have no liability to Licensee
relating in any way to the inability of Licensor to obtain such registration.
37. Licensee may offset any GMR or Royalty payments against any outstanding
amounts then owed by Licensor to Licensee resulting from retail purchases by
Licensor of Licensed Products from Licensee (based upon orders actually shipped
by Licensee to Licensor). Licensor may credit against Royalties owing by
Licensee to Licensor under this Agreement any amounts owned by Licensor to
Licensee which result from retail purchases by Licensor of Licensed Products
from Licensee.
IN WITNESS WHEREOF, the parties have executed this Addendum on the date
first above written.
"LICENSOR" "LICENSEE"
B.U.M. INTERNATIONAL, INC., a Nevada HAPPY KIDS LTD., a New York Corporation
Corporation
By /s/ ILLEGIBLE By /s/ Jack M. Benun
------------------------------- ------------------------------------
Its Jack M. Benun, President
-------------------------------
*** Confidential portion omitted and filed separately with the Securities and
Exchange Commission.
-6-
<PAGE>
FIRST AMENDMENT TO LICENSE AGREEMENT
------------------------------------
THIS FIRST AMENDMENT TO LICENSE AGREEMENT ("Amendment") is made and entered
into as of the 1st day of September, 1995, by and between B.U.M. INTERNATIONAL,
INC., a Nevada Corporation ("Licensor") and HAPPY KIDS LTD., a New York
Corporation ("Licensee").
RECITALS
--------
A. Licensor and Licensee entered into a License Agreement ("Agreement")
dated as of June 1, 1995 with respect to the manufacture, sale and distribution
of certain items of apparel bearing the b.u.m. equipment(R), Li'L B.U.M.(R),
Little B.U.M.(R), Baby B.U.M.(R) and Mini B.U.M.(TM) Trademarks.
B. The parties desire to amend the Agreement as provided herein.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
set forth herein, the parties agree as follows:
1. The definition of Trademarks is hereby amended to specifically include
the federally registered Trademark "B.U.M. SPORT(R)" Registration No. 1,794,325.
2. The definition of Licensed Products is hereby amended to include Girls
apparel, sizes 7-14, excluding sleepwear, underwear, quilted and/or lined
outerwear and accessories.
3. There will be separate GMR and Minimum Net Sales Requirements for the
Girls sizes 7-14 Product Category, as follows:
<TABLE>
<CAPTION>
Minimum Net
Year GMR Sales Requirements
---- --- ------------------
<S> <C> <C>
1 *** ***
2 *** ***
3 *** ***
4 (Option) *** ***
5 (Option) *** ***
6 (Option) *** ***
7 (Option) *** ***
8 (Option) *** ***
9 (Option) *** ***
</TABLE>
The payments of GMR for the first Year shall commence as of September 1,
1995 *** subject to the provisions of Paragraph 5 of this Amendment.
If Licensee fails to meet GMR or Minimum Net Sale Requirements for the
Girls sizes 7-14 Product Category during any Year of the Term, then Licensor
shall have the option to terminate said Product Category, but Licensor may not
otherwise declare Licensee to be in default under the Agreement or to terminate
the entire Agreement as a result of the failure of Licensee to meet the GMR or
Minimum Net Sales Requirements for such Product Category. Nothing herein shall
be deemed to restrict Licensor's rights under the Agreement if Licensee breaches
any other provision of the Agreement with respect to the Girls sizes 7-14
Product Category. If Licensor exercises it option to terminate the Girls sizes
7-14 Product Category as provided above prior to the end of the Term, then
Licensor shall be entitled to recover from Licensee, as
*** Confidential portion omitted and filed separately with the Securities and
Exchange Commission.
<PAGE>
liquidated damages, the sum of One Hundred Eighty Thousand Dollars ($180,000).
If Licensor terminates the entire Agreement pursuant to Paragraph 9(e) of the
Addendum to the License Agreement, then the amount of liquidated damages payable
to Licensor by Licensee shall be Six Hundred Eighty Thousand Dollars ($680,000),
instead of Five Hundred Thousand Dollars ($500,000).
4. Notwithstanding the Minimum Net Sales Requirements for the Girls sizes
7-14 Product Category as set forth in Paragraph 3 of this Amendment, the Net
Sales of Girls sizes 7-14 apparel bearing the "B.U.M. SPORT(R)" Trademark during
each Year of the Term shall not be less than the following amounts:
<TABLE>
<CAPTION>
Year Minimum Net Sales
---- -----------------
<S> <C>
1 ***
2 ***
3 ***
4 (Option) ***
5 (Option) ***
6 (Option) ***
7 (Option) ***
8 (Option) ***
9 (Option) ***
</TABLE>
5. An additional Advance in the amount of *** shall be due in connection
with this Amendment, payable *** upon execution hereof and the balance shall be
paid not later than December 31, 1995. The additional Advance shall be applied
against the Installments of GMR for the Girls sizes 7-14 Product Category due
for the months of September 1995 through November, 1996 (with *** credited
against the GMR due on December 1, 1996).
6. In addition to the payment of Royalties, Licensee shall pay to Licensor
an amount equal to *** of Licensee's Minimum Net Sales Requirements (for the
entire Girls sizes 7-14 Product Category only) during each Year of the Term, to
be used by Licensor for advertising and promotion of the Trademarks. Such fee
shall be paid monthly concurrently with the payment of GMR.
7. Capitalized terms used In this Amendment shall have the same meanings as
set forth in the Agreement, unless specified otherwise herein.
8. In all other respects, the Agreement shall remain in full force and
effect as originally written.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above written.
"LICENSOR" "LICENSEE"
B.U.M. INTERNATIONAL, INC., a Nevada HAPPY KIDS LTD., a New York
Corporation Corporation
By [ILLEGIBLE] By /s/ Jack M. Benun
----------------------------------- --------------------------------
Its Jack M. Benun, President
----------------------------------
*** Confidential portion omitted and filed separately with the Securities and
Exchange Commission.
-2-
<PAGE>
SECOND AMENDMENT TO LICENSE AGREEMENT
-------------------------------------
THIS SECOND AMENDMENT TO LICENSE AGREEMENT ("Amendment") is made and
entered into as of the 1st day of October, 1997, by and between B.U.M.
INTERNATIONAL, INC., a Nevada Corporation ("Licensor") and HAPPY KIDS LTD., a
New York Corporation ("Licensee").
RECITALS
--------
A. Licensor and Licensee entered into a License Agreement (as
amended, the "Agreement") dated as of June 1, 1995 with respect to the
manufacture, sale and distribution of certain items of apparel bearing the
b.u.m. equipment(R), Li'L B.U.M.(R), Little BUM(R), Baby B.U.M.(R) and Mini
B.U.M.(TM) Trademarks. The Agreement was amended by a First Amendment to License
Agreement dated as of September 1, 1995 (the "First Amendment").
B. The parties desire to further amend the Agreement as provided
herein.
NOW, THEREFORE, in consideration of the premises and the mutual
covents set forth herein, the parties agree as follows:
1. Concurrently herewith, Licensor and Licensee have entered into
another License Agreement for boys (sizes 8-20) sportswear (the "Boys License
Agreement"). It is agreed that any default under the Boys License Agreement,
beyond any applicable notice, grace and/or cure period, shall be deemed a
default under the Agreement. Notwithstanding the foregoing, if Licensee promptly
pays the amount set forth in Paragraph 8(e) of the Boys License Agreement, as
liquidated damages, the Agreement shall not be deemed to be in default. Further,
if Licensee defaults hereunder but promptly pays the amount set forth in
Paragraph 23 of the Addendum to the Agreement, as modified by Paragraph 3 of the
First Amendment, as liquidated damages, the Boys License Agreement shall not be
deemed to be in default.
2. In the event that the Minimum Net Sales Requirements under both the
Agreement and the Boys License Agreement are equalled or exceeded during any
Year, then for that Year, the Royalty Rate applicable to such excess Net Sales
shall be as follows: *** of Net Sales in excess of the cumulative Minimum Net
Sales Requirements of both the Agreement and the Boys License Agreement and up
to *** of cumulative Net Sales, plus *** of Net Sales in excess of *** of
cumulative Net Sales.
3. Licensee is hereby granted a third option to extend the term of
the Agreement for a period of three (3) Years (from January 1, 2005 through
December 31, 2007). The GMR and Minimum Net Sales Requirements during the third
option period shall be as follows:
<TABLE>
<CAPTION>
Newborns, Infants, Toddlers
Boys (Sizes 4-7) and Girls (Sizes 4-6x)
---------------------------------------
Year GMR Minimum Net Sales
---- --- -----------------
<S> <C> <C>
10 (option period) *** ***
11 (option period) *** ***
12 (option period) *** ***
</TABLE>
*** Confidential portion omitted and filed separately with the Securities and
Exchange Commission.
<PAGE>
Girls (Sizes 7-14)
------------------
<TABLE>
<CAPTION>
Minimum Net Sales
Year GMR Minimum Net Sales (B.U.M. SPORT Only)
---- --- ----------------- -------------------
<S> <C> <C> <C>
10 (option period) *** *** ***
11 (option period) *** *** ***
12 (option period) *** *** ***
</TABLE>
4. The effectiveness of this Amendment is conditioned upon
Licensee concurrently executing the Boys License Agreement.
5. Capitalized terms used in this Amendment shall have the
same meanings as set forth in the Agreement, unless specified otherwise herein.
6. In all other respects, the Agreement, as amended by the
First Amendment, shall remain in full force and effect as originally written.
IN WITNESS WHEREOF, the parties have executed this Amendment as
of the date first above written.
"LICENSOR" "LICENSEE"
B.U.M. INTERNATIONAL, INC., a Nevada HAPPY KIDS LTD., a New York Corporation
Corporation
By /s/ [ILLEGIBLE SIGNATURE] By /s/ Jack M. Bernum
---------------------------- -----------------------------
Its Chairman CEO Jack M. Bernum, President
---------------------------
*** Confidential portion omitted and filed separately with the Securities and
Exchange Commission.
-2-
<PAGE>
HAPPY KIDS LTD.
100 WEST 33RD STREET, SUITE 1100
NEW YORK, NEW YORK 10011
As of October 1, 1997
VIA FACSIMILE (212) 764-7925
- ----------------------------
B.U.M. International, Inc.
1114 Avenue of the Americas
30th Floor
New York, New York 10036
Re: License Agreement Dated as of June 1, 1995 as
heretofore amended (the "Existing License
Agreement")
---------------------------------------------
Gentlemen:
In connection with the grant of a certain new license agreement dated as
of the date above written relative to boys (sizes 8-20) sportswear excluding
underwear, hosiery, swimwear or jeanswear. This is to confirm that in
consideration of and subject to B.U.M. International, Inc. countersigning the
second amendment license agreement and signing the new Boys License Agreement,
Happy Kids Ltd. as licensee, exercises the first option to renew the term of the
existing license agreement for the period January 1, 1999 through December 31,
2001.
Thank you for your cooperation.
Very truly yours,
HAPPY KIDS LTD.
By: /s/ Jack M. Benum
----------------------------
Jack M. Benum, President
cc: Larry Jacobs, Esq.
Bruce R. Greene, Esq.
<PAGE>
Exhibit 10(14)(2)
LICENSE AGREEMENT
(Domestic)
-------------
THIS LICENSE AGREEMENT ("Agreement") is made and entered into as of the 1st
day of October, 1997, by and between B.U.M. INTERNATIONAL, INC., a Nevada
Corporation ("Licensor") and HAPPY KIDS LTD., a New York Corporation
("Licensee").
BASIC TERMS
-----------
A. Trademarks. As used in this Agreement, the "Trademarks" mean the
----------
federally registered trademarks "b.u.m. equipment(R)" Registration Nos.
1,430,327, 1,697,485 and 1,765,172, and "B.U.M. SPORT(R)" Registration No.
1,794,325. The term "Trademarks" shall include any other trademarks now or
hereafter owned by Licensor, which incorporate the word "B.U.M." (with or
without periods between the letters).
B. Licensed Products. As used in this Agreement, the "Licensed Products"
-----------------
means boys (sizes 8-20) apparel, excluding underwear, hosiery, swimwear or
jeanswear.
C. Territory. As used in this Agreement, the "Territory" means the United
---------
States, its territories and possessions.
D. Term. The term of this Agreement commences as of October 1, 1997 (the
----
"Commencement Date") and ends on December 31, 2001, subject to earlier
termination or extension as provided herein (the "Term"). As used in this
Agreement, a "Year" means a calendar year, except that the first Year of the
Term shall commence on the Commencement Date and shall end on December 31, 1998.
E. Options to Extend. Licensee is hereby granted two (2) options to
-----------------
extend the Term of this Agreement for periods of three (3) Years each.
F. Guaranteed Minimum Royalties. Licensee agrees to pay to Licensor
----------------------------
Guaranteed Minimum Royalties ("GMR") in the following amounts for each Year of
the Term:
<TABLE>
<CAPTION>
Year GMR
---- ---
<S> <C>
1 (15 months) ***
2 ***
3 ***
4 ***
5 (option period) ***
6 (option period) ***
7 (option period) ***
8 (option period) ***
9 (option period) ***
10 (option period) ***
</TABLE>
*** Confidential portion omitted and filed separately with the Securities and
Exchange Commission.
<PAGE>
G. Royalties. Licensee agrees to pay Royalties (to the extent not paid as
---------
GMR) at the rate of *** of Licensee's Net Sales (as defined in this Agreement)
for Net Sales up to *** per Year, plus *** of Net Sales for Net Sales in excess
of *** and up to *** per Year, plus *** of Net Sales in excess of *** per Year.
H. Minimum Net Sales Requirements. During each Year of the Term of this
------------------------------
Agreement, Licensee must generate Net Sales equal to or in excess of the
following:
<TABLE>
<CAPTION>
Year Minimum Net Sales
---- -----------------
<S> <C>
1 (15 months) ***
2 ***
3 ***
4 ***
5 (option period) ***
6 (option period) ***
7 (option period) ***
8 (option period) ***
9 (option period) ***
10 (option period) ***
</TABLE>
I. Advance. A non-refundable Advance in the amount of Seventy-Five
-------
Thousand Dollars ($75,000) shall be payable upon execution of this Agreement.
J. Distribution Channels. Licensee agrees to sell Licensed Products only
---------------------
in the following channels of distribution: (1) "Upstairs" retailers, such as
national department stores and specialty stores, (2) "off-price" retailers,
including but not limited to, Ross Marshalls and retail stores of similar
quality, (3) "mid-tier" retailers, including, but not limited to, Sears, JC
Penney, Mervyn's and Montgomery Wards, and (4) the following "regional discount"
retailers: Bradlees, Caldor, Roses, Venture, Shopko, Meijers, Fred Meyer,
Parnida, and Target, and other retail stores of similar quality on a "case-by-
case" basis, as approved in the sole and absolute discretion of Licensor.
Licensee may also sell Licensed Products in any other channels of distribution
to which any other Major Licensee (as defined herein) is now or hereafter
permitted by Licensor to sell. Without limiting the foregoing, Licensee agrees
that it will not sell or distribute Licensed Products (a) to any person or
entity who does not sell at retail in the Territory, (b) to swap meets, flea
markets, parking lot sales, warehouse sales or similar sellers which maintain
minimum quality standards, (5) to any person or entity who Licensee knows or
reasonably suspects will re-sell the Licensed Products outside of the Territory
or through unapproved channels of distribution, including "jobbers". Licensor
may, in its absolute discretion, change (lower, but not higher) the distribution
channels at any time upon notice to Licensee. As used in this Paragraph J, the
term "Major Licensee" means those licensees of Licensor who are granted the
rights to sell men's, women's and children's sportswear,
*** Confidential portion omitted and filed separately with the Securities and
Exchange Commission.
- ii -
<PAGE>
which licensees are presently Dino di Milano Corporation, Trends Clothing
Corporation and Tahiti Apparel, respectively.
K. Initial Marketing Date. Licensee agrees to have shipped
----------------------
commercially reasonable quantities of Licensed Products no later than July 1,
1998.
L. Advertising Fee. Licensee agrees to pay to Licensor each Year
---------------
during the Term of this Agreement an Advertising Fee in an amount equal to the
greater of (1) *** of the Minimum Net Sales Requirements, or (2) *** of the
actual Net Sales. Payments equal to *** of one fourth (1/4) of the Minimum Net
Sales Requirements shall be payable concurrently with the quarter-annual
payments of GMR. To the extent that the actual Net Sales for any quarter exceeds
one-fourth (1/4) of the Minimum Net Sales Requirements for the Year, then
Licensee shall pay to Licensor an amount equal to *** of such excess
concurrently with the payment of Royalties for such quarter. Licensor shall
actively advertise and promote the Trademarks in the Territory during the Term,
using the Advertising Fee together with similar fees received from other
licensees.
M. Standard Terms and Conditions. The Standard Terms and Conditions
-----------------------------
attached to this Agreement are a part of this Agreement and are binding upon
the parties hereto.
The Basic Terms are set forth above for ease of reference, and are
qualified by reference to the Standard Terms and Conditions. The Agreement
consists of the Basic Terms, the Standard Terms and Conditions, and any exhibits
or addenda attached hereto.
BY ITS INITIALS HEREON, LICENSEE EXPRESSLY ACKNOWLEDGES THE PROVISIONS OF
PARAGRAPH 13(g) OF THE STANDARD TERMS AND CONDITIONS AND AGREES THAT EXCEPT AS
SET FORTH IN THE AGREEMENT, NEITHER LICENSOR NOR ANY OF ITS EMPLOYEES, AGENTS OR
REPRESENTATIVES HAVE MADE ANY PROMISES OR REPRESENTATIONS TO LICENSEE CONCERNING
THE SUBJECT MATTER OF THIS AGREEMENT AND THAT ANY PROMISES OR REPRESENTATIONS
NOT EXPRESSLY SET FORTH IN THE AGREEMENT ARE OF NO FORCE OR EFFECT.
----------
LICENSEE'S
INITIALS
///
///
///
///
///
///
///
///
///
*** Confidential portion omitted and filed separately with the Securities and
Exchange Commission.
-iii-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
<TABLE>
<S> <C>
"LICENSOR" "LICENSEE"
B.U.M. INTERNATIONAL, INC., a Nevada HAPPY KIDS LTD., a New York Corporation
Corporation
By /s/ Jack M. Benun
------------------------------------------
By [SIGNATURE ILLEGIBLE] Jack M. Benun, President
---------------------------------
Its [ILLEGIBLE]
--------------------------------
Address:
Address:
100 West 33rd Street, Suite 1100
1114 Avenue of the Americas New York, New York 10001
30th Floor
New York, New York 10036 Fax No.: (212) 736-5839
Fax No.: (212) 764-7925 With Copy To:
With Copy To: Joel Rishty, Esq.
Shekter Rishty Goldstein & Blumenthal P.C.
Stonefield Josephson, Inc. 1500 Broadway, 21st Floor
1620-26th Street, Suite 400 South New York, New York 10036-4015
Santa Monica, California 90404
Fax No.: (212) 944-7372
Attention: Larry Jacobs
Fax No.: (310) 453-1187
With Additional Copy To:
BRUCE R. GREENE, ESQ.
Richman, Lawrence, Mann, Greene,
Chizever, Friedman & Phillips
9601 Wilshire Boulevard, Penthouse Suite
Beverly Hills, California 90210
Fax No.: (310) 205-5348
</TABLE>
-iv-
<PAGE>
STANDARD TERMS AND CONDITIONS
-----------------------------
1. GRANT OF LICENSE.
----------------
(a) Licensor hereby grants to Licensee, upon the terms and conditions
set forth in this Agreement, and Licensee hereby accepts the grant of an
exclusive right to use the Trademarks in connection with the manufacturing,
wholesale sale and distribution of Licensed Products throughout the Territory
during the Term. Notwithstanding the foregoing, Licensee is not granted the
right to use the Trademarks in connection with the manufacture, sale or
distribution of Licensed Products which are cross-licensed (i.e., which
incorporate trademarks other than the Trademarks whether or not such other
trademarks are owned by Licensor), which right is reserved to Licensor.
(b) Licensor hereby reserves all rights not expressly granted to
Licensee hereunder.
2. ROYALTIES AND REPORTING.
-----------------------
(a) Guaranteed Minimum Royalties. Licensee agrees to pay to Licensor
----------------------------
the GMR set forth in the Basic Terms, in equal monthly installments, in advance
on the first day of each month during the Term, without demand, and without
offset or deduction of any nature. (It is understood that the full monthly
installments of GMR will continue to be payable by Licensee, notwithstanding
that Licensee has paid additional Royalties pursuant to Paragraph 2(c), until
such time as the sum of the installments of GMR and the Royalties paid pursuant
to Paragraph 2(c) for any Year equals the annual GMR, whereupon the payment of
monthly installments of GMR shall cease for the remainder of that Year. For
example, assume that the annual GMR is $120,000, payable in monthly installments
of $10,000 in advance on the first day of each month. Assume further that
Licensee pays the $10,000 installment of the GMR on January 1. If Licensee's
sales for the month of January result in Royalties earned in the amount of
$15,000, Licensee shall be required to pay the additional $5,000 on February 15
and will still be required to pay the full $10,000 installments of the GMR on
February 1 and March 1.) Under no circumstances will any portion of the GMR be
refundable to Licensee.
(b) Advance. The Advance set forth in the Basic Terms shall be
-------
credited against the first payment(s) of GMR due and payable by Licensee.
(c) Royalties. During the Term, Licensee shall pay to Licensor
---------
Royalties at the rate specified in the Basic Terms. As used in this Agreement,
"Net Sales" means the total number of units of Licensed Products sold by
Licensee multiplied by the gross invoice price actually charged to the
purchaser, exclusive of sales taxes, freight and insurance (the "Gross Sales"),
reduced by quantity discounts (but not cash discounts) to the extent actually
reflected on the invoices and further reduced by returns and allowances which
are supported by bona fide credit memoranda. Provided, however, that there shall
be no reduction from Gross Sales for discounts,
<PAGE>
returns and allowances which aggregate more than five percent (5%) of the Gross
Sales during each Year. For the purpose of computing Net Sales, there shall be
no other deductions of any nature from Gross Sales and, without limiting the
generality of the foregoing, there shall be no deductions for markdowns,
uncollectible accounts, bad debts or for any costs incurred in the manufacturing
sale, distribution, advertising or promotion of the Licensed Products. Any sales
or other distribution of Licensed Products made to parents, subsidiaries or any
other entity affiliated with Licensee, or which are given away for promotional
or similar purposes, will be deemed to have been sold at the established
wholesale line price for the purpose of computing Royalties. All Royalties
(including the GMR) shall be paid in U.S. currency. Royalties shall be paid
concurrently with the Statement of Royalties described herein.
(d) Statement of Royalties. No later than the fifteenth (15th)
----------------------
day of each month during the Term (commencing on the 15th day of the second
month of the first Year and ending on the 15th day of the month following the
last month of the Term), including any sell-off period subsequent to the
termination of this Agreement, Licensee shall deliver to Licensor a written
report, in a form provided by Licensor (which form may be modified from time to
time by Licensor), showing among other things, Gross Sales, Net Sales and the
computation of Royalties for the immediately preceding month (the "Statement of
Royalties"). The Statement of Royalties shall be certified as being true and
correct by an officer (or other duly authorized representative) of Licensee. The
Statement of Royalties must be furnished whether or not there are any Net Sales
for the month covered thereby, and whether or not any Royalties are due to
Licensor for such month. The receipt or acceptance by Licensor of any Statement
of Royalties shall not be deemed an acknowledgement by Licensor that such
Statement of Royalties is accurate, and Licensor shall be entitled at any time
to question the accuracy of any Statement of Royalties.
(e) Statement of Shipments by Account and Bookings. Concurrently
----------------------------------------------
with the delivery of the Statement of Royalties, and from time to time upon the
request of Licensor, Licensee shall deliver to Licensor a written report, in
a form acceptable to Licensor, showing (i) all shipments of Licensed Products
for the immediately preceding month by account, (ii) all booked (confirmed)
orders for future shipments of Licensed Products, and (iii) all unconfirmed
orders for future shipments of Licensed Products.
(f) Interest. Any Royalties or other monetary sums which are not
--------
paid to Licensor when due shall bear interest at the highest rate allowable by
law.
3. MINIMUM NET SALES REQUIREMENTS. If Licensee fails to meet the
------------------------------
Minimum Net Sales Requirements set forth in the Basic Terms during any Year of
the Term (whether or not Licensee has paid the annual GMR) Licensor shall have
the right, upon notice to Licensee, to immediately terminate this Agreement,
provided that such notice is given not later than sixty (60) days after the end
of the Year in which the Minimum Net Sales Requirements have not been met.
-2-
<PAGE>
4. BOOKS AND RECORDS.
-----------------
(a) Licensee agrees to maintain complete and accurate books of
account and records covering all transactions related to this Agreement at
Licensee's principal place of business, during the Term and for at least three
(3) years after the expiration or termination of this Agreement. Licensor and
its representatives shall have the right, upon reasonable advance notice to
Licensee and during regular business hours to inspect and audit (which includes
the right to copy at no expense to Licensor) such books of account and records.
If any audit discloses that the Royalties due to Licensor exceeded the Royalties
actually paid by Licensee by an amount greater than two percent (2%) for the
period being audited, Licensee shall pay immediately upon demand (in addition to
all unpaid Royalties plus Interest) the cost of the audit.
(b) Licensee agrees to furnish to Licensor, within ninety 990)
days after the end of each Year during the Term, financial statements (current
balance sheet and profit and loss statement for the prior Year), certified by an
appropriate officer (or partner) of Licensee to be true, correct and complete
and prepared in accordance with generally accepted accounting principles,
consistently applied.
5. EXPLOITATION OF LICENSE.
-----------------------
(a) Licensee agrees to use best efforts and diligence to
continuously sell and distribute the Licensed Products throughout the entire
Territory during the Term. If at any time during the Term Licensee fails to ship
Licensed Products in commercially reasonable amounts for a consecutive period of
more than ninety (90) days, the Licensee shall be deemed to be in material
default under this Agreement.
(b) Licensee shall at all times maintain (or contract for)
facilities and personnel adequate to fulfill its obligations under this
Agreement, including, but not limited to, an effective sales force.
(c) During each "season" (as such term is generally used in the
apparel industry), Licensee shall ship not less than eighty-five percent (85%)
of Licensed Products for which Licensee has accepted and confirmed purchase
orders which require delivery during such season.
(d) Licensee shall have the exclusive right to establish prices
and terms for the sale of Licensed Products, Licensee shall provide Licensor, in
advance of each selling season, with line sheets and price lists, and Licensee
shall promptly notify Licensor of any change in pricing.
(e) Licensee shall provide Licensor, upon request, with the names
and addresses of all facilities at which the Licensed Products are manufactured,
stored, and displayed for sale (excluding retailers) and Licensee shall make all
necessary arrangements to allow Licensor or its representatives to have
reasonable access to all such facilities upon reasonable advance notice during
regular business hours for the purposes of conducting inspections to insure that
Licensee is in compliance with this Agreement.
(f) Licensee shall not manufacture, sell or distribute any other
products which are identical or substantially similar to the Licensed Products.
Upon receipt of notice from Licensor that Licensor has determined that any
products being manufactured, sold or distributed by Licensee are, in Licensor's
reasonable opinion, identical or substantially similar to with the Licensed
Products, Licensee shall immediately discontinue the manufacture, sale or
distribution thereof. Without limiting the generality of the foregoing, Licensee
agrees
-3-
<PAGE>
that it will not copy or "knock off" any Licensed Products or offer for sale any
products which are similar in design to the Licensed Products.
(g) Licensee shall include in all of its written orders for the sale
of Licensed Products such language as Licensor may reasonably specify for the
purpose of preventing diversion of the Licensed Products from the approved
channels of distribution.
(h) Licensee shall include in all of its written orders for the
purchase of materials and/or finished goods from third parties such language as
Licensor may reasonably specify for the purpose of prohibiting the sale or other
disposition of any products bearing the Trademarks by such suppliers other than
to Licensee.
(i) Licensee shall cut all labels and hangtags on defective
merchandise (seconds or irregulars) prior to shipment and shall disclose on any
invoices with respect thereto that such merchandise consists of seconds or
irregulars.
(j) Licensee agrees to participate (by among other things, providing
an adequate number of samples for display) in all major trade shows. If Licensee
shares space with other licensees in a booth provided by Licensor, Licensee
shall reimburse Licensor for a portion of Licensor's costs incurred in
connection with such trade shows, in an amount which will be equitably
established by Licensor.
(k) Licensee shall attend meetings called by Licensor from time to
time to discuss any matters relating to this Agreement. All such meetings will
be held at Licensor's offices and may be called by Licensor upon not less than
thirty (30) days' prior written notice to Licensee, but not more frequently than
one (1) time in each calendar quarter.
(l) Licensee shall attend meetings and presentations with key
retailers of the Licensed Products, as requested by Licensor, but not more
frequently than twice each Year for each key retailer. Such meetings shall be
called upon reasonable advance written notice to Licensee, and shall be held at
either the retailer's corporate headquarters or such other place as may be
designated by Licensor.
(m) Licensee shall cooperate with Licensor and other licensees of
Licensor (domestic and international) in connection with the exchange of ideas,
design and other information relative to the manufacture, sale and distribution
of Licensed Products (including, but not limited to, furnishing a reasonable
quantity of samples to be distributed among such other licensees), but nothing
shall require Licensee to divulge any of its trade secrets or other confidential
information.
(n) Nothing herein shall require Licensee to advertise or promote the
Licensed Products. However, any advertising or promotion of the Licensed
Products which Licensee desires to undertake is subject to the approval of
Licensor as provided herein.
(o) Licensee shall submit to Licensor written sales projections. Such
sales projections shall be submitted to Licensor within thirty (30) days of the
Commencement Date, and quarter-annually thereafter during the Term.
-4-
<PAGE>
6. LICENSOR'S STANDARDS AND APPROVALS; SAMPLES.
-------------------------------------------
(a) Licensee agrees that the Licensed Products shall be of a high
quality, consistent with the quality of other products which include the
Trademarks which are manufactured, sold and distributed by Licensor and its
other licensees. Accordingly, Licensee agrees to conform at all times to such
standards as Licensor may direct, from time to time, including, but not limited
to, standards relating to the design, manufacturing and packaging of the
Licensed Products.
(b) In furtherance of maintaining Licensor's standards, it is agreed
that the following matters shall be subject to Licensor's prior written approval
(which may be given or withheld in Licensor's sole and absolute discretion):
(i) Advertising, promotional and display material;
(ii) Labels, hangtags and packaging;
(iii) Designwork (including, but not limited to, fabric,
graphics, colors and concepts);
(iv) Licensed Products (including, but not limited to, approval
of all samples).
Licensee shall strictly follow the procedures established by Licensor with
respect to obtaining Licensor's approvals of the foregoing, as more fully set
forth in Exhibit "A" attached hereto.
(c) Licensee shall provide Licensor, upon request, with a reasonable
number of samples, at no charge, for advertising and promotional purposes.
7. TRADEMARK AND COPYRIGHT PROTECTION.
----------------------------------
(a) Licensee recognizes the great value of the goodwill associated
with the Trademarks and acknowledges that such goodwill belongs exclusively to
Licensor, and that Licensee shall acquire no proprietary rights in the
Trademarks or their goodwill by virtue of this Agreement. Licensee further
recognizes that the Trademarks have acquired secondary meaning in the mind of
the public. Accordingly, Licensee agrees that the breach of its obligations
under this Agreement (other than breaches relating to the payment of monetary
sums) will cause Licensor irreparable damages which may not be compensable by
monetary damages, and that in the event of such breach, in addition to any other
rights or remedies which Licensor may have, Licensor may seek and obtain
injunctive relief, without the necessity of posting bond (unless otherwise
required by law).
(b) Licensee shall prominently display on all Licensed Products
manufactured by Licensee pursuant to this Agreement (including labels, hangtags
and packing material), and in all advertising and promotional materials using
the Trademarks, such trademark and/or copyright notices as Licensor shall
designate.
(c) Licensee shall not identify itself as the owner of the Trademarks
or any right or interest therein except as a licensee. Licensee shall not use
the Trademarks, or any similar mark, symbol or other designation, in connection
with its own corporate or business name, as a tradename, or in any similar
manner. Licensee shall not apply for the registration of any of the Trademarks
which is confusingly similar to the Trademarks anywhere in the world. Licensee
agrees that all designwork created in connection with this Agreement shall be
and remain the property of Licensor, and that it will not use any such
designwork, or any
-5-
<PAGE>
similar designwork on any products bearing a trademark, brand, label or similar
identification other than the Trademarks.
(d) Licensee agrees that it will not attack or contest the validity
or ownership of the Trademarks by Licensor.
(e) Licensee shall promptly notify Licensor if any legal action is
instituted against Licensee relating to Licensee's use of the Trademarks.
Licensee shall also promptly notify Licensor of any counterfeiting or other
infringement of the Trademarks, or any diversion of the Licensed Products from
the approved channels of distribution, of which Licensee becomes aware. Licensor
shall have the right, but not the obligation, to institute legal action or take
any other actions which it deems necessary to protect its interest in the
Trademarks, and Licensee shall fully cooperate with Licensor in any such action,
provided that any out-of-pocket expenses of Licensee incurred in connection
therewith are paid or reimbursed by Licensor. Any monetary recovery resulting
from any such action shall belong solely to Licensor. If Licensor declines to
institute or continue any legal action, Licensee may, with the consent of
Licensor, which will not be unreasonably withheld, institute or continue same in
its name, at its sole expense, in which event any monetary recovery resulting
therefrom shall belong solely to Licensee.
(f) Licensee shall reasonably cooperate with Licensor to prevent
unlawful use of the Trademarks, including counterfeiting, and to prevent
diversion of Licensed Products outside of the Territory and/or approved
distribution channels.
(g) Licensee shall not take any action which damages the reputation
of Licensor or which reflects negatively upon Licensor, the Trademarks or the
Licensed Products.
8. TERMINATION.
-----------
(a) No Cure Period. In addition to any other termination rights which
--------------
Licensor has under this Agreement, Licensor shall have the right to terminate
this Agreement by giving written notice to Licensee, if Licensee (i)
manufactures, sells, distributes, advertises, or promotes any Licensed Products
without having obtained all required approvals of Licensor as provided herein;
(ii) asserts any ownership or proprietary interest in the Trademarks, or
contests Licensor's ownership rights therein; (iii) breaches any of the
provisions of this Agreement prohibiting Licensee from assigning, transferring
or sublicensing this Agreement or any of its rights or obligations hereunder;
(iv) or any guarantor of Licensee's obligations hereunder files a voluntary
petition under the Federal Bankruptcy Code, or is subject to the filing of an
involuntary petition under the Federal Bankruptcy Code which is not dismissed
within thirty (30) days, or is declared insolvent, or makes an assignment for
the benefit of creditors, or dissolves, is liquidated or otherwise discontinues
its business, or suffers a custodian, trustee or receiver to be appointed for it
or for it's business, which is not released or discharged within thirty (30)
days, or if substantially all of its assets or Licensee's interest in this
Agreement is subjected to any writ of attachment, execution, garnishment or
other legal process which is not released within thirty (30) days; (v) fails to
begin distributing substantial quantities of Licensed Products by the Initial
Marketing Date set forth in the Basic
-6-
<PAGE>
Provisions; or (vi) sells or distributes any Licensed Products outside of the
Territory or outside of the approved distribution channels set forth in the
Basic Provisions.
(b) Cure Period. This Agreement shall automatically terminate ten
-----------
(10) days after written notice by Licensor to Licensee of any breach or default
by Licensee in the performance of its obligations under this Agreement (other
than those set forth in subparagraph (a) unless such breach or default is cured
within such ten (10) day period; provided that if the nature of the breach or
default is such that it cannot reasonably be cured within such ten (10) day
period, then Licensee shall have an additional thirty (30) days to cure same if
Licensee commences the cure within the ten (10) day period and diligently
pursues same to completion. The additional thirty (30) day cure period shall not
apply to the breach or default by Licensee in the payment of Royalties or any
other monetary sums hereunder.
(c) Rights Upon Termination. Subject to the rights of Licensor to
-----------------------
purchase Licensee's inventory, as set forth below, upon termination of this
Agreement (other than a termination resulting from the breach by Licensee
pursuant to Paragraph 8(a)(i), (ii), (iii) or (vi) hereof) or a termination upon
the expiration of the Term of this Agreement, Licensee shall have the right to
sell inventory remaining on the date of termination, provided that: (i) a
detailed schedule of the inventory remaining on the date of termination and its
location is provided to Licensor within fifteen (15) days after the date of
termination (and if such schedule is not provided within such time period,
Licensee shall not have any sell-off rights); (ii) all such sales shall be duly
accounted for and shall be subject to all provisions of this Agreement,
including but not limited to, the furnishing of Statements of Royalties and the
payment of Royalties; (iii) all such inventory is disposed of within ninety (90)
days after the date of termination; and (iv) no defective or unapproved Licensed
Products may be sold. Immediately upon the termination of this Agreement,
Licensee shall cease taking orders and shall cease the manufacture of all
Licensed Products, except that any work-in-process may be completed at
Licensee's option, to fill orders taken prior to the date of termination, and
such work-in-process will be considered inventory for the purposes of this
Paragraph. Licensor shall have the option (but not the obligation) to purchase
all or any portion of the inventory of Licensed Products and/or raw materials
which contain the Trademarks remaining upon termination (other than inventory
necessary to fill existing orders) at Licensee's actual cost of labor and
materials. Licensor shall notify Licensee within fifteen (15) days after receipt
of the list of inventory required by this Paragraph of its exercise of this
option to purchase. Any Licensed Products which are not disposed of in
accordance with this Paragraph shall, immediately upon expiration of the sell-
off period, be turned over to Licensor, at no cost to Licensor.
(d) At any time during the six (6) months preceding the expiration
of the Term (provided that Licensee has not duly exercised an option to renew),
Licensor or any new licensee shall have the right to promote, advertise and take
orders for the Licensed Products.
(e) Any termination of this Agreement resulting from a breach or
default by Licensee shall not relieve Licensee from any obligations which
accrued prior to the date of termination or from the continuing obligation to
pay GMR and the Advertising Fee for the balance of the Term. Notwithstanding the
foregoing, by placing their initials below, the parties acknowledge that the
breach by Licensee of this Agreement would cause
-7-
<PAGE>
substantial damages to Licensor, including, but not limited to, loss of
"presence" in the marketplace while a successor or replacement license is
located, and that the extent of such damages would be difficult and impractical
to ascertain. Accordingly, it is agreed that if Licensor terminates this
Agreement as a result of Licensee's breach or default, then Licensor shall be
entitled to recover from Licensee, as liquidated damages (in lieu of any
recovery for royalties, payments of GMR and Advertising Fees which would be
payable subsequent to the date of termination, but not in limitation of any
other remedies which Licensor may have a result of such breach or default, such
as the right to injunctive relief and the right to recover royalties, payments
of GMR and Advertising Fees due as of the date of termination) an amount equal
to the greater of (i) twenty-four (24) times the monthly GMR applicable on the
date of termination; or (ii) twenty-four (24) times the highest actual Royalties
payable during any of the six (6) months immediately preceding the month in
which the Agreement is terminated. The parties agree that under the
circumstances existing on the date of this Agreement the foregoing sum is a fair
and reasonable estimate of Licensor's damages resulting from Licensee's breach
and that this sum is intended to constitute liquidated damages pursuant to
California Civil Code (S)1671.
[DMD] JMB
------------------- -------------------
LICENSOR'S INITIALS LICENSEE'S INITIALS
9. INDEMNIFICATION AND INSURANCE.
-----------------------------
(a) Licensee agrees to indemnify, defend and hold Licensor
and its shareholders, officers, directors, parents, subsidiaries, managing
agents and other agents free and harmless from and against any and all claims,
demands, actions, causes of action, lawsuits, judgments, costs, expenses and
other liabilities of every nature, including attorneys' fees, arising from (i)
Licensee's manufacture, sale, advertising or promotion of the Licensed Products
including, without limitation, any product liability claims or any chargebacks
or credits claimed by any customer, vendor, factor or creditor of Licensee, and
(ii) the breach or inaccuracy of any of Licensee's warranties, representations
or covenants contained in this Agreement. Licensor agrees to indemnify, defend
and hold Licensee and its shareholders, officers, directors, parents,
subsidiaries and agents free and harmless from and against any and all claims,
demands, actions, causes of action, lawsuits, judgments, costs, expenses and
other liabilities of every nature, including attorneys' fees, arising from the
breach or inaccuracy of any of Licensor's representations or warranties
contained in this Agreement. The foregoing indemnification provisions shall
survive the termination of this Agreement.
(b) Licensee shall obtain and maintain at its sole cost and
expense throughout the Term standard product liability insurance from a
reputable licensed insurance company reasonably acceptable to Licensor, naming
Licensor as additional insured, which policy shall provide protection against
any and all claims for injuries or property damage arising out of defects in the
Licensed Products. The minimum amount of coverage shall be Five Million Dollars
($5,000,000.00) combined single limit for bodily injury and/or for property
damage, which may include an umbrella policy of not more than Two Million
Dollars ($2,000,000.00). The policy shall provide for ten (10) Days notice to
Licensor from the insurer in the event of any modification,
- 8 -
<PAGE>
cancellation or termination. Licensee agrees to furnish Licensor with a
certificate of insurance naming Licensor as additional insured within ten (10)
days after execution of this Agreement and upon each renewal of insurance
coverage.
10. REPRESENTATIONS AND WARRANTIES.
------------------------------
(a) Representations of Licensee. Licensee represents as
----------------------------
follows:
(i) [If Licensee is a corporation] Licensee has been duly
incorporated and organized and is validly existing in good standing
under the laws of the jurisdiction in which it was incorporated.
[If Licensee is a partnership] Licensee is a partnership
(either general or limited, as described in the Basic Provisions) duly
formed and existing under the laws of the jurisdiction in which it was
formed.
[If Licensee is a limited liability company] Licensee has
been duly organized and is validly existing in good standing under the
laws of the jurisdiction in which it was organized.
(ii) Licensee is duly qualified to do business in all
jurisdictions within the Territory which require such qualification to
conduct the business to be conducted by Licensee under this Agreement.
(iii) Licensee has full power and authority to enter into
and perform this Agreement.
(iv) This Agreement has been duly authorized by all
necessary action on the part of Licensee's board of directors (or other
governing body) and has been duly executed and delivered by Licensee.
(v) Licensee has entered into no other agreement or
contract, and is not subject to any order, decree or ruling, which would
prohibit Licensee from performing its obligations under this Agreement.
(vi) Licensee has adequate capital to finance the
business contemplated by this Agreement and has adequate production
resources to fulfill its obligations hereunder.
(b) Representations of Licensor. Licensor represents as follows:
---------------------------
(i) Licensor has been duly incorporated and organized and
is validly existing in good standing under the laws of the State of
Nevada.
(ii) Licensor has corporate power and authority to enter
into and perform this Agreement.
(iii) This Agreement has been duly authorized by all
necessary corporate action on the part of Licensor and has been duly
executed and delivered by Licensor.
(iv) Licensor is the lawful owner of the Trademarks and has
the right, power and authority to grant the rights granted to Licensee
hereunder.
-9-
<PAGE>
(v) Licensor has entered into no other agreement or
contract and is not subject to any order, decree or ruling, which would
prohibit Licensor from performing its obligations under this Agreement.
11. OPTIONS TO EXTEND TERM. Licensee must exercise its options to
----------------------
extend the Term by delivering written notice thereof to Licensor not later than
six (6) months prior to the expiration of the Term, or any extension of the
Term. Notwithstanding anything herein to the contrary, Licensee shall have no
right to exercise any option to extend the Term if (a) at the time of purported
exercise of any option, Licensee is in default under this Agreement, or (b)
during any Year of the Term, including any option period, Licensee received more
than two notices of default from Licensor, regardless of whether such defaults
were cured.
12. SUBLICENSING AND ASSIGNMENT.
---------------------------
(a) Licensee's right under this Agreement may not be
sublicensed without the prior written consent of Licensor, which consent may be
granted or withheld in the sole and absolute discretion of Licensor. Approval
of one sublicense shall not be deemed an approval of any other sublicense.
(b) Licensee shall have no right or power to assign this
Agreement, or any interest therein, nor may this Agreement or any interest
therein beassignable by operation of law, or otherwise, without the prior
written consent of Licensor, with may be granted or withheld in the sole and
absolute discretion of Licensor. An assignment shall be deemed to have occurred
in the event that fifty percent (50%) or more of the ownership interests (which
means shares if Licensee is a corporation, or general partnership interests if
Licensee is a partnership or membership interests if Licensee is a limited
liability company) of Licensee shall be sold or otherwise transferred to any
person or entity who does not hold an ownership interest as of the date that
this Agreement is executed.
(c) Any assignment or sublicensing (or attempt to do either
of the foregoing) by Licensee without the prior written consent of Licensor
shall be null and void and of no force or effect and shall also constitute
grounds for immediate termination as provided in Paragraph 8(a) hereof. No
approved assignment or sublicensing shall release Licensee from any of its
obligations hereunder, unless a release of liability is expressly agreed upon in
writing by Licensor.
13. GENERAL PROVISIONS.
------------------
(a) Disclaimer of Agency; No Franchise. This Agreement does
----------------------------------
not constitute either party the agent of the other, or create a partnership or
joint venture between the parties, and neither Licensor nor Licensee shall have
any power to obligate or bind the other in any manner whatsoever. The parties
specifically acknowledge that this Agreement creates a licensor/licensee
relationship between them, and that although Licensor retains certain approval
rights and other controls, Licensee acknowledges that such approval rights and
controls are necessary to protect the Trademarks and the goodwill associated
therewith, which Licensee recognizes as being usual and customary for licenses
in the apparel industry. Licensee further acknowledges that (i) it is relying
- 10 -
<PAGE>
primarily on its own knowledge, skill and expertise. In the apparel business,
and (ii) no marketing plan has been provided, suggested or recommended by
Licensor and that, subject to Licensor's approval rights and controls provided
herein, Licensee shall be free to operate its business according to its own
marketing plan or system. Accordingly, the parties specifically agree that this
Agreement does not create a franchise.
(b) Governmental Compliance. Licensee agrees to comply, at its own
-----------------------
expense, with all laws, ordinances, rules, regulations, and other requirements
of all governmental authorities and agencies having jurisdiction over Licensee
relating to the manufacture, sale, distribution and advertising of the Licensed
Products or any of Licensee's other activities pursuant to this Agreement.
Without limiting the generality of the foregoing, Licensee shall strictly comply
with the Fair Labor Standards Acts, the California Labor Code and all other
federal and state labor laws and regulations, and shall take all necessary steps
to insure compliance with such laws and regulations by all third-party
contractors which are retained by Licensee to manufacture the Licensed Products.
Licensee agrees that all Licensed Products shall be of good and merchantable
quality, free from all defects, and free from any materials or substances which
may be harmful or dangerous to human beings. Proof of compliance with the
provisions of this Paragraph shall be furnished by Licensee to Licensor upon
demand.
(c) Notices. All notices required or permitted to be given pursuant to
-------
this Agreement shall be in writing and shall be delivered either personally, by
overnight delivery service or by U.S. certified or registered mail, postage
prepaid, return-receipt requested and addressed to the parties at their
respective addresses as they appear below their respective signatures hereon.
Notices may also be given by facsimile transmission to the facsimile telephone
numbers which appear below the parties' respective signatures hereon, provided
that a copy of the notice is also sent by one of the other above-described
methods of service. The parties may change their addresses or facsimile
telephone numbers for notice by giving notice of such change in accordance with
this Paragraph. Notices sent by overnight delivery service shall be deemed
received on the business day following the date of deposit with the delivery
service. Mailed notices shall be deemed received upon the earlier of the date of
delivery shown on the return-receipt, or the second business day after the date
of mailing. Notices sent by facsimile transmission shall be deemed served on the
date of transmission, provided that is during regular business hours, otherwise
on the next business day.
(d) Construction; Jurisdiction. This Agreement has been executed in
--------------------------
and is to be performed in the State of California, and this Agreement shall be
interpreted in accordance with the laws of the State of California. The parties
specifically agree that any action to enforce or interpret this Agreement (which
is not subject to arbitration as provided herein) may be brought in any state or
federal court in the State of California, County of Los Angeles or in the State
of New York, Count of Kings (at the option of Licensor) and the parties hereby
submit to the jurisdiction of all such courts.
(e) Benefit. This Agreement shall be binding upon and Inure to the
-------
benefit of the parties hereto, and their respective heirs, assigns,
successors-in-interest, and legal representatives, subject to the restrictions
on assignment set forth herein.
(f) Amendments. This Agreement may not be amended, modified or altered
----------
except by a written instrument executed by all parties hereto.
-11-
<PAGE>
(g) Entire Agreement. Neither of the parties has made any
----------------
representations, warranties, covenants or promises relating to the subject
matter of this Agreement except as set forth herein, and any prior agreements or
understandings not specifically set forth herein shall be of no force or effect.
This Agreement constitutes the entire agreement of the parties relative to the
subject matter hereof.
(h) Invalidity. If any provision of this Agreement is declared by a court
----------
of competent jurisdiction to be invalid or unenforceable, the remaining
provisions hereof shall nevertheless be given full force and effect.
(i) Captions and Exhibits. Captions are for convenience only and shall
---------------------
not be considered in interpreting any of the provisions hereof. All exhibits and
addenda attached hereto are incorporated herein by reference.
(j) Gender; Number. As used herein, the masculine, feminine or neuter
--------------
gender, and the singular or plural number, shall each be deemed to include the
others whenever the context so indicates.
(k) Attorneys' Fees. Should either party be required to bring legal
---------------
action (including arbitration) to enforce its rights under this Agreement, the
prevailing party in said action shall be entitled to recover from the losing
party its reasonable attorneys' fees and costs in addition to any other relief
to which he is entitled. Such recovery of attorneys' fees shall include any
attorneys' fees incurred in connection with any bankruptcy or reorganization
proceeding, including stay litigation. The parties further agree that any
attorneys' fees incurred in enforcing any judgment are recoverable as a separate
item, and that this provision is intended to be severable from the other
provisions of this Agreement, shall survive the judgment, and is not to be
deemed merged into the judgment. Licensee also agrees to reimburse Licensor in
the sum of Three Hundred Dollars ($300) for attorneys' fees incurred in
connection with the sending of any notice of breach or default, whether or not
such breach or default is cured.
(l) Arbitration. Any controversy or claim arising out of or relating to
-----------
this Agreement, or breach thereof in which the amount in controversy is less
than Fifty Thousand Dollars ($50,000), shall be settled by binding arbitration
in Los Angeles, California, or New York, New York (at the option of Licensor) in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association then in effect, and judgment upon the award rendered by the
arbitrator(s) may be entered in any court of competent jurisdiction.
Notwithstanding the foregoing, nothing herein shall prohibit Licensor from
applying to a court of competent jurisdiction for any appropriate injunctive
relief or othe provisional remedies. The cost of arbitration shall be borne by
the losing party, or, if there is no losing party, as the arbitrator(s) shall
determine.
In any arbitration proceedings relative to this Agreement, or breach
thereof, all parties shall have the right to take depositions and to obtain
discovery regarding the subject matter of the arbitration pursuant to California
Code of Civil Procedure Section 1283.05, or any successor statute.
Service of any Petition to confirm or vacate the Arbitration award and
Notice of Hearing thereon may be made by certified or registered mail,
return-receipt requested, or by personal delivery.
-12-
<PAGE>
The arbitrator'(s) award may be limited to a statement that one party pay
to the other a sum of money. The arbitrator(s) will not be deemed to exceed
their powers (per California Code of Civil Procedure Sections 1286.2 or 1286.6)
by committing an error of law or legal reasoning, it being agreed that the
decision of the arbitrator(s) shall be final and unreviewable for error of law
or legal reasoning of any kind.
(m) Counterparts. This Agreement may be executed in one (1) or
------------
more counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute one (1) and the same instrument.
(n) Waiver. The failure of any party, at any time, to require
------
timely performance by any other party of any provision of this Agreement shall
not affect such party's rights thereafter to enforce the same, nor shall the
waiver by any party of any breach of any provision of this Agreement, whether or
not agreed to in writing, be taken or held to be a waiver of the breach of any
other provision or a waiver of any subsequent breach of the same provision of
this Agreement. No extension of time for the performance of any obligation or
act hereunder shall be deemed to be an extension of time for the performance of
any other obligation or act hereunder.
(o) Time of Essence. Time is of the essence with respect to the
---------------
performance by the parties of their respective obligations under this Agreement.
(p) Additional Acts. The parties agree to perform such further
---------------
acts and to execute, acknowledge and deliver such documents as may be necessary
to effectuate the provisions of this Agreement.
(q) Confidentiality. The parties agree that the provisions of this
---------------
Agreement shall be and remain confidential and shall not be disclosed by either
party to any other person or entity, except (i) as may be required by court
order or other legal process or (ii) as may be required for the legitimate
conduct of a party's business, such as a disclosure to a party's attorneys,
accountants or other representatives, but only to the extent necessary for the
foregoing purposes. Each of the parties shall take reasonable precautions to
prevent any further disclosure by such party's employees and such party's
representatives to whom disclosure is permitted pursuant to this Paragraph.
-13-
<PAGE>
ADDENDUM TO LICENSE AGREEMENT
-----------------------------
THIS ADDENDUM TO LICENSE AGREEMENT ("Addendum") is attached to and made a
part of that certain License Agreement dated as of October 1, 1997 ("Agreement")
between B.U.M. INTERNATIONAL, INC., a Nevada Corporation ("Licensor") and HAPPY
KIDS LTD., a New York Corporation ("Licensee"). Capitalized terms used in this
Addendum shall have the same meaning as set forth in the Agreement, unless
otherwise provided herein. In the event of any conflict or inconsistency
between the provisions of the Agreement and the provisions of this Addendum, the
provisions of this Addendum shall control.
1. Paragraph 2(a). The GMR shall be paid quarter-annually, in advance
--------------
on the fifteenth (15th) day of the months of January, April, July and October of
each Year.
2. Paragraph 2(c). The words "(but not cash discounts)" in the second
--------------
sentence are hereby deleted. The words and number "five percent (5%)" in the
third sentence are hereby amended to read "fifteen percent (15%)".
3. Paragraph 2(d). The Statement of Royalties shall be due
--------------
quarter-annually on the fifteenth (15th) day of January, April, July and October
of each Year.
4. Paragraph 3. The following sentence is added at the end of the
-----------
paragraph: "Notwithstanding the foregoing Licensor shall not have the right to
terminate the Agreement as a result of the failure of Licensee to meet the
Minimum Net Sales Requirements for any Year if (a) Licensee has paid the full
GMR for that Year, and (b) Licensee has generated Net Sales equal to at least
eighty percent (80%) of the Minimum Net Sales Requirements for that Year."
5. Paragraph 4(a). Licensor's inspection and audit rights shall be
--------------
exercised no more frequently than one (1) time each Year. The words and number
"two percent (2%)" in the last sentence are hereby amended to read "five percent
(5%)".
6. Paragraph 5(a). The provisions of Paragraph 5(a) shall apply only
--------------
after the Initial Marketing Date.
7. Paragraph 5(c). The words and number "eighty-five percent (85%)" are
--------------
hereby amended to read "eighty percent (80%)".
8. Paragraph 5(e). The entire Paragraph is hereby deleted and the
following is inserted in its place: "Throughout the Term, Licensee shall
maintain accurate and complete records containing the names and addresses of all
facilities at which the Licensed Products are manufactured and stored. In the
event that Licensor reasonably determines that just cause exists (i.e., as a
result of counterfeiting or other Trademark infringement, diversion of the
Licensed Products from the approved channels of distribution, quality control
problems with the License Products, or similar circumstances) Licensee shall
disclose as reasonably necessary the identity of such facilities to Licensor and
shall cooperate with Licensor to arrange for access thereto by Licensor or its
representatives for the limited purpose of remedying the problem. Any such
information disclosed to Licensor by Licensee shall be treated as confidential."
<PAGE>
9. Paragraph 5(f). The entire Paragraph is hereby deleted.
--------------
10. Paragraph 5(j). The words "that bear any of the Trademarks" are
--------------
hereby inserted after the word "merchandise" in the first line.
11. Paragraph 5(i). The words "all major" in the first sentence are
--------------
hereby deleted and the words "the M.A.G.I.C." are hereby inserted in their
place. The word "direct" is hereby inserted before the word "costs" in the
second sentence. The following sentence is hereby added at the end of the
Paragraph: "Licensee shall be permitted to participate in such trade show
separately from Licensor, as long as it also participates jointly with
Licensor".
12. Paragraph 5(m). The following words are added at the end of the
--------------
Paragraph: "which shall include, without limitation, its costs, pricing and
sources of new materials and/or production".
13. Paragraph 5(p). The following new Paragraph 5(p) is added to the
--------------
Agreement: "(p) Licensor shall make available to Licensee, upon request of
Licensee, ideas, designs, and other information relative to the manufacture,
sale and distribution of Licensed Products developed by Licensor or derived from
other licensees of Licensor (domestic and international). Licensor makes no
representations that any such ideas, designs or information will in fact be
developed and nothing herein shall be deemed to require Licensor to create any
designs for Licensee, such being the sole responsibility of Licensee."
14. Paragraph 8(a). The words "regularly and repeatedly" are hereby
--------------
inserted before the word "manufactures" in the third line. The words "thirty
(30)", in both places where they appear in subparagraph (iv) only, are hereby
replaced with the words "sixty (60)".
15. Paragraph 8(b). The words "ten (10)", in all places which they
--------------
appear, are hereby replaced with the words "thirty (30)".
16. Paragraph 8(c). The words "including, without limitation, work in
--------------
process" are hereby added after the word "inventory" in the fourth line. The
words "fifteen (15)" in the sixth line are hereby deleted and replaced with the
words "thirty (30)". The words "ninety (90)" in the ninth line are hereby
deleted and replaced with the words "one hundred eighty (180)". The words "or
otherwise reasonably anticipated as of that date" are hereby inserted after the
word "termination" in the thirteenth line.
17. Paragraph 8(e). The words "an amount equal to the greater of (i)
--------------
twenty-four (24) times the monthly GMR applicable on the date of termination; or
(1) twenty-four (24) times the highest actual Royalties payable during any of
the six (6) months immediately preceding the month in which the Agreement is
terminated" are hereby amended to read "the amount of Two Hundred Fifty Thousand
Dollars ($250,000)".
18. Paragraph 8(f). The following new Paragraph 8(f) is hereby added to
--------------
the Agreement: "Licensee may, at any time during the Term, terminate the
Agreement by giving at least six (6) months advance notice to Licensor,
accompanied by a "termination fee" in the amount of Two Hundred Fifty Thousand
Dollars ($250,000). In such event, the Agreement shall terminate on the date set
forth in the notice as if the Term had expired on that date (it being understood
that the provisions of Paragraph 8(c) shall apply in such event and Licensee
shall remain liable for all Royalties due through the termination date)."
19. Paragraph 11. The word "two" is hereby deleted and the word "four
------------
(4)" is hereby inserted in its place.
-2-
<PAGE>
20. Paragraph 12(b). The sale or transfer of common stock of
---------------
Licensee shall not be deemed to be an assignment if such common stock is
publicly trading on any nationally recognized securities exchange, or if
Licensee is a public company with its common stock trading "over the counter".
21. Paragraph 12(d). The following new Paragraph 12(d) is hereby
---------------
added to the Agreement: "Notwithstanding the foregoing, Licensee may, without
Licensor's prior consent, enter into sublicenses and/or assign this Agreement to
a parent or wholly-owned subsidiary of Licensee, or to an affiliate of Licensee
which is at least fifty-one percent (51%) owned and controlled by Jack Benun
(and/or his spouse and/or his children and/or any bona fide estate planning
trust or similar device for Jack Benun), provided that Licensee shall notify
Licensor of each such sublicense and assignment, and provided further that such
assignment or sublicense shall not release Licensee from liability under the
Agreement."
22. Any default under that certain License Agreement dated June 1,
1995 between Licensor and Licensee (the "Existing License Agreement") beyond any
applicable notice, grace and/or cure period, shall be deemed a default under
this Agreement. Notwithstanding the foregoing, if Licensee promptly pays the
amount set forth in Paragraph 23 of the Addendum to the Existing License
Agreement, as modified by Paragraph 3 of the First Amendment to the Existing
License Agreement, as liquidated damages, this License Agreement shall not be
deemed to be in default. Further, if Licensee defaults hereunder but promptly
pays the amount set forth in Paragraph 8(e) as liquidated damages, the Existing
License Agreement shall not be deemed to be in default.
23. The effectiveness of this Agreement is conditioned upon
Licensee concurrently exercising its first option to renew the term of the
Existing License Agreement (for the period January 1, 1999 through December 31,
2001) and the concurrent execution of a Second Amendment to the Existing License
Agreement.
24. In the event that the Minimum Net Sales Requirements under
both this Agreement and the Existing License Agreement are equalled or exceeded
during any Year, then for that Year, the Royalty Rate for such excess Net Sales
shall be as follows: *** of Net Sales in excess of the cumulative Minimum Net
Sales Requirements of both this Agreement and the Existing License Agreement and
up to *** of cumulative Net Sales, plus *** of Net Sales in excess of *** of
cumulative Net Sales.
IN WITNESS WHEREOF, the parties have executed this Addendum as of the
date above first written.
"LICENSOR" "LICENSEE"
B.U.M. INTERNATIONAL, INC. HAPPY KIDS, LTD., a New York Corporation
a Nevada Corporation
By: /s/ Illegible By: /s/ Jack M. Benun
------------------------------- -------------------------------------
Jack M. Benun, President
Its: Chairman and CEO
------------------------------
*** Confidential portion omitted and filed separately with the Securities and
Exchange Commission.
-3-
<PAGE>
APPROVAL PROCEDURE
------------------
1. Product Approval Procedure.
--------------------------
(a) Before offering for sale any item which Licensee intends
to sell as a Licensed Product, Licensee shall obtain Licensor's prior approval
of such item according to the procedure set forth in this Section 1, which
procedure may, from time to time, be changed by Licensor at its discretion on
written notice to Licensee.
(b) Not later than the fifteenth (15th) day of January of
each calendar year during the Term, Licensee shall give written notice to
Licensor of:
(i) The number of collections of Licensed Products
(also known in the trade as "lines" or "seasons") it intends to offer for sale
during that exact calendar year;
(ii) The approximate date Licensee intends to present
the final proposed Licensed Products for each such collection for approval by
Licensor in a pre-production showing pursuant to Section (c) hereof;
(iii) The approximate date Licensee intends to
commence production of each proposed Licensed Product; and
(iv) Any other related information Licensor may, from
time to time, request.
(c) (i) To obtain Licensor's prior approval of each
proposed Licensed Product, Licensee shall present to Licensor, for Licensor to
retain (and prior to the production thereof), no less than one (1) final product
representing each proposed Licensed Product intended to be part of that
collection, two (2) swatches of material of no less than six (6) square inches
each which indicate the material and color intended to be used for each Licensed
Product's specifications, sources of all raw materials and said source code
numbers and/or code numbers, relating thereto, and completed Licensed Product
Approval Forms (said presentation hereinafter being referred to as a
"Pre-Production Showing").
(ii) Licensor shall indicate its approvals, which
shall not survive the time period of the collection for which they are granted,
or disapprovals on the Licensed Product Approval Forms - copies of which shall
be delivered or mailed to Licensee within ten (10) business days thereafter (or
within a reasonable extension period, written notice of which shall be mailed or
personally delivered to Licensee during said ten (10) business day period).
Performance by Licensee shall be in strict accordance with that which is
indicated on the Licensed Product Approval Forms. No item may be manufactured
or sold as a Licensed Product unless approved by Licensor in accordance with the
procedures set forth herein.
(iii) Pre-Production Showings shall be set by the
parties at a mutually convenient date and time at Licensor's notice address or
where Licensor shall otherwise direct. If the parties cannot agree on a date
or time, Licensee shall give Licensor written notice of two (2) alternative
dates and times (between the hours of 10:00 a.m. and 5 p.m. on regular business
days), receipt by Licensor of which shall be no less than five (5) business days
prior to the first alternate date. If Licensor does not confirm an appointment
for each date
EXHIBIT "A"
Page - 1 -
<PAGE>
in writing at lease twenty-four (24) hours prior to the time set forth in the
first alternate date, then Licensee shall deliver to Licensor, at Licensor's
notice address, on said first alternate date at the time specified, that which
it intended to present Licensor at the Pre-Production Showing, and a written,
itemized receipt indicating each proposed Licensed Product, swatch set, sketch,
and Licensed Product Approval Forms delivered.
(iv) Any proposed Licensed Product or aspect of its
physical characteristics not disapproved by Licensor in writing and mailed or
personally delivered to Licensee within the ten (10) business days after
receipt of the Licensed Product Approval Form (subject to a reasonable extension
under the terms set forth in Section (c)(ii) hereof) shall be deemed approved
for use in that collection.
(v) Any disapproved item or aspect relating to its
physical characteristics thereof shall not be used by Licensee, but may be
submitted in altered form for Licensor's approval. Such resubmission must
follow the procedures set forth in this Section 1 as if it were an original
submission.
(d) In order for Licensor to determine and assure itself that
Licensee is maintaining the quality control standards set forth herein, within
ten (10) business days after the commencement of each Licensed Product's first
production run, Licensee shall deliver to Licensor no less than one (1) of each
first production run Licensed Product without charge. Licensee shall also, from
time to time, within five (5) business days of each request from Licensor,
deliver to Licensor, Licensed Products in accordance with Licensor's specific
order (e.g., color, size, fabrication and the like) in the then present
collection not to exceed twenty (20) items per Licensed Product style without
charge to licensor.
2. Trademark Use Approval Procedure.
--------------------------------
(a) All uses of the Trademarks (including, but not limited to
uses on hangtags, labels, packaging, advertising and promotion) shall at all
times be subject to the prior approval of Licensor according to the procedure
set forth in this Section 2. Such approval must be in writing on a Trademark Use
Approval Form. Said Trademark Use Approval Forms must be completed in detail and
submitted to Licensor as required. In all instances, Licensee shall inform
Licensor in writing of the name, address, and telephone number of each and every
person and/or entity that causes a use of the Trademarks on Licensee's behalf as
well as all details regarding the use relating thereto.
(b) Licensor shall indicate its approvals, which shall not
survive the time period of the specific use for which they are granted, or
disapprovals on the Trademark Use Approval Forms - copies of which shall be
delivered or mailed to Licensee within ten (10) business days thereafter (or
within a reasonable extension period, written notice of which shall be mailed or
personally delivered to Licensee during said ten (10) business day period).
Performance by licensee shall be in strict accordance with that which is
indicated on the Trademark Use Approval Forms. No use may be made of the
Trademarks unless approved by Licensor in accordance with the procedures set
forth herein.
EXHIBIT "A"
Page -2-
<PAGE>
(c) Any proposed Trademark use or aspect of its physical
characteristics not disapproved by Licensor in writing and mailed or personally
delivered to Licensee within the ten (10) business days after receipt of the
Trademark Use Approval Form (subject to a reasonable extension under the terms
set forth in Section (b) hereof) shall be deemed approved for the use requested.
(d) If any proposed use of the Trademarks has been disapproved by
Liscensor, Licensee may resubmit such proposed use in altered form only if
submitted in accordance with the procedures set forth herein. Licensee shall
under no circumstances use the Trademarks in any disapproved manner.
3. Forms.
-----
(a) The Licensed Product Approval Form and the Trademark Use
Approval form shall be provided by Licensor to Licensee, and shall initially be
in the form attached hereto as Exhibits "1" and "2", respectively.
(b) Licensor may, from time to time, upon reasonable notice
to Licensee, modify any of its forms, or provide additional forms for use by
Licensee to facilitate the approval procedures.
4. Standards for Approvals. In granting or withholding approvals
-----------------------
pursuant to Sections 1 and 2, Licensor agrees to act in good faith. Licensee
acknowledges that the nature of the approvals required hereunder is highly
subjective, and accordingly, Licensee agrees that Licensor shall not be held to
any objective standard of "reasonableness".
5. Limitations of Effect of Approvals. Licensor's approval in any
----------------------------------
instance of Licensed Products or any use of the Trademarks shall not be deemed
an acknowledgment by Licensor that Licensee has complied with its other
obligations under this Agreement, including, but not limited to, the obligation
of Licensee to comply with applicable laws and the obligation of Licensee to
manufacture safe and defect-free products.
<PAGE>
PRODUCT APPROVAL FORM-SUBMISSION SUMMARY/COVER PAGE
---------------------------------------------------
LICENSEE: [ ] PAGE OF
----------------------- ----- -----
PRODUCTS: [ ]
-----------------------
SUBMITTED ON: BY:
-----/-----/----- -------------------------------
==========================================================================
INTENDED SELLING SEASON: YEAR: SEASON: [CODE: ]
-------- ------------- ----
TOTAL ITEMS SUBMITTED: FIRST TIME SUBMISSIONS:
-------------
RESUBMISSIONS:
-------------
PRODUCTION/SHIPPING SCHEDULE:
DATE: EVENT:
----/----/---- -----------------------------------------
-----------------------------------------
DATE: EVENT:
----/----/---- -----------------------------------------
-----------------------------------------
DATE: EVENT:
----/----/---- -----------------------------------------
-----------------------------------------
NOTE: ANY APPROVAL SHALL NOT BE CONSTRUED AS CONSENT TO INFRINGE A THIRD-
PARTY'S COPYRIGHT, TRADEMARK OR OTHER RIGHT AND SHALL NOT SURVIVE THE
ABOVE SEASON.
==========================================================================
*****To Be Completed By Licensor*****
DATE RECEIVED: BY:
----/----/---- ---------------------------------------
ACTION TAKEN: TOTAL: ITEMS ITEMS
APPROVED APPROVED
----------------------------------
FIRST TIME SUBMISSIONS: |
----------------------------------
RESUBMISSIONS: |
----------------------------------
HARDFILE LOCATION: TITLE: DRAWER NO.:
------------------ ------------
DATE LICENSEE NOTIFIED: BY:
----/----/---- --------------------------------
METHOD:
-------------------------------
EXHIBIT "1"
Page 1 of 3
<PAGE>
PRODUCT APPROVAL FORM - SUBMISSION DETAIL BY ITEM
-------------------------------------------------
LICENSEE: [ ] PAGE OF
--------------------------------- --- ---
PRODUCTS: [ ]
---------------------------------
SUBMITTED ON: / / BY:
--- --- --- -------------------------------
INTENDED SELLING SEASON: YEAR: SEASON: [CODE: ]
--------- ------------ -------
================================================================================
ITEM NO./STYLE NO.: / [ ] FIRST TIME OR
----- -----
[ ] RESUBMISSION
PROPOSED WHOLESALE SELLING PRICE: $
---------------
DESCRIBE ITEM:
(Fabric, Color, -------------------------------------------------------------
Source Code No.,
Etc.) -------------------------------------------------------------
-------------------------------------------------------------
SHIPPING: BEGINS: / / ENDS: / /
--- --- --- --- --- ---
[ATTACH SKETCHES TO THIS FORM; ATTACH SWATCHES TO "SWATCH ATTACHMENT FORM"]
NOTE: ANY APPROVAL SHALL NOT BE CONSTRUED AS CONSENT TO INFRINGE A
THIRD-PARTY'S COPYRIGHT, TRADEMARK OR OTHER RIGHT AND SHALL NOT SURVIVE
THE ABOVE SEASON.
================================================================================
*****To Be Completed by Licensor*****
DECISION DATE: / / BY:
--- --- --- ------------------------------------------
Name
-----------------------------------------
Title/Department
-----------------------------
[_] APPROVED [_] DISAPPROVED
COMMENTS/BASIS:
-------------------------------------------------------------
-------------------------------------------------------------
-------------------------------------------------------------
WAS ITEM LEFT FOR QUALITY CONTROL PURPOSES?: [_] YES [_] NO
IF NOT, DATE ITEM IS DUE: / /
--- --- ---
DATE LICENSEE NOTIFIED: / / BY:
--- --- --- ------------------------------------
METHOD:
---------------------------------
EXHIBIT "1"
Page 2 of 3
<PAGE>
PRODUCT APPROVAL FORM-SWATCH ATTACHMENT PAGE
--------------------------------------------
LICENSEE: [ ] PAGE OF
------------------------------ ---- ----
PRODUCTS: [ ]
------------------------------
SUBMITTED ON: / / BY:
-------------- ----------------------------------
ITEM NO./STYLE NO.: /
------------------------------
INTENDED SELLING SEASON: YEAR: SEASON: [CODE: ]
------ ------ ----
================================================================================
*****AFFIX RELEVANT SWATCHES, ETC., TO THIS PAGE*****
<PAGE>
TRADEMARK USE APPROVAL FORM
---------------------------
LICENSEE: [ ] PAGE OF
------------------------------ ---- ----
PRODUCTS: [ ]
------------------------------
SUBMITTED ON: ___/___/___ BY:
----------------------------------
================================================================================
[ ] FIRST TIME SUBMITTED OR [ ] RESUBMISSION
DATE OF PRIOR SUBMISSION: / /
--------------
DESCRIPTION:
-----------------------------------------------------------------
-----------------------------------------------------------------
-----------------------------------------------------------------
***** AFFIX A SAMPLE OF THIS USE TO THIS FORM *****
SUPPLIER/AD AGENCY NAME:
--------------------------------------------------------
INTENDED USE:
------------------------------------------------------------
------------------------------------------------------------
USE PERIOD: ___/___/___ ___/___/___ SEASON:
-------------------
USE IS AFFIXED ON OR USED WITH WHAT PRODUCTS?:
----------------------------------
- --------------------------------------------------------------------------------
NOTE: ANY APPROVAL SHALL NOT BE CONSTRUED AS CONSENT TO INFRINGE A THIRD-PARTY'S
COPYRIGHT, TRADEMARK OR OTHER RIGHT AND SHALL NOT SURVIVE THE ABOVE-SEASON.
================================================================================
***** To Be Completed By Licensor *****
SUBMISSION NO.: DATE RECEIVED: ___/___/___ MEDIA CODE:
-------
or
NON-MEDIA CODE:
-------
DECISION DATE: ___/___/___ BY:
-----------------------------
Name
----------------------------
Title/Department
----------------
[ ] APPROVED [ ] DISAPPROVED
COMMENTS/BASIS:
-----------------------------------------------------------------
-----------------------------------------------------------------
-----------------------------------------------------------------
DATE LICENSEE NOTIFIED: ___/___/___ BY:
----------------------------
METHOD:
------------------------------------
EXHIBIT "2"
<PAGE>
Exhibit 10.15
U.S.A TRADEMARK LICENSE AGREEMENT
BETWEEN: OCEAN PACIFIC APPAREL CORP.,
a Delaware corporation
"LICENSOR" "Op"
AND
HAPPY KIDS, LTD.,
a New York corporation
"LICENSEE"
TRADEMARKS: "Ocean Pacific"; "Op"
PRODUCT CATEGORIES: See Exhibit A
TERRITORY: U.S.A., its territories and
possessions.
October 27, 1994
<PAGE>
U.S.A. TRADEMARK LICENSE AGREEMENT
----------------------------------
THIS U.S.A. TRADEMARK LICENSE AGREEMENT (this "Agreement") is made and
entered into this _______ day of October 1994, by and between Ocean Pacific
Apparel Corp., a Delaware corporation ("Licensor"), and Happy Kids, Ltd., a New
York corporation ("Licensee").
RECITALS
--------
A. Licensee is in the business of manufacturing and selling apparel,
B. Licensor is the owner (i) in the United States of the registrations
for the trademarks "Ocean Pacific" and "Op" and related marks, (ii) the goodwill
associated therewith, (iii) the owner of various common law and either rights in
said marks, and (iv) the owner in various foreign countries of said or similar
marks, goodwill and rights, all of which marks, goodwill and rights are
collectively referred to herein as the "Trademarks" and
C. Licensor is in the business of licensing the use of the Trademarks in
the manufacture and sale of apparel and related items and of providing design,
merchandising, marketing and sales direction and coordination to licensees of
the Trademarks.
AGREEMENT
---------
NOW, THEREFORE IN CONSIDERATION OF THEIR RESPECTIVE PROMISES MADE HEREIN
AND FOR OTHER GOOD AND VALUABLE CONSIDERATION, THE RECEIPT AND ADEQUACY OF WHICH
ARE HEREBY ACKNOWLEDGE, LICENSOR AND LICENSEE HEREBY AGREE AS FOLLOWS:
1. LICENSE
-------
1.1 GRANT OF LICENSE: Subject to the terms and conditions of this
----------------
Agreement, Licensor hereby grants to Licensee an exclusive right, but for the
rights of Licensor under this Agreement, to use the Trademarks in the
manufacture and wholesale distribution and sale in the United States, its
territories and possessions (the "Territory") only of the products set forth
October 27, 1994
1
<PAGE>
on Exhibit A attached hereto and made a part hereof, as such Exhibit may be
modified from time to time by the mutual agreement of Licensor and Licensee
(hereinafter the "Licensed Products"). For purposes of this Agreement, the term
"Trademark" shall not include the "Op Tech"(R) trademark of Licensor or any
---
other trademark, name, words, logo or design related to or similar to Licensor's
"OP Tech" (R) trademark or the "Op Pro" trademark or any other trademark, name,
words, logo or design related to or similar to the "Op Pro" trademark which
Licensor expects to develop and register as a trademark in the near future. The
license created hereby (hereinafter the "License") does not permit Licensee to
engage in the retail sale of the Licensed Products.
1.2 DETERMINATION OF LICENSED PRODUCTS: Licensee agrees to accept at all
----------------------------------
times the reasonable decision of Licensor with respect to whether a proposed
type of product is a Licensed product within the scope of the License. Licensee
will not manufacture or sell any type of product which Licensor in its
reasonable discretion decides is not a Licensed Product within the scope of the
License.
Any dispute between Licensee and any other licensee of Licensor regarding
the Licensed Products and the scope of their respective licenses shall be
resolved by Licensor as Licensor reasonably deems appropriate within the
confines of Licensee's rights hereunder, and Licensee agrees to be bound by such
resolution.
1.3 APPROVALS REGARDING OTHER PRODUCTS, ETC.: Licensee acknowledges that
---------------------------------------
Licensor has previously licensed the use of the Trademarks in connection with
products other than the Licensed Products to other manufacturers and that
Licensor may grant additional licenses to other persons or entitles in the
future for territories and/or products not within the scope of this License. If
at any time Licensor permits Licensee to manufacture a product, or to distribute
within an area, which is not, in the opinion of the Licensor, within the scope
of the
October 27, 1994
2
<PAGE>
License, such permission (i) shall apply only to the precise products, seasons
and territories specifically allowed by Licensor, and (ii) shall not constitute
a continuing approval, or a waiver of the right of Licensor subsequently to
disapprove, of such manufacture or distribution by Licensee.
1.4 USE OF TRADEMARK: Other than as expressly set forth in this Agreement
----------------
and in other license agreements between Licensor and Licensee (regarding other
product categories), if any, Licensee has absolutely no right, title or interest
in or to the Trademarks or the use thereof. Licensee shall make absolutely no
use of the Trademarks, whether in connection with the Licensed Products, in
advertising, in promotion, in public relations, or otherwise, that has not been
approved by Licensor pursuant to the approval procedures and requirements of
this Agreement.
Licensee acknowledges that it is only acquiring the right to use the
Trademarks in connection with (i) the manufacture of the Licensed Products, and
(ii) the wholesale distribution and sale of the Licensed Products in the United
States for the term of this Agreement. Upon the termination of the License,
Licensee shall cease all use of the Trademarks, except as specifically allowed
by the post-termination provisions of this Agreement.
Licensee will not apply for any registration of copyright, trademark or
trade name that in any way concerns, mentions or uses the Trademarks or any
similar marks or names without the express prior written consent of Licensor. In
any case, Licensee will transfer to Licensor, upon Licensor's request (whether
during or after the term of this Agreement), without charge, full and complete
ownership of any and all such applications, registrations, trademarks,
copyrights, or trade names whether or not they were obtained with the permission
of Licensor.
However, notwithstanding the foregoing, Licensor represents that Licensor
has not granted to any third party rights to use the Trademarks in the
manufacture and wholesale sale of
October 27, 1994
3
<PAGE>
the Licensed Products in the Territory during the term of this Agreement and
Licensor agrees to indemnify and hold harmless Licensee and its officers,
directors, representatives and agents against and from any and all losses,
damages, judgments, awards, penalties, costs and expenses (including attorneys'
fees and expenses) incurred by any of them as a result of any grant by Licensor
to any person or entity not a party to this Agreement of any right during the
term of this Agreement to use the Trademarks in the manufacture and wholesale
sale of the Licensed Products in the Territory, except for any such losses,
damages, judgments, awards, penalties, costs and expenses which occur as a
result of actions or failures to act on the part of Licensee or its officers,
directors, representatives or agents. A party claiming indemnification pursuant
to this Section 1.5 shall give prompt notice to Licensor any legal proceeding or
other claim which may give rise to such indemnification, and shall cooperate
with counsel for Licensor in connection with the conduct of the defense of any
legal action giving rise to such potential indemnification. Licensor shall have
the right to select counsel for the defense of any such action.
1.5 OWNERSHIP OF TRADEMARKS: Licensee acknowledges and agrees that the
-----------------------
Trademarks, all goodwill pertaining thereto, and all rights, registrations,
applications and entitlements thereto, and all extensions thereof, are and shall
remain the sole and exclusive property of Licensor and that nothing in this
Agreement shall be construed to convey any rights or interest in the Trademarks
to Licensee, other than the specific license granted hereunder. Whenever
requested by Licensor, whether during the term of this Agreement or thereafter,
Licensee shall execute such documents as Licensor may from time to time deem
necessary or appropriate to confirm, maintain or perfect Licensor's ownership of
the Trademarks and to ensure that all right, title and interest in and to the
Trademarks resides in Licensor.
Licensee acknowledges that it is often difficult to obtain clear,
registered title to
October 27, 1994
4
<PAGE>
trademarks and other intellectual property rights. Accordingly, Licensee agrees
that the rights granted herein exist only to the extent that Licensor owns such
rights, and, except as specifically provided in Section 1.4 above, no
representation, guarantee or warranty, express or implied, is made with respect
to Licensor's ownership of such rights or with respect to the rights of any
third parties that may conflict with the rights granted herein.
Without limiting the generality of the foregoing, Licensee specifically
acknowledges and agrees that, except as specifically provided in Section 1.4
above, Licensor makes no representation, guarantee or warranty of any kind that
the use by Licensee of the Trademarks does not or will not infringe upon any
trademark, copyright or other proprietary right of any other individual,
corporation, partnership, venture, estate, trust, association, governmental body
or authority or any other entity, and Licensee expressly waives any claim it may
now or hereafter have against Licensor for any such infringement.
1.6 USE OF NAMES: Except as this Agreement specifically authorizes the
------------
use of the Trademarks, and only to that extent, Licensee shall not use the words
and names "Ocean Pacific" or "Op" or any similar words or name as part of any
firm, corporate, trade or business name without the express prior written
consent of Licensor. Any permission by Licensor to Licensee to use such names or
words shall terminate upon termination of this Agreement or upon fifteen (15)
days' written notice from Licensor to Licensee.
1.7 NON-CONFLICT: Licensee shall not use the Trademarks in any manner
------------
that conflicts with the rights of any third party. If, in Licensor's good faith
determination, any use of the Trademarks by Licensee infringes or impairs the
rights of any third party or weakens or impairs Licensor's rights in the
Trademarks, Licensee will immediately terminate or modify such use in accordance
with Licensor's instructions. Except as may be specifically provided in Section
1.4 above, Licensee shall have no right of damages, offset or right to terminate
this
October 27, 1994
5
<PAGE>
Agreement in connection with such a termination or modification; provided,
however, that if Licensor requires any such termination or modification solely
as a result of any actual or alleged infringement by any of the Trademarks
themselves (as opposed to infringement by Licensee's usage of otherwise
non-infringing Trademarks) in any rights of any third party, Licensor shall
agree to negotiate in good faith an appropriate equitable reduction of the
minimum sales requirements set forth in Section 4 of this Agreement
corresponding to the Net Sales (as defined in Section 6.1 below) which Licensee
would reasonably expect to lose on account of such termination or modification;
and provided further that in the event any such termination or modification
resulting from any actual or alleged infringement by any of the Trademarks
materially deprives Licensee of the economic benefits of the License, Licensee
shall have the right to terminate this Agreement upon thirty (30) days' prior
written notice to Licensor, and Licensor shall thereafter reimburse Licensee
for the out-of-pocket costs actually incurred by Licensee in manufacturing any
Licensed Products whose sale was prohibited by Licensor because of such
termination or modification and for any penalties actually incurred by Licensee
under any contracts to purchase piece goods or raw materials for the manufacture
of any Licensed Products whose sale was prohibited by Licensor because of such
termination or modification In the event Licensee fails to terminate or modify
such use as directed by Licensor, Licensor may, in its sole discretion,
terminate the rights of Licensee under this Agreement.
1.8 BEST EFFORTS: To induce Licensor to grant the License provided for in
------------
this Agreement, Licensee has represented to Licensor that Licensee is
experienced in the development, production, manufacturing, marketing and sale of
products similar in nature to the Licensed Products, and that Licensee will
commit itself to a reasonable, vigorous and diligent program of exploiting the
License. Accordingly, Licensee agrees to devote its best efforts to
October 27, 1994
6
<PAGE>
manufacture and ship the Licensed Products in order to meet the demand for the
Licensed Products and to exploit the rights herein granted to maximize the
manufacture and sale of the Licensed Products. Licensee agrees to devote its
best efforts to manufacture and ship each accepted order for Licensed Products
within a reasonable time of receipt of the order or by the delivery date
specified in the order.
1.9 COOPERATION WITH OTHER LICENSEES: Licensee acknowledges that (i) it is
--------------------------------
one of various domestic and international licensees of the Trademarks; (ii)
Licensor has design, merchandising, marketing and other obligations to all
licensees of Trademarks: and (iii) it is Licensor's goal to have all licensees
produce products which are reasonably consistent and cohesive in terms of theme,
style, design, coloration, fabric, trim, identification, ect. and which cause
the consumer to perceive that such products (although coming from different
manufacturers and licensees) emanate from a single source. Licensee acknowledges
the value of this perception by both retailers and consumers and the benefit of
this perception both to Licensee and to all other licensees of the Trademarks.
Licensee agrees to cooperate with all other licensees of the Trademarks, both
foreign and domestic, in the following:
1. The sharing of information regarding fabric and other resources:
2. The joint purchasing of fabric and other materials where price
discounts, fabric or color consistency or other significant advantages are
available from joint purchasing: and
3. The sharing of merchandising and marketing ideas, concepts and
materials.
Licensor acknowledges that Licensee is entitled (i) to be reasonably
reimbursed by the benefitted licensees for expenses incurred in the reasonable
cooperation required by this paragraph, and (ii) to reasonable compensation from
the benefitted licensee for Licensee's efforts under this paragraph. Licensee
acknowledges that to the extent Licensee receives and uses information, ideas,
concepts or materials from other licensees under this paragraph or
October 27, 1994
7
<PAGE>
participates with other licensees in joint purchasing of materials under this
paragraph, other licensees of the Trademarks are entitled (i) to be reasonably
reimbursed by Licensee for their expenses incurred in the reasonable cooperation
required by this paragraph, and (ii) to reasonable compensation from Licensee
for their efforts under this paragraph. Any dispute between Licensee and other
licensees of the Trademarks regarding Licensee's obligations under this
paragraph or the obligations of other licensees to Licensee for such reasonable
cooperation or the amounts of money to be paid to or by Licensee under this
paragraph shall be resolved by Licensor as it deemes appropriate, and Licensee
agrees to be bound by any such resolution.
1.10 NOT A FRANCHISE: The parties acknowledge and agree that this
---------------
Agreement is an intellectual property rights license agreement and does not
constitute, and shall not be construed as, a franchise agreement. The parties
further acknowledge and agree that state and federal franchise laws do not and
will not apply to this Agreement or to the relationship between Licensee and
Licensor and their respective rights and obligations hereunder. The parties
agree that, due to their respective business backgrounds and prior licensing
experience, they do not need the protection of state or federal franchise laws.
2. TERRITORY: The Licensed Products shall not be sold, marketed,
---------
distributed or delivered, by Licensee, either directly or indirectly, anywhere
except in the Territory without the prior written consent of Licensor. Licensee
shall not sell or otherwise transfer the Licensed Products to any individual or
entity who Licensee knows intends to sell the Licensed Products outside the
Territory, or who Licensee has reason to believe intends to sell the Licensed
Product outside the Territory, without the prior written permission of Licensor.
Nothing in this paragraph shall be construed to prohibit Licensee from
manufacturing the Licensed Products outside the Territory, provided such
Licensed Products are sold, marketed, distributed or delivered only in the
Territory. Licensor may manufacture, market or sell, or allow others
October 27, 1994
8
<PAGE>
(including other licensees of the Trademarks) to manufacture, market or sell,
the Licensed Products outside of the Territory.
3. TERM: The initial term of this Agreement shall commence on
----
September___, 1994 (the "Commencement Date") and terminate on December 31, 1999,
unless sooner terminated as provided herein. Licensee has the option to extend
the term of this Agreement for an additional period of five (5) years, unless
sooner terminated as provided herein, commencing on the date following the
expiration of the original term. Such option must be exercised by a notice in
writing to Licensor delivered at least six (6) months and no more than nine (9)
months prior to the end of the initial term. Such option may be exercised only
if Licensee is in full compliance with its obligations under this Agreement at
the time of exercise, and only if Licensee shall have cured all defaults of this
Agreement of which Licensor has given notice to Licensee at the time of exercise
and which defaults occurred not more than six (6) months prior to notice
thereof. In addition, such option shall become null and void and of no further
force and effect, and this Agreement shall terminate not later than the
expiration of the initial term hereof, if Licensee shall have committed any
default of any of the provisions of this Agreement after the date of exercise of
such option but prior to the commencement of the extended term of this Agreement
and shall have failed to cure such default promptly after receiving notice of it
provided such default occurred not more than six (6) months prior to such
notice. All extensions will be on all of the terms and conditions of this
Agreement. Should Licensor, at any time, exercise its rights under this
Agreement to terminate the rights of Licensee hereunder, all options to extend
the term shall likewise be terminated, whether or not such options shall have
been exercised.
4. MINIMUM SHIPMENTS: From the Commencement Date through December 31,
-----------------
1995, Licensee shall timely and accurately ship at least seventy-five percent
(75%), and
October 27, 1994
9
<PAGE>
thereafter Licensee shall timely and accurately ship, each year, at least
eighty-five percent (85%) of all firm orders for Licensed Products accepted by
Licensee and input into Licensee's management information system (MIS). In
determining whether Licensee shall have met the shipping requirements of this
paragraph and for purposes of calculating the minimum royalties payable
hereunder, all firm orders accepted by Licensee, and all orders which should
have been accepted by Licensee, as required by this section, shall be deemed
"orders". In determining whether Licensee shall have met its minimum shipping
requirement, orders canceled as a result of late delivery, poor quality, or
other acts of Licensee shall be deemed orders not to have been shipped by
Licensee. For purposes of this section, "timely" shipment shall mean the
shipment of goods in such a time and manner that the customer receives the goods
on an order before the originally contracted and agreed upon delivery date,
without discounts or other concessions for late or otherwise improper delivery.
In determining whether Licensee shall have met its minimum shipping requirement
goods shipped and accepted by the customer after the cancellation date, as set
forth in the original order, will be deemed to have been timely shipped.
"Accurately" to ship shall mean to ship goods substantially in compliance with
the requirements of the orders therefor; provided that goods accepted by the
customer not in compliance with the requirements of the order shall be deemed to
have been accurately shipped.
As set forth in Section 23.1 hereof, if Licensee shall fail timely and
accurately to ship eighty-five percent (85%) of its orders for Licensed Products
as required by this Section 4 for any calendar year during the term hereof,
Licensor shall be entitled immediately to terminate Licensee's rights under this
Agreement at any time thereafter without prior notice to Licensee; provided,
however, that Licensee's failure to meet its obligation under this Section 4 in
a calendar year solely and exclusively because of circumstances mainly and
substantially beyond the control of Licensee, Licensee's failure so to meet such
obligation shall be excused to
October 27, 1994
10
<PAGE>
the extent caused by such circumstances and; provided, further, that in such
case Licensee shall timely and accurately ship eighty-five percent (85%)
(seventy-five percent [75%] from the Commencement Date through December 31,
1995) of all orders not precluded by such circumstances, and Licensor may, at
its option, terminate the rights of Licensee under this Agreement if Licensee
fails timely and accurately to ship eighty-five percent (85%) (seventy-five
percent [75%] from the Commencement Date through December 31, 1995) of the
orders not so precluded. Notwithstanding the previous sentence, Licensee may
cure a failure to timely and accurately ship such minimum percentage of accepted
firm orders and Licensor may not terminate Licensee's rights under this
Agreement pursuant to the preceding sentence (a) in the event Licensee shall
have failed to timely and accurately to ship seventy-five (75%) of its accepted
firm orders from the Commencement Date through December 31, 1995. If Licensee
shall have paid to Licensor, not later than January 20, 1996, an amount equal to
six percent (6%) of the difference between the total dollar amount of orders
actually shipped and seventy-five percent (75%) of all accepted firm orders; or
(b) in the event Licensee shall have failed timely and accurately to ship
eighty-five percent (85%) of such orders in any year after December 31, 1995. If
Licensee shall have paid to Licensor, not later than twenty (20) days following
the end of such year, six percent (6%) of the difference between the total
dollar amount of orders actually shipped and eighty-five percent (85%) of all
accepted firm orders during such year, but only if (i) Licensee shall have
shipped Licensed Products producing Net Sales (as defined in Section 6.1 below)
during such year equalling or exceeding one hundred twenty-five percent (125%)
of the amount set forth for such year in the paragraph immediately following,
and (ii) Licensee shall have timely and accurately shipped eighty-five percent
(85%) of all accepted firm orders during the immediately preceding year (or
seventy-five percent (75%) of such orders in the preceding year if such
preceding year shall have been
October 27, 1994
11
<PAGE>
the year ended December 31, 1995.
During the initial term hereof, Licensee shall sell and deliver Licensed
Products (with royalties paid thereon) producing Net Sales (as defined in
Section 6.1 below) equalling or exceeding the amounts set forth below for each
of the periods set forth below.
<TABLE>
<S> <C>
The Commencement Date through December 31, 1995 ***
January 1, 1996 through December 31, 1996 ***
January 1, 1997 through December 31, 1997 ***
January 1, 1998 through December 31, 1998 ***
January 1, 1999 through December 31, 1999 ***
</TABLE>
The required minimum deliveries of the Licensed Products for any calendar year
during any extended term of this Agreement shall be increased or decreased, as
the case may be, over the required minimum for the prior year by (a) adding to
the required minimum for the prior year the amount obtained by multiplying the
required minimum for the prior year by the *** of (i) ***, or (ii) the *** by
which the level of the *** (as defined below) shall have *** during the period
from the first day of the prior year, through the last day of the prior year, or
(b) if the level of the *** shall have *** from the first day of the prior year
through the last day of the prior year, the amount obtained by multiplying the
required minimum for the prior year by the *** by which the level of the ***
shall have *** from the first day of the prior year through the last day of the
prior year. ***
If Licensee fails to sell and deliver Licensed Products producing Net Sales
equalling or
*** Confidential portion omitted and filed separately with the Securities and
Exchange Commission.
October 27, 1994
12
<PAGE>
exceeding the amounts set forth above (with royalties paid thereon) for any
calendar year (a "Poor Shipment Year") during the term of this Agreement (or any
extension thereof), Licensor shall have the right to terminate this Agreement
and Licensee's rights hereunder at any time at Licensor's option without prior
notice at any time after January 31 but before May 1 of the succeeding year;
provided, however, that Licensor shall not have the right to terminate this
Agreement and Licensee's rights hereunder due to a failure by Licensee to sell
and deliver Licensed Products producing such Net Sales in any such Poor Shipment
Year if Licensee shall pay to Licensor, not later than January 31 of the
succeeding year, an amount equal to the total combined royalty and advertising
payments which Licensee would have been required to pay to Licensor under this
Agreement for the Poor Shipment Year had Licensee sold and delivered Licensed
Products producing Net Sales equal to the amount set forth above for such Poor
Shipment Year, less the amount of any combined royalty and advertising payments
actually paid by Licensee to Licensor with respect to Net Sales for such Poor
Shipment Year. As set forth in Section 6.2 below, the failure of Licensee to
achieve the minimum sales and delivery amounts set forth above for the period
from the Commencement Date through December 31, 1995 shall not excuse Licensee's
obligation to pay minimum royalties based on such minimum sales and delivery
amounts.
In addition to the minimum shipping requirements set forth above with
respect to Net Sales of all of the Licensed Products, Licensee's Net Sales
during each of the periods set forth above of Licensed Products in each of the
product categories set forth below shall equal or exceed *** of the amounts set
forth above with respect to minimum Net Sales of all categories of Licensed
Products:
1. Sportswear, outerwear and swimwear and related accessories for
newborns and infants;
*** Confidential portion omitted and filed separately with the Securities and
Exchange Commission.
October 27, 1994
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<PAGE>
2. Sportswear, outerwear and swimwear for toddler girls and toddler boys;
3. Little boys' sportswear, outerwear and swimwear in the size ranges
4-7;
4. Little girls' sportswear, outerwear and swimwear in the size ranges
4-6; and
5. Girls' sportswear and outerwear in the size range 7-14.
If Licensee fails to sell and deliver Licensed Products in any of the above
enumerated categories producing Net Sales equalling or exceeding *** of the
amounts set forth above with respect to required minimum Net Sales of all
categories of Licensed Products during any period set forth above, Licensor may
at its option exercised at any time after January 31 but before May 1 of the
succeeding year permanently exclude such category from the Licensed Products
covered under this Agreement. If Licensor exercises this option, Licensee's
license under this Agreement to use the Trademarks in the manufacture and
wholesale distribution and sale in the Territory of that category of products
shall immediately cease and terminate, and the definition of Licensed Products
in this Agreement and in Exhibit A thereto shall automatically be deemed to be
amended to delete such category of products from such definition. Upon
Licensor's exercise of such option, the rights and obligations of Licensor and
Licensee with respect to such category of products shall thereupon become
governed by the provisions of Sections 24 through 24.5 of this Agreement;
provided, however that the respective rights and obligations of Licensor and
Licensee under this Agreement shall remain unchanged and unaffected with respect
to all other categories of the Licensed Products, including without limitation
the obligations of Licensee under this Section 4.
In order for Licensor to determine whether Licensee is in compliance with
the shipping requirements of this Agreement, Licensee shall provide Licensor
with current and accurate information regarding its orders and shipments. Such
information shall be provided in such content, form and manner as Licensor may
from time to time direct.
*** Confidential portion omitted and filed separately with the Securities and
Exchange Commission.
October 27, 1994
14
<PAGE>
Non-compliance with any of the provisions of this Section 4 shall
constitute a default under this Agreement.
5. INITIAL LICENSING FEE: In addition to all other amounts due from
---------------------
Licensee to Licensor under this Agreement and notwithstanding any termination of
this Agreement. Licensee shall pay to Licensor the sum of Seventy-Five Thousand
Dollars ($75,000.00) payable as follows: Twenty-Five Thousand Dollars
($25,000.00) upon execution and delivery of this Agreement by Licensee, Twenty-
Five Thousand Dollars ($25,000.00)on or before December 31, 1995; and the
balance on or before December 31, 1996.
Any payment due to Licensor under this Section 5 shall be made to Licensor
notwithstanding any assignment by Licensor of any or all of its rights under
this Agreement, unless Licensor provides explicit written instructions to
Licensee directing such payments under this Section 5 to be made to another
person or entity.
6. ROYALTY AND ADVERTISING PAYMENTS: As a combined royalty and
--------------------------------
advertising payment. Licensee shall pay to Licensor a sum equal to *** of the
dollar amount of all Net Sales of the Licensed Products, up to the first *** of
such Net Sales in any calendar year, and a sum equal to *** of the dollar amount
of all Net Sales of the Licensed Products in excess of *** in any calendar year.
Royalties and advertising payments shall accrue upon the sale of the Licensed
Products. A sale of a Licensed Product shall be deemed to have occurred upon the
earliest to occur of the following: (a) the sending of an invoice for such
Licensed Product, (b) the shipment of such Licensed Product, or (c) receipt of
payment for such Licensed Product.
6.1 NET SALES: As used herein, "Net Sales" means the gross dollar amount
---------
of all sales by Licensee of the Licensed Products, less actual returns of
Licensed Products and bona
*** Confidential portion omitted and filed separately with the Securities and
Exchange Commission.
October 27, 1994
15
<PAGE>
fide trade discounts and allowances. No deduction from "Net Sales" shall be made
for cash or other payment discounts (including anticipation or other similar
discounts or allowances for early payment), uncollectible accounts, or reserves
for chargebacks. No costs or charges incurred in the manufacture, sale,
distribution, marketing, advertisement or promotion of the Licensed Products, in
the factoring or other financing of sales of the Licensed Products, or in the
payment by Licensee of any local, State or Federal taxes of any nature
whatsoever shall be deducted from the gross sales amount of the Licensed
Products in calculating "Net Sales" or from any royalty payable to Licensor.
Notwithstanding the foregoing, Licensee is not required to pay royalty (or any
other fees) on amounts it actually pays for bona fide freight charges. Any sales
or transfers of Licensed Products made by Licensee to any person or entity that
does not deal at arm's length with Licensee shall be computed, for the purpose
of determining "Net Sales", at an amount equal to the price at which Licensee
would charge purchasers who deal at arm's length with Licensee. "Net Sales"
does not include the sale of samples to Licensor's sales force.
6.2 MINIMUM ROYALTY PAYMENT: Regardless of whether or not Licensee sells
-----------------------
and delivers Licensed Products producing Net Sales equalling or exceeding the
amounts set forth in Section 4 above, Licensee shall pay to Licensor, as a
minimum royalty and advertising payment hereunder, for the period from the
Commencement Date through December 31, 1995, an amount equal to *** of the
required minimum sales and deliveries for that period (as set forth in Section 4
above). If by December 31, 1995, Licensee shall not have paid to Licensor
royalties and advertising payments equalling or exceeding the minimum royalty
and advertising payments for that year as set forth in this section, Licensee
shall pay to Licensor the balance due on such royalties and advertising payments
not later than January 20, 1996.
*** Confidential portion omitted and filed separately with the Securities and
Exchange Commission.
October 27, 1994
16
<PAGE>
6.3 MANNER OF PAYMENT: MONTHLY STATEMENTS: The payment of royalties and
-------------------------------------
advertising payments shall be made on or before the 20th day of each calendar
month for Net Sales occurring during the previous calendar month. Licensee shall
send to Licensor with each royalty payment a statement certified to be accurate
by an officer of Licensee, which completely and accurately sets forth a detailed
accounting of (i) the quantities of Licensed Products and Discounted Goods
shipped and/or sold during the preceding month by product and size. (ii) a
summary of the billings thereon and/or the payments received therefrom that
comprise the gross sales and Net Sales of such products during the preceeding
month, (iii) the calculation of royalties and advertising payments on such
shipments, billings and payments, and (iv) the total of royalties so computed
and due to Licensor. Such statement shall be in the form and shall contain such
additional information as Licensor may from time to time direct. Neither receipt
nor acceptance of any payment under this Agreement shall constitute acceptance
of such statement's contents or preclude Licensor from thereafter questioning
any such statements of the accruing of any payment made hereunder. Time is of
the essence with respect to all payments herein.
6.4 SYSTEMS, BOOKS AND RECORDS: Licensee shall maintain an adequate
--------------------------
system of internal controls, (i.e., policies, procedures, organizational plans,
and other measures), to ensure the accuracy and reliability of financial and
operational data. Additionally, Licensee shall maintain true, complete and
accurate books of account and records of all transactions with respect to the
Licensed Products and all other data necessary for the proper computation of the
royalty, advertising and other payments required under this Agreement, all in
accordance with generally accepted accounting principles applied on a consistent
basis.
6.5 ANNUAL REPORTS OF SALES: For each calendar year during the term
-----------------------
hereof, Licensee shall submit to Licensor an annual statement for the twelve
month period ending
October 27, 1994
17
<PAGE>
December 31. The annual statement shall be submitted by January 20th of each
year for the previous calendar year and shall include a detailed and cumulative
account of all transactions involving the Licensed Products, including, without
limit, all orders, shipments, returns, trade discounts and allowances, royalties
paid and payable, goods returned as substandard, and orders canceled for
non-delivery and such other information as Licensor may from time to time
request. This report shall be certified to be correct by the Chief Executive
Officer and the Chief Financial Officer of the Licensee or such officers or
employees of Licensee as Licensor and Licensee may agree.
6.6 MULTIPLE LICENSES: In the event Licensee is or shall become a party
-----------------
to more than one license agreement with Licensor, Licensee shall maintain and
generate separate reports and records as required by Sections 6.5, 6.6 and 6.7
hereof for each license agreement. Failure to comply with the provisions of this
Section 6.8 shall constitute a default of this Agreement.
7. AUDIT: Licensor or its authorized agent shall have the right from time
-----
to time, and at any reasonable time but not more than once in any calendar year,
to examine and to perform tests of the Licensee's books and records and
undertake other reasonable procedures to verify compliance by Licensee with the
provisions of this Agreement. The cost of said examination and tests shall be
borne by Licensor, unless the royalties or other amounts owing to Licensor by
Licensee hereunder are discovered to have been understated or underpaid by five
percent (5%) or more over the period since the last such examination or test, in
which case Licensee shall pay forthwith to Licensor the cost of such examination
and/or test, and all payments found to be due, with interest thereon, at the
rate of five hundred (500) basis points over the Prime Rate (as defined below)
per annum, or the maximum legal rate, whichever is less, computed from the date
said unpaid payments would have been due had they been properly accounted for
until the date they are actually paid. The "Prime Rate" shall mean the Prime
Rate
October 27, 1994
18
<PAGE>
(the base rate on corporate loans posted by at least seventy-five percent (75%)
of the nation's thirty (30) largest banks), as published in The Wall Street
Journal on the business day immediately following any day on which Licensee
shall have failed to make a payment under this Agreement when due.
If any such examination or tests reveal that Licensee has understated or
underpaid the royalties and/or other payments owing to Licensor hereunder and/or
under all other license agreements of which Licensee or any of its affiliates
and Licensor are parties by two hundred thousand dollars ($200,000) or more over
the period since the last such examination or test, Licensor shall have the
right, at its sole and absolute discretion, to terminate this Agreement
immediately, and Licensee shall have no right to cure any such underpayment
prior to such termination. In addition, if any two (2) such examinations shall
each reveal that Licensee has understated or underpaid the royalties and/or
other payments owing to Licensor hereunder and/or under all other license
agreements of which Licensee or any of its affiliates and Licensor are parties
by ten percent (10%) or more over the respective periods since the last such
examinations or tests, Licensor shall have the right at its sole and absolute
discretion, to terminate this Agreement immediately, and Licensee shall have no
right to cure any such under payment prior to such termination.
8. ANNUAL STATEMENTS; QUARTERLY SHIPPING STATEMENTS OF NET WORTH:
-------------------------------------------------------------
Promptly after Licensee's receipt thereof and in no event later than
seventy-five (75) days after the end of Licensee's fiscal year, Licensee shall
furnish Licensor with a statement of Licensee's net worth, which shall be
certified by a reputable certified public accounting firm as being Licensees net
worth as of the end of such fiscal year, as determined in accordance with
generally accepted accounting principles consistantly applied ("G.A.A.P."). In
addition, Licensee shall furnish to Licensor quarterly statements forty-five
(45) days after the end of
October 27, 1994
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<PAGE>
each calendar quarter during the term of this Agreement which shall set forth in
detail Licensee's compliance with the minimum shipping requirement set forth in
Section 4 of this Agreement.
9. ADVERTISING/PUBLIC RELATIONS: Licensor shall spend the advertising
----------------------------
payment received pursuant to this Agreement in its sole discretion and judgment.
Licensor shall reasonably consult with all of its licensees of the Trademarks on
a periodic basis with respect to the advertisement and promotion of the Licensed
Products and the Trademarks. However, Licensor shall have the sole and absolute
right to decide how to advertise and promote the Licensed Products and the
Trademarks.
All advertising, promotions and public relations concerning the Licensed
Products and/or the Trademarks, including any done directly by Licensee or any
of its agents, representatives or customers, whether or not at Licensee's own
expense (including cooperative advertising), shall require the prior written
approval of Licensor, acting in its sole and absolute discretion; provided,
however that Licensor's consent shall not be required with respect to Licensee's
repeated use of an advertising format which Licensor has previously approved,
provided the product depicted or advertised in such format has itself been
approved by Licensor.
10. SHOW, SHOWROOM, SALES MEETING AND BRAND SUPPORT EXPENSE: Licensee
-------------------------------------------------------
shall be under no obligation to make use of any showroom owned, operated, leased
or managed by Licensor or participate with Licensor in any trade show or sales
meeting, but shall have the right to do so at Licensee's discretion. However, If
Licensee shall, during any calendar year during the term of this Agreement, use
or make use of any showroom owned, operated, leased or managed by Licensor or
participated with Licensor (at Licensee's request) in any display at any
tradeshow or sales meeting. Licensee shall pay to Licensor. In addition to all
other payments
October 27, 1994
20
<PAGE>
required hereunder, Licensee's pro rata share, based on the ratio of Licensee's
Net Sales of the Licensed Products to the total United States Net Sales of all
products using the Trademarks in the Territory, of Licensor's show, showroom,
sales meeting and brand support expenses, charges and overhead: provided,
however, that Licensee's payment under this Section 10 shall not exceed one and
one-half percent (1-1/2%) of the dollar amount of Net Sales of the Licensed
Products (including sales of Discounted Goods) in any calendar year.
Licensor shall spend the payment it receives under this Section 10 in its
sole discretion and judgment. Licensor shall reasonably consult with all of its
licensees of the Trademarks on a periodic basis with respect to the expenditure
of such payments. However, Licensor shall have the sole and absolute right to
decide how to spend such payments.
If Licensee shall not have made use of any showroom owned, operated, leased
or managed by Licensor in any display at any tradeshow or sales meeting during
any calendar year, Licensee shall not be liable for any expense under this
Section 10 for such calendar year.
11. ADMINISTRATIVE COSTS: Licensor and Licensee shall each pay its own
--------------------
administrative and legal costs associated with this Agreement.
12. REPRESENTATIONS AND WARRANTIES OF LICENSEE: Licensee represents and
------------------------------------------
warrants to Licensor as follows:
(a) ORGANIZATION AND AUTHORITY: Licensee is a corporation, duly
--------------------------
incorporated, validly existing and in good standing under the laws of the State
of New York and has all necessary corporate power and authority to enter into
this Agreement and to perform its obligations hereunder. This Agreement has been
duly authorized, executed and delivered by Licensee and constitutes a legal,
valid and binding obligation of Licensee enforceable against Licensee according
to its terms.
(b) NO CONFLICT: The execution, delivery and performance of this Agreement
-----------
by
October 27, 1994
21
<PAGE>
Licensee does not and will not (i) violate or conflict with its [Articles] of
Incorporation, or (ii) conflict with or violate any law, rule, registration,
order, writ, judgment, injunction, decree, determination or award applicable to
Licensee.
(c) ABSENCE OF LITIGATION: No claims, lawsuit, action, proceeding or
---------------------
Investigation has been asserted or instigated against Licensee which seeks to
delay or prevent the consummation of the License transaction contemplated by
this Agreement or which would be reasonably likely to adversely affect or
restrict Licensee's obligations hereunder.
13. PRODUCT STANDARDS: No Licensed Product shall be distributed or sold
-----------------
unless it is of the highest standards and unless it has received the approval of
Licensor prior to its distribution and sale as set forth below.
13.1 APPROVAL OF PRODUCT DESIGNS AND GRAPHICS: Each design of and graphic
----------------------------------------
for a Licensed Product that Licensee desires to manufacture or distribute, sell
or otherwise market, shall be submitted to Licensor for approval, along with
samples of all proposed colors, fabrics and other materials for such Licensed
Products. All submissions for approval shall be at the sole expense of the
Licensee. For purposes of submitting designs and graphics Licensee shall use
such design and graphics approval forms, and shall supply Licensor with such
information in connection therewith, as Licensor may from time to time direct.
Licensor shall have fifteen (15) working days following its receipt of a
proposed design and/or graphic, from Licensee within which to approve or
disapprove such design and/or graphic. Failure by Licensor to disapprove within
such fifteen (15) working day period shall be deemed to constitute approval of a
design or graphic. Licensor may approve a design or graphic subject to such
changes as it deems appropriate, in which event Licensee shall resubmit the
design and/or graphic with the suggested changes for Licensor's approval as set
forth above. Licensor may approve or disapprove of a design or graphic in its
sole and absolute
October 27, 1994
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<PAGE>
discretion. Licensee shall not produce a Licensed Product which has not
received design and graphics approval from Licensor as set forth in this
paragraph.
Licensor shall grant approval of Licensee's line of Licensed Products for
each season upon approving Licensee's graphics and designs (storyboards) for
each Licensed Product proposed to be included in such line and fabric and color
samples proposed to be used in manufacturing each such Licensed Product. Such
approval shall be deemed to constitute approval of each Licensed Product in each
color and fabric approved for such Licensed Product; provided, however, that
such approval shall not limit in any way Licensee's obligation pursuant to
Section 13.2 below to submit a sample of each style of Licensed Product proposed
to be included in Licensee's line for each season, and Licensor reserves the
right to require Licenses to make changes to any such Licensed Product after
having examined Licensee's sample of such Licensed Product.
Without limiting the generality of the foregoing, it is specifically agreed
that Licensor may disapprove a design and/or graphic which Licensor decides does
not meet all of the following criteria: It is wholesome; not obscene or
obnoxious; not sacrilegious; not racist; not sexist; does not disparage
Licensor's product or the products of others; does not Infringe the trademark
rights or copyrights of others; properly uses the Trademarks; and does not
violate any Federal or state law; does not portray illegal conduct.
13.2 APPROVAL OF SAMPLES TO SALES FORCE: A sample of each proposed
----------------------------------
Licensed Product which has received design and graphics approval as set forth
above, shall be submitted by Licensee to Licensor for approval; provided,
however, that Licensee need submit a sample of any style of Licensed Product in
only one of the colors and fabrics approved by Licensor for such Licensed
Product pursuant to Section 13.1 above. All such submissions of samples for
approval shall be at the sole expense of Licensee. Licensee shall use such
sample approval forms and
October 27, 1994
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<PAGE>
supply Licensor with such information in connection therewith as Licensor may
from time to time direct. All samples shall be submitted on a timely basis so
that the approval process (and any changes) may be accomplished in time to allow
an orderly distribution of samples to the sales force and show rooms and timely
manufacturing and shipment of the product. Licensee shall submit a sample of
each product it intends to sell, with complete specifications, fabric samples
and color swatches.
Licensor shall be permitted to approve a sample subject to such changes as
it deems appropriate. Licensor may approve or disapprove of a sample acting in
the exercise of its sole and absolute discretion. Licensee shall be permitted to
make running changes to any Licensed Product which has received Licensor's
approval, provided that such changes do not materially affect the style or
quality of the approved product. Licensee shall provide an approved sample of
each of the Licensed Products, with complete specifications, fabric samples and
color swatches (as requested by Licensor), to Licensor for Licensor's historical
sample line at the expense of Licensee.
13.3 APPROVAL PRIOR TO DELIVERY: Licensee shall not ship, distribute or
--------------------------
sell any LIcensed Product unless Licensor has granted design and/or graphics and
sample approval, as requires by Sections 13.1 and 13.2 above.
13.4 SEASONS: Licensee acknowledges that Licensor and Licensee shall
-------
jointly develop each season's proposed line in a cooperative process taking
various factors into account, including, without limitation, cost and
availability of fabric and other piece goods, price points, competitors'
products, other licensee's products, overall line direction, the retail
environment and general economic conditions,
13.5 PRODUCT DISTRIBUTION: Licensee agrees to maintain Licensor's
--------------------
marketing and retailing standards to protect the value of the Trademarks and the
image of the Licensed
October 27,1994
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<PAGE>
Products. Licensee shall maintain the same or higher standards for the selection
of retail, wholesale and other outlets as those maintained by Licensor during
the term of this Agreement. Licensee acknowledges that Licensor may change such
standards from time to time during the term of this Agreement and that the
changed standards shall apply to Licensee after reasonable notice thereof;
provided, however, that Licensee may terminate this Agreement upon ninety (90)
days' written notice to Licensor if Licensor changes such standards such that
Licensor shall require or permit the Licensed Products to be sold in retail
outlets which are substantially "down market" from the outlets in which Licensor
previously allowed the Licensed Products to be sold.
Licensor shall have the right at any time, acting in the exercise of its
sole discretion, to disapprove the use of particular wholesale and/or retail
outlets, including the right to disapprove of outlets that were previously
acceptable, except as otherwise specifically provided herein. Unless prior
written approval is obtained from Licensor, Licensee shall not sell, dispose of
or distribute any Licensed Products through (i) K-Mart, Walmart, Target,
Montgomery Ward, Caldor, Venture, Sears, DSJS, Burlington Coat Factory, or
similar outlets, (ii) Newtons or Marshalls or similar outlets, except on a
close-out basis, (iii) any other outlets disapproved by Licensor except for
outlets to which Licensee has been permitted to sell the Licensed Products on a
regular basis unless such outlets shall have lowered retail standards (it being
understood that (x) Licensor may from time to time permit Licensee to sell
Licensed Products to specific retailers for a limited time or on a limited basis
without Licensee being considered to sell to such retailers on a regular basis,
and (y) Licensee shall not be deemed to be selling Licensed Products to Costco
or other clubs on a regular basis, and Licensor may prohibit Licensee from
selling to such clubs, unless Licensor and Licensee agree otherwise), or (iv)
any factory outlet stores, warehouse sales, parking lot sales, swap meets, flea
markets or similar
October 27, 1994
25
<PAGE>
sales, stores or outlets. Licensor may, at its sole option, terminate the rights
of Licensee under this Agreement for failure to adhere to the provisions of this
Section 13.5.
13.6 SAMPLES FOR SALES FORCE: Prior to the showing of any new line, and
-----------------------
after receiving the approvals described in Sections 13.1 and 13.2 above Licensee
shall furnish to Licensor sufficient samples for its use and display of the
Licensed Products to customers and at trade shows and showrooms. Licensor shall
consult with Licensee in determining the number of samples which Licensee shall
furnish under this Section 13.6; however, the decision of Licensor with respect
to such number shall be binding on Licensee. Nothing in this Section 13.6 shall
be construed to impose any duty or responsibility on Licensor to sell any of the
Licensed Products either by itself or with or through its sales force or to
imply that any such duty or responsibility exists.
13.7 MERCHANDISER/DESIGNER: Licensee shall provide, at its own expense,
---------------------
sufficient full time employees qualified to act as designers, merchandisers, and
production/sample coordinators with respect to the Licensed Products. Such
employees shall be subject to approval by Licensor and shall devote
substantially all of their working time on the development and coordination of
the Licensed Products in conjuction with the design and merchandising staff of
Licensor.
13.8 APPEARANCE AS ONE PRODUCT LINE: Licensee acknowledges that to the
------------------------------
extent reasonably possible and prudent, Licensor and its designers and
merchandisers will attempt to make the product lines of all licensees of the
Trademarks cohesive and consistent and appear to be the product of one company.
Licensee agrees to cooperate with Licensor in this endeavor.
14. SALES FORCE; FULL-TIME SALES MANAGER: Licensee agrees that all
------------------------------------
Licensed Products (including seconds, irregulars and close outs) shall be sold
and distributed through Licensee or a sales force which is managed by Licensee.
October 27,1994
26
<PAGE>
Licensee shall retain a full-time sales manager who shall devote
substantially all of his or her time to sales of the Licensed Products, and to
managing Licensee's sales force in selling Licensed Products, Licensee agrees to
give due consideration to hiring Steve Pinkow or a corporation owned and
controlled by Steve Pinkow as such full-time sales manager: provided, however,
that nothing in this Section 14 shall be construed to require or bind Licensee
actually to retain Mr. Pinkow or corporation controlled by Mr. Pinkow.
15. QUALITY CONTROL: Licensor shall have the right to make on site
---------------
inspections at any reasonable time at all manufacturing and distribution points
used by Licensee to ensure the quality of the Licensed Products. If at any time
Licensor determines in its reasonable discretion that a Licensed Product is of
lesser quality than the sample approved pursuant to Section 12.1 hereof or is
otherwise an irregular or second product, Licensor shall give Licensee notice
thereof, and Licensee shall immediately cease production and distribution of
that Licensed Product until its quality is improved to the satisfaction of
Licensor.
15.1 SECONDS, IRREGULARS: Seconds and irregulars are merchandise which
-------------------
contain a production flaw or fabric flaw or other mistake or problem which makes
the goods unsalable for full line list price. Licensor shall have the right, in
its sole discretion, to determine whether goods are seconds or irregulars, and
Licensee agrees to be bound by such determination; provided, however, that if
Licensee or any customer for the Licensed Products believes that any Licensed
Product is a second or irregular, Licensor agrees to accept and be bound by such
determination. Licensee shall not sell or dispose of any irregulars or seconds
in excess of three percent (3%) of Licensee's total production of the Licensed
Products for any season without the express prior written permission of
Licensor. Licensor may, in its discretion, require Licensee to destroy seconds
or irregulars in excess of three percent (3%) of Licensee's total production of
the Licensed Products for any season and/or impose
October 27, 1994
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<PAGE>
requirements on the disposal of seconds and irregulars, including, without
limitation, the cutting or removal of labels and the removal of logos and/or
other brand identification.
16. LABELLING: All Licensed Products shall have a label and/or hangtag
---------
designated by Licensor. The labels and hangtags may be acquired only from
sources approved in writing by Licensor. On all labels, hangtags and Licensed
Products the appropriate Trademark notices (R) or (TM), denoting United States
Trademark registration or common law rights shall appear, and where applicable,
all items subject to copyright protection shall bear a proper and complete
copyright notice as specified by law. Licensor shall have the right at any time
to designate the exact symbols or language to be used by Licensee to denote
ownership by Licensor of trademarks, copyrights and other Intellectual property.
Licensee understands the importance of maintaining the security and
integrity of all labels used on the Licensed Products and agrees to obtain such
labels only from the sources approved by Licensor. Licensee further agrees to
maintain a strict, accurate and current inventory of all labels to preclude
diversion of labels. No additional labels, hangtags or identification shall
appear on the Licensed Products without the prior written approval of Licensor,
except for a separate label designating the care, content, size and country of
origin of the Licensed products. Any breach of the provisions of this paragraph
shall entitle Licensee, at its option, to terminate the rights of Licensee under
this Agreement.
16.1 SECURITY LABEL In addition to the labels designated in Section 16
--------------
above, when directed by Licensor, Licensee shall use a security label in a
location designated by Licensor on each of the Licensed Products. Licensee shall
fully cooperate in implementation of any security label program that Licensor
may deem necessary or appropriate to protect the Trademarks. Licensor shall pay
for the development of the security label program, but Licensee shall pay for
the labels and the appropriate hardware and software necessary to install
October 27, 1994
28
<PAGE>
the labels.
16.2 U.P.C. LABEL: Licensee agrees to cooperate with Licensor and other
------------
licensees of Licensor in developing an appropriate U.P.C. or similar labelling
system at such time as Licensor deems necessary or appropriate.
16.3 LABEL INVENTORY: Licensee shall maintain a strict, accurate and
---------------
current inventory of all labels described in this Section 16 to preclude
diversion of such labels and shall furnish to Licensor a monthly accounting of
such inventory.
17. TRADEMARK: Licensee agrees to represent the Trademarks accurately, as
---------
directed by Licensor, in any reproduction by Licensee, whether on the Licensed
Products or in print or anywhere else. Licensee further agrees that the
Trademarks will be exactly reproduced, unless Licensee shall have received prior
written authorization for modification from Licensor. Each use of the Trademarks
on a Licensed Product shall be submitted to Licensor for prior approval pursuant
to the approval procedures set forth above in this Agreement. As provided in
Section 9 hereof, Licensee shall obtain Licensor's prior written approval for
all uses of the Trademarks in advertising, public relations and/or promotions by
Licensee.
17.1 TRADEMARK INFRINGEMENT OR MISUSE: Licensor shall maintain and defend
--------------------------------
all actions with respect to protection and maintenance of the Trademarks, as it
deems appropriate. Licensee shall fully and completely cooperate in the
protection of the Trademarks and in any investigation, maintenance, defense and
resolution of any action taken by Licensor and shall supply Licensor with
technical assistance, genuine samples, business records, as Licensor may deem
appropriate in undertaking any such action. If Licensee becomes aware of any
misuse or infringement of the Trademarks or if Licensee becomes aware of any
marks confusingly similar to any of the Trademarks, Licensee shall immediately
notify Licensor.
October 27, 1994
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<PAGE>
17.2 LATER DEVELOPED TRADEMARKS: Licensor has from time to time developed
--------------------------
and will continue to develop new trademarks and other intellectual property.
This Agreement shall automatically apply to all such later developed trademarks
which, in the sole opinion of Licensor, are specifically developed for use or
maintained in the same branded product line as the Licensed Products. Licensee
shall have no right whatsoever to any trademark or other intellectual property
that may be developed by Licensor or its affiliates that is not, in the sole
opinion of Licensor, part of the same branded product line as the Licensed
Products. The term "Trademarks" as used in this Agreement is intended to include
all such later developed trademarks which Licensee has the right to use under
the terms of this section.
18. GOODWILL: Licensee recognizes the great value of the publicity and
--------
goodwill associated with the Trademarks, and agrees that such value and
goodwill, including any such value and goodwill arising from the activities of
Licensee belong to and shall inure exclusively to Licensor. Licensee further
acknowledges that the Trademarks have acquired a secondary meaning in the mind
of the public.
19. COPYRIGHT NOTICE: Licensor has the right, in its sole discretion, to
----------------
register in its name the copyright on any and all graphics, artwork and/or
writings developed by Licensee and/or and incorporated in or on or associated
with the Licensed Products. Licensee agrees that all such artwork and writings
and the copyrights thereto shall be the sole and exclusive property of Licensor,
and Licensee agrees to execute any copyright assignments or other documents
deemed necessary by Licensor to transfer, perfect or confirm full copyright
ownership in and to Licensor, Licensee shall place a legally sufficient
copyright notice which protects the rights of Licensor on every design, style,
garment, creation or writing which is capable of protection pursuant to the
copyright laws of the United States of America or any treaty to which it is a
party. Any public distribution of goods bearing copyrightable works of
October 27, 1994
30
<PAGE>
Licensor by Licensee without a copyright notice as required above, is
unauthorized and shall constitute a default of this Agreement.
20. ADDITIONAL INSURED/INDEMNITY: During the term of this Agreement and
----------------------------
for one year thereafter Licensee shall maintain public and product liability
Insurance coverage of at least five million dollars ($5,000,000) with an insurer
reasonably acceptable to Licensor. Licensor agrees that [name of Licensee's
current carrier] __________________ is an insurer acceptable to Licensor. The
insurance policy shall name Licensor and its affiliates as additional insureds
and shall provide that such policies cannot be canceled without thirty (30)
days' prior written notice to Licensor. Licensee shall, on execution of this
Agreement, and annually thereafter, furnish to Licensor a certificate or other
adequate proof of such coverage naming Licensor and its affiliates as additional
insureds.
Without in any way limiting any of the rights or remedies otherwise
available to Licensor, Licensee shall indemnify and hold harmless Licensor and
its officers, directors, stockholders, employees, agents, attorneys,
representatives, affiliates, successors and assigns (collectively, the
"Indemnitees") against and from any and all losses, damages, injuries, lost
opportunities, liabilities, exposure, claims, demands, settlements, judgments,
awards, fines, penalties, taxes, fees, charges or expenses (including attorneys'
fees and expenses) (collectively, the "Losses") that are directly or indirectly
suffered or incurred at any time by any of the Indemnitees and that become
payable or arise directly out of, or by virtue of, or relate directly or
indirectly to, the manufacture, distribution, marketing, promotion or sale of
any of the Licensed Products or the performance of Licensee's duties under this
Agreement. Losses resulting from Licensor's wilful misconduct, wrongful acts or
wilful failure to act, except for Losses resulting from any actual infringement
by the Trademarks themselves (as opposed to Losses resulting from Licensee's
usage of otherwise non-infringing Trademarks) in
October 27, 1994
31
<PAGE>
any rights of any third party. This indemnity and hold harmless shall survive
the termination of this Agreement.
21. NONASSIGNABILITY: Licensee shall not assign this Agreement or any of
----------------
its rights under this Agreement, without the express prior written consent of
Licensor, which consent may be withheld in the exercise of Licensor's sole and
absolute discretion. Except as described in Section 21.1 and 21.2 below, the
transfer of a majority of the issued and outstanding capital stock of
Licensee, however accomplished, and whether in a single transaction or in a
series of related or unrelated transactions, or the merger of Licensee into any
other person or entity in which Licensee is not the surviving entity, or the
sale of all or substantially all of Licensee's assets, shall be deemed an
assignment of Licensee's rights hereunder. Any attempted or purported assignment
of Licensee's rights under this Agreement without the prior written consent of
Licensor shall be deemed null and void ab initio. Any attempt by a non-approved
assignee or transferee to do business under the License shall entitle Licensor
to terminate the rights of Licensee (and such purported assignee or transferee)
under this Agreement immediately. Any direct or indirect transfer or assignment
of the License or any of Licensee's rights under this Agreement, by operation of
law or otherwise, including, without limitation, any transfer or assignment
which results from forfeiture of or foreclosure upon the License or any of
Licensee's rights hereunder pursuant to any security interest, lien, mortgage,
charge, pledge, hypothecation or other encumbrance or pursuant to any default
hereunder, shall be deemed to be an assignment subject to the provisions of this
Section 21. Nothing in the preceding sentence shall be construed to limit
Licensee's ability to grant a lien or security interest in the License or
Licensee's rights under this Agreement, or to require Licensor's consent for any
such grant, provided, however, than any purported transfer or assignment of the
License or Licensee's rights hereunder pursuant to any forfeiture or foreclosure
under any
October 27, 1994
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<PAGE>
such lien security interest which occurs without Licensor's express prior
written consent shall be deemed null and void ab initio and shall entitle
Licensor to terminate the rights of Licensee (and any purported transferee or
assignee) under this Agreement pursuant to this Section 21. In determining
whether to give its consent to an assignment Licensor may consider such factors
as it deems appropriate, including, without limitation, the following factors
and attributes of the proposed assignee, its principals and its related
entities; their business plans; their history; their financial resources;
potential competition by their other businesses; the impact of the proposed
assignment on Licensor's other licensees; and the compatibility of Licensor and
its other licensees with the proposed assignee and/or its principals and related
entities. Licensor may assign its rights or delegate its duties under this
Agreement to any person or entity at any time.
21.1 PERMITTED STOCK TRANSFERS
-------------------------
Notwithstanding the provisions of Section 21, the shareholders of
Licensee holding their shares immediately subsequent to the signing of this
Agreement (the "Current Shareholders") may transfer shares to the following
persons (hereafter the "Permitted Transferees") without requiring Licensor's
prior written consent for a transfer or assignment of this License;
A. Licensee;
B. other Current Shareholders;
C. any bona-fide employee stock ownership plan or similar plan
for the benefit of the employees of Licensee;
D. any current or former spouse of a Current Shareholder
incident to a judgment of dissolution of marriage;
E. any bona fide estate planning trust or other similar device,
and;
October 27, 1994
33
<PAGE>
F. the heirs, devisees and/or legatees of a current Shareholder upon
his or her death.
21.2 SUBLICENSEES/SUBCONTRACT: Licensee's rights under this Agreement may
------------------------
be sublicensed by Licensee only with the express prior written consent of
Licensor and subject to any conditions or requirements that Licensor in its sole
discretion may impose. Any attempted or purported sublicense by Licensee
without the prior written consent of Licensor shall constitute a breach of this
Agreement.
Licensee shall have the right to subcontract the actual manufacture of the
Licensed Products provided its subcontractors agree to be subject to all
inspections, audits, time limits, design and sample approval requirements,
quality control standards and procedures, and intellectual property protection
provisions set forth herein. Licensee shall promptly notify Licensor in writing
of the identity and location of any such subcontractor and the Licensed Products
being subcontracted. Licensor may from time to time require each such
subcontractor to sign such agreements as Licensor deems necessary or advisable
to protect the rights of Licensor hereunder, including, without limitation, the
agreement of the subcontractor not to sell or otherwise dispose of Licensed
Products or piece goods, trims, or fasteners bearing the Trademarks to any
unauthorized person or entity without the prior written consent of Licensor.
Licensee shall use its reasonable best efforts to cooperate with Licensor in
obtaining the signature of subcontractors to such agreements. Licensee shall
remain responsible for all of its obligations under this Agreement
notwithstanding any such subcontract, and Licensee agrees to be responsible for
any breach of any provisions of this agreement by any of Licensee's
subcontractors.
Licensee shall remain responsible for any Licensed Product sold, shipped,
delivered or distributed by or through Licensee to the full extent under this
Agreement as if Licensee had
October 27, 1994
34
<PAGE>
manufactured such Licensed Product itself, notwithstanding any such subcontract
for the manufacture of such Licensed Product. Licensee shall also remain fully
responsible and liable for any use by any such subcontractor of any labels
bearing the Trademarks which Licensee may supply to such subcontractor and any
product containing any such label, regardless of whether the manufacture of such
product was authorized under this Agreement or not. In addition, Licensee shall
indemnify and hold harmless Licensor and the other Indemnitees against and from
any Losses that are directly or indirectly suffered or incurred at any time by
any of the Indemnitees and that become payable or arise directly or indirectly
out of, or by virtue of, or relate directly or indirectly to, any injury or
damage suffered or incurred or alleged to have been suffered or incurred by any
party other than the Indemnitees in connection with any manufacture, sale or
distribution of any of the Licensed Products or any use or misuse of the
Trademarks, whether or not authorized by this Agreement, by any such
subcontractor. Licensee further agrees to use its best efforts to cause any
such subcontractor not to sell or distribute any Licensed Products to any person
or entity other than Licensee and to cease any use of the Trademarks not
explicitly authorized pursuant to this Agreement or any other conduct which
might constitute a breach of any of the provisions of this Agreement, and
Licensee agrees that, should such best efforts fail, Licensee shall (a) at
Licensor's request promptly terminate and discontinue its subcontract (and/or
any similar arrangement) with such subcontractor and its officers, directors,
stockholders, agents, affiliates, successors and assigns, and (b) reimburse
Licensor for eighty percent (80%) of any costs or expenses (including attorneys'
fees and expenses) incurred by Licensor in attempting to prevent such
subcontractor from selling or distributing Licensed Products to any person or
entity other than Licensee or from using the Trademarks in any manner not
explicitly authorized pursuant to this Agreement or from engaging in any other
conduct which might constitute a breach of any of the provisions of this
October 27, 1994
35
<PAGE>
Agreement. The provisions of this Section 21.2 shall survive any termination of
this Agreement.
21.4 NO HYPOTHECATION: Licensee shall not pledge, hypothecate, mortgage,
----------------
grant liens in or upon, grant security interests in, use as collateral or
otherwise borrow upon the License, or any of Licensee's rights under this
Agreement, without the express prior written consent of Licensor which consent
shall not be unreasonably withheld, except that Licensor's consent shall be
deemed to have been granted in connection with any pledge, hypothecation, or
granting of a lien or security interest in all general intangibles of Licensee
existing as of the date of this Agreement. Any such action without consent shall
be void and of no effect and shall entitle Licensor to terminate Licensee's
rights under this Agreement.
22. MUTUAL EXCLUSIVITY: Licensee acknowledges that Licensor will provide
------------------
substantial design input with respect to the Licensed Products, and it is and
will be impossible to determine which design features of the Licensed Products
are not the result of Licensor's efforts. Licensee therefore agrees that, during
the term of this Agreement, Licensee shall not market or manufacture other
products unless a reasonable person would conclude that such other products
represent a distinctly different line and brand of products from the Licensed
Products.
Licensee agrees that all existing and future designs and artwork relating
to the Licensed Products are and shall remain the sole and exclusive property of
Licensor. Licensee agrees that it will not manufacture or sell products using
the designs or artwork of the Licensed Products or substantially similar designs
or artwork under any other name or label other than the Trademarks.
23. TERMINATION: The remedies provided in Sections 23.1 through 23.12
-----------
hereof are cumulative and not exclusive. In addition to these remedies, Licensor
may exercise any and
October 27, 1994
36
<PAGE>
all other rights and remedies it has under other provisions of this Agreement or
applicable law. Licensor may terminate the rights of Licensee under this
Agreement for the reasons set forth below or for other reasons provided for in
other provisions of this Agreement. Licensee agrees that if Licensor has a right
to terminate this Agreement, as set forth herein, and elects to terminate this
Agreement, such termination shall become effective, and the post-termination
provisions of Sections 24 through 24.5 shall become operable, notwithstanding
any actual or alleged breach by Licensor of any of its obligations under this
Agreement. Throughout this Agreement the phrases "termination of this
Agreement", "termination of the rights of Licensee under this Agreement",
"termination of Licensee's rights under this Agreement" and "termination of this
License" and similar phrases may be used interchangeably.
23.1 FAILURE TO MEET MINIMUM SALES: Except as otherwise provided herein,
-----------------------------
at the option of Licensor, the rights of Licensee under this Agreement shall
terminate immediately at any time if Licensee fails (a) to ship the required
eighty-five percent (85%) of its orders for any season during the term of this
Agreement or any extended term, or (b) fails to ship or deliver Licensed
Products producing Net Sales equalling or exceeding the amounts set forth in
Section 4 hereof without having paid the royalties and advertising payments
which would have been due on Net Sales in such amounts by January of the
succeeding year, as provided in Section 4. Licensee shall be obligated to pay
its initial licensing fee and minimum royalties as set forth in Sections 5 and
6.2 hereof, regardless of any failure to achieve minimum sales and deliveries.
23.2 DEFAULT IN LICENSEE PAYMENTS: At the option of Licensor, the rights
----------------------------
of Licensee under this Agreement shall terminate if Licensee fails to make
timely payment of any payment required hereunder, including, without limitation,
the timely payment of royalties and advertising payments, show and showroom
expenses and sales commissions. Except as otherwise provided in Section 23.9
hereof, Licensee shall have ten (10) days following written notice
October 27, 1994
37
<PAGE>
from Licensor to cure a default by payment of the entire balance due of all
amounts then due from Licensee to Licensor (not limited to the amounts set forth
in the written notice) plus interest thereon.
23.3 DEFAULT OF LICENSEE/CROSS DEFAULT: At the option of Licensor, the
---------------------------------
rights of Licensee under this Agreement shall terminate if Licensee is in
default or breach of any of the terms of this Agreement. If Licensee or any of
its affiliates is, or at any time hereafter becomes, a licensee with respect to
other products using or incorporating the Trademarks (other than the Licensed
Products), a default under or with respect to any such other license shall be a
default under this Agreement and shall entitle Licensor to terminate this
Agreement.
23.4 DEFAULT ON OTHER PAYMENTS/OFF SETS: The parties hereto acknowledge
----------------------------------
that Licensee may from time to time become indebted to Licensor for patterns,
samples, fabrics, freight, and other goods and services. Failure of Licensee to
pay for such goods and service upon the terms agreed to by the parties shall
constitute a default under this Agreement, if such failure continues for ten
(10) days following written notice from Licensor. Licensee is prohibited from
using any funds owed by Licensor to Licensee as a set off, offset, charge back,
or reduction of any payment due from Licensee to Licensor or the sales force
managed by Licensor, and any attempt to do so shall constitute a default under
this Agreement. Licensee's sole remedy for enforcing a claim for funds owed or
alleged to be owed by Licensor to Licensee or for any breach or alleged breach
by Licensor of any of the provisions of this Agreement shall be a cause of
action for damages against Licensor.
23.5 LATE PAYMENTS: Regardless of whether a default is declared by
-------------
Licensor with respect to any late payment under this Agreement, Licensor is
entitled to and shall be paid by Licensee interest at the rate of five hundred
(500) basis points over the Prime Rate per annum or the maximum legal rate,
whichever is less, on any late payment from the date on which such
October 27, 1994
38
<PAGE>
payment was due until all principal and interest on such late payment has been
paid in full. The acceptance of late payments hereunder shall not constitute a
waiver of timely payments. If Licensor declares a default and the rights of
Licensee under this Agreement are terminated, all payments required hereunder
shall be due Licensor immediately, in full, plus interest at the rate of one and
one-half percent (1-1/2%) per month, five hundred (500) basis points over the
Prime Rate per annum or the maximum legal rate, whichever is less, from the date
due or the date of declaration of default, whichever is earlier.
23.6 INSOLVENCY OR BANKRUPTCY: NET WORTH: Licensor shall have the right to
-----------------------------------
terminate the rights of Licensee under this Agreement (i) if Licensee files a
petition in bankruptcy, or if a petition in bankruptcy is filed against it; (ii)
if Licensee becomes Insolvent, or makes an assignment for the benefit of its
creditors, or files a petition or otherwise seeks relief under or pursuant to
any bankruptcy, insolvency or reorganization statute or proceeding, or if it
discontinues its business, or if a custodian, receiver or trustee is appointed
for it or a substantial portion of its business or assets; or (iii) if at any
time, the total stockholders' equity (according to G.A.A.P.) of Licensee as
reflected in Licensee's year and financial statements is less than zero dollars
($0).
23.7 CURE PERIOD: Before Licensor terminates the rights of Licensee under
-----------
this Agreement for a default or breach of Licensee, Licensor shall give Licensee
a chance to cure said breach or default, if it is curable. If a provision of
this Agreement provides Licensor with a right to terminate this Agreement
forthwith or immediately, because of a default or breach of any provision of
this Agreement by Licensee, Licensee shall have no right to cure such default or
breach. If a provision of this Agreement specifies a certain cure or notice
period, such provision shall apply. If no such specific provison shall apply,
Licensee shall have thirty (30) days after notice from Licensor to cure the
breach or default, except as otherwise
October 27, 1994
39
<PAGE>
provided in Section 23.8 below. If Licensee fails to cure the breach or default
within the applicable cure period, Licensor may thereupon immediately terminate
all of Licensee's rights hereunder. No notice need be given for breaches or
defaults which are not curable.
23.8 NO RIGHT TO CURE AFTER THREE (3) DEFAULTS: Notwithstanding anything
-----------------------------------------
in this Agreement to the contrary, Licensor shall have the right to terminate
this Agreement immediately upon Licensee's third default of any of the payment
provisions of this Agreement (including provisions relating to the times at
which payments are required to be made) within any period of twelve (12)
consecutive months, and Licensee shall have no right to cure any such third
default.
23.9 BREACH OF REPRESENTATION OR WARRANTY: Licensor shall have the right
------------------------------------
to terminate this Agreement immediately at any time upon the breach by Licensee
of any of its representations and warranties set forth in this Agreement, and
Licensee shall not have the right to cure any such breach.
23.10 ROYALTIES: Upon termination of this Agreement by either party,
---------
Licensee shall not be liable for any royalties to Licensor after termination of
this Agreement with respect to Licensed Products not sold, shipped or delivered
by Licensee under this Agreement, except for the initial licensing fee and
minimum royalties provided for in Sections 5 and 6.2 above. Nothing in this
Section 23.10 shall be construed or interpreted to limit in any way Licensee's
obligation to pay royalties and other amounts due under this Agreement with
respect to Licensed Products which are sold, shipped or delivered under this
Agreement, either before termination or after termination under the provisions
of Section 24.2 below.
23.11 INJUNCTIVE RELIEF: Licensee acknowledges that the Trademarks possess
-----------------
a special, unique and extraordinary character which makes difficult the
assessment of monetary damages that would be sustained by Licensor from the
unauthorized use of the Trademarks, and
October 27, 1994
40
<PAGE>
that irreparable injury would be caused by such use. Licensee further
acknowledges that any unauthorized use of the Trademarks would result in
substantial confusion in the minds of consumers as to the source of products
bearing the Trademarks and as to whether such products were authorized by
Licensor. Accordingly, Licensee recognizes and acknowledges that it would be
difficult, if not impossible, to compensate Licensor fully for damages for any
violation by Licensee of (i) the provisions of this Agreement relating to the
protection of, or the use of the Trademarks and/or other Intellactual property
of Licensor: and (ii) the provisions of this Agreement relating to quality
control and required design and sample approvals. Accordingly, Licensee
specifically agrees that Licensor shall be entitled to temporary and permanent
injunctive relief to enforce this Agreement or to enjoin Licensee against any
unauthorized use of the Trademarks (either with respect to products which are
not Licensed Products or after termination of this Agreement), and Licensee
shall expressly waive the defense that a remedy in damages would be adequate and
any requirement for the security or posting of any bond in connection with any
such injunctive relief. This provision with respect to injunctive relief shall
not, however, diminish the right of Licensor to claim and recover damages in
addition to or in lieu of injunctive relief.
24. POST TERMINATION RIGHTS AND DUTIES: All of the following rights and
-----------------------------------
duties shall be applicable upon any termination of Licensee's rights under this
Agreement, whether by expiration of the term hereof or by earlier termination
pursuant to the provisions hereof.
24.1 DELETION OF TRADEMARK: Immediately upon termination of this
----------------------
Agreement, Licensee shall take steps to change its name to the extent it has
incorporated any of the Trademarks, the words "Op" or "Ocean Pacific" or similar
words into such name to delete the Trademarks and such words from such name and
from any signs, business names, and any other use. This change of name and
deletion shall be completed within thirty (30) days after
October 27,1994
41
<PAGE>
termination.
24.2 DISPOSITION OF PATTERNS, MARKERS, LABELS AND FASTENERS:
------------------------------------------------------
Any patterns, markers, and labels or fasteners (snaps, buttons, etc.)
on which the Trademarks appear which are not affixed to a Licensed Product shall
be delivered by Licensee at its expense to Licensor, without charge to Licensor,
within thirty (30) days of termination. An inventory of such items on hand shall
be delivered to Licensor within ten (10) days of termination. Licensee shall be
strictly liable for any damages to Licensor resulting from any of these items
coming into the possession of a third party.
24.3 DISPOSITION OF TRADEMARK MANUFACTURING EQUIPMENT: Immediately upon
------------------------------------------------
termination of this Agreement, Licensee shall deliver to Licensor, without
charge, all computer chips, PROMS, gross tapes, heat stamp dyes and all other
equipment which have no function other than the reproduction of the Trademarks.
Licensee shall identify, collect and deliver to Licensor any and all such
devices which may be in the possession of Licensee's subcontractors within ten
(10) days of the date of termination.
24.4 LIQUIDATION OF GOODS: Immediately on termination of Licensee's rights
--------------------
under this Agreement, Licensee shall discontinue manufacture of the Licensed
Products and Licensee shall no longer have the right to use the Trademarks in
any form or manner. Licensor shall have the right of first refusal to purchase
all or any portion of the finished goods in the possession of Licensee at a
price equal to Licensee's cost of production plus ten percent (10%) and the
piece goods in possession of Licensee on the date of termination at a price
equal to Licensee's cost of production. Licensor shall have fifteen (15) days
from receipt of a full and complete list of such goods and costs in which to
exercise such right of first refusal. Licensee shall cease all shipment, sale or
distribution of the Licensed Products until Licensor shall have exercised, or
declined to exercise its right of first refusal hereunder or until seven (7)
days
October 27, 1994
42
<PAGE>
have elapsed from Licensor's receipt of Licensee's complete list of its goods
and costs. If Licensor fails to exercise its right of first refusal, then
Licensee shall have one hundred eighty (180) days from termination of this
Agreement to dispose of its inventory of the Licensed Products; provided,
however, that such disposal shall be made only through outlets acceptable as
provided herein. If any of the Licenses Product remain unsold after the
expiration of one hundred eighty (180), Licensee shall then remove from the
Licensed Products any labels on which the Trademarks appear before further
attempting to sell or distribute such Licensed Product. Royalties, advertising,
show and showroom charges and sales commissions shall be payable upon any sales
of goods pursuant to this Section 24.4 and the reporting requirements of this
Agreement shall apply to any such sale of goods pursuant to this section.
24.5 SURVIVAL OF OBLIGATIONS: The termination of Licensee's rights under
------------------------
this Agreement shall not terminate Licensee's duties, obligation and
responsibilities (i) to pay all monies owed to Licensor on a timely basis,
including money due on goods shipped post-termination, (ii) to prepare, make and
maintain timely, full and accurate reports and records of its activities
regarding the Licenses Products, (iii) to protect the Trademarks and copyrights
of Licensor and Licensor's full and complete ownership thereof, and (iv) to
indemnify and hold Licensor harmless pursuant to Section 20 hereof. Licensor's
rights to inspect and audit the books, and records of Licensee, and Licensees
obligation under Section 21.2 above, shall also survive termination of this
Agreement.
25 GENERAL PROVISIONS:
-------------------
25.1 ALL PAYMENTS: All payments due hereunder shall be payable to OCEAN
-------------
PACIFIC APPAREL CORP, and sent to 3 Studebaker, Irvine, California, 92718 or to
such other address as Licensor may designate in writing.
25.2 NOTICES: Any notice, report or communication hereunder shall be
--------
deemed
October 27, 1994
43
<PAGE>
sufficiently given by one party to another, if in writing, and if and when
delivered or tendered either in person, by courier, (including overnight air
courier), or by depositing it in the United States Mail in a sealed envelope,
registered or certified, with postage and postal charges prepaid or by telephone
facsimile transmission, with a hard copy delivered pursuant to one of the other
methods set forth above, addressed:
If to Licensor:
OCEAN PACIFIC APPAREL CORP.
3 Studebaker
Irvine, CA 92718
Telecopier No.: (714) 580-1877
Attn: President
With a copy to:
BERKELEY INTERNATIONAL CAPITAL CORPORATION
650 California Street
San Francisco, CA 94108
Telecopier No.: (415) 249-0554
Attn: John W. Quarterman, Esq.
If to Licensee:
HAPPY KIDS, LTD.
100 West 33rd Street, Suite 1100
New York, NY 10001-2916
or to such other address as the party addressed shall have previously designated
by notice to the serving party given in accordance with this paragraph;
provided, that a notice not given as above shall, if it is in writing, be deemed
given if and when actually received by the party to whom it is given.
25.3 ENTIRE AGREEMENT: This agreement constitutes the sole and entire
----------------
agreement among the parties pertaining to the subject matter hereof and
supersedes all prior negotiations, dealings, agreements and understandings of
the parties in connection therewith, and completely
October 27, 1994
44
<PAGE>
supersedes and replaces all prior agreements between Licensor and Licensee with
respect to the use of the Trademarks in connection with the Licensed Products.
25.4 SEVERABILITY: If any provision of this Agreement, or the
------------
application of such provision to any person or entity or set of circumstances,
shall be determined to be unenforceable to any extent, the remainder of this
Agreement, and the application of such provision to persons or entities or to
circumstances other than those as to which it is determined to be unenforceable,
shall not be affected and shall continue to be valid and enforceable to the
fullest extent permitted by law.
25.5 AMENDMENT: No amendment, modification or alteration of this
---------
Agreement shall be valid unless it shall be in writing and signed by all parties
hereto. No course of conduct or method of doing business shall modify or amend
the terms hereof.
25.6 NON-AGENCY OF PARTIES: This Agreement does not constitute and shall
---------------------
not be construed as constituting an agency, a partnership or joint venture
between and Licensor and Licensee and Licensee shall not hold itself out as an
agent, partner or joint venture of Licensor. Licensee shall have no right to
obligate or bind Licensor in any manner whatsoever except as may be expressly
stated herein, and nothing herein contained shall give, or is intended to give,
any rights of any kind to any third persons.
25.7 GOVERNING LAW: This Agreement shall be governed by, and construed
-------------
in accordance with, the laws of the State of California exclusive of conflicts
of laws provisions which would direct the application of another jurisdiction's
law. This Agreement is deemed to be consummated in the State of California and
the forum for any dispute shall be the Federal Courts located in the State of
California whose venue is the County of Orange or the Superior Court of
California for the County of Orange, whichever is appropriate.
25.8 CONFIDENTIALITY: This Agreement, its terms, conditions and
---------------
provisions, and
October 27, 1994
45
<PAGE>
the trade secrets, confidential information and property of Licensor are
confidential and shall not be disclosed by Licensee to any other person or
entity without the prior written consent of Licensor. The parties acknowledge
the Uniform Trade Secrets Act as codified in California in Civil Code (S)3426
et. seq. and agree to adhere to and be bound by the provisions thereof.
25.9 CONSTRUCTION: The paragraph headings and footers at the page
------------
bottoms are provided herein for convenience of reference only and shall not
serve as a basis for interpretation or construction of this Agreement. Each
party hereto agrees that any rule of construction to the effect that ambiguities
are to be resolved against the drafting party shall not be applied in the
construction or interpretation of this Agreement. As used in this Agreement, the
words "include" and "including," and all variations thereof, shall not be deemed
to be terms of limitation.
25.10 FURTHER ACTION: Each party hereto agrees to perform all further acts
--------------
and to execute and deliver or cause to be executed and delivered all documents,
instruments and agreements which may be reasonably necessary to carry out the
intents and purposes of this Agreement or to enable the other party to enforce
any of its rights under this Agreement.
25.11 COUNTERPARTS: This Agreement may be executed in counterparts, each
------------
of which shall be deemed an original, but both of which taken together shall
constitute one and the same agreement.
25.12 NO IMPLIED WAIVERS: The failure of either party at any time to
------------------
require performance at any time thereafter. The waiver by either party of a
breach of any provision hereof shall not be a waiver of the provision itself or
any other breach thereof. No failure on the part of either party to exercise any
right or remedy hereunder, and no delay on the part of either party hereto in
exercising any such right or remedy, shall preclude any other
October 27, 1994
46
<PAGE>
or further exercise thereof or of any other right or remedy.
25.13 TIME/FORCE MAJEURE: Time is of the essence of this Agreement.
------------------
However, neither Licensee nor Licensor shall be responsible for any delays
caused by acts of God, war, earthquake, labor controversy, acts of any
government, orders of court, or other material circumstances beyond the party's
reasonable control. The time for performance shall be extended for a period of
time equal to the delay caused by such circumstance, but not to exceed ninety
(90) days in any event.
IN WITNESS WHEREOF, the parties hereto have entered into this Agreement on
the day and year first written above.
LICENSOR:
OCEAN PACIFIC APPAREL CORP.
a Delaware corporation
By: [SIGNATURE ILLEGIBLE]
--------------------------
Its: CEO
--------------------------
LICENSEE:
HAPPY KIDS, LTD.,
a New York corporation
By: [SIGNATURE ILLEGIBLE]
--------------------------
Its: PRESIDENT
--------------------------
October 27, 1994
47
<PAGE>
EXHIBIT A
---------
PRODUCT CATEGORIES:
1. Sportswear, outerwear and swimwear for newborns:
2. Infants' apparel and related infants' accessories:
3. Sportswear, outerwear and swimwear for toddler girls:
4. Sportswear, outerwear and swimwear for toddler boys:
5. Little boys' sportswear, outerwear and swimwear in the size ranges 4
- 7:
6. Little girls' sportswear, outerwear and swimwear in the size range 4
-6X: and
7. Girls' sportswear and outerwear in the size range 7 - 14.
October 27, 1994
48
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
We have issued our report dated January 29, 1998, accompanying the consolidated
financial statements and schedules of Happy Kids Inc. and Subsidiaries contained
in the Registration Statement and Prospectus which will be signed upon
consummation of the transactions described in Note A to the consolidated
financial statements. We consent to the use of the aforementioned reports in
the Registration Statement and Prospectus, and to the use of our name as it
appears under the caption "Experts."
GRANT THORNTON LLP
/s/ Grant Thornton LLP
New York, New York
February 24, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1997 JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<CASH> 374 674 283
<SECURITIES> 0 0 0
<RECEIVABLES> 24548 18009 11817
<ALLOWANCES> 513 486 274
<INVENTORY> 16316 9488 15156
<CURRENT-ASSETS> 42724 31272 30754
<PP&E> 1476 1732 1627
<DEPRECIATION> 0 0 0
<TOTAL-ASSETS> 44952 33986 33568
<CURRENT-LIABILITIES> 36305 26045 27494
<BONDS> 26263 21292 22840
0 0 0
0 0 0
<COMMON> 78 78 78
<OTHER-SE> 6566 5495 3770
<TOTAL-LIABILITY-AND-EQUITY> 44952 33986 33568
<SALES> 106673 90723 79828
<TOTAL-REVENUES> 106673 90723 79828
<CGS> 79748 69886 65036
<TOTAL-COSTS> 18457 15370 14816
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 3803 2980 2375
<INCOME-PRETAX> 4665 2487 (2399)
<INCOME-TAX> 473 119 (757)
<INCOME-CONTINUING> 4192 2368 (1642)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 4192 2368 (1642)
<EPS-PRIMARY> 0.54 0.31 (0.21)
<EPS-DILUTED> 0.54 0.31 (0.21)
</TABLE>
