SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____ Commission file number: 0-18926
INNOVO GROUP INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2928178
(State or other jurisdiction of (IRS Employer incorporation
or organization) Identification No.)
27 North Main Street 37172
Springfield, Tennessee (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code (615) 384-0100
Securities registered pursuant to Section 12 (b) of the Act:
NONE
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.01 par value per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months or (for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ X ]
As of February 15, 1997, 28,763,990 shares of common stock were outstanding.
The aggregate market value of the voting stock held by non-affiliates of the
registrant approximated $9,783,000 at the close of business on February 15,
1997.
Documents incorporated by reference: NONE
<PAGE>
INNOVO GROUP INC.
FORM 10-K
TABLE OF CONTENTS
PART I Page
Item 1. Business 3
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of
Security Holders 15
PART II
Item 5. Market for the Company's Common Equity
and Related Stockholder Matters 16
Item 6. Selected Consolidated Financial Data 18
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 19
Item 8. Financial Statements and Supplementary Data 34
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosures 61
PART III
Item 10. Directors and Executive Officers of the
Registrant 62
Item 11. Executive Compensation 65
Item 12. Security Ownership of Certain Beneficial
Owners and Management 68
Item 13. Certain Relationships and Related
Transactions 70
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 71
SIGNATURES 78
<PAGE>
PART I
Item 1. Business
Introduction
Innovo Group Inc. ("Innovo Group"), operating through its wholly-owned
subsidiaries (which, collectively with Innovo Group are referred to as "the
Company"), designs, manufactures and domestically markets various cut and
sewn canvas and nylon consumer products, such as tote bags and aprons, for
sale to various retailers and in the premium and advertising specialty
market, and manufactures and domestically markets ladies ready-to-wear at-
home, sleep and lounge wear for sale to retailers and through mail order
distribution. The Company also internationally markets and distributes the
Company's canvas and nylon products, as well as sport bags and backpacks.
The Company's operations are classified into two industry segments. See Note
10 of Notes to Consolidated Financial Statements for financial information on
industry segments.
Innovo, Inc. ("Innovo"), a wholly owned subsidiary, manufactures and
domestically distributes cut and sewn canvas and nylon consumer products for
the utility, craft, sports licensed and advertising specialty markets.
Innovo's products are domestically manufactured at facilities owned or leased
by the Company. See "-Products" and "-Manufacturing."
NASCO Products International, Inc. ("NP International") markets and
distributes overseas, principally in Europe and the Middle East, certain
products similar to those marketed domestically by Innovo, as well as
licensed sports bags and backpacks, which the Company generally obtains from
foreign suppliers. See "-Products" and "-Manufacturing."
The products comprising Innovo's sports licensed line, and those
distributed by NP International, display logos, insignia, names, slogans or
characters licensed from various licensors. Innovo and NP International hold
licenses for the use of the logos and names of the teams of the National
Football League, the National Basketball Association, Major League Baseball,
the National Hockey League, and over 130 colleges, as well as the slogans and
taglines of Anheuser-Busch Cos. and the drawings of sports artist Gary
Patterson. In the second half of fiscal 1996 NP International obtained
licenses for the use of the Walt Disney Co. ("Walt Disney") cartoon
characters, and the Warner Bros. Studios ("Warner Bros.") Looney Tunes
cartoon characters, on sports bags, backpacks, fanny packs and other products
it markets in Europe and the Middle East. NP International will begin
selling the Walt Disney and Warner Bros. products in fiscal 1997. For the
year ended November 30, 1996, 39.9% of the Company's net sales represented
the sale of products produced pursuant to such licenses. See "-Licenses."
Thimble Square, Inc. ("Thimble Square"), which Innovo Group acquired in
April, 1996, manufactures and markets ladies' ready-to-wear at-home, sleep
and lounge wear. Thimble Square also provides "sew-only" manufacturing for
other distributors of private-label sleep and lounge wear. See "-Products"
and "-Manufacturing."
The Company is also developing a retail facility in Florida (see Item 2.
- - "Properties").
During fiscal 1994 the Company began restructuring its operations to
concentrate on domestic manufacturing and the international distribution of
licensed products, which the Company views as its strategic strengths. In
October, 1994 the Company relocated to its owned facility in Springfield,
Tennessee the manufacturing operations it had previously conducted in leased
facilities in Sugarland, Texas to eliminate the expense of the leased space
in Texas and also eliminate certain shipping and duplicative supervision
costs. On July 31, 1995, NASCO Products, Inc. ("NASCO Products"), a wholly-
owned subsidiary, sold to Accessory Network Group, Inc. ("ANG") its
operations of importing to and distributing in the United States sports bags,
backpacks and equipment bags bearing the logos of the teams of the four major
professional sports leagues. The sale did not include the products
distributed by Innovo or NP International. For the licenses ANG is paying
NASCO Products $750,000 through July 31, 1998. In addition, ANG will make an
ongoing annual payment, for up to forty years, of certain percentages of
sales under each of the National Football League, Major League Baseball,
National Hockey League licenses, and National Basketball Association
licenses. See Note 3 of Notes to Consolidated Financial Statements.
During fiscal 1994 the Company's marketing emphasis was placed on the
U.S. retail market for its sports licensed products. The Company devoted
fiscal 1995 to shifting its emphasis to developing new products and marketing
programs for its products in the fashion, utility and craft lines and for the
premium and advertising specialty markets and to preparing marketing plans
for its U.S. Olympic Team products for the 1996 Summer Games. As a result of
the Company's fiscal 1995 efforts, Innovo increased its sales of craft
products in fiscal 1996. However, the Company's increase in net sales was
limited by shortages of raw materials, which were caused by a lack of working
capital, and by labor shortages, each of which prevented the Company from
accepting certain orders. The Company raised additional working capital in
the second and third quarters of fiscal 1996 which was used, in part, to
increase raw materials levels to more desirable levels, and in October, 1996
the Company obtained a three year lease of an additional sewing facility.
Production at the facility, which began in November, 1996, will substantially
offset the effects of the labor shortages experienced in fiscal 1996.
In fiscal 1997 the Company will attempt to improve its operating results
by continuing the growth in sales while also improving its gross profit
margins and controlling any increase in fixed selling, general and
administrative expenses.
- Growth in sales. Sales increases are anticipated from the
continued recapture of domestic craft market share by Innovo,
increased sports licensed market sales, by both Innovo and NP
International, as the result of recovering demand, and NP
International's sale of the new products being produced under the
Walt Disney and Warner Bros. licenses.
Sales increases may also be generated from the Anheuser-Busch and
Gary Patterson licenses, and from expanding Thimble Square's
marketing to include mass merchants with which Innovo already has
established relationships but to which Thimble Square has not
previously marketed.
- Improvement in gross margins. To improve gross profit margins the
Company will attempt to both increase prices and reduce
manufacturing costs. Price increases on selected products were
implemented in the first quarter of fiscal 1997, and the review of
product pricing will continue. Prices for certain sports licensed
products will be increased as the result of artwork or other
enhancements that will allow retailers to increase retail pricing.
To reduce production costs, both product designs and production
operations will be revised. These steps began in the first quarter
of fiscal 1997, and will continue into the third quarter of fiscal
1997.
The Company believes that both the increases in sales and improvements
in gross profit margins can be accomplished without significant increases to
fixed overhead costs. However, there can be no assurance that any of these
steps will be successful. See "- Growth Strategy and Product Development,"
"-Manufacturing," and Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The Company estimates that its products are carried in over 5,000 retail
outlets in the United States, as well as in numerous retail outlets in
Europe. The Company's marketing efforts are conducted by its own sales and
marketing staff together with its network of domestic marketing organizations
and sales representatives and foreign distributors. The Company sells to
retail accounts such as mass merchandisers, department, sporting goods,
grocery, craft and drug store chains, and mail order retailers, including K
Mart Apparel Corp., Wal-Mart Stores, Inc., J.C. Penney Company, Inc., Sports
Authority, Inc., and Michael's Stores, Inc., and advertising specialty
accounts.
Innovo began operations in April, 1987. In August, 1990, Innovo merged
into Elorac Corporation, a so called "blank check" company, which was renamed
Innovo Group. In fiscal 1991 the Company acquired the business of NASCO,
Inc. ("NASCO"), a manufacturer, importer and distributor of sports-licensed
sports bags, backpacks, and other sporting goods, located in Springfield,
Tennessee. NASCO, subsequently renamed Spirco, was also engaged in the
marketing of fundraising programs to school and youth organizations. The
fundraising programs involved the sale of magazines, gift wraps, food items
and seasonal gift items. Effective April 30, 1993, the Company sold the
youth and school fundraising business of Spirco to QSP, Inc. ("QSP").
Spirco had incurred significant trade debt from the fiscal 1992 losses
it incurred in marketing fundraising programs and from liabilities incurred
by Spirco prior to its acquisition which were not disclosed at that time. On
August 27, 1993, Spirco filed for reorganization under Chapter 11 of the U.S.
Bankruptcy Code. Innovo Group, Innovo and NASCO Products were not parties to
the filing. Spirco's plan of reorganization was confirmed by the court on
August 5, 1994, and became effective on November 7, 1994. Under the plan,
administrative claims were paid in cash from funds borrowed under the
Company's bank credit facility. Leasall Management, Inc. ("Leasall"), a
newly formed subsidiary of Innovo Group, acquired Spirco's equipment and
plant and assumed the related equipment and mortgage debt, which Innovo Group
had previously guaranteed, and Spirco was merged into Innovo Group which as
a result acquired direct ownership of its other assets. Spirco claims which
had been guaranteed by Innovo Group received full payment through the
issuance of shares of Innovo Group common stock. Additionally, shares of
Innovo Group common stock were issued to a trust ("the Class 3 Trust") which,
in fiscal 1996, completed the process of selling those shares and
distributing the proceeds to the Class 3 claimants, which were federal, state
and local taxing authorities that had claims for income, sales, property and
unemployment taxes. Unsecured claims did not receive any distribution, and
were extinguished, under the plan of reorganization.
The principal executive offices of the Company are located at 27 North
Main Street, Springfield, Tennessee 37172. Its telephone number is (615)
384-0100. Unless the context requires otherwise, "the Company" refers to
Innovo Group Inc. and its subsidiaries, and "Innovo Group" refers to Innovo
Group Inc.
Products
Innovo is a domestic manufacturer that designs and markets a wide
variety of cut and sewn canvas and nylon consumer products. The following
sets forth the principal products that Innovo manufactures and distributes to
the utility, craft and sports licensed markets:
<TABLE>
<CAPTION>
Utility Craft Sports Licensed
_______ _____ _______________
</CAPTION>
<S> <S> <S>
tote bags tote bags tote bags
gift bags aprons and smocks laundry bags
laundry bags banners* shoe bags
shoe bags vests* insulated lunch bags
duffle bags Christmas stockings duffle bags
aprons and smocks stadium totes
fanny packs
</TABLE>
*new product for fiscal 1997.
The products Innovo manufactures for the utility market utilize designs
and artwork developed either in-house or by independent contractors. For the
craft market, Innovo's products are produced without artwork, and are sold
(sometimes packaged with paints or other supplies) as a product for craft
projects (the creation and applications of a design by the customer).
Innovo's sports licensed products are produced with the logos or other
designs licensed from the four major professional sports leagues, colleges,
Anheuser-Busch and Gary Patterson. See "-Licenses."
Innovo also markets each of these products to the advertising specialty
market, for which it produces the product with the customer's logo, design or
slogan for use as a customer or employee promotion or premium sale item. In
fiscal 1995 Innovo also developed a fashion line featuring higher style
backpacks and "day packs." As a result of test marketing in fiscal 1996, the
Company is currently reconsidering the design, pricing and sourcing of the
fashion line products.
NP International designs, manufactures, imports and distributes licensed
sports products internationally, principally throughout Europe and the Middle
East, to distributors that in turn sell to sporting goods, department and
mass merchandise chains, and mail order, grocery and drug chains. Its line
of products consists of the products produced (and distributed in the United
States) by Innovo, and a variety of sport, gym, equipment and duffle bags and
backpacks. NP International's products are generally imprinted or
embroidered with logos licensed from the four major professional sports
leagues, colleges, Anheuser-Busch, or the characters licensed from Walt
Disney and Warner Bros.
Thimble Square designs, manufactures and distributes moderately priced
ladies' nylon, polyester and cotton at-home, lounge, and sleep wear. It's
products include sleep shirts, night gowns, teddies, house coats and pajamas.
Thimble Square also provides "sew-only" services for other distributors of
similar products. For these customers, Thimble Square cuts, sews and
packages the products using fabric supplied by the customer.
Growth Strategy and Product Development
The Company believes that growth in its business can be accomplished
both by the expansion of the sales of its existing products and through the
development or acquisition of new product designs and the acquisition of new
licenses. The Company spent approximately $363,000 on the design and
acquisition of new products and the acquisition of new licenses in fiscal
1996, and management anticipates that in fiscal 1997 such expenditures
approximate $200,000.
The Company continually seeks to develop new designs in-house, and
design or acquire new products. In fiscal 1996 the Company developed canvas
banners and vests, which have been added to its craft market line in fiscal
1997, and in the first quarter of fiscal 1997 developed and began the test
marketing of denim and stone-washed denim tote bags, aprons and vests.
The Company also continually evaluates the market potential for the sale
of products bearing licensed logos, characters or artwork. Those evaluations
involve both situations where a license has been offered to the Company, and
where the Company itself identifies a logo or character that may have market
potential. Where such an evaluation indicates a sufficient likelihood of
market acceptance, the Company attempts to negotiate and obtain a license
from the owner of the logo or character. In fiscal 1996 the Company acquired
the Walt Disney, Warner Bros., Anheuser-Busch and Gary Patterson licenses.
However, there can be no assurance that the Company will be able to obtain
other new licenses, or to renew existing licenses, on favorable terms.
In general, a period of from four to six months is required, once a
license is obtained, to develop and obtain the approval for the art and the
products for the new license, and produce samples and begin marketing. The
Company commenced the product development for the newly obtained Walt Disney,
Warner Bros., Anheuser-Busch and Gary Patterson licenses in the third and
fourth quarters of fiscal 1996. The Company currently expects to complete
the product development for the Walt Disney products in the first quarter of
fiscal 1997, which would allow the Company to begin shipments in the second
quarter of fiscal 1997 and, more significantly, be able to solicit and fill
orders for retailers' back-to-school and holiday seasons, which would be
shipped principally in the third and fourth quarters. The Company has
received, and expects to ship in the first quarter, initial or test orders
for its Warner Bros. products. Product development is continuing for this
line, with a plan to complete that process in time for back-to-school and
holiday season orders. Minor sales, resulting from test orders, for the
Anheuser-Busch and Gary Patterson products, were shipped in the first quarter
of fiscal 1997.
Marketing and Customers
During fiscal 1996, the Company's Innovo and Thimble Square operations
involved sales to approximately 1,100 domestic retail accounts, which
included a mix of mass merchandisers, such as K Mart and Wal-Mart,
department, sporting goods, grocery, craft and drug store chains, mail order
retailers and other retail accounts. NP International's operations involved
sales to 13 foreign distributors which in turn resell to retail accounts.
The Company estimates that its products are carried in over 5,000 retail
outlets in the United States and numerous retail outlets in Europe.
Generally the Company's domestic accounts are serviced by the Company's
sales personnel working together with marketing organizations which have
sales representatives. NP International's marketing is conducted by the
Company's sales department working together with 13 foreign distributors and
sales representatives having representation throughout Europe and the Middle
East. Marketing organizations are compensated on a commission basis.
The Company is currently developing, and expects to complete in March,
1997, a store site on the internet (http://innovo-group.com and
http://www.virtualhouse.com/innovo) which will offer selected Innovo products
directly to consumers. The site is being developed under an agreement
whereby the web site developer will absorb all development and maintenance
costs in exchange for a percentage of sales.
In marketing its products the Company attempts to emphasize the
competitive pricing and quality of its products, its ability to assist
customers in designing marketing programs, its short lead times, and the high
sell-through its products have historically achieved. To assist customers in
achieving a higher sell-through of its sports team (professional and college)
logoed products, the Company tracks the retail sales by team logo for various
geographic areas. The Company then uses this information to assist customers
in selecting the optimum mix of team logos for their market. The Company has
an electronic data interchange system that allows certain larger customers to
place orders directly.
For fiscal 1996, two customers accounted for sales in excess of 10% of
net sales; Wal-Mart, a customer of Innovo, and Crown-Tex, a customer of
Thimble Square, which accounted for 12.5%, and 11.2% of net sales,
respectively. However, no customer accounted for 10% or more of sales in
fiscal 1995, and generally the Company is not dependent upon a single
customer or a few customers the loss of any one or more of which would have
a material adverse effect on the Company.
Backlog
Although the Company may at any given time have significant business
booked in advance of purchase orders, customers' purchase orders are
typically filled and shipped within two to six weeks, and at November 30,
1996 and October 31, 1995, there was no significant backlog.
Seasonality
The Company's business is seasonal. The majority of the marketing and
sales activities take place during the first half of the calendar year, while
the greatest volume of shipments and sales are generally made in the summer
and fall, which coincides with the Company's third and fourth fiscal
quarters. See Item 7. - "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Seasonality."
Manufacturing
Innovo's and Thimble Square's products are manufactured domestically in
facilities operated by the Company. The Company manufactures its domestic
products from an inventory of unfinished fabric rolls using cutting, sewing
and finishing equipment owned or leased by the Company. Innovo utilizes
silk-screening machines to permanently imprint designs onto its various
products. Using its in-house design staff and its computer graphic
equipment, the Company has the capacity to rapidly produce new product
samples.
The Company believes that its equipment provides it with manufacturing
capacity sufficient for projected production over the next twelve months.
During fiscal 1996 Innovo experienced an inability to obtain sufficient
production labor to, at times, meet the demand and customer delivery
requirements for its domestically produced products and, as a result, the
Company was unable to accept certain orders and experienced production
inefficiencies and excess overtime costs. In October, 1996, the Company
obtained a three-year lease on a sewing facility in Red Boiling Springs,
Tennessee which, in November, 1996, began to produce Innovo products. The
geographical location of Red Boiling Springs, relative to Innovo's other
production facility in Springfield, Tennessee, is such that the Red Boiling
Springs facility draws its production labor from a different labor pool while
production at the two facilities can be overseen by a single group of senior
management. Accordingly, the Company believes that the addition of the Red
Boiling Springs facility will reduce the Company's exposure to labor
shortages, which will favorably impact sales and production costs. However,
there can be no assurance that the Company will not again be adversely
affected by labor shortages in the future.
The principal materials used in Innovo's and Thimble Square's products
include canvas, plain and printed rolls of nylon, polyester and cotton, mesh
and webbing. The Company buys raw materials in bulk for the products it
manufactures domestically. The Company has generally concentrated its
purchases of raw materials for domestic manufacturing among a small number of
suppliers, and during fiscal 1996 purchased the majority of each type of raw
material it uses from one or two suppliers. Although the Company does not
have any long-term agreements with these or other suppliers, it has to date,
despite its lack of working capital, been able to obtain suppliers to satisfy
its raw material requirements. Management believes that if its current
suppliers were unable to supply the necessary raw materials in sufficient
quantities or on acceptable price terms, alternative suppliers would be
available on comparable price terms and delivery schedules. In the event the
Company was unable to find such alternative suppliers at competitive prices
and on a timely basis, its operations could be materially adversely affected.
The sport and gym bags and backpacks marketed overseas by NP
International are generally obtained from overseas manufacturers in order to
reduce the cost of obtaining these more labor intensive products. The
independent overseas contractors that manufacture these products are
responsible for obtaining the necessary supply of raw materials and for
manufacturing the products to the Company's specifications. The Company
generally uses one independent contractor to fulfill all of its requirements
in order to maximize its control over production quality and scheduling.
Although the Company uses this, and other methods, to reduce the risk that
the independent contractor will fail to meet the Company's requirements, the
use of independent overseas contractors does reduce the Company's control
over production and delivery and exposes the Company to the other usual risks
of sourcing products abroad. The Company does not have any long-term supply
agreements with independent overseas contractors, but believes that there are
a number of contractors that could fulfill the Company's requirements.
The Company has generally utilized overseas contractors that utilize
production facilities located in China. As a result, the products
manufactured for the Company are subject to export quotas and other
restrictions imposed by the Chinese government. To date the Company has not
been adversely affected by such restrictions; however, there can be no
assurance that future changes in such restrictions by the Chinese government
would not adversely affect the Company, even if only temporarily while the
Company shifted production to other countries or regions such as Korea,
Taiwan, or Latin America. Substantially all of the products manufactured
overseas for the Company are shipped directly to customers outside the United
States; accordingly, the Company is generally not subject to United States
import quotas, inspection or duties.
Licensing Agreements
The following sets forth certain information concerning the license
agreements currently held by the Company.
<TABLE>
<CAPTION>
Licensor/Licensed Names
logos, characters, etc. Types of Products Geographical Areas
</CAPTION>
<S> <S> <S>
National Basketball tote, lunch, shoe, and United States; United
Association/logos of NBA laundry bags, Kingdom; Europe
Teams, NBA Finals stadium seat cushions,
and NBA All-Star Game sports bags and backpacks
Major League Baseball/ tote, lunch, shoe, and United States; United
logos of MLB Teams, World laundry bags, Kingdom; Europe
Series, All-Star Game stadium seat cushions,
sports bags and backpacks
National Football League/ tote, lunch, shoe, and United States; United
logos of NFL Teams, Super laundry bags, Kingdom; Europe
Bowl Game stadium seat cushions,
sports bags and backpacks
National Hockey League/ tote, lunch, shoe, and United States; United
logos of NHL Teams laundry bags, Kingdom; Europe
stadium seat cushions,
sports bags and backpacks
Colleges/logos of tote, lunch, shoe, and United States; United
approximately 130 colleges laundry bags, Kingdom; Europe
stadium seat cushions,
sports bags and backpacks
United States Olympic tote, lunch, shoe, and United States
Committee/logos of U.S. laundry bags,
Olympic Teams stadium seat cushions,
sports bags and backpacks
Licensor/Licensed Names
logos, characters, etc. Types of Products Geographical Areas
Major League Baseball caps, t-shirts, United States
Players' Association/ various bags
names, records, likenesses
of MLB players
Anheuser-Busch/ totes, cooler bags, United States; Europe
advertising slogans aprons Central America; Far
characters, etc. of East
Anheuser/Busch*
Gary Patterson/sports tote and other bags, United States; Europe
drawings of Gary Patterson* t-shirts
Walt Disney/Walt tote, sport, gym and Europe; Middle East
Disney characters in other backpacks,
sports settings* waistpacks, wallets
Warner Bros./Warner tote, sport, gym and Europe; Middle East
Bros. cartoon characters other bags, backpacks,
in sports settings* waistpacks, wallets
Warner Bros./Space Jam tote, sport, gym and Europe; Middle East
movie cartoon characters* other bags, backpacks,
waistpacks, wallets
Hillerich & Bradsby Co./ various bags United States; Europe
Louisville Slugger
logos
</TABLE>
*licenses obtained in fiscal 1996; initial sales in fiscal 1997.
Each license agreement grants the Company either an exclusive or non-
exclusive license for use in connection with specific products and/or
specific territories. The license agreements with the major professional
sports licensing organizations are generally non-exclusive. However, the
Company's experience has been that while the licenses are non-exclusive, the
licensing entities generally limit the number of licenses they grant for any
particular line of products. Thus, direct competition is limited by the
availability of licenses.
Typically, a license agreement is effective for a one or two-year term
for the use of particular characters or designs of the licensor on some or
all the Company's products. A royalty is paid to the licensor that is
usually a percentage of net sales, with a minimum annual guarantee for the
license period. The royalty rates range from 8% to 15% and the minimum
annual guarantees range from $5,000 to $200,000. Some license agreements
grant the licensor broad termination rights, and most of the license
agreements grant the licensor the right to terminate the license in the event
minimum sales targets are not reached, if the Company does not diligently
market the licensed products, or for the breach of any material term of the
license agreement by the Company. The Company believes that it is in
substantial compliance with the terms of all material licenses.
The expiration dates of the current license agreements range from 1997
to 1999. Generally, the renewal provisions of the license agreements provide
that the licensee may, at its option, renew the license for an additional
one- or two-year term, provided certain conditions are satisfied.
Historically, licenses have been terminated by the Company due to decreased
sales or popularity, rather than by the licensors, and to date the Company
has generally been able to obtain the renewal of licenses it wished to
continue. The Company believes that it will continue to be able to obtain
the renewal of all material licenses, however, there can be no assurance that
competition for an expiring license from another entity, or other factors,
will not result in the non-renewal of a license.
Competition
The industries in which the Company operates are fragmented and highly
competitive. The Company competes against a large number of baggage
manufactures and importers, and other generally small companies, that
distribute products similar to Innovo's and NP International's, and a large
number of companies that produce ladies at-home, sleep and lounge wear. NP
International's sports-licensed products also compete with those of sporting
goods manufacturers, such as Reebok, Nike and Adidas, that produce or license
the manufacture of sports bags bearing their names and logos. In all areas
the Company does not hold a dominant competitive position, and its ability to
sell its products is dependent upon the anticipated popularity of its
designs, or the logos or characters its products bear, the price and quality
of its products and its ability to meet its customers' delivery schedules.
The Company believes that it is competitive in each of the above-
described areas with companies producing goods of like quality and pricing,
and that new product development, product identity through marketing,
promotions and low price points will allow it to maintain its competitive
position. In addition, the Company's ability to manufacture its products
domestically and fill orders more promptly than companies whose sole or
predominant source of products are outside the United States is an important
aspect of keeping it competitive in the markets in which Innovo and Thimble
Square compete. However, some of the Company's competitors possess
substantially greater financial, technical and other resources than the
Company, including the ability to implement more extensive marketing
campaigns.
Intellectual Property
Innovo's utility line includes tote bags imprinted with the E.A.R.T.H.
("EVERY AMERICAN'S RESPONSIBILITY TO HELP") BAG trademark. E.A.R.T.H. Bags
are marketed as a reusable bag that represents an environmentally conscious
alternative to paper or plastic bags. Sales of E.A.R.T.H. Bags, while
significant in Innovo's early years, have not been significant in the last
four years. Nonetheless, the Company considers such trademark to be a
valuable asset, and has registered it with the United States Patent and
Trademark Office.
Employees
As of February 15, 1997, the Company employed 143 full-time personnel at
the Springfield and Red Boiling Springs, Tennessee facilities, comprised of
11 persons in management, 9 persons in general administration and 123 persons
in manufacturing and production, and Thimble Square employed 123 full-time
personnel in Pembroke and Baxley, Georgia, comprised of 8 persons in
management and administration and 115 in production. Due to varying seasonal
demands, the Company's total work force fluctuates within a range of
approximately 250 to 350 employees through any given year. Management
considers its relationship with its employees to be excellent. None of the
Company's employees is party to a collective bargaining agreement. There has
never been any material interruption of operations due to labor
disagreements.
Item 2. Properties
The Company's headquarters, manufacturing and distribution facilities
are located in Springfield, Tennessee, where Leasall owns four buildings.
The main complex is situated on seven acres of land with approximately
220,000 square feet of usable space, including 30,000 square feet of office
space and 35,000 square feet of cooled manufacturing area. The warehouse
annex contains 30,000 square feet. First Independent Bank of Gallatin,
Tennessee holds a First Deed of Trust on the real property located in
Springfield.
Innovo also leases a 5,000 square foot sewing facility in Red Boiling
Springs, Tennessee under a three year lease having an annual rental of
$24,000.
Thimble Square owns a 40,000 square foot manufacturing and distribution
facility in Pembroke, Georgia, which is subject to liens held by the First
Bank of Coastal Georgia, the Bryan County Development Authority, Inc. and
the Business Development Corporation of Georgia, Inc. In addition, Thimble
Square leases a 21,000 square foot manufacturing facility in Baxley, Georgia
for an annual rental of $36,000. The lease runs through August, 2000 and
provides Thimble Square with a bargain purchase option.
In November, 1995 the Company acquired a 32,000 square foot building,
situated on three acres of land, in Lake Worth, Florida. The Company is
developing the site as a specialty mall, which would include an outlet for
the Company's products and other retail tenants, and currently anticipates
that the facility will be ready to accept tenants and begin operations in the
second quarter of fiscal 1997. The property was acquired for $1.5 million,
including an $800,000 first lien non-recourse mortgage payable to the seller.
Item 3. Legal Proceedings
The Company is a party to lawsuits in the ordinary course of its
business. While the damages sought in some of these actions are material,
the Company does not believe that it is probable that the outcome of any
individual action will have a material adverse effect, or that it is likely
that adverse outcomes of individually insignificant actions will be
sufficient enough, in number or magnitude, to have a material adverse effect
in the aggregate.
In December 1991, Michael J. Tedesco v. Innovo, Inc., Innovo Group Inc.,
Rick Binet, and Patricia Anderson-Lasko, f/k/a Patricia M. DeAlejandro, Cause
No. 91-064033, was filed in the 164th Judicial District Court of Harris
County, Texas. Tedesco's allegations included fraud, tortious interference,
breach of his employment agreement with Innovo and conversion of his
"property interest in the E.A.R.T.H. trademark, idea, concept, and product
lines. . . ." Tedesco claimed in excess of $13.5 million in monetary damages
and sought a declaratory judgment and an accounting relative to his claim
that he was the owner of the "E.A.R.T.H." trademark.
In August, 1994, the trial court granted the Company's motion for
partial summary judgement and directed verdicts with respect to certain of
Tedesco's claims, including those concerning his ownership of an interest in
the "E.A.R.T.H." trademark, or the existence of a partnership with the
Company to jointly own the trademark, and the state court jury returned
findings in favor of the Company on the remainder of the plaintiff's claims
concerning the trademark as well as his claims for wrongful termination,
fraud and conspiracy. However, the jury awarded Tedesco approximately
$700,000, of which $50,000 was assessed against Innovo Group and $650,000 was
assessed against Innovo, including pre-judgement interest and attorney's
fees, on the theory that he was entitled to have received certain employment
benefits, including employee stock awards, during, and after, the term of his
employment. The Company appealed the jury's award, and in August, 1996 (as
revised in an amended October, 1996 opinion), the appeals court reversed
approximately $350,000 of the initial judgement as not supported by the
evidence or improper as a matter of law. As a result, the judgement,
including post-judgement interest through August, 1996, has been reduced to
$420,000. In addition, the appeals court ruled that the trial court erred in
not submitting to the jury the questions of the Company's counterclaim of
breach of fiduciary duty by Tedesco, ruling that the trial record indicated
that there was evidence of such breach and damages therefrom. The appeals
court remanded the case to the trial court for trial of the Company's claims
of breach of fiduciary duty by Tedesco. The Company is filing motions with
the trial court for the scheduling of the ordered trial on its claims against
the Tedesco award. The Company has also appealed to the Texas Supreme Court
the issue of the appeal courts' decision to uphold $200,000 of the original
judgement (which accounts for $340,000 of the August, 1996 $420,000 amount).
In connection with its appeal the Company has pledged as an appeal bond
200,000 shares of its unissued common stock.
The Company believes that its appeal arguments, and its fiduciary duty
claims against Tedesco, are meritorious. However, there can be no assurance
that the Company's appeal, or its claims against Tedesco, will be successful,
or that alternatively the litigation can be settled on terms manageable to
the Company. The need to immediately satisfy the plaintiff's award in the
event the Company's appeal and claims are unsuccessful would have a material
adverse impact on the Company.
In May, 1996, a foreign manufacturer that had previously supplied
imported products to NASCO Products filed suit against NASCO Products
asserting that it is owed approximately $300,000 in excess of the amount
presently recorded by NASCO Products (Pannoy Enterprises Corporation v. NASCO
Products, Inc., Case No. 12948, in the Chancery Court for Robertson County,
Tennessee). NASCO Products and the supplier had previously reached an
agreement on the balance owed (which is the balance recorded) , as well as an
arrangement under which the schedule for NASCO Products' payments reducing
the balance would be based on future purchases from that supplier of products
distributed internationally by NP International. The Company has denied the
supplier's claims, and has asserted affirmative defenses, including the
supplier's late shipment of the original products, and the supplier's refusal
to accept and fill NP International orders on terms contained in the
agreement. NASCO Products sold its operations in July, 1995, and that
company currently has no operations or unencumbered assets. See Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - General and -Liquidity and Capital Resources."
On October 29, 1996, the Company filed suit against Joseph Assad, its
former vice-president of sales and marketing, whose employment the Company
had terminated effective November 1, 1996 (Innovo Group Inc. v. Joseph Assad,
Cause 13073, in the Chancery Court for Robertson County, Tennessee). The
Company's suit alleges breach by Mr. Assad of his employment agreement with,
and his fiduciary duty as an officer to, the Company, as the result of Mr.
Assad's expenditure of time pursuing employment with and developing business
plans for, and his disclosure of confidential information to, companies which
would compete with the Company and which had, as significant stockholders,
individuals with financial interests adverse to the Company. The Company's
complaint seeks unspecified damages. Mr. Assad has denied the Company's
allegations, and has filed a counterclaim seeking unspecified severance
benefits and unreimbursed expenses. The Company believes that Mr. Assad's
counterclaims are without merit.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
<PAGE>
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder
Matters
The Company's common stock is currently traded on the NASDAQ SmallCap
Market under the symbol "INNO". The following sets forth the high and low bid
quotations for the Company's common stock in such market for the periods
indicated. This information, which has been adjusted to reflect the one-for-
ten reverse stock split effected in June, 1995, reflects inter-dealer prices,
without retail mark-up, mark-down or commissions, and may not necessarily
represent actual transactions. No representation is made by the Company that
the above quotations necessarily reflect an established public trading market
in the Company's common stock.
<TABLE>
<CAPTION>
High Low
____ ___
Fiscal 1995
___________
</CAPTION>
<S> <C> <C>
First Quarter 3 1/8 15/16
Second Quarter 4 1/16 1 1/4
Third Quarter 2 7/8 1 1/2
Fourth Quarter 2 1/4 1
November 1995 (1) 1 1/8 1/2
Fiscal 1996
___________
First Quarter (Dec. to Feb.) 7/8 7/32
Second Quarter (March to May) 2 3/16 17/64
Third Quarter (June to August) 1 3/4 9/16
Fourth Quarter (Sept. to Nov.) 5/8 3/16
</TABLE>
(1) Effective November 1, 1995 the Company changed its fiscal year to end on
November 30. Previously the Company's fiscal year had ended on October 31.
As of February 15, 1997, there were approximately 870 record holders of
the Company's common stock.
The Company has never declared or paid a dividend and does not
anticipate paying dividends on its common stock in the foreseeable future.
In deciding whether to pay dividends on the common stock in the future, the
Company's Board of Directors will consider factors it deems relevant,
including the Company's earnings and financial condition and its working
capital expenditure requirements.
Under the rules of the NASDAQ, a company must, among other things,
maintain total assets of $2 million, stockholders' equity of $1 million, a
minimum bid price of $1 (or alternatively stockholders' equity of $2
million), and must remain current in the filing of reports under the
Securities Exchange Act of 1934 (the "Exchange Act") in order to continue
trading on the NASDAQ SmallCap Market. In November, 1995, the Company's
common stock traded on the NASDAQ SmallCap Market pursuant to temporary
exemptions granted while the Company took steps to comply with the
stockholders' equity requirement, which was met when the Company's
stockholders' equity increased to above $1 million during the first quarter
of fiscal 1996. Additionally, although the Company's common stock generally
traded at prices below $1.00 between November, 1995 and May, 1996, and has
generally traded at prices below $1.00 since July, 1996, the Company has been
able to maintain its NASDAQ SmallCap listing by complying with the
alternative $2 million stockholders' equity requirement. However, in
November, 1996, the NASDAQ proposed changes to its listing standards that
would, among other things, eliminate the $2 million stockholders' equity
alternative.
If the Company's stockholders' equity were to fall below $2 million due
to operating losses or for other reasons, or if the NASDAQ adopts final rules
which eliminate the $2 million stockholders' equity alternative, and the
Company's common stock was not trading at prices above $1.00, the Company
could face delisting unless it took action to increase the minimum bid price
of its common stock to $1.00, or, if the alternative standard is still
available, to increase its stockholders' equity to above $2 million.
Although the Company will continually use its best efforts to maintain its
NASDAQ SmallCap listing, there can be no assurance that it will be able to do
so. If, in the future, the Company is unable to satisfy the NASDAQ criteria
for maintaining listing, its securities would be subject to being delisted,
and trading, if any, in the Company's securities would thereafter be
conducted in the over-the-counter market in the so-called "pink sheets" or on
the National Association of Securities Dealers, Inc. ("NASD") "Electronic
Bulletin Board". As a consequence of any such delisting, a stockholder would
likely find it more difficult to dispose of, or to obtain accurate quotations
as to the prices, of the Company's common stock.
During the fourth quarter of fiscal 1996 the Company issued an aggregate
of 7,521,912 shares of common stock upon the conversion of outstanding 8%
convertible debentures. The shares were issued to ten institutional
investors that were the holders of the 8% convertible debentures. No
commissions or other discounts were paid. The shares were issued in reliance
upon the exemption under Section 3(A)(9) of, and Rules 901 through 903
promulgated under, the Securities Act of 1933.
<PAGE>
Item 6. Selected Consolidated Financial Data
The table below (including the notes hereto) sets forth a summary of
selected consolidated financial data. The selected consolidated financial
data should be read in conjunction with the related consolidated financial
statements and notes thereto.
<TABLE>
<CAPTION>
Year Year Ended
Ended October 31,
November 30, ___________________________________________
Income Statement Data: 1996 (1)(2) 1995 1994 1993 1992
___________ ___________________________________________
</CAPTION>
<S> <C> <C> <C> <C> <C>
Net Sales $ 7,391 $ 5,276 $ 8,028 $12,468 $12,768
Cost of Goods Sold 4,853 3,808 5,044 6,998 8,899
Gross Profit 2,538 1,468 2,984 5,470 3,869
Operating Expenses 4,478 3,134 5,389(3) 5,023 4,723
Income (loss) from operations (1,940) (1,666) (2,405) 447 (854)
Interest expense (963) (511) (821) (960) (836)
Income (loss) before income taxes
(benefit) (3,088) (67)(4) (4,124) (223) (1,622)
Income (loss) from
continuing operations (3,088) (67)(4) (7,905)(5) (661)(5) (843)
Income (loss) per share
from continuing operations (.23) (.03) (3.99) (.63) (.79)
Supplemental loss per share from
continuing operations (6) - - (3.77) (.14) -
Income(loss) from discontinued
operations (7) - (626) (685) (7,268) (2,117)
Income(loss) per share from
discontinued operations (7) - (.24) (.34) (6.92) (1.95)
Extraordinary gain (loss) (8) - (258) 699 - -
Extraordinary gain (loss) per share - (.09) .35 - -
Net income (loss) (3,088) (951) (7,891) (7,929) (2,896)
Net income (loss) per share (.23) (.36) (3.98) (7.55) (2.74)
Cash dividends declared
per common share - - - - -
Weighted Average Shares of
Common Stock and Common Stock
Equivalents Outstanding 13,613 2,616 1,982 1,050 1,055
Balance Sheet Data:
Total Assets $ 9,433 $ 5,667 $11,143 $19,351 $29,957
Long-Term Debt 3,303 1,565 1,514 1,759 1,962
Common Stock Issuable (9) - - - 2,911 -
Redeemable Common Stock (10) - - 1,423 1,423 -
Stockholders' Equity 2,275 (230) (2,372) 951 7,520
</TABLE>
_______________
(1) Effective November 1, 1995 the Company changed its fiscal year to end on
November 30. Previously the Company's fiscal year ended on October 31. The
results of operations and cash flows for the transition period of November 1,
1995 to November 30, 1995 are separately presented in the Company's consolidated
financial statements presented elsewhere herein.
(2) Includes the effects of the acquisition of Thimble Square, accounted for
under the purchase method of accounting, beginning April, 1996. See Note 2 of
Notes to Consolidated Financial Statements.
(3) Operating expenses for fiscal 1994 include plant consolidation charges of
$470,000 ($.20 per share) relating to the consolidation of the Company's
manufacturing facilities. See Note 1(l) of Notes to Consolidated Financial
Statements.
(4) Includes other income of $1.9 million from the settlement of litigation.
See Item 7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operations".
(5) Includes the effect of additions to the deferred tax valuation allowance of
$3,679,000 ($1.86 per share) and $624,000 ($.59 per share) in fiscal 1994 and
1993, respectively.
(6) Represents net loss per share adjusted to treat as outstanding from the date
of the loans the 229,720 shares of common stock issued in fiscal 1994 to
extinguish certain borrowings. See Note 8 of Notes to Consolidated Financial
Statements.
(7) Reflects the operations and July 1995 sale of the import operations of NASCO
Products, the operations and May 1993 sale of the fundraising program direct
marketing operations of Spirco and the operations and loss from the disposal of
Sportswear. See Note 3 of Notes to Consolidated Financial Statements.
(8) Represents gains and losses resulting from the Chapter 11 reorganization of
Spirco. See Note 4 of Notes to Consolidated Financial Statements.
(9) Represents obligations extinguished subsequent to October 31, 1993 by the
issuance of common stock. See Note 8 of Notes to Consolidated Financial
Statements.
(10) Represents 189,761 shares of common stock, which were issued in September
1993 to extinguish $1,423,000 of debt and accrued interest, which the Company
could have been required to repurchase at $7.50 per share between January 1994
and April 1995. See Note 8 of Notes to Consolidated Financial Statements.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview of 1994 to 1996
The Company has incurred losses from continuing operations in each of
the last three fiscal years, principally as the result of a lack of adequate
working capital and lower than expected sales. The Company's capital
resources have been below the necessary level throughout the last three
fiscal years. The losses incurred by the Company's discontinued Spirco and
NASCO Products operations absorbed significant working capital.
Additionally, those losses and the bankruptcy reorganization of Spirco
prevented the Company from pursuing a public offering during fiscal 1994,
causing NBD Bank ("NBD"), then the Company's principal lender, to reduce the
amounts available under the bank credit facility and prevented the Company
from obtaining traditional bank working capital financing.
In fiscal 1994 the Company's sales were significantly affected by
production delays caused by working capital constraints, and by a weak retail
environment and the coinciding decline in sports licensed sales caused by the
baseball and hockey strikes, and the resulting shortfall from prior year and
projected sales levels caused a $2.5 million decline in gross profit from
continuing operations and was the principal reason for the fiscal 1994 loss
from operations. The fiscal 1994 loss from continuing operations also
results from the write-down of deferred tax assets originally recorded
principally in 1991 and 1992.
Fiscal 1995 sales were also adversely affected by the continuing
weakness in the retail sector, and by a shortage of working capital. The
Company had projected that its sale of the NASCO Products imported product
line would provide it with both immediate working capital and the ability to
obtain more traditional accounts receivable and inventory financing, as the
terms originally negotiated with the buyer provided for an all cash payment
with which the Company could have retired certain existing borrowings.
However, shortly before the completion of the sale, the buyer, ANG, advised
the Company that it would not proceed on an all cash basis. The Company
decided to proceed with the sale to ANG, under revised terms that allow ANG
to pay the purchase over a three year period, because the preceding process
of obtaining league approvals, which had been proceeding since March, 1995,
had made it impractical for the Company to alter its restructuring strategy
and remain in this business.
Fiscal 1995 results also reflect effects of the Company's 1994 strategy
of emphasizing sports licensed products in its marketing. The Company
devoted fiscal 1995 to shifting its emphasis to developing new products and
marketing programs for its products in the fashion, utility and craft lines
and for the premium and advertising specialty markets and to preparing
marketing plans for its U.S. Olympic Team products for the 1996 Summer Games.
As a result of the Company's fiscal 1995 efforts, Innovo increased its
sales of craft products in fiscal 1996, which contributed to a 14.2% increase
in net sales before considering the effect of the April, 1996 acquisition of
Thimble Square, and a 40.1% increase in net sales including those of Thimble
Square. However, the Company's increase in net sales was limited by
shortages of raw materials during the first half of fiscal 1996, which were
caused by a lack of working capital, and by labor shortages experienced
during the second, third and fourth quarters of fiscal 1996. These
conditions prevented the Company from accepting orders for an estimated $1
million of products, and also adversely affected the Company's gross profit
percentage. The Company raised additional working capital in the second and
third quarters of fiscal 1996 which was used, in part, to increase raw
material levels to more desirable levels, and in October, 1996 the Company
obtained a three year lease of a sewing facility in Red Boiling Springs,
Tennessee. Production at the facility, which began in November, 1996, will
substantially offset the effects of the labor shortages experienced in fiscal
1996.
The results of operations for fiscal 1996 were also affected by
increases in selling, general and administrative expenses that resulted from
the Company's pursuit of, and subsequent product development for, four new
licenses which were obtained in the second half of fiscal 1996. In the third
quarter of fiscal 1996 the Company obtained a license to use the Warner Bros.
Studios Looney Tunes cartoon characters on various bags and backpacks to be
sold in Europe, a license to use the tag lines and logos of the Anheuser-
Busch Cos. on various bags and totes to be marketed both domestically and
overseas, and a license to use the sports drawings of sports artist Gary
Patterson on various bags and t-shirts. In the fourth quarter of fiscal 1996
the Company obtained a license to use the Walt Disney Co. cartoon characters
on various bags and totes in Europe.
In general, a period of from four to six months is required, once a
license is obtained, to develop and obtain the approval for the art and
products for the new license, and produce samples and begin marketing. The
Company commenced the product development for these new licenses in the third
and fourth quarters of fiscal 1996, and expended approximately $363,000 in
fiscal 1996 on those projects. Product development for the Walt Disney and
Warner Bros. products will continue into the second quarter of fiscal 1997.
The completion of product development on that schedule would allow the
Company to begin shipments of the products in the second quarter of fiscal
1997 and, more significantly, enable the Company to solicit and fill orders
for retailers back-to-school and holiday seasons, which would be shipped
principally in the third and fourth quarters.
The Company acquired Thimble Square on April 12, 1996. Thimble Square's
operating results are included in the consolidated results of operations from
April 12, 1996. Thimble Square's sales for its fiscal year ended December
31, 1995 were approximately $3 million. Thimble Square operated profitably
for many years, but during fiscal 1994 and 1995 (years ended December 31)
incurred losses, due principally to lower levels of sales. That lower level
of sales, and resulting operating losses, continued through the Company's
1996 fiscal year, in part due to labor shortages, and the Company's use of
Thimble Square's production capacity to produce Innovo products.
In fiscal 1994 the Company began a restructuring, which has continued
throughout fiscal 1995 and 1996. Effective November 1, 1994 the Company
closed its Sugarland, Texas manufacturing facility and consolidated all of
Innovo's domestic operations to Tennessee to eliminate the expense of the
leased space in Texas and also eliminate certain shipping and duplicative
supervision costs. In connection with the plant consolidation the Company
recorded a charge of $470,000 during fiscal 1994. See Note 1(l) of Notes to
Consolidated Financial Statements. On July 31, 1995 NASCO Products sold to
ANG its operations of importing to and distributing in the United States
sports bags, backpacks and equipment bags bearing the logos of the teams of
the four major professional sports leagues. The disposed of product line was
imported, and therefore required the Company to make substantial investments
to order and purchase inventory several months ahead of expected sales.
Competition and soft demand for these products caused the Company to incur
operating losses in order to sell the imported inventories, and the Company's
decision to sell the product line reflected its conclusion that these market
conditions were likely to continue for some time, as a result of which near-
term profitability was unlikely. As the result of the disposal, the
Company's continuing operations became concentrated around its domestic
manufacturing capabilities and its international license rights, which the
Company views as its strategic strengths.
In October, 1996, the Company implemented a restructuring of its senior
management. The Company terminated its senior vice-president of sales after
concluding that the sales and marketing functions under his direction were
not receiving the proper direction and effort, causing both lost sales and
unnecessary expenses (see Item 3 - "Legal Proceedings"), and these functions
were placed under the direct, full-time supervision of the chief executive
officer. A new chief operating officer was added, who will be directly
responsible for production operations and cost controls. Previously, both
the sales and marketing, and production functions had reported to the chief
executive officer, and the Company believes that having each function
directed on a full-time basis by separate senior executives will improve the
effectiveness of both areas. In connection with the restructuring the
Company implemented salary and personnel reductions that will reduce
expenses, net of salaries for new positions, by $150,000 annually. The
management and administrative structure in place after this restructuring
represents a level of costs that the Company currently plans to continue in
anticipation of, and to generate, increased sales and improved gross margins.
The Company recognizes that absent such increases it will not operate
profitably without additional significant expense reductions. If sales
increases are not achieved, it will attempt to further restructure to
accomplish those cost reductions.
1997 Strategy and Outlook
For fiscal 1997 the Company will focus on improving its operating
results by:
- continuing the growth in sales;
- improving its gross profit margins; and
- controlling any increases in fixed selling, general and
administrative expenses.
Sales increases are anticipated to be generated from:
- the continued recapture of domestic craft market share by Innovo;
- increased sports licensed sales, by both Innovo and NP
International, as the result of recovering demand and improved
products. Orders, and order indications, which the Company has
received in the first quarter of 1997 indicate that the demand
for pro licensed products appears to be recovering from the
decline of 1994 to 1996; and
- NP International's sales of the new Walt Disney and Warner Bros.
products.
Sales increases may also be generated from the Anheuser-Busch and Gary
Patterson licenses, and from expanding Thimble Square's marketing programs.
The October, 1996 restructuring of the Company's senior management
included the implementation of new product pricing and costing procedures and
controls, and the Company will monitor product pricing and costs, attempting
to improve gross profit margins through both price increases and reductions
in manufacturing costs.
- Price increases on selected products were implemented in the
first quarter of fiscal 1997. These price increases would, on an
annualized basis, increase the gross profit percentage from the
34.3% for fiscal 1996 to approximately 35.7%. The price
increases already implemented did not cause a loss of customers
or sales. The Company will continue, throughout 1997, to review
the pricing of products with the goal of increasing those where
current prices yield unacceptable gross margins. Although such
increases could meet customer resistance, causing the Company to
either lose, or decline, an order, the lost sale would generally
be one that would have not contributed material gross profits.
- The design of several products has been revised, and other
products will be redesigned, to lower either or both of the
material component costs or the manufacturing time.
- Prices for certain sports licensed products are anticipated to
increase as the result of artwork or other enhancements that will
allow retailers to increase retail pricing.
- The addition of the Red Boiling Springs facility, and continuing
efforts to reduce the exposure to labor shortages, will aid in
reducing overtime costs and other production inefficiencies that
were experienced in fiscal 1996.
As previously discussed, the October, 1996 restructuring of senior
management has allowed the Company to put cost controls under more direct
supervision, and the Company believes that both the increases in sales, and
improvements in gross profit margins, can be accomplished without significant
increases to fixed overhead costs.
The Company is also currently evaluating the efficiency of its
production facilities. While the Company believes that these facilities are
adequate for its current and projected future needs, and its investments
therein are recoverable from future operations, it is studying whether the
consolidation or relocation of certain facilities might improve efficiency
and reduce production costs. If the Company were to decide to relocate or
consolidate from any of its owned or leased facilities, such a step could
require the Company to record a non-cash charge relating to the closed
facility, which charge would adversely effect operating results for the
period in which it was recorded.
The Company believes that these steps, once fully effective, will allow
it to return to profitability. However, the timing and ultimate success of
these plans can be affected by numerous factors and risks. See "-Forward
Looking Statements."
Forward Looking Statements
Certain statements in the discussion and analysis of financial condition
and results of operations, and elsewhere in this Annual Report on Form 10-K,
represent "forward looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. Such forward looking statements involve
management's estimates, projections or predictions of future developments or
events concerning the development, manufacturing and marketing of products,
operating plans and results, liquidity, significant customers, litigation,
and other plans for the Company and its business, and generally can be
identified by the use of forward looking terminology such as "may", "will",
"would", "could", "should", "expect", "estimate", "anticipate", "project", or
the negative thereof, or other variations thereon or comparable terminology.
Such statements involve matters that are subject to various risks and
uncertainties, as a result of which actual future developments, results or
events may differ materially from management's estimates, projections or
predictions. The following discusses certain of the more significant risks
and uncertainties.
The Company operates in competitive and fragmented industries, and its
ability to maintain or increase its level of sales, and its gross profit
margins, will depend on the popularity of its designs or of the logos or
characters its product bear, and upon overall consumer spending patterns.
Both are difficult to predict with certainty, as a result of which actual
future results can differ materially from projections or estimates.
Additionally, a material portion of the Company's sales are of products
produced pursuant to license agreements obtained from sports or entertainment
licensors. The loss or non-renewal of a material license, either due to the
Company's performance, or due to competition for the license, would
materially affect future results.
The Company's ability to maintain or increase its level of sales, and
its gross profit margins, is also dependent on its ability to meet customers'
delivery schedules. The Company's domestic manufacturing has, in the past
and could in the future, be affected by raw material shortages caused by a
lack of working capital, and by labor shortages. Shortages of working
capital or labor can be caused, or magnified, by the seasonality of the
Company's business. The Company could also be affected by the ability of
foreign manufacturers to meet needed delivery schedules. Such events could
limit the Company's ability to accept and fill customer orders, and would
adversely affect the profitability of the sales the Company does make.
As discussed in Note 9 of Notes to Consolidated Financial Statements,
the Company is engaged in certain litigation. As a result, the Company faces
risks concerning the ultimate outcome of these matters, which, if adverse,
could have a material adverse effect on the Company.
In accordance with the provisions of the Private Securities Litigation
Reform Act of 1995, the Company assumes no obligation to update forward
looking statements.
Results of Continuing Operations
Change in Fiscal Year
Effective November 1, 1995 the Company changed its fiscal year to end on
November 30. Previously, the Company's fiscal year needed on October 31.
The results of operations and cash flows for the transition period of
November 1, 1995 to November 30, 1995 are separately presented in the
Company's consolidated financial statements.
Fiscal 1996 Compared to Fiscal 1995
Sales for the year ended November 30, 1996 increased by $2,115,000, or
40.1%, to $7,391,000, from $5,276,000 for fiscal 1995. The inclusion of
Thimble Square's operations for April 12, 1996 through November 30, 1996,
contributed $1,368,000 of the increase. The remaining $747,000 increase was
due to sales of the Company's new craft products, the recapture of certain
craft accounts from import suppliers, and approximately $1.1 million of sales
of the Company's U.S. Olympic Team products, offset by declines in
international and domestic pro-licensed sales. As previously discussed,
insufficient working capital caused raw material shortages during the first
half of fiscal 1996, and labor shortages experienced in the second, third and
fourth quarters of fiscal 1996, forced the Company to not accept orders for
an approximate $1 million, and therefore limited the growth in the Company's
sales.
Gross profit as a percentage of sales was 34.3% for fiscal 1996 compared
to 27.8% for the year ended October 31, 1995. The gross profit percentage
for the sales of Innovo's and NP International's was 33.9% in fiscal 1996,
and was favorably impacted by the increase in Innovo's sales of domestically
manufactured products, which lowered the per unit absorption of fixed
manufacturing costs, and other manufacturing improvements. However, the
gross profit percentage for fiscal 1996 was adversely affected by the
Company's lack of working capital for the purchase of raw materials, the
shortages of labor at its manufacturing facilities, and the presence of
specialized U.S. Olympic orders in the sales mix. These factors caused
production inefficiencies, overtime labor costs, and higher freight costs.
The overall gross profit percentage for fiscal 1996 includes the effect of
the gross profit percentage of 36.3% for Thimble Square for the period April
12, 1996 to November 30, 1996.
Selling, general and administrative ("SG&A") expenses increased from
$2,728,000 for fiscal 1995 to $3,890,000 for the year ended November 30,
1996. The $1,162,000 increase was principally due to the inclusion of
Thimble Square's operations since April 12, 1996 ($347,000), an increase in
commissions and royalties of $302,000 as the result of higher sales,
additional minimum royalties to the USOC of $88,000, and approximately
$358,000 in increases in costs for functions related to the development of
new products, and products for the Company's newly obtained licenses. As a
percentage of sales SG&A expenses were 52.6% for fiscal 1996 compared to
51.7% for the year ended October 31, 1995. Depreciation and amortization
expense increased in the fiscal 1996 periods principally due to the inclusion
of the depreciation and amortization of Thimble Square, including goodwill
amortization of $56,000.
The loss from operations was $1,940,000 for the year ended November 30,
1996, compared to $1,666,000 for fiscal 1995, a difference of $449,000. That
difference is caused principally by the increase in SG&A expenses, as
discussed above.
Interest expense increased to $963,000 for the year ended November 30,
1996 as compared to $511,000 for fiscal 1995. The $452,000 increase results
from interest on higher accounts receivable based borrowings reflecting the
increase in sales and interest expense of $82,000 relating to Thimble
Square's assumed notes payable and long-term debt.
In March, 1995 the Company recognized other income of $1.9 million for
the net proceeds it received upon the settlement of its lawsuit against the
former auditors of NASCO. The absence of such a gain from fiscal 1996 is the
principal cause in the decline in other income between the current and prior
year periods, and also for $2.1 million of the change in the results of
continuing operations.
Fiscal 1995 compared to Fiscal 1994
Sales from continuing operations for fiscal 1995 were $5,276,000, a
decline of $2,752,000 from sales from continuing operations of $8,028,000 for
fiscal 1994. Fiscal 1995 sales of utility products continued to be affected
by a weak retail sector, and by the Company's 1994 strategy of emphasizing
sports licensed products in its marketing. Innovo's sales of domestically
manufactured sports licensed items continued during fiscal 1995 to be
negatively affected by the overall slow down in the market for sports
licensed merchandise, which in part was triggered by the 1994 baseball
strike. Additionally, marketing efforts for the Company's college logoed
sports bags and backpacks were interrupted pending the decision as to whether
the college products would be continued domestically by Innovo or included in
the sale to ANG.
Gross profit as a percentage of sales was 27.8% for the year ended
October 31, 1995 compared to 37.2% for fiscal 1994. The change in the gross
profit percentage reflects the affect of lower sales, which increased the per
unit absorption of fixed manufacturing costs and adversely effected the gross
profit percentage. The effect was partially offset by the cost savings
achieved from the Company's fourth quarter fiscal 1994 consolidation of its
manufacturing operations. The fiscal 1995 gross profit percentage was also
affected by incentive pricing used to reduce college logoed inventory levels
and provide liquidity.
Selling, general and administrative expenses declined by $1,377,000 to
$2,728,000 for fiscal 1995. Commissions and royalties decreased by $294,000
in fiscal 1995, to 4.7% of sales, principally as the result of an increase in
"in house" sales and a resulting decline in commissions. Other SG&A declined
by $1,083,000, and equaled 47% of sales in fiscal 1995 compared to 44% of
sales for the year ended October 31, 1994. The principal components of the
decline in other SG&A were reductions in salary costs ($240,000), legal and
professional expenses ($490,000), rent ($255,000) and bad debt allowances
($128,000). Although fixed personnel and overhead costs were reduced in
fiscal 1995, as a percentage of sales SG&A was higher in fiscal 1995 due to
the decline in sales. Depreciation expense declined from $814,000 in fiscal
1994 to $406,000 in fiscal 1995 principally due to the complete depreciation,
during fiscal 1994 and 1995, of machinery and other equipment acquired in the
Company's 1991 acquisition of Spirco and the fiscal 1994 write-off of the
unamortized leasehold improvements upon the closure of the Company's
Sugarland, Texas facility.
The fiscal 1995 loss from operations of $1,666,000 was $739,000 lower
than the operating loss for the year ended October 31, 1994. Operating
expense reductions of $2.3 million offset the decline in gross profits of
$1.5 million, resulting in the decline in the operating loss.
Interest expense declined by $310,000 for fiscal 1995 when compared to
the year ended October 31, 1994, mainly as the result of lower borrowings
under the Company's accounts receivable and inventory borrowing facilities.
However, the effect of lower borrowings was partially offset by higher
interest rates, and by the interest expense on the $600,000 working capital
loan obtained in July, 1994.
During the second quarter of fiscal 1995 the Company recognized other
income of $1.9 million for the net proceeds it received upon the settlement
of its lawsuit against the former auditors of Spirco (then NASCO). The
Company had sued the accountants alleging, among other things, misstatements
in the financial statements of NASCO for pre-acquisition periods. The
accountants did not admit any wrong doing in settling the lawsuit.
Results of Discontinued Operations
Sales for the discontinued NASCO Products operations decreased by $3.2
million in fiscal 1995, from in fiscal 1994 $5,937,000 to $2,777,000. The
decline in sales in fiscal 1995 reflected the effects of the weakness in the
sporting goods sector of the retail sector, and the effects of the baseball
and hockey strikes. The negative effect of those factors was partially
offset by sales the Company made at discounted prices to reduce its
investment in imported inventory. NASCO Products' fiscal 1995 sales were
also impacted by a decline in marketing efforts which took place during, and
as a result of, the negotiations with ANG. Additionally, sales for fiscal
1995 represent only sales through July 31, 1995, or for nine months.
The gross profits from the discontinued NASCO Products operations were
8.8% and 22.0% of sales for fiscal 1995 and 1994, respectively. The fiscal
1995 and 1994 gross profit percentages were adversely affected by the sales
made at discounted prices to reduce inventory in reaction to the decline in
industry-wide sales of sports licensed products.
The SG&A relating to NASCO Products' discontinued operations equaled
37.6% and 44.1% of sales in fiscal 1995 and 1994, respectively. The
percentage decreased in fiscal 1995, as compared to fiscal 1994, due to lower
commissions, as the majority of fiscal 1995 sales were made to accounts
serviced directly by the Company.
The Company recognized a gain from the sale of NASCO Products' domestic
operations of $301,000 during the third quarter of fiscal 1995. The gain
reflects the recording of the payments to be received from ANG over the next
three years at their present value, discounted at 10% per annum.
Reorganization of Spirco
As described in Note 4 of Notes to Consolidated Financial Statements,
the plan of reorganization for Spirco under Chapter 11 of the U.S. Bankruptcy
Code was confirmed on August 5, 1994 and became effective on November 7,
1994. Generally Spirco's plan of reorganization provided for the full
payment of all claims ranking above general unsecured claims, with claims
ranking below general unsecured claims receiving no distribution. With the
exception of administrative expenses, which were paid in cash with funds
borrowed under the Company's bank credit facility, the claims were paid
through the issuance of Innovo Group common stock. Spirco's equipment and
plant were transferred to Leasall, which assumed the related debt, and Spirco
was merged into Innovo Group, which acquired direct ownership of its other
assets.
The implementation of Spirco's plan of reorganization resulted in a
fiscal 1994 extraordinary gain of $699,000 (net of taxes of $429,000) from
the extinguishment of the unsecured and other claims that did not receive any
distribution under the plan of reorganization. In fiscal 1995 the Company
recorded extraordinary charges of $258,000 for changes in the estimates of
certain allowed claims. Certain claims ("the Class 3 claims") were
contributed to a trust ("the Class 3 Trust"), to which shares of the
Company's common stock were contributed. The Class 3 Trust sold those shares
and distributed the proceeds to satisfy the Class 3 claims. For financial
reporting purposes the Class 3 claims were reported as satisfied as the Class
3 Trust sold the shares of common stock and distributed the proceeds to the
claimants (see Note 4 of Notes to Consolidated Financial Statements).
Accordingly, the full impact of the plan of reorganization was not reflected
in the consolidated balance sheet until that process was completed in fiscal
1996. On an overall basis, Spirco's plan of reorganization had the effect of
eliminating liabilities of approximately $3.4 million and increasing
stockholders' equity by approximately $2.5 million.
The majority of Spirco's creditors were related to its discontinued
fundraising program operations and are not suppliers to the Company's
continuing operations. Spirco had continued during its reorganization to
make the scheduled payments on its mortgage debt, and the implementation of
the plan of reorganization resulted in a significant reduction in the amount
and periodic payments for the equipment debt assumed by Leasall.
Additionally, the Company's creditors had, since March, 1994, been generally
aware that unsecured Spirco creditors would receive little or no
distribution. Accordingly, the implementation of the plan did not have a
material adverse effect on the Company's liquidity. Additionally, the
implementation of Spirco's plan of reorganization did not have a material
impact on the Company's results of continuing operations.
Seasonality
The Company's business is seasonal. The greatest volume of shipments
and sales are, in general, made in the summer and fall, which coincide with
the Company's third and fourth fiscal quarters. During the first half of the
calendar year, the Company incurs the expenses of maintaining corporate
offices, administrative, sales and production employees, and developing the
marketing programs and designs for and conducting the majority of its sales
campaigns. Inventory levels also increase during the first half of the year.
Consequently, during the first half of each calendar year, corresponding to
the Company's first and second fiscal quarters, the Company utilizes
substantial working capital and its cash flows are diminished, whereas the
second half of the calendar year, corresponding to the Company's third and
fourth fiscal quarters, generally provides increased cash flows and the
build-up of working capital.
The following table presents unaudited quarterly consolidated financial
data for the four quarters in each of the years ended November 30, 1996 and
October 31, 1995. The Company believes all necessary adjustments have been
included in the amounts stated below to present fairly the following selected
quarterly information when read in conjunction with the consolidated
financial statements appearing elsewhere herein. The information includes
all normal recurring adjustments the Company considers necessary for a fair
presentation thereof, in accordance with generally accepted accounting
principles.
<TABLE>
<CAPTION>
Quarter Ended
__________________________________________________________________________________
1996 1995
__________________________________________________________________________________
February 28,May 31,August 31,November 30,January 31,April 30,(1)July 31,October 31,
__________________________________________________________________________________
(In thousands, except for per share amounts)
</CAPTION>
<S> <C> <C> <C> (c> <C> <C> <C> <C>
Net sales $1,319 $2,081 $2,304 $1,687 $1,115 $1,249 $1,638 $1,274
Gross profit 587 810 756 385 597 633 385 (147)
Income (loss)
from continuing
operations (161) (436) (890) (1,601) (311) 1,927 (601) (1,082)
Earnings (loss) per
share from continuing
operations (.02) (.04) (.05) (.08) (.15) .77 (.22) (.37)
</TABLE>
(1) The results for the second quarter of fiscal 1995 include a $1.9 million
gain from the settlement of litigation.
Liquidity and Capital Resources
On an overall basis the Company's liquidity was materially restricted
throughout most of fiscal 1994, 1995 and 1996. The repayment of the bank
borrowings that had financed a significant portion of the losses incurred by
the Company's discontinued Spirco and NASCO Products operations absorbed
significant working capital. Additionally, those losses and bankruptcy
reorganization of Spirco caused NBD, the Company's principal lender through
fiscal 1994, to reduce the amounts available to the Company, and prevented
the Company from pursuing a public offering originally planned for fiscal
1994. Although the Company has been able to obtain working capital through
the private placement of debt and equity securities, the Company's losses,
and the other factors discussed above, have had adverse effects on the per
share price of the Company's common stock which in turn has impaired the
amount and terms of capital available from such sources. The Company has
financed its operations and its debt reductions through the issuance of
common stock, borrowings and internally generated cash flow. External
financing sources provided net capital of $2,776,000 in fiscal 1996, and
required net repayments of $1,787,000 and $1,058,000 in fiscal 1995 and 1994,
respectively, while operations provided (absorbed) cash flow of $(2,743,000),
$1,704,000 and $(406,000) during those periods.
Operating cash flows were a negative $2.7 million for fiscal 1996
principally as the result of the $3,088,000 million net loss, non-cash
charges of $672,000, a $836,000 increase in accounts receivable and
inventories and a $40,000 decrease in accounts payable and accrued expenses.
The increase in accounts receivable results from the increase in sales; at
November 30, 1996, accounts receivable equals approximately 58 days of sales,
as compared to 108 days at October 31, 1995.
The net loss, accounts receivable and inventory increases and accounts
payable and accrued expense decreases were financed with an aggregate of $2.8
million obtained from the sale of shares of the Company's common stock, or
the exercise of outstanding common stock purchase warrants, and new notes
payable or long-term debt borrowings (net of repayments on those notes and
the final repayment of NBD, as discussed below). $1.6 million of that
capital was raised during the second quarter and used to reduce trade debt,
which improved the Company's trade credit with its suppliers and allowed it
to finance through new trade credit the increases in accounts receivables and
inventories required to support the increases in sales. The private
placements of shares of common stock, which the Company undertook to obtain
the working capital needed to support the increase in sales, were undertaken
in February, April and May, 1996, at times when the Company's common stock
was trading at prices of between $.25 and $.63 per share.
During the third quarter of fiscal 1996 the Company raised an aggregate
of $2.0 million, principally from the issuance of 8% Convertible Debentures.
The Company undertook these financings to fund the development of the
products, and the advance royalty deposits, for the new Warner Bros. and Walt
Disney licenses, the repayment of the notes issued in the acquisition of
Thimble Square (repaid in September, 1996), the completion of the development
of the Florida retail property, and to further reduce accounts payable to
increase the availability of trade credit.
$1,205,000 of the 8% Convertible Debentures were converted into shares
of common stock during the fourth quarter of fiscal 1996 (see Note 6 of Notes
to Consolidated Financial Statements). Additionally, other notes payable or
other liabilities aggregating $423,000 were extinguished during fiscal 1996
through the issuance of a total of 1,269,470 shares of common stock (see Note
8 of Notes to Consolidated Financial Statements).
Cash flows from operations of $1,704,000 in fiscal 1995 were generated
principally from a $4.4 million reduction in inventories. The inventory and
accounts receivable reductions both principally resulted from the Company's
exit from its import operations. The cash flows generated from those sources
allowed the Company to reduce current liabilities, including notes payable,
by $5.5 million.
The fiscal 1994 net loss of $7.9 million included significant non-cash
charges for depreciation and amortization, the write-down of deferred tax
assets and the write-off of costs incurred in prior years. As a result, the
cash flow absorbed by operations, $406,000, was $7.5 million less than the
net loss. Inventories were essentially unchanged; although the Company
reduced its investment in imported sports-logoed inventories by offering
discounts, the resulting decrease in inventory was offset by the purchases of
mostly blank sports bags the Company imported in the second and third
quarters of fiscal 1994 in order to obtain adequate supplies of these
products before the exhaustion of the Chinese export quotas.
The Company's issuances of common stock in fiscal 1994 and fiscal 1995
were principally to extinguish debt (including the debt extinguished through
Spirco's plan of reorganization). On April 5, 1994 the Company completed an
equity for debt exchange in which an aggregate of 301,789 shares of common
stock were issued to extinguish an aggregate of $2,132,000 of indebtedness
(see Note 8 of Notes to Consolidated Financial Statements). In addition, in
other transactions during fiscal 1994 the Company issued an aggregate of
153,424 shares of common stock to extinguish liabilities totaling $672,000
(including 115,700 shares issued to reimburse a principal stockholder for
personally pledged shares sold by creditors - see Note 8 of Notes to
Consolidated Financial Statements), and issued 247,097 shares of common stock
in connection with the implementation of Spirco's plan of reorganization. In
fiscal 1995 the Company issued 119,813 shares of common stock to reduce by
$128,000 the balance of notes payable outstanding at October 31, 1994, and
issued 187,049 shares upon the resolution of Class 8 claims in Spirco's
reorganization proceeding that were in dispute when the plan was initially
implemented (see "- Reorganization of Spirco"). Additionally, the Class 3
Trust sold 359,049 shares of common stock for proceeds of $590,000, which
were distributed to the Class 3 claimants, and $350,000 of debt and related
accrued interest was tendered as payment for 372,149 shares of common stock
that were subsequently issued to the former creditor over the period
November, 1995 to May, 1996.
Through fiscal 1994 the Company's principal credit facility was with
NBD. The credit facility was initially obtained in fiscal 1992, and provided
for borrowings up to specified percentages (which were reduced in fiscal
1994) of the accounts receivable and inventories of Innovo and NASCO
Products. Interest was paid monthly at 4% above NBD's prime rate. The
substantial majority of the borrowings the Company historically obtained
under the NBD credit facility were supported by, and needed to finance, the
accounts receivable of NASCO Products and Innovo and the imported inventories
of NASCO Products. The domestic raw materials and finished goods inventories
of Innovo have not supported or required significant borrowings because the
time that elapses from Innovo's purchase of raw materials to its completion
and shipment of finished goods is relatively short, resulting in generally
low inventory levels.
In April, 1995 Innovo entered into an accounts receivable factoring
agreement with Riviera Finance under which the Company obtains advances of
80% of assigned Innovo accounts receivable. Riviera Finance charges 1% of
each invoice assigned plus 2% per month of average outstanding advances.
Thimble Square was added to the factoring agreement in April, 1996 after
Innovo Group's acquisition of that company. NP International's sales to
foreign customers are generally secured by letters of credit provided by the
customer prior to shipment, which are paid upon or shortly after delivery to
the customer. The Company utilizes those letters of credit to secure the
purchase of the foreign manufactured products included in such orders.
Additionally, the Company is generally able to obtain these orders
sufficiently in advance of requested delivery to contract for foreign
manufacturing of quantities that closely match its sales, and as a result can
generally avoid significant investments in foreign manufactured inventories.
As a result, this aspect of NP International's business neither requires or
provides material borrowings.
At the same time the Company paid $936,000 to NBD to eliminate the then
outstanding borrowings on Innovo's existing accounts receivable and
inventory. The payment to NBD was funded from net proceeds of $1.9 million
which the Company received in March 1995 upon the settlement of its lawsuit
against the former auditors of Spirco (then NASCO). NBD agreed to continue
to advance funds against the accounts receivable and inventories of NASCO
Products through July 31, 1995. Effective August 1, 1995, NBD began to apply
to the balance due it all of the proceeds from the collection of NASCO
Products' accounts receivable, and payments being received by NASCO Products
from ANG.
In July, 1994, the Company obtained a $600,000 working capital loan
which was used principally to reduce past due royalties and commissions. The
original term of the loan expired in January, 1995. In April, 1995 the
Company paid accrued interest through that date, and reduced the outstanding
principal to $407,000, using $258,000 from the settlement with Spirco's
former auditors. An extension of the maturity to the earlier of October 15,
1995 or the repayment of the NBD facility was obtained in exchange for the
issuance of 69,500 shares of common stock and the increase of the loan's
interest rate to 20%. In January, 1996, the Company and the lenders extended
the maturity of the working capital loan to October 31, 1996 and reduced the
interest rate to 16% retroactively to October, 1995. The lenders were
granted a security interest, subordinate to NBD's, in the payments to be
received from ANG, to be used to retire the working capital loan once NBD has
been fully repaid. To obtain the extension, the Company issued 50,000 shares
of common stock and issued an additional 6,250 shares each month the
extension remained in force. The Company completed the repayment of the
borrowings under the NBD credit facility in the third quarter of fiscal 1996
with funds from payments received from ANG. The remaining payments received
from ANG were used to reduce the outstanding borrowings on the working
capital loan to $213,000 by November 30, 1996. In February, 1997, the
holders of $124,000 of such remaining balance agreed to accept $70,000,
payable by June 30, 1997 without additional interest, in full satisfaction of
such $124,000 balance, in exchange for the release of certain claims by the
Company against them. The maturity of the remaining $89,000 due under the
loan was extended, under the existing terms, to December 31, 1997.
As previously discussed, the Company had anticipated throughout its
negotiations with ANG that it would receive an all cash settlement upon the
completion of the sale. The receipt of those funds at that time would have
allowed the Company to eliminate the balances due NBD, and the balance due on
the July, 1994 working capital loan. Based on discussions the Company had
with potential lenders, such repayments would have allowed the Company to
replace the Riviera factoring facility with an accounts receivable and
inventory financing facility that would have provided the Company with the
working capital necessary to accept certain orders and operate more
efficiently. However, as the result of having to finance ANG's purchase, the
Company was unable to take these actions, and was forced to both take other
steps to obtain some of the needed working capital, and to operate at a lower
working capital level.
The Company believes that working capital provided by operations will be
sufficient to fund operations and required debt reductions in fiscal 1997.
However, due to the seasonality of the Company's business, operating cash
flows may be negative during the first half of the year, and the Company may
therefore be required to obtain capital through debt or equity financing.
The Company's ability to obtain capital through equity financing is currently
limited by the fact that it has utilized essentially all of its authorized 30
million common shares. On February 10, 1997 the Company filed with the
Securities and Exchange Commission preliminary proxy materials for its 1997
annual meeting, tentatively scheduled for April, 1997, which propose for
stockholder approval an increase in the number of authorized common shares to
90 million. Until, and unless, the Company receives such approval, it will
be required to fulfill any interim capital needs with debt financing. In
January and February, 1997 the Company obtained an aggregate of $232,000 of
capital from short-term debt financing, and $175,000 for additional
development of the Florida retail property. The Company believes that
additional capital, to the extent needed, could be obtained from the
refinancing of Thimble Square's plants and equipment, the sale of all or a
portion of the Florida property, or the remaining payments due from ANG.
However, there can be no assurance that this or other financing will be
available if needed. The inability of the Company to be able to fulfill any
interim working capital requirements would force the Company to have to
constrict its operations.
Innovo Group is a holding company the principal assets of which are the
common stock of the operating subsidiaries. As a result, to satisfy its
obligations Innovo Group is dependent on cash obtained from the operating
subsidiaries, either as loans, repayments of loans made by Innovo Group to
the subsidiary, or distributions, or on the proceeds from the issuance of
debt or equity securities by Innovo Group. Leasall's first mortgage loan
contains restrictions on its ability to make advances or distributions to
Innovo Group; however, Leasall's activities are limited to the ownership of
the Company's real property and the servicing of the mortgage debt thereon.
The debt agreements of the other subsidiaries do not restrict advances or
distributions to Innovo Group.
Other
Inflation has not had a significant impact on the operations or
financial position of the Company.
The Company has no material commitments or plans for capital
expenditures. The Company has certain commitments for minimum royalty
payments and may, under certain circumstances, be required to repurchase
certain shares of its common stock. See Notes 8 and 9 of Notes to
Consolidated Financial Statements.
Certain of the Company's sales are to foreign customers, and a material
portion of those sales involved products sourced from foreign suppliers.
Sales to foreign customers and purchases from foreign suppliers are generally
negotiated in U.S. dollars, and are settled at shipment, so that the exchange
rate risk for these transactions is not significant. The Company does not
utilize foreign currency contracts or other derivative instruments.
In March, 1995, the Financial Accounting Standards Board ("FASB") issued
Statement on Financial Accounting Standards ("SFAS") No. 121. "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." The Company will adopt SFAS No. 121 as of December 1, 1996 and its
implementation is not expected to have a material effect on the Company's
consolidated financial statements.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock
Based Compensation," SFAS No. 123 is effective December 15, 1995, and
requires either the application of an option pricing model measurement for
stock compensation, or, if a company elects to continue to measure stock
compensation based on the difference between the market price of the
Company's common stock and the exercise price of the employer stock option,
disclosure of what the effect of the application of option pricing model
measurement would have been. The Company will initially apply SFAS No. 123
in fiscal 1997, and will elect to disclose the effect that the application of
option pricing model measurement would have been for options granted from
December 1, 1995. The adoption of SFAS No. 123 will not impact the Company's
consolidated results of operations, financial position or cash flows.
<PAGE>
Item 8. Financial Statements
Innovo Group Inc.
Index to Consolidated Financial Statements
Report of Independent Certified Public Accountants 35
Consolidated Balance Sheets 36
Consolidated Statements of Operations 37
Consolidated Statements of Stockholders' Equity 38
Consolidated Statements of Cash Flows 39
Notes to Consolidated Financial Statements 40
Financial Statement Schedules are included at Item 14.
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Innovo Group Inc.
We have audited the accompanying consolidated balance sheets of
Innovo Group Inc. and subsidiaries as of November 30, 1996 and October 31,
1995, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years ended November 30, 1996 and
October 31, 1995 and 1994 and for the period November 1, 1995 to November 30,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated 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 presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Innovo Group Inc. and subsidiaries as of November 30, 1996 and
October 31, 1995, and the consolidated results of their operations and their
cash flows for each of the years ended November 30, 1996, October 31, 1995
and 1994 and for the period November 1, 1995 to November 30, 1995, in
conformity with generally accepted accounting principles.
/s/BDO SEIDMAN, LLP
BDO SEIDMAN, LLP
Atlanta, Georgia
February 18, 1997
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000's, except for share data)
<TABLE>
<CAPTION>
November 30, October 31,
1996 1995
____________ ___________
ASSETS
CURRENT:
</CAPTION>
<S> <C> <C>
Cash and cash equivalents $ 31 $ 6
Accounts receivable (Note 5) 1,238 1,524
Inventories (Note 5) 1,749 1,229
Prepaid expenses 332 406
_______ _______
TOTAL CURRENT ASSETS 3,350 3,165
PROPERTY AND EQUIPMENT, net (Note 6) 5,188 2,126
OTHER ASSETS 895 376
_______ _______
$ 9,433 $ 5,667
_______ _______
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable (Note 5) $ 921 $ 993
Subordinated notes payable (Note 8) - 235
Current maturities of long-term
debt (Note 6) 224 143
Accounts payable 1,861 1,942
Accrued expenses 954 735
_______ ______
TOTAL CURRENT LIABILITIES 3,960 4,048
LONG-TERM DEBT, less current
maturities (Note 6) 3,079 1,422
OTHER 119 153
_______ _______
TOTAL LIABILITIES 7,158 5,623
_______ _______
COMMITMENTS AND CONTINGENCIES (Note 9)
CLASS 3 TRUST (Note 4) - 274
_______ _______
STOCKHOLDERS' EQUITY (Notes 4 and 8):
Common stock, $.01 par - shares
authorized 30,000,000; issued 26,530,577 in
1996 and 3,050,062 in 1995 265 30
Stock subscription (Note 8) - 50
Additional paid-in capital 25,076 19,137
Deficit (20,640) 17,358)
Treasury stock, 119,691 and 53,072 shares (2,426) (2,389)
_______ ______
TOTAL STOCKHOLDERS' EQUITY 2,275 (230)
_______ _______
$ 9,433 $ 5,667
_______ _______
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(000's except earnings per share information)
<TABLE>
<CAPTION>
Transition
Year Ended Period Year ended October 31,
November 30, November 1-30,_____________________
1996 1995 1995 1994
_________ __________ _____ _____
</CAPTION>
<S> <C> <C> <C> <C>
NET SALES $ 7,391 $ 281 $ 5,276 $ 8,028
COST OF GOODS SOLD 4,853 166 3,808 5,044
_______ _______ _______ ______
Gross profit 2,538 115 1,468 2,984
OPERATING EXPENSES
Selling, general and administrative 3,890 233 2,728 4,105
Depreciation and amortization 588 31 406 814
Plant consolidation (Note 1(l)) - - - 470
_______ _______ _______ ______
Income (loss) from operations (1,940) (149) (1,666) (2,405)
INTEREST EXPENSE (963) (33) (511) (821)
OTHER INCOME (EXPENSE), net (Note 1(m)) (185) (12) 2,110 (898)
_______ _______ _______ _______
Income (loss) before income taxes
(benefit) (3,088) (194) (67) (4,124)
INCOME TAXES (BENEFIT) (Note 7) - - - 3,781
_______ _______ _______ _______
INCOME (LOSS) FROM CONTINUING OPERATIONS (3,088) (194) (67) (7,905)
_______ _______ _______ _______
DISCONTINUED OPERATIONS, NET OF TAXES (Note 3)
Results of discontinued NASCO Products
operations - - (927) (1,537)
Gain on sale of NASCO Products operations - - 301 -
Gain (loss) on sale of Spirco
operations - - - 852
- - (626) (685)
_______ _______ _______ _______
EXTRAORDINARY ITEM (Note 4) - - (258) 699
_______ _______ _______ _______
NET INCOME (LOSS) $ (3,088) $ (194) $ (951) $(7,891)
_______ _______ _______ _______
EARNINGS (LOSS) PER SHARE:
Continuing operations $ (.23) $ (.05) $ (.03) $ (3.99)
Discontinued operations (Note 3) - - (.24) (.34)
Extraordinary item (Note 4) - - (.09) .35
_______ _______ _______ _______
Net income (loss) $ (.23) $ (.05) $ (.36) $ (3.98)
_______ _______ _______ _______
WEIGHTED AVERAGE SHARES OUTSTANDING 13,613 3,846 2,616 1,982
_______ _______ _______ _______
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(000's except for shares)
<TABLE>
<CAPTION>
Additional Retained
Common Stock Stock paid-in earnings Treasury
Shares Amount Subscription capital (deficit) stock Total
______ ______ ____________ _______ _________ ________ _____
</CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, November 1, 1993 1,181,437 $ 12 $ - $12,926 $ (8,516) $(3,471) $ 951
Issuance of common stock
Cash 110,000 1 - 474 - - 475
Services 62,750 1 - 306 - - 307
Stock award (Note 8(b)) 9,875 - - 81 - - 81
Extinguishment of debt (Notes 5 and 8) 455,213 4 - 2,800 - - 2,804
Loan fees (Note 5) 80,000 1 - 299 - - 300
Spirco reorganization (Note 4) 247,097 2 - 700 - - 702
Costs of issuances - - - (584) - - (584)
Capital contribution (Note 8) - - - 483 - - 483
Net loss - - - - (7,891) - (7,891)
_________ ____ ____ ______ _______ ______ ______
BALANCE, October 31, 1994 2,146,372 21 - 17,485 (16,407) (3,471) (2,372)
Issuance of common stock
Spirco reorganization (Note 4) 546,103 5 - 1,116 - - 1,121
Extinguishment of debt (Note 8(a)) 119,873 1 350 127 - - 478
Loan extension (Note 5) 69,500 1 - 121 - - 122
Other 2,500 - - 9 - - 9
Costs of issuances - - - (60) - - (60)
Expiration of put options (Note 8(a)) 189,761 2 - 1,421 - - 1,423
Cancellation of treasury shares (24,047) - - (1,082) - 1,082 -
Net loss - - - - (951) - (951)
_________ _____ ______ _______ _______ _______ ______
BALANCE, October 31, 1995 3,050,062 30 350 19,137 (17,358) (2,389) (230)
Issuances of common stock
Exercise of warrants 750,000 8 - 232 - - 240
Subscription agreement 60,793 1 (58) 57 - - -
Spirco reorganization (Note 4) 18,000 - - 12 - - 12
Issuance of stock option (Note 6) - - - 700 - - 700
Net loss - - - - (194) - (194)
_________ _____ ______ _______ ________ _______ ____
BALANCE, November 30, 1995 3,878,855 39 292 20,138 (17,552) (2,389) 528
Issuances of common stock
Cash 7,316,282 73 - 1,737 - - 1,810
Subscription agreements 311,356 3 (292) 289 - - -
Spirco reorganization (Note 4) 312,994 3 - 295 - - 298
Manufacturing agreement 1,200,000 12 - 388 - - 400
Thimble Square acquisition (Note 4) 1,241,176 12 - 621 - - 633
Extinguishment of debt 1,269,470 13 - 410 - - 423
Conversion of debentures (Note 6) 7,521,912 75 - 915 - - 990
Exercise of warrants and options 3,372,730 34 - 412 - - 446
Loan fees (Note 5) 105,802 1 - 31 - - 32
Debt settlement - - - - - (37) (37)
Issuance of warrants (Note 6) - - - 40 - - 40
Issuance costs - - - (200) - - (200)
Net loss - - - - (3,088) - (3,088)
_________ ____ _____ ______ ______ ______ _____
BALANCE, November 30, 1996 26,530,577 $ 265 - $25,076 $(20,640) $(2,426) $2,275
_________ ____ $_____ ______ _______ ______ _____
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's)
<TABLE>
<CAPTION>
Transition
Year Ended Period Year ended October 31,
November 30, November 1-30,_____________________
1996 1995 1995 1994
_________ __________ _____ _____
CASH FLOWS FROM OPERATING ACTIVITIES:
</CAPTION>
<S> <C> <C> <C> <C>
Net income (loss) $(3,088) $ (194) $ (951) $(7,891)
Adjustments to reconcile net income
(loss) to cash provided by
(used in) operating activities:
Depreciation and amortization 588 26 412 822
Deferred income taxes - - - 4,630
Provision for uncollectible accounts 78 - 102 383
Loss (gain) on disposal of discontinued
operations - - (395) (1,374)
Extraordinary gain or loss - - 258 (1,128)
Other 6 (2) - -
Changes in assets and liabilities (exclusive
of Thimble Square acquisition):
Accounts receivable (430) 821 279 1,365
Inventories (406) (14) 430 (26)
Prepaid expenses 560 (672) (25) 33
Accounts payable 558 (688) (867) 37
Accrued expenses (598) 556 (1,032) 1,306
Other (11) (2) (507) 1,437
______ _______ ______ ______
Cash provided by (used in) operating activities (2,743) (169) 1,704 (406)
______ _______ ______ ______
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (379) - (19) (18)
Increase (decrease) in other assets - - 4 -
Proceeds from sale of discontinued operations 257 - 100 1,445
______ _______ ______ ______
Cash provided by (used in) investing activities (122) - 85 1,427
______ _______ ______ ______
CASH FLOWS FROM FINANCING ACTIVITIES:
Addition of notes payable - 300 356 612
Repayments of notes payable (444) (245) (1,970) (1,493)
Additions to long-term debt 1,675 - - -
Debt issue costs (285) - - -
Repayments of long-term debt (226) (12) (113) (68)
Proceeds from issuance of common stock 2,256 240 - 475
Stock issuance costs (200) - (60) (584)
Purchase of treasury stock - - - -
______ _______ ______ ______
Cash provided by (used in) financing activities 2,776 283 (1,787) (1,058)
______ _______ ______ ______
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (89) 114 2 (37)
CASH AND CASH EQUIVALENTS, at beginning of period 120 6 4 41
______ _______ ______ ______
CASH AND CASH EQUIVALENTS, at end of year $ 31 $ 120 $ 6 $ 4
______ _______ ______ ______
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of business
Innovo Group Inc. ("Innovo Group") is a holding company, the principal
assets of which is the common stock of three operating subsidiaries, Innovo,
Inc. ("Innovo"), NASCO Products, Inc. ("NASCO Products"), NASCO Products
International, Inc. ("NP International") and Thimble Square, Inc. ("Thimble
Square"), which Innovo Group acquired in April, 1996 (see Note 2). Innovo
Group and its wholly-owned subsidiaries are referred to as "the Company".
Innovo is a domestic manufacturer and distributor of cut and sewn canvas
and nylon consumer products, such as tote and other bags and aprons, which
are sold to the utility, craft, sports licensed and advertising specialty
markets. Innovo's sports licensed products are produced with logos or other
designs licensed from various sports and entertainment related licensors.
Innovo grants credit to customers, substantially all of which are retail
merchandisers or are in the premium incentive industry.
NP International distributes in foreign, principally European markets,
the products similar to those manufactured by Innovo, as well as canvas and
nylon sports bags and backpacks, imprinted or embroidered with logos or other
designs licensed from various sports and entertainment related licensors.
International generally receives payment at the time of shipment.
Thimble Square manufactures and markets ladies' ready-to-wear at home,
sleep and lounge wear. Its products are sold to mail order companies,
retailers and through mail order distribution. Thimble Square also provides
"sew-only" manufacturing for other distributors of private-label sleep and
lounge wear; in those instances, the customer provides the raw materials and
Thimble Square manufactures the products to the customer's specifications.
Thimble Square grants credit to apparel retailers, mail order distributors,
and to other apparel distributors.
NASCO Products imported a line of canvas and nylon sport bags, backpacks,
equipment bags, and other sporting goods products imprinted or embroidered
with emblems and logos licensed from various sports related licensors,
principally the major professional sports teams. NASCO Products granted
credit to customers, substantially all of which are major retailers and mail
order catalog businesses. Effective July 31, 1995 the Company disposed of
and discontinued the import operations of NASCO Products (see Note 3).
Spirco, Inc. ("Spirco"), formerly known as NASCO, Inc. ("NASCO"), was a
wholly-owned subsidiary of Innovo Group until November, 1994, at which time
it was merged into Innovo Group. Spirco's principal products and markets
included magazines and food products which were sold directly to primary and
secondary schools for fundraising and school spirit programs. Spirco
discontinued marketing fundraising programs to school and youth organizations
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
in May 1993 (see Note 3). On August 27, 1993 Spirco filed for protection
under Chapter 11 of the Bankruptcy Code. Its plan of reorganization was
confirmed by the U.S. Bankruptcy Court on August 5, 1994 and became effective
on November 7, 1994 (see Note 4).
The Company operated in a single business segment, the manufacture and
sale of Innovo's and NP International's canvas and nylon consumer products,
throughout fiscal 1994 and fiscal 1995. Thimble Square's operations are
classified as a separate business segment ("apparel products"). See Note 10.
Sales to one customer accounted for 13.9% of net sales in fiscal 1994, and
sales to two customers (one a customer of Innovo, and one a customer of
Thimble Square) accounted for 12.5%, and 11.2% of net sales for the year
ended November 30, 1996. Sales to foreign customers, principally in Europe,
accounted for 27.5% and 12.1% of net sales in fiscal 1995 and fiscal 1996,
respectively.
(b) Changes in fiscal year end
Effective November 1, 1995, the Company changed its fiscal year to end
on November 30. Previously, the Company's fiscal year ended on October 31.
The results of operations and cash flows for the transition period of
November 1, 1995 to November 30, 1995 are separately presented in the
accompanying consolidated financial statements.
(c) Principles of consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated.
(d) Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Estimates most significantly affect the amortization of
goodwill (see Note 1(g)), the evaluation of contingencies (see Note 9), and
the determination of allowances for accounts receivable (see Note 1(i)) and
inventories (see Note 5).
(e) Inventories
Inventories are stated at the lower of cost, as determined by the first-
in, first-out method, or market.
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventories consisted of the following:
<TABLE>
<CAPTION>
November 30, October 31,
1996 1995
(000's) (000's)
</CAPTION>
<S> <C> <C>
Finished goods $ 440 $ 601
Work-in-process 719 177
Raw materials 663 469
______ ______
1,822 1,247
Less inventory reserve (73) (18)
______ ______
$ 1,749 $ 1,229
______ ______
</TABLE>
(f) Property, plant, equipment, depreciation and amortization
Property, plant and equipment, including assets utilized under capital
leases, are stated at cost. Depreciation and amortization are provided in
amounts sufficient to allocate the cost of depreciable assets to operations
over their estimated useful lives using the straight-line method. Leasehold
improvements are amortized over the lives of the respective leases or the
estimated service lives of the improvements, whichever is shorter. On sale
or retirement, the asset cost and related accumulated depreciation or
amortization are removed from the accounts, and any related gain or loss is
included in the determination of income.
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
Useful
Lives November 30, October 31,
(Years) 1996 1995
_______ _________ _________
(000's) (000's)
Buildings, land and
</CAPTION>
<S> <C> <C> <C>
improvements 8-20 $ 4,351 $ 1,500
Machinery and equipment 5-8 1,766 1,506
Furniture and fixtures 3-8 412 597
Transportation equipment 5 65 54
Leasehold improvements 5-8 11 3
______ ______
6,605 3,660
Less accumulated depreciation
and amortization (1,417) (1,534)
______ ______
Net property and equipment $ 5,188 $ 2,126
______ ______
</TABLE>
The cost and accumulated depreciation for assets utilized under capital
leases were $704,000 and $203,000, respectively, at November 30, 1996.
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(g) Other assets
Other assets consisted of the following:
<TABLE>
<CAPTION>
November 30, October 31,
1996 1995
(000's) (000's)
Goodwill, net of accumulated
</CAPTION>
<S> <C> <C>
amortization $ 786 $ -
Debt issue costs, net 80 41
Non-current receivable (Note 3) - 306
Other 29 29
______ ______
$ 895 $ 376
______ ______
</TABLE>
Goodwill, which arose in the Company's acquisition of Thimble Square, is
being amortized over a period of ten years. The Company assesses the
recoverability of goodwill by comparison to the projected undiscounted cash
flows from the acquired operations. If such a comparison indicates
impairment, unamortized goodwill will be reduced to equal the present value
of such projected cash flows. The amortization of goodwill for the year
ended November 30, 1996, and accumulated amortization at November 30, 1996,
were $56,000.
Cost incurred in the issuance of debt securities or to obtain bank
financing are capitalized and are amortized as a component of interest
expense using the level yield method.
The Company charges to expense in the year incurred costs to develop new
products and programs. Amounts charged to expense approximated $363,000,
$39,000 and $152,000 in fiscal 1996, 1995 and 1994, respectively.
(h) Income taxes
The Company files a consolidated income tax return and provides for
income taxes under Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes." Under that standard, deferred income
taxes are provided for temporary differences arising from differences between
financial statement and federal income tax bases of assets and liabilities.
(i) Revenue recognition
Revenues are recorded on the accrual basis of accounting when the Company
ships products to its customers. The Company provides an allowance ($66,000
and $120,000 at November 30, 1996 and October 31, 1995, respectively) for
estimated losses to be incurred in the collection of accounts receivable.
(j) Earnings per share
Earnings (loss) per share are computed using weighted average common
shares and dilutive common equivalent shares outstanding. Common stock
equivalents consist of outstanding options and warrants. Common stock
equivalents were not considered in the computation of weighted average common
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
shares as their effect would have been antidilutive.
On June 8, 1995 the Company declared a one-for-ten reverse stock split,
effective June 19, 1995. All share and per share amounts have been restated
to reflect the effects of the reverse stock split.
(k) Statement of cash flows
Cash and cash equivalents are generally comprised of highly liquid
instruments with original maturities of three months or less, such as
treasury bills, certificates of deposit, commercial paper and call and time
deposits.
<TABLE>
<CAPTION>
Year Ended
November 30, Year ended October 31,
1996 1995 1994
(000's)
</CAPTION>
<S> <C> <C> <C>
Cash paid for interest $ 618 $ 576 $ 454
Cash paid for income taxes - - -
</TABLE>
During fiscal 1996 the Company issued common stock in connection with the
acquisition of Thimble Square (see Note 2), to extinguish an aggregate of
$423,000 in liabilities, as a loan fee extension, to acquire manufacturing
services (see Notes 4, 5 and 8) and upon the conversion of $1,205,000 of 8%
Convertible Debentures (see Note 6). The Company also issued stock warrants
and a mortgage note to acquire property for $1.5 million (see Note 6).
During fiscal 1995 the Company issued common stock and common stock
subscriptions to extinguish an aggregate of $1,599,000 in liabilities, as a
loan extension fee, and for stock awards. See Notes 4, 5 and 8.
During fiscal 1994 the Company issued common stock to extinguish an
aggregate of $3,506,000 in liabilities, for services of $307,000, and in
consideration for a $600,000 working capital loan. See Notes 4,5 and 8.
(l) Plant Consolidation
In October, 1994 the Company began certain steps to restructure its
operations. Principal among these steps were the closing of its leased
manufacturing facility in Texas and the consolidation of its operations to
Tennessee. In connection with these steps the Company incurred expenses of
$470,000, which included the accrual of provisions of $152,000 for the
remaining obligations under its Texas lease, and $40,000 for the termination
of employees who were not relocated to Tennessee.
(m) Other Income (Expense)
Other income in fiscal 1995 includes a $1.9 million gain from the
settlement from litigation. Other expense in fiscal 1994 includes $300,000
of costs associated with the preparation of a public offering of the
Company's securities which was charged to expense when the Company decided
not to proceed with an offering.
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)
(n) Financial Instruments
The fair values of the Company's financial instruments (consisting of
cash, accounts receivable, accounts payable, notes payable and long-term
debt) do not differ materially from their recorded amounts.
The Company neither holds, or is obligated under, financial instruments
that possess off-balance sheet credit or market risk.
(o) New Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement on Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of". The Company will adopt SFAS No. 121 as of December 1, 1996 and its
implementation is not expected to have a material effect on the Company's
consolidated financial statements.
The Company accounts for the grant of employee stock options under
Accounting Principles Board Opinion ("APB") No. 25. In October 1995, the
FASB issued SFAS No. 123, "Accounting for Stock Based Compensation". SFAS
No. 123 is effective December 15, 1995, and requires either the application
of an option pricing model measurement for stock compensation, or, if a
company elects to continue to measure stock compensation under APB No. 25,
based on the difference between the market price of the company's common
stock and the exercise price of the employer stock option, disclosure of what
the effect of the application of option pricing model measurement would have
been. The Company will initially apply SFAS No. 123 in fiscal 1997, and will
elect to disclose the effect that the application of option pricing model
measurement would have been for options granted from December 1, 1995. The
adoption of SFAS No. 123 will not impact the Company's consolidated results
of operations, financial position, or cash flows.
NOTE 2 - ACQUISITIONS
On April 12, 1996, the Company acquired 100% of the outstanding common
stock of Thimble Square, Inc. ("Thimble Square") for an aggregate of $1.1
million, paid by the issuance of shares of the restricted common stock of the
Company. In a concurrent transaction, Thimble Square acquired from its
stockholders a plant it had previously leased from them in exchange for (a)
$300,000 paid by the issuance of shares of the restricted common stock of
Innovo Group, and (b) the issuance by Thimble Square of $200,000 of unsecured
notes payable, which were paid in September, 1996. The Company also issued
95,686 shares in payment of a finder's fee related to the acquisition.
A total of 2,840,784 shares of the Company's common stock were initially
issued to effect the acquisition. However, in August, 1996, upon completion
of the audit of Thimble Square's financial statements and the appraisal of
its plants and equipment, the number of shares was, pursuant to the terms of
the merger agreement, reduced by 519,608 shares. Additionally, at the time
of the acquisition Thimble Square owned 1,080,000 shares of the Company's
common stock as a result of the January, 1996 manufacturing agreement between
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 2 - ACQUISITIONS (concluded)
the companies (see Note 6). As a result of the acquisition, Innovo Group
reacquired, and retired, those shares, and the net increase in the number of
shares of Innovo Group common stock outstanding was 1,241,176 shares.
The aggregate purchase price, as adjusted, of $1,584,000 (which includes
the finder's fee of $49,000 and acquisition costs of $200,000) was allocated
to Thimble Square's assets and liabilities, based on their fair values, as
follows:
<TABLE>
<CAPTION>
(000's)
</CAPTION>
<S> <C>
Current assets $ 220
Property and equipment 1,525
Investment in Innovo Group
common stock 551
Goodwill 842
Current liabilities (924)
Long-term debt (546)
Other liabilities (84)
_______
$ 1,584
_______
</TABLE>
The acquisition was accounted for as a purchase, and Thimble Square's
operating results are included in the consolidated results of operations from
April 12, 1996. The following unaudited pro forma information indicates what
net sales, income from continuing operations, and income from continuing
operations per share, would have been had the acquisition of Thimble Square
been completed on December 1, 1995 and November 1, 1994, respectively. This
unaudited pro forma information has been prepared for illustrative purposes
only and is not necessarily indicative of the Company's future financial
position or results of operations.
<TABLE>
<CAPTION>
Year Ended
________________________
November 30, October 31,
1996 1995
___________ __________
(000's except per share amounts)
</CAPTION>
<S> <C> <C>
Sales $ 7,824 $8,905
Income (loss) from
continuing operations (3,300) (165)
Income (loss) from continuing
operations per share $ (.24) $ (.04)
</TABLE>
NOTE 3 - DISCONTINUED OPERATIONS
The components of income (loss) from discontinued operations are as
follows:
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3 - DISCONTINUED OPERATIONS (continued)
<TABLE>
<CAPTION>
Year ended October 31,
______________________
1995 1994
____ ____
(000's)
Results of discontinued NASCO
</CAPTION>
<S> <C> <C>
Products operations $ (927) $(1,537)
Gain on sale of NASCO Products
operations 301 -
Gain (loss) on sale of Spirco
operations - 852
_______ _______
$ (626) $ (685)
_______ _______
</TABLE>
On July 31, 1995 the Company executed an agreement with Accessory Network
Group ("ANG") under which ANG succeeded to all of the rights held by NASCO
Products to market and distribute in the United States the National Football
League, NBA, Major League Baseball and National Hockey League logoed sports
bags, back packs and equipment bags NASCO Products previously imported and
distributed. The products marketed and sold under those license rights
represented a separate class of products and previously issued 1994 and 1993
financial statements have been restated to report the results of those
operations as a component of discontinued operations.
For each license ANG is paying NASCO Products $187,500 ($750,000 in the
aggregate), of which $100,000 was paid on July 31, 1995. The remaining
$650,000 is payable, without interest, in monthly installments equal to 5% of
ANG's aggregate sales of the licensed products, with the final payment due
July 31, 1998. ANG assumed all of NASCO Products' obligations under the
licenses, including the payment of royalties and minimum royalties. NASCO
Products also transferred to ANG its existing inventory of these products,
for which ANG paid approximately 67% of NASCO Products' cost over a six month
period. The gain of $301,000 recognized in fiscal 1995 from the sale of the
NASCO Products' domestic operations reflects the recording of the payments to
be received from ANG over the next three years at their present value,
discounted at 10% per annum.
In addition, ANG will make an ongoing annual payment to NASCO Products
of 2% of sales under each of the National Football League, Major League
Baseball and National Hockey League licenses, and 1% of sales under the NBA
license, up to aggregate sales of $15 million, and 1.5% and .5% of sales
thereafter. The payments will continue for forty years unless a license
expires or is terminated and is not renewed or reinstated within twelve
months.
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3 - DISCONTINUED OPERATIONS (concluded)
The revenues and expenses relating to the disposed NASCO Products
imported product line were as follows:
<TABLE>
<CAPTION>
Year ended October 31,
____________________
1995 1994
____ ____
(000's)
</CAPTION>
<S> <C> <C>
Net sales $ 2,777 $ 5,937
Cost of goods sold (2,532) (4,631)
Selling, general and
administrative expenses (1,043) (2,619)
Interest expense (79) (193)
Other (50) (111)
Income tax benefit - 80
________ _______
Income (loss) from operations $ (927) $(1,537)
________ _______
</TABLE>
Interest expense was allocated to the discontinued operations in
accordance with EITF 87-24, which provides for allocating interest to a
discontinued operation based on the relationship of the net assets employed
in the discontinued operation to the Company's consolidated net assets.
Effective April 30, 1993 the Company sold the youth and school
fundraising program direct marketing operations formerly conducted by Spirco.
The operations were purchased by QSP, Inc. ("QSP"), which is a wholly-owned
subsidiary of The Reader's Digest Association, Inc. The sales agreement
provided that QSP would pay Spirco 25% of the gross sales, as defined in the
sales agreement, received by QSP between July 1, 1993 and June 30, 1994 from
fundraising programs sold to former Spirco fundraising customers or by former
Spirco salespersons. The minimum sales price was $0.5 million, which Spirco
received on May 10, 1993. In addition, Innovo Group received $1.0 million
under the non-competition agreement. During fiscal 1994 Spirco received
additional payments of $1,445,000 from QSP. The fiscal 1994 gain on the
disposals of Spirco is net of income tax expense of $522,000.
NOTE 4 - REORGANIZATION OF SPIRCO
On August 5, 1994 the U.S. Bankruptcy Court for the Western District of
Pennsylvania issued an order confirming the plan of reorganization of Spirco,
and the confirmed plan was implemented and made effective on November 7,
1994. Spirco had filed for reorganization under Chapter 11 of the Bankruptcy
Code on August 27, 1993. Innovo Group, Innovo and NASCO Products were not
parties to the filing.
Spirco's plan of reorganization established fourteen classes of creditors
which, with respect to the nature and amount of distribution, were divided
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 4 - REORGANIZATION OF SPIRCO (continued)
into six categories. Administrative expenses were paid in cash using funds
borrowed under the Company's bank credit facility (see Note 4). Spirco's
equipment and mortgage debt, which had been guaranteed by Innovo Group, were
assumed by Leasall Management, Inc. ("Leasall"), a newly formed subsidiary,
together with its acquisition of the collateral assets, and other Spirco
liabilities that were secured or that had been guaranteed by Innovo Group
were paid in full through the issuance of 222,000 shares of Innovo Group
common stock on the basis of $2.84 per share. The claim of the Internal
Revenue Service ("IRS") resulting from its 1991 examination of the 1986 and
1988 income tax returns of Spirco was satisfied through the issuance to the
IRS of 25,000 shares of common stock, in return for which the IRS released
its lien on 25,000 shares of Innovo Group treasury stock owned by Spirco.
Additionally, the IRS foreclosed on 30,000 shares of common stock that had
been personally pledged to it by the Company's president.
Priority claims for sales, property and unemployment taxes held by state
and local taxing authorities, estimated to total $826,000 after the
resolution of disputes, were contributed to a trust ("the Class 3 Trust") to
which Innovo Group issued 584,000 shares of common stock. The plan of
reorganization provided that the Class 3 Trust would sell the shares of
common stock and distribute the net proceeds therefrom to the Class 3
claimants. During fiscal 1995 and the period November 1, 1995 to November
30, 1995, the Class 3 Trust received, and distributed to the Class 3
claimants, $590,000 and $12,000, respectively, from the sale of 359,054 and
18,000 shares of common stock. During fiscal 1996 the Class 3 Trust sold an
additional 286,678 shares, and, with the distribution of the proceeds of
$271,000 therefrom, completed the payment of the Class 3 claims.
Additionally, an aggregate of 187,049 shares were issued to settle certain
disputed claims.
For financial reporting purposes the shares of common stock issued
pursuant to Spirco's plan of reorganization to satisfy the secured, Innovo
Group guaranteed and IRS claims were recorded as issued on October 31, 1994
at a value of $2.84 per share, which represents the per share value
determined pursuant to the plan of reorganization. The claims contributed to
the Class 3 Trust were reflected as a separate item on the Company's
consolidated balance sheet. As shares of common stock were sold by the Class
3 Trust, the satisfaction of those claims and the issuance of those shares
was reflected based on the net proceeds received and distributed by the Class
3 Trust. The implementation of Spirco's plan of reorganization resulted in
the discharge of all of its remaining indebtedness, including the claims of
Spirco's general unsecured creditors and of Innovo Group, Innovo and NASCO
Products, for intercompany advances to Spirco. As a result, in fiscal 1994,
the Company recognized an extraordinary gain of $1,128,000, before related
deferred income tax expense of $429,000, representing principally the
forgiveness of the general unsecured claims that received no distribution
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 4 - REORGANIZATION OF SPIRCO (concluded)
under the plan. During fiscal 1995 the Company recorded extraordinary
charges of $258,000 for changes in the estimates of allowed claims.
NOTE 5 - NOTES PAYABLE
Notes payable consisted of the following:
<TABLE>
<CAPTION>
November 30, October 31,
1996 1995
____________ ___________
(000's) (000's)
</CAPTION>
<S> <C> <C>
Accounts receivable factoring facility $ 468 $ 356
Bank credit facility - 202
Working capital loan 213 407
NP International loan 100 -
Other 140 28
______ ______
$ 921 $ 993
______ ______
</TABLE>
Innovo and Thimble Square borrow under an accounts receivable factoring
facility with Riviera Finance ("Riviera") under which Riviera advances 80% of
assigned accounts receivable. The factoring facility provides for advances
up to $1,000,000. Riviera charges 1% of each invoice assigned plus 2% per
month of outstanding advances. Borrowings under the facility are
collateralized by assigned accounts receivable, which aggregated $652,000 and
$445,000 at November 30, 1996 and October 31, 1995, respectively.
Previously Innovo, and NASCO Products, borrowed under a bank credit
facility with NBD Bank ("NBD"). Borrowings under the bank credit facility
bore interest at 4% over the NBD's prime rate. Effective August 1, 1995 NBD
began to apply to the balance due it all proceeds from the collection of
NASCO Products accounts receivable, and all payments being received from ANG
(see Note 3). The repayment of the borrowings under the NBD facility was
completed in fiscal 1996 from the proceeds of the payments from ANG.
The July 1994 working capital loan originally bore interest payable
quarterly at 4% above NBD's prime rate, and was collateralized by a security
interest, subordinate to those held by Riviera and NBD, in the Company's
accounts receivable and inventory. As consideration for making the loan the
lenders received 80,000 shares of common stock, valued at $300,000 on the
basis of the then market price. In January 1995 the Company obtained an
extension of the maturity of the working capital loan until the earlier of
October 15, 1995 or the repayment of NBD's advances. At that time the
interest rate on the working capital loan was reset at 20% per annum, and the
Company issued 69,500 shares of its common stock as an extension fee. In
January, 1996 the lenders agreed to extend the maturity of the working
capital loan until October 31, 1996 and reduce the interest rate to 16%
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 5 - NOTES PAYABLE (concluded)
retroactively to October, 1995 in exchange for (i) the issuance of 50,000
shares of common stock and (ii) the assignment to the repayment of the loan
of the payments being received from ANG (see Note 3) after the repayment of
NBD. During fiscal 1996 an aggregate of 105,802 shares of common stock were
issued pursuant to the second extension, and the outstanding principal was
reduced to $213,000 through the application of payments from ANG. In
February, 1997, the holders of $124,000 of such remaining balance agreed to
accept $70,000, payable by June 30, 1997 without additional interest, in full
satisfaction of such $124,000 balance, in exchange for the release of certain
claims by the Company against them. The maturity of the remaining $89,000
due under the loan was extended, under the existing terms, to December 31,
1997.
In December, 1995, the Company obtained a $300,000 short-term loan,
collateralized by the common stock of NP International, which bears interest
at 12%. At November 30, 1996, $100,000 remains outstanding. The lender is
a company owned and controlled by a relative of the Company's chief executive
officer.
The weighted average interest rate on outstanding short-term borrowings
was 18.7% and 19.6% at November 30, 1996 and October 31, 1995, respectively.
NOTE 6 - LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
November 30, October 31,
1996 1995
(000's) (000's)
Notes payable to ICON Cash Flow Partners,
</CAPTION>
<S> <C> <C>
L.P., Series D ("ICON") $ 268 $ 355
Leasall first mortgage loan 876 895
Non-recourse first mortgage on
Florida property 787 -
Thimble Square SBA loan 214 -
Thimble Square first mortgage loan 140 -
Capital plant lease obligation 221 -
Capitalized equipment lease obligation 151 315
8% Convertible Debentures 470 -
Other 176 -
______ _______
Total long-term debt 3,303 1,565
Less current maturities (224) (143)
______ _______
$ 3,079 $ 1,422
______ _______
</TABLE>
The ICON loan bears interest at 11% and is collateralized by all
the equipment and personal property located at the Company's main office in
Springfield, Tennessee. The loan was originally obtained by Spirco, and was
assumed by Leasall in connection with the implementation of Spirco's plan of
reorganization (see Note 4). Innovo and NASCO Products have each guaranteed
the obligations of Leasall under this loan.
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6 - LONG-TERM DEBT (continued)
Leasall's first mortgage loan is collateralized by a first deed of trust
on the real property in Springfield, Tennessee and by an assignment of key-
man life insurance on the president of the Company in the amount of $950,000.
The loan bears interest at 2.75% over the lender's prime rate (which was
8.25% at November 30, 1996) and requires monthly payments of $9,900. In
order for the loan to be guaranteed by the Small Business Administration
("SBA"), Innovo Group, Innovo, NASCO Products, and the president of the
Company agreed to act as guarantors for Spirco's obligations under the loan
agreement.
In November, 1995 the Company acquired a facility which it is developing
as an indoor retail outlet featuring antique and flea market shops. The $1.5
million purchase price was paid by the issuance to the seller of (i) options
to purchase 1 million shares of the Company's common stock, exercisable at
$.01 per share through March, 1998, and (ii) an $800,000 first lien non-
recourse mortgage secured by the property. The mortgage is payable $25,500
quarterly; all unpaid principal, and interest (which accrues at the rate of
9.5% per annum) is due January, 2006. Construction period interest of
$79,000 was capitalized during fiscal 1996. The stock option was exercised
in March, 1996. The Company also issued a warrant, exercisable for the
purchase of 100,000 shares at $.01 per share, as a finder's fee on the
property acquisition. The warrant was exercised in April, 1996.
Thimble Square's SBA and first mortgage loans are collateralized by liens
on that company's Pembroke, Georgia plant and certain machinery and
equipment. The loans bear interest at 2.75% and 2%, respectively, over the
prime rate. The capital plant lease obligation represents the lease on
Thimble Square's Baxley, Georgia plant. Interest on the capital plant lease
is imputed at the rate of 10% per annum.
In fiscal 1996 the Company privately placed $1,625,000 of 8% Convertible
Debentures due September 30, 1998. As of November 30, 1996 $1,205,000 of the
8% Convertible Debentures had been converted into 7,521,912 shares of common
stock, and subsequent to November 30, 1995 an additional $265,000 of 8%
Convertible Debentures were converted into 2,353,104 shares of common stock.
The remaining $205,000 of 8% Convertible Debentures are convertible into
1,802,198 shares of common stock, provided, however, that the Company is not
required to allow conversion, or reserve or otherwise keep available shares
of common stock for issuance upon conversion, unless and until the Company's
authorized common stock is increased to 40 million shares. The Company may,
at its option, pay any outstanding debentures and accrued interest at their
September 30,1998 maturity by the issuance of shares of common stock on the
basis of 70% of the then closing bid price, and may call the 8% Convertible
Debentures prior to their maturity by the payment of the value of the shares
of common stock obtainable upon conversion.
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6 - LONG-TERM DEBT (concluded)
Principal maturities of long-term debt as of November 30, 1996 are as
follows:
<TABLE>
<CAPTION>
Year ending November 30, Amount
(000's)
</CAPTION>
<C> <C>
1997 $ 224
1998 810
1999 220
2000 395
2001 175
Thereafter 1,479
</TABLE>
NOTE 7 - INCOME TAXES
The provision (benefit) for income taxes included in net income (loss)
was as follows:
<TABLE>
<CAPTION>
Year ended
November 30, Year ended October 31,
___________ ____________________
1996 1995 1994
_______ _______ ____
(000's)
Continuing operations:
</CAPTION>
<S> <C> <C> <C>
Current (Federal) $ - $ - $ -
Deferred:
Federal - - 3,781
State - -
Total - - 3,781
_____ _______ ________
Total continuing operations - - 3,781
Discontinued operations - - 442
Extraordinary item - - 429
_____ _______ ________
Total income taxes (benefit) $ - $ - $ 4,652
_____ _______ ________
</TABLE>
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 7 - INCOME TAXES (continued)
Net deferred tax assets result from the following temporary
differences between the book and tax bases of assets and liabilities:
<TABLE>
<CAPTION>
November 30, October 31,
1996 1995
(000's) (000's)
Deferred tax assets (liabilities):
</CAPTION>
<S> <C> <C>
Allowance for doubtful accounts $ 22 $ 41
Inventory reserves 57 6
Property and equipment 91 239
Other 62 65
Benefit of net operating loss
carryforwards 3,183 8,464
______ ______
Gross deferred tax assets 3,415 8,815
Deferred tax assets valuation allowance (3,415) (8,815)
_______ ______
Net deferred tax assets $ - $ -
_______ ______
</TABLE>
A net increase in the valuation allowance for deferred taxes of
$5,767,000 was recorded in fiscal 1994. The valuation allowance decreased in
fiscal 1996 as the result of the reduction in the net operating loss
carryforward resulting from the limitations of Internal Revenue Code Section
382, as discussed below.
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate
to pretax income from continuing operations as a result of the following
differences:
<TABLE>
<CAPTION>
Year ended
November 30, Year ended October 31,
1996 1995 1994
00's)
Computed tax (benefit)
</CAPTION>
<S> <C> <C> <C>
at the statutory rate $(1,049) $ (23) $(1,402)
State income tax - - -
Change in valuation allowance 1,049 23 5,767
Other - - (584)
______ ______ _______
$ - $ - $ 3,781
______ ______ _______
</TABLE>
The Company has consolidated net operating loss carryforwards of
approximately $26.6 million expiring through the year 2011. However, as the
result of "changes in control" as defined in Section 382 of the Internal
Revenue Code, approximately $25 million of such carryforwards may be subject
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 7 - INCOME TAXES (concluded)
to an annual limitation, which is currently estimated to be a minimum of
$432,000, subject to adjustment. Such limitation would have the effect of
limiting to approximately $8 million the future taxable income which the
Company may offset through the year 2011 through the application of its net
operating loss carryforwards. A subsidiary of the Company has state tax net
operating loss carryforwards of approximately $11.0 million to offset state
taxable income. These carryforwards expire in varying amounts between the
years 1999 and 2005.
NOTE 8 - STOCKHOLDERS' EQUITY
(a) Common Stock
In June 1992, Innovo Group issued $2,000,000 of 12% Subordinated
Collateralized Notes (the "Subordinated Collateralized Notes") due on or
before December 1, 1992. On April 5, 1994 the Company completed an equity
for debt exchange in which (i) 216,128 shares of common stock were issued to
extinguish $1.7 million of the Subordinated Collateralized Notes and related
accrued interest of $191,000, (ii) 6,334 shares of common stock were issued
to extinguish $50,000 of other notes payable and accrued interest of $5,400
and (iii) 26,327 shares of common stock were issued to satisfy $185,000 of
other obligations. Several of the holders of the debt exchanged for common
stock were also holders of the units sold by the Company in a June, 1993
private placement. As a result, in order to obtain agreement to the debt
conversion, the Company also agreed to revise the terms of the June, 1993
private placement by issuing 53,000 shares of common stock to increase to two
shares the number of shares included in the units sold, decrease to $20 the
exercise price of the 53,000 warrants included in the units, and extend the
term of the warrants until July 31, 1997. As a result, the Company issued an
aggregate of 301,789 shares, which have been recorded in stockholders' equity
at the amount of debt extinguished ($2,132,000). Costs and expenses of the
exchange of $270,000 were charged against stockholders' equity. No gain or
loss was recognized.
In December, 1993 the Company reached an agreement with a vendor,
which had been owed approximately $1.3 million, under which the vendor (i)
retained proceeds of $483,000 from its sale of shares previously pledged by
a principal stockholder, (ii) received proceeds of $500,000 from its sale of
100,000 shares previously pledged by the Company's president and (iii)
received a $300,000 interest-free note due June, 1994 collateralized by the
remaining 15,700 shares previously pledged by the Company's president. The
$483,000 was recorded as a contribution to the Company's capital. In July
and August, 1994, the vendor sold the 15,700 pledged shares, applying the
proceeds of $60,000 to reduce the note. The Company's president was issued
115,700 shares to reimburse her in August, 1994. In other transactions in
fiscal 1994 the Company issued 37,724 shares to reduce outstanding notes
payable by $112,000.
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8 - STOCKHOLDERS' EQUITY (continued)
During fiscal 1995 the Company issued an aggregate of 119,873 shares
of common stock to extinguish an aggregate of $128,000 of unsecured notes
payable, which were past due. Additionally, in October 1995 the holder of
unsecured notes aggregating $319,000 tendered the notes, and accrued interest
of $31,000, as a subscription for shares of the Company's common stock.
Under the subscription agreement the Company issued 372,149 shares over the
six month period ending May, 1996, on the basis of 75 percent of the market
prices at the times the shares are issued.
In January, 1996, the Company entered into an agreement to obtain
contract manufacturing services, and issued to the contractor (Thimble
Square) 1,200,000 shares of its common stock as prepayment for $400,000
(approximately 57,000 hours) of manufacturing operations which the Company
may use on an as needed basis through July 31, 1997. Thimble Square owned
1,080,000 of such shares at the time of its acquisition by the Company (see
Note 2), as the result of which the agreement was canceled and the Company
reacquired, and retired, such 1,080,000 shares.
During the first quarter of fiscal 1996 the Company settled an
outstanding obligation held by a creditor who had previously received 66,619
shares of common stock as a partial payment. As a part of the settlement the
creditor returned the shares to the Company. The returned shares were
recorded as treasury stock at their market value.
In connection with the private placement of shares of its common stock
for cash during the first quarter of fiscal 1996, the Company issued warrants
for the issuance of 2,272,730 shares of its common stock, exercisable through
January, 1998 at a per share price equal to 50% of the exercise date market
price of the Company's common stock. The warrants were exercised in April
and May, 1996.
During the third quarter of fiscal 1996 the Company completed the
private placement of aggregate of 1,751,516 shares of its common stock for
net cash proceeds of $560,000. The placements included the issuance of
warrants for the purchase of 775,758 shares of the Company's common stock
exercisable for five years at an exercise price of $.52 per share. In
connection with the third quarter fiscal 1996 placements of common stock and
the 8% Convertible Debentures, the Company issued to the placement agent
warrants for the purchase of an aggregate of 1,220,588 shares of its common
stock, subject to adjustment, exercisable for a period of five years at an
exercise price of $.17 per share.
An aggregate of 1,269,470 shares of common stock, and 250,000 Class E
and 50,000 Class G common stock purchase warrants, were issued during fiscal
1996 to extinguish an aggregate of $423,000 of indebtedness. The
extinguished indebtedness included the remaining $300,000 of Subordinated
Collateralized Notes.
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8 - STOCKHOLDERS' EQUITY (continued)
As of November 30, 1996 the Company has outstanding common stock
purchase warrants as follows:
<TABLE>
<CAPTION>
Class Exercise Price Shares Expiration
_____ ______________ ______ __________
</CAPTION>
<S> <C> <C> <C>
A $30 91,700 July 1997
A-1 $ 2 2,250 March 1997
B $20 53,000 July 1997
E $.30 250,000 April 1999
G $.28 50,000 May 1998
H $.52 725,758 August 2001
I $.17 ,220,588 August 2001
</TABLE>
The Company has reserved 446,950 shares for issuance upon the exercise
of the outstanding common stock purchase warrants. Under the terms of the
Class H and Class I warrants, the Company is not required to reserve or
otherwise keep available from its authorized but unissued common stock shares
for issuance upon the exercise, if any, of the Class H and Class I warrants,
unless and until the Company's authorized common stock is increased to 40
million shares, and prior to any such increase, is only required to allow the
exercise of the Class H and Class I warrants if and to the extent there are
available shares of its authorized common stock not already issued and
outstanding, or reserved for the exercise of other then outstanding stock
options, warrants, or conversion rights.
In September 1993 the Company issued 189,761 shares of restricted common
stock to extinguish notes payable and accrued interest of $1,423,000. The
holders of such shares hold options ("put options") that allowed them, until
April, 1995, to require that the Company repurchase any or all of the shares
at a price of $7.50 per share. The put options continue to be exercisable at
$30 per share, in the event of certain "changes in control" not approved by
the board of directors. The put options grant the Company a right of first
refusal to purchase any of the related shares upon the payment of the same
price offered to the holders by another party. Also, the Company can cancel
the put options by paying nominal consideration.
(b) Stock Compensation
The Company adopted a Stock Option Plan (the "1991 Plan") in December
1991 (amended in April 1992) under which 100,000 shares of the Company's
common stock have been reserved for issuance to officers, directors,
consultants and employees of the Company under the terms of the 1991 Plan.
The 1991 Plan will expire on December 10, 2001.
The 1991 Plan provides for the issuance of "incentive stock options" (as
defined in the Internal Revenue Code) and non-qualified options to officers,
directors, consultants and employees of the Company. The exercise price of
incentive stock options must be equal to the fair market value of the
underlying common stock on the date of grant. The exercise price of non-
qualified stock options must be at least 50% of the fair market value of the
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8 - STOCKHOLDERS' EQUITY (concluded)
common stock on the date of issuance.
The following table summarizes the activity in the 1991 Plan for the
periods indicated:
<TABLE>
<CAPTION>
Exercise
Options Price Options
Outstanding Per Share Exercisable
___________ _________ ___________
Outstanding at
</CAPTION>
<S> <C> <C> <C>
November 1, 1993 7,800 $80 - 10 7,800
Canceled (4,800) $80 - 10
Granted 1,500 $ 3.80
______
Outstanding at
October 31, 1994 4,500 $10 - $3.80 4,500
Canceled (1,500) $10
Granted -
______
Outstanding at
October 31, 1995 3,000 $3.80 3,000
Canceled -
Granted -
______
Outstanding at
November 30, 1996 3,000 $3.80 3,000
______
</TABLE>
During fiscal 1994 the Company granted a restricted stock award of
9,875 shares having an aggregate value of $81,000. The award vested during
fiscal 1994.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
The Company leases certain property, buildings and equipment. Rental
expense for the years ended November 30, 1996, October 31, 1995 and 1994 was
approximately $54,000, $50,000 and $276,000, respectively. The minimum
rental commitments under noncancellable operating leases as of November 30,
1996 are as follows: 1997, $38,000; 1998, $28,000; 1999, $28,000.
The Company displays characters, names and logos on its products under
license agreements that require royalties ranging from 8% to 12.5% of sales.
The agreements expire through 1998 and require annual advance payments
(included in prepaid expenses) and certain annual minimums. Royalties were
$441,000, $402,000 and $823,000 for fiscal 1996, 1995 and 1994, respectively.
An executive officer has an employment agreement with the Company that
expires in October, 1997. The Company or the employee may terminate the
employment agreement at any time for cause. The agreement provides that, in
the event of a "change in control" not approved by the board of directors,
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9 - COMMITMENTS AND CONTINGENCIES (continued)
any breach or termination shall require the payment of severance benefits
equal to the greater of the annual salary payable for the remainder of the
agreement's term, or three times the annual salary under the agreement
(presently $175,000).
In December 1991, a former employee filed suit against the Company and
others alleging breach of his employment agreement and conversion of his
interest in certain property rights of the Company. The complaint, as
amended, sought compensation damages of at least $13.5 million. In August,
1994 the trial court granted the Company's motion for partial summary
judgement and directed verdicts with respect to certain of the former
employee's claims, including those concerning his ownership of an interest in
the "E.A.R.T.H." trademark, or the existence of a partnership with the
Company to jointly own the trademark, and the state court jury returned
findings in favor of the Company on the remainder of the plaintiff's claim
concerning the trademark as well as his claims for wrongful termination of
employment. However, the jury awarded the plaintiff approximately $700,000,
of which $50,000 was assessed against Innovo Group and $650,000 was assessed
against Innovo, including pre-judgement interest and attorney's fees, on the
theory that he was entitled to have received certain employment benefits,
including employee stock awards, during, and after, the term of his
employment. The Company appealed the jury's award, and in August, 1996 (as
revised in an amended October, 1996 opinion), the appeals court reversed
approximately $350,000 of the initial judgement as not supported by the
evidence or improper as a matter of law. As a result, the judgement,
including post-judgement interest through August, 1996, has been reduced to
$420,000. In addition, the appeals court ruled that the trial court erred in
no submitting to the jury the question of the Company's counterclaim of
breach of fiduciary duty by Tedesco, ruling that the trial record indicated
that there was evidence of such breach and damages therefrom. The appeals
court remanded the case to the trial court for trial on, and submission to a
jury of, the Company's claim of breach of fiduciary duty by Tedesco. The
Company is filing motions with the trial court for the scheduling of the
ordered trial on its claims against Tedesco and would be entitled to offset
any damages it is awarded against the Tedesco award. The Company has also
appealed to the Texas Supreme Court the issue of the appeal courts' decision
to uphold $200,000 of the original judgement (which accounts for $340,000 of
the August, 1996 $420,000 amount). In connection with its appeals the
Company has pledged as an appeal bond 200,000 shares of its unissued common
stock. The Company continues to believe that the ultimate resolution of the
case is unlikely to result in a material loss. An adverse outcome of the
Company's appeal to the Texas Supreme Court, and of the Company's claims
against Tedesco, could result in a loss of up to $400,000.
In May, 1996, a foreign manufacturer that had previously supplied
imported products to NASCO Products filed suit against NASCO Products
asserting that it is owed approximately $300,000 in excess of the amount
presently recorded by NASCO Products. NASCO Products and the supplier had
previously reached an agreement on the balance owed (which is the balance
recorded), as well as an arrangement under which the schedule for NASCO
Products' payments reducing the balance would be based on future purchases
from that supplier of products distributed internationally by NP
INNOVO GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Concluded)
NOTE 9 - COMMITMENTS AND CONTINGENCIES (continued)
International. The Company has denied the supplier's claims, and has
asserted affirmative defenses, including the supplier's late shipment of the
original products, and the supplier's refusal to accept and fill NP
International orders on terms contained in the agreement. NASCO Products
sold its operations in July, 1995, and that company currently has no
operations or unencumbered assets. No provisions for the additional amount
sought has been recorded in the consolidated financial statements.
NOTE 10 - SEGMENT INFORMATION
Information concerning the two segments in which the Company operated in
fiscal 1996 is as follows:
<TABLE>
<CAPTION>
Canvas and Apparel General
Nylon Consumer Products Corporate Consolidated
Products
______________ ________ _________ ____________
(000's)
</CAPTION>
<S> <C> <C> <C> <C>
Net Sales $ 6,023 $ 1,368 $ - $ 7,391
Income (loss) from
operations (965) (12) (963) (1,940)
Identifiable
assets 3,657 2,830 2,946 9,433
Capital
expenditures 48 1,525 331 1,904
Depreciation and
amortization 397 134 57 588
</TABLE>
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
Not applicable.
<PAGE>
PART III
Item 10. Directors and Executive Officers
The following table sets forth certain information regarding the
directors and executive officers of the Company as of February 15, 1997.
<TABLE>
<CAPTION>
Name Age Position
____ ___ ________
</CAPTION>
<S> <C> <S>
Patricia Anderson-Lasko (1) 37 Chairman of the
Board, President,
Chief Executive
Officer and
Director
Scott Parliament 39 Senior Vice
President; Chief
Operating Officer
Terrance Bond 40 Controller
Felix Lee 48 Vice President
of Manufacturing
of Innovo and
Director
Eleanor V. Schwartz 64 Director; Designer
for Thimble Square
Alexander K. Miller (2) (3) 50 Director
Reino C. Lanto, Jr. (1)(2) 53 Director
Marvin M. Williamson (1)(2)(3) 58 Director
</TABLE>
____________________
(1) Member of the audit committee of the board of directors.
(2) Member of the executive compensation committee of the board of directors.
(3) Member of the stock option committee of the board of directors.
Patricia Anderson-Lasko has been Chairman, President, Chief Executive
Officer and a director of the Company since August 1990, and President of
Innovo since her founding of that company in 1987.
Scott Parliament joined the Company as Senior Vice-President and chief
operating officer in October, 1996. From November, 1993 until October, 1996
Mr. Parliament was a principal of Parlon Ventures, Ltd., a privately held
consulting and investment firm. From March, 1990 until he joined Parlon
Ventures, Ltd. Mr. Parliament held various positions with National Steel
Services Center, Inc.
Terrance Bond joined the Company as Controller in April 1993. From
November 1988 until he joined Innovo Group, Mr. Bond was Director of
Corporate Accounting at United Merchants and Manufacturers, Inc.
Felix Lee has been a director of the Company since August 1990 and Vice
President of Manufacturing of Innovo since June 1989. From July 1981 through
May 1989, Mr. Lee was plant manager at Industria Nacional De Artefactes,
S.A., a luggage manufacturer in Panama City, Republic of Panama, where his
responsibilities included production and manufacturing.
Eleanor V. Schwartz became a director of the Company in April, 1996 upon
the completion of the Company's acquisition of Thimble Square. Mrs.
Schwartz, together with her husband Philip Schwartz, founded Thimble Square
in 1985 and since that time has been a director of Thimble Square and its
principal designer. Mrs. Schwartz has over 35 years of experience in the
buying, design and marketing of ladies apparel.
Alexander K. Miller has been a director of the Company since December
1991. From June 1993 to December 1994, Mr. Miller also served as the Vice-
President of Administration of the Company. Prior and subsequent to that
period Mr. Miller also served the Company on a consulting basis. Mr. Miller
is self-employed as a management and marketing consultant. From 1986 to 1993
he was a member of the faculty of California State Polytechnic University in
San Luis Obispo, California, where he taught business administration.
Reino C. Lanto, Jr. has been a director of the Company since August 1990.
He is an attorney licensed to practice in Illinois and has been a partner in
the law firm of Wilson & Lanto since November 1982.
Marvin M. Williamson has been a director of the Company since August
1990. From April 1982 to June 1987, he was a Vice President and Mortgage
Sales Manager for First Boston Corp. in New York City. From June 1987
through August 1990 he was Vice President of Mortgage Sales for Greenwich
Capital, Greenwich, Connecticut. From August 1990 to April 1991 Mr.
Williamson was a Senior Vice President with Alliance Funding Co. in Montvale,
New Jersey. In April 1991 he left Alliance Funding Co. to establish his own
business, Marvin Williamson Associates, a mortgage investment brokerage and
consulting firm in New Canaan, Connecticut. Mr. Williamson is currently a
registered representative of First Sentinel Securities Ltd., a member firm of
the National Association of Securities Dealers, Inc.
Each of the Company's directors is elected at the annual meeting of
stockholders and serves until the next annual meeting or until his successor
has been elected and qualified. Vacancies in the board of directors are
filled by a majority vote of the remaining members of the board of directors.
Executive officers of the Company are elected on an annual basis and
serve at the discretion of the board of directors.
Compliance With Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers, directors, and persons who own more than 10% of the
registered class of the Company's equity securities to file reports of
ownership with the Securities and Exchange Commission. Officers, directors
and greater than 10% stockholders are required by the regulations of the
Securities and Exchange Commission to furnish the Company with copies of all
Section 16(a) forms they file.
Based solely on a review of the Forms 3, 4 and 5 and amendments thereto
and certain written representations furnished to the Company, the Company
believes that during the fiscal year ended October 31, 1995, all filing
requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with.
Form 5 is not required to be filed if there are not previously unreported
transactions or holdings to report. Nevertheless, the Company is required to
disclose the name of directors, executives officers and 10% shareholders who
did not file a Form 5, unless the Company has obtained a written statement
that no filing is due. The Company has been advised by those required to
file Form 5 that no filings were due.
<PAGE>
Item 11. Executive Compensation
Executive Compensation
The following table sets forth summary information concerning
compensation paid or accrued by or on behalf of the Company's chief executive
officer, and the one other executive officer who is compensated at an annual
rate of $100,000 or higher.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
______________________
Annual Compensation Awards Payouts
___________________ ______ _______
Other
Annual Restricted LTIP All Other
Compen- Stock Compen-
Name and Principal sation Award(s) Options/ Payouts sation
Position Year Salary($) Bonus($) ($) ($) (1) (#) ($)
_______ ____ _________ ________ _______ _______ ________ _______ ________
</CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Patricia Anderson- 1996 $171,354(2) - 1,346(3) 0 0 0 -
Lasko 1995 175,000(2) - 1,346(3) 0 0 0 -
President, Chief 1994 175,000(2) - 2,791(3) 0 0 0 -
Executive Officer,
and Chairman of the
Board
Scott Parliament 1996 $16,900(4) - - 0 0 0 -
Senior Vice-President
and Chief Operating
Officer
</TABLE>
(1) No executive officer received or held restricted stock awards during
or at the end of fiscal 1996, 1995, or 1994, or received, exercised or held
stock options during or at the end of fiscal 1996, 1995 or 1994.
(2) At the request of the Company Ms. Anderson-Lasko deferred the payment
of $51,000 of her fiscal 1995 salary until fiscal 1996.
(3) During fiscal 1996, 1995 and 1994 Ms. Anderson-Lasko received life
insurance benefits in the aggregate amount of $1,346, $1,346 and $2,019,
respectively, and, in fiscal 1994, health insurance benefits in the aggregate
amount of $772.
(4) Represents salary paid to Mr. Parliament from October, 1996, the
commencement of his employment, through November 30, 1996. Mr. Parliament is
compensated at the rate of $120,000 annually.
<PAGE>
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
Ms. Anderson-Lasko and Messrs. Lanto and Williamson served on the
executive compensation committee of the board of directors during the past
fiscal year. Although Ms. Anderson-Lasko, the Company's President, chief
executive officer and Chairman of the Board, served on the Company's
executive compensation committee, she did not participate in any decisions
regarding her own compensation as an executive officer. Messrs. Lanto and
Williamson are not officers of the Company.
Employment Agreements
In September 1993 the Company entered into a revised employment
agreement with Patricia Anderson-Lasko. The agreement expires in October
1997, but provides that its terms may be extended for additional one-year
periods, starting in October 1995, at the election of the parties. The
employment agreement provides that Ms. Anderson-Lasko shall be employed as
the chief executive officer of the Company at an annual base salary of
$175,000 and shall be eligible for such increases in salary, other bonuses
and payments as the Board of Directors shall direct. In January, 1997, Ms.
Anderson-Lasko's employment contract was amended to eliminate provisions
entitling her to a $100,000 mortgage loan from the Company. Ms. Anderson-
Lasko had not taken the loan.
The employment agreement of Ms. Anderson-Lasko contains provisions
requiring certain severance payments in the event (i) the Company terminates
her employment other than for cause, death or disability or (ii) Ms.
Anderson-Lasko terminates the contract after a change in control, or as the
result of a breach of the agreement by the Company, including a change in her
responsibilities or authorities not provided for in the contract. In such
event, Ms. Anderson-Lasko is entitled to a severance payment equal to the
greater of three times the annual salary in effect at the date of termination
or such annual salary multiplied by the number of years remaining in the term
(including extensions thereof) of the contract. For purposes of the
contract, a change in control is defined to occur if any "person" (as such
term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of
1934 (the "Exchange Act") but excluding the Company, its existing officers
and directors and any other individual, entity or group whose acquisition of
control is approved in advance by the Board) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities issued by the Company representing 30% or more of
the combined voting power of the Company's then-outstanding securities, or if
during any period of two consecutive years during the term of the agreement,
individuals who at the beginning of such period constitute the Board cease
for any reason to constitute at least a majority thereof, unless the
election, or the nomination for election by the Company's stockholders, of
each new director was approved by a vote of at least two-thirds of the
directors then in office who were directors at the beginning of the period.
Stock Option Plan
The Company has adopted a stock option plan (the "1991 Plan") pursuant
to which an aggregate of 100,000 shares of common stock had been reserved for
issuance to officers, directors, consultants and employees of the Company and
its subsidiaries upon exercise of non-qualified options and exercise of
"incentive stock options" (within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended) issuable under the 1991 Plan. The primary
purpose of the 1991 Plan is to attract and retain capable executives,
consultants and employees by offering them stock ownership in the Company.
The 1991 Plan was originally adopted by the board of directors on December
11, 1991, and amended and ratified by the board of directors on April 10,
1992. The 1991 Plan was approved by the Company's shareholders at the annual
meeting of shareholders on May 28, 1992.
The 1991 Plan is administered by the stock option committee appointed
by the Company's board of directors. The current members of the stock option
committee are Messrs. Miller and Williamson. No member of the stock option
committee will be eligible to participate in a grant of options pursuant to
the 1991 Plan.
The stock option committee will determine, among other things, the
persons to be granted options, the number of shares subject to each option
and the option price. The exercise price of any incentive stock option
granted under the 1991 Plan to an eligible employee must be equal to the fair
market value of the shares on the date of grant and, with respect to persons
owning more than 10% of the outstanding common stock, the exercise price may
not be less than 110% of the fair market value of the shares underlying such
option on the date of grant. The exercise price for non-qualified options
must be at least 50% of the fair market value of the shares on the date of
issue. The stock option committee will determine the terms of each option
and the manner in which it may be exercised. No option may be exercisable
more than ten years after the date of grant, except for those held by
optionee who own more than 10% of the Company's common stock, which may not
be exercisable more than five years after the date of grant. Options are not
transferable except upon the death of the optionee.
The board of directors may amend the 1991 Plan from time to time;
however, without stockholder approval, the 1991 Plan may not be amended to:
(i) increase the aggregate number of shares subject to the 1991 Plan; (ii)
materially increase the benefits accruing to participants under the 1991
Plan; (iii) change the class of individuals eligible to receive options under
the 1991 Plan; or (iv) extend the term of the 1991 Plan.
As of February 15, 1997, the Company had outstanding options to acquire
a total of 3,000 shares of the Company's common stock held by officers and
other employees of the Company under the 1991 Plan. No options granted under
the 1991 Plan have been exercised.
Stock Bonus Plan
The board of directors has authorized and may in the future authorize
the issuance of restricted stock to certain employees of the Company.
<PAGE>
Item 12: Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information with respect to the
beneficial ownership of the Company's common stock on February 15, 1997 by
(i) each of the Company's executive officers or directors, (ii) each person
known to the Company to be the beneficial owner of more than five percent of
the outstanding shares of the common stock, and (iii) all directors and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
Shares Beneficially Owned (1)
_____________________________
Name Number (1) Percent
__________________________________________________________________________________________
</CAPTION>
<S> <C> <C>
Patricia Anderson-Lasko 363,440 (2) 1.3%
27 North Main Street
Springfield, TN 37172
Scott Parliament - -
27 North Main Street
Springfield, TN 37172
Alexander K. Miller - -
27 North Main Street
Springfield, TN 37172
Terrance Bond 1,000 (3) *
27 North Main Street
Springfield, TN 37172
Felix Lee 1,050 (4) *
27 North Main Street
Springfield, TN 37172
Reino C. Lanto, Jr. 61,286 (5) *
235 North Garrard St.
Rantoul, IL 61866
Marvin M. Williamson 2,000 *
53 Fitch Lane
New Canaan, CT 06840
Eleanor and Philip Schwartz 1,665,745 (6) 5.8%
23362 Water Circle
Boca Raton, FL 33486
All Executive Officers 2,928,521 (2) (3) (4) (5) 10.2%
and Directors as a Group (6) (7)
(6 persons)
</TABLE>
_________________
* Less than 1%.
(1) Pursuant to the rules of the Securities and Exchange Commission,
certain shares of the Company's common stock that a beneficial owner set
forth in this table has a right to acquire within 60 days of the date hereof
pursuant to the exercise of options or warrants for the purchase of shares of
common stock are deemed to be outstanding for the purpose of computing the
percentage ownership of that owner but are not deemed outstanding for the
purpose of computing percentage ownership of any other beneficial owner shown
in the table. Shares outstanding and eligible to vote exclude (i) 213,625
shares held by trusts established under the Plan of Reorganization of Spirco,
Inc. (see Note 4 of Notes to Consolidated Financial Statements) and (ii)
200,000 shares held as an appeal bond for the Company's appeal of the Tedesco
litigation (see Note 9 of Notes to Consolidated Financial Statements). Under
the terms of the trusts and the bond, such shares are not eligible to vote.
(2) Includes 79,432 shares owned by DWL International, a corporation in
which Ms. Anderson-Lasko's spouse, Donald W. Lasko, holds a controlling
interest.
(3) Consists of 1,000 shares subject to options exercisable by Mr. Bond.
(4) Includes 50 shares currently held by Mr. Lee and 1,000 shares subject
to options exercisable by Mr. Lee.
(5) Consists of 32,735 shares owned by Jeanene Lanto, the wife of Mr.
Lanto, and 28,551 shares owned by a trust for the benefit of Jeanene Lanto of
which Mr. Lanto is the trustee, as to all of which Mr. Lanto disclaims any
beneficial ownership.
(6) Pursuant to a voting agreement between Lee Schwartz, Eleanor Schwartz
and Philip Schwartz, Lee Schwartz and Philip Schwartz have granted to Eleanor
Schwartz the power to vote any shares owned by the for so long as Eleanor
Schwartz is a member of the Company's board of directors, including 553,000
shares, owned by Lee Schwartz, that Eleanor Schwartz has the power to vote
pursuant to such voting agreement.
(7) Includes 834,000 shares held by Matthew Mulhern. Pursuant to an
agreement between the Company and Mr. Mulhern, Mr. Mulhern has agreed to vote
in accordance with the recommendations of the Company's board of directors.
<PAGE>
Item 13. Certain Relationships and Related Transactions
In December, 1995, the Company obtained a $300,000 12% short term loan
collateralized by the common stock of NP International from DWL
International. Donald W. Lasko, the husband of Patricia Anderson-Lasko, is
an officer and stockholder of DWL International. $200,000 of the loan was
repaid in fiscal 1996, together with interest of $22,000.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements. See Item 8.
(2) Financial Statement Schedules
Schedule Page Reference
Report of Independent Certified Public
Accountants on Financial Statement Schedules 76
Schedule II - Valuation and Qualifying Accounts 77
(3) Exhibits
<TABLE>
<CAPTION>
Exhibit Reference
Number Description No.
</CAPTION>
<C> <S> <C>
3.1 Form of Amended and Restated Certificate
of Incorporation of Registrant. 3.1 (12)
3.2 Amended and Restated Bylaws of Registrant.* 4.2 (5)
4.1 Article Four of the Registrant's Amended
and Restated Certificate of Incorporation
(included in Exhibit 3.1)*
10.1 Registrant's 1991 Stock Option Plan.* 10.5 (2)
10.2 NASCO, Inc. Amended Stock Bonus Plan dated
as of December 31, 1991.* 10.6 (2)
10.3 Note executed by NASCO, Inc. and payable to
First Independent Bank, Gallatin, Tennessee
in the principal amount of $950,000 dated
August 6, 1992.* 10.21 (2)
10.4 Deed of Trust between NASCO, Inc. and First
Independent Bank, Gallatin, Tennessee dated
August 6, 1992.* 10.22 (2)
10.5 Authorization and Loan Agreement from the
U.S. Small Business Administration, Nashville,
Tennessee dated July 21, 1992.* 10.23 (2)
10.6 Indemnity Agreement between NASCO, Inc. and
First Independent Bank, Gallatin, Tennessee.* 10.24 (2)
10.7 Compliance Agreement between NASCO, Inc. and
First Independent Bank, Gallatin, Tennessee
dated August 6, 1992.* 10.25 (2)
<PAGE>
10.8 Assignment of Life Insurance Policy issued
by Hawkeye National Life Insurance Company
upon the life of Patricia Anderson-Lasko to
First Independent Bank, Gallatin, Tennessee
dated July 31, 1992.* 10.26 (2)
10.9 Guaranty of Patricia Anderson-Lasko on behalf
of NASCO, Inc. in favor of First Independent
Bank, Gallatin, Tennessee dated August 6, 1992.* 10.27 (2)
10.10 Guaranty of Innovo Group Inc. on behalf of
NASCO, Inc. in favor of First Independent Bank,
Gallatin, Tennessee dated August 6, 1992.* 10.28 (2)
10.11 Guaranty of Innovo, Inc. on behalf of NASCO,
Inc. in favor of First Independent Bank,
Gallatin, Tennessee dated August 6, 1992.* 10.29 (2)
10.12 Guaranty of NASCO Products, Inc. on behalf of
NASCO, Inc. in favor of First Independent Bank,
Gallatin, Tennessee dated August 6, 1992.* 10.30 (2)
10.13 Note executed by NASCO, Inc. and payable to
ICON Cash Flow Partners, L.P., Series D, in
the principal amount of $750,000 dated
August 7, 1992.* 10.36 (2)
10.14 Security Agreement between NASCO, Inc.
and ICON Cash Flow Partners, L.P., Series
D dated August 7, 1992.* 10.37 (2)
10.15 Guaranty of Innovo Group Inc. on behalf
of NASCO, Inc. in favor of ICON Cash Flow
Partners, L.P., Series D dated July 30, 1992.* 10.38 (2)
10.16 Guaranty of Innovo, Inc. on behalf of NASCO,
Inc. in favor of ICON Cash Flow Partners,
L.P., Series D dated July 30, 1992.* 10.39 (2)
10.17 Guaranty of NASCO Products, Inc. on behalf
of NASCO, Inc. in favor of ICON Cash Flow
Partners, L.P., Series D dated July 30, 1992.* 10.40 (2)
10.18 Guaranty of NASCO Sportswear, Inc. on behalf
of NASCO, Inc. in favor of ICON Cash Flow
Partners, L.P., Series D dated July 30, 1992.* 10.41 (2)
10.19 1993-1996 U.S. Olympic Merchandise Agreement
between United States Olympic Committee and
Innovo Group Inc. dated April 29, 1993.* 10.51 (6)
10.20 Non-Competition and Non-Solicitation Agreement
dated May 10, 1993 among QSP, Inc., NASCO,
Inc. and Innovo Group Inc.* 10.45 (4)
<PAGE>
10.21 Employment Agreement dated September 30, 1993
between Innovo Group Inc. and Patricia
Anderson-Lasko.* 10.56 (6)
10.22 Form of Common Stock Put Option.* 10.61 (6)
10.23 Form of Debt Conversion Agreement between
Innovo Group Inc. and certain holders of
notes payable or Subordinated Notes Payable.* 10.63 (6)
10.24 Form of Agreement between Innovo Group Inc.
and Purchasers under the June 11, 1993 Unit
Purchase Agreement.* 10.64 (6)
10.25 Agreement dated April 29, 1994 between C.I.
Sports, Inc. and NASCO Products, Inc.* 10.65 (7)
10.26 Amended Plan of Reorganization of Spirco, Inc.* 10.67 (8)
10.27 $600,000 Secured Promissory Note and Security
Agreement dated July 20, 1994 between Innovo
Group Inc., Innovo, Inc. and NASCO Products,
Inc. and certain individual lenders.* 10.68 (8)
10.28 License Agreement dated January 24, 1994
between NFL Properties Europe B.V. and NASCO
Marketing, Inc.* 10.66 (9)
10.29 License Agreement dated July 6, 1994 between
National Football League Properties, Inc. and
Innovo Group Inc.* 10.68 (9)
10.30 First Amendment to $600,000 Secured Promissory
Note and Security Agreement dated April 15, 1995.* 10.70 (9)
10.31 Security Agreement dated April 28, 1995 between
Innovo, Inc. and Riviera Finance.* 10.71 (9)
10.32 Form of Amendment to Common Stock Put Option.* 10.72 (9)
10.33 Agreement dated July 31, 1995 between NASCO
Products, Inc. and Accessory Network Group, Inc.* 10.1 (11)
10.34 License Agreement dated November 14, 1995 between
Innovo Group Inc., United States Olympic Committee
and Warner Bros. Studios* 10.47 (12)
10.35 Agreement dated December 11, 1995 between Innovo
Group Inc., United States Olympic Committee and
Original Appalachian Artworks, Inc.* 10.48 (12)
10.36 License Agreement dated August 9, 1995 between
Innovo, Inc. and NHL Enterprises, Inc.* 10.49 (12)
10.37 License Agreement dated August 9, 1995 between
NASCO Products International, Inc. and NHL
Enterprises, B.V.* 10.50 (12)
10.38 License Agreement dated December 15, 1995
between Major League Baseball Properties, Inc.
and Innovo Group Inc.* 10.51 (12)
10.39 License Agreement dated October 6, 1995
between Major League Baseball Properties
and NASCO Products International, Inc.* 10.52 (12)
10.40 License Agreement dated October 13, 1995
between NBA Properties, Inc. and Innovo, Inc.* 10.53 (12)
10.41 License Agreement dated October 13, 1995
between NBA Properties, Inc. and NASCO
Products International, Inc.* 10.54 (12)
10.42 Merger Agreement dated April 12, 1996 between
Innovo Group Inc. and TS Acquisition, Inc.
and Thimble Square, Inc. and the Stockholders
of Thimble Square, Inc.* 10.1 (13)
10.43 Property Acquisition Agreement dated
April 12, 1996 between Innovo Group Inc.,
TS Acquisition, Inc. and Philip Schwartz
and Lee Schwartz.* 10.2 (13)
10.44 License Agreement between Innovo, Inc. and
Anheuser-Busch Cos., Inc.* 10.57(14)
10.45 License Agreement between Innovo Group Inc.
and Warner Bros. dated June 25, 1996.
10.46 License Agreement between Innovo Group Inc.
and Walt Disney dated September 12, 1996.
10.47 Indenture of Lease dated October 12, 1993
between Thimble Square, Inc. and Development
Authority of Appling County, Georgia
10.48 Lease dated October 1, 1996 between Innovo,
Inc. and John F. Wilson, Terry Hale, and
William Dulworth
21 Subsidiaries of the Registrant 21 (13)
23.1 Consent of BDO Seidman, LLP (incorporated by
reference as Exhibit 23.2 to Registration
Statements No. 33-71576 and No. 333-12527).
27 Financial Data Schedule (appears only in
electronically filed version of this report).
</TABLE>
_________________________
* Certain of the exhibits to this Report, indicated by an asterisk, are
incorporated by reference to other documents on file with the Securities and
Exchange Commission with which they were physically filed, to be part hereof
as of their respective dates. Documents to which reference is made are as
follows:
(1) Amendment No. 4 Registration Statement on Form S-18 (No. 33-
25912-NY) of ELORAC Corporation filed October 4, 1990.
(2) Amendment No. 2 to the Registration Statement on Form S-1 (No.
33-51724) of Innovo Group Inc. filed November 12, 1992.
(3) Annual Report on Form 10-K of Innovo Group Inc. (file no. 0-
18926) for the year ended October 31, 1993.
(4) Current Report on Form 8-K of Innovo Group Inc. (file no. 0-
18926) dated May 10, 1993 filed May 25, 1993.
(5) Registration Statement on Form S-8 (No. 33-71576) of Innovo Group
Inc. filed November 12, 1993.
(6) Annual Report on Form 10-K of Innovo Group Inc. (file 0-18926)
for the year ended October 31, 1993.
(7) Amendment No. 2 to the Registration Statement on Form S-1 (No.
33-77984) of Innovo Group Inc. filed July 25, 1994.
(8) Amendment No. 4 to the Registration Statement on Form S-1 (No.
33-77984) of Innovo Group Inc. filed August 18, 1994.
(9) Annual Report on Form 10-K of Innovo Group Inc. (file 0-18926)
for the year ended October 31, 1994.
(10) Registration Statement on Form S-8 (No. 33-94880) of Innovo Group
Inc. filed July 21, 1995.
(11) Current Report on Form 8-K of Innovo Group Inc. (file 0-18926)
dated July 31, 1995 filed September 13, 1995.
(12) Annual Report on Form 10-K of Innovo Group Inc. (file 0-18926)
for the year ended October 31, 1995.
(13) Current Report on Form 8-K of Innovo Group Inc. (file 0-18926)
dated April 12, 1996, filed April 29, 1996.
(14) Registration Statement on Form S-1 (No. 333-03119) of Innovo
Group Inc., as amended June 28, 1996.
(b) Reports on Form 8-K
On September 13, 1996, the Company filed a Current Report on Form 8-K
that included certain updated historical and pro forma financial information
relating to the acquisition of Thimble Square.<PAGE>
Report of Independent Certified Public Accountants
on Financial Statement Schedules
Board of Directors
Innovo Group Inc.
The audits referred to in our report to Innovo Group Inc. and
subsidiaries, dated February 18, 1997 which is contained in Item 8,
included the audits of the schedule listed under Item 14(a)(2).
This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion
on this financial statement schedule based on our audits.
In our opinion, such schedule presents fairly, in all material
respects, the information set forth therein.
/s/BDO SEIDMAN, LLP
BDO SEIDMAN, LLP
Atlanta, Georgia
February 18, 1997
<PAGE>
INNOVO GROUP INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
________________________________
(1) (2)
Balance at Charged Charged to Balance
Beginning to Costs Other Accounts- Deductions- at End
Description of Period and Expenses Describe Describe of Period
___________ _________ ____________ ________ _______ _________
Allowance deducted
from asset to
which it applies:
Allowance for
doubtful accounts:
Year ended November 30,
</CAPTION>
<C> <C> <C> <C> <C> <C>
1996 $ 99,000 $ 78,000 $ - $111,000(A) $66,000
Year ended October 31,
1995 117,000 102,000 - 99,000(A) 120,000
Year ended October 31,
1994 170,000 383,000 - 436,000(A) 117,000
Allowance for inventories:
Year ended November 30,
1996 $ 18,000 $ 55,000 $ - $ - $ 73,000
Year ended October 31,
1995 759,000 - - 741,000(B) 18,000
Year ended October 31,
1994 689,000 759,000 - 689,000(B) 759,000
</TABLE>
Note A - Uncollected receivables written off, net of recoveries.
Note B - Recovery of valuation reserve.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
INNOVO GROUP INC.
By:/s/ Patricia Anderson-Lasko
Patricia Anderson-Lasko
Chairman of the Board, President and
Chief Executive Officer
February 28, 1997
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed by the following persons on
behalf of the Registrant in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature and Title Date
___________________ ____
/s/ Patricia Anderson-Lasko
Patricia Anderson-Lasko
Chairman of the Board, President
Chief Executive Officer and Director
</CAPTION>
<C> <C>
(Principal Executive and Financial Officer) February 28, 1997
/s/ Terrance Bond
Terrance Bond
Controller
(Chief Accounting Officer) February 28, 1997
/s/ Reino C. Lanto, Jr.
Reino C. Lanto, Jr.
Director February 28, 1997
/s/ Felix Lee
Felix Lee
Director February 28, 1997
/s/ Alexander K. Miller
Alexander K. Miller
Director February 28, 1997
/s/Eleanor V. Schwartz
Eleanor V. Schwartz
Director February 28, 1997
/s/ Marvin N. Williamson
Marvin N. Williamson
Director February 28, 1997
</TABLE>
LICENSE AGREEMENT 50541-WBLT
WARNER BROS. CONSUMER PRODUCTS (UK) LIMITED ("LICENSOR") whose
address is 135 Wardour Street, London, W1V 4AP, England and
INNOVO GROUP INC TRADING AS NASCO INTERNATIONAL LTD. ("Licensee")
whose address is 27 North Main Street, Springfield, Tennessee,
37172, USA agree as follows:
As of the Effective Date (as defined below) and subject to the
Standard Terms and Conditions attached hereto, all of which are
incorporated herein by this reference and made a part hereof,
Licensor grants to Licensee a non-exclusive license to utilize the
Licensed Material solely upon or in connection with the
manufacture, distribution, and sale of the Articles throughout the
Territory, as defined and specified as follows:
Licensed Material: The representations, names, logos,
movements, personalities, artwork, photographs and other material
in connection with the following "LOONEY TUNES" cartoon characters:
BUGS BUNNY, SYLVESTER, TWEETY, SPEEDY GONZALES, PORKY PIG, ELMER
FUDD, DAFFY DUCK, YOSEMITE SAM, FOGHORN LEGHORN, ROAD RUNNER, WILE
E. COYOTE, MARVIN the MARTIAN and TASMANIAN DEVIL only.
Licensee acknowledges that the rights granted herein are
limited only to the cartoon characters set forth above and that any
and all rights in, to or associated with the theatrical motion
picture tentatively entitled "Space Jam", as well as with any
sequels thereto, are specifically excluded herefrom.
Further, Licensee specifically understands and agrees that no
rights are granted herein with respect to the Warner Bros. "LOONEY
TUNE LOVABLES AND/OR BABY LOONEY TUNES", infant property, it being
understood that all rights in and to said property are reserved
exclusively to Licensor for use and/or licensing as it deems
appropriate to third party(s) of its choice.
Articles(s):
Article 1-Backpack, ref. MBP 101 Article 2-Backpack, ref. MBP 111
Article 3-Backpack, ref. BNP 171 Article 4-Backpack, ref. BP 121
Article 5-Backpack, ref. BPN 271 Article 6-Backpack, ref. RSN 171
Article 7-Backpack, ref. BPN 161 Article 8-Backpack, ref. BBP 191
Article 9-Backpack, ref. FLBP 1 Article 10-Backpack, ref. FLBPP 9S1
Article 11-Sports bag, ref. TBN 231 Article 12-Sports bag, ref. CBN 271
Article 13-Sports bag, ref. CBN 301 Article 14-Waist pack, ref. FPN 14S1
Article 15-Waist pack, ref. FPN 14E1 Article 16- Duffle bag, ref. BOD 1
Article 17- Wallets, to be used as a premium item only and not for sale
separately.
Territory:
Territory 1- Austria, Belgium, Cyprus, Denmark, Eire, Finland,
Germany, Greece, Iceland, Israel, Italy, Lebanon, Norway, Portugal,
Spain, Sweden, The Netherlands and United Kingdom of Great Britain
& Northern Ireland.
Territory 2- France and Switzerland.
Distribution: Sports stores and sports departments within
department stores only, in accordance with Special Stipulation (a)
herebelow.
Term: 31st May 1996 to 28th February 1998
Effective Date: The date of full execution of this Agreement,
provided that Licensee has not, within seven (7) days of such
execution date, received notice from Licensor that the owner of the
Trademarks which relate to all or any part of the Licensed Material
shall not enter into a Trademark License.
Royalty Rate:
For Articles 1 to 16- thirteen and one half percent (13.5%)
FOB or the following Minimum per Article Royalties
Article 1-US $0.40 Article 2-US $0.54
Article 3-US $0.57 Article 4-US $0.81
Article 5-US $0.98 Article 6-US $1.12
Article 7-US $1.15 Article 8-US $1.17
Article 9-US $1.31 Article 10-US $1.40
Article 11-US $0.95 Article 12-US $1.62
Article 13-US $1.76 Article 14-US $0.31
Article 15-US $0.45 Article 16-US $1.19
- For Article 17- thirteen and one half percent (13.5%) on
purchase price.
Guaranteed Consideration: US $100,000 payable to US $25,000
on execution hereof and US $25,000 on or before 31st July 1996: US
$25,000 on or before 31st July 1997 and US $25,000 on or before
30th November 1997.
Marketing Date:
For Territory 1- August 1996
For Territory 2- from 1st January 1997
1st statement due on: 30th October 1996
Promotion Commitment: Three percent (3%) of the updated
projected sales as communicated by Licensee to Licensor in writing.
Trademark/Copyright notice: LOONEY TUNES names, characters
and all related indicia are trademarks of Warner Bros. a Division
of Time Warner Entertainment Company, L.P.
Samples: Fifteen (15) of each Article.
Insurance: 500,000
Special Stipulations
(a) Distribution: Licensee shall submit its choice of distributor
to Licensor for Licensor's prior written approval.
(b) Business Development: Licensee's Sales Manager agrees to
travel to the Territory and visit Licensor's offices on a monthly
basis to contribute to business development.
(c) Public Relations: All communications by Licensee in relation
to this Agreement and the Licensed Material in general for public
release must be approved in writing by Licensor prior to release.
By signing below, Licensee affirms that it is in agreement
with the foregoing and that it has read and understands and agrees
to be bound by the Standard Terms and Conditions attached hereto
and forming part hereof. Licensee further agrees that this
Agreement shall also serve as an invoice to Licensee with respect
to the amount payable as set forth above and Licensee agrees to pay
such amounts pay such amounts to Licensor as specified above.
Important additional terms of this Agreement are printed on
the attached pages entitled "Standard Terms and Conditions".
Please read carefully.
This agreement shall be of no force and effect unless and
until signed by all parties hereto as specified below.
AGREED AND ACCEPTED: AGREED AND ACCEPTED:
LICENSEE LICENSOR
INNOVO GROUP INC. TRADING AS WARNER BROS. CONSUMER PRODUCTS
NASCO INTERNATIONAL LTD. (UK) LIMITED
By:/s/ Joseph T. Assad By:/s/ Karin Visser
Title:Vice President By:Manager, Legal Affairs
Date:June 14, 1996 Date:June 25, 1996
<PAGE>
CONSENT FOR MANUFACTURING SUB-LICENSE
Dear Sir:
Reference is made to the basic Agreement of even date herewith
between WARNER BROS. CONSUMER PRODUCTS (UK) LIMITED ("Licensee")
and INNOVO GROUP INC. TRADING AS NASCO INTERNATIONAL LTD.
("Licensee) expiring on 31st December 1997. Licensor hereby
consents to the manufacture of the "Articles" listed below by the
manufacturer named below for the account of Licensee, upon the
following conditions to which Licensee agrees: (1) that the said
manufacturer sign and endorse the Agreement hereto appended; and
(2) that said manufacturer shall fully comply in all respects with
that signed Agreement. Failure of either of said conditions shall
entitle Licensor to terminate this Agreement forthwith and require
that that portion of all copies and moulds or other devices used to
manufacture the "Articles" in the possession of Licensees or the
named manufacturer be immediately delivered to Licensor or be
destroyed to the satisfaction of Licensor. No Royalties are
payable to Licensor for the manufacture of the said Articles, but
Royalties are payable to Licensor on authorized sales by Licensee
thereof if and when such sales are made.
Manufacturer Name & Address:
High Performance
3/F Suite M
Kaiser Estate Phase III
11 Hok Yuen Street
Hunghom
Kowloon
Hong Kong
Articles:
Articles 1 to 17 inclusive.
Territory of Manufacture:
Hong Kong
LICENSEE: LICENSOR:
INNOVO GROUP INC. TRADING AS WARNER BROS. CONSUMER PRODUCTS
NASCO INTERNATIONAL LTD. (UK) LIMITED
BY:/s/ Joseph T. Assad By:/s/ Karin Visser
Dated:June 14, 1996 Dated:June 25, 1996
<PAGE>
STANDARD TERMS AND CONDITIONS
1. RIGHTS GRANTED TO LICENSEE
(a) During the Term and any extension thereof, Licensor
grants to Licensee the non-exclusive right in the Territory to use,
and reproduce the Licensed Material only on and in connection with
the manufacture, advertising, distribution and sale of the
Articles. Licensee specifically understands and agrees that no
rights are granted herein in respect of the Warner Bros. WB Shield
Device or any other trademarks, logos, copyrights, tradenames or
other rights of Licensor or any parent, subsidiary or affiliate of
Licensor other than expressly set forth herein.
(b) Licensor further grants to Licensee the non-exclusive
right to reproduce, with Licensor's prior written approval, the
Licensed Material only within the Territory and the European Union
("EU") on containers, packaging, display material and in
advertising for the Articles, subject to the provisions of this
Agreement. It is specifically understood that no television, radio
and/or theatrical commercials may be utilized under this Agreement
without Licensor's prior written approval.
(c) Licensee shall be free to sell Articles to Licensor or to
any subsidiary of Licensor's, subject to the payment to Licensor of
Royalties on such sales. Licensee agrees that sales of Articles to
Licensor shall be at one cost, or at a reduced price or at the best
price available to the trade.
(d) Licensee and its customers shall be free to sell the
Articles at such prices as Licensee or its customers shall
determine. However, Licensee agrees that any proposed sales of
Articles at a liquidation price cannot occur without Licensee first
offering Licensor the opportunity to said Articles.
(e) The Licensee acknowledges that there are subsisting
intellectual property rights parallel to those licensed to the
Licensee hereunder which are either licensed to another licensee of
the Licensor or exploited by the Licensor itself, throughout the EU
and accordingly the Licensee shall not, in any part of the EU
outside the Territory pursue an active policy of selling or
marketing Articles, or engage in advertising of the Articles, the
name Warner Bros. or the WB Shield Device (or any other trademarks,
logos, copyrights, tradenames or other rights of Licensor or any
parent, subsidiary or affiliate of Licensor) or the Licensed
Material, other than expressly set forth herein, including but
without prejudice to the generality of the foregoing, soliciting
orders for Articles from customers, establishing any branch or
maintaining any distribution depot of Articles.
(f) Notwithstanding anything in this Agreement to the
contrary, the Licensee may (upon giving prior written notice to
Licensor) sell Articles pursuant to an unsolicited order which does
not involve or result from a breach by Licensee of the provisions
of Subparagraph (e) above to:
(i) a customer located in another member state of the EU; or
(ii) a customer located in a country outside the EU if
the Articles which are the subject of such sale are destined
for ultimate delivery in the Territory or in the EU.
2. CONSIDERATION
(a) Licensee agrees to pay the Guaranteed Consideration as set
forth above to Licensor, which shall be on account of Royalties to
accrue during the Term only and only with respect to sales in the
Territory. However, if any part of the Guaranteed Consideration as
specified hereinabove applies to any period less than the Term,
such part shall be on account of during such lesser period only.
No part of Guaranteed Consideration shall be repayable to Licensee
for that period.
(b) Royalties accruing from any sales of Articles during an
extension of the Term or after the expiration or termination of the
Agreement as provided in Paragraph 16, shall not be offset against
the Guaranteed Consideration unless otherwise agreed in writing.
(c) Royalty Payments:
(i) Licensee shall pay to Licensor a sum equal to the Royalty
Rate as set forth above of all Net Invoiced Billings (as
defined below) by Licensee of the Articles covered by this
Agreement. Royalties shall be payable concurrently with the
statements required in Paragraph 10 hereof, except to the extent
offset by Guaranteed Consideration theretofore remitted. The
credit shall be taken in the Accounting Period in which the refund
is given or credit memo issued. Unused credits may be carried
forward, but in no event shall Licensee be entitled to a refund of
Royalties.
(ii) The term "Net Invoiced Billings" shall mean all monies billed
or billable by Licensee, or its sub-licensee, if any, from the
exercise of its rights to distribute and sell Articles in the
Territory or in the EU before any allowances or discounts, which
have been deducted from the normal selling price, inclusive of
interest, monetary correction, and any other payment charges
whatsoever, less the following items only:
(A) any sales, excise or value added taxes, which are separately
stated, and which are required to be collected from customers as
part of Net Invoiced Billings, and which are payable to taxing
authorities, and
(B) actual defective returns.
(iii) It is specifically understood and agreed that no deduction
may be made for any actual returns (except for defective returns),
or any reserves therefor, any bad debts, or any reserves therefor,
any manufacturing costs, importing costs, selling costs,
advertising costs, any real estate taxes, business license taxes,
net income taxes, franchise taxes, or any other taxes not billed as
part of Net Invoice Billings. It is also understood, and agreed
that all sums billed in respect of Articles lost and/or unaccounted
for shall also be included in Net Invoiced Billings. The sums,
which Licensor is paid as Royalties on any sales to Affiliated
Customers of Licensee (as defined below), shall be no less than the
sums paid as Royalties on sales to unaffiliated customers. For
purposes of this agreement, Affiliated Customers of Licensee shall
mean any entity which owns or controls, is owned or controlled by,
is under common ownership or control with, licensee, including but
not limited to parent companies, subsidiary companies, sister
companies, partnerships, and joint ventures of Licensee. The word
"control" (including "controlled by" and "controls"), as used in
the preceding sentence shall be deemed to mean possession, directly
or indirectly, of the power to command the course of management,
policy making and business activity of the entity or of the
Licensee, as the case may be, regardless of equity, debt, or voting
securities position.
(iv) Royalties payable for each Article sold shall not be less
than the Minimum Per Article Royalty (if specified). No royalties
are payable on the mere manufacture of Articles to the extent all
manufactured Articles are accounted for as required herein.
3. APPROVALS
(A) (i) Licensee shall submit to Licensor for its prior review
and written approval all preliminary and proposed final artwork and
three-dimensional models which are to appear on or in the Article
and Licensee's proposed use of such materials in preparing a pre-
production sample. Licensee shall submit such material as early as
possible, and in any case at least twenty (20) business days prior
to commercial production of any Article. Thereafter, Licensee
shall submit to Licensor for its written approval a pre-production
sample of each Article.
(ii) All containers, packaging, display material, hangtags,
promotional material, catalogues and advertising for Articles which
utilize or incorporate the Licensed Material must be submitted to
Licensor and receive its written approval before use. Licensor's
approval thereof should be procured when same is still in rough or
storyboard format. Licensor shall endeavor to respond to requests
for approval without undue delay. Approval shall lie in Licensor's
sole discretion, and the use of containers, packaging, display
material, promotional material, catalogues or advertising not
approved by Licensor in writing is strictly prohibited. Whenever
Licensee shall prepare catalogue sheets or other printed matter
containing illustrations of Articles, it will furnish to Licensor
five (5) copies of same.
(iii) Before shipping an Article to any customer, Licensee shall
furnish to Licensor, for its approval of all aspects of the Article
in question, from the first production run of each supplier or
manufacturer of each of the Articles, the number of samples, with
packaging, which is hereinabove set forth. Such samples shall
conform to the approved artwork, three-dimensional models and pre-
production sample previously approved by Licensor hereunder.
(iv) Approval or disapproval of the artwork utilizing or
incorporating Licensed Material as it appears on the Article, as
well as of the quality of the Article, shall lie in Licensor's sole
discretion. If any Article or item not approved hereunder by
Licensor in writing is being sold, distributed, published or
otherwise used, Licensor may at its sole election require, together
with other remedies available to it including but not limited to
immediate termination of this Agreement by written notice, such
Article or item to immediately withdrawn from the market, or from
distribution, publication or other dissemination by Licensee, and
Licensee agrees to so withdraw such Article or item within the
period so stated by Licensor. Articles and items so withdrawn
shall be immediately destroyed and such destruction shall be
attested to in a certificate signed by an independent third party,
firm, or agency approved by Licensor and delivered forthwith to
Licensor. Any Article not approved, as provided in the previous
sentence, shall not be sold and shall be immediately destroyed.
Such destruction shall be attested to by an independent third
party, firm or agency approved by Licensor and delivered forthwith
to Licensor.
(v) Any modification of an Article, including but not limited to,
change of materials, color, design or size of the representation of
Licensed Material, must be submitted in advance for Licensor's
prior written approval as if it were a new Article. approval of an
Article which uses particular artwork does not constitute approval
of such artwork for use with a different Article. The fact that
artwork has been taken from a publication or article previously
approved by Licensor does not mean that its use will be approved in
connection with an Article licensed hereunder. Licensor shall
endeavor to respond to requests for approval within a reasonable
time, but Licensee shall seek such approvals as early as possible
in case of delays. Licensor's failure to respond shall be deemed
disapproval.
(b) (i) If Licensee submits for approval artwork from an article
or book manufactured or published by another licensee of Licensor
or of any subsidiary of Licensor, Licensee must advise Licensor in
writing of the source of such artwork. It is specifically
understood that Licensee may not, in certain cases, be permitted to
utilize any previously published artwork or artwork not
specifically provided by Licensor, it being understood by Licensee
that any and all uses of artwork featuring the Licensed Material
shall be entirely subject to Licensor's approval as provided
herein.
(ii) If Licensee fails to advise Licensor as required in (i)
above, any approval which Licensor may give for use by Licensee of
such artwork may be withdrawn at any time by giving Licensee
written notice thereof, and upon receipt of such written notice
Licensee shall be prohibited by Licensor from selling any Articles
using such artwork.
(iii) If Licensor has supplied Licensee with forms for use in
applying for approval of artwork, models, pre-production and
production samples of Articles , Licensee shall use such forms when
submitting anything for licensor's approval as provided for
hereunder.
(c) Licensee shall make available to Licensor at no charge three
(3) additional samples from each production run of each supplier or
manufacturer of each of the Articles for the purpose of comparison
with samples from the first production run of each supplier or
manufacturer of each of the Articles, to maintain consistent
quality.
(d) Licensee shall permit Licensor, upon reasonable request, to
inspect Licensee's manufacturing operations (and those of its
suppliers) for the Articles.
(e) It is specifically understood that Licensor may in its sole
discretion interalia disapprove an Article or a production run of
an Article because the quality is unacceptable to Licensor.
Accordingly, Licensor recommends that Licensee submit production
samples to it for approval before committing to any original
production run or any purchase of a shipment from a new supplier.
(f) No modification of an approved production sample shall be made
without Licensor's prior written approval. Articles being sold
must conform in all respects to the approved production sample. It
is understood that if in Licensor's reasonable judgement the
quality of an Article originally approved has deteriorated in later
production runs, or if the Article has otherwise been altered,
Licensor may, in addition to other remedies available to it,
require by written notice such Article to immediately withdrawn
from the market, and Licensee agrees to withdraw such Article
within the period so stated by Licensor. Articles so withdrawn
shall be immediately destroyed, and such destruction shall be
attested to in a certificate signed by a independent third party,
firm or agency approved by Licensor and delivered forthwith to
Licensor.
(g) The rights granted hereunder do not permit the sale of
"seconds" or "irregulars." All Articles not meeting the standard
of approval shall be destroyed, pursuant to Subparagraph (f) above,
unless otherwise directed by Licensor.
4. SPECIFIC UNDERTAKINGS OF LICENSEE
During the Term and any renewal period and thereafter, Licensee
warrants, represents, and agrees that:
(a) It shall not sell Articles for use as premiums (including
those in purchase-with-purchase promotions), promotions, giveaways,
fund raisers or entries in sweepstakes or to customers for resale
only by direct mail or other resale through direct marketing
methods. However, nothing contained herein shall preclude Licensee
from soliciting orders by mail from wholesalers or retail outlets,
nor from selling to retailers who include the Articles in their
mail order catalogues or otherwise sell the Articles by direct
marketing methods as well as at retail.
(b) It shall obtain all necessary approvals and bear all expenses
from any third party(s) in connection with any print and/or
broadcast advertising Licensor authorizes. Licensee shall submit
all proposed advertising materials and concepts to Licensor as set
forth in Paragraph 3 and Licensor's approval of copy or storyboards
for such advertising will not constitute a representation or belief
by any code, standard, or other obligation imposed by any third
party(s). No media commercials incorporation any character voices
may be utilized under this Agreement without Licensor's specific
prior written approval.
(c) It shall cause Licensee's name, trade name (or trademark of
Licensee's which it has advised Licensor in writing that it is
using) and its address and the country of manufacture of the
Article to appear on the permanently affixed labeling on each
Article and, if the Article is sold to the public in packaging or
a container, printed on such packaging or container so that the
public can identify the supplier of the Article. On soft goods
"permanently affixed" shall mean sewn on.
(d) It shall advise Licensor in writing of all trade names or
trademarks it is using on or in connection with Articles being sold
under this Agreement if such names or marks differ from its
corporate name as indicated herein.
(e) It shall ensure that each Article distributed hereunder shall
be of high quality and shall comply with all applicable laws,
regulations and established industry standards of the country of
origin and the country of destination and conform to the sample
thereof approved by Licensor.
(f) It shall not associate other characters or other properties
with the Licensed Material, either on the Articles or in their
packaging, on advertising, promotional or display materials without
Licensor's prior written permission.
(g) It shall manufacture (or have manufactured for it) and offer
for sale all of the Articles and exercise the rights granted
herein. Licensee agrees that not later than by the Marketing Date
applicable to a particular Article, shipments to customers of
Articles in quantities sufficient to meet reasonably and
anticipated demand will have taken place and that Articles shall be
available for purchase and prompt delivery to customers. Any
Article as to which such sales have not taken place or which are
not then available for purchase and prompt delivery may be
recaptured from the scope of this Agreement without obligation to
Licensee, other than to provide it with written notice thereof.
Licensee further agrees to use its best endeavors to promote sales
of Articles.
(h) It shall carry out the Promotion Commitment, if applicable,
which shall be defined as the sum set forth above which Licensee
shall budget and expend on advertising of the Articles in the
Territory. Accordingly, within sixty (60) days following the end
of each year of the Term, Licensee shall submit to Licensor a
statement which shall include total Net Invoiced Billings, total
sums expended on advertising the Articles, together with the
resulting percentage. In the event Licensee fails to expend in
full the sum specified herein within the required time period, upon
submission of the statement required in Paragraph 10, Licensee
shall pay to Licensor an amount equal to such shortfall.
(i) Its parent or any subsidiary or affiliate of it shall not
register or attempt to register, in any country, copyrights, or to
register as a trademark, service mark, design patent or industrial
design any of the Licensed Material or derivations or adaptations
thereof, or any word, symbol or design which is so similar thereto
as to suggest association with or sponsorship by Licensor or any
subsidiary of Licensor's. In the event of a breach of the
foregoing, Licensee agrees, at its expense and at Licensor's
request, to immediately terminate the unauthorized registration
activity and to promptly execute and deliver or cause to be
delivered to Licensor such assignments and other documents as it
may require to transfer to it all rights to the registrations,
patents or applications involved.
(j) It shall not use wither the Licensed Material or any other
material, the copyright or trademark to which is owned or
controlled by Licensor, in any way other than as herein authorized
(or as authorized in such other written contract signed by both
Licensee and Licensor in effect). In addition to any other remedy
Licensor may have, Licensee agrees that the total revenues to
licensee from any use of such material on products other than the
Articles (unless authorized by Licensor in writing), and total
revenues to Licensee from the use of any other copyright or
registered material of Licensor's without written authorization,
shall be payable to Licensor.
(k) It shall give Licensor prompt written notice of any unlicensed
use by third parties of Licensed Material or material which
infringes any rights in the Licensed Material due to its similarity
thereto, and Licensee shall not bring or cause to be brought any
criminal prosecution, lawsuit or administrative action for
infringement, interference with or violation of any rights to
Licensed Material or violation of any rights granted herein.
Licensee shall cooperate and, if Licensor deems appropriate, be
named by Licensor as a sole plaintiff or co-plaintiff in any action
against an infringer of Licensor's or Licensee's rights hereunder,
provided it gives Licensee prior written notice of such actions and
bears the expense thereof. Any and all settlements, penalties,
damages, and recoveries arising from or in connection with such
action shall be the sole property of Licensor.
(l) It shall not use any Licensed Material on any business sign,
business cards, stationery or forms (except as licensed herein) or
use any Licensed Material as the name of its business or any
division thereof.
5. RIGHTS RESERVED BY LICENSOR
(a) Licensor reserves all rights not expressly conveyed to
Licensee hereunder. Notwithstanding anything to the contrary in
this Agreement, licensee hereby acknowledges that the rights
granted hereunder are subject to the rights of Licensor, and the
owner of the Licensed Material, to use or license without
limitation throughout the world any third party(s) of its choice
for the manufacture, distribution, advertising and sale of products
similar or identical to those set forth above for sale through any
catalogue(s) produced or distributed by or on Licensor's behalf, or
for sale or distribution in any motion picture theaters, or for
sale or distribution on any retail stores (or portion thereof)
operated by Licensor or on Licensor's behalf.
(b) Licensor reserves the right to withdraw any Licensed Material
or Articles, the use or sale of which under this Agreement would
infringe or reasonable be claimed to infringe the rights, other
than rights granted by Licensor, of a third party(s). In such case
Licensor's obligations to Licensee shall be limited to the
purchase, at cost without overhead, of Articles and other materials
utilizing such withdrawn Licensed Material which cannot be sold or
used.
6. ARTWORK
Should Licensee wish to use Licensor's services in developing
artwork for the creation of Articles, display packaging or
promotional material, (including any artwork which, in Licensor's
opinion, is necessary to modify artwork initially prepared by
Licensee and submitted to Licensor for approval) Licensee shall pay
Licensor, within thirty (30) days following the date of Licensor's
invoice therefor the amounts due, based upon Licensor's prevailing
commercial art rates, including any delivery charges incurred by
Licensor in connection therewith. Estimates of artwork charges are
available upon request. Licensee acknowledges, that in certain
cases it may be required by Licensor to utilize artwork or
renditions of the Licensed Material as specifically provided by
Licensor and Licensee agrees to so utilize such renditions. In
those instances where Licensee is unable or unwilling to use such
renditions, and if Licensor approves in writing, Licensee may
create or procure the creation of artwork to be submitted for
approval as required herein. Nonetheless, in those instances where
Licensee is not obligated to utilize Licensor's services, Licensee
is encouraged to do so in order to minimize delays which may occur
if outside artists do renditions of Licensed Material which
Licensor does not approve and to maximize the attractiveness of the
Articles.
7. LICENSOR'S OWNERSHIP OF ALL RIGHTS IN LICENSED MATERIAL
Licensee acknowledges that, as between Licensee and Licensor, the
Licensed Material and all copyrights and other proprietary rights
in and to the Licensed Material are exclusively owned, reserved
and/or controlled by Licensor. Licensee further agrees and
acknowledges that all rights in and to any and all artwork created
(including if created in whole or in part by Licensee) and
authorized for use hereunder by Licensor in connection with the
Articles or otherwise which utilizes or incorporates any of the
Licensed Material shall, as between Licensee and Licensor, be
owned, reserved, and/or controlled in its entirety exclusively by
Licensor, who shall be the author at law and copyright proprietor
thereof. Licensor reserves itself or its designees all rights to
use any and all artwork created, utilized and or approved hereunder
without limitation in the Territory or the EU, or otherwise during
or after the Term. At the request of Licensor, Licensee shall
execute such form of assignment to Licensor of the copyright in any
amendments to or derivative works based in whole or in part upon
the Licensed Material and all other proprietary rights in and to
the Licensed Material as Licensor may reasonable request.
8. LEGAL NOTICES
As a condition to the grant of rights hereunder, each Article and
any other matter containing Licensed Material shall bear one or
more properly located legal notice in the form as set forth above
or prescribed by Licensor. Licensee will comply with such
instructions as to form, location and content of the notice as
Licensor may give from time to time. Licensee will not affix to
any Article or any other matter containing Licensed Material al
legal notice in any other name. If by inadvertence a proper legal
notice in Licensor's name is omitted from any Article or other
matter containing Licensed Material, Licensee agrees, at its
expense, to immediately use all possible efforts to correct the
omission on all such Articles or other matter in process of
manufacture or in distribution. Licensee agrees to advise Licensor
promptly and in writing of the steps being taken to correct any
such omission and to cooperate fully with Licensor in making the
corrections on all existing Articles which can be located.
9. GOODWILL
Licensee recognizes and acknowledges the great value of the
publicity and goodwill associated with Licensed Material and in
such connection, it acknowledges that such goodwill exclusively
belongs to Licensor and that the Licensed Material has acquired
a secondary meaning in the mind of the purchasing public. Licensee
further recognizes and acknowledges that a breach by it of any of
its covenants, agreements or undertakings hereunder will cause
Licensor irreparable harm, which cannot be readily remedied in
damages in an action at law, and will, in addition thereto,
constitute an infringement of Licensor's rights in and to the
Licensed Materials, thereby entitling Licensor to injunctive relief
and other equitable remedies, costs and reasonable attorney's fees.
10. STATEMENTS, PAYMENTS AND AUDITS
(a) Within thirty (30) days following the end of each calendar
quarter during the Term ("Accounting Period"), Licensee shall
submit to Licensor:
(i) With respect to cumulative New Invoiced Billings, a "Royalty
Statement" which shall include, at a minimum, the information
listed on the format to be provided by Licensor upon execution of
this Agreement.
(ii) A "Statement of Account" which shall include, at a minimum,
the information listed on the format to be provided by Licensor
upon execution of this Agreement.
(iii) With respect to Articles manufactured, sold and defective
sales returns, an "Inventory Movement Report' which shall include,
at a minimum, the information listed on the format to be provided
by Licensor upon execution of this Agreement.
(iv) With respect to sales of Articles by Licensee to customers in
more than one country, as comprises the Territory, such formats as
specified above shall be prepared and submitted on a country-by-
country basis, as well in a summary format.
(v) Licensor will provide the formats for the above-referenced
reports and reserves the right to review and amend the minimum
requirements referred to above, from time to time, and in such
amended version in accordance herewith.
(b) Licensee shall provide Licensor at the beginning of the Term
and thereafter within seven (7) days of the close of each financial
quarter ("Quarterly Accounting Period") with a completed revenue
forecast projected forward to a date twelve (12) months from the
beginning of said quarter ("the Forecast"). The Forecast shall be
completed by Licensee in a format which Licensor shall provide.
Licensor reserves the right to review and amend the format of the
Forecast from time to time and in such event Licensee shall duly
complete and return to Licensor any such amended version in
accordance herewith.
(c) Within thirty (30) days following the end of each year during
the Term, Licensee shall conduct at its own expense a physical
inventory of all Articles in Licensee's possession or control and
submit to Licensor a written statement detailing the results of
such physical inventory.
(d) Licensee shall utilize best efforts to comply on a timely
basis with all reasonable requests of Licensor for supplementary
accounting information and reports in addition to the statements
specifically required by this Agreement.
(e) (i) Within thirty (30) days following the end of each
Accounting Period, Licensee shall pay Licensor in the national
currency of the country of the Territory where remittances are
required the amount shown to be due to Licensor. Licensee further
agrees to pay any amounts due to Licensor as required by the
Trademark License simultaneously with the payment of amounts due
hereunder, as if said amounts were stated herein, and to
incorporate same in any and all statements and/or reports as are
required herein. All sums due Licensor shall be deposited in a
bank account to be designated by Licensor. In the event Licensee
has amounts due Licensor in currencies other than the national
currency of the country of the Territory, where remittances are
required, then Licensee shall convert said amounts into the
national currency of the country of the Territory where remittances
are required based upon the exchange rate published by the national
bank(s) in the country of the Territory, and Licensee shall furnish
Licensor with external evidence with respect to the authenticity of
the exchange rate used, such as a bank statement. Exchange rates
in respect of each Accounting Period shall be determined as of the
30th day of the applicable month, or if such 30th day shall fall on
a non-business day then as of the first business day following said
30th day.
(ii) In the event Licensee cannot, because of laws and
restrictions make remittances to the country of the Territory where
remittances are required, as hereinabove provided, upon submission
to Licensor designates or to have the Royalties due deposited in
licensee's interest bearing account or in a joint trust account
with resulting interest, and the Royalties paid in Licensee's
national currency to Licensor on the date remittance restrictions
terminate. However, in no event shall remittance restrictions in
a particular country as comprises the Territory relieve the
Licensee of the obligation of reporting and remitting Royalties as
required hereunder.
(iii) In the event amounts payable to Licensor are not remitted in
full within the requested thirty (30) days following the end of an
Accounting Period, and Licensee has not provided evidence to
Licensor that because of laws and restrictions in a country or
countries of the Territory, amounts payable could not be remitted,
then Licensee shall pay to Licensor as liquidated damages and not
as a penalty an amount equal to five percent (5%) per month,
without any deductions for tax or other purposes, on the
outstanding balance. Interest will become due on the first day the
payment is not made beyond the said thirty (30) days as aforesaid,
and an additional month will be deemed to have passed for the
purposes hereof on the first day of each subsequent month until the
delinquent amount are paid.
(iv) In the event Licensor shall suffer any exchange losses
arising from late payments, including those late payments arising
as a result of understated amounts due discovered as a result of an
audit, such losses shall be determined by deducting the monies
which would have been received if the delinquent balance had been
paid on the last due date at the exchange rate on that date, said
exchange rate source to be designated and agreed upon by both
parties, from the national currency actually received from such
delinquent balances. Any resulting national currency shortfall
will be paid in the national currency on the date that these
delinquent balances are remitted. This exchange loss protection
described above will also apply to all liquidated damages described
above, and the last due date, for purposes of determining the
exchange rate, shall be deemed to be the first day a payment
becomes delinquent.
(v) If remittance restrictions shall remain in effect for six (6)
months or more, Licensor shall have the right and option,
exercisable by the service of a written notice to such effect upon
Licensee, to terminate this Agreement. Licensee will use its best
efforts at all times to obtain government approval for remittance
of all sums due to Licensor at the earliest possible date.
Licensee is fully obligated to provide this best effort whether
sums due to Licensor are
(A) held by Licensee, or
(B) have been deposited into a bank account in Licensor's name.
(f) Licensee shall keep true and accurate books and records of all
transactions relating to the manufacture, distribution, and
exploitation of Articles hereunder which shall include but not be
limited to the following minimum requirements:
(i) inventory records showing the receipt, dispatch, return and
balance of Articles stocked by Licensee.
(ii) billing records that are capable of being traced to the above
inventory records.
(iii) an overall reconciliation showing the total number of
Articles received and/or manufactured in connection with the
exploitation of Licensee's rights hereunder and showing their
actual disposition, i.e., whether with customers, damaged,
destroyed, lost, or in stock.
(g) Licensor shall have the right from time to time during normal
business hours at reasonable intervals to inspect, audit and make
extracts of the books and records of Licensee insofar as said books
and records relate to the manufacture, distribution, and
exploitation of Articles licensed hereunder and, if applicable, as
said books and records relate to the Promotion Commitment and such
right of audit shall continue for a period of four (4) years
following either expiry or termination of this Agreement. Should
an inspection or audit carried out pursuant hereto reveal any
shortfall, Licensee shall pay to Licensor an amount equal to such
shortfall together with interest thereon from the respective dates
that same should have been payable hereunder until the date of
payment of such shortfall at a rate per annum equal to the maximum
legal rate in such country of the Territory. Should an inspection
or audit carried out pursuant hereto reveal a shortfall of more
than one percent (1%) of the total amount due to Licensor for the
periods reviewed, the costs of such audit or inspection shall be
reimbursed by Licensee to Licensor within thirty (30) days of
Licensor's invoice therefor. Licensor shall also have the right to
inspect or audit, under the same terms described in this Paragraph,
the books and records of any of Licensee's affiliated companies
which charged expenses to Licensee including bills, invoices, and
overhead charges.
(h) Each character or element of the Licensed Material hereunder
shall constitute a separate unit for purposes of accounting
statements and remittance to Licensor hereunder.
(i) Any income taxes, other taxes, and/or fees which local law
requires to be levied against Licensor's royalties shall, in order
to avoid any interest charges or other penalties, be advanced by
Licensee on behalf of Licensor within the period of time required
by such local law; provided that Licensee shall not make such
advance if Licensor has advised Licensee in writing not to do so,
and has taken appropriate legal action to contest the propriety of
such taxes and/or fees and legally withheld payment, and in such
event Licensor shall indemnify Licensee against any interest
charges or other penalties with respect to such taxes. Any such
taxes or fees which Licensee advances shall be deducted from the
total amount of royalty otherwise payable to Licensor. In the
event that new or revised law(s) establishing fees, taxes or other
impositions are promulgated in the Territory, Licensee must notify
Licensor immediately and in ample time to afford Licensor an
opportunity to contest such impositions through the appropriate
legal channels. Licensee shall file all necessary tax returns or
other government documents on licensor's behalf, which agree
required by local law, within the time period required by local
law. The original receipt, and the computations for such taxes as
may be deducted from the royalties must accompany the Statement of
Account (referred to in Subparagraph (a) (ii) above) in the
Accounting Period in which such tax deduction is made. If local
law stipulates that the original tax receipt must be retained by
the Licensee, a bonafide copy thereof must be attached to the
Statement of Account.
11. MANUFACTURE OF ARTICLES BY THIRD PARTY MANUFACTURES
(a) Prior to entering into this Agreement, Licensee shall advise
Licensor in writing of the place of manufacture of the Articles.
If Licensee at any time desires to have Articles or components
thereof containing Licensed Material manufactured by a third party,
it must, as a condition to the continuation of this Agreement,
notify Licensor of the name and address of such manufacturer and
the Articles or components involved and obtain Licensor's prior
written permission to do so. The granting of said permission, if
Licensor is prepared to grant the same, will be conditional upon:
(i) In the case of Manufacture outside the Territory:
(1) Licensee's signing a consent agreement in a form to be
provided by Licensor; and
(2) Licensee causing each such manufacturer and any
submanufacturer to sign a consent agreement in a form to be
provided by Licensor; and
(3) Licensor's receipt of such agreements properly signed; and/or:
(ii) In the case of Manufacture in the Territory:
(1) if Licensor so requests, Licensee causing each such
manufacturer to sign a consent agreement in a form to be provided
by Licensor; and
(2) Licensor's receipt of such agreement properly signed.
(b) Notwithstanding the above subparagraph (a), Licensee
acknowledges and agrees that in the event Licensor shall request
Licensee to have Articles or components thereof containing Licensed
Material manufactured by Licensor's designee or source, Licensee
shall comply with such requests.
(c) If Licensor requests an agreement from a third party
manufacturer of Licensee, Licensee's purchase of Articles from a
third party manufacturer without such an agreement as required
hereunder being signed and delivered to Licensor shall be a
violation of this Agreement. It is not Licensor's policy to reveal
the names of its suppliers to third parties or to any division of
Licensor's involved with buying products except as may be necessary
to enforce its contract rights or protect its property rights.
(d) If any such manufacturer utilizes Licensed Material for any
unauthorized purpose, Licensee shall cooperate fully in bringing
such utilization to an immediate halt. If, by reason of Licensee
not having supplied the above-mentioned agreements to Licensor or
not having given Licensor the name of any supplier, Licensor makes
any representation or takes any action and is thereby subjected to
any penalty or expense, Licensee will indemnify Licensor for any
cost or loss Licensor sustains.
12. LICENSOR'S WARRANTIES AND REPRESENTATIONS
Licensor warrants and represents to Licensee that:
(a) It has, and will have throughout the Term of this Agreement,
the right to license the Licensed Material to Licensee in
accordance with the terms and provisions of this Agreement; and
(b) The entering into of this Agreement by Licensor does not
violate any agreement, rights or obligations existing between
Licensor and any other person, firm or corporation.
13. INDEMNITY
(a) During the Term, and continuing after expiration or
termination of the Agreement, Licensee shall indemnify Licensor
against all claims, liabilities (including settlements entered into
in good faith) and expenses (including reasonable attorney's fees)
arising out of Licensee's activities hereunder or out of any
alleged defect (whether obvious or hidden) in an Article or arising
from personal injury or any infringement of any rights of
Licensor's or of any third party by the manufacture, sale,
possession or use of Articles (or the advertising therefor) or
their failure to comply with applicable laws. The parties
indemnified hereunder shall include Licensor, its parent,
affiliates, subsidiaries and their respective officers, directors,
shareholders, employees and agents.
(b) Licensor shall indemnify Licensee against all claims,
liabilities (including settlements entered into in good faith)
arising out of any claim that Licensee's use of any representation
of the Licensed Material provided by Licensor approved in
accordance with the provisions of this Agreement infringes the
copyright of any third party. Licensee shall not, however, be
entitled to recover for consequential loss including without
limitation or materials.
(c) Additionally, if by reason of any such claims specified in
subparagraph (b) above, and which are sustained in a final
judgement by a court of competent jurisdiction, Licensee is
precluded from selling any stock of Articles or utilizing any
materials in its possession or which come into its possession by
reason of any required recall, Licensor shall be obligated to
purchase such Articles and materials from Licensee at the out-of-
pocket cost to Licensee, excluding overheads, but Licensor shall
have no other responsibility or liability with respect to such
Articles or materials.
(d) No warranty or indemnity is given with respect to any
liability or expense arising from any claim that use of the
Licensed Material on or in connection with the Articles hereunder
or any packaging, advertising or promotional material infringes
upon any trademark right of any third party or otherwise
constitutes unfair competition by reason of any prior rights
acquired by such third party other than rights acquired from
Licensor. It is expressly agreed that it is Licensee's
responsibility to carry out such investigations as it may deem
appropriate to establish that Articles, packaging, promotional and
advertising material which are manufactured or created hereunder,
including any use made of the Licensed Material therewith, do ont
infringe such right of any third party, and Licensor shall not be
liable to Licensee if such infringement occurs.
14. INSURANCE
Licensee shall maintain in full force and effect at all times while
this Agreement is in effect comprehensive general liability
insurance, including product liability coverage with broad form
vendor's endorsement, with combined single limits as set forth
above and naming as additional insureds those indemnified herein.
Licensee shall deliver to Licensor a certificate or certificates of
insurance evidencing satisfactory coverage and indicating that
Licensor shall receive notice of cancellation or of any material
change in coverage at least thirty (30) days prior to the effective
date thereof, and deleting any "other insurance" clause so that the
coverage of said insurance shall be primary and not secondary.
15. CREDIT AND SECURITY INTERESTS
(a) Licensee agrees to provide credit information and other
documentation as Licensor may request including, but not limited
to, fiscal year-end financial statements (profit and loss statement
and balance sheet), and operating statements.
(b) Licensee agrees to provide Licensor at Licensor's request
either a grant to Licensor of a lien and security interest in
Licensee's inventory, contract rights and accounts receivable, and
all proceeds thereof, and/or a letter of credit issued in favor of
Licensor from a financial institution as approved by Licensor in an
account and form approved by Licensor and/or such other form of
security acceptable to Licensor. Licensee agrees to execute all
documentation as Licensor may require in connection with perfecting
such security interests.
16. TERMINATION
(a) This Agreement shall terminate, without prejudice to the
accrued rights and remedies of the parties, forthwith on
termination, howsoever occurring, of the Trademark License which as
used herein shall mean the license or trademark rights which relate
to all or any part of the Licensed Material to be entered into
between the Licensee and the owner of such rights.
(b) Without prejudice to any other right or remedy available to it
and in addition to any other termination rights specified
throughout this Agreement, Licensor shall have the right at any
time to terminate this Agreement forthwith by giving Licensee
written notice thereof:
(i) If Licensee defaults in the performance of any of its material
obligations provided for in this Agreement and any such default is
not corrected within ten (10) days after written notice to Licensee
from Licensor thereof; or
(ii) If Licensee does not commence in good faith to manufacture,
distribute and sell each Article throughout the Territory on or
before the Marketing Date and thereafter fails to diligently and
continuously manufacture, distribute and sell each of the Articles
throughout the Territory. Such default, and Licensor's resultant
right of termination shall apply only to the specific characters,
elements and logos of the Licensed Material and/or the specific
nation of which or wherein Licensee fails to meet said marketing
requirements, and if any such failure is not corrected within ten
(10) days after written notice to Licensee from Licensor thereof.
(c) Licensor shall have the right at any time to terminate this
Agreement by giving Licensee written notice thereof:
(i) if Licensee delivers to anyone without Licensor's written
authorization merchandise containing representations of Licensed
Material or other material, the copyright or other proprietary
rights to which are owned or controlled by Licensor other than the
Articles approved in accordance with the provisions hereof; or
(ii) if Licensee shall breach any other agreement in effect
between Licensee on the on hand and Licensor or any other company
in Time Warner Entertainment Company, L.P. group on the other; or
(iii) if Licensee shall make any assignment for the benefit of
creditors or file a petition in bankruptcy or is adjudged bankrupt
or becomes insolvent or generally unable to pay its debts as and
when due or is placed in the hands of a receiver or if the
equivalent of any such proceedings or acts occurs though known by
some other name or term; or
(iv) if an order is made or effective resolution is passed for the
winding up of Licensee (other than a voluntary winding up for the
purpose of reconstruction or amalgamation or, as the case may be,
the Licensee shall become bankrupt or if Licensee seeks to make any
composition or arrangement with creditors or is unable to pay its
debts within the meaning of Section 518 of the Companies Act of
1985 or any statutory modification or reenactment thereof; or if
any administrator or receiver or administrative receiver or manager
is appointed of the whole or any part of the assets of the Licensee
or if any distress, execution or other process is levied on or
enforced upon any property of the Licensee; or if an application
for administration order in relation to the licensee is presented
to the courts; or if anything analogous to or having substantially
similar effect to any of the events specified above shall occur
under the laws of the applicable jurisdiction; or
(vi) if Licensee undergoes a substantial change of management or
ownership.
17. RIGHTS AND OBLIGATIONS UPON EXPIRATION OR TERMINATION
(a) Upon the expiration or termination of this Agreement, all
rights herein granted to Licensee shall immediately revert to
Licensor. Licensor shall be entitled to retain all Royalties and
other things of value paid or delivered to Licensor.
(b) Licensee agrees that from and after the expiration or
termination of this Agreement Licensee shall neither manufacture
nor have manufactured for it Articles, that Licensee shall destroy
or deface any moulds, plates or other items used to reproduce
Licensed Material and that, except as hereinafter provided, it
shall cease selling Articles.
(c) If Licensee has any unsold Articles in inventory on the
expiration or termination of this Agreement, Licensee shall provide
Licensor with a full statement of the kinds and numbers of such
unsold Articles. If such statement has been provided to Licensor
and if Licensee has fully complied with the terms of this
Agreement, including the payment of all Royalties due, Licensee
shall have the right, for a period of sixty (60) days from such
expiration or earlier termination date, to sell off and deliver
such Articles ("Sell Off Period"). Licensee shall furnish to
Licensor statements covering such sales and pay Licensor Royalties
on such sales, where applicable. In no event, however, may
Licensee distribute and sell during such period an amount of
Articles sold during any consecutive sixty (60) day period during
the Term. In the event this Agreement is terminated by Licensor
for cause, Licensee shall be deemed to have forfeited its sell-off
rights hereunder. Except as otherwise agreed by Licensor in
writing, any inventory of Articles in Licensee's possession or
control after the Sell-Off Period granted hereunder shall be
destroyed forthwith. Such destruction shall be attested to in a
certificate signed by an independent third party, firm, or agency
approved by Licensor delivered forthwith to Licensor.
18. WAIVERS
A waiver by either party at any time of a breach of any provision
of this Agreement shall not apply to any other provision on this
Agreement or imply that a breach of the same provision at any other
time has been or will be waived.
19. ASSIGNABILITY
(a) This Agreement does not provide for a joint venture between
the parties. Licensee's rights as granted hereunder cannot be
assigned, disposed of or transferred, voluntarily or involuntarily,
to anyone else without Licensor's prior written consent. Without
limiting the foregoing, a merger of Licensee's company into another
company or the transfer of a controlling interest in Licensee's
company shall be deemed a disposal of Licensee's rights hereunder
which, to be effective hereunder, would require Licensor's written
consent.
(b) Licensor shall have the right to assign this Agreement or any
of its rights and obligations or interests hereunder to any
subsidiary, affiliate, or successor in interest by merger or
acquisition or otherwise, of Licensor or Time Warner Entertainment
Company, L.P., or to any person or entity succeeding to
substantially all of the assets of Licensor or Time Warner
Entertainment Company, L.P. and such assignment shall not require
the consent of Licensee.
20. CONFIDENTIALITY
Licensee hereby agrees that, both during the term of this Agreement
and after the expiration or termination hereof, it shall maintain
in strict confidence all information, including but not limited to
the Licensed Material, books of account, inventories, production
and sales records, reports correspondence and any other materials
relating to this Agreement, and shall not disclose such information
to third parties without the prior written consent of Licensor.
21. ETHICS
Licensee agrees that no part of the consideration paid pursuant to
this Agreement shall be offered, paid or promised, directly or
indirectly, to any government official, political party or official
thereof, or any candidate for political office, for the purpose of
influencing any act or decision of such person or party or inducing
such person or party to use his or its influence to affect or
influence any act or decision of any national, state or local
government or instrumentality thereof. For the purposes of this
paragraph, the term "governmental official" shall include any
officer or employee of a national, state or local government, or
any department, agency or instrumentality thereof, or any person
acting in an official capacity of or on behalf of such government
or department, agency or instrumentality.
22. HEADINGS
Headings of paragraphs herein are for convenience of reference only
and are without substantive significance.
23. NOTICES/HEADINGS
All notices which either party is required or may desire to serve
upon the other party shall be in writing, addressed to the party to
be served at the address set forth above and may be served
personally or by depositing the same, postage prepaid, in the
official mail of the country of deposit, or by facsimile, provided
that a hard copy of the facsimile is sent by mail (in the manner
described above) on the same day as the facsimile transmission.
Such notice shall be deemed served upon personal delivery or upon
the date of mailing, or, if sent by facsimile, on receipt by the
addressee.
24. FORCE MAJEURE
The parties shall be excused from performance under this Agreement
while and to the extent they are unable to perform by reason of
war, fire, storm, flood, earthquake, explosion, rebellion, labor
dispute, insurrection, action of the elements, or other acts of
God. It is understood, however, that excuse from performance does
not toll the Term of this Agreement. It is further understood that
Licensor's inability to perform for any of the above enumerated
causes shall not excuse Licensee's obligation to pay Licensor the
Guaranteed Consideration. Additionally, if the circumstance of a
force majeure continues for a period of six months or longer, then
either party shall have the right to terminate this Agreement
forthwith on written notice to the other party.
25. CONSTRUCTION
This Agreement shall be enforced, construed and interpreted in
accordance with the laws of England, and the parties hereby submit
to the exclusive jurisdiction of the English courts.
26. MISCELLANEOUS
(a) Each of the parties acknowledges and agrees that the other has
not made any representations, warranties or agreements of any kind,
except as may be expressly set forth herein.
(b) This Agreement constitutes and contains the entire agreement
between the parties with respect to the subject matter hereof and
supersedes any prior or contemporaneous agreements, oral or
written. Nothing herein contained shall be binding upon the
parties until this Agreement has been executed by an officer of
each party. This Agreement may not be changed, modified, amended
or supplemented, except in writing signed by both parties.
(c) If any part of this Agreement shall be declared invalid or
unenforceable by a court of competent jurisdiction, it shall not
affect the validity of the balance of this Agreement, provided,
however, that if any provision of this Agreement pertaining to the
payment of monies to Licensor shall be declared invalid or
unenforceable, Licensor shall have the right, at its option, to
terminate the Term of this Agreement upon giving written notice to
Licensee of its election to do so.
(d) In the event of any action suit, or proceeding hereunder, the
prevailing party shall be entitled to recover its attorney' fees
and the costs of said action, suit, or proceeding.
LICENSE AGREEMENT 50540-SPJ
WARNER BROS. CONSUMER PRODUCTS (UK) LIMITED ("Licensor") whose
address is 135 Wardour Street, London, W1V 4AP, England and INNOVO
GROUP INC. TRADING AS NASCO INTERNATIONAL LTD. ("Licensee") whose
address is 27 North Main Street, Springfield, Tennessee 37172, USA
agree as follows:
As of the Effective Date (as defined below) and subject to the
Standard Terms and Conditions attached hereto, all of which are
incorporated herein by this reference and made a part hereof,
Licensor grants to Licensee a non-exclusive license to utilize the
Licensed Material solely upon or in connection with the
manufacture, distribution, and sale of the Articles throughout the
Territory, as defined and specified as follows:
Licensed Material: Those certain elements depicted in the
theatrical motion picture entitled "SPACE JAM" (the "Motion
Picture"), including all trademarks, copyrights, related logos,
indicia, set and costume designs, and other elements depicted
therein. In addition, such elements shall also include the
representations, names, logos, movements, personalities, artwork,
photographs and other material in connection with the animated
characters NERDLUCKS, MONSTARS, SWACKHAMMER, and LOLA BUNNY as well
as the following "Looney Tunes" animated characters as depicted in
the Motion Picture: BUGS BUNNY, DAFFY DUCK, SYLVESTER, TWEETY,
ROAD RUNNER, WILE E. COYOTE, TASMANIAN DEVIL, ELMER FUDD, PORKY
PIG, YOSEMITE SAM, PEPE LE PEW and MARVIN THE MARTIAN only.
Specifically excluded herein, however, is the right to reproduce
the likenesses of the performers except to the extent specifically
permitted otherwise in writing by Licensor and then only to the
extent such performers have granted merchandising rights to
Licensor. Notwithstanding the foregoing, all uses of any of the
elements set forth above, including the names and likenesses of any
of the performers afforded hereunder must be specifically approved
in writing by Licensor, pursuant to the Standard Terms and
Conditions hereto.
Licensee acknowledges that the rights granted herein are
limited only to the elements contained in the Motion Picture and
that any and all rights in, to or associated with any subsequently
produced motion picture, as well as with any sequels thereto, as
well as with any subsequently produced television series are
specifically excluded herefrom.
Licensee understands and agrees that Licensee has no rights in
and to Michael Jordan and his name, likeness, voice and uniform
(including, without limitation, the number 23) and that Michael
Jordan's name, likeness, voice and uniform (including, without
limitation, the number 23) shall not be utilized or reproduced
under any circumstances.
Further, Licensee specifically understands and agrees that no
rights are granted herein with respect to the Warner Bros. "LOONEY
TUNES" characters not associated with the Motion Picture, it being
understood that all rights in and to said characters are reserved
exclusively to Licensor for use and/or licensing as it deems
appropriate to third party(s) of its choice.
Article(s):
Article 1 - Backpack, ref. MBP 101 Article 2 - Backpack, ref. MBP 111
Article 3 - Backpack, ref. BNP 171 Article 4 - Backpack, ref. BP 121
Article 5 - Backpack, ref. BPN 271 Article 6 - Backpack, ref. RSN 171
Article 7 - Backpack, ref. BPN 161 Article 8 - Backpack, ref. BBP 191
Article 9 - Backpack, ref. FWB 1 Article 10 - Backpack, ref. FLBPP 9S1
Article 11 - Sports bag, ref. TBN 231 Article 12 - Sports bag, ref. CBN 271
Article 13 - Sports bag, ref. CBN 301 Article 14 - Waist pack, ref. FPN 1451
Article 15 - Waist pack, ref. FPN 14E Article 16 - Duffle bag, ref. BOD 1
Article 17 - Wallets, to be used as a premium item only and not for sale
separately.
Territory: Austria, Belgium, Cyprus, Denmark Eire, Finland,
France, Germany, Greece, Iceland, Israel, Italy, Lebanon, Norway,
Portugal, Spain, Sweden, Switzerland, The Netherlands and United
Kingdom of Great Britain & Northern Ireland.
Distribution: Sports stores and sports departments within
department stores only, in accordance with Special Stipulation (a)
herebelow.
Term: 31st May 1996 to 31st December 1997
Effective Date: The date of full execution of this Agreement,
provided that Licensee has not, within seven (7) days of such
execution date, received notice from Licensor that the owner of the
Trademarks which relate to all or any part of the Licensed Material
shall not enter into a Trademark License.
Royalty Rate:
- - For Articles 1 to 16 - fifteen and one half percent (15.5%)
FOB or the following Minimum per Article Royalties:
Article 1 - US $0.45 Article 2 - US $0.61
Article 3 - US $0.64 Article 4 - US $0.93
Article 5 - US $1.12 Article 6 - US $1.28
Article 7 - US $1.31 Article 8 - US $1.34
Article 9 - US $1.49 Article 10 - US $1.60
Article 11 - US $1.08 Article 12 - US $1.86
Article 13 - US $2.00 Article 14 - US $0.35
Article 15 - US $0.51 Article 16 - US $1.36
- - For Article 17 - fifteen and one half percent (15.5%) on
purchase price
Guaranteed Consideration: US $30,000 payable as to: US
$10,000 on execution hereof and US $10,000 on or before 28th
February 1997 and US $10,000 on or before 30th June 1997.
1st statement due on: 30th October 1996 Marketing Date: August 1996
Promotion Commitment: Three percent (3%) of the projected sales as
communicated by Licensee to Licensor in writing.
Trademark/Copyright notice: SPACE JAM names, characters and all
related indicia are trademarks of Warner Bros. a Division of Time
Warner Entertainment Company, L.P. TM & Copyright Warner Bros.
All Rights Reserved. and/or such other copyright and trademark
notices as Licensor shall advise Licensee to use.
Samples: Fifteen (15) of each Article.
Insurance: 500,000
Special Stipulations:
(a) Distribution: Licensee shall submit its choice of distributor
to Licensor for Licensor's prior written approval.
(b) Business Development: Licensee's Sales Manager agrees to
travel to the Territory and visit Licensor's offices on a monthly
basis to contribute to business development.
(c) Public Relations: All communications by Licensee in relation
to this Agreement and the Licensed Material in general for public
release must be approved in writing by Licensor prior to release.
By signing below, Licensee affirms that it is in agreement
with the foregoing and that it has read and understands and agrees
to be bound by the Standard Terms and Conditions attached hereto
and forming part hereof. Licensee further agrees that this
Agreement shall also serve as an invoice to Licensee with respect
to the amount payable as set forth above and Licensee agrees to pay
such amounts to Licensor as specified above.
Important additional terms of this Agreement are printed on
the attached pages entitled "Standard Terms and Conditions".
Please read carefully.
This Agreement shall be of no force and effect unless and
until signed by all parties hereto as specified below.
AGREED AND ACCEPTED: AGREED AND ACCEPTED:
LICENSEE LICENSOR
INNOVO GROUP INC. TRADING AS WARNER BROS. CONSUMER PRODUCTS
NASCO INTERNATIONAL LTD. (UK) LIMITED
By:/s/Joseph T. Assad By:/s/Karin Visser
Title: Vice President Title: Manager, Legal Affairs
Date: June 14, 1996 Date: June 25, 1996
CONSENT FOR MANUFACTURING SUB-LICENSE
Dear Sir:
Reference is made to the basic Agreement of even date herewith
between WARNER BROS. CONSUMER PRODUCTS (UK) LIMITED ("Licensee")
and INNOVO GROUP INC. TRADING AS NASCO INTERNATIONAL LTD.
("Licensee) expiring on 31st December 1997. Licensor hereby
consents to the manufacture of the "Articles" listed below by the
manufacturer named below for the account of Licensee, upon the
following conditions to which Licensee agrees: (1) that the said
manufacturer sign and endorse the Agreement hereto appended; and
(2) that said manufacturer shall fully comply in all respects with
that signed Agreement. Failure of either of said conditions shall
entitle Licensor to terminate this Agreement forthwith and require
that that portion of all copies and moulds or other devices used to
manufacture the "Articles" in the possession of Licensees or the
named manufacturer be immediately delivered to Licensor or be
destroyed to the satisfaction of Licensor. No Royalties are
payable to Licensor for the manufacture of the said Articles, but
Royalties are payable to Licensor on authorized sales by Licensee
thereof if and when such sales are made.
Manufacturer Name & Address:
High Performance
3/F Suite M
Kaiser Estate Phase III
11 Hok Yuen Street
Hunghom
Kowloon
Hong Kong
Articles:
Articles 1 to 17 inclusive.
Territory of Manufacture:
Hong Kong
LICENSEE: LICENSOR:
INNOVO GROUP INC. TRADING AS WARNER BROS. CONSUMER PRODUCTS
NASCO INTERNATIONAL LTD. (UK) LIMITED
BY:/s/ Joseph T. Assad By:/s/ Karin Visser
Dated:June 14, 1996 Dated:June 25, 1996
<PAGE>
STANDARD TERMS AND CONDITIONS
1. RIGHTS GRANTED TO LICENSEE
(a) During the Term and any extension thereof, Licensor
grants to Licensee the non-exclusive right in the Territory to use,
and reproduce the Licensed Material only on and in connection with
the manufacture, advertising, distribution and sale of the
Articles. Licensee specifically understands and agrees that no
rights are granted herein in respect of the Warner Bros. WB Shield
Device or any other trademarks, logos, copyrights, tradenames or
other rights of Licensor or any parent, subsidiary or affiliate of
Licensor other than expressly set forth herein.
(b) Licensor further grants to Licensee the non-exclusive
right to reproduce, with Licensor's prior written approval, the
Licensed Material only within the Territory and the European Union
("EU") on containers, packaging, display material and in
advertising for the Articles, subject to the provisions of this
Agreement. It is specifically understood that no television, radio
and/or theatrical commercials may be utilized under this Agreement
without Licensor's prior written approval.
(c) Licensee shall be free to sell Articles to Licensor or to
any subsidiary of Licensor's, subject to the payment to Licensor of
Royalties on such sales. Licensee agrees that sales of Articles to
Licensor shall be at one cost, or at a reduced price or at the best
price available to the trade.
(d) Licensee and its customers shall be free to sell the
Articles at such prices as Licensee or its customers shall
determine. However, Licensee agrees that any proposed sales of
Articles at a liquidation price cannot occur without Licensee first
offering Licensor the opportunity to said Articles.
(e) The Licensee acknowledges that there are subsisting
intellectual property rights parallel to those licensed to the
Licensee hereunder which are either licensed to another licensee of
the Licensor or exploited by the Licensor itself, throughout the EU
and accordingly the Licensee shall not, in any part of the EU
outside the Territory pursue an active policy of selling or
marketing Articles, or engage in advertising of the Articles, the
name Warner Bros. or the WB Shield Device (or any other trademarks,
logos, copyrights, tradenames or other rights of Licensor or any
parent, subsidiary or affiliate of Licensor) or the Licensed
Material, other than expressly set forth herein, including but
without prejudice to the generality of the foregoing, soliciting
orders for Articles from customers, establishing any branch or
maintaining any distribution depot of Articles.
(f) Notwithstanding anything in this Agreement to the
contrary, the Licensee may (upon giving prior written notice to
Licensor) sell Articles pursuant to an unsolicited order which does
not involve or result from a breach by Licensee of the provisions
of Subparagraph (e) above to:
(i) a customer located in another member state of the EU; or
(ii) a customer located in a country outside the EU if
the Articles which are the subject of such sale are destined
for ultimate delivery in the Territory or in the EU.
2. CONSIDERATION
(a) Licensee agrees to pay the Guaranteed Consideration as set
forth above to Licensor, which shall be on account of Royalties to
accrue during the Term only and only with respect to sales in the
Territory. However, if any part of the Guaranteed Consideration as
specified hereinabove applies to any period less than the Term,
such part shall be on account of during such lesser period only.
No part of Guaranteed Consideration shall be repayable to Licensee
for that period.
(b) Royalties accruing from any sales of Articles during an
extension of the Term or after the expiration or termination of the
Agreement as provided in Paragraph 16, shall not be offset against
the Guaranteed Consideration unless otherwise agreed in writing.
(c) Royalty Payments:
(i) Licensee shall pay to Licensor a sum equal to the Royalty
Rate as set forth above of all Net Invoiced Billings (as
defined below) by Licensee of the Articles covered by this
Agreement. Royalties shall be payable concurrently with the
statements required in Paragraph 10 hereof, except to the extent
offset by Guaranteed Consideration theretofore remitted. The
credit shall be taken in the Accounting Period in which the refund
is given or credit memo issued. Unused credits may be carried
forward, but in no event shall Licensee be entitled to a refund of
Royalties.
(ii) The term "Net Invoiced Billings" shall mean all monies billed
or billable by Licensee, or its sub-licensee, if any, from the
exercise of its rights to distribute and sell Articles in the
Territory or in the EU before any allowances or discounts, which
have been deducted from the normal selling price, inclusive of
interest, monetary correction, and any other payment charges
whatsoever, less the following items only:
(A) any sales, excise or value added taxes, which are separately
stated, and which are required to be collected from customers as
part of Net Invoiced Billings, and which are payable to taxing
authorities, and
(B) actual defective returns.
(iii) It is specifically understood and agreed that no deduction
may be made for any actual returns (except for defective returns),
or any reserves therefor, any bad debts, or any reserves therefor,
any manufacturing costs, importing costs, selling costs,
advertising costs, any real estate taxes, business license taxes,
net income taxes, franchise taxes, or any other taxes not billed as
part of Net Invoice Billings. It is also understood, and agreed
that all sums billed in respect of Articles lost and/or unaccounted
for shall also be included in Net Invoiced Billings. The sums,
which Licensor is paid as Royalties on any sales to Affiliated
Customers of Licensee (as defined below), shall be no less than the
sums paid as Royalties on sales to unaffiliated customers. For
purposes of this agreement, Affiliated Customers of Licensee shall
mean any entity which owns or controls, is owned or controlled by,
is under common ownership or control with, licensee, including but
not limited to parent companies, subsidiary companies, sister
companies, partnerships, and joint ventures of Licensee. The word
"control" (including "controlled by" and "controls"), as used in
the preceding sentence shall be deemed to mean possession, directly
or indirectly, of the power to command the course of management,
policy making and business activity of the entity or of the
Licensee, as the case may be, regardless of equity, debt, or voting
securities position.
(iv) Royalties payable for each Article sold shall not be less
than the Minimum Per Article Royalty (if specified). No royalties
are payable on the mere manufacture of Articles to the extent all
manufactured Articles are accounted for as required herein.
3. APPROVALS
(A) (i) Licensee shall submit to Licensor for its prior review
and written approval all preliminary and proposed final artwork and
three-dimensional models which are to appear on or in the Article
and Licensee's proposed use of such materials in preparing a pre-
production sample. Licensee shall submit such material as early as
possible, and in any case at least twenty (20) business days prior
to commercial production of any Article. Thereafter, Licensee
shall submit to Licensor for its written approval a pre-production
sample of each Article.
(ii) All containers, packaging, display material, hangtags,
promotional material, catalogues and advertising for Articles which
utilize or incorporate the Licensed Material must be submitted to
Licensor and receive its written approval before use. Licensor's
approval thereof should be procured when same is still in rough or
storyboard format. Licensor shall endeavor to respond to requests
for approval without undue delay. Approval shall lie in Licensor's
sole discretion, and the use of containers, packaging, display
material, promotional material, catalogues or advertising not
approved by Licensor in writing is strictly prohibited. Whenever
Licensee shall prepare catalogue sheets or other printed matter
containing illustrations of Articles, it will furnish to Licensor
five (5) copies of same.
(iii) Before shipping an Article to any customer, Licensee shall
furnish to Licensor, for its approval of all aspects of the Article
in question, from the first production run of each supplier or
manufacturer of each of the Articles, the number of samples, with
packaging, which is hereinabove set forth. Such samples shall
conform to the approved artwork, three-dimensional models and pre-
production sample previously approved by Licensor hereunder.
(iv) Approval or disapproval of the artwork utilizing or
incorporating Licensed Material as it appears on the Article, as
well as of the quality of the Article, shall lie in Licensor's sole
discretion. If any Article or item not approved hereunder by
Licensor in writing is being sold, distributed, published or
otherwise used, Licensor may at its sole election require, together
with other remedies available to it including but not limited to
immediate termination of this Agreement by written notice, such
Article or item to immediately withdrawn from the market, or from
distribution, publication or other dissemination by Licensee, and
Licensee agrees to so withdraw such Article or item within the
period so stated by Licensor. Articles and items so withdrawn
shall be immediately destroyed and such destruction shall be
attested to in a certificate signed by an independent third party,
firm, or agency approved by Licensor and delivered forthwith to
Licensor. Any Article not approved, as provided in the previous
sentence, shall not be sold and shall be immediately destroyed.
Such destruction shall be attested to by an independent third
party, firm or agency approved by Licensor and delivered forthwith
to Licensor.
(v) Any modification of an Article, including but not limited to,
change of materials, color, design or size of the representation of
Licensed Material, must be submitted in advance for Licensor's
prior written approval as if it were a new Article. approval of an
Article which uses particular artwork does not constitute approval
of such artwork for use with a different Article. The fact that
artwork has been taken from a publication or article previously
approved by Licensor does not mean that its use will be approved in
connection with an Article licensed hereunder. Licensor shall
endeavor to respond to requests for approval within a reasonable
time, but Licensee shall seek such approvals as early as possible
in case of delays. Licensor's failure to respond shall be deemed
disapproval.
(b) (i) If Licensee submits for approval artwork from an article
or book manufactured or published by another licensee of Licensor
or of any subsidiary of Licensor, Licensee must advise Licensor in
writing of the source of such artwork. It is specifically
understood that Licensee may not, in certain cases, be permitted to
utilize any previously published artwork or artwork not
specifically provided by Licensor, it being understood by Licensee
that any and all uses of artwork featuring the Licensed Material
shall be entirely subject to Licensor's approval as provided
herein.
(ii) If Licensee fails to advise Licensor as required in (i)
above, any approval which Licensor may give for use by Licensee of
such artwork may be withdrawn at any time by giving Licensee
written notice thereof, and upon receipt of such written notice
Licensee shall be prohibited by Licensor from selling any Articles
using such artwork.
(iii) If Licensor has supplied Licensee with forms for use in
applying for approval of artwork, models, pre-production and
production samples of Articles , Licensee shall use such forms when
submitting anything for licensor's approval as provided for
hereunder.
(c) Licensee shall make available to Licensor at no charge three
(3) additional samples from each production run of each supplier or
manufacturer of each of the Articles for the purpose of comparison
with samples from the first production run of each supplier or
manufacturer of each of the Articles, to maintain consistent
quality.
(d) Licensee shall permit Licensor, upon reasonable request, to
inspect Licensee's manufacturing operations (and those of its
suppliers) for the Articles.
(e) It is specifically understood that Licensor may in its sole
discretion interalia disapprove an Article or a production run of
an Article because the quality is unacceptable to Licensor.
Accordingly, Licensor recommends that Licensee submit production
samples to it for approval before committing to any original
production run or any purchase of a shipment from a new supplier.
(f) No modification of an approved production sample shall be made
without Licensor's prior written approval. Articles being sold
must conform in all respects to the approved production sample. It
is understood that if in Licensor's reasonable judgement the
quality of an Article originally approved has deteriorated in later
production runs, or if the Article has otherwise been altered,
Licensor may, in addition to other remedies available to it,
require by written notice such Article to immediately withdrawn
from the market, and Licensee agrees to withdraw such Article
within the period so stated by Licensor. Articles so withdrawn
shall be immediately destroyed, and such destruction shall be
attested to in a certificate signed by a independent third party,
firm or agency approved by Licensor and delivered forthwith to
Licensor.
(g) The rights granted hereunder do not permit the sale of
"seconds" or "irregulars." All Articles not meeting the standard
of approval shall be destroyed, pursuant to Subparagraph (f) above,
unless otherwise directed by Licensor.
4. SPECIFIC UNDERTAKINGS OF LICENSEE
During the Term and any renewal period and thereafter, Licensee
warrants, represents, and agrees that:
(a) It shall not sell Articles for use as premiums (including
those in purchase-with-purchase promotions), promotions, giveaways,
fund raisers or entries in sweepstakes or to customers for resale
only by direct mail or other resale through direct marketing
methods. However, nothing contained herein shall preclude Licensee
from soliciting orders by mail from wholesalers or retail outlets,
nor from selling to retailers who include the Articles in their
mail order catalogues or otherwise sell the Articles by direct
marketing methods as well as at retail.
(b) It shall obtain all necessary approvals and bear all expenses
from any third party(s) in connection with any print and/or
broadcast advertising Licensor authorizes. Licensee shall submit
all proposed advertising materials and concepts to Licensor as set
forth in Paragraph 3 and Licensor's approval of copy or storyboards
for such advertising will not constitute a representation or belief
by any code, standard, or other obligation imposed by any third
party(s). No media commercials incorporation any character voices
may be utilized under this Agreement without Licensor's specific
prior written approval.
(c) It shall cause Licensee's name, trade name (or trademark of
Licensee's which it has advised Licensor in writing that it is
using) and its address and the country of manufacture of the
Article to appear on the permanently affixed labeling on each
Article and, if the Article is sold to the public in packaging or
a container, printed on such packaging or container so that the
public can identify the supplier of the Article. On soft goods
"permanently affixed" shall mean sewn on.
(d) It shall advise Licensor in writing of all trade names or
trademarks it is using on or in connection with Articles being sold
under this Agreement if such names or marks differ from its
corporate name as indicated herein.
(e) It shall ensure that each Article distributed hereunder shall
be of high quality and shall comply with all applicable laws,
regulations and established industry standards of the country of
origin and the country of destination and conform to the sample
thereof approved by Licensor.
(f) It shall not associate other characters or other properties
with the Licensed Material, either on the Articles or in their
packaging, on advertising, promotional or display materials without
Licensor's prior written permission.
(g) It shall manufacture (or have manufactured for it) and offer
for sale all of the Articles and exercise the rights granted
herein. Licensee agrees that not later than by the Marketing Date
applicable to a particular Article, shipments to customers of
Articles in quantities sufficient to meet reasonably and
anticipated demand will have taken place and that Articles shall be
available for purchase and prompt delivery to customers. Any
Article as to which such sales have not taken place or which are
not then available for purchase and prompt delivery may be
recaptured from the scope of this Agreement without obligation to
Licensee, other than to provide it with written notice thereof.
Licensee further agrees to use its best endeavors to promote sales
of Articles.
(h) It shall carry out the Promotion Commitment, if applicable,
which shall be defined as the sum set forth above which Licensee
shall budget and expend on advertising of the Articles in the
Territory. Accordingly, within sixty (60) days following the end
of each year of the Term, Licensee shall submit to Licensor a
statement which shall include total Net Invoiced Billings, total
sums expended on advertising the Articles, together with the
resulting percentage. In the event Licensee fails to expend in
full the sum specified herein within the required time period, upon
submission of the statement required in Paragraph 10, Licensee
shall pay to Licensor an amount equal to such shortfall.
(i) Its parent or any subsidiary or affiliate of it shall not
register or attempt to register, in any country, copyrights, or to
register as a trademark, service mark, design patent or industrial
design any of the Licensed Material or derivations or adaptations
thereof, or any word, symbol or design which is so similar thereto
as to suggest association with or sponsorship by Licensor or any
subsidiary of Licensor's. In the event of a breach of the
foregoing, Licensee agrees, at its expense and at Licensor's
request, to immediately terminate the unauthorized registration
activity and to promptly execute and deliver or cause to be
delivered to Licensor such assignments and other documents as it
may require to transfer to it all rights to the registrations,
patents or applications involved.
(j) It shall not use wither the Licensed Material or any other
material, the copyright or trademark to which is owned or
controlled by Licensor, in any way other than as herein authorized
(or as authorized in such other written contract signed by both
Licensee and Licensor in effect). In addition to any other remedy
Licensor may have, Licensee agrees that the total revenues to
licensee from any use of such material on products other than the
Articles (unless authorized by Licensor in writing), and total
revenues to Licensee from the use of any other copyright or
registered material of Licensor's without written authorization,
shall be payable to Licensor.
(k) It shall give Licensor prompt written notice of any unlicensed
use by third parties of Licensed Material or material which
infringes any rights in the Licensed Material due to its similarity
thereto, and Licensee shall not bring or cause to be brought any
criminal prosecution, lawsuit or administrative action for
infringement, interference with or violation of any rights to
Licensed Material or violation of any rights granted herein.
Licensee shall cooperate and, if Licensor deems appropriate, be
named by Licensor as a sole plaintiff or co-plaintiff in any action
against an infringer of Licensor's or Licensee's rights hereunder,
provided it gives Licensee prior written notice of such actions and
bears the expense thereof. Any and all settlements, penalties,
damages, and recoveries arising from or in connection with such
action shall be the sole property of Licensor.
(l) It shall not use any Licensed Material on any business sign,
business cards, stationery or forms (except as licensed herein) or
use any Licensed Material as the name of its business or any
division thereof.
5. RIGHTS RESERVED BY LICENSOR
(a) Licensor reserves all rights not expressly conveyed to
Licensee hereunder. Notwithstanding anything to the contrary in
this Agreement, licensee hereby acknowledges that the rights
granted hereunder are subject to the rights of Licensor, and the
owner of the Licensed Material, to use or license without
limitation throughout the world any third party(s) of its choice
for the manufacture, distribution, advertising and sale of products
similar or identical to those set forth above for sale through any
catalogue(s) produced or distributed by or on Licensor's behalf, or
for sale or distribution in any motion picture theaters, or for
sale or distribution on any retail stores (or portion thereof)
operated by Licensor or on Licensor's behalf.
(b) Licensor reserves the right to withdraw any Licensed Material
or Articles, the use or sale of which under this Agreement would
infringe or reasonable be claimed to infringe the rights, other
than rights granted by Licensor, of a third party(s). In such case
Licensor's obligations to Licensee shall be limited to the
purchase, at cost without overhead, of Articles and other materials
utilizing such withdrawn Licensed Material which cannot be sold or
used.
6. ARTWORK
Should Licensee wish to use Licensor's services in developing
artwork for the creation of Articles, display packaging or
promotional material, (including any artwork which, in Licensor's
opinion, is necessary to modify artwork initially prepared by
Licensee and submitted to Licensor for approval) Licensee shall pay
Licensor, within thirty (30) days following the date of Licensor's
invoice therefor the amounts due, based upon Licensor's prevailing
commercial art rates, including any delivery charges incurred by
Licensor in connection therewith. Estimates of artwork charges are
available upon request. Licensee acknowledges, that in certain
cases it may be required by Licensor to utilize artwork or
renditions of the Licensed Material as specifically provided by
Licensor and Licensee agrees to so utilize such renditions. In
those instances where Licensee is unable or unwilling to use such
renditions, and if Licensor approves in writing, Licensee may
create or procure the creation of artwork to be submitted for
approval as required herein. Nonetheless, in those instances where
Licensee is not obligated to utilize Licensor's services, Licensee
is encouraged to do so in order to minimize delays which may occur
if outside artists do renditions of Licensed Material which
Licensor does not approve and to maximize the attractiveness of the
Articles.
7. LICENSOR'S OWNERSHIP OF ALL RIGHTS IN LICENSED MATERIAL
Licensee acknowledges that, as between Licensee and Licensor, the
Licensed Material and all copyrights and other proprietary rights
in and to the Licensed Material are exclusively owned, reserved
and/or controlled by Licensor. Licensee further agrees and
acknowledges that all rights in and to any and all artwork created
(including if created in whole or in part by Licensee) and
authorized for use hereunder by Licensor in connection with the
Articles or otherwise which utilizes or incorporates any of the
Licensed Material shall, as between Licensee and Licensor, be
owned, reserved, and/or controlled in its entirety exclusively by
Licensor, who shall be the author at law and copyright proprietor
thereof. Licensor reserves itself or its designees all rights to
use any and all artwork created, utilized and or approved hereunder
without limitation in the Territory or the EU, or otherwise during
or after the Term. At the request of Licensor, Licensee shall
execute such form of assignment to Licensor of the copyright in any
amendments to or derivative works based in whole or in part upon
the Licensed Material and all other proprietary rights in and to
the Licensed Material as Licensor may reasonable request.
8. LEGAL NOTICES
As a condition to the grant of rights hereunder, each Article and
any other matter containing Licensed Material shall bear one or
more properly located legal notice in the form as set forth above
or prescribed by Licensor. Licensee will comply with such
instructions as to form, location and content of the notice as
Licensor may give from time to time. Licensee will not affix to
any Article or any other matter containing Licensed Material al
legal notice in any other name. If by inadvertence a proper legal
notice in Licensor's name is omitted from any Article or other
matter containing Licensed Material, Licensee agrees, at its
expense, to immediately use all possible efforts to correct the
omission on all such Articles or other matter in process of
manufacture or in distribution. Licensee agrees to advise Licensor
promptly and in writing of the steps being taken to correct any
such omission and to cooperate fully with Licensor in making the
corrections on all existing Articles which can be located.
9. GOODWILL
Licensee recognizes and acknowledges the great value of the
publicity and goodwill associated with Licensed Material and in
such connection, it acknowledges that such goodwill exclusively
belongs to Licensor and that the Licensed Material has acquired
a secondary meaning in the mind of the purchasing public. Licensee
further recognizes and acknowledges that a breach by it of any of
its covenants, agreements or undertakings hereunder will cause
Licensor irreparable harm, which cannot be readily remedied in
damages in an action at law, and will, in addition thereto,
constitute an infringement of Licensor's rights in and to the
Licensed Materials, thereby entitling Licensor to injunctive relief
and other equitable remedies, costs and reasonable attorney's fees.
10. STATEMENTS, PAYMENTS AND AUDITS
(a) Within thirty (30) days following the end of each calendar
quarter during the Term ("Accounting Period"), Licensee shall
submit to Licensor:
(i) With respect to cumulative New Invoiced Billings, a "Royalty
Statement" which shall include, at a minimum, the information
listed on the format to be provided by Licensor upon execution of
this Agreement.
(ii) A "Statement of Account" which shall include, at a minimum,
the information listed on the format to be provided by Licensor
upon execution of this Agreement.
(iii) With respect to Articles manufactured, sold and defective
sales returns, an "Inventory Movement Report' which shall include,
at a minimum, the information listed on the format to be provided
by Licensor upon execution of this Agreement.
(iv) With respect to sales of Articles by Licensee to customers in
more than one country, as comprises the Territory, such formats as
specified above shall be prepared and submitted on a country-by-
country basis, as well in a summary format.
(v) Licensor will provide the formats for the above-referenced
reports and reserves the right to review and amend the minimum
requirements referred to above, from time to time, and in such
amended version in accordance herewith.
(b) Licensee shall provide Licensor at the beginning of the Term
and thereafter within seven (7) days of the close of each financial
quarter ("Quarterly Accounting Period") with a completed revenue
forecast projected forward to a date twelve (12) months from the
beginning of said quarter ("the Forecast"). The Forecast shall be
completed by Licensee in a format which Licensor shall provide.
Licensor reserves the right to review and amend the format of the
Forecast from time to time and in such event Licensee shall duly
complete and return to Licensor any such amended version in
accordance herewith.
(c) Within thirty (30) days following the end of each year during
the Term, Licensee shall conduct at its own expense a physical
inventory of all Articles in Licensee's possession or control and
submit to Licensor a written statement detailing the results of
such physical inventory.
(d) Licensee shall utilize best efforts to comply on a timely
basis with all reasonable requests of Licensor for supplementary
accounting information and reports in addition to the statements
specifically required by this Agreement.
(e) (i) Within thirty (30) days following the end of each
Accounting Period, Licensee shall pay Licensor in the national
currency of the country of the Territory where remittances are
required the amount shown to be due to Licensor. Licensee further
agrees to pay any amounts due to Licensor as required by the
Trademark License simultaneously with the payment of amounts due
hereunder, as if said amounts were stated herein, and to
incorporate same in any and all statements and/or reports as are
required herein. All sums due Licensor shall be deposited in a
bank account to be designated by Licensor. In the event Licensee
has amounts due Licensor in currencies other than the national
currency of the country of the Territory, where remittances are
required, then Licensee shall convert said amounts into the
national currency of the country of the Territory where remittances
are required based upon the exchange rate published by the national
bank(s) in the country of the Territory, and Licensee shall furnish
Licensor with external evidence with respect to the authenticity of
the exchange rate used, such as a bank statement. Exchange rates
in respect of each Accounting Period shall be determined as of the
30th day of the applicable month, or if such 30th day shall fall on
a non-business day then as of the first business day following said
30th day.
(ii) In the event Licensee cannot, because of laws and
restrictions make remittances to the country of the Territory where
remittances are required, as hereinabove provided, upon submission
to Licensor designates or to have the Royalties due deposited in
licensee's interest bearing account or in a joint trust account
with resulting interest, and the Royalties paid in Licensee's
national currency to Licensor on the date remittance restrictions
terminate. However, in no event shall remittance restrictions in
a particular country as comprises the Territory relieve the
Licensee of the obligation of reporting and remitting Royalties as
required hereunder.
(iii) In the event amounts payable to Licensor are not remitted in
full within the requested thirty (30) days following the end of an
Accounting Period, and Licensee has not provided evidence to
Licensor that because of laws and restrictions in a country or
countries of the Territory, amounts payable could not be remitted,
then Licensee shall pay to Licensor as liquidated damages and not
as a penalty an amount equal to five percent (5%) per month,
without any deductions for tax or other purposes, on the
outstanding balance. Interest will become due on the first day the
payment is not made beyond the said thirty (30) days as aforesaid,
and an additional month will be deemed to have passed for the
purposes hereof on the first day of each subsequent month until the
delinquent amount are paid.
(iv) In the event Licensor shall suffer any exchange losses
arising from late payments, including those late payments arising
as a result of understated amounts due discovered as a result of an
audit, such losses shall be determined by deducting the monies
which would have been received if the delinquent balance had been
paid on the last due date at the exchange rate on that date, said
exchange rate source to be designated and agreed upon by both
parties, from the national currency actually received from such
delinquent balances. Any resulting national currency shortfall
will be paid in the national currency on the date that these
delinquent balances are remitted. This exchange loss protection
described above will also apply to all liquidated damages described
above, and the last due date, for purposes of determining the
exchange rate, shall be deemed to be the first day a payment
becomes delinquent.
(v) If remittance restrictions shall remain in effect for six (6)
months or more, Licensor shall have the right and option,
exercisable by the service of a written notice to such effect upon
Licensee, to terminate this Agreement. Licensee will use its best
efforts at all times to obtain government approval for remittance
of all sums due to Licensor at the earliest possible date.
Licensee is fully obligated to provide this best effort whether
sums due to Licensor are
(A) held by Licensee, or
(B) have been deposited into a bank account in Licensor's name.
(f) Licensee shall keep true and accurate books and records of all
transactions relating to the manufacture, distribution, and
exploitation of Articles hereunder which shall include but not be
limited to the following minimum requirements:
(i) inventory records showing the receipt, dispatch, return and
balance of Articles stocked by Licensee.
(ii) billing records that are capable of being traced to the above
inventory records.
(iii) an overall reconciliation showing the total number of
Articles received and/or manufactured in connection with the
exploitation of Licensee's rights hereunder and showing their
actual disposition, i.e., whether with customers, damaged,
destroyed, lost, or in stock.
(g) Licensor shall have the right from time to time during normal
business hours at reasonable intervals to inspect, audit and make
extracts of the books and records of Licensee insofar as said books
and records relate to the manufacture, distribution, and
exploitation of Articles licensed hereunder and, if applicable, as
said books and records relate to the Promotion Commitment and such
right of audit shall continue for a period of four (4) years
following either expiry or termination of this Agreement. Should
an inspection or audit carried out pursuant hereto reveal any
shortfall, Licensee shall pay to Licensor an amount equal to such
shortfall together with interest thereon from the respective dates
that same should have been payable hereunder until the date of
payment of such shortfall at a rate per annum equal to the maximum
legal rate in such country of the Territory. Should an inspection
or audit carried out pursuant hereto reveal a shortfall of more
than one percent (1%) of the total amount due to Licensor for the
periods reviewed, the costs of such audit or inspection shall be
reimbursed by Licensee to Licensor within thirty (30) days of
Licensor's invoice therefor. Licensor shall also have the right to
inspect or audit, under the same terms described in this Paragraph,
the books and records of any of Licensee's affiliated companies
which charged expenses to Licensee including bills, invoices, and
overhead charges.
(h) Each character or element of the Licensed Material hereunder
shall constitute a separate unit for purposes of accounting
statements and remittance to Licensor hereunder.
(i) Any income taxes, other taxes, and/or fees which local law
requires to be levied against Licensor's royalties shall, in order
to avoid any interest charges or other penalties, be advanced by
Licensee on behalf of Licensor within the period of time required
by such local law; provided that Licensee shall not make such
advance if Licensor has advised Licensee in writing not to do so,
and has taken appropriate legal action to contest the propriety of
such taxes and/or fees and legally withheld payment, and in such
event Licensor shall indemnify Licensee against any interest
charges or other penalties with respect to such taxes. Any such
taxes or fees which Licensee advances shall be deducted from the
total amount of royalty otherwise payable to Licensor. In the
event that new or revised law(s) establishing fees, taxes or other
impositions are promulgated in the Territory, Licensee must notify
Licensor immediately and in ample time to afford Licensor an
opportunity to contest such impositions through the appropriate
legal channels. Licensee shall file all necessary tax returns or
other government documents on licensor's behalf, which agree
required by local law, within the time period required by local
law. The original receipt, and the computations for such taxes as
may be deducted from the royalties must accompany the Statement of
Account (referred to in Subparagraph (a) (ii) above) in the
Accounting Period in which such tax deduction is made. If local
law stipulates that the original tax receipt must be retained by
the Licensee, a bonafide copy thereof must be attached to the
Statement of Account.
11. MANUFACTURE OF ARTICLES BY THIRD PARTY MANUFACTURES
(a) Prior to entering into this Agreement, Licensee shall advise
Licensor in writing of the place of manufacture of the Articles.
If Licensee at any time desires to have Articles or components
thereof containing Licensed Material manufactured by a third party,
it must, as a condition to the continuation of this Agreement,
notify Licensor of the name and address of such manufacturer and
the Articles or components involved and obtain Licensor's prior
written permission to do so. The granting of said permission, if
Licensor is prepared to grant the same, will be conditional upon:
(i) In the case of Manufacture outside the Territory:
(1) Licensee's signing a consent agreement in a form to be
provided by Licensor; and
(2) Licensee causing each such manufacturer and any
submanufacturer to sign a consent agreement in a form to be
provided by Licensor; and
(3) Licensor's receipt of such agreements properly signed; and/or:
(ii) In the case of Manufacture in the Territory:
(1) if Licensor so requests, Licensee causing each such
manufacturer to sign a consent agreement in a form to be provided
by Licensor; and
(2) Licensor's receipt of such agreement properly signed.
(b) Notwithstanding the above subparagraph (a), Licensee
acknowledges and agrees that in the event Licensor shall request
Licensee to have Articles or components thereof containing Licensed
Material manufactured by Licensor's designee or source, Licensee
shall comply with such requests.
(c) If Licensor requests an agreement from a third party
manufacturer of Licensee, Licensee's purchase of Articles from a
third party manufacturer without such an agreement as required
hereunder being signed and delivered to Licensor shall be a
violation of this Agreement. It is not Licensor's policy to reveal
the names of its suppliers to third parties or to any division of
Licensor's involved with buying products except as may be necessary
to enforce its contract rights or protect its property rights.
(d) If any such manufacturer utilizes Licensed Material for any
unauthorized purpose, Licensee shall cooperate fully in bringing
such utilization to an immediate halt. If, by reason of Licensee
not having supplied the above-mentioned agreements to Licensor or
not having given Licensor the name of any supplier, Licensor makes
any representation or takes any action and is thereby subjected to
any penalty or expense, Licensee will indemnify Licensor for any
cost or loss Licensor sustains.
12. LICENSOR'S WARRANTIES AND REPRESENTATIONS
Licensor warrants and represents to Licensee that:
(a) It has, and will have throughout the Term of this Agreement,
the right to license the Licensed Material to Licensee in
accordance with the terms and provisions of this Agreement; and
(b) The entering into of this Agreement by Licensor does not
violate any agreement, rights or obligations existing between
Licensor and any other person, firm or corporation.
13. INDEMNITY
(a) During the Term, and continuing after expiration or
termination of the Agreement, Licensee shall indemnify Licensor
against all claims, liabilities (including settlements entered into
in good faith) and expenses (including reasonable attorney's fees)
arising out of Licensee's activities hereunder or out of any
alleged defect (whether obvious or hidden) in an Article or arising
from personal injury or any infringement of any rights of
Licensor's or of any third party by the manufacture, sale,
possession or use of Articles (or the advertising therefor) or
their failure to comply with applicable laws. The parties
indemnified hereunder shall include Licensor, its parent,
affiliates, subsidiaries and their respective officers, directors,
shareholders, employees and agents.
(b) Licensor shall indemnify Licensee against all claims,
liabilities (including settlements entered into in good faith)
arising out of any claim that Licensee's use of any representation
of the Licensed Material provided by Licensor approved in
accordance with the provisions of this Agreement infringes the
copyright of any third party. Licensee shall not, however, be
entitled to recover for consequential loss including without
limitation or materials.
(c) Additionally, if by reason of any such claims specified in
subparagraph (b) above, and which are sustained in a final
judgement by a court of competent jurisdiction, Licensee is
precluded from selling any stock of Articles or utilizing any
materials in its possession or which come into its possession by
reason of any required recall, Licensor shall be obligated to
purchase such Articles and materials from Licensee at the out-of-
pocket cost to Licensee, excluding overheads, but Licensor shall
have no other responsibility or liability with respect to such
Articles or materials.
(d) No warranty or indemnity is given with respect to any
liability or expense arising from any claim that use of the
Licensed Material on or in connection with the Articles hereunder
or any packaging, advertising or promotional material infringes
upon any trademark right of any third party or otherwise
constitutes unfair competition by reason of any prior rights
acquired by such third party other than rights acquired from
Licensor. It is expressly agreed that it is Licensee's
responsibility to carry out such investigations as it may deem
appropriate to establish that Articles, packaging, promotional and
advertising material which are manufactured or created hereunder,
including any use made of the Licensed Material therewith, do ont
infringe such right of any third party, and Licensor shall not be
liable to Licensee if such infringement occurs.
14. INSURANCE
Licensee shall maintain in full force and effect at all times while
this Agreement is in effect comprehensive general liability
insurance, including product liability coverage with broad form
vendor's endorsement, with combined single limits as set forth
above and naming as additional insureds those indemnified herein.
Licensee shall deliver to Licensor a certificate or certificates of
insurance evidencing satisfactory coverage and indicating that
Licensor shall receive notice of cancellation or of any material
change in coverage at least thirty (30) days prior to the effective
date thereof, and deleting any "other insurance" clause so that the
coverage of said insurance shall be primary and not secondary.
15. CREDIT AND SECURITY INTERESTS
(a) Licensee agrees to provide credit information and other
documentation as Licensor may request including, but not limited
to, fiscal year-end financial statements (profit and loss statement
and balance sheet), and operating statements.
(b) Licensee agrees to provide Licensor at Licensor's request
either a grant to Licensor of a lien and security interest in
Licensee's inventory, contract rights and accounts receivable, and
all proceeds thereof, and/or a letter of credit issued in favor of
Licensor from a financial institution as approved by Licensor in an
account and form approved by Licensor and/or such other form of
security acceptable to Licensor. Licensee agrees to execute all
documentation as Licensor may require in connection with perfecting
such security interests.
16. TERMINATION
(a) This Agreement shall terminate, without prejudice to the
accrued rights and remedies of the parties, forthwith on
termination, howsoever occurring, of the Trademark License which as
used herein shall mean the license or trademark rights which relate
to all or any part of the Licensed Material to be entered into
between the Licensee and the owner of such rights.
(b) Without prejudice to any other right or remedy available to it
and in addition to any other termination rights specified
throughout this Agreement, Licensor shall have the right at any
time to terminate this Agreement forthwith by giving Licensee
written notice thereof:
(i) If Licensee defaults in the performance of any of its material
obligations provided for in this Agreement and any such default is
not corrected within ten (10) days after written notice to Licensee
from Licensor thereof; or
(ii) If Licensee does not commence in good faith to manufacture,
distribute and sell each Article throughout the Territory on or
before the Marketing Date and thereafter fails to diligently and
continuously manufacture, distribute and sell each of the Articles
throughout the Territory. Such default, and Licensor's resultant
right of termination shall apply only to the specific characters,
elements and logos of the Licensed Material and/or the specific
nation of which or wherein Licensee fails to meet said marketing
requirements, and if any such failure is not corrected within ten
(10) days after written notice to Licensee from Licensor thereof.
(c) Licensor shall have the right at any time to terminate this
Agreement by giving Licensee written notice thereof:
(i) if Licensee delivers to anyone without Licensor's written
authorization merchandise containing representations of Licensed
Material or other material, the copyright or other proprietary
rights to which are owned or controlled by Licensor other than the
Articles approved in accordance with the provisions hereof; or
(ii) if Licensee shall breach any other agreement in effect
between Licensee on the on hand and Licensor or any other company
in Time Warner Entertainment Company, L.P. group on the other; or
(iii) if Licensee shall make any assignment for the benefit of
creditors or file a petition in bankruptcy or is adjudged bankrupt
or becomes insolvent or generally unable to pay its debts as and
when due or is placed in the hands of a receiver or if the
equivalent of any such proceedings or acts occurs though known by
some other name or term; or
(iv) if an order is made or effective resolution is passed for the
winding up of Licensee (other than a voluntary winding up for the
purpose of reconstruction or amalgamation or, as the case may be,
the Licensee shall become bankrupt or if Licensee seeks to make any
composition or arrangement with creditors or is unable to pay its
debts within the meaning of Section 518 of the Companies Act of
1985 or any statutory modification or reenactment thereof; or if
any administrator or receiver or administrative receiver or manager
is appointed of the whole or any part of the assets of the Licensee
or if any distress, execution or other process is levied on or
enforced upon any property of the Licensee; or if an application
for administration order in relation to the licensee is presented
to the courts; or if anything analogous to or having substantially
similar effect to any of the events specified above shall occur
under the laws of the applicable jurisdiction; or
(vi) if Licensee undergoes a substantial change of management or
ownership.
17. RIGHTS AND OBLIGATIONS UPON EXPIRATION OR TERMINATION
(a) Upon the expiration or termination of this Agreement, all
rights herein granted to Licensee shall immediately revert to
Licensor. Licensor shall be entitled to retain all Royalties and
other things of value paid or delivered to Licensor.
(b) Licensee agrees that from and after the expiration or
termination of this Agreement Licensee shall neither manufacture
nor have manufactured for it Articles, that Licensee shall destroy
or deface any moulds, plates or other items used to reproduce
Licensed Material and that, except as hereinafter provided, it
shall cease selling Articles.
(c) If Licensee has any unsold Articles in inventory on the
expiration or termination of this Agreement, Licensee shall provide
Licensor with a full statement of the kinds and numbers of such
unsold Articles. If such statement has been provided to Licensor
and if Licensee has fully complied with the terms of this
Agreement, including the payment of all Royalties due, Licensee
shall have the right, for a period of sixty (60) days from such
expiration or earlier termination date, to sell off and deliver
such Articles ("Sell Off Period"). Licensee shall furnish to
Licensor statements covering such sales and pay Licensor Royalties
on such sales, where applicable. In no event, however, may
Licensee distribute and sell during such period an amount of
Articles sold during any consecutive sixty (60) day period during
the Term. In the event this Agreement is terminated by Licensor
for cause, Licensee shall be deemed to have forfeited its sell-off
rights hereunder. Except as otherwise agreed by Licensor in
writing, any inventory of Articles in Licensee's possession or
control after the Sell-Off Period granted hereunder shall be
destroyed forthwith. Such destruction shall be attested to in a
certificate signed by an independent third party, firm, or agency
approved by Licensor delivered forthwith to Licensor.
18. WAIVERS
A waiver by either party at any time of a breach of any provision
of this Agreement shall not apply to any other provision on this
Agreement or imply that a breach of the same provision at any other
time has been or will be waived.
19. ASSIGNABILITY
(a) This Agreement does not provide for a joint venture between
the parties. Licensee's rights as granted hereunder cannot be
assigned, disposed of or transferred, voluntarily or involuntarily,
to anyone else without Licensor's prior written consent. Without
limiting the foregoing, a merger of Licensee's company into another
company or the transfer of a controlling interest in Licensee's
company shall be deemed a disposal of Licensee's rights hereunder
which, to be effective hereunder, would require Licensor's written
consent.
(b) Licensor shall have the right to assign this Agreement or any
of its rights and obligations or interests hereunder to any
subsidiary, affiliate, or successor in interest by merger or
acquisition or otherwise, of Licensor or Time Warner Entertainment
Company, L.P., or to any person or entity succeeding to
substantially all of the assets of Licensor or Time Warner
Entertainment Company, L.P. and such assignment shall not require
the consent of Licensee.
20. CONFIDENTIALITY
Licensee hereby agrees that, both during the term of this Agreement
and after the expiration or termination hereof, it shall maintain
in strict confidence all information, including but not limited to
the Licensed Material, books of account, inventories, production
and sales records, reports correspondence and any other materials
relating to this Agreement, and shall not disclose such information
to third parties without the prior written consent of Licensor.
21. ETHICS
Licensee agrees that no part of the consideration paid pursuant to
this Agreement shall be offered, paid or promised, directly or
indirectly, to any government official, political party or official
thereof, or any candidate for political office, for the purpose of
influencing any act or decision of such person or party or inducing
such person or party to use his or its influence to affect or
influence any act or decision of any national, state or local
government or instrumentality thereof. For the purposes of this
paragraph, the term "governmental official" shall include any
officer or employee of a national, state or local government, or
any department, agency or instrumentality thereof, or any person
acting in an official capacity of or on behalf of such government
or department, agency or instrumentality.
22. HEADINGS
Headings of paragraphs herein are for convenience of reference only
and are without substantive significance.
23. NOTICES/HEADINGS
All notices which either party is required or may desire to serve
upon the other party shall be in writing, addressed to the party to
be served at the address set forth above and may be served
personally or by depositing the same, postage prepaid, in the
official mail of the country of deposit, or by facsimile, provided
that a hard copy of the facsimile is sent by mail (in the manner
described above) on the same day as the facsimile transmission.
Such notice shall be deemed served upon personal delivery or upon
the date of mailing, or, if sent by facsimile, on receipt by the
addressee.
24. FORCE MAJEURE
The parties shall be excused from performance under this Agreement
while and to the extent they are unable to perform by reason of
war, fire, storm, flood, earthquake, explosion, rebellion, labor
dispute, insurrection, action of the elements, or other acts of
God. It is understood, however, that excuse from performance does
not toll the Term of this Agreement. It is further understood that
Licensor's inability to perform for any of the above enumerated
causes shall not excuse Licensee's obligation to pay Licensor the
Guaranteed Consideration. Additionally, if the circumstance of a
force majeure continues for a period of six months or longer, then
either party shall have the right to terminate this Agreement
forthwith on written notice to the other party.
25. CONSTRUCTION
This Agreement shall be enforced, construed and interpreted in
accordance with the laws of England, and the parties hereby submit
to the exclusive jurisdiction of the English courts.
26. MISCELLANEOUS
(a) Each of the parties acknowledges and agrees that the other has
not made any representations, warranties or agreements of any kind,
except as may be expressly set forth herein.
(b) This Agreement constitutes and contains the entire agreement
between the parties with respect to the subject matter hereof and
supersedes any prior or contemporaneous agreements, oral or
written. Nothing herein contained shall be binding upon the
parties until this Agreement has been executed by an officer of
each party. This Agreement may not be changed, modified, amended
or supplemented, except in writing signed by both parties.
(c) If any part of this Agreement shall be declared invalid or
unenforceable by a court of competent jurisdiction, it shall not
affect the validity of the balance of this Agreement, provided,
however, that if any provision of this Agreement pertaining to the
payment of monies to Licensor shall be declared invalid or
unenforceable, Licensor shall have the right, at its option, to
terminate the Term of this Agreement upon giving written notice to
Licensee of its election to do so.
(d) In the event of any action suit, or proceeding hereunder, the
prevailing party shall be entitled to recover its attorney' fees
and the costs of said action, suit, or proceeding.
Page 1
Contract 6950132
NASCO PRODUCTS
THIS AGREEMENT made this 12th day of September, 1996, by and
between Licensor The Walt Disney Company Licensing (Europe, Middle
East & Africa) S.A. with its principal office located at 50, avenue
Montaigne, 75378 Paris Cedex 08, France and Licensee Nasco Products
International Inc. with its principal office located at 27, North
Main ST, Springfield, TN 37172, United States of
America("you"and"your").
WITNESSETH:
WHEREAS, we have heretofore entered into an agreement with Disney
Enterprises, Inc., a corporation organized and existing under the
laws of the State of Delaware, United States of America
(hereinafter referred to as "Disney"), pursuant to which, in the
Territory hereinafter identified, we have been granted the right to
license third parties to use certain materials and trademarks which
are owned by Disney in a number of merchandising activities and
endeavors; and
WHEREAS, you desire to obtain a license to use some of those
materials and trademarks in and/or in connection with the Article
or Articles of merchandise specified below and we are willing to
grant said license under the conditions, provisions and limitations
hereinafter set forth; and
WHEREAS, you understand and accept that we may sublicense certain
of our rights and obligations under this Agreement to certain
subsidiaries owned or controlled by Disney or other designees or
marketing licensees of Disney who will thereby become sublicensors
hereunder and shall succeed to certain of our rights and duties
hereunder (hereinafter The Walt Disney Company Licensing (Europe,
Middle EASt & Africa) S.A., and such other sublicensors shall be
collectively referred to as "we", "us" or "our").
NOW, THEREFORE, it is mutually agreed between you and us as
follows:
1. MEANING OF TERMS As used in this Agreement:
a. "Licensed Material" means the representations of the
following characters:
Mickey Mouse, Minnie Mouse, Donald Duck, Daisy Suck, Goofy,
Pluto, only used in association with sport themes for the "Mickey
Unlimited" brand.
Page 2
and designated still scenes from the motion pictures identified in
Subparagraph 1(b) hereafter.
b. "Trademarks" means "Walt Disney", "Disney", the
representations of Licensed Material included in Subparagraph 1(a)
above, and the logo(s) of the following motion pictures, television
series and/or branded programs in which Licensed Material appears:
MICKEY UNLIMITED
c. "Articles" means the following items on or in connection
with which the Licensed Material and/or the Trademarks are
reproduced or used:
Sportbags, Sport backpacks, Sport wallets, Sport tote bags, Sport
waistpacks all to be made of 70D Nylon minimum with PVC backing or
600D Polyester minimum with PVC backing.
d. "Minimum Per Article Royalty" means the following sum for
each Article sold:
Backpacks: 0.70 US$
Waistpacks: 0.35 US$
Sportbags: 0.65 US$
Wallets: 0.25 US$
Tote Bags: 0.80 US$
e. "Principal Term" means the period commencing October 1,
1996 and ending May 31, 1998.
f. "Territory" means Austria, Germany, Switzerland, Belgium,
The Netherlands, Denmark, Finland, Iceland, Norway, Sweden, Spain,
Portugal, France, United Kingdom, Ireland, Italy.
If the Territory includes a country within the European Economic
Area you may export Articles to other countries within the European
Economic Area which are not included in the Territory provided you
give us prior written notice of the countries involved. You may not
export Articles outside the European Economic Area unless such
Articles are destined for ultimate delivery in the Territory or in
the European Economic Area and may not sell or otherwise distribute
any of the Articles to any party if you know, or in the exercise of
prudent business judgment should know, that such sale(s) ultimately
with result in the exporting of Articles outside of the European
Economic Area. Except as specifically provided herein, you shall
not export Articles outside the Territory without prior written
consent.
Page 3
g. "Royalties" means a copyright royalty in an amount equal to
the greater of:
(i) Twelve percent (12%) of your Net Invoiced Billings
for Articles sold C.I.F. a location in the Territory or in the
European Economic Area ("In Sales") or, if Articles are sold to a
customer in the Territory or in the European Economic Area F.O.B.
a shipping point outside the Territory or the European Economic
Area for importation by the customer into the Territory ("Out
Sales"), Seventeen percent (17%) of your Net Invoiced Billings for
such Articles. All sales of Articles shipped to a customer outside
the Territory and outside the European Economic Area pursuant to a
distribution permission shall bear a Royalty at the rate for Out
Sales; or
(ii) the Minimum Per Article Royalty, if any has been
specified in Subparagraph 1 (d) above.
"Net Invoiced Billing" shall mean actual invoiced billings (ie
sales quantity multiplied by the selling price) for Articles sold
less volume discounts and other customary discounts separately
identified by Article on the sales invoices. Customary discounts
shall not include cash discounts granted as terms of payments early
payment discounts, year end rebates and allowances or discounts
relating to advertising. Royalties are not due or invoiced charges
for transportation of Articles with the Territory, value added
taxes and taxes on the sale of Articles which are separately
identified on the sales invoices and have actually been paid. No
costs incurred in manufacturing, importing, selling or advertising
the Articles shall be deductible from the actual invoiced billings
for Articles sold, nor shall any deduction be taken for freight
costs included in the selling price or for uncollectible accounts.
No royalties are payable for the mere manufacture of Articles.
You agree that you will advise us, in writing, prior to selling
Articles to any person or entity which is a parent, affiliate,
subsidiary, joint venturer or partner of yours or to any entity
which is directly or indirectly controlled by you or under common
control with you (collectively referred to as ("affiliated
entities"). For purposes of this Agreement, an entity shall be
deemed to be controlled by you if you are the actual or beneficial
owner of 20% or more of the voting corporate or partnership shares.
If you are a corporation with fewer than 20 shareholders, an entity
will also be deemed to be controlled by you if, in the aggregate,
20% or more of the voting corporate or partnership shares of such
entity are owned or controlled by relatives, attorneys, or other
agents of yours or any of your shareholders. Royalties paid to us
on sales of Articles to your affiliated entities shall not be less
than the Royalties paid to us on sales of such Articles to non-
Page 4
affiliated entities, regardless of the Net Invoiced Billing amount
charged by you to such affiliated entities. Further, if such
affiliated entity is a reseller of the Articles, the sale to such
affiliated entity shall be counted as a sale for Royalty
calculation purposes but rather, the relevant sale for Royalty
calculation purposes shall be that of such affiliated entity to its
customers.
h. "Royalty Payment Period" means each calendar quarter
period during the Principal Term and during any other term,
provided that the last Royalty Payment Period of the Principal Term
covers the period from April 1, 1998 through May 31, 1998.
i. "Advance" means the following sum(s) payable by the
following date(s) as an advance on Royalties to accrue in the
following period(s).
US$ 10,000 for the period from January 1, 1997 through May 31,
1998; payable upon signature of the agreement.
Royalties generated by sales outside the Territory but within the
European Economic Area, outside the European Economic Area, or made
pursuant to a distribution permission may not be applied against
the Advance.
j. "Guarantee" means the following sum(s) which you guarantee
to pay as minimum Royalties on your cumulative sales in the
Territory in the following period(s):
US$ 207,500 for the period January 1, 1997 through May 31, 1998 to
be allocated as follows:
Country(ies)
Austria 10,000
Belgium 7,000
Denmark 7,500
Finland 7,500
France 30,000
Germany 30,000
The Netherlands 20,000
Iceland 500
Ireland 3,500
Italy 25,000
Norway 2,500
Portugal 2,500
Spain 20,000
Sweden 15,000
Switzland 2,500
United Kingdom 24,000
Total in US$ 207,500
Page 5
Such Guarantee shall apply to each country or group of countries as
applicable, as separate accounts, and shall not be cross-
collateralized between and among countries or groups of countries.
k. "Samples" means ten (10) free copies from the first
production run of each supplier of each Article.
l. "Promotion Commitment" means the following sum(s) which you
agree to spend during the following period(s) in the following
way(s):
A minimum of 3% (three percent) of your Net Invoiced Billings
as defined in paragraph 1(g) during the Principal Term to advertise
the Articles. Such sum will be spent in trade show, catalogues and
in other ways as we may determine in our sole discretion from time
to time.
m. "Marketing Date" means the following date(s) by which the
following Article(s) shall be available for purchase and immediate
delivery:
June 1, 1997
n. "Laws" means any and all applicable laws, rules,
regulations, voluntary industry standards, association laws, codes
or other obligations pertaining to any of your activities under
this Agreement, including but not limited to those applicable to
the manufacture, pricing, sale and/or distribution of the Articles.
2. RIGHTS GRANTED
a. In consideration for your promise to pay and actual payment
to us of all Royalties, Advances and Guarantees specified herein,
during the Principal Term and any extension thereof, we grant you
the nonexclusive right under Disney's various copyrights and
Trademarks in the Territory, to reproduce the Licensed Material
only on or in connection with the Articles, to use the Trademarks,
but only such Trademarks and uses thereof as may be approved when
the Articles are approved and only on or in connection with the
Articles, and to manufacture, distribute for sale and sell (other
than by direct marketing methods, including but not limited to
direct mail and door-to-door solicitation) the Articles. You will
sell the Articles only to retailers for resale to the public in the
Territory or to wholesalers for resale to such retailers; provided
however that you may not sell the Articles to retailers that sell
the Articles on a duty-free basis nor may you sell the Articles to
wholesalers for
Page 6
resale to such retailers, unless such retailer or wholesaler has a
then-current license agreement with us or an affiliate of ours
permitting it to make such duty-free sales.
b. Unless we consent in writing, you shall not sell or
otherwise provide Articles for use as premiums (including those in
purchase-with-purchase promotions), promotions, give-aways, fund-
raisers or entries in sweepstakes or to customers for resale by
direct mail or other direct marketing methods, or to customers for
inclusion in another product. However, nothing contained herein
shall preclude you from soliciting orders by mail from wholesalers
or retail outlets nor from selling to retailers which sell
predominantly at retail, but which include the Articles in their
mail order catalogs or otherwise sell Articles by direct marketing
methods as well as at retail. If you wish to sell the Articles to
other customers for resale through mail order catalogs, you must
obtain written consent in each instance.
c. Nothing contained herein shall preclude you from selling
Articles to us, Disney or to any subsidiary of ours or Disney's
subject to the payment to us of Royalties on such sales.
d. We further grant you the right to reproduce the Licensed
Material and to use the Trademarks only within the Territory and,if
the Territory includes a country in the European Economic Area, the
European Economic Area, on containers, packaging, display material
and in advertising for the Articles.
e. Nothing contained in this Agreement shall be deemed to
imply any restriction on your freedom and that of your customers to
sell the Articles at such prices as you or they shall determine.
f. You recognize and acknowledge the vital importance to us of
the characters and other proprietary material we own and create and
the association of the Disney name with them. In order to prevent
the denigration of products bearing the Licensed Material and/or
the Trademarks and the value of their association with the Disney
name, and in order to ensure the dedication of your best efforts to
preserve and maintain that value, you agree that during the
Principal Term and any extension hereof, you will not manufacture
or distribute any merchandise embodying or bearing any artwork or
other representation which we determine, in our reasonable
discretion, is confusingly similar to the Disney characters or
other proprietary material.
3. ADVANCE
a. You agree to pay us in full the nonrefundable Advance plus
value-added taxes or other applicable taxes thereon, if any, which
shall be
Page 7
on account of Royalties earned and payable only during the
Principal Term and only with respect to sales in the Territory;
provided, however, that if any part of the Advance is specified
hereinabove as applying to any period less than the Principal Term,
such part shall be on account of Royalties to accrue during such
lesser period only. If Royalties earned during any period are less
than the Advance shall be refunded to your.
b. Royalties accruing any sell-off period or extension of the
Principal Term shall not be offset against the Advance unless
otherwise agreed in writing. Royalties accruing during any
extension of the Principal Term or any other term shall be offset
only against an advance paid with respect to such extended term.
c. In no event shall Royalties accruing by reason of any sales
to us or a subsidiary of ours or by reason of sales outside the
Territory pursuant to a distribution permission be offset against
the Advance or any subsequent advance.
d. Notwithstanding anything hereinabove to the contrary, upon
your breach of this Agreement (which breach is not cured in the
period specified in Subparagraph 28(a) hereof) you agree that nay
and all Advances due hereunder shall become immediately due and
payable, regardless of whether we also exercise our right hereunder
to terminate this Agreement because of such breach.
4. GUARANTEE
a. With your statement for each Royalty Payment Period ending
on a date indicated in Subparagraph l(j) hereof defining
"Guarantee," you shall pay us the amount, if any, by which
cumulative Royalties paid with respect to sales in the Territory
during any period or periods covered by the Guarantee provision or
any Guarantee provision contained in any agreement extending the
term hereof, fall short of the amount of the Guarantee for such
period.
b. Advances applicable to Royalties due on sales in the period
to which the Guarantee relates apply towards meeting the Guarantee.
c. In no event shall Royalties paid with respect to sales to
us or to any subsidiary or affiliate of ours or with respect to
sales outside the Territory or outside the European Economic Area
pursuant to a distribution permission apply towards meeting the
Guarantee or any subsequent guarantee.
d. Notwithstanding anything hereinabove to the contrary, upon
your breach of this Agreement (which breach is not cured in the
period specified in Subparagraph 28(a) hereof) you agree that any
and all
Page 8
Guarantees due hereunder shall become immediately due and payable,
regardless of whether we also exercise our rights hereunder to
terminate this Agreement because of such breach.
5. PRE-PRODUCTION APPROVALS
a. As early as possible and in any case before commercial
production of any Article you shall submit to us for our review and
written approval (to utilize such materials in preparing a pre-
production sample) all concepts, all preliminary and proposed final
artwork and all three-dimensional models which are to appear on or
in the Article. Thereafter, you shall submit to us for our written
approval a pre-production sample of each Article. We shall
endeavor to respond to such requests within a reasonable time, but
such approvals should be sought as early as possible in case of
delays. In addition to the foregoing, as early as possible, and in
any case no later than sixty (60) days following written conceptual
approval, you shall supply to us for our use for internal purposes,
a mock-up, prototype or pre-production sample of each style of each
Article on or in connection with which the Licensed Material is
used. You acknowledge that we may not approve concepts or artwork
near the end of the Principal Term.
b. Approval or disapproval shall lie solely in our discretion,
and any Article not so approved in writing shall be deemed
unlicensed and shall not be manufactured or sold. If any
unapproved Article is sold, we may, together with other remedies
available to us (including but not limited to immediate termination
of this Agreement), by written notice require such Article to be
immediately withdrawn from the market. Any modification of an
Article, including but not limited to, change of materials, colors,
design or size of the representation of Licensed Material must be
submitted in advance for our written approval as if it were a new
Article. Approval of an Article which uses particular artwork does
not imply approval has been taken from a Disney publication or a
previously approved Article does not mean that its use will
necessarily be approved in connection with an Article licensed
hereunder.
c. If you submit for approval artwork from an article or book
manufactured or published by another licensee of ours or Disney's
of any subsidiary of ours or Disney's, you must advise us in
writing of the source of such artwork. If you fail to do so, any
approval which we may give for use by you of such artwork may be
withdrawn by giving you written notice thereof, and you may be
required by us not to sell Articles using such artwork.
Page 9
d. Notwithstanding the above, as we rely primarily on you for
the consistent quality and safety of the Articles and their
compliance with applicable laws and standards, we will not
unreasonably object to any change in the design of an Article or in
the materials used in the manufacture of the Article or in the
process of manufacturing the Articles which you advise us in
writing is intended to make the Article safer or more durable.
e. If we have supplied you with forms for use in applying for
approval of artwork, models, pre-production and production samples
of Articles, you shall use such forms when submitting anything for
our approval.
6. APPROVAL OF PRODUCTION SAMPLES
a. Before shipping an Article to any customer, you agree to
furnish to us, for our approval of all aspects of the Article in
question, from the first production run of each supplier of each of
the Articles the number of Samples, with packaging, set forth in
Subparagraph 1(k) which shall conform to the approved artwork,
three-dimensional models and pre-production sample. Approval or
disapproval of the artwork as it appears on the Article as well as
of the quality of the Article shall lie in our sole discretion and
may inter alia be based on unacceptable quality of the artwork or
of the Article as manufactured. Any Article not so approved shall
be deemed unlicensed, shall not be sold and unless otherwise agreed
by us in writing, shall be destroyed. Such destruction shall be
attested to in a certificate signed by an officer of yours.
Production samples of Articles for which we have approved a pre-
production sample shall be deemed approved, unless with 20 days of
our receipt of such production sample we notify you to the
contrary.
b. You agree to make available at no charge such additional
samples of each Article as we may from time to time reasonably
request for the purpose of comparison with earlier samples or to
test for compliance with applicable laws, regulations and
standards, to maintain consistent quality and to permit us upon
reasonable request to inspect your manufacturing operations and
testing records (and those of your suppliers) for the Articles.
c. It is specifically understood that we may disapprove an
Article or a production run of an Article because the quality is
unacceptable to us, and, accordingly, we recommend that you submit
production samples to us for approval before committing to a large
original production run or to purchase a large shipment from a new
supplier.
Page 10
d. No modification of an approved production sample shall be
made without our further prior written approval. Articles being
sold must confirm in all respects to the approved production
sample. It is understood that if in our reasonable judgement the
quality of an Article originally approved has deteriorated in later
production runs, or if the Article has otherwise been altered, we
may, in addition to other remedies available to us, by written
notice require such Article to be immediately withdrawn from the
market.
e. The rights granted hereunder do not permit the sale of
"seconds" or "irregulars". All Articles not meeting the standard
of approved samples shall be destroyed or all Licensed Material and
Trademarks shall be removed or obliterated therefrom.
f. Notwithstanding the above, as we rely primarily on you for
the consistent quality and safety of the Articles and their
compliance with applicable laws and standards, we will not
unreasonably object to any change in the design of an Article or in
the materials used in the manufacture of the Article or in the
process of manufacturing the Articles which you advise us in
writing is intended to make the Article safer or more durable.
g. We shall have the right, by written notice to you, to
require modification of any Article approved by us under any
pervious agreement between us pertaining to the Licensed Material.
Likewise, if the Principal Term of this Agreement is extended by
you mutual agreement, we shall have the right, by written notice to
you, to require modification of any Article approved by us under
this Agreement. It is understood that there is no obligation upon
either party to extend the Agreement.
h. If we so notify you of a required modifications under
Subparagraph 6(g) with respect to a particular Article, such
notification shall advise you of the nature of the changes required
and you shall not accept any order for any such Article until the
Article has been resubmitted to us with such changes and you have
received our written approval of the Article as modified. However,
you may continue to distribute your inventory of the previously
approved Articles until such inventory is exhausted (unless such
Articles are dangerously defective, as determined by us.)
i. You shall take professional quality photographic slides of
each Article approved hereunder and shall provide us with (2) two
copies of each such slide within 30 days of the first production
run of each respective Article. Each such slide shall bear the
relevant style number of the Article shown. You also shall prepare
and supply us with copies of a photobook containing photos of all
such items for each complete collection.
Page 11
7. APPROVAL OF PACKAGING, PROMOTIONAL MATERIAL AND ADVERTISING
a. All containers, packaging, display material, promotional
material catalogs and advertising, including but not limited to
television advertising and press releases, for Articles must be
submitted to us for our written approval before use. To avoid
unnecessary expense if changes are required, our approval thereof
should be procured when such is still in rough or storyboard
format. We shall endeavor to respond to requests for approval
within a reasonable time. Approval or disapproval shall lie in our
sole discretion, and the use of unapproved containers, packaging,
display material, promotional material, catalogs or advertising is
prohibited. Whenever you shall prepare catalog sheets or other
printed matter containing illustrations of Articles, you will
furnish to us five (5) copies therof when they are published.
b. If we have supplied you with forms for use in applying for
any such approvals, you shall use such forms when submitting
anything for our approval.
8. ARTWORK
Within 15 days of receiving our invoice,you shall pay us for
artwork done at your request by us or Disney or third parties under
contract to us or Disney in the development and creation of
Articles, display, packaging or promotional material (including any
artwork which in our opinion is necessary to modify artwork
initially prepared by you and submitted to us for approval) at our
or Disney's then prevailing commercial art rates. Estimates of
artwork charges are available upon request. While you are not
obligated to use our or Disney's in house creative services, you
are encouraged to do so in order to minimize delays which may occur
if outside artists do renditions of Licensed Material which we
cannot approve and to maximize the attractiveness of the Articles.
9. PRINT, RADIO OR TV ADVERTISING
You shall obtain all consents and approvals necessary in connection
with print, radio or television advertising, if any, for the
Articles which we may authorize. Such authorization shall be
exercised within our sole discretion, including without limitation
for reasons of overexposure of the Licensed Material. We shall
have the right to prohibit you from advertising the Articles by
means of television and/or billboards. You represent and warrant
that all advertising and promotional materials shall comply with
all applicable laws and regulations. Our approval of copy or
storyboards for such advertising will not imply a representation or
belief by us that such copy or storyboards are sufficient to meet
any applicable code, standard,
Page 12
or other obligation. This Agreement does not grant you any rights
to use the Licensed Material in animation.
10. LICENSEE NAME AND ADDRESS ON ARTICLES
a. Your name (or a trademark of yours which you have advised
us in writing that you are using) your address (at least city and
country) and the country of manufacture (if different from your
address) will appear on permanently affixed labeling on each
Article or, if the Article is sold to the public in packaging or
container, printed on such packaging or container so that the
public can identify the supplier of the Article. On soft goods
"permanently affixed" shall mean sewn on.
b. You shall advise us in writing of all trade names or
trademarks you are using on Articles if such names or marks differ
from your corporate name as indicated herein.
11. COMPLIANCE WITH APPROVED SAMPLES AND APPLICABLE LAWS AND
STANDARDS
a. Each article and component thereof distributed hereunder
shall be of good quality and free of defects in design, materials
and workmanship, and shall comply with all applicable Laws, and
such specifications, if any, as may have been specified in
connection with this Agreement, and shall conform to the sample
thereof approved by us.
b. Without limiting the foregoing, you covenant on behalf of
your own company, and on behalf of all of your third-party
manufacturers and suppliers (collectively, "Manufactures"), as
follows:
(i) You and the Manufacturers agree not to use child
labor in the manufacturing, packaging, or distribution of the
Articles. The term "child" refers to a person younger than the age
for completing compulsory education, but in no case shall any child
younger than fourteen (14) years of age be employed in the
manufacturing, packaging or distribution of the Articles.
Page 13
(ii) You and the Manufacturers agree to provide employees
with a safe and healthy workplace in compliance with all applicable
Laws. You and the Manufacturers agree to provide us with all
information we may request about manufacturing, packaging and
distribution facilities for the Articles.
(iii) You and the Manufacturers agree only to employ
persons whose presence is voluntary. You and the Manufacturers
agree not to use prison labor, or to use corporal punishment or
other forms of mental or physical coercion as a form of discipline
of employees.
(iv) You and the Manufacturers agree to comply with all
applicable wage and hour Laws, including minimum wage, overtime,
and maximum hours. You and the Manufacturers agree to utilize fair
employment practices as defined by applicable Laws.
(v) You and the Manufacturers agree not to discriminate
in hiring and employment practices on grounds of race, religion,
national origin, political affiliation, sexual preference, or
gender.
(vi) You and the Manufacturers agree to comply with all
applicable environmental Laws.
(vii) You and the Manufacturers agree to comply with all
applicable Laws pertaining to the manufacture, pricing, sale and
distribution of the Articles.
(viii) You and the Manufacturers agree that we may engage
in activities such as unannounced on-site inspections of
manufacturing, packaging and distribution facilities in order to
monitor compliance with applicable Laws.
c. Both before and after you put Articles on the market, you
shall follow reasonable and proper procedures for testing that
Articles comply with all applicable Laws, and shall permit our
designees to inspect testing, manufacturing and quality control
records and procedures and to test the Articles for compliance.
You agree to promptly reimburse us for the reasonable costs of such
testing. You shall also give due consideration to any
recommendations by us that Articles exceed the requirements of
applicable Laws. Articles not manufactured, packaged or
distributed in accordance with applicable Laws shall be deemed
unapproved, even if previously approved by us, and shall not be
shipped unless and until they have been brought into full
compliance therewith.
Page 14
12. DISNEY OWNERSHIP OF ALL RIGHTS IN LICENSED MATERIAL
You acknowledge that the copyrights and all other proprietary
rights in and to Licensed Material are exclusively owned by and
reserved to Disney. You shall neither acquire nor assert copyright
ownership or any other proprietary rights in Licensed Material or
in any derivation, adaptation, variation or name thereof. Without
limiting the foregoing, you hereby assign to Disney all your
worldwide right, title and interest in the Licensed Material and in
any material objects consisting of or incorporating drawings,
paintings, animation cels, or sculptures of the Licensed Material,
or other derivations, adaptations, compilations, collective works,
variations or names of Licensed Material heretofore or hereafter
created by or for you or any parent, subsidiary, affiliate, joint
venturer or partner of yours. All such new materials shall be
included in the definition of "Licensed Material" under this
Agreement. You acknowledge that said assignment includes, without
limitation, the right on Disney's part to license such material
outside the Territory during the term of this Agreement and
anywhere thereafter and to demand delivery of such materials
(delivery costs to be borne by us) when they are no longer needed
by you for the manufacture, sale or promotion of the Articles. If
any third party makes or has made any contribution to the creation
of any new materials which are included in the definition of
Licensed Material under this Paragraph, you agree to obtain from
such party a full assignment of rights so that the foregoing
assignment by you shall vest full rights to such new materials in
Disney. The obtaining of such assignment forthwith upon the
creation of new materials is an essential term of this Agreement.
The foregoing assignment to us of material objects shall not
include that portion of your displays, catalogs or promotional
material not containing Licensed Material or the physical items
constituting the Articles, unless such items are in the shape of
the Licensed Material.
13. COPYRIGHT NOTICE
As a condition to the grant of rights hereunder, each Article and
any other matter containing Licensed Material shall bear a properly
located permanently affixed copyright notice in our name(e,g,
"Disney") or such other notice as we may notify to you in writing.
You will comply with such instructions as to form, location and
content of the notice as we or Disney may give from time to time.
You will not, without our prior written consent, affix to any
Article or any other matter containing Licensed Material a
copyright notice in any other name. If through inadvertence or
otherwise a copyright notice on any Article or other such matter
should appear in your name or the name of a third party, you hereby
agree to assign to Disney the copyright represented by any such
copyright notice in your name and, upon request, cause the
execution and delivery to us of whatever documents are necessary to
convey to Disney that copyright represented by any such copyright
notice in another party's name. If by inadvertence a proper
Page 15
copyright notice in Disney's name is omitted from any Article or
other matter containing Licensed Material, you agree at your
expense to use all reasonable efforts to correct the omission on
all such Articles or other matter in process of manufacture or in
distribution. You agree to advise us promptly and in writing of
the steps being taken to correct any such omission and to make the
corrections on existing Articles which can be located.
14. NON-ASSOCIATION OF OTHER FANCIFUL CHARACTERS WITH LICENSED
MATERIAL
To preserve Disney's identification with its characters and to
avoid confusion of the public, you agree not to associate other
characters (other than such as constitute a trademark of yours) or
licensed properties with the Licensed Material or the Trademarks
either on the Articles or in their packaging or, without our
written permission, on advertising, promotional or display
materials.
15. ACTIVE MARKETING OF ARTICLES
You agree to manufacture (or have manufactured for you) and offer
for sale all the Articles and to exercise the rights granted
herein. You agree that not later than by the Marketing Date
applicable to a particular Article or, in the absence of such a
date being specified in Subparagraph 1(m), by six (6) months from
the commencement of the Principal Term, shipments to customers of
Articles will have taken place and that Articles shall be available
for purchase and prompt delivery to customers. In any case in
which such sales have not taken place or when the Article is not
then and thereafter available for purchase by the public, we may
either invoke our remedies under Paragraph 28, or withdraw such
Article from the list of Articles licensed in this Agreement
without obligation to you other than to give you written notice
thereof.
16. PROMOTION COMMITMENT
You agree to carry out the Promotion Commitment, if any, as defined
in Subparagraph 1(1). Concurrently with your submitting to us a
statement following each Royalty Payment Period as specified
herein, you also shall provide us with a statement describing the
funds spent as required in this paragraph and a description of the
manner in which such funds were spent, all in such detail as we may
specify from time to time.
Page 16
17 TRADEMARK RIGHTS AND OBLIGATIONS
a. All uses of the Trademarks by you hereunder shall inure to
Disney's benefit. You acknowledge that Disney is the exclusive
owner of all the Trademarks and of any trademark incorporating all
or any part of a Trademark or any Licensed Material and the
trademark rights created by such uses. Without limiting the
foregoing, you hereby assign to Disney all the Trademarks and any
Licensed Material and the trademark rights created by such uses
together with the goodwill attaching to that part of the business
in connection with which such Trademarks or trademarks are used.
You agree to execute and deliver to Disney such documents as Disney
may require to register you as a registered user or permitted user
of the Trademarks or such trademarks and to follow Disney's or our
instructions for proper use thereof in order that protection and/or
registrations for the Trademarks and such trademarks may be
obtained or maintained. We acknowledge that you retain all rights
of ownership in and to your trademarks, trade names, trade dress
and all other indicia used on or in association with the Articles
that do not incorporate Disney related elements.
b. You agree not to use any Licensed Material or Trademarks or
any trademark incorporating all or any part of a Trademark or any
Licensed Material on any business sign, business cards, stationary
or forms (except as licensed herein) or to use any Licensed
Material or Trademark as the name of your business or any division
thereof, unless otherwise agreed by Disney in writing.
c. Nothing contained herein shall prohibit you from using your
own trademarks on the Articles or your copyright notice on the
Articles when the Articles contain independent material which is
your property. Further, nothing contained herein is intended to
give us any rights to, and we shall not use, any trademark,
copyright or patent used by you in connection with the Articles
which is not derived or adapted from Licensed Trademarks or other
material owned by us.
18. REGISTRATIONS
Except with Disney's written consent, neither you, your parent or
any subsidiary, affiliate, joint venturer or partner of yours will
register or attempt in any country to register copyrights in, or
register as a trademark, service mark, design patent or industrial
design, or business designation,any of the Licensed Material,
Trademarks or derivations or adaptions any of the Licensed
Material, Trademarks or derivations or adaptions thereof, or any
word, symbol or design which is so similar thereto as to suggest
association with or sponsorship by us or Disney or any subsidiary
Page 17
of ours or Disney's. In the event of breach of the foregoing, you
agree, at your expense and at our request, immediately to terminate
the unauthorized registration activity and promptly to execute and
deliver, or cause to be delivered, to Disney such assignments and
other documents as Disney may require to transfer to Disney all
rights to the registrations, patents or applications involved.
19. UNLICENSED USE OF LICENSED MATERIALS
a. You agree that you will not use the Licensed Material or
the Trademarks or any other material the copyright to which is
owned by Disney in any way other than as herein authorized (or as
is authorized in such other written contract signed by both of us
as may be in effect between us). In addition to any other remedy we
may have, you agree that the profits from any use thereof on
products other than the Articles (unless authorized by us in
writing), and all Disney's without written authorization, shall be
payable to us.
b. You agree to give us prompt written notice of any
unlicensed use by third parties of Licensed Material or Trademarks
and that you will not, without written consent, bring or cause to
be brought any criminal prosecution, lawsuit or administrative
action for infringement, interference with or violation of any
rights to Licensed Material or Trademarks. You agree to cooperate
with us, and, if necessary, to be named by us as a sole complaint
or co-complainant in any action against an infringer of the
Licensed Material or Trademarks and you agree to pay to us all or
any part of damages or other monetary relief recovered in such
action other than for reasonable expenses incurred at our request.
20. STATEMENTS AND PAYMENTS OF ROYALTIES
a. (i) You agree to furnish to us by the 15th day after each
Royalty Payment Period a full and accurate statement showing by
Article, with stock number or other item description, the Royalties
payable, quantities, country of sale, Net Invoiced Billings and
applicable Royalty rate(s) of Article invoiced during the preceding
Royalty Payment Period reported in the currency invoiced to
customers and the quantities and invoice value of defective
Articles returned for credit or refund in such period. A statement
is due even if no sales occurred during the period covered by the
statement. We then shall submit to you an invoice for all
Royalties due on Billings shown by such statements, plus value
added taxes, if any, and other applicable taxes due
Page 18
thereon ("Royalty invoice"). You agree to pay us all amounts
indicated on such Royalty invoices on or by the earlier of thirty
(30) days after the end of the Royalty Payment Period, or the
fifteenth (15th) day after we send such invoice to you. You shall
bear any costs associated with the transfer of such payments to us.
To the extent that any Royalties are not paid, you authorize us to
offset Royalties due against any sums which we or any affiliate of
out may owe to you or any parent or subsidiary or affiliate of
yours. No deduction or withholding from Royalties payable to us
shall be made by reason of any tax. Any applicable tax on the
manufacture, distribution and sale of the Article shall be borne by
you.
(ii) If you fail to furnish to us a royalty statement i
such detail and by such day as required hereunder, we may
nevertheless submit a Royalty invoice to you, prepared based on the
average amount invoiced during the immediately preceding three
periods, together with interest thereon, the amount of which
invoice shall be immediately payable. We will make any necessary
adjustments to such invoice amount on the Royalty invoice next
prepared after we receive accurate reporting information from you.
Our submission of a Royalty invoice to you due to your failure to
timely furnish the statement required hereunder, shall not
constitute a waiver on our part of your breach of your reporting
obligations.
b. If we at any time so request, your statements shall be made
on statement forms which we provide or in a form as we require
(including for example, electronic transmission). Should any
investment to implement electronic reporting be required, such
investment shall be borne entirely by you. You will fully comply
with the instructions supplied by us for completing such forms or
adhering to any such format. Apparel Articles shall be reported
separately by size range (e.g. "boys'", "girls'"," men's", etc.)
Your statements shall identify for each Article the character or
other Licensed Material used on each such Article.
c. Your statement shall with respect to all Articles report
separately:
(i) In Sales;
(ii) Out Sales;
(iii) sales of Articles outside the Territory pursuant to
a distribution permission (indicating the country involved);
Page 19
(iv) your sales of Articles as a supplier to any of our
licensees and the licensees of any of our affiliates for the
Articles (which sales shall not generate Royalties payable to us so
long as such licensees are reselling the Articles and Paying us
royalties on such resales);
(v) sales of Articles to us, Disney or any subsidiary of
ours or Disney's; and
(vi) sales of Articles under any brand or program
identified in Subparagraph 1(b).
d. Sales of items licensed under contracts with us other than
this Agreement shall not be reported on the same statement as sales
of Articles under this Agreement.
e. Your statements and payments shall be delivered to us at
the address indicated on page 1 of this Agreement and/or to any
entity designated by us as a sublicensor of our rights hereunder,
at the address indicated on any notice of sublicense we may deliver
to you.
21. ARTICLES RETURNED FOR CREDIT OR REFUND
Royalties reported on sales of defective Articles which have been
returned to you for credit or refund and on which a refund has been
made or credit memo issued may be credited against Royalties due.
The credit shall be taken in the Royalty Payment Period in which
the refund is given or credit memo issued. Unused credits may be
carried forward, but in no event shall you be entitled to a refund
of Royalties.
22. INTEREST
Royalties, Advances or Guarantees received after the date due shall
bear interest at the rate of fifteen (15%) per annum from the date
due (or maximum permissible by law if less than (15%).
23. AUDITS AND MAINTENANCE RECORDS
You agree to keep and preserve during the term of this Agreement
and for at least two years after the expiration of this Agreement
accurate records of all transactions relating to this Agreement
including shipments to you of Articles and components thereof,
inventory records, records of sales and shipments by you and
records of returns, and that we, or our representatives, shall have
the right from time to time, during normal business hours, but only
for the purpose of confirming your performance
Page 20
hereunder, to examine and make extracts from all such records,
including the general ledger, all invoices (whether or not they
relate to the Articles) and any other records which we reasonably
deem appropriate to verify the accuracy of your statements or your
performance hereunder, including records of your parent, subsidiary
and affiliate companies if they are involved in activities that are
the subject of this Agreement. In particular your invoices shall
identify the Articles separately from goods which are not licensed
hereunder. If in an audit of your records it is determined that
there is a shortfall in Royalties reported for any Royalty Payment
Period you shall, upon request by us, pay such shortfall and, if
the shortfall is 5% or more in Royalties reported for such period,
you also shall reimburse us for the full out-of-pocket costs of the
audit, including the costs of employee auditors calculated at
US$150 per hour per person for travel time during normal working
hours and actual working time. The obligation to maintain records
and to grant us and our resprsentatives access to such records
shall survive the expiration or earlier termination of this
Agreement.
24. MANUFACTURE OF ARTICLES BY THIRD PARTY MANUFACTURERS
a. If you at any time desire to have Articles or components
thereof containing Licensed Material manufactured by a third party,
you must, as a condition to the continuation of this Agreement,
notify us of the name and address of such manufacturer and the
Articles or components involved and obtain our prior written
permission to do so. If we are prepared to grant permission, we
willdo so if:
(i) you and each of your manufacturers and any
submanufacturers sign a Consent/Manufacturer's Agreement in the
form attached hereto; and
(ii) we receive suvh agteements properly signed.
b. Your purchase of Articles from a third party manufacturer
without such agreements as are required hereunder being signed and
delivered to us shall be a violation of this Agreement. It is not
our policy to reveal the names of your suppliers to third parties
or to any division of ours involved with buying products except a
may be necessary to enforce our contract rights or protect out
trademarks and copyrights.
c. If any such manufacturer utilizes Licensed Material or
Trademarks for any unauthorized purpose, you shall cooperate fully
in bringing such utilization to an immediate halt. If, by reason
of your not having supplied the above mentioned agreements to us or
not having given us the name of any
Page 21
penalty, loss, damage or expense, you will fully compensate us for
any cost or loss we sustain.
25. INDEMNITY
a. You shall indemnify us and Disney and our their related
companies during and after the term hereof against all claims,
liabilities (including settlements entered into in good faith with
your consent, not to be unreasonably withheld) and expenses
(including reasonable legal fees) arising out of your activities
hereunder or out of any defect (whether obvious or hidden and
whether or not present in any sample approved by us) in any Article
or arising from personal injury, property damage, or any
infringement of any rights of any other person by the manufacture,
sale, possession or use of Articles or their failure to comply with
applicable laws, regulations and standards. The parties
indemnified hereunder shall include Disney Enterprises, Inc. and
its parent, subsidiaries and their officers, directors, employees
and agents. This agreement to indemnify shall survive the
expiration or earlier termination of this Agreement. The indemnity
shall not apply to any claim or liability relating to any
infringement of the copyright of a third party caused by your
utilization of the Licensed Material and the Trademarks in
accordance with provisions hereof.
b. We shall indemnify you during and after the term hereof
against all claims, liabilities (including settlements entered into
in good faith with our consent, not to be unreasonably withheld)
and expenses (including reasonable legal fees) arising out of any
claim that your use of any representation of the Licensed Material
or the Trademarks approved in accordance with the provisions of
this agreement infringes the copyright of any third party or
infringes any right granted by us or Disney to such third party.
You shall not, however, be entitled to recover for lost profits.
c. Additionally, if by reason of any claims referred to in
Subparagraph 25(b) you are precluded from selling any stock of
Articles or utilizing any materials in your possession or which
come into your possession by reason of any required recall, we
shall be obligated to purchase such Articles and materials from you
at their out-of-pocket cost to you, excluding overhead, but we
shall have no other responsibility or liability with respect to
such Articles or materials.
d. No warranty or indemnity is given with respect to any
liability or expense arising from any claim that use of the
Licensed Material or the Trademarks on or in connection with the
Articles hereunder or any packaging, advertising or promotional
material infringes on any trademark right of any third party or
otherwise constitutes unfair competition by reason of any prior
rights acquired by such third party other than rights acquired
Page 22
party other than rights acquired from Disney. It is expressly
agreed that it is your responsibility to carry out such
investigations as you may deem appropriate to establish that
Articles, packaging, promotional and advertising material which are
manufactured or created hereunder, including any use made of the
Licensed Material and the Trademarks therewith, do not infringe
such right of any third party, and neither we nor Disney shall be
liable to you if such infringement occurs.
e. You an we agree to give each other prompt written notice of
any claim or suit which may arise under the indemnity provisions
set forth above. Without limiting the foregoing, you agree to give
us written notice of any product liability claim made with respect
to any Article within seven (7) days of your receipt of the claim.
26. INSURANCE
You shall maintain at your cost in full force and effect at all
times while this Agreement is in effect and for three years
thereafter commercial general liability insurance, including
contractual and products liability coverage waiving subrogation
with limits of no less than the equivalent of ten million French
Francs (FF10,000,000) per occurrence and naming as additional
insured those indemnified in Paragraph 25 hereof. You shall
deliver to us a certificate or certificates of insurance evidencing
satisfactory coverage and indicating that we shall receive written
notification of cancellation, non-renewal or of any material change
in coverage at least 30 days prior to the effective date thereof.
Compliance herewith in no way limits your indemnity obligations,
except to the extent that your insurance company actually pays us
amounts which you would otherwise be obligated to pay us.
27. WITHDRAWAL OF LICENSED MATERIAL
You agree that we may, without obligation to you other than to give
you written notice thereof, withdraw from the scope of this
Agreement any Licensed Material which by the Marketing Date or, in
the absence of such a date being specified in Subparagraph 1(m), by
six(6) months from the commencement of the Principal Term, is not
being used on or in connection with Articles. We may also withdraw
any Licensed Material or Articles the use or sale of which under
this Agreement would infringe or reasonably be claimed to infringe
the rights, other than rights granted by us, of a third party, in
which case our obligations to you shall be limited to the purchase
at cost of Articles and other materials utilizing such withdrawn
Licensed Material which cannot be sold or used.
Page 23
28. TERMINATION
Without prejudice to any other right or remedy available to us:
a. If you fail to manufacture, sell and distribute the
Articles or to furnish statements or to pay Royalty invoices as
herein provided, or if you breach the terms of this Agreement, and
if any such failure is not corrected within 15 days after we send
you written notice thereof (or, in the event of a breach which
cannot be corrected within 15 days, if you fail to commence such
correction within 15 days and thereafter diligently prosecute it to
completion), we shall have the right at any time to terminate this
Agreement by giving you written notice thereof.
b. We shall have the right at any time to terminate this
Agreement by giving you written notice thereof:
(i) if you deliver to any customer without our written
authorization merchandise containing representations of Licensed
Material or other material the copyright or other proprietary
rights to which are owned by Disney other than Articles listed
herein and approved in accordance with the provisions hereof; or
(ii) if you deliver Articles outside the European
Economic Area or knowingly sell Articles to a third party for
delivery outside the European Economic Area (except when such
Articles are destined for immediate re-importation into the
European Economic Area), unless pursuant to a written distribution
permission or separate written license agreement with us or any
affiliate of ours;
(iii) if a breach occurs which is of the same nature, and
which violates the same provision of this Agreement, as a breach of
which we have previously given you written notice;
(iv) if you breach any material term of any other license
agreement between us, and we terminate such agreement for cause;
(v) if you make any assignment for benefit of creditors,
or file a petition in bankruptcy, or are adjudged bankrupt, or
become insolvent, or are placed in the hands of a receiver, or if
the equivalent of any such proceedings or acts occurs, though known
by some other name or term; and/or
(vi) if you are not permitted or are unable to operate
your business in the usual manner, or are not permitted or are
unable to provide us with assurance satisfactory to us that
Page 24
you will so operate your business, as debtor in possession or its
equivalent, or are not permitted, or are unable to otherwise meet
your obligations under this Agreement or to provide us with
assurance satisfactory to us that you will meet such obligations.
29. RIGHTS AND OBLIGATIONS UPON EXPIRATION OR TERMINATION
Upon the expiration or termination of this Agreement all rights
herein granted to you shall revert to us, and we shall be entitled
to retain as our property all Royalties and other things of value
paid or delivered to us. You agree that from the expiration or
termination of this Agreement you shall neither manufacture not
have manufactured for you any Articles, that upi will deliver to us
any and art work (including animation cels and drawings) which may
have been provided to you or used or created by you in connection
with this Agreement, that you will at our option either sell to us
at a price to be negotiated in good faith between us (reflecting
the residual economic value but at a rate not exceeding cost to
you) or destroy or efface any molds, plates and other items used to
reproduce Licensed Material or Trademarks and that, subject as
hereinafter provided, you will cease selling Articles. If you have
any unsold Articles in inventory on the expiration or termination
of this Agreement, you shall provide us with a full statement of
the kinds and numbers of such unsold Articles and, if such
statement has been provided to us and if you have fully complied
with the terms of this Agreement including the payment of all
Royalties due and the Guarantee, you shall have the right for a
limited period of 90 days from such expiration or earlier
termination date to sell off and deliver such Articles; provided
however, in recognition of our interest in maintaining a stable and
viable market for the Articles during and after the sell-off
period, you agree to refrain from "dumping" the Articles in the
Territory or in the European Economic Area during the sell-off
period. For purposes of this paragraph 29, "dumping" shall mean the
distribution of product at volume levels significantly above your
prior sales practices with respect to the Articles and at price
levels significantly below your prior sales practices with respect
to the Articles, provided that nothing contained herein shall be
deemed to restrict your ability to set product prices at your
discretion. You shall furnish us statements covering such sales
and pay us Royalties on such sales. Such Royalties shall not be
applied against the Advance or toward meeting the Guarantee.
Except as otherwise agreed by us in writing, any inventory of
Articles in your possession or control after the expiration or
termination hereof and of any sell-off period granted hereunder
shall be destroyed or all Licensed Material and Trademarks removed
or obliterated therefrom or, if we so elect at our option, shall be
sold to us at cost.
Page 25
30. WAIVERS
A waiver by either of us at any time of a breach of any provision
of this Agreement shall not apply to any breach of any other
provision of this Agreement or imply that a breach of the same
provision at any other time has been or will be waived or that this
Agreement has been in any way amended, nor shall any failure by
either party to object to conduct of the other be deemed to waive
such party's right to claim that a repetition of such conduct is a
breach hereof.
31. PURCHASE OF ARTICLES BY US OR DISNEY
If we or Disney wish to purchase Articles, you agree to sell such
Articles to us or Disney or any subsidiary of ours or theirs at as
low a price as you charge for similar quantities sold to your
regular customers and to pay us Royalties on any such sales.
32. NON-ASSIGNABILITY
a. You shall not voluntarily or by operation of law assign,
sublicense, transfer, encumber or otherwise dispose of all or any
part of your interest in this Agreement without our prior written
consent, to be granted or withheld in our absolute discretion. Any
attempted assignment, sublicense, transfer, encumbrance or other
disposal without such consent shall be void and shall constitute a
material default and breach of this Agreement. "Transfer" within
the meaning of this Paragraph 32 shall include any merger or
consolidation involving your company, its majority shareholder or
its ultimate controlling entity, any sale or transfer of all or
substantially all of your parent company's or your ultimate
controlling entity's assets and any transaction or series of
related transactions resulting in the transfer of thirty-three and
one-third percent (33-1/3%) or more of the voting stock of your
company, its majority shareholder or its ultimate controlling
entity or, if your company is a partnership, thirty-three and one-
third percent (33-1/3) or more of the profit and loss participation
in your company or the occurrence of any of the foregoing with
respect to any general partner of your company.
b. You agree to provide us with at least two (2) weeks prior
written notice of any desired assignment of this Agreement or other
transfer as defined in Subparagraph 32(a). Our consent (if given)
to any assignment of this Agreement or other transfer shall be
subject to such terms and conditions as we deem appropriate,
including but not limited to payment of a transfer fee. The amount
of the transfer fee shall be determined by us based upon the
circumstances of the particular assignment or transfer, taking
Page 26
into account such factors as the estimated value of the license
being assigned or otherwise transferred; the risk of business
interruption or loss of quality, production or control we may
suffer as a result of the assignment or other transfer, the
identity, reputation, creditworthiness, financial condition and
business capabilities of the proposed assignee or transferee; and
our internal costs related to the assignment or other transfer;
provided however, in no event shall the transfer fee be less than
an amount equal to the actual Royalties earned hereunder in the
twelve (12) month period immediately preceding the notice of
proposes assignment or, in such figures are unavailable, then an
amount equal to the Guarantee for the first year of this Agreement.
The foregoing transfer fee shall not apply if this Agreement is
assigned to one or more of your affiliates as part of a corporate
reorganization involving some or all of the entities existing in
your corporate structure when this Agreement is signed; provided
however, that you must give us written notice of such assignment
and a description of the reorganization. If you have more than ne
merchandise license agreement with us for the Territory, and an
event occurs which would trigger the transfer fee provisions of
this Paragraph 32, you need only pay to us one transfer fee,
determined by us as set forth above. The provision of this
Subparagraph 32 (b) shall supersede any conflicting provisions on
this subject in any merchandise license agreement previously
entered into between you and us.
c. Notwithstanding Subparagraphs 32(a) and (b), you may, upon
written notice to us, unless we have objected within thirty (30)
days of receipt of such notice, sublicense your rights hereunder to
your affiliates. You, hereby irrevocably and unconditionally
guarantee that they will observe and perform all of your
obligations hereunder, including without limitation, the provisions
governing approvals, and compliance with approved samples,
applicable laws and all other provisions hereof, and that they will
otherwise adhere strictly to all of the terms hereof, and act in
accordance with your obligations hereunder. Any involvement of an
affiliate in the activities which are the subject of this Agreement
shall be deemed carried on pursuant to such a sublicense and thus
covered by such guarantee, but, unless notified by us as a breach
of this Agreement.
Page 27
33. RELATIONSHIP
This Agreement does not provide for a joint venture, partnership,
agency or employment relationship between us.
34. CHOICE OF LAW AND VENUE
This Agreement shall be governed and interpreted according to the
laws of the Republic of France. Any legal actions pertaining to
this Agreement shall be commenced with the courts of Paris,
however, each party has the right to assert claims vis a vis the
other at its general place of jurisdiction. The prevailing party
shall be entitled to recover reasonable attorneys' fees and costs
incurred in any action.
35. HEADINGS
Headings of paragraphs herein are for convenience of reference only
and are without substantive significance.
36. MODIFICATIONS OR EXTENSIONS OF THIS AGREEMENT
Except as otherwise provided herein, this Agreement can only be
extended or modified by a writing signed by both parties.
37. NOTICES
All notices which either party is required or may desire to serve
upon the other party shall be in writing, addressed to the party to
be served at the address set forth on page 1 of this Agreement,
(unless we have provided you with a notice of sublicense of this
agreement, in which case you shall address all notices to the
sublicensor(s) as shall have been notified to you pursuant to such
notice of sublicense) and may be served personally, sent by an
internationally recognized courier service, by postage prepaid
registered or certified mail, addressed as herein provided (unless
and until otherwise notified) or by facsimile transmission
confirmed by a transmission report. Such notice shall be deemed
served upon personal delivery, on the date it is recorded as
delivered by receipt of courier service or mailing receipt, or upon
the date shown on the facsimile transmission report; provided,
however, that service of a request for approval of materials under
this Agreement will be effective only upon our actual receipt of
the request and of any required accompanying materials.
Page 28
38. MUSIC
Music is not licensed hereunder. Any charges, fees or royalties
payable for music rights or any other rights not covered by this
Agreement shall be in addition to the Royalties and covered by
separate agreement.
39. SEVERABILITY
The invalidity or unenforceability of any provision or portion of
this Agreement shall effect the validity or enforceability or any
other provision or portion of this Agreement.
40. PREVIOUS AGREEMENTS
This Agreement, and any confidentiality agreement you may have
signed pertaining to any of the Licensed Material, contains the
entire agreement between us concerning the subject matter hereof,
and supersedes any pre-existing agreement and any oral or written
communications between us concerning the subject matter hereof.
However, this Paragraph 40 shall not be construed as preventing
application of any provision which survives the term hereof.
Further, if any pre-existing agreement(s) allow you to sell or
distribute Articles outside the Territory or to manufacture any
Articles outside the Territory, such agreements(s) shall be deemed
to remain in effect to the extent that they relate to Licensed
Material and Articles licensed hereunder.
41. CONFIDENTIALITY
You represent and warrant that you did not disclose to any third
party the prospect of a license from us, and that you did not trade
on a prospect of a license from us prior to full execution of this
Agreement. You agree to keep the terms and conditions to any third
party without obtaining our prior written consent; provided,
however, that this Agreement may be disclosed on a need-to-know
basis to your attorneys and accountants who agree to be bound by
this confidentiality provision.
Page 29
Please sign below under the word "Agreed". When signed by both
parties this shall constitute an agreement between us.
THE WALT DISNEY COMPANY
LICENSING (EUROPE, MIDDLE
EAST & AFRICA)S.A.
By:_______________________
Title:_____________________
Date:______________________
AGREED:
NASCO Products International, Inc.
By:/s/Patricia Anderson-Lasko
Title: President
Page 30
CONSENT/MANUFACTURER'S AGREEMENT
DISNEY CHARACTER MERCHANDISE
Licensee: Nasco Products International Inc
27, North Main Street
Springfield, TN 37172
U.S.A.
Reference is made to the license agreement dated September 12, 1996
between The Walt Disney Company Licensing (Europe, Middle East &
Africa)S.A. ("Licensor") and Nasco Products International Inc.
("Licensee"), expiring on May 31, 1998. Licensor hereby consents
to the manufacture of the "Authorized Articles" referenced below,
for the account of Licensee, upon the condition that the
Manufacturer shall sign and fully comply in all respects with this
Agreement. Failure of said condition shall entitle Licensor to
terminate the Manufacturer's Agreement forthwith and require that
that portion of all copies and molds or other devices used to
manufacture the "Authorized Articles" in possession of the Licensee
or the Manufacturer be immediately delivered to Licensor or be
destroyed to Licensor's satisfaction.
NAME AND ADDRESS Hi Performance Company Limited
OF MANUFACTURER: 3F Kaiser Estate Phase 3 Flat 0
11 Hok Yuen Street, Kowloon Hong Kong
TERRITORY OF MANUFACTURE China - Hong Kong
EXPIRATION OF
LICENSE AGREEMENT: May 31, 1998
(unless sooner terminated or extended)
AUTHORIZED ARTICLES:
Sportbags, Sport backpacks, Sport wallets, Sport
tote bags, Sport waistpacks all to be made of 70D
Nylon minimum with PVC backing or 600D Polyester
minimum with PVC backing.
DISNEY PROPERTIES:
Mickey Mouse, Minnie Mouse, Donald Duck, Daisy Duck,
Goofy, Pluto, only used in association with sport
themes for the "Mickey Unlimited" brand.
The Manufacturer signing below agrees that (except as may be
authorized under a separate Disney Manufacturer's agreement or
license):
1. The Manufacturer will not manufacture the Authorized Articles to
the order of anyone but the Licensee, will invoice only the
Page 31
Licensee, will not ship to anyone other than the Licensee or
Licensee;s designees and will not ship after the expiration date of
the License.
2. The Manufacturer will not subcontract production of the
Authorized Articles or components which contain the Disney
Properties without Disney's written consent.
3. The Manufacturer will not (without Licensor's written consent)
manufacture merchandise utilizing any of the Disney Properties
listed above or any other properties the copyright or trademark to
which is owned by Disney, other than the Authorized Articles in
accordance with this agreement.
4. From time to time, the Manufacturer will permit Licensor's
authorized representative to inspect its activities and premises,
accounting books and invoices relevant to its manufacture and
supply of Authorized Articles.
5. The Manufacturer will not publish or cause the publication of
pictures of the Authorized Articles in any publication or
promotional material, nor advertise the fact that it is permitted
to manufacture Authorized Articles, nor use the name "Disney" or
any variant thereof without Licensor's prior written consent.
6. In manufacturing the Authorized Articles, the Manufacturer will
comply with all applicable laws and regulations, voluntary industry
standards, codes or other obligations (collectively, "Laws"),
including but not limited to, applicable laws and regulations,
voluntary industry standards, codes or other obligations
(collectively, "Law"), including but not limited to, applicable
health and safety standards and labor laws for manufacturing
operations. Specifically, the Manufacturer covenants that:
a. The Manufacturer agrees not to use child labor in the
manufacturing or packaging of Disney merchandise. The Term "child"
refers to a person younger than the age of completing compulsory
education, but in no case shall any child younger than fourteen
(14) years of age be employed in the manufacturing of Disney
merchandise.
b. The Manufacturer agrees to provide employees with a safe
and healthy workplace in compliance with all applicable Laws. The
Manufacturer agrees to provide Disney with all information Disney
may request about manufacturing or packaging facilities for the
Articles.
c. The Manufacturer agrees only to employ persons whose
presence is voluntary. The Manufacturer agrees not to use prison
labor, or to use corporal punishment or other forms of mental or
physical coercion as a form of discipline of employees.
Page 32
d. The Manufacturer agrees to comply with all applicable wage
and hour Laws, including minimum wage, overtime, and maximum hours.
The Manufacturer agrees to utilize fair employment practices as
defined by applicable Laws.
e. The manufacturer not to discriminate in hiring and
employment practices on grounds of race, religion, nation origin
political affiliation, sexual preference or gender.
f. The Manufacturer agrees to comply with all applicable
environmental Laws.
g. The Manufacturer agrees that Licensor may engage in
activities such as unannounced inspections of manufacturing or
packaging facilities in order to monitor compliance with applicable
laws.
7. Upon expiration or termination of the License Agreement, or
upon notification by Licensor or Licensee, the Manufacturer will
(a) immediately cease manufacturing the Authorized Articles and
deliver to Licensor or its authorized representative that portion
of any and all molds, plates, engravings or other devices used to
reproduce the Disney Properties, or (b) provide Licensor with
satisfactory evidence that the Disney properties, have been erased
or eradicated and are no longer reproducible.
LICENSOR: LICENSEE:
By:/s/P. Sissmann By:/s/Patricia Anderson-Lasko
Title: President Title: President
MANUFACTURER:
By:/s/Ron Sonenberg
Title: President
STATE OF GEORGIA,
COUNTY OF APPLING
INDENTURE OF LEASE
THIS INDENTURE OF LEASE (this "Lease"), made and executed in
duplicate as of the 12 day of October, 1993, by and between
DEVELOPMENT AUTHORITY OF APPLING COUNTY
a body politic created by statutory authority contained in
provisions of an Act of the Georgia General Assembly (Ga. Laws,
1969, p.137, et.seq., as amended) with its office in Appling
County, Georgia ("Lessor"), and
THIMBLE SQUARE, INC.
a Georgia corporation with its registered office in Bryan County,
Georgia, and a place of business in Appling County, Georgia
("Lessee").
WITNESSETH :
WHEREAS, Lessor owns the Premises ( as hereinafter defined),
and desires to lease same to Lessee; and
WHEREAS, Lessee desires to lease the Premises from Lessor with
the right to purchase upon the terms and conditions set forth
herein;
NOW, THEREFORE, for and in consideration of the rents stated
in Article III hereof and of the covenants and agreements
hereinafter mentioned to be kept and performed by Lessee, Lessor
does by these presents lease and let unto Lessee, and Lessee does
hereby hire and take from Lessor, that certain improved tract or
parcel of land in the Appling County Industrial Park described in
Exhibit A attached hereto and made a part hereof, and hereinafter
referred to as the "Premises".
It is hereby mutually covenanted and agreed that; (a) delivery
of the Premises is being made by Lessor to Lessee in its present
condition "as is" and "where is" and that Landlord has made no
representation with respect to the physical condition thereof
except that Lessor will warrant the heating and air conditioning
system to be in good operating condition for a period of thirty
(30) days after the Commencement Date; and (b) this Lease is made
upon the following agreements, conditions, covenants and terms:
ARTICLE I. HEADINGS.
Section 1.01. The various headings and numbers herein, and
the grouping of the provisions of this Lease into separate Articles
and Paragraphs, are for the purpose of convenience only and in no
way define, limit, construe, or describe the scope or intent of
such Sections or Articles nor in any way affect this Lease.
ARTICLE II. TERMS OF THIS LEASE
Section 2.01. The term of this Lease shall commence on the
first day of October, 1993, (the "Commencement Date"), and shall
continue for a term of eighty-four (84) months (the "Term"),
commencing on the Commencement Date and expiring the last day of
September, 2000 (the "Termination Date"), unless sooner terminated
in accordance with this Lease. For the purpose of this Lease, the
term "Lease Year" shall mean any twelve (12) month period beginning
on the first day of the month next following the Commencement Date
unless the Term commences on the first day of a month in which
event the twelve (12) month period shall commence on the
Commencement Date.
ARTICLE III. RENT.
Section 3.01. Lessee covenants and agrees to pay without
demand, set-off or abatement, except as specifically otherwise set
forth herein, and Lessor agrees to accept as "Monthly Rent" (herein
so called) for the Premises during the Term the following sums:
a. $2,000.00 per month for the first and second Lease Years
(October, 1993 through September, 1995);
b. $2,500.00 per month for the third Lease Year (October, 1995
through September, 1996); and
c. $3,000.00 per month for the balance of the Lease Term.
The aforesaid lease payments ("Monthly Rent") shall be paid on
the first day of each calendar month in advance. In the event the
Commencement Date is other than the first day of a month, rent for
the initial month shall be prorated according to the number of days
from the Commencement Date through the end of the month.
All rental payments hereunder shall be made to Lessor at Post
Office Box 413, Baxley Georgia 31513, or at such other place or to
such other person as Lessor may designate in writing from time to
time.
Section 3.02. All payments other than Monthly Rent required
to be made by Lessee under any of the terms or conditions of this
Lease shall be collectible as "Additional Rent" hereunder whether
or not the provision requiring such payment specifically so states
(Monthly Rent and Additional Rent are collectively referred to
herein as "Rent"). Any payment of Rent not made by Lessee on the
date or time herein specified for such payment shall bear interest
at the lesser of eighteen percent (18%) per annum (the "Lease
Interest Rate"), from such date or time until such payment shall be
made by Lessee.
Section 3.03. The parties intend that this Lease shall
provide for a net return to Lessor in the amount of the rentals set
forth hereinabove. The parties, therefore, agree that all costs,
expenses or obligations related to Lessee's use or occupancy of the
Premises, shall be paid and discharged by Lessee and shall be
collectible as Additional Rent for all purposes of this Lease.
This section contemplates that Lessee shall be responsible for
taxes, utilities, insurance and routine maintenance attributable to
Lessee's use of the Premises.
ARTICLE IV. ADDITIONS, CHANGES AND ALTERATIONS; EQUIPMENT.
Section 4.01. At any time, and from time to time, with
Lessor's prior written approval, which will not be unreasonably
withheld, Lessee, at its sole cost and expense, may make additions
to and structural changes and alterations in and upon any or all of
the improvements now or hereafter located on the Premises and may
make additional improvements on the Premises provided that:
a. Such additions, changes, alterations or improvements, when
completed, shall not materially impair the strength or value of the
existing improvements located on the Premises and shall be in
conformity and compliance with all applicable laws, building
ordinances and regulations;
b. Whenever the contemplated cost of such structural
additions, changes, alterations, or improvements exceeds $5,000.00,
Lessee shall first deliver to Lessor detailed plans and
specifications therefor and Lessee shall grant Lessor a period of
thirty (30) days during which Lessor may approve such plans and
specifications or indicate the reasons for its disapproval of same.
Provided that the work to be constructed is in accordance with
Subsection 4.01 (a) hereof, Lessor shall approve such plans and
specifications. If Lessor has not acted within thirty (30) days of
the date of delivery of such plans and specifications, it will be
deemed to have approved the same. Nothing in the Lease shall imply
or be deemed to be a consent or agreement by Lessor to subject
Lessor's estate or the Premises to liability under any mechanics'
or other lien law. All such additions, changes, alterations or
improvements shall be and remain part of the realty and the
property of the Lessor and subject to this Lease.
Section 4.02.
a. At any time, and from time to time, Lessee may, at its sole
cost and expense, install, assemble or place upon the Premises any
items of Equipment (as defined in Subsection 4.02 (b)), which
Equipment shall be and remain the property of Lessee or other owner
thereof and shall not become part of the Premises.
b. As used herein, the term "Equipment" shall mean all
wquipment, appliances, machinery, signs, furniture and trade
fixtures now or hereafter installed or placed on the Premises,
whether or not physically attached thereto, and used or useable in
the operation and maintenance of the business of Lessee or any
Permitted Subtenant (as defined in Article XII) or any other person
on the Premises. Equipment shall not include heating, ventilating
and air-conditioning plants and systems, electrical (except bus
duct installed by Lessee), sprinkler and plumbing fixtures and
systems and other like equipment and fixtures which constitute an
integral part of the building constructed on the Premises.
c. Lessee may remove the Equipment at any time at or prior to
the Expiration Date or earlier termination of this Lease, provided
that Lessee shall repair any and all damage to the Premises
resulting from such removal. For the purposes of this Subsection
4.02(c), the term "Lessee" shall be deemed to include subsidiaries
of Lessee and any other Permitted Subtenant.
ARTICLE V. RECONSTRUCTION OF DAMAGED, DESTROYED OR REMOVED
IMPROVEMENTS; REPAIR AND MAINTENANCE.
Section 5.01. In the event that the Premises are damaged or
destroyed by fire or other casualty, Lessee shall have the right
and option to either (i) repair, replace or reconstruct the
premises utilizing insurance proceeds, or (ii) terminate this
Lease, with Lessor and/or Lessor's mortgagee to receive all
building insurance proceeds and the parties having no further
rights or obligations with respect to the other. Lessee shall be
entitled to the proceeds of the insurance on its contents, business
interruption and other insurance it may obtain in connection with
the business conducted upon the Premises. If Lessee elects to
continue, the repair, replacement or reconstruction shall be
accomplished within such time as may be reasonable under the
circumstances after allowing for delays caused by strikes,
lockouts, acts of God, fire, unavailability of materials or labor,
or any other cause or casualty beyond the reasonable control of
Lessee. The design and specifications of such repair, replacement
or reconstruction shall be as determined by Lessee after obtaining
Lessor's prior consent, which shall not be unreasonably withheld;
but such work shall restore the Premises to not less than their
value immediately prior to the damage, destruction, demolition or
removal.
Section 5.02. Lessee, at its sole cost and expense, will keep
and maintain the Premises in good repair and in safe and sanitary
condition and will, at its sole expense, make all necessary non-
structural repairs, replacements and renewals, which shall be
substantially equal in quality and class to the original work.
Lessee will conform with and do all things necessary to comply with
every valid law, regulation, order and requirement of any
governmental authority relating to the Premises and will hold and
save Lessor free and harmless of all losses, costs, expenses,
claims or liabilities for the breach thereof, or failure to comply
therewith and for the breach of or failure to comply with any valid
law, regulation, order and requirement of any governmental
authority relating to the conduct of Lessee's business in the
Premises.
ARTICLE VI. USE OF THE PREMISES.
Section 6.01. The Premises shall be used only for lawful,
proper and legitimate purposes, and Lessee shall not use, nor
suffer nor permit any person to use, the same or any part thereof
for any purpose or in violation of the laws of the United States or
of the State in which the Premises are located, or of the
ordinances of any political subdivision of the State, or any
covenant, restriction or condition affecting the Premises, nor for
any immoral or unlawful purpose whatsoever.
Section 6.02. Lessor shall not be liable for any encroachment
upon any property adjacent to the Premises by any future building
or other structure intended to be erected upon the Premises by
Lessee. Lessee agrees to indemnify and save harmless Lessor from
and against any and all liabilities, penalties, damages, expenses
and judgments on account of the location of any such building or
other structure on or partly on such adjacent property.
ARTICLE VII. CONSTRUCTION LIENS.
Section 7.01. Lessee will keep the Premises free and clear of
mechanics', laborers', or materialmen's liens, and other liens of
similar nature, which may arise in connection with any work
performed on the Premises by or at the direction or sufferance of
Lessee; provided, however, that Lessee shall have the right to
contest the validity or the amount of any such lien or claimed
lien, if Lessee shall, within ten (10) days after Lessee is
informed that the lien is filed against the Premises, give to
Lessor or any mortgagee of the Premises ( a "Mortgagee"), such
reasonable security as may be demanded by Lessor or a Mortgagee to
insure payment of such lien and prevent any sale, foreclosure or
forfeiture of the Premises by reason of such nonpayment. On final
determination of the lien or claimed lien, Lessee shall immediately
pay any judgement rendered, with all proper costs and charges, and
shall have the lien released or judgment satisfied at Lessee's own
expense. Should any such lien be placed on the Premises and the
same ripen into a judgment which has become final, Lessor, at its
option, may pay any such final judgment and clear the Premises
therefrom, and any monies so paid out by Lessor on account of any
such judgment shall be repaid by Lessee to Lessor at the next
ensuing rent day and shall draw interest at the Lease Interest Rate
from time of payment by Lessor until repaid by Lessee.
Section 7.02. In the event any lien is filed against the
Premises or any such action is commenced affecting the title
hereto, as between Lessor and Lessee, the notified party shall give
the other prompt written notice thereof.
Section 7.03. Nothing in this Lease shall authorize Lessee
to, and Lessee shall not do any act which will in any way encumber
the title of Lessor in and to the Premises, nor shall the interest
or estate of Lessor in the Premises be in any way subject to any
claim whatsoever by virtue of any act or omission of Lessee. Any
claim to a lien upon the Premises arising from any act or omission
of Lessee shall be valid only against Lessee and shall in all
respects be subordinate to the title and rights of Lessor and any
person claiming by, through or under Lessor in and to the Premises.
Lessee shall remove any lien or encumbrance on its interest in the
Premises within ten (10) days after it has received notice thereof;
provided, however, that Lessee may in good faith contest any such
item if it posts a bond or other adequate security with Lessor.
ARTICLE VIII. TAXES, ASSESSMENTS, AND UTILITY CHARGES.
Section 8.01. Lessor and Lessee agree that Lessor is under no
obligation to provide and/or pay for any services, including any
utilities, and taxes, including personal property taxes,
assessments and levies, whether general or special, ordinary or
extraordinary, of every nature or kind whatsoever which may be
taxed, charged, assessed, levied or imposed at any time or from
time to time during the term of this Lease (including taxes for the
year in which such term begins) by the State, any political
subdivision thereof or any governmental or quasi-governmental body
having jurisdiction thereover, upon or against: (i) the Premises or
the occupancy, use or possession thereof; or (ii) any estate,
right, title or interest of Lessor and of Lessee or of either of
them in or to the Premises. It is agreed, however, that (x) taxes
for the years in which the commencement and the termination of this
Lease occur shall be prorated, and Lessee shall be required to pay
as its prorated share only that portion of the taxes levied for the
period of the taxable year for which this Lease shall have been in
effect, and (y) Lessee shall not be obligated to pay any
installment of any special assessment which may be levied, assessed
or confirmed during the Term, but which does not fall due and is
not required to be paid until after its termination, unless the
special assessment is attributable to Lessee's use, occupancy or
possession of the Premises. All amounts payable by Lessee but not
paid when due may be paid by Lessor and collectible by Lessor as
though the same were Additional Rent hereunder.
Section 8.02. Nothing contained herein shall be construed to
require Lessee to pay any transfer, estate, inheritance,
succession, or gift tax or taxes imposed in respect of any devise
or gift of any interest of Lessor or it successors or assigns in
the Premises, nor nay income tax imposed in respect of Lessor's
income from the Premises.
Section 8.03. Except as permitted by Section 8.04 the taxes,
assessments and other impositions to be paid by Lessee in this
Article VIII shall be paid before any delinquency can occur therein
or in any part or installment thereof, and certificates of payment
shall be delivered to Lessor upon request.
Section 8.04. Both Lessor and Lessee shall have the right to
contest the legality or validity of any of the taxes, assessments
or other impositions herein provided to be paid by Lessee, but no
such contest shall be carried on or maintained by Lessee after the
time limit for the payment of any such taxes, assessments or other
impositions unless Lessee as its option, (i) shall pay the amount
involved under protest; or (ii) shall procure and maintain a stay
of all proceedings to enforce any collection of such taxes,
assessments or other impositions, together with all penalties,
interest, costs and expenses, by a deposit of a sufficient sum of
money or by such undertaking as may be required or permitted by law
to accomplish such stay; or (iii) shall deposit with Lessor, or a
Mortgagee, as security for the performance by Lessee of its
obligations hereunder with respect to such taxes, assessments or
other impositions, such reasonable security which will not be less
than the amount of the taxes, assessments or other impositions,
then due as may be demanded by Lessor or a Mortgagee to ensure
payment of such contested taxes, assessments or other impositions
and all penalties, interest costs and expenses which may accrue
during the period of the contest. In the event any such contest id
made by Lessee, then, within thirty (30) days after final
determination thereof, Lessee shall fully pay and discharge the
amount determined in or by any such contest, together with all
penalties, fines, interest, costs or expenses that may have accrued
thereon or that may have result from any such action by Lessee,
whereupon Lessor shall return to Lessee all amounts, if any,
deposited by Lessee in accordance with the provisions hereof.
Section 8.05. Lessor will promptly deliver to Lessee any and
all tax notices or assessments which it may receive relating to the
Premises.
ARTICLE IX. PUBLIC LIABILITY AND PROPERTY DAMAGE.
Section 9.01.
a. Lessee does hereby release Lessor and shall at all times
indemnify and defend Lessor and save it harmless from and against
all claims, suits, actions, damages, judgments, liabilities, fines,
penalties, costs and expenses for loss of life, personal injury or
damage to property arising from or out of occurrences during the
Term within or upon the Premises occasioned wholly or in part by
any act or omission of Lessee or breach of this Lease by Lessee or
by any person or entity under its control. If Lessor shall be made
a party to any litigation commenced by or against Lessee or by any
third party, which litigation is related solely to Lessee's use or
occupancy of the Premises and involves Lessor only as owner of the
Premises, Lessee shall indemnify and hold Lessor in connection with
such litigation. Provided, however, that this indemnify is not
intended and shall not extend to any action filed by Lessee against
Lessor as a result of any claimed breach of this Lease.
b. Lessee also hereby releases Lessor from any and all
liability arising from (i) the operation, conduct or management of
or from any work or thing whatsoever done in, on or about the
Premises or any building, structure, equipment (including, without
limitation, plumbing, heating or air-conditioning equipment, water
pipes and electrical wiring) or improvement now or hereafter
erected or placed on the Premises, excepting Lessor's thirty (30)
day heating and air conditioning system warranty set forth at the
beginning of this Lease.
Section 9.02. Lessee will keep in effect at its sole cost and
expense and with financially responsible insurance companies
qualified to do business in the state in which the Premises is
located and acceptable to Lessor (an "Insurer"), a comprehensive
general liability policy either directly or indirectly covering the
Premises and providing coverage with minimum limits of liability
not less than $500,000.00 for bodily injury to one person,
$1,000,000.00 for bodily injury to any group of persons as a result
of one accident and $1,000,000.00 for property damage. Such policy
shall name Lessor and a Mortgagee, if any, as additional insured
and certificates that such insurance is in force shall be delivered
to Lessor; such certificate containing an agreement by the Insurer
that such policy shall not be cancelled or modified (as it applies
to Lessor and a Mortgagee) without thirty (30) days' prior written
notice to Lessor and a Mortgagee by registered mail, return policy
receipt requested, and that no act or omission by Lessee shall
invalidate such policy as it applies to Lessor or Mortgagee.
Section 9.03. Lessee shall bring or keep property upon the
Premises solely at its own risk, and Lessor shall not be liable for
any damages thereto or any theft thereof. Lessee shall maintain
fire and extended coverage insurance, which may include self-
insurance, covering such personal property in such amounts and
against such risks as is customarily maintained by similar
businesses, and provide Lessor with evidence of such insurance
coverage.
ARTICLE X. FIRE INSURANCE.
Section 10.01. Lessee, at its sole cost and expense, will
keep the buildings and the improvements now or hereafter located on
the Premises insured against fire (with extended coverage) with an
Insurer in an amount equal to not less than their full fair
insurable value, exclusive of foundations, excavations and
pavement. Such insurance shall be so issued as to cover the
several interests of Lessor, a Mortgagee, and Lessee, and shall
provide that in case of loss or damage the proceeds thereof shall
be payable to Lessor, Mortgagee, and Lessee, as their interests may
appear. Such insurance may also provide for "rents coverage"
insurance.
Section 10.02. If after any loss insured against pursuant to
Section 10.01, Lessor shall, pursuant to Lessee's options set forth
in Section 5.01, hereof, either (i) proceed with repair or
rebuilding the Premises, or (ii) terminate this Lease.
Section 10.03. Lessee shall deliver to Lessor certificates
evidencing that all insurance which Lessee is required to provide
and maintain in effect hereunder is in force. Should Lessee fail
to provide, maintain or pay for any of the insurance hereinbefore
provided for, Lessor at its option may procure such insurance. Any
sums paid out by Lessor for any such insurance shall be repaid by
Lessee to Lessor on the first day of the calendar month next
following payment thereof by Lessor, together with interest thereon
at the Lease Interest Rate from the date of payment by Lessor until
repaid by Lessee.
Section 10.04. Lessor, Lessee and the owner of the Premises
shall be named insureds, as their interests may appear, in any
insurance policy issued pursuant to Articles IX and X.
ARTICLE XI. CONDEMNATION.
Section 11.01. In the event that the Premises, or any part
thereof, shall be taken in condemnation proceedings or by exercise
of any right of eminent domain or by agreement between Lessor,
Lessee and those authorized to exercise such right (any such
"Partial Taking" [herein so called] or "Full Taking" [herein so
called]) being hereinafter generically referred to as a "Taking"),
Lessor, Lessee and any person or entity having an interest in the
award or awards shall have the right to participate in any such
condemnation proceedings or agreement for the purpose of protecting
their interests hereunder. Each party so participating shall pay
its own expenses therein.
Section 11.02. If at any time during the Term there shall be
a Taking of the whole or substantially all of the Premises, this
Lease shall terminate and expire on the date of such Taking and
Monthly Rent and Additional Rent shall be apportioned and paid to
the date of such Taking. For the purpose of this Article XI,
"substantially all of the Premises" shall be deemed to have been
taken if Lessee and Lessor agree, or failing such agreement, it is
determined by arbitration as provided in Section 11.05, that the
untaken part of the Premises is insufficient for the economic and
feasible operation thereof by Lessee.
Section 11.03. If this Lease shall have terminated as a
result of such Taking, the proceeds from the real estate award
("the Award"), shall be applied for the following purposes in the
following order:
a. First, to pay the unpaid balance of any mortgages affecting
the Premises at the time of taking; and
b. Second, any balance of the Award remaining after payment of
the amount set forth in Subsection 11.03(a) shall be paid to Lessor
as owner of the fee, and Lessee for its leasehold interest, as the
parties or a court may determine.
Lessee shall be entitled to a separate award for removal and
dislocation expenses as granted to tenants of real estate under the
Eminent Domain Laws of the State in which the Premises is located.
Section 11.04. If this Lease shall not have been terminated
pursuant to Section 11.02, after any such Taking, this Lease shall
continue in full force and effect as to the portion of the Premises
not taken and otherwise remain unaffected except:
a. The Monthly Rent shall be reduced by an amount which bears
the same proportion to the Monthly Rent immediately prior to the
Partial Taking as the amount of the Award paid to Lessor or a
Mortgagee and not applied to the restoration of the improvements
located on the Premises pursuant to Subsection 11.04(b) shall bear
to the condemnation proceedings or agreement. Until the new
Minimum Rent shall have been determined, Lessee shall continue to
Minimum Monthly Rent as set forth in Section 1.01 of Schedule One
and upon such determination, an appropriate adjustment shall be
made and Lessee shall receive credit for any overpayment.
b. Lessee shall, promptly after such Taking and, at its sole
cost and expense, restore such building or buildings to a complete
architectural unit, in which event Lessee shall be entitled to
reimbursement from Lessor for the costs thereof the Award. Lessee
shall be responsible for obtaining at its sole cost and expense any
replacement or substitute equipment required by it.
c. The Award shall be paid to Lessor and applied first to
restoration as set forth in Subsection 11.04(b) and any balance of
the Award shall be the property of Lessor subject to an obligation
to make a Minimum Annual Rent adjustment as set forth in Subsection
11.04(a).
Section 11.05. In the event of any dispute between Lessor and
Lessee with respect to any issue of fact (other than one determined
by the condemnation court or board or other body authorized to make
the award) arising out of a Taking set forth in this Article XI,
such dispute shall be resolved by arbitration in accordance with
the Georgia Arbitration Special Statutory Proceedings (O.C.G.A.
Sections 9-9-30, et.seq.).
ARTICLE XII. ASSIGNMENTS, TRANSFERS, AND SUBLETTING.
Section 12.01. Any assignment or subletting of Lessee's
rights in this Lease shall require the prior written consent of
Lessor, which will not be unreasonably withheld. No such
subletting or assignment shall relieve Lessee of any of the
obligations under the terms and conditions of this Lease, and
Lessor shall at all times have the right to look to Lessee for the
performance of all of the covenants to be performed on the part of
Lessee.
Section 12.02. This Lease may be assigned or transferred by
Lessor without limitation; provided that (except in the case of
assignments to a Mortgagee) twenty (20) days' prior notice of the
assignment or transfer is given to Lessee; and upon such assignment
or transfer, which shall be subjected to this Lease, and notice to
Lessee thereof, the individuals and corporate entity now comprising
Lessor shall be relieved of any liability hereunder thereafter
accruing; provided, further, that any successor or assignee assumes
all obligations and covenants of Lessor under this Lease and
immediately thereafter is in compliance therewith. In the event of
an assignment of this Lease by Lessor to a Mortgagee, Lessee agrees
upon notice to pay all monthly Rent and Additional Rent directly to
such Mortgagee.
ARTICLE XIII. EXPENSES OF ENFORCEMENT; LESSORS'S BANKRUPTCY;
TERMINATION; SURRENDER OF PREMISES.
Section 13.01.
a. Either party hereto shall pay all reasonable attorneys'
fees and expenses incurred by the other in enforcing any of the
obligations under this Lease.
b. Subject to the notice requirements of this Article XIII, if
Lessee shall default in the observance or performance of any of its
obligations hereunder, Lessor may preform such obligations after
twenty (20) days following notice to Lessor. If Lessor, in
connection therewith or in connection with any default by Lessee in
the covenant to pay Rent hereunder, makes any expenditure or incurs
any obligations for the payment of money, including, but not
limited to, reasonable attorney's fees and costs incurred in
instituting, prosecuting or defending any action or proceeding,
such sums so paid or obligations incurred, together with interest
at the Lease Interest Rate, shall be deemed to be Additional Rent
hereunder and shall be paid by Lessee to Lessor upon demand in
accordance with the provisions of Article III. If the Term shall
have expired or this Lease shall have been terminated at the time
Lessor makes such expenditures or incurs such obligations, such
sums shall be recoverable by Lessor as damages.
Section 13.02.
a. If Lessee defaults under this Lease, and such default shall
continue for ten (10) days following notice thereof from Lessor, in
the payment of Rent due hereunder, or of any other sum required to
be paid by Lessee under this Lease, or under the terms of any other
agreement between the parties, or if default shall be made, and
shall continue for twenty (20) days following notice, in the
performance of any of the other terms, covenants or conditions
which Lessee is required to observe and perform under the Lease or
if the interest of Lessee in this Lease shall be levied upon
execution or other legal process, or if any petition shall be filed
by or against Lessee in a court of bankruptcy, or if Lessee shall
be declared insolvent according to law, or make an assignment, or
if Lessee shall abandon or vacate the Premises during the Term,
then Lessor may, but need not, treat the occurrence of any one or
more of the foregoing events as a breach of this Lease, and
thereupon may, at its options, terminate this Lease, repossess the
Premises in accordance with the provisions hereof, and be entitled
to recover immediately, as damages, the total amount of Rent and
any other charges due and to be paid by Lessee during the balance
of the Term, less the fair rental value of the Premises for said
period, together with any other sum of money owed by Lessee to
Lessor.
b. Lessee or any trustee for Lessee may only assume this Lease
if (i) it cures or provides adequate assurance that Lessee or the
trustee will promptly cure any default hereunder, (ii) it
compensates or provides adequate assurance that Lessee will
promptly compensate Lessor for any actual pecuniary loss to Lessor
resulting from Lessee's default, and (iii) it provides adequate
assurance of future performance under this Lease by Lessee. To the
extent permitted by law, in on event after the assumption of this
Lease by Lessee or any trustee for Lessee shall any then existing
default remain uncured for a period in excess of that permitted by
this Lease. Adequate assurance of future performance of this Lease
shall include, without limitation, adequate assurance (x) of the
source of Rent required to be paid by Lessee hereunder, and (y)
that assumption or permitted assignment of this Lease will not
breach any provision hereunder.
Section 13.04.
a. Upon the expiration or earlier termination of this Lease,
whether by lapse of time, operation of law or pursuant to the
provisions of this Lease, Lessee shall surrender the Premises
(including approved alterations, additions or improvements made
pursuant to Articles IV and V) in good condition and repair,
reasonable wear and tear excepted, remove all of its personal
property from the Premises and repair any damage to the Premises
caused by such removal.
b. If Lessee shall fail or refuse to restore the Premises,
Lessor may do so and recover its cost from Lessee for so doing. If
Lessee shall fail or refuse to comply with Lessee's duty to remove
all personal property from the Premises and the building upon the
expiration or termination of this Lease, the parties hereto agree
and stipulate that Lessor may, at its election (i) treat such
failure or refusal as an offer by Lessee to transfer title to such
personal property to Lessor, in which event the title thereto shall
thereupon pass under this Lease as a bill of sale, or (ii) treat
such failure or refusal as conclusive evidence, on which Lessor
shall be entitled to rely absolutely, that Lessee has forever
abandoned such personal property. In either event, Lessor may,
with or without accepting title thereto, keep or remove, store,
destroy, discard or otherwise dispose of all or any part thereof in
any manner that Lessor shall choose without incurring liability to
Lessee or to any other person. In connection with any such
disposition, Lessor shall use reasonable efforts to mitigate its
damages. In no event shall Lessor ever become or be charged with
the duties of a bailee of any personal property of Lessee. The
failure of Lessee to remove any personal property from the Premises
shall forever bar Lessee from bringing any action or asserting any
liability against Lessor with respect to any such property which
Lessee fails to remove.
ARTICLE XIV. OWNERSHIP AND POSSESSION WARRANTY.
Section 14.01. If Lessee shall perform all of its covenants,
agreements and obligations hereunder, Lessor covenants and agrees
that Lessee shall have the peaceful and quiet enjoyment of the
Premises throughout the Term without hindrance on the part of
Lessor.
ARTICLE XV. HOLDING OVER BY LESSEE.
Section 15.01. If Lessee holds over or remains in possession
or occupancy of the Premises or any part thereof after the
expiration of the Primary Term or any extended term (if such option
has been provided for in this Lease and has been properly exercised
by Lessee) or after any sooner termination of this Lease, without
a proper exercise of any extension option or without another
written agreement leasing the Premises being actually made and
entered into by Lessor and Lessee, and only if Rent is paid by
Lessee and accepted by Lessor for or during any period of time
Lessee so holds over or remains in possession or occupancy, such
holding over or continued possession of occupancy shall create only
a tenancy from month to month at a mutually agreeable rental but no
less than the last Minimum Monthly Rent in effect on the last day
of the Term or any extension thereof then in effect and upon all
terms, covenants and conditions, (other than length of the Term and
extension thereof), set forth in this Lease, which may at any time
be terminated by either Lessor or Lessee by giving to the other
thirty (30) days prior notice of intention to terminate the same.
ARTICLE XVI. WAIVERS.
Section 16.01. No waiver by Lessor of any breach by Lessee of
any of its obligations or agreements, or the terms, covenants and
conditions hereunder shall be deemed to be a waiver of any
subsequent breach of the same or any other covenants, agreements or
obligations, nor shall any forbearance by Lessor to seek a remedy
for any breach by Lessee by deemed a waiver by Lessor of its rights
or remedies with respect to such breach.
ARTICLE XVII. TERMINATION.
Section 17.01. At the termination of this Lease or upon
repossession by Lessor for any reason, Lessee and any subtenants
under Lessee, and any and all persons holding or claiming under
Lessee, shall surrender possession of the Premises to Lessor as
provided in Section 13.04 hereof.
Section 17.02. At the termination of this Lease for any
cause, provided Rent and other charges shall have been fully paid,
Lessee and any subtenants under Lessee, and any and all persons
holding or claiming under Lessee, shall have the right to remove
from the Premises all personal property, tools, machinery and trade
fixtures and Equipment installed by Lessee or any person holding
under Lessee at its own expense, irrespective of how any of such
property may be attached to the Premises; provided, however, that
Lessee shall repair to Lessor's satisfaction any and all damage to
the Premises caused by the removal of such property.
ARTICLE XVIII. COVENANTS TO RUN WITH THE LAND.
Section 18.01. All covenants, agreements, and engagements in
this Lease shall be construed as covenants running with the land,
and all rights given to and obligations imposed upon the respective
parties shall be construed as inuring to and binding upon the
successors in interest and assigns of the parties hereto,
respectively.
ARTICLE XIX. SHORT FORM OF THIS LEASE.
Section 19.01. Upon request of either party after the
execution of this Lease, the parties agree to promptly execute,
acknowledge and deliver a Short Form or Memorandum of Lease for
recording purposes if requested by one of the parties, and the
terms hereof shall constitute a part thereof as though recited at
length therein.
ARTICLE XX. NOTICES
Section 20.01. Any notice provided for herein must be
delivered by courier service or mailed by certified or registered
United States mail, postage prepaid, return receipt requested, to
the parties as follows:
If to Lessor: Development Authority of Appling County
501 West Parker Street
Post Office Box 413
Baxley, GA 31513
Attn: Chairman
Fax: 912-367-2073
If to Lessee: Thimble Square, Inc.
230 Frost Industrial Blvd.
Baxley/Pembroke, Georgia 31513
Attn: Lee Schwartz, President
Fax: 912-367-1320
Each party shall have the right to specify any other address
in the United States by giving to the other party at least fifteen
(15) days prior written notice thereof.
ARTICLE XXI. SUBORDINATION, ATTORNMENT AND NON-DISTURBANCE.
Section 21.01. This Lease and Lessee's leasehold estate shall
be subordinate and subject in all respects to any presently
existing mortgage or mortgages which ar liens against the Premises
and, at Lessor's request, Lessee shall execute and deliver to
Lessor an instrument in recordable form confirming such
subordination; provided that such subordination shall not affect
the respective rights of Lessor, Lessee and any mortgagee under
Article XII hereof; and, provided further, that Lessor will use its
best efforts to secure for Lessee at such time an instrument
executed by all necessary parties in recordable form whereby any
Mortgagee or proposed mortgagee agrees that Lessee shall not be
interfered with or disturbed in its use, possession and enjoyment
of the Premises by the mortgagee, or any person or firm claiming
under the mortgagee, such instrument to be binding upon any
successor of a Mortgagee or any purchaser at judicial sale upon
foreclosure of the mortgage, so long as Lessee is not in default
hereunder.
If at any time during the Term any Mortgagee or proposed
mortgagee shall become owner of the Premises as a result of
foreclosure or otherwise or becomes a "Mortgagee in Possession" of
the Premises, Lessee shall, upon request and upon assumption by
said mortgagee of Lessor's obligations hereunder, attorn to such
mortgagee from time to time upon the then terms and conditions of
this Lease and shall execute instruments in confirmation of such
attornment.
ARTICLE XX11. ESTOPPEL; CERTIFICATE.
Section 22.01. At any time, and from time to time, Lessee
shall execute, acknowledge and deliver to Lessor a statement in
writing in form satisfactory to Lessor certifying that this Lease
is unmodified and in full force and effect (or if there have been
modifications, that the same is in full force and effect as
modified and stating the modifications), and the dates to which
Minimum Monthly Rent and Additional Rent have been paid in advance,
if any, and stating whether or not to the best knowledge of the
signer of such certificate Lessor is in default in performance of
any term, covenant or condition contained in this Lease.
ARTICLE XXIII. ENTRY AND INSPECTION.
Section 23.01. Lessee shall permit Lessor and Lessor's
authorized agents to enter upon the Premises at reasonable time
during Lessee's business hours for the purpose of inspecting the
same and of ascertaining Lessee's compliance with the terms and
conditions of this Lease.
Section 23.02. In entering upon the Premises, Lessor will
observe Lessee's prevailing security arrangements and will make
such entries so as to cause as little inconvenience, annoyance or
disturbance as possible.
ARTICLE XIV. CUMULATIVE REMEDIES; NO WAIVER; ENTIRE AGREEMENT,
NO ORAL CHANGE; GOVERNING LAW; SEVERABILITY; EXHIBITS; SIGNS.
Section 24.01. The specific remedies to which Lessor or
Lessee may resort under the terms of this Lease are cumulative and
are not intended to be exclusive of any other remedies or means of
redress to which they may be lawfully entitled in case of any
breach or threatened breach by either of them of any provision of
this Lease. The failure of either party to insist in any one or
more cases upon the strict performance of any of the covenants of
this Lease, or to exercise any option herein contained, shall no be
construed as a waiver or relinquishment for the future of such
covenant or option. A receipt by Lessor of any installment of Rent
with knowledge of the breach of any covenant hereof shall not be
deemed a waiver of such breach. This Lease and the Schedules and
Exhibits attached to this Lease and made a part hereof set forth
all the covenants, promises, agreements, conditions and
understanding between Lessor and Lessee concerning the Property,
and there are no covenants, promises, agreements, conditions or
understandings, heretofore made, either oral or written, between
them other than as herein set forth. No waiver, change,
modification or discharge by either party hereto of any provision
in this Lease shall be effective unless expressed in writing and
signed by the party to be bound.
Section 24.02. This Lease shall be construed and enforced in
accordance with the laws of the State of Georgia.
Section 24.03. If any provisions of this Lease or the
application thereof to any person or circumstance shall, to any
extent, be invalid or unenforceable, the remainder of this Lease
shall not be affected thereby and each provision of this Lease,
including the invalid or unenforceable provision, shall be valid
and enforceable to the fullest extent permitted by law.
Section 24.04. Any signs which Lessee desires to use on the
Premises must be approved by Lessor, which approval shall not be
unreasonable withheld, and meet all applicable laws, ordinances and
regulations.
ARTICLE XXV. SUCCESSORS AND ASSIGNS.
Section 25.01. This Lease shall be binding upon and inure to
the benefit of the parties hereto and their successors and assigns.
ARTICLE XXVI. ENVIRONMENTAL COMPLIANCE.
Section 26.01. Lessee covenants and agrees that it will use
the Premises in compliance with any and all local, state or federal
laws and regulations dealing with hazardous or dangerous waste,
clean air and water and other environmental matters, and Lessee
specifically shall indemnify and hold Lessor harmless for any costs
and expenses incurred by Lessor in default of this covenant by
Lessee. Any work or expense for such compliance shall be the sole
responsibility of Lessee from and after the Commencement Date.
Section 26.02. At the termination of this Lease, Lessee shall
remove any tanks, drums or other storage of any hazardous or
dangerous waste substances (as so defined by any local, state or
federal authority) installed by Lessee or installed by Lessor at
the written request of Lessee. Such removal shall satisfy all
applicable laws and regulations, and Lessee shall furnish to Lessor
appropriate documentation of lawful removal and disposition.
Section 26.03. If, at any time during the term of this Lease,
any local, state or federal authority or any of Lessor's mortgagees
should request a report on any such hazardous substances Lessee has
stored or allowed to be stored on the Premises during the Term,
Lessee will either cause said report to be made as soon as
practicable at its own cost and expense, or if not made within
thirty (30) days of Lessor's request for the same, will reimburse
Lessor, as Additional Rent, for Lessor's cost of obtaining said
report.
Section 26.04. Lessee shall dispose of any cleaning
materials, including rags, cloths, liquids, gases or chemical
compounds off of the Premises promptly and according to any
applicable laws or regulations after use.
Section 26.05. At any time during the Term, or within one
hundred eighty (180) days thereafter, Lessor may enter upon the
Premises and inspect the Premises for any evidence of hazardous or
dangerous waste or substances. In the event that there exists any
such hazardous waste or hazardous substances deposited during the
Term by Lessee, Lessee shall promptly remove and dispose of the
same in accordance with all applicable federal, state or local laws
or regulations. This Section 26.05. shall survive the termination
or expiration of this Lease.
ARTICLE XXVII. BROKERS.
Section 27.01. Lessor and Lessee each represent that it has
not dealt with any broker in connection with the negotiation,
execution, or delivery of this Lease.
ARTICLE XXVIII. COMPLIANCE WITH LAW.
Section 28.01. Lessee shall, at its sole cost and expense,
comply or cause compliance with any notices of violations of any
laws and regulations of federal, state, municipal and local
governments, departments, commissions and boards, pursuant to law,
which may impose any violation, order or duty upon Lessee with
respect to the Premises, arising out of Lessee's use thereof.
Notwithstanding the foregoing, Lessee may contest or appeal such
violations, requirements or orders and shall not be required to
comply therewith if Lessee shall contest same by appropriate
proceedings and shall not subject Lessor to criminal liability or
material civil liability provided Lessee shall give such reasonable
security during the pendency of such contest as shall be requested
by Lessor with respect to any costs, fines, expenses, penalties or
damages which may be imposed on Lessor by reason of Lessee's
contest; provided, however, that during any such contest, Lessee
shall, unless prohibited by law (i) continue to pay all rentals due
under this Lease to Lessor and, (ii) continue operations of the
Premises in accordance with the terms and conditions of this Lease.
Upon final resolution of any such contest, Lessee shall promptly
comply with judgement, finding, or order.
ARTICLE XXIX. RELATIONSHIP OF PARTIES; DEFINITION OF LESSOR;
DEFINITION OF LESSEE.
Section 29.01. Nothing contained in this Lease shall be
construed to create the relationship of principal and agent,
partnership, joint venture, or any other relationship between the
parties hereto other than the relationship of landlord and tenant.
Nothing contained in this Lease shall in any way impose any
liability upon the stockholders, officers or directors of Lessor or
stockholders, officers, directors or trustees of Lessee, should
such parties be corporate entities.
29.02. The term "Lessor" as used herein, means Lessor named
herein and subsequent owner of Lessor's estate hereunder, but any
owner of Lessor's estate shall be relieved of all liability under
this Lease, after the date it ceases to be the owner of Lessor's
estate (except for any liability arising or accruing prior to such
date) provided the party succeeding to Lessor's estate shall have
executed an agreement of assumption and assignment of Lessor's
estate; and further provided that any such assumption of liability
is approved in writing by Lessee, which approval shall not by
unreasonably withheld.
Section 29.03. The term "Lessee" as used herein, means Lessee
named herein and any subsequent owner of Lessee's estate hereunder.
ARTICLE XXX. OPTION TO PURCHASE THE PREMISES.
Section 30.01. Lessee shall have the right and option to
purchase the premises at any time prior to the termination of this
Lease for the sum of Three Hundred Eighty Thousand Dollars
($380,000.00); provided that Lessor shall receive written notice of
Lessee's intention to exercise its right to purchase at least
ninety (90) days prior to the expiration of the Lease Term.
Section 30.02. All lease payments made pursuant to Article
III hereof shall be credited against the said price, so that the
price paid at closing shall be a sum equal to the aforesaid
purchase price less the total of lease payments made.
Section 30.03. In the event Lessee desires to exercise its
right to purchase prior to the end of the Lease Term, Lessee shall
notify Lessor in writing of its intention at any time during the
Lease Term, and closing shall occur within thirty (30) days of the
receipt of said notice by Lessor. Each party shall be responsible
for the payment of such closing costs as are customarily paid by
selling and purchasing parties in Appling County, Georgia.
IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease
to be duly executed the day and year first above written.
LESSOR:
DEVELOPMENT AUTHORITY OF
APPLING COUNTY
By:_________________________(L.S.)
B.W. Sapp, Chairman
Attest:_____________________(L.S.)
Esco Hall, Jr., Secretary
Signed, sealed and delivered (CORPORATE SEAL)
this 12 day of October, 1993,
in the presence of:
____________________
Unofficial Witness
/s/Jane Coleman
Notary Public
State of Georgia
County of Appling
Commission Expires: 11/22/96
(NOTARY SEAL)
LESSEE:
THIMBLE SQUARE, INC.
By:/s/Lee Schwartz (L.S.)
Title: President
Attest:/s/Jane Silk (L.S.)
Title: Asst. Secretary
Signed, sealed and delivered (CORPORATE SEAL)
this 12 day of October, 1993,
in the presence of:
____________________
Unofficial Witness
/s/Jane Coleman
Notary Public
State of Georgia
County of Appling
Commission Expires: 11/22/96
(NOTARY SEAL)
<PAGE>
EXHIBIT A
TO LEASE BETWEEN
DEVELOPMENT AUTHORITY OF APPLING COUNTY, As Lessor
and THIMBLE SQUARE, INC., As Lessee
Dated October 12, 1993
All that tract or parcel of land lying and being in Land Lot No.291
of the Second Land District of Appling County, Georgia, consisting
of 3.50 acres, more or less, being designated as Tract No. 3 on
that certain plat of survey by Walte P. Copeland, G.R.L.S 2271,
which plat is recorded in Plat Book 9, Page 291, Appling County
Records, and incorporated by reference herein for a more full and
complete description and all other legal purposes.
This property is subject to an easement for a Georgia Power Company
power line right way as shown on the aforesaid plat of survey.
THIS INSTRUMENT PREPARED UPON
INFORMATION FURNISHED BY THE
LESSOR BY RICHARD M. BROOKS, ATTY.
CARTHAGE, TENNESSEE 37030
LEASE
This Lease is made and executed on this the 1st day of
October, 1996, by and between the owners of the building known as
the Sulphur City Manufacturing Building and its adjoining parking
lot, JOHN F. WILSON, TEDDY HALE, and WILLIAM DULWORTH, (hereinafter
called " Lessor"), and INNOVO, INC., a Tennessee Corporation,
located and doing business in Springfield, Tennessee, which is a
subsidiary of the parent corporation, INNOVO GROUP, INC.,
(hereinafter called "Lessee").
SECTION ONE
Lessors lease to Lessee and Lessee hires from Lessors, for the
purpose of conducting a lawful business and for no other purpose,
those certain premises described as follows:
Being located in the Sixth (6) Civil District of Macon
County, Tennessee and being only that portion of the
property described in Deed Book 171, pages 304-305, in
the Register's Office of Macon County, Tennessee which
encompasses the building known as the Sulphur City
Manufacturing Building and the surrounding parking lot.
This being a portion of the same property conveyed unto
John F. Wilson, Teddy Hale, and William Dulworth by
Warranty Deed from Naomi Driver, dated September 27,
1990 and recorded September 28, 1990 in Deed Book 171,
pages 304-305, R.O.M.C.T.
SECTION TWO
The term of this Lease shall be for Thirty-Six (36) months,
commencing on the date of this instrument. At the end of the
Thirty-Six (36) month period, this Lease will become null and void,
and Lessee will vacate the premises, unless the option to renew and
extend the term of this Lease is exercised as set out in Section
Four herein. If said option is exercised, the term of this Lease
shall be extended for an additional Three (3) years, at the end of
which this Lease shall terminate and Lessee shall vacate the
premises.
SECTION THREE
The total rent for the building and parking lot under the
terms of this Lease shall be due and payable as follows: The
rental payments for the first (1st) and second (2nd) months of the
Thirty-Six (36) month term of this Lease shall be One Thousand No
Hundred Dollars ($1,000.00) per month. The rental payments for the
third (3rd) month through the thirty-sixth (36th) month of the
Thirty-Six (36) month term of this Lease shall be Two Thousand No
Hundred Dollars ($2,000.00) per month.
The total rent for the equipment under the terms of this Lease
shall be due and payable as follows: No payment will be due for
the first (1st) month of the Thirty-Six (36) month term of this
Lease. All rental payments thereafter for the second (2nd) month
through the thirty-six (36) month of the Thirty-Six (36) month term
of this Lease shall be Three Hundred Dollars ($300.00) per month.
All rental payments, for the building and parking lot and for
the equipment are due on the first (1st) day of each month
beginning October 1, 1996. Any payment of rent that shall be more
than Ten (10) days past due shall be considered delinquent, and a
penalty of Five Percent (5%) will be charged for each day past the
10th of the month that payment is not made. Lessee agrees that
they shall pay any and all court costs, attorney's fees, or other
legal fees incurred to collect any delinquent rent and penalties.
SECTION FOUR
Lessors hereby grant to Lessee an option to renew this Lease
and extend the term of this Lease for a period of Three (3) years,
to be exercised by Lessee's giving written notice of its intent to
exercise to Lessor at least One (1) month before the expiration of
the current Lease term. If the term of this Lease is so extended,
this Lease shall remain in full force and effect without change for
an additional Three (3) years, except that the renewal rental
payment shall be increased to Two Thousand Two Hundred Dollars
($2,200.00) per month for the real estate, with the equipment
rental rate to be re-negotiated at the time the option to renew is
exercised.
SECTION FIVE
Lessors covenant that they are seized of the demised premises
in fee simple and have full right to make this Lease and that
Lessee shall have quiet and peaceable possession of the demised
premises during the term hereof.
SECTION SIX
In the event of total destruction of the premises by fire,
wind or other casualty or Act of God, this Lease shall terminate
immediately at the option of either party.
In the event of partial destruction of less than Fifty (50%)
per cent of the premises by fire, wind or other casualty or Act of
God, this Lease shall remain in full force and effect, provided
that the damages can be repaired within Ninety (90) days, however,
Lessee shall not be required to pay rent for the period of time the
premises are unfit for the purposes rented.
SECTION SEVEN
During the term of this Lease, Lessee shall comply with all
applicable laws affecting the demised premises, the breach of which
might result in any penalty on Lessors or forfeiture of Lessors'
title to the demised premises. Lessee shall not commit, or suffer
to be committed, any waste on the demised premise, or any nuisance.
SECTION EIGHT
Lessee shall not vacate or abandon the premises at any time
during the term hereof. If Lessee shall abandon, vacate or
surrender the demised premises, or be dispossessed by process of
law, or otherwise, any personal property belonging to Lessee and
left on the premises shall be deemed to be abandoned, at the option
of Lessors.
SECTION NINE
Lessee cannot sublet the premises in whole or in part or
assign this Lease without the written consent of the Lessors. Said
consent cannot be unreasonably withheld. Neither this Lease or the
leasehold estate of Lessee or any interest of Lessee hereunder in
the demised premise or any buildings or improvements thereon shall
be subject to involuntary assignment, transfer, or sale, or to
assignment, transfer, or sale by operation of law in any manner
whatsoever, and any such attempted involuntary assignment,
transfer, or sale shall be void and of no effect and shall, at the
option of Lessors terminate this Lease.
SECTION TEN
Lessee shall fully and promptly pay all taxes and public
utilities of every kind on the premises throughout the term hereof,
as well as all other costs and expenses of every kind, whatsoever,
of or in connection with the use, operation, maintenance and
repairs of the premises and equipment.
SECTION ELEVEN
Lessee shall obtain and keep in full force and effect a
general liability insurance policy on the premises in the amount of
One Million Dollars ($1,000,000.00) against any and all claims for
personal injury or property damage occurring within, upon, or about
the leased Premises during the term of this Lease, which shall
include, but not be limited to, any injury to any one person in any
one accident or occurrence, any injuries to any number of persons
in any one accident or occurrence, or any damage to property in any
one accident or occurrence. Lessors shall be named as additional
insured under all such policies together with Lessee. Lessee shall
furnish to Lessors appropriate and acceptable evidence of their
respective compliances with the provisions of this Section, such as
certificates of insurance or copies of the policies upon each
renewal of the same.
Further, Lessee shall obtain and keep in full force and effect
a fire and extended liability coverage insurance policy or policies
protecting the leased premises and the improvements thereon from
loss or damage within the coverage of said policy of policies
during the term of this Lease, such fire and extended liability
coverage insurance policy of policies to be in the amount of Two
Hundred Ten Thousand No Hundred Dollars ($210,000.00). Lessors
shall be named as additional insured under all such policies
together with Lessee. Lessee shall furnish to Lessors appropriate
and acceptable evidence of their respective compliances with the
provisions of this Section, such as certificates of insurance or
copies of the policies upon each renewal of the same.
Lessee shall, at their own cost and expense, obtain and keep
in full force and effect a fire and extended coverage insurance
policy or policies protecting Lessee's merchandise, property, and
equipment, and that of any subsidiary, related, or affiliated
corporation, firm, person, or entity, located within, upon, or
about the leased premises.
Any and all such policies of insurance required hereunder are
to be written by reputable insurance companies qualified to do
business in the State of Tennessee.
SECTION TWELVE
Lessors shall not be liable for any loss, injury, death, or
damage to persons or property which at any time may be suffered or
sustained by Lessee or by any person whosoever may be at any time
be using or occupying or visiting the demised premises or be in,
on, or about the same, whether such loss, injury, death or damage
shall be caused by or in any way result from or arise out of any
act, omission, or negligence of Lessee or of any occupant,
subtenant, visitor, or user of any portion of the premises, or
shall result from or be caused by any other matter or thing,
whether of the same kind as or of a different kind than the matters
or things above set forth, and Lessee shall indemnify Lessors
against all claims, liability, loss, or damage whatsoever on
account of any such loss, injury, death or damage.
SECTION THIRTEEN
Lessee shall use the premises solely and alone for the express
purpose of a manufacturing business and parking lot in accordance
with all applicable statutes and regulations, except for the
expressed written approval of Lessor which cannot be reasonably
withheld.
SECTION FOURTEEN
Lessee shall maintain the interior of the building, all
equipment of Lessors left in the building for Lessee's use, and the
parking area. Any improvements Lessee shall desire to make to this
property, building, equipment, or parking area must first be
approved by the Lessors, and payment for any such improvements will
be the responsibility of the Lessee.
SECTION FIFTEEN
At the termination of this Lease, Lessee shall return premises
to Lessors in substantially the same condition as present, normal
wear and tear excepted, and Lessee may remove trade fixtures which
were installed by them, but must restore the building, all
equipment originally in the building, and the parking area to their
original conditions prior to Lessee's installment of any trade
fixtures or use of Lessors' equipment or the parking area.
SECTION SIXTEEN
The covenants and conditions herein contained shall apply to
and bind the heirs, successors, executors, administrators and
assigns, of all of the parties hereto; and all of the parties
hereto shall be jointly and severally liable hereunder. Time is of
the essence of this Lease, and of each and every covenant, term,
condition and provision hereof.
IN WITNESS WHEREOF, the parties have executed this Lease at
______________,_____________ on the day and year first above
written.
"LESSEE"
INNOVO,INC. INNOVO GROUP,INC.
BY:________________________ BY:_____________________
PAT ANDERSON LASKO, PAT ANDERSON LASKO,
PRESIDENT PRESIDENT
"LESSORS"
_______________________
JOHN WILSON
_________________________
TEDDY HALE
_______________________
WILLIAM DULWORTH
STATE OF __________________
COUNTY OF _________________
PERSONALLY appeared before me, the undersigned authority, a
Notary Public in and for the County and State aforesaid, the within
named bargainor ("Lessee"), PAT ANDERSON LASKO, with whom I am
personally acquainted, or who proved to me the basis of
satisfactory evidence, and who acknowledged that she is the
President of INNOVO, INC., a Tennessee Corporation located and
doing business in Springfield, Tennessee, which is subsidiary of
the parent corporation, Innovo Group, Inc., and that as such
President of Innovo, Inc., she is authorized to sign said
instrument on behalf of said Corporation for the purposes therein
contained.
WITNESS MY HAND and official seal at office in ___________,
____________County, ____________, this the ______ day of October,
1996.
_____________________
NOTARY PUBLIC
MY COMMISSION EXPIRES:_____________
______________________________________________________________
STATE OF _____________
COUNTY OF _____________
PERSONALLY appeared before me, the undersigned authority, a
Notary Public in and for the County and State aforesaid, the within
named bargainor ("Lessee"), PAT ANDERSON LASKO, with whom I am
personally acquainted, or who proved to me the basis of
satisfactory evidence, and who acknowledged that she is President
of INNOVO GROUP, INC., and that as such President of Innovo Group,
Inc., she is authorized to sign said instrument on behalf of said
Corporation for the purposes therein contained.
WITNESS MY HAND and official seal at the office in __________,
_____________County, ___________, this the ____ day of October,
1996.
____________________
NOTARY PUBLIC
MY COMMISSION EXPIRES:_________________
STATE OF TENNESSEE
COUNTY OF ____________
PERSONALLY appeared before me, the undersigned authority, a
Notary Public in and for the County and State aforesaid, the within
named bargainors ("Lessors") JOHN F. WILSON, TEDDY HALE, and
WILLIAM DULWORTH, with whom I am personally acquainted, or who
proved to me the basis of satisfactory evidence, and who
acknowledged that they executed the fore going instrument for the
purposes therein contained.,
WITNESS MY HAND and official seal at office in _____________,
______________County, Tennessee, this the ____day of October, 1996.
_________________________
NOTARY PUBLIC
MY COMMISSION EXPIRES:__________________
Exhibit 23.1
Consent of Independent Certified Public Accountants
Board of Directors
Innovo Group Inc.
We hereby consent to the incorporation by reference of
our reports dated February 18, 1997 relating to the consolidated
financial statements and schedule of Innovo Group Inc. and
subsidiaries, appearing in the Company's Annual Report on Form 10-K
for the year ended November 30, 1996, to the Registration Statement
on Form S-8 (No. 33-71576) and the Registration Statement on Form
S-3 (No. 333-12527) and the Prospectus constituting a part of those
Registration Statements.
We also consent to the reference to us under the caption
"Experts" in the Prospectus.
/s/BDO SEIDMAN, LLP
BDO Seidman, LLP
Atlanta, Georgia
February 28, 1997
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED
NOVEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30
<PERIOD-START> DEC-1-1995
<PERIOD-END> NOV-30-1996
<EXCHANGE-RATE> 1
<CASH> 13
<SECURITIES> 0
<RECEIVABLES> 1,304
<ALLOWANCES> 66
<INVENTORY> 1,749
<CURRENT-ASSETS> 3,350
<PP&E> 6,605
<DEPRECIATION> 1,417
<TOTAL-ASSETS> 9,433
<CURRENT-LIABILITIES> 3,960
<BONDS> 0
<COMMON> 265
0
0
<OTHER-SE> 2,010
<TOTAL-LIABILITY-AND-EQUITY> 9,433
<SALES> 7,391
<TOTAL-REVENUES> 7,391
<CGS> 4,853
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 963
<INCOME-PRETAX> (3,088)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,088)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,088)
<EPS-PRIMARY> (.23)
<EPS-DILUTED> 0
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