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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended March 31, 1996
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Transition Period from ________________ To __________________
Commission File Number 0-18064
YES CLOTHING CO.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3768671
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1380 WEST WASHINGTON BOULEVARD
LOS ANGELES, CALIFORNIA 90007
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (213) 765-7800
Securities registered pursuant to Section 12 (b) of the Act:
Name of exchange
Title of each class on which registered
NONE NONE
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]
The aggregate market value of the voting stock of the registrant held by non-
affiliates of the registrant on June 25, 1996 based on the average bid and asked
price on such date was $10,132,000.
Number of shares of Common Stock outstanding as of June 25, 1996: 7,036,492
DOCUMENTS INCORPORATED BY REFERENCE: The information required by Part III of
Form 10-K is incorporated herein by reference to the registrant's definitive
Proxy Statement relating to its 1996 Annual Meeting of Stockholders which will
be filed with the Commission within 120 days after the end of the registrant's
fiscal year.
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YES CLOTHING COMPANY
INDEX TO ANNUAL REPORT ON FORM 10-K
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PAGE NO.
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PART I.
Item 1. Business................................................................. 3
Item 2. Properties............................................................... 7
Item 3. Legal Proceedings........................................................ 7
Item 4. Submission of Matters to a Vote of Security Holders...................... 7
PART II.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 8
Item 6. Selected Financial Data.................................................. 8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................... 10
Item 8. Financial Statements and Supplementary Data ............................. 14
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.............................................. 15
PART III.
Item 10. Directors and Executive Officers of the Registrant....................... 15
Item 11. Executive Compensation................................................... 15
Item 12. Security Ownership of Certain Beneficial Owners and Management........... 15
Item 13. Certain Relationships and Related Transactions........................... 15
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........ 16
</TABLE>
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PART I
ITEM 1. BUSINESS
YES Clothing Co.(R), "the Company" designs, contracts for the manufacture
of and markets diversified lines of apparel for women in junior sizes, young men
and kids. The Company sells its apparel to retail department stores and
specialty chains and stores. The Company's garments are made in the United
States and to a lesser extent in the Far East.
The Company was incorporated in California in 1982. Its principal executive
offices are located at 1380 West Washington Boulevard, Los Angeles, California
90007, and its telephone number at that address is (213) 765-7800.
SALE TRANSACTION
On June 4, 1996, Georges Marciano and affiliates sold to Guy Anthome
3,515,000 shares of common stock at a purchase price of $0.01 per share. Mr.
Marciano resigned as a director and Chairman of the Board and agreed to cancel
the option and warrant issued in his favor. Mr. Anthome agreed to become
Chairman of the Board and Chief Executive Officer at a salary of $150,000 per
year. This transaction is known herein as the Sale Transaction.
ACQUISITION TRANSACTION
In November 1994, former Company Chairman of the Board and Chief Executive
Officer, George Randall, and former President, Moshe Tsabag, signed an agreement
to sell their holdings in the Company to affiliates of Georges Marciano, founder
and former chairman of Guess, Inc.. The transaction closed on January 31, 1995,
resulting in the acquisition by Marciano affiliates of approximately 80% of the
outstanding common stock of the Company. As a result of the Acquisition
Transaction, George Randall resigned his positions with the Company in January
1995 and Moshe Tsabag resigned as President in January 1995 and as a Board
Member and employee in April 1995. This transaction is known herein as the
Acquisition Transaction.
BUSINESS STRATEGY
Subsequent to the Acquisition Transaction by affiliates of Georges Marciano
on January 31, 1995, the Company has changed its product focus in styles
produced, the price of its products and targeted gross margins. The Company
licensed a number of trademarks and designs from Mr. Marciano. However, the
strategy was not successful and upon the close of the Sale Transaction the
Company has reconsidered its design and marketing strategy. Subsequent to the
Sale Transaction, the Company changed its merchandising and design direction and
assembled a new management team. Most of its senior executive officers have been
replaced and its design staff has been supplemented. The Company's business
strategy is now to increase sales by reintroducing the YES label as a mass
market line and by licensing branded lines of apparel.
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Immediately before the Sale Transaction, Mr. Marciano, through an
affiliated company, agreed to advance to the Company $3,100,000 to pay off
liabilities associated with three $1,000,000 letters of credit issued on behalf
of the Company in favor of Republic Factors and to purchase certain assets
approximating $1,463,000 in value. Mr. Marciano also agreed to cancel debts owed
to him and his affiliates by the Company totaling $2,767,000 in exchange for a
payment of $250,000 on June 4, 1996 and a note payable of $250,000 due on
January 31, 1997.
On June 25, 1996, the Company signed a five-year licensing agreement to
design, manufacture and market men's and boy's sportswear for Body Glove
International. The Company will pay a royalty on net sales of 6% on men's and 5%
on boy's apparel.
APPAREL AND APPAREL DESIGN
The Company offers clothing for the women's "junior" market and for young
men's and children's markets. The Company's business is generally divided among
five retail selling seasons: Spring, Summer, Fall, Back-to-School; and Holiday.
For each selling season, the Company introduces a separate apparel collection
each year. Seasonal factors can cause some variance in production and sales
levels among fiscal quarters in any fiscal year, but the Company does not regard
its overall business as highly seasonal.
JUNIOR'S. The Company's clothing for the "junior" market incorporates
current styles, fabrics and colors with a look that is designed to appeal to a
broad cross-section of young women. Clothing for the junior market is
characterized by sizes tailored for youthful figured women, The Company uses
primarily denim and, to a lesser degree, twill, for shirts, pants, shorts,
vests, jackets and dresses and knit and woven cotton for T-shirts, sweatshirts
and other types of shirts. In addition, the Company has developed novelty knits
for tops, using fabrics such as second skin satin, printed mesh and printed
nylon.
YOUNG MEN'S. The company markets under the YES U.S.A.(TM) and YES Men(R)
labels, denim jeans, shorts, jackets, and vests and cotton and denim shirts, T-
shirts and sweatshirts. The men's line, with its distinctive look, uses denim,
flannel, polar fleece, corduroy, cotton and rayon twill, wool and rayon
gabardine, cotton pique and nylon in the production of T-shirts, sweatshirts,
shirts, shorts, vests, jackets and pants.
CHILDREN'S WEAR. Prior to fiscal 1994, the Company had manufactured
children's wear, mainly for girls aged to 7 to 14. In fiscal 1994, the Company
discontinued the manufacture of children's wear and licensed out the YES name
for the production of children's apparel. Subsequent to the Acquisition
Transaction, the Company reacquired the children's wear license and began
marketing, under the YES Kids(R) label, denim jeans, overalls, shorts,
shortalls, skirts, skirtalls, vests, and jackets, cotton T-shirts and
sweatshirts and denim and cotton shirts.
PRODUCTION
MANUFACTURING. The Company manufactures its garments using independent
cutting and sewing contractors located principally in the Los Angeles area. The
Company seeks to produce high quality garments through the use of quality
fabrics, insistence on quality workmanship and use of comprehensive fabric and
garment inspection programs.
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The Company acquires fabric from suppliers and supplies such fabric,
together with the garment pattern, to an independent contractor for cutting.
The cut fabric and any buttons, zippers and other trim to be used on the
garments are then delivered to independent sewing contractors. Under the
Company's supervision, these contractors assemble and sew the fabric and add
trim in accordance with production samples. The Company also employs a
production coordinator and two full-time production assistants who regularly
visit the Company's contractors to review the quality of the work in progress.
Prior to distribution, the garments are delivered to the Company's warehouse for
final inspection in the Quality Control Department.
The lead time to fill new orders placed by the Company with its
manufacturing contractors generally ranges from three to four weeks for
domestically produced garments. The Company generally schedules the manufacture
of apparel based on orders received to reduce the risk of obsolescence of its
garment inventory. The Company continuously monitors for obsolete and damaged
inventory. Such inventory is usually sold to customers who specialize in
merchandising off-price clothing or sold through a company owned factory outlet
store.
The Company has long-standing relationships with its cutting contractor and
many of its sewing production contractors but does not have written agreements
with any of its contractors. For its domestically produced garments, the
Company currently utilizes only one cutting contractor (who is located in the
Company's facility and who works mainly for the Company) and approximately 15
sewing contractors (all of whom are located in the Los Angeles area).
The Company believes that its relationships with its cutting and sewing
contractors are satisfactory. The Company does not believe that the loss of any
contractor would have material adverse effect on the Company's operations as
there are a number of domestic and foreign cutting and sewing contractors who
can manufacture the Company's garments.
FABRICS. The fabrics primarily used by the Company are denim, cotton knits
(jersey) and woven cotton (chambray and poplin), which are purchased
domestically.
The Company believes that during the fiscal year ended March 31, 1996, its
total (100%) expenditures for fabrics used in its domestically produced garments
were paid to suppliers located in the United States. For the fiscal year ended
March 31, 1996, approximately 10% of the Company's expenditures for domestically
purchased fabrics was accounted for by its largest domestic fabric supplier,
approximately 22% of such expenditures was accounted for by the Company's four
largest domestic suppliers and approximately 29% of such expenditures was
accounted for by the Company's ten largest domestic suppliers.
The Company does not have any long-term arrangements with any of its fabric
suppliers. To date, the Company has not experienced any difficulty in
satisfying its fabric requirements and it believes that the large number and
diversity of potential suppliers minimizes the risk of the loss of any one
supplier. The Company believes that the effect of the loss of one or a few of
its fabric suppliers on the Company's operations would be minimal due to the
large number and diversity of potential suppliers and the relative ease with
which new supplier relationship may be established.
SALES AND MARKETING
The Company sells its apparel throughout the United States to retail
department stores, specialty chains and specialty stores. For the fiscal year
ended March 31, 1996, the Company sold its
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apparel to over 800 retailing customers. Approximately 86.3% of sales were made
to the Company's 100 largest customers.
Sales of the Company's garments are made through independent sales
organizations and directly by the Company's sales staff. The Company maintains
showrooms in New York City and Los Angeles for women's and men's apparel. The
Company also engages the services of an independent sales organization in Miami
which operates a showroom displaying the Company's products. Sales
representatives at each showroom are responsible for marketing the Company's
apparel within an assigned territory. Each sales representative meets with
customers in the showroom, makes sales calls to customers and represents the
Company at trade shows within the assigned territory. The sales organizations
are retained on non-exclusive basis. The Company's independent sales
organization is compensated on a commission basis on terms consistent with
industry practice. The Company does not sell its garments on consignment.
The Company generally sells its products on net-30 day terms, except for
Misfits and GMSurf(TM) Junior products which are sold on 8/10 end of month
terms. The Company no longer has the right to use these trademarks.
The Company's backlog consists of purchase orders that have been received
but not shipped, and amounted to approximately $1,100,000, $3,200,000 and
$9,137,000 as of June 20, 1996, June 20, 1995 and June 20, 1994, respectively.
The Company expects to ship all of the orders comprising the backlog prior to
September 30, 1996.
While the failure to fill orders on a timely basis could have material
adverse effect on the Company's sales, the Company has generally not experienced
difficulty in shipping orders by the dates requested by its customers. The
company does not generally accept returns except for damaged or defective
garments or with respect to late deliveries. However, the Company does grant
markdown money for slow moving goods.
ADVERTISING AND PROMOTION
The Company's advertising strategy is to promote an image associated with a
fashionable look and youthful style and to promote the YES Clothing Co.(R)
brands. The Company did not advertise extensively in 1996 and anticipates
increasing its advertising budget in 1997. The Company had no cooperative
advertising program for its retailers although it did, with advance approval,
reimburse its customers for advertising the Company's products. The Company's
expenditures for advertising and promotion were approximately $155,000 during
fiscal 1996 (2.0% of net sales), $442,000 during fiscal 1995 (1.5% of net
sales), and approximately $524,000 during fiscal 1994 (1.9% of net sales).
BRANDS AND TRADEMARKS
The Company's principal trademarks, YES Clothing Co.(R), YES(R), YES
Men(R), YES Kids(R) and YES Jeans(R) are registered with the United States
Patent and Trademark Office. The Company also has registered or has trademark
applications pending, for these trademarks in other countries. The Company
believes that these trademarks have significant value in the marketing of its
apparel. There are other companies in the apparel and apparel-related industries
that incorporate the word "yes" in their trademarks, and there can be no
assurance that these or future trademarks which may be granted will not diminish
the value of the Company's "YES Clothing Co.(R)" or "YES(R)" trademarks.
Subsequent to the Acquisition
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Transaction, the Company applied for domestic and foreign trademarks for YES
U.S.A.(TM) in a diamond design.
Guess Inc. has filed oppositions and cancellations to certain of the
Company's trademarks.
In addition to the YES(R) brand, the Company marketed apparel under the GM
Surf(TM) and Misfits(R) labels which were licensed to the Company under an
agreement with Marble Sportswear, Inc., a company controlled by Georges Marciano
(see Related Party Transactions). These license agreements were terminated on
May 1, 1996.
COMPETITION
The segments of the apparel industry in which the Company competes are
highly fragmented. The Company competes with numerous other apparel
manufacturers, which vary in size and in the products with which they design and
manufacture. In addition, department stores, including some of the Company's
customers, sell competing apparel under their own labels. Many of the Company's
competitors are larger and have greater financial resources than the Company.
The marketing of apparel is highly competitive. The Company believes that
the ability to gauge effectively and to respond to changes in consumer demands
and tastes as well as the ability to produce and deliver its products on a
timely basis are necessary to compete successfully in the apparel industry. The
Company believes that consumer acceptance depends on the image, design, quality
and price of its garments, and that its continuity will depend on its ability to
remain competitive in these areas. The failure to design garments that meet
with acceptance in the marketplace in the future could result in the material
deterioration of customer loyalty and the Company's image and could adversely
affect the Company's business.
EMPLOYEES
As of March 31, 1996, the Company employed 41 persons. None of the
Company's employees are represented by a labor union. The Company considers its
relations with employees to be satisfactory.
ENVIRONMENTAL REGULATION
The cost and effect of complying with environmental regulations are not
material due to the nature of the Company's business.
ITEM 2. PROPERTIES
Effective May 1, 1992, the Company's executive offices, merchandising,
production, shipping and warehousing facilities became located in a facility in
Los Angeles totaling approximately 75,000 square feet, occupied pursuant to a
lease expiring in May 1997. The Company also leases the following showrooms
pursuant to leases expiring as indicated: Los Angeles (August 1997) and New
York City showroom (June 2000). Management expects that in the normal course of
business, such leases will be renewed or replaced by other leases. The Company
believes its current facilities are generally in good operating condition and
are suitable and adequate for its foreseeable needs. The Company does not
believe the loss of any of these facilities would have a material adverse effect
on its operations as equivalent facilities are readily available.
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The Company also operates an Outlet Store located in Park City, Utah for the
sale of slow moving/off season merchandise.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any legal proceedings the outcome of which
could have a material effect on the company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter of fiscal year
1996 to a vote of security holders.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common stock is traded on the NASDAQ SmallCap Market under
the symbol YSCO. The following table sets forth the range of high and low sales
prices of the Common stock, as reported by NASDAQ for each quarterly period
during the past three fiscal years:
MARKET PRICES
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QUARTERS ENDING
March 31 Dec. 31 Sept. 30 June 30
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Fiscal 1996
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Low $ 1.06 $1.13 $2.50 $1.00
High 2.38 3.13 4.88 8.75
Fiscal 1995
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Low $ 3.25 $1.75 $1.37 $1.12
High 10.50 4.12 3.00 1.75
Fiscal 1994
-----------
Low $ 1.31 $1.75 $2.03 $2.00
High 2.38 2.50 3.00 2.88
</TABLE>
APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK SECURITIES
The Company had approximately 51 holders of record of Common stock as of
March 31, 1996.
DIVIDENDS
The Company has never paid cash dividends on its common equity. The
Company is not restricted from making any cash dividend payments under its
current credit agreement with its factor. However, the Company intends to
retain any earnings within the Company for the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company as of and for each of
the five years in the period ended March 31, 1996 are derived from the audited
Financial Statements of the Company and should
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be read in conjunction with such Financial Statements and related notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this report.
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(000's omitted)
Year ended March 31
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1996 1995 1994 1993 1992
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<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net Sales $ 7,551 $28,580 $27,883 $37,940 $35,110
Gross profit (1,519) 3,370 3,673 8,052 9,627
Income (loss) before
income taxes (7,835) (4,652) (2,784) (1,430) (1,043)
Net income (loss) (7,835) (4,652) (2,934) (998) (722)
Earnings (loss) per share (1.28) (1.22) (.77) (.26) (.19)
Dividends per share - - - - -
Weighted average number
of shares used in
computation (a) 6,144 3,821 3,821 3,821 3,821
BALANCE SHEET DATA
Inventory 1,398 2,158 3,213 3,243 2,985
Working capital (3,233) 866 5,250 8,171 9,374
Long-term liabilities - 657 171 214 -
Total assets 2,652 4,630 9,077 12,784 12,966
Total liabilities 4,892 3,095 2,805 3,578 2,762
Shareholders' equity (2,240) 1,535 6,272 9,206 10,204
</TABLE>
(a) Weighted average number of shares have been computed based on the number of
shares outstanding each period. The effect of options granted but not
exercised has not been included as the effect would have either been
immaterial or antidilutive.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of net sales represented by certain items in the Company's statements of
operations.
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Percentage of Net Sales
Year ended March 31,
--------------------------
1996 1995 1994
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Net sales 100.0 100.0 100.0
Cost of sales 120.0 88.2 86.8
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Gross profit (20.0) 11.8 13.2
Commission income .4 1.3 2.5
Royalty income - .2 .2
------ ----- -----
Gross operating income (19.6) 13.3 15.9
Selling, general and administrative
expenses 80.0 27.9 31.7
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Loss from operations (99.6) (14.6) (15.8)
Other income - insurance - .2 6.0
Other expense (4.1) (0.9) (0.2)
License reacquisition .- (1.0) -
------ ----- -----
Loss before income taxes (benefit) (103.7) (16.3) (10.0)
Income taxes (benefit) - - 0.5
------ ----- -----
Net loss (103.7)% (16.3)% (10.5)%
====== ===== =====
</TABLE>
FISCAL YEARS 1996, 1995 AND 1994
NET SALES decreased by $21,029,000 or 73.5% to $7,551,000 in fiscal 1996
due to a lack of acceptance of the Company's new marketing and design direction
after the Acquisition Transaction and the termination of the Company's prior
business practices.
In fiscal 1995, net sales increased by $697,000 or 2.5% to $28,580,000 due
to the addition of the GMSurf(TM) and Misfits(R) lines at the end of the fourth
quarter of that fiscal year.
GROSS PROFIT as a percentage of net sales decreased significantly to minus
20.0% in fiscal 1996 from 11.8% in fiscal 1995 due to a number of factors,
including decreased sales volume, significant price competition, increased
materials costs and markdown of inventory as a result of poor sales and an
excessive inventory level. Gross profit as a percentage of net sales decreased
to 11.8% in fiscal 1995 from 13.2% in fiscal 1994 due to higher levels of
markdowns and a reduction in prices negotiated by retailers in response to cost
conscious consumers.
COMMISSION INCOME decreased by $352,000 or 91.9% to $31,000 due to the
discontinuation of commission transactions. Commission income is generated from
shipments of goods manufactured in the
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Orient to domestic and overseas customers. In fiscal 1995, commission income
decreased $306,000 or 44.4% to $383,000 from $689,000 in fiscal 1994 due to a
general decline in sales.
The Company had no ROYALTY INCOME in fiscal 1996. Royalty income decreased
by $9,000 to $51,000 in fiscal 1995 from $60,000 in fiscal 1994 due to the
termination of licensee agreements in Canada and the United States.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") decreased to
$6,039,000 in fiscal 1996 from $7,972,000 in fiscal 1995, which represented
80.0% and 27.9% of net sales, respectively. (When commission and royalty income
is added to net sales, the percentage of SG&A is reduced to 79.6% and 27.5%,
respectively.)
The main factors reducing SG&A in fiscal 1996 were as follows:
1) Payroll and payroll tax decreased to $1,704,000 in fiscal 1996 from
$2,795,000 in fiscal 1995 due to a reduction in the number of
employees and levels of compensation paid to officers.
2) Sales commission and factor expense decreased to $202,000 in fiscal
1996 from $747,000 in fiscal 1995 due to the reduction in sales.
3) Advertising and travel expenses were reduced to $775,000 in fiscal
1995 from $1,064,000 in fiscal 1994 in order to conserve working
capital.
SG&A expenses decreased to $7,972,000 in fiscal 1995 from $8,816,000 is
fiscal 1994 primarily due to decreases in insurance, advertising, travel,
payroll, payroll tax and profit sharing expenses.
OTHER INCOME - INSURANCE - Subsequent to March 31, 1992, the Company
incurred the loss of substantially all of its finished goods inventory in
connection with civil disturbances in the City of Los Angeles. During the
fiscal year ended March 31, 1993 the Company recovered, from one insurance
company, the cost of the inventory lost and its normal gross profit which would
have been derived from the sales of those goods. During the fiscal year ended
March 31, 1994 the Company recovered $1,658,000, net of costs, from a second
insurance company for business interruption losses related to the civil
disturbance.
INTEREST INCOME decreased to $1,000 in fiscal 1996 from $3,000 in fiscal
1995. Interest income decreased to $3,000 in fiscal 1995 from $74,000 in fiscal
1994 due to a change in the Company's factoring agreement. (See CAPITAL
RESOURCES AND LIQUIDITY).
INTEREST EXPENSE increased to $284,000 in fiscal 1996 from $255,000 in
fiscal 1995 due to increased working capital requirements and borrowings from
the Company's Factor. Interest expense increased to $255,000 in fiscal 1995
from $128,000 in fiscal 1994 due to increased borrowings from the Company's
Factor.
INCOME TAXES in fiscal 1995 includes a valuation allowance of $6,377,000
which is equal to 100% of the net deferred tax asset. This valuation allowance
is considered appropriate since the Company cannot conclude that it is more
likely than not that the net deferred tax asset will be realized.
CAPITAL RESOURCES AND LIQUIDITY
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The Company had an agreement with a factor and through June 1994 with a
bank, whereby the factor purchased accounts receivable from the Company on a
non-recourse basis and remitted the funds on a maturity basis. The bank provided
the Company with an unsecured $3,000,000 facility for commercial letters of
credit and at March 31, 1994, the Company had $1,618,000 of letters of credit
outstanding. Under the facility agreement, the Company was prohibited from
declaring or paying any dividends on any class of its stock.
The Company entered into a new factoring agreement with Republic Factors
and a letter of credit facility with Republic National Bank of New York on May
15, 1995 (the financing bank) effective through March 1997. Both the old and new
agreements are non-recourse (i.e., the factor purchases the Company's accounts
receivable that it has preapproved, without recourse, except in cases where
there are merchandise disputes in the normal course of business).
Under the new factoring agreement, the Company sells substantially all of
its trade accounts receivable, without recourse, and may request advances, up to
80% on the net sales factored at any time before their maturity date. The factor
is responsible for the accounting and collection of all accounts receivable sold
to it by the Company and receives a commission of 0.6% of purchased net
receivables on a guaranteed minimum volume for the contract year of $30,000,000.
The commission rate will increase to 0.75% of total invoices factored and be
applied retroactively for the contract year if the guaranteed minimum volume is
not attained. As a result of not meeting its guaranteed minimum sales, the
Company has accrued for the commission rate increase in Fiscal 1996.
Under the letter of credit facility, the financing bank provides a credit
line for letters of credit, ledger debt and factor guaranties up to the 80%
advance rate provided under the factoring agreement. There were no letters of
credit outstanding as of March 31, 1996. Commitments outstanding under the
letter of credit facility as of March 31, 1995 amounted to $652,000.
The agreements are collateralized by accounts receivable and inventory
imported under letters of credit. The Company or the factor may terminate the
credit agreement on the anniversary date of the agreement with at least 60 days
prior written notice.
On June 17, 1995, Georges Marciano agreed to provide $3,300,000 in
additional capital to the Company in exchange for 2,640,000 shares of common
stock and to convert additional shares of common stock at $1.25 per share in
exchange of approximately $700,000 owed by the Company to Mr. Marciano and his
affiliates for advances and expenses incurred by them on the Company's behalf.
Without the infusion of these funds and due to continuing losses, the Company
would have completely depleted its working capital by June of 1995.
On June 4, 1996, as part of the Sale Transaction, Mr. Marciano, through
an affiliated company, agreed to advance to the Company $3,100,000 to pay off
liabilities associated with three $1,000,000 letters of credit issued on behalf
of the Company in favor of Republic Factors and to purchase certain assets
approximating $1,463,000 in value. Mr. Marciano also agreed to cancel debts owed
to him and his affiliates by the Company totaling $2,767,000 in exchange for a
payment of $250,000 on June 4, 1996 and a note payable of $250,000 due on
January 31, 1997.
As of March 31, 1996, the Company had net working capital deficit of
$3,233,000, as compared to a surplus of $866,000 as of March 31, 1995. The
Company's current ratio as of March 31, 1996 was (0.3), as compared to 1.4 as of
March 31, 1995. The decreases in working capital and current ratio are primarily
due to continued operating losses. The factoring position had a net overadvance
of $3,232,000 as compared
13
<PAGE>
to $678,000 in available funds as of March 31, 1995. This change is due to
increased working capital requirments.
Inventories at March 31, 1996 were $1,398,000 as compared to $2,158,000 at
March 31, 1995, a decrease of $760,000. The decrease was due to a reduction of
inventories to levels consistent with reduced order backlog and the markdown of
slow-moving and obsolete merchandise.
The Company has funded its activities principally from advances and letters
of credit provided by its principal shareholder.
In June 1996, the Company entered into an agreement with Imperial Bank
which provides the Company with a $1,200,000 credit facility secured by a letter
of credit provided by an unaffiliated third party.
The Company believes that the credit lines under current lending
agreements and other financial sources available to it will provide sufficient
resources to finance the Company's currently anticipated working capital needs
and capital expenditures through the end of summer of 1996. Continued financial
difficulties encountered by the Company would require additional borrowings and
infusions of capital to avoid a negative impact on the Company's continued
future operations after that time period.
The Company has continued to cut its payroll and reduce its operating
costs. Notwithstanding the foregoing measures, the Company anticipates that it
will not be profitable for the fiscal year ending March 31, 1997 and absent
additional capital or additional third party credit, the Company will exhaust
its available capital by October 1996.
14
<PAGE>
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
15
<PAGE>
REPORT OF CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------
Board of Directors
Yes Clothing Co.
We have audited the accompanying balance sheet of Yes Clothing Co. as of March
31, 1996 and 1995 and the related statements of operations, changes in
shareholders' equity and cash flows for the years then ended. We have also
audited the financial statement schedule for the year ended March 31, 1996,
listed under item 14. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Yes Clothing Co. as of March
31, 1996 and 1995, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.
In our opinion, the schedule for the year ended March 31, 1996 and 1995 presents
fairly, in all material respects, the information set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred operating losses, has a deficit
of working capital and tangible net worth, and other adverse financial
indicators. These conditions raise substantial doubt about its ability to
continue as a going concern. Management's plans regarding those matters also
are described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
MOSS ADAMS LLP
Los Angeles, California
May 30, 1996 (except for Note 10,
as to which the date is June 4, 1996)
1
<PAGE>
REPORT OF CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------
Board of Directors
Yes Clothing Co.
We have audited the balance sheet of Yes Clothing Co., as of March 31,
1994, and the accompanying related statement of operations, changes in
shareholders' equity and cash flows for year then ended. We have also audited
the financial statement schedules listed under Item 14. These financial
statements and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Yes Clothing Co., as of
March 31, 1994 and the results of its operations and its cash flows for year
then ended, in conformity with generally accepted accounting principles.
Also, in our opinion, the schedules for the year ended March 31, 1994
present fairly, in all material respects, the information set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in the "Financial
Condition" section of Note 1 to the financial statements, the Company has
incurred operating losses, has a deficit of working capital and tangible net
worth, and other adverse financial indicators. These conditions raise
substantial doubt about its ability to continue as a going concern. Management's
plans regarding those matters also are discussed in the "Financial Condition"
section of Note 1. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/s/ BDO Seidman, LLP
BDO SEIDMAN, LLP
Los Angeles, California
May 27, 1994 (except for the
"Financial Condition" section
of Note 1 which is as of
July 12, 1996)
<PAGE>
YES CLOTHING CO.
BALANCE SHEET
MARCH 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
CURRENT ASSETS
Cash $ 103,000 $ 232,000
Due from factor - 678,000
Accounts receivable 1,000 209,000
Other receivables 2,000 152,000
Inventories 1,398,000 2,158,000
Prepaid expenses 94,000 83,000
------------ -----------
Total current assets 1,598,000 3,512,000
PROPERTY AND EQUIPMENT, at cost, net of
accumulated depreciation and amortization 978,000 1,034,000
OTHER ASSETS 76,000 84,000
------------ -----------
TOTAL ASSETS $ 2,652,000 $ 4,630,000
============ ===========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES
Due to factor $ 3,232,000 $ -
Accounts payable 881,000 2,145,000
Accrued expenses 292,000 243,000
Contracts payable 57,000 50,000
Due to related party 369,000 -
------------ -----------
Total current liabilities 4,831,000 2,438,000
CONTRACTS PAYABLE, net of current portion 61,000 119,000
DUE TO RELATED PARTY - 538,000
COMMITMENTS
SHAREHOLDERS' (DEFICIT) EQUITY
Preferred stock, no par; 2,000,000 shares authorized;
no shares issued - -
Common stock, no par; 20,000,000 shares authorized;
7,036,000 and 3,821,000 shares issued and
outstanding 8,573,000 4,513,000
Accumulated deficit (10,813,000) (2,978,000)
------------ -----------
TOTAL SHAREHOLDERS' (DEFICIT) EQUITY (2,240,000) 1,535,000
------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,652,000 $ 4,630,000
============ ===========
</TABLE>
The accompanying notes are an
integral part of these financial statements
2
<PAGE>
YES CLOTHING CO.
STATEMENT OF OPERATIONS
YEARS ENDED MARCH 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES $ 7,551,000 $28,580,000 $27,883,000
COST OF SALES 9,070,000 25,210,000 24,210,000
----------- ----------- -----------
Gross profit (loss) (1,519,000) 3,370,000 3,673,000
COMMISSION INCOME 31,000 383,000 689,000
ROYALTY INCOME - 51,000 60,000
----------- ----------- -----------
Operating income (loss) (1,488,000) 3,804,000 4,422,000
----------- ----------- -----------
OPERATING EXPENSES
Selling 1,894,000 3,345,000 3,783,000
General and administrative 4,145,000 4,627,000 5,033,000
----------- ----------- -----------
6,039,000 7,972,000 8,816,000
----------- ----------- -----------
Loss from operations (7,527,000) (4,168,000) (4,394,000)
OTHER INCOME (EXPENSE)
Insurance income, net - 63,000 1,658,000
Interest expense (284,000) (255,000) (128,000)
Interest income 1,000 3,000 74,000
License acquisition - (295,000) -
Other (25,000) - 6,000
----------- ----------- -----------
(308,000) (484,000) 1,610,000
----------- ----------- -----------
LOSS BEFORE INCOME
TAXES (7,835,000) (4,652,000) (2,784,000)
INCOME TAX PROVISION - - 150,000
----------- ----------- -----------
NET LOSS $(7,835,000) $(4,652,000) $(2,934,000)
----------- ----------- -----------
LOSS PER SHARE (1.28) $(1.22) $(.77)
----------- ----------- -----------
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 6,144,000 3,821,000 3,821,000
----------- ----------- -----------
</TABLE>
The accompanying notes are an
integral part of these financial statements
3
<PAGE>
YES CLOTHING CO.
STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------
RETAINED
SHARES AMOUNT EARNINGS (DEFICIT) TOTAL
--------- ---------- ------------------ -----------
<S> <C> <C> <C> <C>
BALANCE, March 31, 1993 3,821,000 $4,598,000 $ 4,608,000 $ 9,206,000
Net loss - - (2,934,000) (2,934,000)
--------- ---------- ------------ -----------
BALANCE, March 31, 1994 3,821,000 4,598,000 1,674,000 6,272,000
Repurchase of stock options - (330,000) - (330,000)
Capital contribution - 245,000 - 245,000
Net loss - - (4,652,000) (4,652,000)
--------- ---------- ------------ -----------
BALANCE, March 31, 1995 3,821,000 4,513,000 (2,978,000) 1,535,000
Exercise of stock options 30,000 80,000 - 80,000
Capital contribution 3,185,000 3,980,000 - 3,980,000
Net loss - - (7,835,000) (7,835,000)
--------- ---------- ------------ -----------
BALANCE, March 31, 1996 7,036,000 $8,573,000 $(10,813,000) $(2,240,000)
========= ========== ============ ===========
</TABLE>
The accompanying notes are an
integral part of these financial statements
4
<PAGE>
YES CLOTHING CO.
STATEMENT OF CASH FLOWS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss $(7,835,000) $(4,652,000) $(2,934,000)
Reconciliation of net loss to
net cash flows from
operating activities
Depreciation and amortization 504,000 341,000 298,000
Increase (decrease) in credits due customers
and allowance for doubtful accounts (258,000) 364,000 (23,000)
Increase (decrease) in cash due to changes
in assets and liabilities
Due from factor 3,748,000 (887,000) 2,117,000
Accounts receivable 339,000 77,000 904,000
Other receivables 147,000 413,000 378,000
Inventories 761,000 1,055,000 30,000
Prepaid expenses (11,000) 23,000 (45,000)
Deferred income taxes - - 378,000
Other assets 1,000 10,000 (1,000)
Accounts payable (1,264,000) (161,000) (612,000)
Accrued expenses 49,000 (41,000) (128,000)
----------- ----------- -----------
Net cash (used) provided by
operating activities (3,819,000) (3,458,000) 362,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (441,000) (276,000) (241,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on contracts payable (52,000) (47,000) (33,000)
Advances from factor, net 291,000 3,116,000 -
Contribution of capital 3,980,000 245,000 -
Borrowing (repayment) from/to related party (168,000) 538,000 -
Exercise (repurchase) of stock options 80,000 (330,000) -
----------- ----------- -----------
Net cash provided (used) by
financing activities 4,131,000 3,522,000 (33,000)
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH (129,000) (212,000) 88,000
CASH BALANCE
Beginning of year 232,000 444,000 356,000
----------- ----------- -----------
End of year $ 103,000 $ 232,000 $ 444,000
----------- ----------- -----------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for
Interest $ 284,000 $ 255,000 $ 128,000
----------- ----------- -----------
Income taxes - - 182,000
----------- ----------- -----------
</TABLE>
The accompanying notes are an
integral part of these financial statements
5
<PAGE>
YES CLOTHING CO.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995
NOTE 1 - ORGANIZATION AND FINANCIAL CONDITION
ORGANIZATION - Yes Clothing Co.(R) (the "Company") was incorporated on July
1, 1982, in the State of California. The Company designs, manufactures and
markets a diversified line of apparel primarily for women and young men. The
Company sells its garments throughout the United States and Canada to retail
department stores, specialty chains and specialty stores.
The Company also arranged for the manufacture, in the Orient, of certain of
its styles, which are shipped directly from the manufacturer to customers in the
United States, Europe and Japan. In connection there within, the Company
received a percentage of the sales price charged by the manufacturer and
recognized this amount as commission income in the accompanying statement of
operations. Subsequent to the acquisition transaction as described below, the
Company discontinued these commission transactions.
In January 1995, control of the Company changed when its two principal
shareholders sold all of their shares, amounting to approximately 80% of the
Company's outstanding stock, to affiliates of an individual. This transaction
is herein referred to as the "Acquisition Transaction" and the collective new
majority interest as the "Principal Shareholder". The principal shareholder
currently holds approximately 88% of the Company's outstanding stock.
FINANCIAL CONDITION - The accompanying financial statements have been
prepared in conformity with generally accepted accounting principles, which
contemplates continuation of the Company as a going concern. The Company
sustained a substantial loss for the year ended March 31, 1996 and has
experienced operating and net losses each year since 1992. The operating
results for the three months ended June 30, 1996 are anticipated to reflect
continued net losses. At this time, the Company is not able to sustain
operations without an infusion of capital.
As described in Note 10, effective June 4, 1996, the Company's principal
shareholder sold approximately 50% of the Company's outstanding shares to an
individual who has assumed the position of Chairman and Chief Executive Officer
of the Company. This transaction infused substantial capital in the Company,
significantly improving its financial condition. Under new management, the
Company has the following plans to return to profitability and continue as a
going concern:
* Increase sales by reintroducing the "YES" label as a mass market line of
apparel and by licensing branded lines of apparel.
* Increase gross margin through the use of controls on manufacturing costs
and design and production overhead.
* Assemble an experienced team of apparel professionals with strengths in
management, sales and marketing.
* Actively seek additional equity funding.
6
<PAGE>
YES CLOTHING CO.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES - Inventories are stated at the lower of cost (first-in, first-
out basis) or market.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization of property
and equipment are provided principally by the straight-line method over the
following estimated useful lives:
Furniture and fixtures 5 years
Machinery and equipment 10 years
Leasehold improvements Life of lease
The Financial Accounting Standards Board has recently issued Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets." This standard will become effective for the
year ending March 31, 1997, although earlier application is permitted. The
Company has determined that it will implement the new standard in 1997. Long-
lived assets such as plant and equipment are recorded at cost, and the cost is
reduced over time by depreciation and amortization. SFAS 121 will require that
long-lived assets be periodically evaluated and a loss recognized should the
carrying amount of the asset be considered unrecoverable. The Company has not
determined the impact, if any, that adoption of the new standard will have on
the financial condition and results of operations. However, management believes
the effect of the new accounting standard will not be significant.
INCOME TAXES - Income taxes are accounted for using an asset and liability
approach. Deferred income taxes are provided for temporary differences between
the financial reporting basis and the tax basis of the Company's assets and
liabilities. Income taxes are further explained in Note 9.
LOSS PER SHARE - Loss per share is based on the weighted average number of
shares of common stock outstanding during each period. Stock options have not
been considered in the loss per share calculations since the effect would be
antidilutive.
STATEMENT OF CASH FLOWS - For purposes of cash flows, the Company considers
all highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents.
FINANCIAL INSTRUMENTS AND RISK CONCENTRATION - Financial instruments which
potentially subject the Company to concentrations of credit risk consist of
accounts receivable. Concentrations of credit risk with respect to receivables
are limited due to the use of a factor.
Statement of Financial Accounting Standard No. 107, "Disclosures About Fair
Value of Financial Instruments" (SFAS 107), became effective in the Company's
year ended March 31, 1996. SFAS 107 requires the disclosure of the fair market
value of financial instruments for which it is practicable to estimate fair
value. Financial instruments include cash, receivables and debt instruments.
The Company considers the carrying amounts in the financial statements to
approximate fair value for these financial instruments and their expected
realization.
8
<PAGE>
YES CLOTHING CO.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
USE OF ESTIMATES - The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
STOCK-BASED COMPENSATION - The Financial Accounting Standards Board has
recently issued Statement of Financial Accounting Standards No. 123 (SFAS 123),
Accounting for Stock-Based Compensation. This standard will become effective
for the year ending March 31, 1997, although earlier application is permitted.
The Company has determined that it will implement the new standard in 1997.
Under SFAS 123, a fair value method is used to determine compensation cost for
stock options or similar equity instruments. Compensation is measured at the
grant date and is recognized over the service or vesting period. Under the
current accounting standard, compensation cost is the excess, if any, of the
quoted market price of the stock at a measurement date over the amount that must
be paid to acquire the stock.
The new standard would allow the Company to continue to account for stock-
based compensation under the current standard, with disclosure of the effects of
the new standard, or adopt a fair value based method of accounting. The Company
has not yet decided which method will be utilized, nor has it determined the
impact, if any, that adoption of the new standard will have on the financial
condition and results of operations. However, management believes the effect of
the new accounting standard will not be significant.
NOTE 3 - TRANSACTIONS WITH FACTOR AND BANK BORROWING
The Company has an agreement with a factor and a letter of credit facility
with a related financing bank through March 1997. Under the factoring
agreement, the Company sells substantially all of its trade accounts receivable,
without recourse, and may request advances, up to 80%, on the net sales factored
at any time before their maturity date. Under the letter of credit facility,
the financing bank provides a credit line for letters of credit, ledger debt and
factor guarantees up to the 80% advance rate provided under the factoring
agreement with an additional over advance facility of $1,050,000.
The factor charges a commission on the net sales factored and interest on
advances at prime plus a negotiated rate. The agreements are collateralized by
accounts receivable and inventory imported under letters of credit.
9
<PAGE>
YES CLOTHING CO.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995
NOTE 3 - TRANSACTIONS WITH FACTOR AND BANK BORROWING (Continued)
There were no outstanding open letters of credit at March 31, 1996.
Included in accounts payable at March 31, 1996 is $39,000 due to the factor for
piece goods purchases.
Due to/from factor consists of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Unmatured receivables
Without recourse $ 561,000 $ 4,297,000
With recourse 99,000 111,000
----------- -----------
660,000 4,408,000
Advances (3,406,000) (3,115,000)
Open credits (486,000) (615,000)
----------- -----------
$(3,232,000) $ 678,000
=========== ===========
</TABLE>
In conjunction with the transaction described in Note 10, subsequent to
March 31, 1996, advances from the factor were repaid.
During fiscal 1996, the maximum amount of advances outstanding was
approximately $3,571,000. The average advances based upon month-end balances was
approximately $2,579,000. The average cost of borrowing, which includes
factoring commission and interest, was approximately 10.9% during 1996.
NOTE 4 - INVENTORIES
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Raw materials $ 401,000 $ 560,000
Work-in-progress 82,000 339,000
Finished goods 915,000 1,259,000
---------- ----------
$1,398,000 $2,158,000
========== ==========
</TABLE>
NOTE 5 - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Furniture and fixtures $ 427,000 $ 203,000
Machinery and equipment 1,400,000 1,311,000
Leasehold improvements 950,000 822,000
---------- ----------
2,777,000 2,336,000
Less accumulated depreciation and amortization 1,799,000 1,302,000
---------- ----------
$ 978,000 $1,034,000
========== ==========
</TABLE>
10
<PAGE>
In conjunction with the transaction described in Note 10, property and
equipment with an aggregate net book value of $260,000 was sold after March 31,
1996.
11
<PAGE>
YES CLOTHING CO.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995
NOTE 6 - CONTRACTS PAYABLE
The Company leases equipment under capital leases which expire on various
dates through March 1998. The remaining obligations under these capital leases
for future years ended March 31 are as follows:
<TABLE>
<S> <C>
1997 $ 68,000
1998 69,000
--------
137,000
Amount representing interest (19,000)
--------
Present value of minimum lease payments 118,000
Less current portion 57,000
--------
Long-term portion $ 61,000
========
</TABLE>
Equipment under capital leases and related accumulated depreciation as of
March 31, 1996 amounts to $248,000 and $138,000, respectively.
NOTE 7 - DUE TO RELATED PARTY
A $369,000 unsecured note payable to the principal shareholder bears
interest at the lessor of 8% or the prime rate of interest less 1%. This note
was terminated in connection with the transaction described in Note 10.
NOTE 8 - COMMITMENTS
The Company leases its office, warehouse, retail store and showrooms under
various operating leases expiring through August 1999. Minimum payments under
non-cancelable operating leases for future years ending March 31 are as follows:
<TABLE>
<S> <C>
1997 $563,000
1998 208,000
1999 142,000
2000 28,000
--------
$941,000
========
</TABLE>
12
<PAGE>
Rent expense for the years ended March 31, 1996, 1995 and 1994, was
approximately $656,000 (net of $96,000 sublease income), $609,000 and $593,000,
respectively.
13
<PAGE>
YES CLOTHING CO.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995
NOTE 9 - INCOME TAXES
Income taxes are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- ---------
<S> <C> <C> <C>
Currently payable
Federal $ - $ - $(211,000)
State - - 4,000
-------- -------- ---------
- - $(207,000)
-------- -------- ---------
Deferred
Federal - - 357,000
-------- -------- ---------
$ - $ - $ 150,000
======== ======== =========
</TABLE>
The primary difference between the income tax benefit or expense computed
at the U.S. statutory corporate income tax rate and the effective income tax
rate is due to the limitations on the utilization of net operating losses and
the valuation allowance established due to the uncertainty of realization of a
future tax benefit.
Deferred income taxes arise from temporary differences between financial
and tax reporting. The effects of these differences on income taxes are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Tax effect of net operating losses $(3,366,000) $(1,857,000) $ (867,000)
Inventory basis (29,000) 32,000 16,000
16,000 Valuation and other reserves 104,000 (146,000) (61,000)
Other, net 23,000 (14,000) 145,000
Valuation allowance 3,268,000 1,985,000 1,124,000
----------- ---------- ----------
Provision for deferred income taxes $ - $ - $ 357,000
=========== ========== ==========
</TABLE>
14
<PAGE>
YES CLOTHING CO.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995
NOTE 9 - INCOME TAXES (Continued)
At March 31, 1996 and 1995, deferred tax assets and liabilities are
comprised of the following elements:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Gross deferred assets
Reserve for chargebacks $ 194,000 $ 246,000
Provision for doubtful accounts 35,000 87,000
Inventory basis 94,000 65,000
Accrued expenses 12,000 50,000
Tax effect of net operating losses 6,090,000 2,724,000
----------- -----------
Gross deferred asset 6,425,000 3,172,000
----------- -----------
Deferred liability
Accumulated depreciation (48,000) (63,000)
----------- -----------
Net deferred asset before valuation
allowance 6,377,000 3,109,000
Valuation allowance (6,377,000) (3,109,000)
----------- -----------
$ - $ -
=========== ===========
</TABLE>
The Federal and State net operating loss carryforwards of approximately
$15,035,000 and $16,304,000, respectively, expire from the years 2007 through
2011. Because ownership of the Company changed control during 1996, a portion
of the net operating loss carryforwards will be limited. Approximately
$5,896,000 and $7,630,000 of Federal and State net operating losses,
respectively, are subject to a maximum annual utilization totaling approximately
$522,000.
15
<PAGE>
YES CLOTHING CO.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995
NOTE 10 - SHAREHOLDERS' EQUITY
STOCK OPTION PLAN - The Company has a stock option plan (the "Plan") for
key employees, directors, officers and consultants of the Company. The plan
provides for the issuance of up to 400,000 shares of common stock.
Outstanding options are exercisable for a period of up to ten years and one week
from the date of grant. Activity under this plan for 1994 through 1996 is as
follows:
<TABLE>
<CAPTION>
Number of Exercise
Shares Price
---------- -----------------
<S> <C> <C> <C>
Outstanding, March 31, 1993 350,000 $2.00 - $8.75
Granted 20,000 1.88 - 2.00
-------- -----------------
Outstanding, March 31, 1994 370,000 1.88 - 8.75
Granted 15,000 6.00
Repurchased and canceled (260,000) 2.00 - 8.75
-------- -----------------
Outstanding, March 31, 1995 125,000 1.88 - 6.00
Granted 80,000 2.13 - 3.38
Exercised (30,000) 1.88 - 3.00
Repurchased and canceled (145,000) 2.13 - 6.00
-------- -----------------
Outstanding, March 31, 1996 30,000 $2.13 - $3.38
======== =================
</TABLE>
REPURCHASE OF STOCK OPTIONS - In conjunction with the change of principal
ownership in February 1995, the Company repurchased various stock options for a
total of $330,000. Funds for this transaction were provided by the principal
shareholder (Note 7).
REPURCHASE OF LICENSE AGREEMENTS - In connection with the change in
principal ownership in 1995, the Company reacquired certain licenses for a total
of $295,000. This amount is reflected as an "other expense" in the statement of
operations.
SIGNIFICANT CAPITAL TRANSACTION - Effective June 4, 1996, the Company's
principal shareholder sold approximately 50% of the Company's outstanding shares
in a private transaction. Concurrent with this transaction, a Company
affiliated through substantially common ownership advanced $3,100,000 to the
Company. In addition, the affiliate purchased from the Company certain
inventory and equipment for $1,463,000 at a gain of $471,000. The Company used
the funds to repay factor advances and related party debt.
The affiliate which advanced the funds has agreed to forgive payment on all
but $500,000 (including $369,000 which was owed as of March 31, 1996), which
shall be repaid in two installments of $250,000 each by January 31, 1997. The
balance of the advances of approximately $1,977,000 will be considered a
contribution of capital.,
16
<PAGE>
YES CLOTHING CO.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995
NOTE 10 - SHAREHOLDERS' EQUITY (Continued)
The selling shareholder returned to the Company for cancellation options to
purchase 2,000,000 shares of common stock and warrants to purchase 2,000,000
shares of common stock of the Company. In addition, the Company surrendered its
right and licenses to use certain trademarks and names associated with the
selling shareholder and the affiliated Company.
The following condensed proforma balance sheet presents the financial
condition of the Company as of March 31, 1996, giving effect to these
transactions as they occurred on or before March 31, 1996.
<TABLE>
<CAPTION>
Historical Basis Proforma Effects Proforma Basis
---------------- ---------------- --------------
<S> <C> <C> <C>
Current Assets
Inventories $1,398,000 $ (732,000) $ 666,000
Other 200,000 - 200,000
---------- ---------- ----------
1,598,000 (732,000) 866,000
Property and Equipment 978,000 (260,000) 718,000
Other Assets 76,000 - 76,000
---------- ---------- ----------
$2,652,000 $ (992,000) $1,660,000
========== ========== ==========
Current Liabilities
Due to factor $3,232,000 $(3,100,000) $ 132,000
Due to related party 369,000 131,000 500,000
Other 1,230,000 - 1,230,000
---------- ----------- ----------
4,831,000 (2,969,000) 1,862,000
Contracts Payable 61,000 - 61,000
Shareholders' Equity (Deficit) (2,240,000) 1,977,000 (263,000)
---------- ----------- ----------
$2,652,000 $ (992,000) $1,660,000
========== =========== ==========
</TABLE>
17
<PAGE>
YES CLOTHING CO.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995
NOTE 11 - INSURANCE RECOVERIES
Subsequent to March 31, 1992, the Company incurred the loss of
substantially all of its finished goods inventory in connection with civil
disturbances in the City of Los Angeles. During the fiscal year ended March 31,
1993 the Company recovered from one insurance company, the cost of the inventory
lost and its normal gross profit which would have been derived from the sale of
those goods. For the years ended March 31, 1995 and 1994, the Company recovered
a net $63,000 AND $1,658,000, respectively, from a second insurance company for
business interruptions losses related to the civil disturbances.
NOTE 12 - OTHER RELATED PARTY TRANSACTIONS
A law firm in which one member of the Board of Directors is a partner, was
paid $93,000 and $62,000 for legal services for the years ended March 31, 1995
and 1994, respectively. This Board member resigned effective May 16, 1995.
One former member of the Board of Directors served as a consultant to the
Company and was paid $111,000 for consulting services for the year ended March
31, 1994, $100,000 for which was special bonus in connection with the settlement
of the Company's business interruption claim (Note 11), and $6,000 annually for
the year ended March 31, 1995. Another former member of the Board of Directors
served as a consultant to the Company and was paid $4,000 for consulting
services for the year ended March 31, 1994.
18
<PAGE>
YES CLOTHING CO.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- - ------------------------ ---------- ---------- ------------ ----------
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND ADDITIONS END OF
DESCRIPTION OF PERIOD EXPENSES (DEDUCTIONS) PERIOD
- - ------------------------ ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
YEAR ENDED MARCH 31, 1996:
Allowance for doubtful accounts
on nonfactored accounts receivable $216,000 $ (90,000) $ (39,000)(a) $ 87,000
-------- --------- --------- --------
Reserve for estimated returns,
allowances and discounts on
factored accounts $615,000 $(129,000) $ - $486,000
-------- --------- --------- --------
YEAR ENDED MARCH 31, 1995:
Allowance for doubtful accounts
on nonfactored accounts receivable $221,000 $ 158,000 $(163,000)(a) $216,000
-------- --------- --------- --------
Reserve for estimated returns,
allowances and discounts on
factored accounts $247,000 $ 368,000 $ - $615,000
-------- --------- --------- --------
YEAR ENDED MARCH 31, 1994:
Allowance for doubtful accounts
on nonfactored accounts receivable $225,000 $ (23,000) $ 19,000(a) $221,000
-------- --------- --------- --------
Reserve for estimated returns,
allowances and discounts on
factored accounts $395,000 $ - $(148,000)(b) $247,000
-------- --------- --------- --------
</TABLE>
(a) Represents net write-offs of uncollectible accounts against the
allowance.
(b) Represents write-offs of uncollectible accounts against the reserve.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item is hereby incorporated by reference to
the Company's proxy statement to be filed pursuant to Regulation 14A which
involves the election of Directors.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is hereby incorporated by reference to
the Company's proxy statement to be filed pursuant to Regulation 14A which
involves the election of Directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is hereby incorporated by reference to
the Company's proxy statement to be filed pursuant to Regulation 14A which
involves the election of Directors.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is hereby incorporated by reference to
the Company's proxy statement to be filed pursuant to Regulation 14A which
involves the election of Directors.
16
<PAGE>
PART IV
ITEM 14. EXHIBIT, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS AND SCHEDULES
The following financial statements of Yes Clothing Co.(R) are included in
Item 8:
Balance sheet
Statement of operations
Statement of changes in shareholders' equity
Statement of cash flows
Notes to financial statements
Financial Statement Schedule:
II - Valuation and qualifying accounts
EXHIBITS
See index to exhibits.
REPORTS ON FORM 8-K
The Company filed a report on Form 8K on June 18, 1996 with respect to the June
4, 1996 transaction between Marciano, the Company and Anthome.
17
<PAGE>
REPORT OF MANAGEMENT
The accompanying financial statements have been prepared by management in
conformity with generally accepted accounting principles, and necessarily
include some amounts that are based on management's best estimates and
judgments.
Yes Clothing Co.(R) maintains a system of internal accounting controls
designed to provide management with reasonable assurance that assets are
safeguarded against loss from unauthorized use or disposition, and that
transactions are executed in accordance with management's authorization and
recorded properly. The concept of reasonable assurance is based on the
recognition that the cost of a system of internal control should not exceed the
benefits derived and that the evaluation of those factors requires estimates and
judgments by management. Further, because of inherent limitations in any system
of internal accounting control, errors or irregularities may occur and not be
detected. Nevertheless, management believes that a high level of internal
control is maintained by Yes Clothing Co. through the selection and training of
qualified personnel, and the establishment and communication of accounting and
business policies.
The Audit Committee of the Board of Directors, composed solely of outside
directors, meets periodically with management and with Yes Clothing Co.(R)'s
independent auditors to review matters relating to the quality of financial
reporting and internal accounting control, and the nature, extent and results of
their audits. Yes Clothing Co.'s independent auditors have free access to the
Audit Committee.
Guy Anthome Guy Anthome Jeffrey Busse
Chairman, President Chief Financial
Chief Executive Officer
Officer
SIGNATURES
Pursuant to the requirements of Section 13 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.
YES Clothing Co.
By: /s/ GUY ANTHOME
-------------------------
Chairman of the Board and
Chief Executive Officer
July 12, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Guy Anthome Chairman of the Board
- - --------------------------- Chief Executive Officer July 12, 1996
Guy Anthome and Director
Principal Executive Officer
18
<PAGE>
/s/ Guy Anthome
- - --------------------------- President
Guy Anthome and Director July 12, 1996
/s/ Jeffrey P. Busse
- - --------------------------- Chief Financial Officer
Jeffrey P. Busse and Director July 12, 1996
Principal Financial and
Accounting Officer
/s/ Irving B. Kroll
- - --------------------------- Director July 12, 1996
Irving B. Kroll
/s/ Maurice Schoenholz
- - --------------------------- Director July 12, 1996
Maurice Schoenholz
19
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
PAGE
SEQUENTIALLY
ITEM NO. DESCRIPTION NUMBERED
- - -------- ----------- --------
<S> <C>
3.1 Restated Articles of Incorporation of the Company. /(1)/
3.2 Restated Bylaws of the Company./(1)/
4.1 Specimen Common Stock Certificate./(1)/
10.1 1989 Stock Option Plan with forms of stock option agreements thereunder./(1)/*
10.2 Profit Sharing Plan dated March 22, 1995.*/(5)/
10.3 Consultant Agreement dated as of April 21, 1989 between the Company and
Alexander Menke./(1)/*
10.4 Employment Agreement dated as of November 1, 1990 between the Company and
Daniel V. Goodstein./(2)/*
10.5 Form of Indemnification Agreement entered into with the Company's Directors
and Executive Officers./(1)/
10.6 Sublease dated May 3, 1989 between the Company and D.G.P. Limited Partnership./(1)/
10.7 Lease dated August 15, 1991 between the Company and California Mart./(4)/
10.8 Lease dated February 14, 1992 between the Company and Jody Apparel, Inc./(3)/
10.9 Lease dated November 4, 1992 between the Company and California Mart./(4)/
10.10 Lease dated May 10, 1993 between the Company and 1466 Broadway Associates./(4)/
10.11 Lease dated September 17, 1990 between the Company and Gettinger Associates, as
renewed pursuant to a letter dated September 22, 1993 from Gettinger
Associates to the Company./(5)/
10.12 Contract for the purchase of assets, including the Sedan trademark, between the
Company and Camden Place, Ltd. dated March 9, 1992./(4)/
10.13 Factoring Agreement dated May 15, 1994 between the Company and Republic
Factors Corp., and related agreements./(5)/
10.14 Form of Continuing Indemnity and Security Agreement between the Company
and Republic Bank California N.A., and related agreements./(5)/
10.15 Promissory Note dated March 9, 1995 between the Company and Georges Marciano/(6)/
10.16 Lease Assignment and First Amendment to lease between the Company and
R.R. Park City, Inc./ (6)/
10.17 Lease dated April 3, 1995 between the Company and 1466 Broadway Associates/(6)/
10.18 License Agreement dated as of April 1, 1995 between the Company and Marble
Sportswear, Inc./ (6)/
10.19 Amendment to Factoring Agreement dated March 2, 1995 between the Company
and Republic Factors Corp./ (6)/
10.20 Retainer Agreement dated June 17, 1995 between the Company and Houlihan
Lokey Howard and Zukin/(6)/
10.21 Indemnification Agreement dated May 3, 1995 between the Company and Georges Marciano/(6)/.
10.22 Indemnification Agreement dated May 3, 1995 between the Company and Irving B. Kroll/(6)/
10.23 Indemnification Agreement dated May 3, 1995 between the Company and Maurice Schoenholz/(6)/
10.24 Indemnification Agreement dated May 18, 1995 between the Company and Guy Anthome/(6)/.
10.25 Indemnification Agreement dated May 18, 1995 between the Company and Jeffrey P. Busse/(6)/
10.26 Employment Agreement dated as of June 17, 1995 between the Company and Georges
Marciano.*/(6)/
10.27 Stock Option Agreement dated June 17, 1995 between the Company and Georges Marciano.*/ (6)/
10.28 Warrant Agreement dated June 17, 1995 between the Company and Georges Marciano(R)/(6)/.
10.29 Three Party Agreement between the Company, Republic Factors Corp. and Georges
Marciano dated June 12, 1995/(6)/.
10.30 Three Party Agreement between the Company, Republic Factors Corp. and Georges
Marciano dated June 21, 1995/(6)/.
</TABLE>
20
<PAGE>
<TABLE>
<S> <C>
10.31 Agreement among Marciano, the Company and Anthome dated June 4, 1996
incorporated by reference to Exhibit A on Form 13-d filed with
the Securities and Exchange Commission on June 6, 1996.
10.32 Body Glove license agreement between Dive N' Surf, Inc. (dba Body
Glove) and the Company dated June 25, 1996.
27 Financial Data Schedule.
99.1 Valuation and Fairness Opinion of Houlihan Lokey Howard and Zukin
dated July 10, 1995/(6)/.
</TABLE>
_______________________
* Management contract or executive compensation plan or arrangement.
(1) Filed as an exhibit to the annual Report on Form 10-K for the fiscal year
ended March 31, 1990, and incorporated herein by this reference.
(2) Filed as an exhibit to the annual Report on Form 10-K for the fiscal year
ended March 31, 1991 and incorporated herein by this reference.
(3) Filed as an exhibit to the Annual Report on Form 10-K for the fiscal year
ended March 31, 1992, and incorporated herein by this reference.
(4) Filed as an exhibit to the Annual Report on Form 10-K for the fiscal year
ended March 31, 1993 and incorporated herein by this reference.
(5) Filed as an exhibit to the Annual Report on Form 10-K for the fiscal year
ended March 31, 1994.
(6) Filed as an exhibit to the Annual Report on Form 10-K for the fiscal year
ended March 31, 1995.
21
<PAGE>
EXHIBIT 10.32
LICENSE AGREEMENT
-----------------
This License Agreement (hereinafter referred to as "Agreement") is
effective as of July 1, 1996, by and between DIVE N' SURF, INC., a California
corporation having offices at 530 Sixth Street, Hermosa Beach, California 90254
(hereinafter referred to as "DNS") and YES Clothing Co. (hereinafter referred
to as "LICENSEE"), located at 1380 West Washington Boulevard, Los Angeles, CA
90007.
WHEREAS, DNS has used for many years the trademarks BODY GLOVE and the HAND
DESIGN and has developed certain intellectual property rights in connection
therewith, which marks are the subject of U.S. and foreign registrations;
WHEREAS, LICENSEE desires to secure the right and license to use said
trademarks and intellectual property rights in connection with the design,
manufacture, advertisement, promotion, distribution and sale of certain Licensed
Products as defined hereinafter;
WHEREAS, DNS is willing to grant LICENSEE such license, upon the terms and
conditions set forth below.
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, the parties hereto agree as follows:
1. Definitions
-----------
The following terms shall have the meanings set forth below:
a. "Marks" shall mean the BODY GLOVE and the HAND DESIGN trademarks,
whether alone or in combination, and any other trademarks (if any) as set forth
in Schedule A attached hereto and incorporated herein by this reference;
provided, however, that the appearance and/or style of the Marks may vary from
time to time as specified by DNS.
b. "Property" shall mean the intellectual property rights which DNS deems
to be desirable or necessary for LICENSEE to enjoy the fruits of the license
granted herein. Such property shall include, but not be limited to, certain
product styles, designs, samples, patterns, colors, materials, fabrics, titles,
trademarks, names, logos, symbols, copyrights, art work, inventions, trade
secrets (patentable or unpatentable), patents and pending patent applications.
c. "Territory" shall mean solely the geographic area specifically set
forth and described in Schedule B, attached hereto and incorporated herein by
this reference.
d. "Licensed Products" shall mean solely the products specified in
Schedule C, attached hereto and incorporated herein by this reference.
e. "Licensed Rights" shall mean solely the combination of the Marks and
Property.
f. "Net Sales" shall mean the total of gross dollar amounts invoiced or
charged to others by LICENSEE for all Licensed Products sold, distributed, or
transferred under the Licensed Rights, reduced by the amount of any bona fide
---- ----
trade quantity discounts and actual returns plus any co-op or advertising
discounts given to customers not to exceed three percent (3%) of gross sales,
only, no deduction shall be made for uncollectible accounts. No costs incurred
in the manufacture, sale, distribution, advertisement or promotion of the
Licensed Products or in the payment by LICENSEE of any local, State or Federal
taxes of any nature whatsoever shall be deducted from the gross sales amounts or
from any royalty payable to DNS by LICENSEE. Any sales or transfers of Licensed
Products made by LICENSEE to any person or entity that does not deal at arm's
length with LICENSEE shall be computed, for the purpose of determining Net
Sales, at an amount equal to the price at which LICENSEE would have invoiced or
charged purchasers which deal at arm's length with LICENSEE.
g. "Show Date" shall mean the date by which LICENSEE agrees to have
samples of the Licensed Products ready to show to DNS, which date, for purposes
of this Agreement, is set forth in Schedule D attached hereto and incorporated
herein by this reference.
h. "Marketing Date" shall mean the date by which LICENSEE agrees to
actually start taking orders from customers for all items defined as Licensed
Products, which date, for purposes of this Agreement, is set forth in Schedule E
attached hereto and incorporated herein by this reference.
<PAGE>
i. "Shipping Date" shall mean the date by which LICENSEE agrees to begin
shipping Licensed Products, which date, for purposes of this Agreement, is set
forth in Schedule F attached hereto and incorporated herein by this reference.
j. "Contract Year" shall mean a twelve (12) month period beginning on the
Shipping Date and each anniversary thereof. Said Contract Year shall define the
periods in which LICENSEE shall be obligated to pay to DNS royalties, other
payments, and minimum royalties, as defined herein.
2. Rights Granted
--------------
a. DNS hereby grants to LICENSEE, and LICENSEE accepts, upon the terms
and conditions set forth herein, a limited exclusive, non-transferable right and
license to use the Licensed Rights solely on or in connection with the design,
manufacture, advertisement, promotion, distribution and sale of Licensed
Products solely within the Territory.
b. The parties acknowledge and agree that this Agreement is an
intellectual property rights license agreement and does not constitute, and
shall not be construed as, a franchise agreement. The parties further
acknowledge and agree that State and Federal franchise laws do not and will not
apply to this Agreement or to the relationship between LICENSEE and DNS and the
respective rights and obligations hereunder since the parties agree that, due to
their respective business backgrounds and prior licensing experience, they do
not need the protection of State or Federal franchise laws.
c. LICENSEE shall not have the right to sublicense without DNS's prior
written consent.
d. LICENSEE shall not have the right to use the Licensed Rights in any
manner that conflicts with the rights of any third party. If the use of the
Licensed Rights on any or all of the Licensed Products infringes the rights of
any third party or weakens or impairs DNS's interest in the Licensed Rights,
then LICENSEE agrees to immediately terminate or modify such use in accordance
with DNS's instructions. However, the parties agree to arbitrate any
determination made pursuant to this paragraph.
e. LICENSEE shall not sell or cause to be sold, directly or indirectly,
any Licensed Products to any party which LICENSEE knows, or has reason to know,
is likely to resell or distribute such Licensed Products outside of the
Territory.
3. Transfer and Ownership of Property
----------------------------------
LICENSEE acknowledges that DNS has expended considerable sums in
establishing a worldwide reputation for the products sold under the Licensed
Rights and for creating a certain unique style or look. Accordingly, LICENSEE
agrees that, during the term of this Agreement, it shall not use the Property in
connection with the sale of any products other than the Licensed Products and
that the Property will be used solely in association with the Marks. Following
termination of this Agreement, LICENSEE agrees that it shall terminate any and
all use of the Property and deliver that property to DNS.
4. Quality Standards and Inspection
--------------------------------
a. The parties acknowledge and agree that great value is placed on the
Licensed Rights and the goodwill associated therewith, that the consuming public
and the industry now associate the Licensed Rights with products of consistently
high quality, and that the terms and conditions of this Agreement are necessary
and reasonable to assure the consuming public and the industry that all Licensed
Products sold hereunder are of the same consistently high quality as products
sold by others who are or may hereafter be licensed to sell any products under
the Licensed Rights.
b. As early as possible, and in any event prior to each season, LICENSEE
shall furnish to DNS, at no expense to DNS, one (1) pre-production sample of
each Licensed Product that LICENSEE intends to manufacture under the Licensed
Rights. Additionally, at the same time LICENSEE shall provide Beach Brokers an
identical pre-production sample line. DNS shall have the right to exercise
quality control and line content over the Licensed Products manufactured and
sold by LICENSEE under the Licensed Rights by making any changes or corrections
in said samples as may be required prior to production, in DNS's sole
determination, to maintain the high quality standard prescribed by DNS.
c. LICENSEE shall make no material changes in any sample after it has been
approved without resubmitting the sample for approval.
d. LICENSEE agrees to exercise its best efforts to cooperate with DNS at
all times in the coordination of Licensed Products so that they are consistent
with the style, image, and quality of other products sold under the Licensed
Rights.
-2-
<PAGE>
e. DNS and its representatives may, at all reasonable business hours and
without prior notice to LICENSEE, inspect the operations and facilities of
LICENSEE with respect to this Agreement, except any facilities that are
restricted to Licensees employees only.
f. Substandard merchandise shall be defined as second or third quality
merchandise, not meeting the first quality standards of DNS. LICENSEE agrees to
limit the sales of substandard merchandise to not greater than five percent (5%)
of sales per year, and LICENSEE further agrees to destroy all excess substandard
merchandise.
g. In order to protect and foster the value and reputation of the
Licensed Rights, LICENSEE agrees to sell Licensed Products only to better
stores, such as sporting goods stores, department stores, specialty stores,
etc., as determined by DNS in its sole discretion. Any sales to other
distribution levels including warehouse clubs must be approved by DNS in writing
before any orders are solicited. Any violation of this paragraph constitutes a
material breach of this Agreement.
h. LICENSEE agrees to comply with all applicable local, State and Federal
labeling laws, and at all times to conduct its activities under this Agreement
in a lawful manner.
5. Duration
--------
(a) This Agreement shall commence on the effective date set forth above and
in Schedule G attached hereto and incorporated herein by this reference, and
shall continue in effect for the number of Contract Years set forth in Schedule
G. This Agreement shall terminate upon the termination date set forth in
Schedule G, unless terminated sooner in accordance with the terms and conditions
set forth herein.
(b) If LICENSEE wishes to exercise its option as set forth in Schedule G,
LICENSEE must notify DNS of such intent in writing no less than one (1) year
prior to the expiration of the first term of this Agreement.
6. Deposit, Royalties, Advertising, and Trade Show Fees
----------------------------------------------------
a. Upon execution of this Agreement, LICENSEE agrees to pay to DNS a
deposit, which sum is set forth in Schedule H attached hereto and incorporated
herein by this reference. The deposit shall be held as security for LICENSEE's
faithful performance of the provisions of this Agreement. If LICENSEE fails to
pay royalties or other charges due hereunder, or otherwise defaults with respect
to any provision of this Agreement, DNS may use the deposit, or any portion of
it, to reimburse DNS for any amounts so owing and for all costs sustained by DNS
resulting from LICENSEE's default including, but not limited to, attorneys' fees
and costs. LICENSEE shall immediately on demand pay to DNS the sum equal to that
portion of the deposit expended or applied by DNS as provided in this paragraph
so as to maintain the deposit in the sum initially deposited with DNS. DNS shall
not be required to keep the deposit separate from its general account nor shall
DNS be required to pay LICENSEE any interest on the deposit. The deposit, or
that portion thereof which has not been previously applied by DNS, shall be
returned to LICENSEE within thirty (30) days after the expiration of the term of
this Agreement, except as otherwise provided in Paragraph 20.f. below. The
application or use of the deposit by DNS as provided in this Paragraph 6 shall
not act as a waiver of DNS's right to terminate this Agreement or to exercise
any other rights or remedies provided in this Agreement or otherwise permissible
under law.
b. LICENSEE further agrees to pay to DNS during the term of this
Agreement, a "Combined Payment" as set forth on Schedule H equal to the sum of:
(i) royalties;
(ii) advertising fees, for use by DNS, in its sole discretion, for
expenditures relating to advertising, public relations, and institutional
brand name promotion;
(iii) trade show fees, for use by DNS, in its sole discretion, for
trade show and related administrative costs and expenses, both direct and
indirect; and
c. The Combined Payment shall be computed by applying the sum of the
percentage rates set forth on Exhibit H ("Combined Rate") to the Net Sales and
shall be paid in accordance with Paragraphs 7 and 8 below.
7. Minimum Shipments and Monthly Payments
--------------------------------------
a. In order to induce DNS to enter into this Agreement, as well as to
demonstrate its good faith, satisfy the demand for Licensed Products in the
Territory, and to further enhance the image and reputation of the Licensed
Rights among consumers, LICENSEE agrees to meet the minimum levels of
performance defined below and set forth in Schedule H.
-3-
<PAGE>
b. During each Contract Year, LICENSEE agrees to ship not less than the
minimum dollar volume of Net Sales of Licensed Products ("Minimum Shipments").
In addition, LICENSEE agrees to pay, on a Contract Year basis, a "Minimum Annual
Combined Payment" which shall be calculated by multiplying the Combined Rate
percentage times the dollar volume of Annual Minimum Shipments. Notwithstanding
the payment by LICENSEE of the Minimum Annual Combined Payment, if LICENSEE does
not meet the Annual Minimum Shipments requirement in any Contract Year, DNS
shall have the right to terminate this Agreement.
c. In order to ensure that the Minimum Annual Combined Payment is met
during each Contract Year, LICENSEE shall pay to DNS each month a "Minimum
Monthly Payment" in the amount of one twelfth (1/12) of the Minimum Annual
Combined Payment. Where the actual Combined Payment for a particular month is
less than the Minimum Monthly Payment, LICENSEE shall pay to DNS the Minimum
Monthly Payment. Where the actual Combined Payment for a particular month
exceeds the Minimum Monthly Payment, the actual Combined Payment shall be paid
to DNS, and the excess of the actual Combined Payment over the Minimum Monthly
Payment shall be credited toward the Minimum Monthly Payment for any subsequent
months in that Contract Year. Such excess shall not be credited toward the
Minimum Monthly Payment in any subsequent Contract Years.
8. Payment
-------
a. The Combined Payment shall be based upon Net Sales of Licensed
Products in each month during each Contract Year. Either the Combined Payment
or the Minimum Monthly Payment shall be due and payable to DNS by LICENSEE by
the twentieth (20th) day of the following month.
b. At the time of each such payment, LICENSEE shall provide to DNS a
written statement illustrating the calculation of the Combined Payment. The
statement shall be certified, under penalty of perjury by an officer of
LICENSEE, to be correct and shall set forth a detailed accounting of the
aggregate number and Net Sales of all Licensed Products. All royalty reports
shall be submitted by LICENSEE to DNS on the Dive N' Surf Inc. Royalty
Computation Form, a copy of which is attached hereto as Exhibit A.
c. All payments required under this Agreement shall be in U.S. dollars
and made payable to the order of "Dive N' Surf Incorporated."
d. Acceptance by DNS of any payments under this Agreement shall not
prevent DNS at any later date from disputing the amount owed or from demanding
more information from LICENSEE regarding payments finally due, and such
acceptance of any payment by DNS shall not constitute a waiver of any breach of
any term or provision of this Agreement by LICENSEE if any such breach shall
have occurred.
e. Time is of the essence with respect to the payments due to DNS by
LICENSEE hereunder. LICENSEE acknowledges and agrees that any manner of payment
other than that stated herein, including without limitation, payment into any
escrow account or to any other third party, shall constitute a material breach
of this Agreement.
9. Books and Records
-----------------
a. LICENSEE shall keep complete and accurate records of all Licensed
Products manufactured, distributed and sold under the Licensed Rights and of
LICENSEE's activities and of all transactions relating to LICENSEE's activities
under this Agreement, and shall make the same readily available to DNS, and its
agents or representatives, at such reasonable times as DNS may from time to time
request for inspection, copying and extracting.
b. Such books of account and records shall be kept in accordance with
generally accepted accounting principles, consistently applied, and shall be
retained by LICENSEE and kept available for at least three (3) years after the
termination of each year of this Agreement for possible inspection, copying,
extracting and/or audit by DNS. All financial information obtained by DNS
regarding LICENSEE shall be kept confidential except in the event that such
information is necessary to resolve a bona fide dispute between the parties.
c. DNS or its duly authorized agents or representatives shall have the
right to conduct audits with respect to the books, records, and all other
documents and material in the possession or custody, or under the control of
LICENSEE relating to this Agreement, the cost of which shall be borne by the
party conducting the audit. If any such audit, however, discloses that payments
due to DNS under this Agreement exceed the amount of payments actually made to
DNS by an amount greater than ten percent (10%) of the payments made, LICENSEE
shall immediately pay the cost of the audit, plus unpaid royalties plus interest
calculated from the date such payment(s) were actually due until the date when
such payment is, in fact, actually made, plus any applicable late penalties.
-4-
<PAGE>
d. No later than ninety (90) days after the close of LICENSEE's fiscal
year, LICENSEE shall provide DNS with its annual financial statements, audited
or unaudited, prepared by an independent certified accountant of LICENSEE's
choice, which statements shall include an income statement and a balance sheet
of LICENSEE prepared in accordance with generally accepted accounting
principles, consistently applied. If unaudited, a senior officer of LICENSEE
shall certify under penalty of perjury that the financial statements are true
and correct, and have been prepared in accordance with generally accepted
accounting principles, consistently applied.
10. Advertising and Promotion
-------------------------
a. LICENSEE shall submit to DNS for approval all copy, scripts, comps,
actuals, proofs, press releases, interviews, magazine and newspaper articles and
other advertising materials prior to the placement of such advertising
materials. Such approval shall not be unreasonably withheld and if DNS fails
to reject the submission within five (5) business days of receipt by DNS, it
shall be deemed "approved." Expenditures for any advertising materials which are
not so submitted and approved in advance of placement shall not be credited
against the mandatory advertising allowance which is provided for in paragraph
10.a. DNS shall only approve for such credit bona fide trade and consumer
advertising in either print, radio, television or other media. DNS shall not
approve for such credit model's fees, public relations charges, tradeshows,
memberships, sponsorships or meetings.
b. LICENSEE agrees that it shall not knowingly or intentionally engage,
participate or otherwise become involved in any activity or course of action
that, in DNS's opinion, diminishes and/or tarnishes the image and/or reputation
of the Licensed Rights. In order to maintain the image and reputation of the
Licensed Rights, LICENSEE further agrees to abide by the policies and procedures
established by DNS from time to time, regarding, without limitation, trademark
usage, trademark notices, advertising, promotion activities and media relations.
DNS agrees not to unreasonably alter such policies and procedures during the
term of this Contract.
c. LICENSEE acknowledges that it is important to maintain within the
relevant industry a consistent and uniform image among all licensees of the
Licensed Rights. Accordingly, LICENSEE agrees to participate, in good faith, in
trade shows to the extent and in the manner that DNS shall reasonably direct.
d. DNS reserves the right to approve or disapprove the sales force
utilized by LICENSEE to sell the Licensed Products. Such approval shall not be
unreasonably withheld.
11. Consultation
------------
LICENSEE agrees to consult with DNS on a regular basis regarding all new
styles and designs, manufacturing schedules, distribution schedules, or any
other substantive changes, new developments or other matters, which would
materially affect the rights, obligations and benefits of either party to this
Agreement.
12. Best Efforts
------------
a. LICENSEE agrees to use its best reasonable efforts to manufacture,
distribute and sell Licensed Products under the Licensed Rights in order to meet
the demand for the Licensed Products in the marketplace and to uphold, protect
and defend the image and reputation of the Licensed Rights. In this regard, and
without limitation, LICENSEE agrees to have its line ready to show to DNS by the
Show Date, to have started taking orders from customers for all items defined as
Licensed Products by the Marketing Date, and to have Licensed Products ready to
ship to customers in substantial quantities by the Shipping Date. Furthermore
if, at any time after such dates, LICENSEE, for a period of three (3)
consecutive months, fails to manufacture, offer to sell, or distribute any of
the Licensed Products (or any class or category thereof), DNS, in addition to
all of the remedies available to it hereunder, may terminate this Agreement with
respect to such Licensed Products.
b. LICENSEE agrees that it will sell and distribute the Licensed Products
in the Territory outright and not on approval, consignment, guaranteed sale or
return basis, or as a premium, promotional tie-in, or give-away. LICENSEE
further agrees to sell and distribute the Licensed Products only to merchants
for sale and distribution directly to the public and only to wholesalers and
distributors for sale and distribution to retail stores.
c. Upon the failure of LICENSEE to manufacture and ship eighty percent
(80%) of confirmed, approved orders during the course of any Contract Year, and
upon thirty (30) days' written notice from DNS to LICENSEE, DNS may demand of
LICENSEE, in writing, an amount equal to the Combined Rate percentage as applied
to all such unfilled, confirmed orders, and LICENSEE agrees to pay the same.
d. DNS and LICENSEE agree that maintenance of the good name and
reputation of the trademark BODY GLOVE and the HAND DESIGN, and the timely
performance of LICENSEE's obligations under this Agreement are of utmost
importance. Accordingly, notwithstanding the provisions of this Agreement and
in lieu of all other
-5-
<PAGE>
remedies available to DNS under this Agreement or applicable law, should DNS
conclude that LICENSEE has defaulted in the performance of its obligations under
this Agreement, including but not limited to (i) the failure to manufacture or
cause to be manufactured the Licensed Products in a timely fashion; (ii) the
failure to distribute or cause to be distributed the Licensed Products in a
timely fashion, or; (iii) the failure to deliver or to cause to be delivered the
Licensed Products in accordance with purchase orders in a timely fashion, cause
a party other than Licensee (including DNS) to perform the acts otherwise
required of LICENSEE under this Agreement for such period or periods and in such
volume as DNS deems necessary.
13. Insurance
---------
a. LICENSEE agrees to obtain and keep in full force and effect, during
the term of this Agreement, at its sole cost and expense, policies of insurance
insuring against those risks customarily insured under comprehensive general
liability policies, including, but not limited to, "product liability" and
"completed operations." Such policies of insurance shall have endorsements or
coverage with combined single limits of not less than Three Million Dollars
($3,000,000) and shall name DNS as an additional insured thereunder. Such
insurance policies shall provide that they cannot be canceled without thirty
(30) days' prior written notice to DNS. It is also agreed that the "other
insurance" clause, if any, will be deleted from such policy, that the insurance
under such policy shall be primary, and that other insurance in force is neither
primary nor contributing.
b. LICENSEE shall provide to DNS, within thirty (30) days of the
effective date of this Agreement, a certificate showing proof that such policies
of insurance are in effect. In no event shall LICENSEE manufacture, offer for
sale, sell, advertise, promote, ship and/or distribute the Licensed Products
prior to the receipt by DNS of such certificates of insurance.
c. LICENSEE agrees to give DNS thirty (30) days' prior written notice of
any reduction in limits or termination of such policies of insurance, or of any
intention on the part of LICENSEE not to pay the premiums thereof.
14. Use and Display of the Marks
----------------------------
a. LICENSEE agrees and acknowledges that the presentation and image of
the Licensed Rights should be uniform and consistent with respect to all
products bearing the Licensed Rights, including Licensed Products. Accordingly,
LICENSEE agrees to use the Licensed Rights solely in the manner which DNS shall,
from time to time, specify. Labels bearing the Licensed Rights and the required
legal notices must be permanently affixed to the Licensed Products manufactured,
distributed and/or sold by LICENSEE.
b. LICENSEE agrees to use, in connection with Licensed Products, only
labels which are provided by or approved in writing by DNS. With respect to the
use by LICENSEE of other forms of identification for the Licensed Rights,
including, but not limited to, tags, signs, banners, stationery, order forms and
business cards, LICENSEE agrees to obtain the prior written approval of DNS. It
is expressly agreed that LICENSEE shall not have the right to use the Licensed
Rights as a trade name, company name, trade style, fictitious name or d.b.a., or
any portion thereof.
c. LICENSEE will submit to DNS, for its prior written approval, any
trademark, service mark or name which is to be used in connection with the
Licensed Rights, and DNS shall have the right to refuse to permit the use of any
such marks or names.
d. All Licensed Products manufactured, distributed or sold by LICENSEE
shall state that the Licensed Rights are owned by DNS of Hermosa Beach,
California. LICENSEE agrees to use the following form of such notice which DNS
may change from time to time, in its sole discretion:
Copyright 19__ Body Glove
All Rights Reserved
BODY GLOVE and the HAND DESIGN are trademarks
of Dive N' Surf, Inc., Hermosa Beach,
California, U.S.A.
e. LICENSEE agrees to use the proper trademark and copyright notices in
connection with the Licensed Rights and any associated copyrightable works,
which notices DNS shall from time to time specify. Such notices shall appear in
the screen for any screen-printed design, in the neck label or waist label of
any Licensed Products, in the salvage of any fabric, or on any label or tag
affixed to the Licensed Products.
-6-
<PAGE>
15. Ownership of the Marks and Copyrights
-------------------------------------
a. LICENSEE acknowledges that the Licensed Rights are owned solely and
exclusively by DNS.
b. LICENSEE agrees that nothing contained in this Agreement shall give to
LICENSEE any right, title or interest in the Licensed Rights, that such Licensed
Rights are the sole and exclusive property of DNS and that all such uses by
LICENSEE of the Licensed Rights shall inure only to the benefit of DNS.
c. Although such use is unauthorized as set forth above, LICENSEE agrees
that any unauthorized use of the Licensed Rights as a trade name, service mark,
business name, trade style, fictitious business name or d.b.a. shall also inure
to the benefit of DNS, and that such use by LICENSEE shall not give to LICENSEE
any right, title or interest in the Licensed Rights.
d. LICENSEE agrees that it will not seek or obtain any registration of
the Licensed Rights in any name or participate directly or indirectly in such
registration without DNS's prior written permission. Subject solely to the
rights and interest granted herein, LICENSEE further agrees and acknowledges
that, if it has obtained or obtains in the future, in any country, any right,
title or interest in the Licensed Rights, or in any marks which are confusingly
similar to the Licensed Rights, or in any other trademark or service mark owned
by DNS, that LICENSEE has acted or will act as an agent and for the benefit of
DNS for the limited purpose of obtaining such registrations and assigning them
to DNS. LICENSEE further agrees to execute any and all instruments deemed by
DNS and/or its attorneys or representatives to be necessary to transfer such
right, title or interest to DNS.
e. LICENSEE agrees not to take any action challenging or opposing, or to
raise or cause to be raised, either during the term of this Agreement or after
its termination, on any grounds whatsoever, any questions concerning, or
objections to, the validity of the Licensed Rights or DNS's rights therein, or
any other trademarks or service marks owned by DNS.
f. LICENSEE agrees to assist DNS in obtaining any registration for the
Licensed Rights by providing, without limitation, information and samples
regarding the Licensed Rights; provided, however, the failure to obtain such
registrations shall not affect the validity of this Agreement.
16. Nontransferability of Rights
----------------------------
LICENSEE shall not grant, assign, sublicense or otherwise convey or
transfer any rights inuring to LICENSEE or any obligation or duties owed by
LICENSEE to DNS under this Agreement, without the prior written consent of DNS
and any attempted transfer or assignment shall be null and void. DNS, however,
may assign or transfer any and/or all of its rights or obligations under this
Agreement without prior notice to, or approval of, LICENSEE.
17. Independent Contractor
----------------------
The parties hereby agree that LICENSEE is and shall be an independent
contractor and that no agency (except for that provided for in Paragraph 15.d),
joint venture or partnership is created by this Agreement. The legal
relationship of any person or entity performing services for LICENSEE shall be
one solely between said parties. LICENSEE shall incur no obligation in the name
of DNS without the prior written consent of DNS.
18. Indemnification
---------------
a. LICENSEE will indemnify, defend and hold DNS and its directors,
officers, agents and employees harmless from any and all liabilities, claims,
obligations, suits, judgments and expenses whatsoever, including court costs and
attorneys' fees, which DNS may incur or which may be asserted against DNS, and
which arise or occur with respect to the operation of LICENSEE's business as it
relates to this Agreement. Such indemnity shall extend to all Licensed
Products, notwithstanding the approval of samples thereof by DNS, and to any and
all liabilities and claims incurred after the termination of this Agreement but
which are based on acts or events of which proximate cause arose during this
Agreement. DNS shall have the right to defend any such action or proceeding
with attorneys of its own selection.
b. DNS will indemnify, defend and hold LICENSEE and its directors,
officers, agents and employees harmless from any and all liabilities, claims,
obligations, suits judgments and expenses whatsoever, including court costs and
attorneys' fees, which LICENSEE may incur or which may be asserted against
LICENSEE which arise or occur with
-7-
<PAGE>
respect to DNS' own acts or omissions. DNS shall not be held liable or obligated
to indemnify LICENSEE for any liabilities, claims, etc. caused by any third
party including other DNS Licensees.
19. Breach and Cure
---------------
Except where the notice requirement is specifically waived, and in the
event of any breach of this Agreement, the party alleging such breach shall give
written notice of the breach to the breaching party and, except as otherwise
specifically set forth in this Agreement, shall specify a reasonable period of
time within which the breaching party is to cure the breach. For purposes of
payments due under Paragraph 8 above, five (5) days shall be deemed a reasonable
time to cure any breach thereof. In the event that a noticed breach, if
required, has not been cured within the specified period, the non-breaching
party may terminate this Agreement upon written notice to the breaching party.
Termination shall be effective upon receipt of the written notice.
20. Termination
-----------
a. Upon termination of this Agreement, for any reason, all rights of
LICENSEE to use the Licensed Rights shall forthwith cease, and LICENSEE shall
immediately:
(i) Cease the manufacture, sale, and distribution of the Licensed
Products except in accordance with this Paragraph;
(ii) Cease all use of the Licensed Rights;
(iii) Delete any reference to the Licensed Rights from any
advertising, promotional, or directory materials, including any reference to
having been previously a licensee of DNS under the Licensed Rights;
(iv) Deliver all packaging, labels, tags and other materials and
property (other than actual Licensed Products) relating to this Agreement to DNS
for destruction or disposal as DNS shall elect; and
(v) Within seven (7) days of termination, furnish DNS with a full
and complete statement setting forth (a) the inventory of Licensed Products
manufactured or in the process of manufacture, including the wholesale price
thereof, (b) the number of orders received, accepted, and approved, which orders
shall be irrevocably assigned to DNS, (c) production and distribution schedules,
and (d) advertising and promotional schedules.
b. DNS shall have the option to purchase any portion of the inventory of
Licensed Products at cost.
c. Should DNS not exercise said option to purchase the inventory or any
portion thereof, LICENSEE shall be entitled to sell any portion for which said
option has not been exercised, on a nonexclusive basis, for a period of ninety
(90) days from the date of termination, such sales to be governed by the terms
of this Agreement. After expiration of said ninety (90) day period, LICENSEE
shall completely remove the Licensed Rights from any products not sold or
distributed before the expiration of said ninety (90) day period.
d. If permitted under any applicable laws, including U.S. bankruptcy
laws, DNS may terminate this Agreement immediately upon (i) the insolvency of
LICENSEE; (ii) the filing of a voluntary petition in bankruptcy by LICENSEE:
(iii) the filing of an involuntary petition in bankruptcy against LICENSEE that
is not dismissed within thirty (30) days from date of filing; (iv) the
appointment of a receiver or trustee for LICENSEE, provided that such
appointment is not vacated within thirty (30) days from the date of such
appointment; (v) the execution by LICENSEE of an assignment for the benefit of
creditors; or (vi) the attachment, execution or other judicial seizure of
substantially all of the assets of LICENSEE where such seizure is not discharged
within thirty (30) days thereof.
e. The termination of this Agreement, for any reason whatsoever, shall
not relieve LICENSEE of any duties and obligations contained herein, including,
but not limited to, the obligation to pay royalties, advertising fees, furnish
royalty statements, etc; nor shall termination extinguish any rights of DNS
necessary to ensure an expeditious conclusion of this Agreement, including,
without limitation, the right to inspect the books, records, and facilities of
LICENSEE, and the right to obtain prior written consents.
f. LICENSEE acknowledges that, if this Agreement is terminated by reason
of LICENSEE's material breach, incalculable damage will result to the image,
reputation and goodwill associated with the Licensed Rights because of the
inability of DNS to meet the demand for the Licensed Products in the
marketplace. In addition, in the event of such termination, the parties
acknowledge that DNS will lose revenues and incur expenses in locating another
licensee and in assisting in bringing the Licensed Products to market.
Therefore, in the event of termination of this Agreement, for cause, LICENSEE
agrees to pay to DNS, within thirty (30) days of the date of such termination,
in addition to
-8-
<PAGE>
all other payments previously made and those due at the time of termination,
liquidated damages in the amount an amount equal to the Minimum Annual Combined
Payment for the Contract Year in which such termination occurs. The parties
hereby agree that these amounts comprise a reasonable estimate of the damages
that DNS would suffer as a result of such termination for cause, that the amount
of actual damages would be impossible or extremely difficult to calculate, and
that these liquidated damages are not in the nature of a penalty. DNS may apply
all or any portion of LICENSEE's deposit as set forth in Paragraph 6 above in
full or partial payment of such liquidated damages.
g. DNS shall be entitled to negotiate for and conclude a licensing
agreement with a third party for the Licensed Products within 180 days prior to
the expiration of this Agreement, provided that, and except as provided in
Paragraph 12.e. above, the proposed new licensee does not distribute any
Licensed Products within the Territory prior to the expiration hereof. It is
acknowledged by DNS and LICENSEE that such new licensee shall have the right to
attend tradeshows, advertise, take orders for licensed products, and otherwise
sell Licensed Products within the Territory prior to the expiration of this
Agreement.
21. Equitable Relief
----------------
a. LICENSEE acknowledges that there will be no adequate remedy at law for
its failure to comply with the terms hereof, including its obligation to cease
the manufacture, sale, advertisement, promotion, or distribution of the Licensed
Products upon termination.
b. Accordingly, in the event LICENSEE fails to comply with the terms of
this Agreement, LICENSEE acknowledges and agrees that DNS shall have the right
to have any breach of this Agreement remedied by equitable relief by way of a
temporary restraining order, preliminary injunction, permanent injunction, and
such other alternative relief as may be appropriate without the necessity of DNS
posting any bond or proving any damages.
22. Legal Actions
-------------
a. LICENSEE agrees to cooperate with and assist DNS in protecting and
defending the Licensed Rights, and shall promptly notify DNS in writing of any
infringements, claims or actions by others in derogation of the Licensed Rights;
provided, however, that DNS shall have the sole right to determine whether any
action shall be taken on account of such infringement, claims or actions.
LICENSEE shall not take any action on account of any such infringement, claim or
action without the prior written consent of DNS. In the event DNS grants
written permission to LICENSEE to take action on account of any such
infringement, claim or action, LICENSEE shall bear all costs and expense related
thereto.
b. In the event DNS initiates any legal proceedings on account of any
infringements, claims or actions by others in derogation of the Licensed Rights
(including, without limitation, unfair competition or other actions which
inhibit the
ability of DNS and/or LICENSEE to advertise, promote or sell the Licensed
Products under the Licensed Rights), LICENSEE agrees to cooperate with and
assist DNS to the extent reasonably necessary to protect the Licensed Rights,
including, but not limited to, being joined as a necessary or desirable party to
such proceedings.
c. In the event DNS determines that it is not in the best interest of DNS
and LICENSEE to initiate any legal proceedings on account of any such
infringements, claims or actions, or in the event DNS settles or resolves any
such proceedings which may be initiated, LICENSEE shall have no claim against
DNS for damages or otherwise, nor shall the same affect the validity or
enforceability of this Agreement.
23. Notice
------
All notices, approvals, consents, requests, demands or other communication
to be given to either party shall be in writing, by certified mail, return
receipt requested, or by other means where receipt is acknowledged, and shall be
effective on the date of receipt thereof. If undeliverable, or if receipt is
not acknowledged, such communication shall be effective on the date mailed or
sent. Such communication shall be addressed to LICENSEE and DNS at their
respective addresses set forth in the preamble above, or at any other address
that each party shall provide to the other in writing.
24. Governing Law and Resolution of Disputes
----------------------------------------
a. This Agreement shall be construed in accordance with the laws of the
State of California, U.S.A., and the parties agree that it is executed and
delivered in the State of California. In the event any legal action becomes
necessary to enforce or interpret the terms of this Agreement, the parties agree
that such action will be brought in the Los Angeles or Orange County Superior
Court or in the U.S. District Court for the Central District of California, and
the parties hereby submit to the jurisdiction of said courts.
b. However, in order to expedite the resolution of legal disputes, DNS
may, at its sole option, elect to have this Agreement construed in accordance
with the laws and regulations of the Territory or any portion thereof, and/or
may elect to have such disputes arising in connection with this Agreement
finally settled under the Rules of
-9-
<PAGE>
Conciliation and Arbitration of the International Chamber of Commerce by one or
more arbitrators appointed in accordance with said Rules, whose decision shall
be binding on the parties. DNS shall have the right to select, in its sole
discretion, the place of arbitration.
c. In any dispute between the parties, the prevailing party shall be
entitled to recover its reasonable costs and fees, including attorneys' fees,
from the non-prevailing party.
25. Binding Effect
--------------
This Agreement shall be binding on the parties, their affiliated companies,
successors and assigns (if any), and they each warrant that the undersigned are
authorized to execute this Agreement on behalf of their respective parties.
This Agreement is also binding upon the officers, directors, agents, employees
and shareholders of the parties, and any other person acting in concert with
them.
26. Manufacture of Licensed Products by Others
------------------------------------------
LICENSEE represents that any third party manufacturers, sub-contractors,
etc., shall operate their facilities in a manner that complies with all State
and Federal labor and business codes.
27. Security Interest
-----------------
a. In order to induce DNS to enter into this Agreement and to secure the
complete and timely performance of LICENSEE's obligations hereunder, LICENSEE
hereby grants to DNS a security interest in the license granted under this
Agreement.
28. General Provisions
------------------
a. No waiver or modification of any of the terms or provisions of this
Agreement shall be valid unless contained in a single written document signed by
both parties. No course of conduct or dealing between the parties shall act as
a waiver of any provision of this Agreement.
b. This Agreement, including Schedules A through H attached hereto,
contains the entire understanding of the parties, and there are no
representations, warranties, promises or undertakings other than those contained
herein. This Agreement supersedes and cancels all previous agreements between
the parties hereto.
c. In the event any legal action becomes necessary to enforce or
interpret the terms of this Agreement, the prevailing party shall be entitled,
in addition to its court costs or arbitration fees, to such reasonable
attorneys' fees as shall be fixed by a court of competent jurisdiction or by an
arbitrator(s).
d. This Agreement, its terms, conditions and provisions, and the trade
secrets, confidential information and property of DNS are confidential and shall
not be disclosed by LICENSEE to any other person or entity without the prior
written consent of DNS.
e. The subject headings of the paragraphs and subparagraphs of this
Agreement are included for convenience only, and shall not affect the
construction or interpretation of its provisions.
f. If any provision of this Agreement should be held to be void or
unenforceable, such provision will be treated as severable, leaving valid the
remainder of this Agreement.
g. Wherever necessary to carry out the intent of the parties, certain
provisions of this Agreement, including, without limitations, Paragraphs 3, 9,
15, 18, 20 and 21 shall survive the expiration or termination of this Agreement
and shall continue in full force and effect.
h. The parties agree to execute promptly any documents necessary to
effectuate the purpose and intent of this Agreement. LICENSEE further
represents and warrants that entering into this Agreement does not violate any
agreements, rights or obligations existing between LICENSEE and any other
entity.
-10-
<PAGE>
i. The parties represent and warrant that they have made no agreements
that are inconsistent with this Agreement or that would prevent them from
entering into this Agreement. The parties further represent and warrant that
entering into this Agreement does not violate any agreements, rights or
obligations existing between them and any other entity.
IN WITNESS WHEREOF, the parties agree that this Agreement shall take effect
as of the date first written above.
DIVE N' SURF, INC.
Dated: ________________________ By:
---------------------------
Russell F. Lesser
President
Dated: ________________________ By:
---------------------------
Randy Meistrell
Vice President
LICENSEE
Dated: _______________________ By:
---------------------------
Guy Anthome
Chairman and CEO
-11-
<PAGE>
SCHEDULES
---------
A: Marks: BODY GLOVE AND THE HAND DESIGN
B: Territory: USA, including its territories and possessions
C: Licensed Products:
Men's Sportswear including:
(1) Walkshorts
(2) Knit tops (with the exception of screen
printed t-shirts, tank tops and fleece)
(3) Woven shirts
(4) Pants
Boy's Sportswear including all 8 to 20 and 4 to 7 apparel
with the exception of swimwear.
D: Show Date: September 1, 1996.
E: Marketing Date: September 1, 1996.
F: Shipping Date: January 1, 1997.
G: Effective Date: July 1, 1996.
Duration/Contract Years:
<TABLE>
<CAPTION>
Contract Years Beginning Ending
-------------- --------- ------
<S> <C> <C>
1 7/1/96 12/31/97
2 1/1/98 12/31/98
3 1/1/99 12/31/99
4 1/1/00 12/31/00
5 1/1/01 12/31/01
6 1/1/02 12/31/02
Option Period 1/1/03 12/31/07
-------------
</TABLE>
H: Deposit, Combined Rate, Fees, Minimum Performance Levels
Deposit: $5,000.00
<TABLE>
<CAPTION>
Combined Rate: Men's Apparel Boy's Apparel
<S> <C> <C>
Royalty Rate 6% 5%
Advertising Fee 2% 2%
</TABLE>
-12-
<PAGE>
<TABLE>
<S> <C> <C>
Trade Show Fee 1%* 1%*
Combined Rate: 9%* 8%*
</TABLE>
In addition, a one time fee of $30,000.00 for brand advertising shall be
paid one half on or before June 30, 1997 and the other half on or before
December 31, 1997.
Minimum Performance Levels (U.S. Dollars):
<TABLE>
<CAPTION>
Minimum Minimum
Contract Minimum Combined Annual Monthly/
Year Shipments Rate Payment Payment
- - ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 0 varies 0 0
2 $ 500,000 varies $ 40,000 $ 3,333
3 $1,000,000 varies $ 80,000 $ 6,667
4 $1,500,000 varies $120,000 $10,000
5 $2,000,000 varies $160,000 $13,333
6 $2,500,000 varies $200,000 $16,667
</TABLE>
Option
Period
75% of shipments in 6th contract year
-13-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 1996 FINANCIAL STATEMENT OF YES CLOTHING CO. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 103,000
<SECURITIES> 0
<RECEIVABLES> 88,000
<ALLOWANCES> 87,000
<INVENTORY> 1,398,000
<CURRENT-ASSETS> 1,598,000
<PP&E> 2,777,000
<DEPRECIATION> 1,799,000
<TOTAL-ASSETS> 2,652,000
<CURRENT-LIABILITIES> 4,831,000
<BONDS> 0
0
0
<COMMON> 8,573,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,652,000
<SALES> 7,551,000
<TOTAL-REVENUES> 7,582,000
<CGS> 9,070,000
<TOTAL-COSTS> 15,109,000
<OTHER-EXPENSES> 308,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 284,000
<INCOME-PRETAX> (7,835,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,835,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,835,000)
<EPS-PRIMARY> (1.28)
<EPS-DILUTED> (1.28)
</TABLE>
