FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[x] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to
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Commission file #33-72880
GLENGATE APPAREL, INC.
(Exact Name of Registrant as Specified in its Charter)
New Jersey 22-3266971
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization Identification No.)
75 Rod Smith Place, Cranford, New Jersey 07016
(Address of principal executive offices) (Zip Code)
Registrant's telephone No. including area code: (908) 653-9100
Securities registered pursuant to Section 12(b) of the Exchange
Act:
None
(Title of class)
Securities registered pursuant to Section 12(g) of the Exchange
Act:
None
(Title of class)
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 and Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such report), and (2) has been subject to such filing
requirement for the past 90 days. Yes X No
---- -----
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-B is not contained herein, and will not
be contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this
Form 10-KSB [X] NONE
Issuer's Revenue for the fiscal year ended September 30, 1997:
$9.3 million
The aggregate market value of the 4,858,032 shares of common stock
held by non affiliates of the Registrant as of December 19, 1997,
was $3,036,270 based upon the closing bid price of such shares as
listed in the over the counter market.
Indicate the number of shares outstanding of each of the
Registrant's classes of common stock, $.001 par value,as of December 19, 1997:
10,613,932
Documents incorporated by reference
Incorporated in Part III of this Form 10-KSB: Proxy Statement to
be furnished to security holders for the fiscal year ended
September 30, 1997
Transitional Small Business Disclosure format Yes No X
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<PAGE>
GLENGATE APPAREL, INC.
Annual Report on Form 10-KSB
Table of Contents
Item Page
- ---- -----
Part I
1 Description of Business . . . . . . . . . . . . . . . 3
2 Description of Property . . . . . . . . . . . . . . . 5
3 Legal Proceedings . . . . . . . . . . . . . . . . . . 5
4 Submission of Matters to a Vote of Security Holders . 5
Part II
5 Market for Common Stock, Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . 6
6 Management's Discussion and Analysis of Financial
Condition and Plan of Operation . . . . . . . . . . . 7
7 Financial Statements and Supplementary Data . . . . . 8
8 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . 8
Part III
9 Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a)
of the Exchange Act . . . . . . . . . . . . . . . . 8
10 Executive Compensation . . . . . . . . . . . . . . . 9
11 Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . 9
12 Certain Relationships and Related Transactions . . . 9
13 Exhibits and Reports on Form 8-K . . . . . . . . . . 9
2
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PART I
ITEM 1 - Description of Business
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General
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GlenGate Apparel, Inc., (the "Company") a New Jersey corporation,
was formed on November 8, 1993. The Company is engaged in the
design and production of a line of golf apparel marketed under the
GlenGate, Sun Ice, Aureus and Fairway to Heaven labels and sold
primarily to public and private golf course pro shops and resorts
domestically through regional sales vice presidents and independent
sale representatives and internationally through licensed
distributors.
Design and Manufacturing
The Company designs and contracts for the design of classic golf-
style garments with contemporary influences with a view toward
developing and maintaining consumer recognition and loyalty across
product lines from season to season. The Company contracts with
third parties to manufacture its lines of apparel. The Company
exhibits at international industry shows and presents two seasonal
lines of clothing which include men's knit cotton shirts, sweaters,
slacks, shorts, jackets and headwear and men's and ladies' golf
outerwear. All items in each line are sold separately.
The Company staffs its design team with both Company and
independent designers who receive direction from the Company's
sales, marketing and production staffs. Product planning meetings
occur on a regular basis to review the status of each line and to
discuss adjustments in line composition, fabrication, selection,
product mix and manufacturing. In addition, members of the design
team attend the industry's principal trade shows during each design
cycle to discuss and consult with customers concerning current
retail trends. The design process for each line is an approximate
six-month process of styling, coloring, fabrication of samples and
selection of sewing techniques.
The Company's design and production team consists of six employees
with extensive experience in the apparel industry. The activities
of these six employees include management of the design and
production process, sourcing, merchandising and quality control.
The merchandise manager is a graduate of the Parson's School of
Design in New York City with over eight years international
experience with men's clothing retailers and manufacturers. The
production assistants have been extensively involved with the
athletic apparel field for many years with emphasis on quality and
production control.
The Company additionally utilizes the services of an independent
design studio located in New York City specializing in men's
sportswear. The studio has expertise in design, trends, color and
patterns, style and product engineering and packaging.
The Company has entered into purchase agreements with third party
domestic and international manufacturers to cut and sew the
Company's products according to the Company's specifications. The
Company has no plans to own any manufacturing facilities. The
Company currently uses ten or more independent facilities to
manufacture its products. One such facility currently accounts for
approximately 30% of such manufacturing on an annual basis and two
other facilities each account for approximately 20%. No other
facility accounts for more than 8% annually. The Company has
generally followed a policy of diversifying production among such
manufacturers while maintaining sufficient production at each to
remain a significant purchaser from each manufacturer. The Company
believes that, while the loss of any one manufacturer would prove
detrimental, given the availability of alternative sources of
supply, such a loss and its impact on the Company's business would
likely be limited in scope and duration.
The Company has chosen to produce its primary product lines within
the United States but has begun the process of off-shore production
to improve margins and attain certain product not attainable
domestically.
The Company's production staff coordinates product engineering
(including pattern and sample making), negotiates price and
quantity with its cutting and sewing contractors, establishes
production scheduling and performs quality control. The production
staff also coordinates inspection of fabric as well as sample
testing of fabric for shrinkage, strength and color fastness. The
production staff additionally oversees production at
the facilities of each of the cutting and sewing contractors as
well as the Company's contract embroidery operations to monitor
continuing compliance with the Company's specifications.
3
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The Company had implemented its original plan to custom embroider
logos of country clubs and resorts utilizing the services of
independent embroidery contractors. The Company has also
implemented an in-house embroidery operation which
has been running approximately one year. The Company has recently
acquired additional embroidery equipment to further expand its in-
house embroidery operation at the warehouse and distribution
center. Final inspection, packing and shipping of the Company's
products is performed by the Company's employees at its warehouse
and distribution center. The Company has implemented a
computerized software system to monitor inventory levels of
finished goods.
Sales and Marketing
Management believes that the Company's ability to attain and
maintain brand name recognition of the GlenGate label will be a
critical element in enabling the Company to successfully continue
to participate in the growing golf industry.
The Company estimates that there are approximately 14,000 public
and private golf clubs and resorts with golf courses in the United
States. The Company has currently targeted approximately 3,500 of
these clubs and resorts as customers. The Company has either made
sales to or received purchase orders from approximately 2,000 clubs
and resorts in the targeted group. No single customer accounted
for more than 3% of the Company's net sales.
The Company enlists the services of 23 independent sales
representatives who sell on a commission basis. These independent
representatives are responsible for certain targeted accounts in a
given territory. Sales management, consisting of three regional
sales vice-presidents and a customer service network of five others
directs and implements the sale and marketing plans and programs
adopted by the Company.
The Company has begun test marketing studies for acceptance of
GlenGate Apparel in the international market. Test marketing has
successfully begun in Canada, where there are over 1,200 clubs and
resorts and to the prime resort facilities in Bermuda.
The Company introduces new product at the two major golf industry
trade shows held January and September each year in Orlando,
Florida and Las Vegas, Nevada. Feedback received from the shows in
the form of orders, comments, and booth attendance is used to
redefine the product lines and corresponding forecasts.
The Company has enlisted six touring golf professionals (Mike
Hulbert, Jerry McGee, Jerry Kelly, Mike Small, Phil Blackmar, and
Jeff Gallagher) and other persons both inside and outside of the
golf industry (including Peter Kostis, a director of the Company),
to endorse and wear GlenGate apparel. In addition, the Company has
enlisted approximately 24 home club golf professionals to help
promote the Company's products. The Company has oral arrangements
with such golf professionals and other persons under which they
have been compensated solely by the granting of stock options. The
Company may attempt to obtain additional endorsement arrangements
in the future with other touring golf professionals, home club
professionals and other notables.
The Company assists its pro shop customers with sales incentives
and merchandise assistance programs.
The Company's sales terms generally require payment from customers
within 30 days after shipment. The Company does not sell goods on
consignment or accept returns of purchased merchandise other than
damaged goods or goods delivered beyond the specified delivery
date.
Competition
Golf apparel sold at the pro shop and resort level is not dominated
by any single company and is highly competitive, both within the
United States and abroad. The Company views Ashworth, Polo/Ralph
Lauren, Izod and Sport-Haley as its most significant competitors.
Recent entries into the market by other competitors offering
comparable product may intensify competitive pressures. Many of
the existing competitors have longer operating histories, better
name recognition and greater financial, marketing and other
resources than the Company. The Company also competes with other
high quality manufacturers of men's leisurewear sold at the
department and specialty store level. There can be no assurances
that the Company will be able to obtain new and maintain existing
market share in the face of competition.
4
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Raw materials
The Company's primary products are made of natural fibers. The
selection of raw materials is based on quality, consistency,
availability, flexibility in meeting changing production
requirements and pricing. The Company's manufacturers generally
obtain the materials to manufacture the product lines in accordance
with the Company's design specifications.
Trademarks
The Company sells and markets its products under the GlenGate, Sun
Ice, Aureus and Fairway to Heaven trademarks. The Company obtained
registration of the GlenGate name with the United States Patent and
Trademark Office in 1994. Registration on the Principal Register
constitutes constructive nationwide notice of the registrants'
claim of ownership of the trademark and creates a refutable
presumption of the registrant's exclusive right to the trademark.
Although the Company believes that it will have the exclusive right
to use the trademark for the United States and overseas markets in
which it is granted registration, there can be no assurance that
the Company will be able successfully to protect the trademark from
conflicting uses or claims of ownership. The Sun Ice, Aureus and
Fairway to Heaven labels are used under exclusive distribution
agreements.
Seasonality
The Company's business is seasonal, with the highest sales volume
expected in the period from February through July and the lowest
sales volume in the period from November through January. In the
golf apparel business, inventories are at their highest from
February through April, as finished goods are accumulated for
Spring and Summer sales. The Company's cash requirements are
highest during this period to enable the Company to support the
accumulation.
Employees
As of December 1, 1997, the Company had 41 full-time employees.
ITEM 2 - Description of Property
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Property
Effective October 1997 the company moved from its 14,000 square
foot of space in Mountainside, New Jersey to a new facility in
Cranford, New Jersey. The new facility has approximately 36,000
square feet of space for use as its principal office, production,
warehouse and distribution facility. The lease provides for an
annual base rental of $209,875 during the term of the lease. The
lease expires October 31, 2002. The Company is also obligated to
pay taxes, insurance and maintenance expenses. Management believes
that the new facilities will be adequate for its future needs.
ITEM 3 - Legal Proceedings
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In January 1997, as a result of performance issues, the Company dismissed
Norman Britman, then the Company's Treasurer and Chief Financial Officer.
On April 11, 1997, Mr. Britman filed an action in the Superior Court
of New Jersey, Law Division, Union County against the Company and
its President. The plaintiff claims that it was represented to him
upon becoming employed that he would remain employed by the Company
until his retirement at age 65. Plaintiff alleges that his
termination from employment on or about January 3, 1997, was
discriminatory based upon his age, was in violation of state anti-
discrimination laws, was wrongful and without cause and that the
Company breached its contract as to allegedly promised stock
options. The Company has filed an Answer to the Complaint and pre-
trail discovery has commenced. The Company believes that the plaintiff's
claims are without merit and it is the Company's intention to
defend the action vigorously to the fullest extent.
ITEM 4 - Submission of Matters to a Vote of Security Holders
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The Company held a Special Meeting of Shareholders on July 11,
1997. At the Special Meeting, the shareholders voted on a proposal
to amend the Company's Certificate of Incorporation to increase the
number of authorized shares of Common Stock from 10,000,000 to
17,000,000, which proposal was approved by a vote of 6,485,558
shares of Common Stock for and 45,195 against.
5
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PART II
ITEM 5 - Market for Common Stock, Equity and Related Stockholder
Matters
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The Company's common stock is quoted on the over-the-counter market
under the symbol "GLNN." On August 19, 1994 the Company completed
its initial public offering of 493,740 Units, each consisting of
five shares of common stock and one Warrant entitling the holder
thereof to purchase one share of common stock. in July 1995, the
Company called for the redemption of all warrants outstanding as of
August 28, 1995 at $.05 each. Through August 28, 1995, 473,200
warrants were exercised and 4,700 warrants were redeemed. The
remaining 15,840 warrants not redeemed were canceled on August 17,
1996.
In June 1995, the Company commenced proceedings for the private
placement of up to 750,000 shares of common stock at $2.00 per
share through August 10, 1995. In July 1995, the Company received
$288,400 for 144,200 shares pursuant to that private placement.
In May 1996, the Company commenced proceedings for the private
placement of up to 1,500,000 shares of common stock at $1.00 per
share. In September 1996, the Company received $1,250,000 for
1,250,000 shares and a warrant to purchase an additional 85,000
shares at $1.00 through September 30, 1997.
In July 1997, the holders of the Company's common stock approved an
increase in the number of authorized shares of common stock to
17,000,000 shares, and the Company consummated a private placement
in which the Company received $2,500,000 for 2,500,000 shares and
the grant of certain stock options.
The following table sets forth the high and low bid quotations for
the common stock for the periods indicated. The quotations in the
over-the-counter market reflect inter-dealer prices without retail
markup, markdown or commissions and may not necessarily represent
actual transactions.
Period High Low
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Fiscal Year 1995
----------------
October 1, 1994 - December 31, 1994 $1.75 $1.25
January 1, 1995 - March 31, 1995 $3.00 $1.25
April 1, 1995 - June 30, 1995 $4.25 $2.25
July 1, 1995 - September 30, 1995 $3.87 $1.43
Fiscal Year 1996
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October 1, 1995 - December 31, 1995 $2.625 $1.625
January 1, 1996 - March 31, 1996 $2.125 $1.375
April 1, 1996 - June 30, 1996 $2.625 $1.25
July 1, 1996 - September 30, 1996 $2.125 $1.25
Fiscal Year 1997
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October 1, 1996 - December 31, 1996 $1.750 $0.625
January 1, 1997 - March 31, 1997 $1.125 $0.688
April 1, 1997 - June 30, 1997 $1.312 $0.875
July 1, 1997 - September 30, 1997 $1.281 $0.812
6
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As of December 19, 1997, there were approximately 200 holders of
record of the common stock and the closing bid price for the common
stock was $0.625. The Company believes that there are
approximately 2,000 beneficial owners of common stock.
The Company has never paid any cash dividends on its common stock.
The Company anticipates that for the foreseeable future any
earnings will be retained for use in the Company's business and no
cash dividends will be paid to stockholders.
ITEM 6 - Management's Discussion and Analysis of Financial Condition
and Plan of Operation
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Results of Operations
Comparison of Fiscal Years Ended September 30, 1997 and 1996.
In February 1997 the Company entered into a Consignment Agreement
with Sun Ice Ltd. and Sun Ice USA, Inc. to sell certain apparel
inventory of Sun Ice on a consignment basis, whereby the Company
agreed to sell such inventory and pay Sun Ice for the costs of the
goods sold and to return, dispose of or purchase any unsold goods
upon the termination of the agreement. In addition, in February
1997 the Company entered into a Trademark License Agreement with
Sun Ice Ltd. and Sun Ice USA under which the Company was granted a
license to use the Sun Ice and Aureus trademarks within the United
States. The Company has agreed to pay a royalty during the
exclusive long-term agreement. The Sun Ice label consists of men's
and ladies' golf outerwear and the Aureus label consists of men's
golf apparel.
During fiscal 1997 the Company had sales of approximately
$9,347,000 an increase of 50% compared to the fiscal 1996 sales of
$6,230,000. The increase in sales resulted from the continually
expanding customer base and sales made pursuant to the Sun Ice
Consignment Agreement and the Sun Ice Trademark License Agreement.
Cost of goods sold as a percentage of sales, was approximately 71%
for fiscal 1997 compared to 70% for fiscal 1996. Costs continued
to run higher than expected in fiscal 1997 primarily due to start-
up costs associated with the addition of the Sun Ice and Aureus
labels and the Company's decision to sell certain prior season's
inventories at reduced prices.
Warehousing, design, selling and administrative expenses as a
percentage of sales was approximately 50% for both fiscal 1997 and
for fiscal 1996. Such expenses remain high due to continued
sales growth and costs related to the acquisition of rights to the
Sun Ice and Aureus trademarks and transaction costs associated with
the infusion of additional funds.
Interest expense was $478,185 for fiscal 1997 compared to $202,821 for fiscal
1996. The increase resulted from higher borrowings required to fund the
Company's net losses and to support the increased levels of inventory and
accounts receivable resulting from the Company's growth. In addition, interest
expenses include $140,000 of costs related to the value of warrants and shares
granted by an officer, George Gatesy, to a lending group in connection with
interim financing requirements. This lending group includes the Koffman Group,
Inc., a stockholder in the company, Lyonshare Venture Capital and Linden Nelson.
The fiscal 1997 net loss was $2,465,222 compared to $1,449,291 for fiscal 1996
as a result of the factors described above. As demonstrated by the growth in
sales, the Company is moving towards its plan with a continued focus on
improving operating results in fiscal 1998.
Liquidity and Capital Resources
In fiscal 1997 working capital requirements increased due to the
continued sales growth and the need to fund continuing losses. The
Company had cash used in operating activities during the fiscal
year of $3,268,489 resulting primarily from a net loss of
$2,465,222 and increases in inventory and accounts receivable of
$1,264,332. In addition, cash of $219,579 was used in investing
activities in fiscal 1997 to purchase equipment and fund security
deposits in connection with the move to expanded facilities which
was necessitated by the continued growth of inventory and sales.
7
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During fiscal 1997 cash requirements for both the
operating and investing activities were funded primarily by
financing activities that provided additional net cash of
$3,634,064 resulting from $2,425,000 in net proceeds from the sale
of common stock and $1,089,648 from borrowings under the Company's
credit facilities and $547,905 from borrowings on equipment notes
payable.
In July 1997, the holders of the Company's common stock approved an
increase in the number of authorized shares of common stock to
17,000,000 shares, enabling American Marketing Industries, Inc. to
purchase 2,500,000 shares and to receive certain stock options
for an aggregate purchase price of $2,500,000. In addition,
effective July 1, 1997 the Company also agreed to amend its
revolving loan and security agreement and continue with the same
lender until September 1998. Management believes these events
place GlenGate Apparel, Inc. in a more stable position to fund its
current growth.
Prior to the receipt of the investment from AMI, the Company received
bridge financing from several sources as follows.
In January 1997, George Gatesy, President and CEO of the Company, and
Peter Kostis, a Director of the Company, advanced the Company a total
of $250,000 to satisfy working capital needs. The notes remain outstanding
at September 30, 1997, are payable on demand and bear interest at a rate
of 12% payable monthly.
In April 1997, the Company obtained a financing arrangement of $750,000
with a lending group (the "lending group") which included the Koffman Group,
Inc., a stockholder of the Company, Lyonshare Venture Capital and Linden
Nelson. Jeffrey Koffman and Martin Koffman, directors of the Company, are
principals of The Koffman Group, Inc. In addition, the lending group made
available another $150,000 in connection with a letter of credit. In connection
with this financing, George Gatesy, President and CEO of the Company was
required to sell 135,000 shares of his common stock to the lending group for
$.20 per share and the Company agreed to grant the lending group warrants to
acquire up to 270,000 shares of common stock with an exercise price equal to
sixty percent of the common stock market value during the thirty day period
prior to exercise of the warrants. The estimated market value of the shares
sold to the lending group by the officer, less the proceeds received, along
with the estimated market value of the warrants amounted to $140,000 and was
charged to interest expense. The financing provided by the lending group also
bore interest at a face rate of prime plus 2-1/2% and was repaid out of
proceeds from the AMI investment.
In June 1997, AMI advanced the Company a bridge loan in the amount of $600,000
pursuant to a term note which bore interest at a rate of 9% per annum, payable
quarterly. The note was to mature on the earlier of June 23, 1998 or at AMI's
option in the event the Company defaulted on the note. The AMI note was
repaid in connection with the AMI investment.
In February 1997, the Company acquired the exclusive right to
distribute certain golf apparel under the Sun Ice and Aureus
trademarks in the United States for the period of five (5) years
renewable at the option of the Company for three (3) successive
five (5) year periods. The product under these labels was
initially provided to the Company on a consignment basis. Although
there can be no assurances, management expects the acquisition of
these distribution rights to have a positive impact on the
liquidity and operating results of the Company.
Future events, including the problems, expenses, difficulties and
delays encountered in connection with a new business and the
competitive environment in which the Company operates, may lead to
cost overruns that could make the Company's sources of working
capital insufficient to fund the Company's planned operations. No
assurance can be given that the Company will be able to obtain such
funds or that the terms thereof will be acceptable to the Company.
8
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Important Factors Related to Forward-Looking Statements
The statements contained in this annual report or incorporated by
reference herein that are not purely historical are forward-looking
statements and are based on current expectations that involve a
number of risks and uncertainties. These forward-looking
statements were based on assumptions that the Company would
continue to develop and introduce new products on a timely basis,
that the competitive conditions within the golf apparel industry
would not change materially or adversely, that the demand for the
company's golf apparel would remain strong, that the market would
accept the Company's new apparel lines, that inventory risks due to
shifts in market demand would be minimized, that the Company's
forecasts would accurately anticipate market demand, and that there
would be no material adverse change in the Company's operations or
business. Assumptions relating to the foregoing involve judgments
with respect to, among other things, future economic, competitive
and market conditions, and future business decisions, all of which
are difficult or impossible to predict accurately and many of which
are beyond the control of the Company. Although the Company
believes that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, there can be no assurance that the
forward-looking information will prove to be accurate. In
addition, the business and operations of the Company are subject to
substantial risks which increase the uncertainty inherent in such
forward-looking statements. Budgeting and other management
decisions are subjective in many respects and thus susceptible to
interpretations and periodic revisions based on actual experience
and business developments, the impact of which may cause the
Company to alter its marketing or other budgets, which may in turn
affect the Company's results of operations. In light of the
significant uncertainties inherent in the forward-looking
information included herein, the inclusion of such information
should not be regarded as a representation by the Company or any
other person that the objectives planned for the Company will be
achieved.
ITEM 7 - Financial Statements
- -----------------------------
The financial information required by this Item is submitted
beginning on Page F-1
ITEM 8 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
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None
PART III
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ITEM 9 - Directors, Executive Officers, Promoters and Control
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persons; Compliance with Section 16(a) of the Exchange Act
- ----------------------------------------------------------
For information with respect to the Company's directors, see the
section entitled "Election of Directors" in the Company's Proxy
Statement to be filed in connection with the Annual Meeting of
Stockholders of the Company to be held on February 16, 1998 which
section is incorporated herein by reference.
ITEM 10 - Executive Compensation
- --------------------------------
For information with respect to the Company's executive
compensation, see the section entitled "Executive Compensation" in
the Company's Proxy Statement to be filed in connection with the
Annual Meeting of Stockholders of the Company to be held on
February 16, 1998 which section is incorporated herein by
reference.
9
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ITEM 11 - Security Ownership of Certain Beneficial Owners and
- -------------------------------------------------------------
Management
- ----------
For information with respect to the Company's security ownership of
certain beneficial owners and management, see the section entitled
"Security Ownership of Directors and Officers" and "Principal
Stockholders" in the Company's Proxy Statement to be filed in
connection with the Annual Meeting of Stockholders of the Company
to be held on February 16, 1998 which section is incorporated
herein by reference.
ITEM 12 - Certain Relationships and Related Transactions
- --------------------------------------------------------
For information with respect to the Company's relationships and
related transactions with certain directors, see the section
entitled "Election of Directors" in the Company's Proxy Statement
to be filed in connection with the Annual Meeting of Stockholders
of the Company to be held on February 16, 1998 which section is
incorporated herein by reference.
ITEM 13 - Exhibits and Reports on Form 8-K
- ------------------------------------------
Reports on Form 8-K
- -------------------
On July 11, 1997, the Company filed a report on Form 8-K relating
to the amendment to the Company's certificate of incorporation to
increase the number of shares of the Company's common stock
authorized for issuance thereunder from 10,000,000 to 17,000,000.
Exhibits
- --------
3.1 (1) Certificate of Incorporation of the Company
3.2 (1) Certificate of Amendment to the Certificate of
Incorporation dated December 1, 1993
3.3 (4) Certificate of Amendment to the Certificate of
Incorporation dated July 11, 1997
3.4 (2) Amended By-laws of the Company
4.1 (1) Specimen certificate for common stock, $.001 par value
4.2 (2) Form of warrant to purchase common stock issuable to The
Koffman Group, Inc.
4.3 (1) Form of Subordinated Note in favor of George Gatesy
4.4 (1) Form of Subordinated Note in favor of Richard Martinelli
10.1 (2) Restricted stockholders agreement
10.2 (2) Financing and Security Agreement
10.3 (2) Lease dated October 4, 1996
10.4 (3) Trademark License Agreement dated February 14, 1997
10.5 Merchandise License Agreement dated as of June 20, 1997
10.11(1) GlenGate Apparel, Inc. 1994 Stock Option Plan
- ------------------------------------------------------------------
(1) Incorporated herein by reference to the identically
numbered Exhibit in the Company's Registration Statement
on Form SB-2, Registration No. 33-7280-NY
(2) Incorporated herein by reference to the identically
numbered Exhibit in the Company's Annual Report for the
fiscal year ended September 30, 1996 on Form 10-KSB
(3) Incorporated herein by reference to the identically
numbered Exhibit in the Company's Registration Statement
on Form SB-2, Regristration No. 333-23417
(4) Incorporated herein by reference to Exhibit 3.1 to the
Company's current report on Form 8-K dated July 11, 1997
10
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SIGNATURES
Pursuant to requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
GLENGATE APPAREL, INC.
BY: /s/ George J. Gatesy
-----------------------------
George J. Gatesy, President
Dated: December 29, 1997
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/ George J. Gatesy President, Director December 29, 1997
- --------------------- (principal executive
George J. Gatesy officer)
/s/ Peter Culbertson Treasurer and December 29, 1997
- --------------------- Secretary (principal
Peter Culbertson financial and
accounting officer)
/s/ Peter J. Kostis Director December 29, 1997
- ---------------------
Peter J. Kostis
/s/ Robert J. Munch Director December 29, 1997
- ---------------------
Robert J. Munch
/s/ Jeffery Koffman Director December 29, 1997
- ---------------------
Jeffery Koffman
Martin Koffman Director December 29, 1997
- ---------------------
Martin Koffman
/s/ James C. Willcox Director December 29, 1997
- ---------------------
James C. Willcox
/s/ Travis Metz Director December 29, 1997
- ---------------------
Travis Metz
11
<PAGE>
INDEX TO FINANCIAL STATEMENTS
-----------------------------
Page
Report of Independent Certified Public Accountants F-1
Balance Sheets as of September 30, 1997 and 1996 F-2
Statements of Operations for the years ended
September 30, 1997 and 1996 F-3
Statements of Stockholders' Equity for the years ended
September 30, 1997 and 1996 F-4
Statements of Cash Flows for the years ended September 30,
1997 and 1996 F-5
Notes to Financial Statements F-6 - F-11
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
Board of Directors and Stockholders
GlenGate Apparel Inc.
Mountainside, New Jersey
We have audited the accompanying balance sheets of GlenGate Apparel Inc. as of
September 30, 1997 and 1996, and the related statements of operations,
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our respons-
ibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing stand-
ards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GlenGate Apparel Inc. as of
September 30, 1997 and 1996, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
BDO Seidman, LLP
Woodbridge, New Jersey
November 12, 1997
F-1
<PAGE>
GLENGATE APPAREL, INC.
BALANCE SHEETS
===========================
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
-------------- -------------
ASSETS (Note 4)
---------------
<S> <C> <C>
Current:
Cash $ 180,913 $ 34,917
Accounts receivable, net of allowance for
doubtful accounts of $112,226 and $173,515 2,471,837 1,848,507
Inventories 1,732,419 1,139,655
Prepaid and other current assets 623,362 381,313
---------- ---------
TOTAL CURRENT ASSETS 5,008,531 3,404,392
Property and equipment, net of accumulated
depreciation and amortization (Note 3) 864,283 257,530
Security deposits and other assets 59,740 35,917
---------- ----------
TOTAL ASSETS $5,932,554 $3,697,839
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------
Current:
Notes payable - bank (Note 4) $2,687,566 $1,597,918
Current portion of long-term debt (Note 4) 136,000 5,127
Subordinated notes payable to stockholders (Note 5) 350,000 190,000
Accouts payable and accrued expenses 872,883 490,915
---------- ----------
TOTAL CURRENT LIABILITIES 4,046,449 2,283,960
Long-term debt (Note 4) 383,065 10,617
---------- ----------
4,429,514 2,294,577
Commitments and contingencies (Notes 7 and 9)
STOCKHOLDERS' EQUITY (Note 9):
Common stock at cost $.001 par value - 17,000,000
and 10,000,000 shares authorized; 10,613,932 and
8,113,932 issued and outstanding 10,614 8,114
Additional paid-in capital 7,230,639 4,668,139
Accumulated deficit (5,738,213) (3,272,991)
------------ ----------
TOTAL STOCKHOLDERS' EQUITY 1,503,040 1,403,262
------------ ----------
TOTAL STOCKHOLDERS' EQUITY AND LIABILITIES $ 5,932,554 $3,697,839
============ ==========
</TABLE>
See accompanying notes to financial statements F-2
<PAGE>
GLENGATE APPAREL INC.
STATEMENTS OF OPERATIONS
==============================
<TABLE>
<CAPTION>
Year Ended
-------------------------------
September 30, September 30,
1997 1996
------------- -------------
<S> <C> <C>
Sales $ 9,347,233 $ 6,229,728
Cost of sales 6,677,713 4,378,949
------------- ------------
GROSS PROFIT 2,669,520 1,850,779
------------- ------------
Operating expenses:
Warehousing 507,170 318,516
Design 258,791 202,779
Selling 2,171,470 1,378,456
General and administrative 1,719,126 1,197,498
------------- ------------
TOTAL OPERATING EXPENSES 4,656,557 3,097,249
------------- ------------
Operating loss (1,987,037) (1,246,470)
Interest expense (Note 5) (478,185) (202,821)
-------------- ------------
Net loss $ (2,465,222) $(1,449,291)
============== ============
Loss per share $ (.29) $ (.22)
============== ============
Weighted average number of common shares
outstanding 8,648,179 6,605,941
============== ============
See accompanying notes to financial statements F-3
</TABLE>
<PAGE>
GLENGATE APPAREL INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
============================================
<TABLE>
<CAPTION>
Common Stock
------------------- Additional Total
Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Equity
--------- -------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1995 6,284,600 $ 6,285 $3,012,448 $(1,823,700) $1,195,033
Options exercised 554,332 554 557,361 - 557,915
Private placements of common
stock 1,275,000 1,275 1,248,725 - 1,250,000
Offering costs, net - - (150,395) - (150,395)
Net loss - - - (1,449,291) (1,449,291)
--------- ------- ---------- ----------- -----------
Balance, September 30, 1996 8,113,932 8,114 4,668,139 (3,272,991) 1,403,262
Private placements of common
stock 2,500,000 2,500 2,497,500 - 2,500,000
Offering costs - - (75,000) - (75,000)
Funding of expenses by
stockholder (Note 6) - - 140,000 - 140,000
Net loss - - - (2,465,222) (2,465,222)
---------- -------- ----------- ------------ ----------
Balance, September 30, 1997 10,613,932 $10,614 $7,230,639 $(5,738,213) $1,503,040
========== ======== ========= ============ ==========
See accompanying notes to financial statements F-4
</TABLE>
<PAGE>
GLENGATE APPAREL INC.
STATEMENTS OF CASH FLOWS
=====================================
<TABLE>
<CAPTION>
Year Ended
-----------------------------
September 30, September 30,
1997 1996
-------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,465,222) $(1,449,291)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 132,908 77,578
Provision for doubtful accounts 48,238 13,051
Non-cash interest expense 140,000 -
Changes in assets and liabilities:
Inventories (592,764) (245,620)
Accounts receivable (671,568) (1,056,221)
Prepaid and other current assets (242,049) (190,033)
Accounts payable and accrued expenses 381,968 222,450
------------ -------------
Net cash used in operating activities (3,268,489) (2,628,086)
------------ -------------
Cash flows from investing activities:
Purchases of property and equipment (193,695) (114,542)
Security deposits and other assets (25,884) -
------------ ------------
Net cash used in investing activities (219,579) (114,542)
------------ ------------
Cash flows from financing activities:
Payment of financing cost - (22,000)
Proceeds from sale of common stock 2,500,000 1,250,000
Proceeds from options exercised - 557,915
Payment of offering and registration costs (75,000) (150,395)
Payments on equipment notes payable (40,584) (30,326)
Net borrowings under line of credit 1,089,648 1,272,809
Borrowings from (repayments to) stockholders 160,000 (110,496)
----------- -----------
Net cash provided by financing activities 3,634,064 2,767,507
----------- -----------
Net increase in cash 145,996 24,879
Cash, beginning of period 34,917 10,038
----------- ----------
Cash, end of period $ 180,913 $ 34,917
=========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 313,915 $ 196,216
=========== ==========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
In 1997, capital lease obligations of $547,905 were incurred in connection with
various leases for new equipment.
See accompanying notes to financial statements F-5
</TABLE>
<PAGE>
GLENGATE APPAREL INC.
NOTES TO FINANCIAL STATEMENTS
====================================
NOTE 1 - ORGANIZATION
- ----------------------
GlenGate Apparel, Inc. (the "Company") was incorporated in the State of New
Jersey on November 8, 1993. The Company designs, contracts to have made, and
markets men's golf apparel and men's and ladies golf outerwear. The Company's
primary products consist of men's knit cotton shirts, sweaters and woven cotton
slacks, shorts and headwear and also men's and ladies golf rainwear. Customers
of the Company are primarily public and private golf course pro shops and
resorts in the United States.
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES
- ---------------------------------------
CASH AND CASH EQUIVALENTS
- -------------------------
For statement of cash flow purposes, the Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents. The Company did not have any cash equivalents at September 30, 1997
and 1996.
REVENUE RECOGNITION
- -------------------
Revenue is recognized upon shipment of goods to customers.
INVENTORIES
- -----------
Inventories consist of finished goods and are valued at the lower of cost or
market with cost determined by the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
- ----------------------
Property and equipment is recorded at cost. Depreciation and amortization are
calculated on a straight line basis over the estimated useful lives of the
related assets.
LOSS PER SHARE
- --------------
Loss per share is computed on the basis of the weighted average number of common
shares outstanding during the period. The assumed conversion of common stock
equivalents has not been included because the effect would be anti-dilutive.
SIGNIFICANT RISKS AND UNCERTAINTIES
- ------------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECLASSIFICATIONS
- -----------------
Certain items presented as of September 30, 1996 have been reclassified to
conform to the presentation used in 1997.
F-6
<PAGE>
GLENGATE APPAREL INC.
NOTES TO FINANCIAL STATEMENTS
================================
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
- ---------------------------------------
In March 1995, the Financial Accounting Standards Board ("FASB") issued State-
ment of Financial Accounting Standard ("SFAS") No. 121 "Accounting for Impair-
ment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," which
establishes accounting standards for, among other things, the impairment of
long-lived assets and certain identifiable intangibles. The adoption of this
pronouncement on October 1, 1996 did not have a material effect on the
Company's financial statements.
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation." On October 1, 1996, the Company adopted SFAS No. 123 and chose to
continue the application of APB Opinion 25 and related interpretations in
accounting for its stock options. As a result, the adoption of SFAS No. 123 did
not have a material impact on the Company's financial statements.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," which
establishes standards for computing and presenting earnings per share. SFAS No.
128 replaces the presentation of primary and fully diluted earnings per share
with basic and diluted earnings per share, respectively. Basic earnings per
share are computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share are computed similarly to fully diluted earnings per share.
The standard is effective for financial statements for periods ending after
December 15, 1997, with earlier application not permitted. The adoption of this
standard is not expected to have a material effect on the Company's earnings per
share.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131,
"Disclosure about Segments of and Enterprise and Related Information," were
issued. SFAS No. 130 addresses standards for reporting and display of
comprehensive income and its components and SFAS No. 131 requires disclosure of
reportable operating segments. Both statements are effective for the Company's
1999 fiscal year. The Company will review these pronouncements to determine
their applicability, if any. Management does not expect these pronouncements to
have a material effect on the Company's financial statements.
NOTE 3 - PROPERTY AND EQUIPMENT
- --------------------------------
Property and equipment consists of the following as of September 30:
Estimated
useful
1997 1996 lives (years)
---------- ----------- -------------
Leasehold improvements $ 23,919 $ 37,718 3
Machinery and equipment 642,474 153,311 4 - 5
Furniture and fixtures 140,772 90,020 3 - 5
Computer equipment and software 256,967 82,483 5
----------- ------------
Less: Accumulated depreciation
and amortization 199,849 106,002
----------- ------------
$ 864,283 $ 257,530
=========== ============
Property and equipment includes capitalized leases of $547,905 for equipment,
less accumulated amortization of $11,000 at September 30,1997.
F-7
<PAGE>
GLENGATE APPAREL INC.
NOTES TO FINANCIAL STATEMENTS
================================
NOTE 4 - NOTES PAYABLE
- -----------------------
On July 25, 1997, the Company amended the revolving loan and security agreement
(the "Agreement") originally entered into in September 1996 with a financial
institution. Availability under the Agreement, is limited by a collateral
formula calculated as the lesser of $4,000,000 or 85% of qualified accounts
receivable and 50% of eligible finished goods inventory. Interest accrues at a
variable rate equal to 2-1/4% in excess of the bank's prime lending rate
(8-1/2% as of September 30, 1997). Outstanding borrowings are collateralized by
substantially all the assets of the Company. The Agreement expires in September
1998.
The average amount outstanding under the Agreement during the year ended
September 30, 1997 was approximately $1,910,422 at a weighted average interest
rate of 9 3/4%.
The fair value of the debt approximates the recorded value based on the
borrowing rates currently available for loans with similar terms and maturities.
Additionally, the Company has outstanding borrowings under several equipment
leases accounted for as capital leases aggregating $519,065 as of September 30,
1997. Annual amounts due under these obligations are approximately $140,000 -
September 30, 1998, $162,000 - September 30, 1999, $169,000 - September 30, 2000
and $48,000 - September 30, 2001.
NOTE 5 - NOTES PAYABLE - STOCKHOLDERS
- -------------------------------------
The Company has currently outstanding $100,000 in note and $3,333 in related
accrued interest in favor of an officer and director. The funds were advanced
during the developmental stages to satisfy working capital needs. The Note has
matured and has been converted to a demand note with interest at a rate per
annum of 1-1/2% over Prime due on January 15 and July 15 until the Note is paid.
In addition, in January 1997, an officer, who is also a director, and a director
advanced the Company a total of $250,000 to satisfy additional working capital
needs. The Notes are payable upon demand and bear interest at a rate of 12%,
payable monthly. Interest expense on these notes amounted to approximately
$30,000 for the year ended September 30, 1997.
NOTE 6 - INTERIM FINANCING
- --------------------------
In April 1997, the Company obtained a financing arrangement of $750,000 with a
lending group (the "lending group"), which included an existing stockholder of
the Company. In addition, the lending group made available another $150,000 in
connection with a Letter of Credit. The debt bore interest at 2-1/2% above the
prime rate quoted in the Wall Street Journal (8-1/2% as of March 31, 1997) and
was collateralized by a second lien on the Company's inventory, accounts
receivable and trademarks. Principal and any outstanding interest was due and
payable on December 31, 1997. As described in Note 9(c), in July 1997, the
Company repaid in full the lending group loan, substituted approximately
$150,000 for the collateral securing the Letter of Credit and the lending group
released the second lien on the Company's inventory, accounts receivable and
trademarks.
As part of the initial loan transaction, an officer of the Company sold 135,000
shares of his common stock to the lending group for $.20 per share and the
Company agreed to grant to the lending group, upon the occurrence of certain
conditions, warrants to acquire up to 270,000 shares of common stock with an
exercise price equal to sixty percent (60%) of the common stock market value (as
defined) during the thirty day period prior to exercise of the warrants. Such
warrants became exercisable on August 8, 1997 for a period of three years. In
addition, if the debt was not repaid by August 8, 1997, the officer agreed to
grant to the lending group options to acquire an additional 90,000 shares of his
F-8
<PAGE>
GLENGATE APPAREL INC.
NOTES TO FINANCIAL STATEMENTS
================================
common stock exercisable from August 8, 1997 to August 18, 1997 at $.20 per
share and the Company agreed to grant the lending group warrants to acquire an
additional 180,000 shares of common stock on the same terms as the warrants
described above. The debt was repaid in July 1997, as described in Note 9(c)
and, accordingly, the additional options and warrants were not granted.
The estimated market value of the shares sold to the lending group by the
officer, less the proceeds received, along with the estimated market value of
the warrants to acquire 270,000 shares of common stock amounted to approximately
$140,000. This amount was charged to interest expense between April and July
1997.
NOTE 7 - COMMITMENTS
- --------------------
As of September 30, 1997, the Company had purchase commitments for merchandise
of approximately $3,765,000.
In June 1997, the Company entered into a five year operating lease agreement
with a three year renewal option for office and warehouse facilities under which
the future minimum annual rentals as of September 30, 1997 are as follows:
1998 $ 192,365
1999 209,875
2000 209,875
2001 209,875
2002 209,875
-----------
$ 1,031,865
===========
Rent expense was $93,225 and $70,408 for the years ended September 30, 1997 and
1996, respectively.
On February 14, 1997, the Company entered into a Consignment Agreement with Sun
Ice Ltd. and Sun Ice USA, Inc. to sell certain apparel inventory of Sun Ice on
a consignment basis. As of September 30, 1997, the Company held approximately
$364,000 of inventory under the Consignment Agreement with Sun Ice. The Company
agreed to return, dispose of or purchase any unsold goods upon the termination
of the Consignment Agreement on November 14, 1997. Through December 1997, no
purchase of unsold goods has been finalized.
In addition, on February 14, 1997, the Company entered into a Trademark License
Agreement with Sun Ice Ltd. and Sun Ice USA under which the Company was granted
a license to use the Sun Ice and Aureus trademarks within the United States for
a five year period. The Company has agreed to pay a royalty based on a percent-
age of licensed net sales with the annual minimum royalty ranging up to approx-
imately $220,000 during the five year term commencing December 1, 1997. The Sun
Ice label consists of men's and ladies' golf outerwear and the Aureus label
consists of men's golf apparel.
NOTE 8 - INCOME TAXES
- ---------------------
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires
a company to recognize deferred tax liabilities and assets for the expected
future tax consequences of events that have been recognized in a company's
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial state-
ment carrying amounts and tax bases of assets and liabilities using enacted tax
rates.
F-9
<PAGE>
GLENGATE APPAREL INC.
NOTES TO FINANCIAL STATEMENTS
================================
in effect in the years in which the differences are expected to reverse.
At September 30, 1997, the Company had net operating loss carryforwards of
approximately $5,600,000, which expire through 2017 and are restricted as to
annual utilization during the carryforward period, and temporary differences
related primarily to inventory costs capitalized for tax purposes totalling
approximately $54,000. The deferred tax asset related to the net operating loss
carryforwards and temporary differences amounted to approximately $2,400,000 and
is fully offset by a valuation allowance of the same amount.
NOTE 9 - STOCKHOLDERS' EQUITY
- ------------------------------
a) Common Stock Options
In December 1994 the Company's Board of Directors approved the adoption of
the 1994 Stock Option Plan (the "Plan") to provide incentives for selected
persons to promote the financial success and progress of the Company. The
Plan provides for the Compensation Committee or such other committee that
the Board may appoint to administer the Plan. The Plan provides for the
reservation of 2,500,000 shares of common stock for issuance upon the
exercise of granted options.
The following is a summary of the common stock options granted, canceled or
exercised under the Plan for the period October 1, 1995 through September
30, 1997.
Exercise price per
Shares share
---------- ----------------
Outstanding - September 30, 1995 1,934,000 $1.00 to $3.00
Granted 476,000 $1.25 to $1.625
Canceled (119,668) $1.00 to $2.50
Exercised (554,332) $1.00 to $1.25
Outstanding - September 30, 1996 1,736,000 $1.00 to $2.50
Granted 67,500 $1.00 to $1.06
Canceled (212,500) $1.00 to $1.25
Exercised - -
---------- ---------------
Outstanding - September 30, 1997 1,591,000 $1.00 to $2.50
========== ===============
The fair value of the stock options granted during 1997 and 1996 was $23,163
and $195,300, respectively, on the date of grant using the Black Scholes
option-pricing model. The weighted-average assumptions used for both 1997
and 1996 were: risk-free interest rate of 6.1%, an expected life of 2 years
and an expected volatility of 47%.
In addition, the Company has 270,000 warrants outstanding as described in
Note 6 and 2,500,000 options outstanding as described in Note 9(c).
F-10
<PAGE>
GLENGATE APPAREL INC.
NOTES TO FINANCIAL STATEMENTS
================================
The following table summarizes information on stock options outstanding at
September 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C>
Weighted
Number Average Weighted Number Weighted
Outstanding at Contractual Average Exercisable at Average
Range of September 30, Life Exercise September 30, Exercise
Exercise Prices 1997 (Years) Price 1997 Price
- ------------------------------------------------------ -------------------------
$1.00 - $1.25 1,437,000 8.3 $1.04 1,335,331 $1.03
$1.50 - $1.63 86,000 9.0 $1.53 80,000 $1.54
$2.00 - $2.40 68,000 8.0 $2.11 68,000 $2.11
------------------------------------- -------------------------
1,591,000 8.3 $1.12 1,483,331 $1.11
====================================== =========================
</TABLE>
b) Stockholders Agreement
In April 1995, the Company and the founding stockholders (the
"Stockholders") negotiated a stockholders' agreement which requires the
Company to purchase the shares held by a Stockholder upon the death of
that Stockholder, at estimated fair market value (as defined), but limited
to the extent of any insurance proceeds payable to the Company as a result
of the Stockholder's death.
c) Increased Shares Authorized and Private Placement of Common Stock
In July 1997, the holders of the Company's stock approved an increase in the
number of authorized shares of common stock to 17,000,000 shares enabling
American Marketing Industries, Inc. ("AMI") to purchase 2,500,000 shares and
receive 2,500,000 stock options for an aggregate price of $2,500,000. The
options consists of an option to acquire up to 1,000,000 shares of Common
Stock at a purchase price of $1.50 per share, such option to be immediately
exercisable and expiring three years after the date of the grant and an
option to acquire up to 1,500,000 shares at a purchase price of $2.00 per
share, such option to become exercisable one year from the date of the grant
and expiring three years after the date of the grant.
In June 1997, AMI had advanced to the Company a bridge loan in the amount
of $600,000 pursuant to a term note, such term note to bear interest at a
rate of 9% per annum, with interest to be payable quarterly beginning
September 1, 1997. The note was to mature on the earlier of June 23, 1998
or at AMI's option in the event the Company defaulted on the note and could
be prepaid by the Company without penalty at any time prior to the maturity
date.
The Company used the net proceeds of $2,425,000 as follows: (i) approx-
imately $600,000 to repay the AMI bridge loan, (ii) approximately $750,000
to repay outstanding loans made by the lending group described in Note 6,
and (iii) approximately $150,000 in substitution of the collateral provided
by the same lending group in connection with a certain letter of credit.
Approximately $200,000 of the remainder of the proceeds was used for capital
expenditures and the balance has been used for working capital and other
general corporate purposes.
NOTE 10 - CONCENTRATION OF CREDIT RISK
- --------------------------------------
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of trade accounts receivable.
The Company performs ongoing credit evaluations of its customers' financial
condition to mitigate its credit risk. The Company does not normally require
collateral on its accounts receivable.
F-11
MTV NETWORKS MERCHANDISE
LICENSE AGREEMENT
Agreement made effective as of this 20th day of June, 1997,
by and between MTV Networks, a division of Viacom International
Inc., a Delaware corporation, with offices at 1515 Broadway, New
York, New York 10036 ("MTVN"), and GlenGate Apparel, Inc., a New
Jersey corporation, with offices at 75 Rod Smith Place, Cranford,
New Jersey 07016 ("Licensee").
BASIC PROVISIONS
----------------
LICENSED PROPERTY: Guitar Swinging Golf Man and VH1 Music
First logos, the words THE TITANS OF
ROCK and THE GIANTS OF GOLF, and the
words FAIRWAY TO HEAVEN when used solely
in combination with the logos.
LICENSED PRODUCTS: T-shirts, fashion upper body garments
(both knit and woven), outerwear, ties,
headwear, socks, neckwear, wind shirts,
fleece and polar fleece.
LICENSED TERRITORY: United States, its territories and
possessions, and Canada. In the event
Licensee desires to obtain any
additional international rights,
Licensee shall submit such requests to
MTVN and MTVN shall approve or
disapprove such requests on a case-by
-case basis at MTVN's sole discretion.
LICENSED CHANNELS OF Golf Chains (i.e., Nevada Bob's);
DISTRIBUTION: Sporting Goods Chains (i.e., Sports
Authority, Modells); College Book
Stores; Green Grass Shops; Mid- to
Upper-Tier Department Stores (i.e., JC
Penny, Dillards Belks) excluding so-
called Mass Market/Merchandisers (i.e.,
Walmart, Kmart, Target); Golf Catalogs,
QVC and electronic retailing with prior
written approval by MTVN.
LICENSE TERM: August 1, 1997 to July 31, 2000; (the
First Year, as such term is used herein,
shall mean the period of time commencing
August 1, 1997 and ending December 31,
1998, and the Second Year shall mean the
period of time commencing January 1,
1999 and ending July 31, 2000.)
In the event Licensee achieves
$3,000,000.00 in Wholesale Sales by the
end of the License Term hereof, Licensor
shall have an option to renew this
Agreement for an additional 12-month
period upon terms and conditions which
shall be negotiated by the parties.
<PAGE>
EXCLUSIVITY: The Licensed Products are exclusive to
Licensee, except for headwear and any
merchandise within the definition of
Licensed Products which is created for
the VH1 Fairway to Heaven golf event.
Licensee shall use best efforts to
submit a headwear line to MTVN for
approval by November 31, 1997 (the
"Proposal"). In the event MTVN approves
such Proposal, the headwear shall be
exclusive to Licensee.
PRESENTATION DATE TO
LICENSEE'S RETAILERS: March 15, 1998
In the event Licensee fails to
manufacture and present any of the
Licensed Products to retailers by the
end of the fourth quarter of 1998, MTVN
reserves the right to remove such
Licensed Products from the definition of
Licensed Products hereunder and all
rights to such Licensed Products granted
to Licensee hereunder shall revert to
MTVN.
INITIAL SHIP DATE TO
LICENSEE'S RETAILERS: June 15, 1998
ROYALTY RATE: First Year:
-----------
six percent (6%) of Net Sales (as
defined in the annexed Additional Terms
and Conditions)
Second Year:
------------
eight percent (8%) of Net Sales (+1% of
Net Sales towards marketing and
advertising)
GUARANTEED MINIMUM
ROYALTY: The Guaranteed Minimum Royalty for the
License Term is $200,000.00 and shall be
allocated and payable as follows:
First Year:
-----------
$60,000.00 payable as follows:
$20,000.00 upon signing, but no later
than November 25, 1997
$10,000.00 no later than September 15,
1998
$30,000.00 no later than December 15,
1998.
Second Year:
------------
$140,000.00 payable as follows:
$57,500.00 no later than March 15, 1999
$27,500.00 no later than June 15, 1999
$27,500.00 no later than September 15,
1999
$27,500.00 no later than December 15,
1999
COPYRIGHT NOTICE: "19____ [Year of Publication] Viacom
International, Inc. All Rights
Reserved".
<PAGE>
TRADEMARK NOTICE: Guitar Swinging Golf Man logo and VH1
Music First name, trademark and logo,
and the words THE TITANS OF ROCK and
THE GIANTS OF GOLF. Licensee shall
also include the following notice on all
materials set forth in subparagraph 5(b)
of the ADDITIONAL TERMS AND CONDITIONS
in proximity to the Licensed Property.
"VH1 Music First and all related titles
and logos are trademarks owned and
licensed for use by Viacom
International, Inc."
This Agreement includes the Additional Terms and
Conditions and the Riders and Schedules, if any, annexed hereto
and made a part hereof. All capitalized terms used in the
Additional Terms and Conditions not defined therein shall have
the respective definitions as set forth in the Basic Provisions
herein. In the event of any conflict or inconsistency between
the Basic Provisions and the Additional Terms and Conditions, the
Basic Provisions will control.
IN WITNESS WHEREOF, the parties hereto have executed
this Agreement as of the day and year first above written.
GLENGATE APPAREL, INC. MTV NETWORKS, a division of
Viacom International Inc.
By: /s/ Wayne E. Webber By: /s/ Lisa Silf
------------------------- ---------------------
Name: Wayne E. Webber Name: Lisa Silf
------------------------- ---------------------
Title: Executive Vice President Title: Vice President
------------------------- ----------------------
<PAGE>
ADDITIONAL TERMS AND CONDITIONS
-------------------------------
1. LICENSE:
-------
MTVN hereby grants to Licensee the exclusive right, as
defined in the Basic Provisions, to use the Licensed Property
solely for the purpose of the manufacture, distribution, sale and
advertisement of the Licensed Products through Licensee's present
Licensed Channels of Distribution in the Licensed Territory
during the License Term (the "License"). Licensee shall not have
the right to sublicense the rights granted hereunder. Licensee
may contract with third parties for the manufacture and
distribution of the Licensed Products, subject to MTVN's prior
approval and the completion and return of the Approval of
Manufacturer Form attached hereto as Exhibit D. In all instances
where MTVN's prior approval is required hereunder, such approval
shall not be unreasonably withheld or delayed.
2. RESERVATION OF RIGHTS:
---------------------
MTVN retains all rights not expressly granted hereunder
(including but not limited to the right to distribute and sell
the Licensed Products through premium offers, combination and
giveaway sales, direct response, direct mail, home shopping type
of networks, the on-line medium or any other non-traditional
medium now known or hereafter invented, sales clubs, incentive
programs theme parks/ recreational attractions and activities,
any MTVN or its affiliated companies' retail outlets and the
rights to the Guitar Swinging Golf Man, and VH1 Music First
logos, the words THE TITANS OF ROCK and THE GIANTS OF GOLF, and
the words FAIRWAY TO HEAVEN when used in combination with the
logos, and all names, trademarks and likenesses of characters
which are used in connection with a motion picture or other
theatrical or live stage presentation for all products, including
the Licensed Products).
3. ROYALTIES, ACCOUNTING AND AUDIT:
--------------------------------
(a) COMPUTATION:
------------
(i) Royalties shall be payable at the Royalty Rate set
forth in the Basic Provisions on Net Sales of all Licensed
Products. "Net Sales" shall mean gross sales less customary
trade quantity discounts and allowances and returns for damaged
goods only, the aggregate of which shall not exceed six percent
(6%) of gross sales. Except for those expressly provided for in
this paragraph, there shall be no deductions of any sort or kind,
including but not limited to deductions for returns, cash
discounts, costs or expenses incurred in the manufacture,
distribution, sale or advertisement of the Licensed Products, or
for uncollected bills.
(ii) Royalty obligations shall accrue upon sale of the
Licensed Products. A Licenses Product is considered "sold" when
it is shipped or paid for, whichever event occurs first.
<PAGE>
(iii) In the event that Licensed Products are sold to
any party affiliated, controlled, or in any way related to
Licensee at a special price lower than the average price charged
to other parties, the royalty payable to MTVN shall be based upon
said average price.
(iv) If, upon termination or expiration of the License
Term, the total Royalties paid by Licensee to MTVN during the
period of the License Term immediately preceding expiration or
termination is less than the Guaranteed Minimum Royalty for such
period, Licensee shall immediately pay such difference to MTVN.
Royalty payments made for any period of the License Term shall be
credited against the Guaranteed Minimum Royalty for such period
of the License Term.
(b) PAYMENT:
--------
(i) Royalties shall be payable, (to the extent not
credited against the Guaranted Minimum Royalty Payment pursuant
to Section 3(a)(iv)), on a quarterly basis throughout the License
Term, within fifteen (15) days after the close of each respective
quarter. Quarters shall be based on a standard calendar year.
All amounts past due shall be subject to a late charge of one
percent (1%) per month (or the highest rate allowed by law if
lower), from the date such payments were due.
(ii) Licensee shall pay to MTVN a non-refundable
Guaranteed Minimum Royalty as set forth in the Basic Provisions.
All amounts past due shall be subject to a late charge of one
percent (1%) per month (or the highest rate allowed by law if
lower), from the date such payments were due.
(iii)Late charges shall not accrue pursuant to
subparagraphs (b)(i) and (b)(ii) until thirty (30) days after any
payments owed to MTVN are past due and MTVN shall have given
Licensee oral or written notice to that effect.
(c) ACCOUNTING:
-----------
Within fifteen (15) days after the close of each
quarter, Licensee shall furnish to MTVN complete and accurate
statements of its sales of Licensed Products and royalties due
MTVN, in the form annexed hereto as Schedules A and B ("Quarterly
Reports"). Quarterly Reports shall be furnished whether or not
Licensee has actual royalties to report for any quarter. All
Quarterly Reports shall be signed and certified as correct by an
officer of Licensee. Acceptance by MTVN of royalty payments and
Quarterly Reports shall not preclude MTVN from questioning the
accuracy thereof.
(d) AUDIT:
------
(i) Licensee shall keep accurate books of account and
records at its principal place of business of all transactions
relating to or affecting this License, during the License Term
and for a period of three years thereafter. MTVN or its
representative shall have the right during reasonable business
hours to examine and verify Licensee's physical inventory of the
Licensed
<PAGE>
Products as well as Licensee's books of accounts and records, and
to make copies and extracts thereof at MTVN's cost.
(ii) In the event that an audit by MTVN discloses an
underpayment in royalties due MTVN, Licensee shall promptly pay
MTVN such discrepancy plus a late charge of one percent (1%) per
month (or the highest rate allowed by law if lower), from the day
such payments were due. If such audit discloses a discrepancy of
five percent (5%) or more for any quarter, Licensee shall also
reimburse MTVN for all reasonable costs incurred by MTVN in
connection with the audit.
4. QUALITY, SAMPLES, APPROVALS:
----------------------------
(a) The quality and style of all Licensed Products, and the
manner in which the Licensed Property may appear on the Licensed
Products and on any packaging, promotional materials, labels,
advertising, publicity and display materials of any kind used in
connection with the Licensed Products are subject to MTVN's prior
written approval, which approval shall not be unreasonably
withheld.
(b) At each stage of development or production and prior to
manufacture, Licensee shall promptly provide MTVN with two (2)
samples in the form of proofs and/or prototypes for each Licensed
Product and all related materials. MTVN shall advise Licensee in
writing of its approval or disapproval of such samples within
five (5) business days of Licensee's submission; provided,
however that in those special circumstances where production
and/or manufacture of a Licensed Product may be materially
affected or delayed and Licensee provides MTVN with written
notice to that effect, MTVN shall use best efforts to approve or
disapprove such samples within twenty-four (24) hours. No
samples shall be deemed approved unless and until MTVN has given
its approval in writing. Licensee shall not proceed beyond any
development or production stage where approval is required
without first securing such approval. In connection with the
submission of samples by Licensee for MTVN's approval, Licensee
shall also submit to MTVN a completed copy of the Licensed
Product Approval Form provided by MTVN as Schedule C. Once a
sample has been approved, Licensee shall not depart therefrom.
Approval by MTVN shall not relieve Licensee of any of its
agreements, indemnities and warranties hereunder.
(c) Licensee shall promptly reimburse MTVN for any and all
costs of artwork and other creative materials prepared by MTVN at
Licensee's request in connection with the Licensed products if
and only if such artwork and other creative material is not
contained in MTVN's style guide, a copy of which shall be
provided to Licensee by MTVN.
(d) Concurrently with the initial shipment of each Licensed
Product, Licensee shall furnish to MTVN, at no cost to MTVN, six
(6) samples of each Licensed Product and each subsequent year of
the License Term, six (6) samples of each Licensed Product. Any
Licensed Products requested by MTVN in excess of the foregoing
amounts shall be made available to MTVN at Licensee's cost.
<PAGE>
(e) Upon MTVN's request, Licensee shall provide MTVN with a
list of the names and addresses of Licensee's manufacturers
and have such manufacturers fill out MTVN's manufacturer's form.
MTVN agrees that such information shall only be used by MTVN in
connection with the maintenance of quality control standards of
the Licensed Products.
(f) From time to time, upon MTVN's request, Licensee shall
include certain materials provided by MTVN relating to MTVN's
programs, programming services, or ancillary businesses in the
packaging of the Licensed Products; provided that in each
instance such request does not increase Licensee's cost.
5. MARKINGS:
---------
(a) Licensee shall affix the Copyright and Trademark
Notices set forth in the Basic Provisions to all Licensed
Products and to all packaging, labels, promotional, advertising,
publicity, and display materials used in connection therewith, in
accordance with instructions from MTVN. No Licensed Products or
related materials shall contain any other copyright, trademark or
trade name unless MTVN has given Licensee prior written consent
thereto. MTVN may at any time require an addition to or change
of the Copyright and Trademark Notices, effective not less than
thirty (30) days after receipt by Licensee of notice thereof,
provided that Licensee shall have the right to continue to
distribute any inventory containing the Copyright and Trademark
Notices previously approved by MTVN which were manufactured prior
to the date it receives such notice. Licensee shall cooperate
with MTVN in connection with MTVN's obtaining or maintaining
copyright and/or trademark protection for the Licensed Property
in MTVN's name.
(b) Licensee shall affix to the Licensed Products and all
packaging, labels, promotional materials, advertising, publicity,
and display materials used in connection therewith, any other
legends, markings and notices required by any law or regulation
in the Licensed Territory or which MTVN reasonably may request.
6. OWNERSHIP:
----------
(a) As between MTVN and Licensee, all right, title and
interest in and to the Licensed Property shall be and remain the
sole and complete property of MTVN. Licensee recognizes the
value of the goodwill associated with the Licensed Property, that
the Licensed Property has secondary meaning in the mind of the
public, and that the trademarks and copyrights in the Licensed
Property, and any registrations therefor, are good and valid.
All use by Licensee of the Licensed Property shall inure to the
benefit of MTVN. Licensee shall not, during the License Term or
thereafter, contest or assist others to contest, MTVN's rights or
interests in the Licensed Property or the validity of this
License. Licensee shall not seek any copyright or trademark
registration for the Licensed Property.
(b) Any copyright, trademark, or other proprietary rights
owned by Licensee and heretofore used by it, which are used in
connection with the Licensed Products as approved by MTVN
pursuant to paragraph 5(a) above, shall continue to be owned by
Licensee and shall not become the property of MTVN.
<PAGE>
(c) All right, title, or interest in or to any copyright,
trademark, or other proprietary rights that come into existence
during the License Term as a result of the exercise by Licensee
of any right granted to it hereunder, shall immediately and
automatically vest in MTVN.
(d) Except as otherwise provided, all creations, including
but not limited to art work and designs, that come into existence
during the License Term, including any packaging, labels and
promotional, advertising, publicity, and display materials used
in connection with the Licensed Products shall be deemed "works
made for hire" for MTVN within the meaning of the U.S. Copyright
Law. To the extent that any such work does not so qualify, for
the consideration set forth herein, Licensee hereby irrevocably
and absolutely assigns to MTVN all rights throughout the universe
in perpetuity in all media now known or hereafter developed,
including but not limited to the copyright and any extensions and
renewals thereof and the trademarks and the goodwill associated
therewith.
(e) Licensee agrees to execute and deliver to MTVN any
documents which MTVN may reasonably request to confirm MTVN's
ownership of its rights hereunder. Licensee hereby irrevocably
appoints MTVN as its attorney-in-fact coupled with an interest to
sign any such documents in Licensee's name.
7. INFRINGEMENTS:
--------------
Licensee shall promptly notify MTVN of any unauthorized use
or infringement by third parties of any rights granted to
Licensee herein, and will cooperate fully in any action at law or
in equity undertaken by MTVN with respect to such unauthorized
use or infringement. Licensee shall not institute any suit in
connection with any unauthorized use or infringement without
first obtaining the written consent of MTVN to do so, and MTVN
shall have the sole right to determine whether or not any action
shall be taken on account of any such unauthorized uses or
infringements.
8. REPRESENTATIONS, WARRANTIES, AND UNDERTAKINGS:
----------------------------------------------
(a) Licensee represents, warrants, and undertakes as
follows:
(i) It is free to enter into and fully perform
this Agreement;
(ii) All ideas, creations, designs, materials and
intellectual property furnished by Licensee
in connection with the Licensed Products will
be Licensee's own and original creation or
fully licensed by Licensee;
(iii) The Licensed Products and all materials used
in connection therewith shall be of the
highest standard reasonably suitable for
goods of the type of the Licensed Products.
The Licensed Products will be safe for use by
consumers and will comply with all applicable
governmental rules, guidelines, codes,
regulations, and warranties (express or
implied) including, without limitation those
contained in the Child Safety Protection Act
and/or adopted by the Consumer Product Safety
Commission;
<PAGE>
(iv) The Licensed Products will be manufactured,
distributed, sold and advertised in
accordance with all applicable federal, state
and local laws including but not limited to
all applicable labor laws and regulations and
in a manner that will not reflect adversely
upon MTVN, and will not infringe upon or
violate any rights of any third parties;
(v) Licensee shall use commerically reasonable
efforts to obtain maximum sales in the
Licensed Territory during the License Term.
(b) MTVN represents, warrants, and undertakes as follows:
(i) It is free to enter into and fully perform
this Agreement;
(ii) The Licensed Property (except for the words
"FAIRWAY TO HEAVEN") is original to and the
sole property of MTVN, and does not infringe
upon or violate any copyright or proprietary
right of any third party;
(iii) to MTVN's knowledge, there are no pending or
threatened suits or proceedings in connection
with the Licensed Products.
9. INDEMNITIES:
------------
(a) Licensee will at all times indemnify and hold MTVN, its
officers, directors and employees harmless from and against any
and all claims, damages, liabilities, costs and expenses,
including reasonable counsel fees, arising out of any breach or
alleged breach by Licensee of any representation, warranty or
undertaking made herein, or out of any defect (latent or patent)
in the Licensed Products, provided that MTVN shall give prompt
written notice, cooperation and assistance to Licensee relative
to any such claim or suit, and provided further that no
settlement of any such claim or suit shall be made without the
prior written consent of MTVN.
(b) MTVN will at all times indemnify and hold Licensee, its
officers, directors and employees harmless from and against any
and all claims, damages, liabilities, costs and expenses,
including reasonable counsel fees, arising out of any (i) breach
or alleged breach by MTVN of any representation, warranty or
undertaking made herein; and (ii) a claim against Licensee in
connection with Licensee's use of the words "FAIRWAY TO HEAVEN"
solely as contemplated under this Agreement; provided, however,
that Licensee shall give prompt written notice, cooperation and
assistance to MTVN relative to any such claim or suit, and
provided further that MTVN shall have the option to undertake and
conduct the defense and/or settlement of any such claim or suit
so brought and that no settlement of any such claim or suit is
made without the prior written consent of MTVN.
10. INSURANCE:
----------
Licensee shall obtain and maintain at its own cost and
expense from a qualified insurance company licensed to do
business in New York, standard Product Liability
<PAGE>
Insurance naming MTVN as an additional named insured, with
respect to all Licensed Products manufactured hereunder, whether
sold during the License Term or thereafter. Such policy shall
provide protection against any and all claims, demands and causes
of action arising out of any defects or failure to perform,
alleged or otherwise, of the Licensed Products or any material
used in connection therewith or any use thereof. The amount of
coverage shall be Five Million Dollars ($5,000,000). The policy
shall provide for ten (1O) days notice to MTVN from the insurer
by Registered or Certified Mail, return receipt requested, in the
event of any modification, cancellation or termination thereof.
Licensee agrees to furnish MTVN a certificate of insurance
evidencing same within thirty (30) days after execution of this
Agreement and in no event shall Licensee manufacture, distribute
or sell the Licensed Products prior to receipt by MTVN of such
evidence of insurance.
11. DEFAULT:
--------
(a) Upon the occurrence of any of the following events
(each of which is a "Default"), then in addition and without
prejudice to any rights which it may have at law, in equity or
otherwise, MTVN shall have the right to terminate this Agreement,
to delete from this Agreement any elements of the Licensed
Property or any Licensed Products and/or to require the immediate
payment of any Guaranteed Minimum Royalty and royalties due or to
become due hereunder:
(i) Licensee fails to meet the Presentation Date
To Licensee's Retailers or the Initial Ship Date To Licensee's
Retailers of the Licensed Products;
(ii) Licensee fails to actively manufacture,
advertise, distribute or sell the Licensed Products;
(iii) Licensee fails to make a payment or furnish a
statement in accordance herewith and does not cure such
failure within fifteen (15) days after notice thereof;
(iv) Licensee fails to comply with the approval,
quality, and safety requirements hereunder and/or the Licensed
Products do not comply with such requirement and/or the Licensed
Products are the subject matter of adverse or negative publicity
due to such failure;
(v) Licensee fails to comply with any other of
Licensee's material obligations hereunder or breaches any
warranty or representation made by it hereunder and does not cure
such failure or breach within fifteen (15) days after notice
thereof;
(vi) Licensee sells or otherwise disposes of all
or substantially all of its business or assets to a third party,
or control of Licensee is transferred and the management thereby
changed;
(vii) Licensee sells or causes others to sell the
Licensed Products outside Licensee's Licensed Distribution
Channels and/or outside the Licensed Territory;
<PAGE>
(viii) Licensee fails to obtain or maintain product
liability insurance in the amount of the type provided for
herein; or
(ix) Licensee contests or assists others to
contest MTVN's rights or interests in the Licensed Property or
the validity of this License; or
(b) In the event that the Licensed Products pose a safety
threat to the consumer, or are the subject of a claim or inquiry
by the Consumer Product Safety Commission or the Child Safety
Protection Act or any other person, agency or commission because
of quality and/or safety concerns, and/or labeling or are the
subject of negative publicity due to poor quality and/or safety
of the Licensed Products, Licensee shall, upon MTVN's reasonable
request, immediately recall such Licensed Products from the
market place, and take any other measures MTVN may reasonably
demand.
(c) If a petition in bankruptcy is filed by or against
Licensee, or Licensee is adjudicated bankrupt, which is not
dismissed within forty-five (45) days, or Licensee makes any
assignment for the benefit of creditors or becomes insolvent, is
placed in the hands of a trustee or receiver, fails to satisfy
any judgment against it or is unable to pay its debts as they
become due, whichever is sooner, this License shall automatically
terminate forthwith without any notice whatsoever. Upon such
termination for any reason under this subparagraph 11(c)
Licensee, its receiver, representatives, trustees, agents,
administrators, successors and assigns shall have no further
rights hereunder, and neither this License nor any right or
interest herein shall be deemed an asset in any insolvency,
receivership, and/or bankruptcy.
12. FORCE MAJEURE:
--------------
In the event that Licensee is prevented from manufacturing,
distributing or selling the Licensed Products because of any act
of God; unavoidable accident; fire, epidemic; strike, lockout, or
other labor dispute; war, riot or civil commotion; act of public
enemy; enactment of any rule, law, order or act of government or
governmental instrumentality (whether federal, state, local or
foreign); or other cause of a similar or different nature beyond
Licensee's control, and such condition continues for a period of
two (2) months or more, either party hereto shall have the right
to terminate this Agreement effective at any time during the
continuation of such condition by giving the other party at least
thirty (30) days' notice to such effect. In such event, all
royalties on sales theretofore made shall become immediately due
and payable and this Agreement shall be automatically terminated.
13. EFFECT OF EXPIRATION OR TERMINATION:
------------------------------------
Upon expiration or termination of this Agreement, all rights
granted to Licensee herein shall forthwith revert to MTVN, with
the following consequences:
(a) No portion of any prior payments shall be repayable to
Licensee, and any and all
<PAGE>
payments due or to become due, including any royalties and
Guaranteed Minimum Royalty shall be immediately due and payable.
If, at such time, the total amount of royalties paid by Licensee
during the License Tenn is less than the Guaranteed Minimum
Royalty, Licensee shall immediately pay such difference to MTVN.
(b) After the expiration or termination of this Agreement,
Licensee shall not manufacture, advertise, distribute or sell the
Licensed Products containing or including the Licensed Property
or any product which may infringe upon MTVN's proprietary rights,
or use any name, logo or design which is substantially or
confusingly similar to the Licensed Property on any product in
any place whatsoever. Licensee shall promptly deliver to MTVN a
statement indicating the number of Licensed Products then
currently on hand or in the process of being manufactured. MTVN
shall have the right to conduct a physical inventory in order to
ascertain or verify such inventory and/or statement. Except as
provided in subparagraph (c), such inventory shall at MTVN's
option be destroyed (as set forth below) by Licensee or purchased
by MTVN at Licensee's cost of manufacture. Disposition of any
plates, moulds, forms, lithographs and other material relating to
the Licensed Products then remaining on hand shall be subject to
written instructions from MTVN to Licensee either to destroy or
to deliver same to MTVN or its designee. In the event that MTVN
requests Licensee to destroy its inventory, the Licensed Property
or materials relating thereto (subject to Licensee's right to
continue to sell Licensed Products according to the terms
provided in subparagraph (c)), MTVN may require Licensee to
deliver to MTVN an affidavit by an officer of Licensee, attesting
to such destruction in such form as MTVN may in its sole
discretion require.
(c) Upon expiration of this Agreement, so long as Licensee
is not in default at time of expiration, Licensee may continue to
sell any Licensed Products, previously manufactured and on hand,
on a non-exclusive basis during the period of sixty (60) days
thereafter subject to all of the terms and conditions contained
in this Agreement and provided that: (i) the Licensed Products
are sold in the ordinary course of business at prices not lower
than the prevailing wholesale price or prices charged by Licensee
during the ninety (90) day period immediately preceding
expiration; (ii) no new Licensed Products are manufactured during
such sell-off period; and (iii) MTVN is paid its then existing
Royalty Rate on all Licensed Products sold during the sell-off
period.
(d) All warranties, indemnification and any other
applicable obligations of Licensee shall survive the expiration
or termination of this License.
14. PAYMENTS AND NOTICES:
---------------------
All notices which either party hereto is required or may
desire to give to the other shall be given by addressing the same
to the other at the address first set forth above, or at such
other address as may be designated in writing by any such party
in a notice to the other given in the manner prescribed in this
paragraph. All such notices shall be made in writing by mailing
the same by certified or registered mail, return receipt
requested, and shall be effective immediately upon receipt
thereof. Any and all notices to MTVN shall be addressed to
Attention: Vice President, Consumer Products, MTV: Music
Television, with a copy to the Sr. Vice President, Business
Affairs and General Counsel. All payments and statements to MTVN
hereunder shall
<PAGE>
be addressed to the Attention: MTV Networks, Ancillary Sales,
P.O. Box 13801, Newark, NJ 07188-0801 with a copy to the Vice
President Consumer Products, MTV: Music Television.
15. CONFIDENTIALITY:
----------------
In connection with the services provided hereunder, each of
Licensee and MTVN may, from time to time, be exposed to and will
be furnished with certain information, relating to the other's
plans for certain productions and services, which are
confidential. Each of Licensee and MTVN shall keep confidential
and not reveal or disclose any of said information, material or
data to any third party or the terms of this Agreement, or any
agreement Licensee enters into pursuant to this Agreement during
the Term or thereafter. Neither Licensee or MTVN will disclose
or make known to anyone outside of Licensee or MTVN, as
applicable, directly or indirectly, the interest of the other in
this Agreement or the terms of this Agreement. The provisions of
this paragraph shall not apply to information which is or becomes
publicly available or information which is required to be
disclosed pursuant to a court order or applicable law, rules or
regulations.
16. GENERAL CLAUSES:
----------------
(a) Any attempted or purported assignment or other
transfer, sublicense, mortgage or other encumbrance of this
License and the rights granted herein by Licensee without the
prior written approval of MTVN shall be void and of no effect.
This Agreement and the rights and obligations of the parties
hereunder shall be binding upon and shall inure to the benefit of
MTVN and Licensee and their respective legal representatives,
successors in interest and permitted assigns.
(b) Nothing herein contained shall be construed to
constitute a partnership or joint venture between the parties
hereto, and neither Licensee nor MTVN shall become bound by any
representation, act or omission of the other. Licensee is an
independent contractor in the manufacture, advertisement, sale
and distribution of the Licensed Products, and Licensee will pay
all sales taxes and other taxes or charges imposed on Licensee or
MTVN, except for MTVN's corporate income tax, by any law,
ordinance or requirement of any government or governmental
instrumentality in connection therewith.
(c) A waiver by either party of any terms or conditions of
this Agreement in any instance shall not be deemed or construed
to be a waiver of such term or condition for the future, or of
any subsequent breach thereof. All remedies, rights,
undertakings, obligations and agreements contained in this
Agreement shall be cumulative, and none of them shall be in
limitation of any other remedy, right, undertaking, obligation or
agreement of either party.
(d) This Agreement and all matters or issues collateral
thereto shall be governed by the laws of the State of New York
applicable to contracts performed entirely therein. In any such
action or proceeding, service of process upon Licensee may be
accomplished by sending such process in the manner specified
herein for the giving of notice to Licensee. Licensee hereby
consents and submits to the jurisdiction of the Federal, and/or
state court located in New York.
<PAGE>
(e) The entire understanding between the parties hereto
relating to the subject matter hereof is contained herein and no
warranties, representations or undertakings are made by the
parties hereto except as expressly provided herein. This
Agreement cannot be changed except in writing signed by the
parties.
(f) The paragraph titles of this Agreement are for
convenience only and shall not affect the interpretation of this
Agreement or any paragraph thereof.
(g) The parties hereto agree to execute such other
writings, documents and instruments as may be necessary or
desirable to effectuate the purposes of this Agreement.
(h) Notwithstanding any termination, cancellation or
expiration of this Agreement, the following provisions hereof
that are intended to continue and survive are paragraphs: 3 (d);
6-10; 11 (b); and 13-15.
(i) This Agreement shall be interpreted as if the parties
hereto jointly prepared it.
<PAGE>
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0
0
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