<PAGE> 1
As filed with the Securities and Exchange Commission on September 28, 1998.
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission file number: 0-24636
THE SIRENA APPAREL GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 36-2998726
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
10333 Vacco Street
South El Monte, California 91733
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (626) 442-6680
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 per share
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of September 8, 1998, the aggregate market value of the Common Stock held by
non-affiliates of the Registrant, as reported on the Nasdaq National Market, was
approximately $13,421,664, based upon the closing price of the Common Stock on
that date.
Number of shares of Common Stock of the Registrant outstanding as of
September 8, 1998: 5,019,391.
Portions of the Registrant's definitive Proxy Statement, which will be filed
with the Securities and Exchange Commission pursuant to Regulation 14A in
connection with the Registrant's 1999 annual meeting of stockholders, are
incorporated by reference in Part III herein. Such Proxy Statement will be filed
with the Securities and Exchange Commission not later than 120 days after the
Registrant's fiscal year ended June 30, 1998.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. BUSINESS................................................................................1
General..........................................................................1
Strategy.........................................................................1
Develop a Diversified Portfolio of Swimwear and Resortwear................1
Expand Intimate Apparel...................................................2
Emphasize Fashion Innovation and Quality..................................2
Build Strong Relationships with Retail Customers..........................2
Achieve Operating Efficiencies............................................2
Expand Through Acquisitions...............................................3
Products.........................................................................3
Branded Swimwear..........................................................3
Private Label Swimwear....................................................4
Resortwear................................................................4
Intimate Apparel..........................................................4
Product Design...................................................................5
Manufacturing....................................................................5
Marketing........................................................................6
Bookings.........................................................................6
Competition ....................................................................7
License Agreements...............................................................7
Anne Klein................................................................7
Liz Claiborne.............................................................8
Hang Ten..................................................................8
Employees ....................................................................8
Item 2. PROPERTIES .............................................................................8
Trademarks ....................................................................8
Physical Properties..............................................................9
Item 3. LEGAL PROCEEDINGS ......................................................................9
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....................................9
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................10
Nasdaq Listing..................................................................10
Dividends ...................................................................10
Item 6. SELECTED FINANCIAL DATA................................................................11
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS .........................................................................12
Results of Operations...........................................................12
Fiscal 1998 Compared to Fiscal 1997......................................13
Fiscal 1997 Compared to Fiscal 1996......................................13
Fiscal 1996 Compared to Fiscal 1995......................................14
Variability of Quarterly Results and Seasonality................................15
Liquidity and Capital Resources.................................................16
Inflation.......................................................................17
Year 2000.......................................................................17
Factors That May Affect Future Results..........................................17
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
Item 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.............................20
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................20
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...20
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.....................................20
Item 11. EXECUTIVE COMPENSATION.................................................................20
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.........................20
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.........................................20
Item 14. EXHIBITS, FINANCIAL, STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.......................21
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE........................................................22
</TABLE>
ii
<PAGE> 4
PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K contains forward-looking
statements which are subject to a variety of risks and uncertainties. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set
forth below in "Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--Factors That May Affect Future Results."
GENERAL
The Sirena Apparel Group, Inc. (the "Company" or "Sirena") is
a leading designer, manufacturer and marketer of branded and private label
swimwear, resortwear and intimate apparel with product offerings to each
principal segment of the women's market. The Company's branded products include
the Anne Klein collection of designer swimwear, the Liz Claiborne collection of
better contemporary swimwear, the Sirena collections of better misses' and
better contemporary swimwear, the Hot Water collection of better junior's
swimwear, the Rose Marie Reid collection of traditional misses' swimwear, the
Sirena Kids collection of better children's swimwear, and the WearAbouts
collection of resortwear. In August 1998, the Company introduced the Hang Ten
collection of surfing-inspired swimwear for juniors and children. In addition,
the Company's private label division provides value-priced swimwear and
resortwear to national chain department stores and mass merchandisers under
various labels. In February 1998, the Company acquired the Jezebel brand, a line
of intimate apparel established in 1914. The Company's intimate apparel products
are sold under both the Jezebel brand and the retailer's own brand names.
The Company believes that each established brand is among the
leaders in its respective category and has achieved a high degree of brand
recognition and customer loyalty. In addition, the Company believes that its
brands are widely recognized for their fashionable styling, consistent fit and
quality construction at prices tailored to specific market segments.
The Company's products are sold in prestige department stores
(such as Bloomingdales, Lord & Taylor, Neiman Marcus, Nordstrom and Saks Fifth
Avenue), traditional department stores (such as Belk, Dillards, May Department
Stores and Federated Department Stores), apparel specialty stores (such as Swim
& Sport), national chain department stores (such as JC Penney and Sears), mass
merchandisers (such as Kmart and Wal-Mart), off-price retailers (such as
Marshalls) and mail order catalogs (such as Eddie Bauer, Talbots and Victoria's
Secret). The Company has leveraged its distribution network, fashion leadership
and merchandising and manufacturing expertise in several ways, including the
introduction of new brands and products. Branded swimwear accounted for
approximately 57.5% of the Company's net sales in fiscal 1998, private label
swimwear for approximately 24.9%, resortwear for approximately 12.7% and
intimate apparel (based upon five months of results after the acquisition of the
Jezebel brand) for approximately 4.9%.
STRATEGY
The Company's objective is to be a leading supplier of women's
fashion swimwear and resortwear in the United States and of intimate apparel in
selected market segments. Key elements of the Company's strategy include:
DEVELOP A DIVERSIFIED PORTFOLIO OF SWIMWEAR AND RESORTWEAR
The Company has developed a diversified portfolio of swimwear
and resortwear that enables it to offer branded and private label products at
varying price points through each principal channel of distribution. By offering
a broad array of products for each principal market segment, the Company aims to
be a "one-stop-shop" for swimwear and resortwear for its retail customers. The
Company believes that opportunities exist to grow its branded lines, primarily
through increased penetration of existing retail customers, both by increasing
the sell-
1
<PAGE> 5
through of existing lines and by introducing new lines, such as Hang
Ten. The Company also intends to focus on achieving growth in its private label
lines, through both increased penetration of existing retail customers and the
addition of new retail customers.
The Company believes that its strategy of developing product
lines for specific channels of distribution enhances its ability to maintain the
integrity of its brands while reducing the fashion risk associated with any
particular line.
EXPAND INTIMATE APPAREL
In February 1998, the Company acquired the Jezebel brand, a
line of intimate apparel established in 1914. Industry sources estimate retail
sales of intimate apparel in the United States to be approximately $7 billion
per year, compared to $1.2 billion for swimwear. In addition, the Company
believes that the intimate apparel business is substantially less seasonal than
the swimwear industry and uses many of the same design and production techniques
as the swimwear industry. Accordingly, the Company believes that intimate
apparel provides an area for potential growth in sales and the opportunity for
the Company to reduce the seasonality of its swimwear and resortwear business.
EMPHASIZE FASHION INNOVATION AND QUALITY
The Company believes that the success of its product lines is
dependent, in large part, on its ability to continue to develop innovative
fashions and design features capable of achieving broad consumer acceptance. The
Company continuously updates its lines and develops new products in a
combination of colors, fabrics and styles intended to enable retailers to make
powerful merchandising statements in their display of the Company's products.
The Company incorporates successful fashion elements from its own designer
collections into its other branded and private label lines, which enables the
Company to capitalize in a timely manner on key fashion trends. In addition to
introducing entirely new fashion designs and features into each of its lines on
an annual basis, the Company attempts to reduce its fashion risk by
incorporating into each of its lines certain designs and features that have
proven successful for the Company and the swimwear industry in the past. The
Company's sales force continually monitors the sell-through of its products to
determine and react to changing consumer preferences. With each of its product
lines, the Company emphasizes fashionable styling, consistent fit and quality
construction at prices tailored to specific market segments.
BUILD STRONG RELATIONSHIPS WITH RETAIL CUSTOMERS
Sirena builds and maintains close working relationships with
its retail customers. The Company believes that such relationships enable it to
better understand the needs of its retail customers and enhance its ability to
develop products and marketing programs that can favorably affect the sales
volume and profitability realized by both the Company and its retail customers.
Furthermore, by developing these close working relationships, Sirena believes
that it increases its importance to its retail customers as a major product
resource. The Company also believes that such relationships facilitate the
identification of marketing opportunities, design trends and shifting
demographics based upon information provided by retail buyers. Sirena's ability
to interact effectively with its retail customers is enhanced by the fact that
many key members of the Company's senior management have significant prior
experience as buyers of swimwear and other apparel for major department stores.
ACHIEVE OPERATING EFFICIENCIES
To provide retailers in various channels of distribution with
products that can be designed and priced to deliver value to consumers, Sirena
focuses on controlling its costs and achieving certain operating efficiencies.
The Company employs a portfolio approach to manufacturing, using its own
manufacturing operations as well as contractors both in the United States and in
Mexico. This approach enables Sirena to maintain manufacturing flexibility,
handle quick response requirements and pursue its goal of being the quality, low
cost producer. As part of its continuing program to achieve manufacturing
efficiencies and better serve customers, the Company currently is expanding its
manufacturing facilities in Mexico and investing in additional management
information systems and material handling systems. These investments include (i)
the purchase of fully integrated
2
<PAGE> 6
manufacturing, order entry, distribution and finance software, (ii) the hiring
of additional production personnel, and (iii) the installation of material
requirement planning systems that enhance inventory management, electronic data
interchange systems ("EDI") and advance shipping notice systems ("ASN") that
enhance communication and service to select retail customers and computer-aided
design systems that improve the capability and capacity of the design, pattern
and grading functions. See "-- Marketing."
EXPAND THROUGH ACQUISITIONS
Sirena believes that consolidation within the apparel industry
is creating opportunities for Sirena to acquire product lines and businesses
that are complementary to those of the Company. Sirena intends to explore
acquisition opportunities that may exist from time to time to expand its
swimwear, resortwear and intimate apparel lines or to diversify its business
into other segments of the apparel market where it believes that it may
capitalize on its design, manufacturing, marketing and distribution expertise or
further reduce the seasonality of its current business.
PRODUCTS
The Company participates in four areas of the women's apparel
industry: branded swimwear, private label swimwear, resortwear and intimate
apparel. Each product line has a unique combination of fashionable styling and
quality construction appropriate to the prices prevailing in a specific
distribution channel. The Company's products primarily target the women's, or
"misses'," as opposed to the "junior's," market and include both constructed and
unconstructed garments.
BRANDED SWIMWEAR
The Company's branded swimwear includes the Anne Klein
collection of designer swimwear, the Liz Claiborne collection of better
contemporary swimwear, the Sirena Signatures and Sirena Concepts collections of
better misses' and better contemporary swimwear, the Rose Marie Reid collection
of traditional misses' swimwear, the Hot Water collection of better junior's
swimwear, and the Sirena Kids collection of better children's swimwear. In
August 1998, the Company introduced the Hang Ten collection of surfing-inspired
swimwear for junior's and children. Each established brand is among the leaders
in its category and is widely recognized for its fashionable styling and quality
construction. Branded swimwear accounted for 57.5% of the Company's net sales
for fiscal 1998.
Anne Klein. Anne Klein & Company ("Anne Klein") has granted
the Company the right to use certain Anne Klein trademarks in connection with
the sale of women's designer bathing suits and related accessories in the United
States of America. Although the Anne Klein collection is jointly developed by
the Company and Anne Klein, the colors and styles of this collection are
generally directly related to the sportswear collections designed by Anne Klein.
This collection is characterized by fashion fabrics, including tricot and
imported trim. As a result, the Anne Klein collection is intended to appeal to
the fashion forward consumer and currently is sold in prestige department
stores, traditional department stores and apparel specialty stores, including
Bloomingdales, Lord & Taylor, Neiman Marcus, Nordstrom and Saks Fifth Avenue.
Retail prices for the Anne Klein collection range from $40 to $122. This
collection also includes selected items of resortwear coordinated by color or
fabric to the swimwear, including cover-ups, kimono jackets and robes.
Liz Claiborne. Liz Claiborne, Inc. ("Liz Claiborne") has
granted the Company the right to use the trademarks Liz Claiborne and Elisabeth
in connection with the sales of women's designer swimsuits and related
accessories in the United States of America and its territories and possessions,
and Canada. In August 1997, the Company introduced the Liz Claiborne and
Elisabeth collections of better contemporary swimwear. Elaborating on the
sophisticated styling of Liz Claiborne sportwear, the Liz Claiborne and
Elisabeth swimwear collections feature original designs and silhouettes in a
signature color palette and include a broad range of swimwear and coordinating
cover-ups from the modern classic to the sporty athletic look. Retail prices
range from $70 to $110, and these collections are sold in prestige department
stores, traditional department stores and apparel specialty stores, including
Bloomingdales, Lord & Taylor, Belk, Dillards, May Department Stores and
Federated Department Stores and overseas in Liz Claiborne stores.
3
<PAGE> 7
Sirena. The Sirena collections consist of better misses' and
better contemporary swimwear for women with an active, youthful attitude. These
collections are characterized by quality construction and fashionable fabrics
and styles. Retail prices range from $45 to $90, and the Sirena collections
currently are sold in prestige department stores, traditional department stores
and apparel specialty stores, including Bloomingdales, Lord & Taylor, Belk,
Dillards, May Department Stores and Federated Department Stores. These
collections also include selected items of resortwear coordinated by color or
fabric to the swimwear, including T-shirts, caftans, cover-ups and anorak
jackets.
Hot Water. In mid-1996, the Company launched the Hot Water
brand of better junior's swimwear to provide merchandise for teenagers who were
not previously targeted by the Company's product lines. Retail prices range from
$24 to $40, and the Hot Water brand is sold in traditional department stores,
apparel specialty stores and surf shops.
Rose Marie Reid. In May 1994, the Company acquired the
trademarks relating to the Rose Marie Reid brand, which was established in 1937
and was a competitor of the Sirena brand. The Company has broadened the
distribution of the Rose Marie Reid brand to include traditional department
stores and apparel specialty stores. The Rose Marie Reid brand provides
traditional department stores and apparel specialty stores with a leading brand
name for the traditional misses' customer, thereby complementing the Sirena
brand which is targeted towards a somewhat younger customer. Retail prices
range from $36 to $70.
Sirena Kids. To expand the Company's branded swimwear
portfolio to include fashion-oriented swimwear for girls and pre-teens, the
Company launched Sirena Kids in mid-1995. The collection primarily uses selected
silhouettes and fabrics from the Sirena collection. Retail prices for Sirena
Kids range from $24 to $40, and the collection is sold in traditional department
stores and apparel specialty stores.
Hang Ten. In August 1998, the Company introduced the Hang Ten
collection of surfing-inspired swimwear for juniors and children. Retail prices
range from $24 for a coverup to $74 for swimwear, and the collection is intended
for traditional department stores, apparel specialty stores and surf shops.
PRIVATE LABEL SWIMWEAR
The Company provides its fashion, merchandising and
manufacturing expertise to national chain department stores and mass
merchandisers through its private label swimwear. Such products are designed by
the Company using the fashion inspiration provided by the Company's branded
swimwear and are characterized by the use of simplified construction, fewer
embellishments, lower cost fabrics and lower cost domestic and foreign cutting
and sewing contractors. Retail prices for private label swimwear range from $16
to $30. Private label swimwear accounted for 24.9% of the Company's net sales
for fiscal 1998.
RESORTWEAR
The Company's resortwear, currently consisting of jackets,
pants, shorts, tops, cover-ups, rompers, dresses and jumpsuits, is sold under
the WearAbouts brand name primarily in swimwear departments to complement the
Company's swimwear and to enhance the consumer's contemporary leisure lifestyle.
Retail prices range from $18 for a cover-up to $80 for a romper. Resortwear
accounted for 12.7% of the Company's net sales for fiscal 1998. The Company
continues to expand the product offerings and distribution channels of its
resortwear in the same manner as it previously expanded its swimwear and,
thereby, aims to maximize growth and minimize risk by reducing the seasonality
of the Company's business.
INTIMATE APPAREL
In February 1998, the Company acquired the Jezebel brand, a
line of intimate apparel established in 1914. The Company's intimate apparel
products, currently consisting of shapewear, sleepwear and daywear, is sold
under both the Jezebel brand and the retailer's own brand names to prestige
department stores, traditional department stores, apparel specialty stores and
catalog marketers. The Company's offerings emphasize specialty products,
including figure-enhancing designs, characterized by quality construction and
fit. Retail prices range from
4
<PAGE> 8
$25 to $50. The Company believes that intimate apparel provides an area for
potential growth in sales and the opportunity for the Company to reduce the
seasonality of its swimwear and resortwear business.
PRODUCT DESIGN
The Company produces one swimwear line annually, except for
the Anne Klein brand for which two lines are produced, the Preview and Cruise
lines. The Preview line, which accounts for approximately 2% of the Company's
net sales of the Anne Klein brand, is shown in January and February and shipped
in May and June. The Cruise line, which accounts for approximately 98% of the
Company's net sales of the Anne Klein brand, is shown primarily between July and
January and shipped primarily between January and April. The Company uses the
Preview line to test the response of retailers and consumers to its new product
offerings.
The Company's merchandising staff determines market trends by
visiting retail stores and trade shows throughout the United States and Europe,
studying fashion trends in swimwear, sportswear and lingerie and consulting with
the Company's sales force, buyers for retail stores and representatives of
textile suppliers and mills. Based upon such research, the merchandising staff
selects the styles, fabrics and colors for each new product line. The design
staff then prepares concept boards containing proposed designs and fabric
selections which are reviewed both within the Company and, on occasion, with
major customers. The production staff then determines whether each item can be
manufactured within the line's established cost structure, prepares a working
prototype of each garment and finalizes the design and production patterns
ensuring the high standards of the "Sirena" fit. The Company's sales force
actively monitors the sell-through of each product to determine changes in
consumer preferences. In recent years, the Company has acquired computer-aided
design systems for each of its design studios that enable designers to more
rapidly and inexpensively try innovative design concepts.
MANUFACTURING
Orders for the Company's branded products generally are
received up to three months prior to the scheduled shipping date, compared to
five months for the Company's private label products. Furthermore, the Company
seeks to manufacture its products based primarily on orders. The time required
from the decision to manufacture an order to the shipment of the order is
approximately six weeks if the fabric is in stock and approximately ten to
twelve weeks if the fabric is not in stock.
In fiscal 1998, the Company cut approximately 35% and sewed
approximately 50% of its products in its own facilities and used four
contractors who cut primarily for the Company, to cut approximately 65% of its
products and three contractors to sew approximately 20% of its products. The
balance of the Company's products in fiscal 1998 were sewn by 20 sewing
contractors in the Los Angeles area and four sewing contractors in Mexico. The
use of its own facilities permits the Company to maintain the high quality of
its products, reduce fabric waste and respond more quickly to the demands of
retailers.
In September 1995, the Company established a swimwear
manufacturing facility in leased premises in Sonora, Mexico to support the
growth of the Company's private label swimwear business and enhance the
Company's capacity for quality, low cost production. In January 1997, the
Company established a resortwear manufacturing facility in leased premises in
Sonora, Mexico to support the continuing growth of this division. In July 1998,
American Industries, Inc. ("AII"), a corporation controlled by Howard Hedinger,
a principal stockholder and a director of the Company, acquired the premises
containing the Mexican swimwear manufacturing facilities. The Company and AII
currently are renegotiating the terms of the Company's lease of these premises
and the terms upon which AII will expand these premises for the production of
resortwear, Rose Marie Reid swimwear and intimate apparel.
The Company believes that the use of contractors enables it to
reduce capital expenditures, more efficiently employ its facilities,
particularly in light of the seasonality of the swimwear business, and reduce
the costs associated with a larger production force. Although the Company has no
master manufacturing agreements with any of its domestic or foreign contractors
and competes with other apparel companies for production capacity, the Company
believes that its relationships with its contractors are satisfactory and that
alternative domestic or foreign sources of cutting and sewing services are
readily available.
5
<PAGE> 9
Although the Company monitors the compliance of its
independent contractors with applicable labor laws, the Company does not control
its contractors or their labor practices. The violation of federal or state
labor laws by one of the Company's contractors can result in the Company being
subject to fines and the Company's goods which are manufactured in violation of
such laws being seized or their sale in interstate commerce being prohibited. To
date, the Company's contractors have not been subject to any sanctions that,
individually or in the aggregate, could have a material adverse effect upon the
Company, and the Company is not aware of any facts on which any such sanctions
could be based. There can be no assurance, however, that in the future the
Company will not be subject to sanctions as a result of violations of applicable
labor laws by its contractors, or that such sanctions will not have a material
adverse effect on the Company. In addition, certain of the Company's customers
require strict compliance by their apparel manufacturers, including the Company,
with applicable labor laws. There can be no assurance that the violation of
applicable labor laws by one of the Company's contractors will not have a
material adverse effect on the Company's relationship with its customers.
The Company has an extensive quality control program to
maintain the consistent fit and quality of its products. The Company's staff of
quality control inspectors monitors sewing quality and fit throughout the
production process at its in-house production facilities, as well as at its
contractors, to ensure that the Company's specifications and tolerances are met.
Each finished garment is inspected prior to shipment to the Company's warehouse.
The principal fabrics used in the Company's products are
raschel, tricot, pique, terry and cotton, 95% of which currently is acquired
from suppliers and textile mills located in the United States. The Company
purchased 22% and 11% of its total requirements in fiscal 1998 from H. Warshaw &
Sons and Liberty Fabrics, respectively. No other source accounted for more than
10% of the Company's fabric purchases for fiscal 1998. Although the Company has
no long-term agreements with any of its fabric suppliers and competes with other
apparel companies for fabric, the Company believes that its relationships with
its suppliers are satisfactory and that alternative sources of fabric are
readily available.
MARKETING
The Company sells its products through eight account
executives and 11 independent sales representatives located in six showrooms
across the United States. No sales representative markets directly competitive
products manufactured by others. The Company's products are sold in prestige
department stores (such as Bloomingdales, Lord & Taylor, Neiman Marcus,
Nordstrom and Saks Fifth Avenue), traditional department stores (such as Belk,
Dillards, May Department Stores and Federated Department Stores), apparel
specialty stores (such as Swim & Sport), national chain department stores (such
as JC Penney and Sears), mass merchandisers (such as Kmart and Wal-Mart),
off-price retailers (such as Marshalls) and mail order catalogs (such as Eddie
Bauer, Talbots and Victoria's Secret). The Company's ten largest customers
accounted for an aggregate of 52% of the Company's net sales for fiscal 1998.
May Department Stores accounted for 15% of the Company's net sales for fiscal
1998, and no other customer accounted for more than 10% of such sales.
In fiscal 1998, the Company continued to expand EDI, Quick
Response and ASN with selected retail accounts. EDI permits the computerized
placement of orders, billing and exchange of information, including current
inventory levels and selling trends, between the Company and its customers.
Quick Response is a program in which the Company commits to shipping selected
styles within 72 hours of order. This program enables a retailer to maintain a
full size range of a featured style and turn its inventory faster, thereby
encouraging the retailer to commit to the selected styles. ASN is a computerized
system that permits the customer to determine the status of each order,
including the anticipated shipping date.
BOOKINGS
The Company's booking of orders was approximately $18,500,000
at September 8, 1998 compared to approximately $16,200,000 at September 8, 1997,
an increase of 14%. All such 1998 bookings are for shipment before May 15, 1999.
In general, bookings may be canceled by the customer only in the event of late
delivery or delivery of non-conforming goods, although cancellation for other
reasons occurs from time to time.
6
<PAGE> 10
The Company generally has not experienced difficulty in shipping orders by the
dates requested by its customers. This increase in bookings is a function of the
timing of receipt of the bookings and of stronger acceptance of the Company's
products by the marketplace. The peak booking period runs from November through
April and the receipt of bookings may fluctuate from year to year. Accordingly,
year-to-date bookings are not necessarily indicative of annual bookings. In
addition, the amount of bookings manufactured and shipped during any period is
highly dependent on the season and on various other factors and, accordingly,
the amount of bookings at any date is not necessarily indicative of actual
shipments. Further, returns and allowances have ranged between 7% and 15% of
gross sales during the last three fiscal years.
COMPETITION
Each segment of the women's apparel industry in which the
Company offers products is highly competitive. The Company competes with
numerous apparel manufacturers, including those with their own retail stores, as
well as department stores, retail chains and mass merchandisers, including
certain of the Company's customers, which sell apparel under their own labels.
In the women's swimwear industry, the Company's principal competitors include
Authentic Fitness Corporation which markets under the Anne Cole(R), Cole of
California(R) and Catalina(R) brand names, among others, VF Corporation which
markets under the Jantzen(R) brand name and Apparel Ventures, Inc. which markets
under the La Blanca(R) and Sessa(R) brand names. In the intimate apparel
industry, the Company's principal competitors include Warnaco Group Inc. which
markets under the Calvin Klein(R), Warners(R) and Olga(R) brand names and VF
Corporation which markets under the Vanity Fair(R), Best Form(R) and
Vassarette(R) brand names. Many of the Company's competitors have substantially
greater financial, distribution, marketing and other resources, including
greater brand awareness, than the Company.
The Company competes primarily on the basis of offering a
combination of fashionable styling, consistent fit and quality construction
appropriate to the prices prevailing in the specific distribution channel.
Although the Company believes that its competitive strategy in the past has
resulted in its long-term increased market share, there can be no assurance that
the Company will be able to maintain or increase its revenues or earnings or to
correctly anticipate, gauge and respond to changing preferences of consumers and
retailers in a timely manner.
LICENSE AGREEMENTS
ANNE KLEIN
Anne Klein has granted the Company the right to use the
trademarks Anne Klein, Anne Klein II and the "lion's head" design in connection
with the sale of women's designer bathing suits and related accessories in the
United States of America and its territories and possessions. This license first
was granted in 1987, subsequently was renewed in 1990 and 1993 and was amended
and restated effective July 1, 1995. The license currently terminates on
December 31, 1999. The license may be terminated earlier by Anne Klein under
certain circumstances, including the Company's failure to pay certain guaranteed
minimum royalties, the acquisition of a controlling interest in the Company, or
a change in management of the Company. No assurance can be given that the
Company will continue to achieve the required minimum sales levels. The designs,
materials, fabrication, labels and packaging of the Anne Klein collection must
be approved by, and are the sole property of, Anne Klein, and the Anne Klein
collection must include the number of styles determined by Anne Klein. The
Company is required to spend specified minimum amounts on advertising for the
collection, and all creative elements of such advertising are developed and
controlled by Anne Klein. The collection may be sold only in retail outlets
approved by Anne Klein. In consideration of the license and design services, the
Company pays Anne Klein a royalty based upon the net sales of the collection.
The Company is prohibited from manufacturing or marketing women's swimwear
bearing the name of any other well known American designer of high end products,
other than Liz Claiborne. Anne Klein has the right to use the Anne Klein
trademarks in connection with women's bathing suits and related accessories
contained in its collection or a couture or limited edition line.
7
<PAGE> 11
LIZ CLAIBORNE
In 1997, Liz Claiborne granted the Company the right to use
the trademarks Liz Claiborne and Elisabeth in connection with the sale of
women's designer bathing suits and related accessories in the United States of
America and its territories and possessions, and Canada. The license currently
terminates on June 30, 2000. The license may be terminated earlier by Liz
Claiborne under certain circumstances, including the Company's failure to
achieve minimum annual sales levels, the Company's failure to pay certain
guaranteed minimum royalties, the acquisition of a controlling interest in the
Company or a change in management of the Company. No assurance can be given that
the Company will continue to achieve the required minimum sales levels. The
designs, materials, fabrication, labels and packaging of the Liz Claiborne and
Elisabeth collections must be approved by, and are the sole property of, Liz
Claiborne and must include the number of styles determined by Liz Claiborne. The
Company is required to spend specified minimum amounts on advertising for the
collections, and all creative elements of such advertising are developed with
and controlled by Liz Claiborne. The collections may be sold only in retail
outlets approved by Liz Claiborne. In consideration for the license and design
services, the Company pays Liz Claiborne a royalty based upon the net sales of
the collections. The Company is prohibited from manufacturing or marketing
women's swimwear bearing the name of any other well known American designer of
high end products, other than Anne Klein.
HANG TEN
In 1998, International Licensing (California) Corp. ("ILC"),
the licensing agent for Hang Ten International, Inc., granted the Company the
right to use the trademarks Hang Ten and the Hang Ten bare foot logo in
connection with the sale of junior's swimwear and swimwear related cover-ups in
the United States of America and its territories and possessions (including
Puerto Rico, Guam, and all U.S. military bases worldwide). The license currently
terminates on December 31, 2001. The license may be terminated earlier by ILC
under certain circumstances, including the Company's failure to achieve minimum
annual sales levels and the Company's failure to pay certain guaranteed minimum
royalties. No assurance can be given that the Company will achieve the minimum
sales levels in the future. The Company is required to submit samples of its
advertising, sales and promotional materials and samples of its products to ILC
for its prior approval. ILC may use any of the features or styling that the
Company uses in its licensed Hang Ten products under license agreements with
third parties. The Company is also required to spend specified minimum amounts
on advertising for the Hang Ten licensed products, and those products may only
be sold in stores that are considered to be "up market" stores. In consideration
for the license, the Company pays ILC a royalty based upon the net shipments (as
defined in the license) of the licensed products.
EMPLOYEES
At September 8, 1998, the Company had 569 full-time employees
in the United States and Mexico, of whom three were engaged in corporate
management, 22 in administration, eight in merchandising and design, 32 in
pattern and sample making, 48 in production supervision, 16 in quality control,
ten in cutting, 338 in sewing, 42 in sales and customer service, four in
management information systems and 46 in warehousing and shipping. The Company's
employees are not covered by a collective bargaining agreement, and the Company
considers its relations with its employees to be satisfactory.
ITEM 2. PROPERTIES
TRADEMARKS
Sirena, Sirena II, Hot Water, Rose Marie Reid, Sirena Kids,
WearAbouts, Sirena Signatures, Coco Beach, Jezebel, Sirena Concepts and various
private label trademarks are trademarks of the Company and some are registered
in certain foreign countries. Rose Marie Reid, Sirena II, Hot Water and
WearAbouts are federally registered trademarks in the United States, and Sirena,
Sirena Signatures and Coco Beach are pending federal registration. The Company
regards these trademarks as valuable assets and believes that they are an
important factor in marketing its products. It is the policy of the Company to
defend vigorously these trademarks against infringement.
8
<PAGE> 12
Anne Klein and Anne Klein II are federally registered
trademarks of Anne Klein in the United States. Liz Claiborne and Elisabeth are
federally registered trademarks of Liz Claiborne in the United States. Hang Ten
and the Hang Ten bare feet logo are federally registered trademarks of Hang Ten
International, Inc. in the United States. Under the Company's license
agreements, Anne Klein, Liz Claiborne and Hang Ten International, Inc. (and its
licensing agent) have the sole right to defend their respective trademarks
against infringement.
PHYSICAL PROPERTIES
The Company's principal executive offices and warehouse are
located in South El Monte, California. These premises contain approximately
93,000 square feet, of which 15,000 square feet are used for administrative
offices, 45,000 square feet are used for manufacturing and 33,000 square feet
are used as a warehouse, and are leased from an independent third party under
leases which expire on October 31, 1999. The annual rent on such premises is
$464,000 subject to a cost-of-living adjustment in alternate years which
commenced on November 1, 1991. In addition, the Company leases showrooms in New
York, Miami, Chicago, Boston and Los Angeles and factory buildings in San Luis
and Sonora, Mexico.
In July 1998, American Industries, Inc. ("AII"), a corporation
controlled by Howard Hedinger, a principal stockholder and a director of the
Company, acquired the premises containing the Company's swimwear manufacturing
facilities located in Sonora, Mexico. The Company and AII currently are
renegotiating the terms of the Company's lease of these premises and the terms
upon which AII will expand these premises for the production of resortwear, Rose
Marie Reid swimwear and intimate apparel.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved from time to time in litigation
incidental to the conduct of its business, The Company does not believe that any
such litigation currently pending will have a materially adverse effect on its
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's
stockholders during the fourth quarter of the fiscal year ended June 30, 1998.
9
<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
NASDAQ LISTING
The Company's Common Stock began trading publicly on the
Nasdaq National Market under the symbol "SIRN" on August 12, 1994. The following
table sets forth, for the periods indicated, the range of high and low sale
prices for the Company's Common Stock as reported by the Nasdaq National Market.
Those prices do not include retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
Fiscal 1997 Sales Prices
------------------------
Low High
--------- ---------
<S> <C> <C>
First Quarter $ 2.13 $ 3.13
Second Quarter 2.13 2.94
Third Quarter 2.50 3.50
Fourth Quarter 3.00 3.75
Fiscal 1998
First Quarter $ 2.63 $ 4.25
Second Quarter 3.31 4.38
Third Quarter 3.13 5.63
Fourth Quarter 4.88 8.00
Fiscal 1999
First Quarter (through September 8, 1998) $ 4.625 $ 7.38
</TABLE>
On September 8, 1998, the closing price of the Company's
Common Stock as reported on the Nasdaq National Market was $4.88. Stockholders
are urged to obtain current market quotations for the Common Stock. As of
September 8, 1998, there were approximately 14 stockholders of record of the
Company.
DIVIDENDS
Since 1987, the Company has not paid dividends on its Common
Stock. The Company currently intends to retain any future earnings to provide
funds for the operation and expansion of its business and does not anticipate
paying cash dividends on its Common Stock in the foreseeable future. The payment
of dividends is within the discretion of the Company's Board of Directors, and
will depend upon, among other things, the Company's earnings, financial
condition, level of indebtedness, contractual restrictions contained in the
Company's loan agreement on the payment of dividends, capital requirements and
general business conditions.
10
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data is qualified in its
entirety by, and should be read in conjunction with, the other information and
financial statements, including the notes thereto, appearing elsewhere herein.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------------------
1994 1995 1996 1997 1998
-------------------------------------------------------------------------
(In thousands, except share and per share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales $ 38,932 $ 49,206 $ 49,206 $ 43,732 $ 51,042
Cost of goods sold 26,751 34,010 38,390 31,393 32,963
----------- ----------- ----------- ----------- -----------
Gross profit 12,181 15,196 10,816 12,339 18,079
Selling, general and 9,633 10,893 14,030 13,124 14,627
administrative expenses
Depreciation and amortization 204 241 274 284 375
----------- ----------- ----------- ----------- -----------
Income (loss) before interest and income taxes 2,343 4,062 (3,488) (1,069) 3,077
Interest expense 1,417 1,033 908 896 755
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes 926 3,030 (4,396) (1,965) 2,322
Income taxes 25 142 15 20 90
Net income (loss) $ 901 2,888 $ (4,411) $ (1,985) $ 2,232
=========== =========== =========== =========== ===========
Net income (loss) per common share(1)
Basic $ 0.52 $ 0.97 $ (1.05) $ (0.43) $ 0.47
=========== =========== =========== =========== ===========
Diluted $ 0.52 $ 0.93 $ (1.05) $ (0.43) $ 0.46
=========== =========== =========== =========== ===========
Weighted average common shares outstanding(1)
Basic 1,743,971 2,968,971 4,205,946 4,649,230 4,700,514
=========== =========== =========== =========== ===========
Diluted 1,743,971 3,104,255 4,205,946 4,649,230 4,806,924
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------
1994 1995 1996 1997 1998
--------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital $ 1,410 $ 6,120 $ 9,900 $ 8,013 $ 9,177
Total assets 10,372 14,738 18,678 16,688 22,030
Total current liabilities 4,164 3,885 3,858 3,766 5,226
Long-term debt, less current maturities 3,611 86 50 138 312
Stockholders' equity 2,596 10,768 14,770 12,784 16,492
</TABLE>
- ---------------
(1) The earnings per share amounts prior to 1998 have been restated as
required to comply with Statement of Financial Accounting Standards No.
128, Earnings Per Share. For further discussion of earnings per share
and the impact of Statement No. 128, see Note 2 of Notes to
Consolidated Financial Statements.
11
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Annual Report on Form 10-K contains forward-looking
statements which are subject to a variety of risks and uncertainties. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set
forth below in "--Factors That May Affect Future Results."
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage which certain items in the statements of operations data bear to net
sales and the percentage dollar increase (decrease) of such items from period to
period.
<TABLE>
<CAPTION>
Percent of Net Sales Percentage Dollar
Fiscal Year Ended June 30, Increase (Decrease)
---------------------------------------- --------------------------------
1995 and 1996 and 1997 and
1995 1996 1997 1998 1996 1997 1998
---- ---- ---- ---- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0% --% (11.1%) 16.7%
----- ----- ----- -----
Cost of goods sold 69.1 78.8 71.8 64.6 12.9 (18.2) 5.0
----- ----- ----- -----
Gross profit 30.9 22.0 28.2 35.4 (28.9) 14.1 46.5
Selling, general and administrative
expenses 22.1 28.5 30.0 28.7 28.8 (6.5) 11.5
Depreciation and amortization(1) 0.5 0.6 0.7 0.7 13.7 3.7 32.0
----- ----- ----- -----
Income (loss) before interest and income
taxes 8.3 (7.1) (2.5) 6.0 (185.9) 69.4 387.8
Interest expense 2.1 1.8 2.0 1.5 (12.1) (1.3) (15.7)
----- ----- ----- -----
Income (loss) before income taxes 6.2 (8.9) (4.5) 4.5 (245.1) 55.3 218.1
Income taxes 0.3 0.1 0.05 0.2 (89.40) 33.3 350.0
----- ----- ----- -----
Net income (loss) 5.9% (9.0%) (4.5%) 4.3% (252.7%) 55.0% 212.4%
</TABLE>
- --------------
(1) See Note 2 of Notes to Consolidated Financial Statements.
The following table sets forth, for the periods indicated, the percentage which
net sales for each division bears to the Company's aggregate net sales.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------------
1995 1996 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Branded 62.7% 58.3% 60.4% 57.5%
Resortwear 10.9 11.2 13.6 12.7
Private label 26.4 30.5 2.6 24.9
Intimate Apparel -- -- -- 4.9
---- ---- ---- ----
Total 100% 100% 100% 100%
==== ==== ==== ====
</TABLE>
12
<PAGE> 16
FISCAL 1998 COMPARED TO FISCAL 1997
Net Sales. Net sales increased from $43,732,000 in fiscal 1997
to $51,042,000 in fiscal 1998, an increase of 16.7 %, due primarily to (i) an
increase in the average price of each of the Company's swimwear and resortwear
lines, (ii) sales of Liz Claiborne swimwear and Jezebel intimate apparel for
which there were no sales in fiscal 1997 and (iii) an increase in early season
orders of the Sirena brand at full price as a result of improved retail sales
performance in the latter part of fiscal 1997.
Gross Profit. Gross profit increased from $12,339,000 (28.2%
of net sales) in fiscal 1997 to $18,079,000 (35.4% of net sales) in fiscal 1998,
an increase of 46.5%, due primarily to (i) the Company's efforts to accelerate
orders to earlier in the year and to reduce orders in the latter part of the
year, which later orders generally are subject to end-of-season discounting by
the retailer, (ii) an increase in emphasis on branded products which generally
have a higher gross profit margin than private label products, (iii) the
introduction of the Jezebel line of intimate apparel which replaced generally
off-priced swimwear sales in the latter part of the year, (iv) an increase in
the average price of the Sirena brand following its improved retail sales
performance in the latter part of fiscal 1997 and (v) more favorable
manufacturing costs as a result of the hiring of additional production
management personnel.
Selling, General, and Administrative Expenses. Selling,
general and administrative expenses increased from $13,408,000 (30.7% of net
sales) in fiscal 1997 to $15,002,000 (29.4% of net sales) in fiscal 1998, an
increase of 11.9%. The increase in such expenses was due primarily to (i) the
introduction of the Liz Claiborne line of swimwear, the Jezebel line of intimate
apparel and the Hang Ten line of surfing-inspired swimwear, (ii) expenses
associated with certain employee severance arrangements, (iii) the hiring of a
Chief Operating Officer and additional production management personnel and (iv)
an increase in bonuses as a result of the substantial improvement in the
Company's results of operations. The increase was partially offset by (i) the
net settlement of litigation in fiscal 1997 and (ii) cost savings resulting from
the abandonment of a consulting agreement with a former director.
Interest Expense. Interest expense declined from $896,000
(2.0% of net sales) in fiscal 1997 to $755,000 (1.5% of net sales) in fiscal
1998, a decrease of 15.7%, due primarily to (i) the Company's effort to
accelerate orders to earlier in the year and, thereby, reduce its reliance on
its inventory line of credit and (ii) the reduction of swimwear inventory at
year end. The reduction in year end swimwear inventory was offset by the
Company's inventory of intimate apparel, which was introduced in fiscal 1998,
and an increase in year end work-in-process to support the Company's effort to
accelerate orders to earlier in fiscal 1999.
Net Income. As a result of the foregoing factors, net income
increased from a loss of $1,985,000 ($0.43 per share loss) in fiscal 1997 to
income of $2,232,000 ($0.46 per share) in fiscal 1998.
FISCAL 1997 COMPARED TO FISCAL 1996
Net Sales. Net sales declined from $49,206,000 in fiscal 1996
to $43,732,000 in fiscal 1997, a decrease of 11.1%. The decrease in net sales
resulted from a 24.3% decrease in the revenue of the private label division due
primarily to a significant reduction in orders from a major account caused by
their shift in sourcing from the U.S. to the Far East, and a 7.9% decrease in
the revenue of the branded division due to a reduction in early season orders of
the Sirena brand based on lower fiscal 1996 retail sales performance. The
decline in net sales was partially offset by a 7.7% increase in revenue of the
resortwear division due to increased penetration and market share of the
existing account base.
Gross Profit. Gross profit increased from $10,816,000 (22.0%
of net sales) in fiscal 1996 to $12,339,000 (28.2% of net sales) in fiscal 1997,
an increase of 14.1%. The increase in gross profit and gross margin resulted
from (i) improved capacity utilization of the Company's manufacturing
facilities, (ii) expanded production levels of the Company's lower cost facility
in Mexico, and (iii) an additional inventory reserve provision of $600,000 in
fiscal 1997 compared to an additional inventory provision of $1,600,000 in
fiscal 1996.
Selling, General, and Administrative Expenses. Selling,
general and administrative expenses declined from $14,304,000 (29.1% of net
sales) in fiscal 1996 to $13,408,000 (30.7% of net sales) in fiscal 1997, a
13
<PAGE> 17
decrease of 6.3%. The decrease in such expenses resulted from (i) lower
advertising expenses relating to a reduction in co-operative advertising
commitments as well the costs of a national print advertising campaign in fiscal
1996 for which there was no comparable expenditure in fiscal 1997, (ii) lower
distribution expenses resulting from improved efficiency levels and lower sales
volume, (iii) headcount reductions effected in late fiscal 1996 whose financial
impact was fully realized in fiscal 1997, and (iv) legal expenses offset by the
net settlement of litigation in fiscal 1997. The decrease was partially offset
by additional expenses related to the abandonment of a consulting agreement with
a former board member, and development costs related to the introduction of the
Liz Claiborne swimwear brand, for which there were no comparable expenses in
fiscal 1996. The increase in selling, general and administrative expenses as a
percentage of net sales resulted primarily from lower net sales in fiscal 1997
as compared to fiscal 1996.
Interest Expense. Interest expense declined from $908,000
(1.8% of net sales) in fiscal 1996 to $896,000 (2.0% of net sales) in fiscal
1997, a decrease of 1.3%. The decrease resulted primarily from lower average
borrowings in fiscal 1997, driven by a reduction in year over year ending
inventory.
Net Loss. As a result of the foregoing factors, net loss
declined from $4,411,000 ($1.05 per common share) for fiscal 1996 to net loss of
$1,985,000 ($0.43 per common share) for fiscal 1997. Both periods reflect a
nominal tax rate.
FISCAL 1996 COMPARED TO FISCAL 1995
Net Sales. Net sales remained unchanged at $49,206,000 for
fiscal 1995 as compared to $49,206,000 for fiscal 1996. Changes in the
components of net sales included (i) a 6.4% decrease in the revenue of the
branded division resulting from adverse weather conditions in the Spring of 1996
which reduced consumer traffic and limited reorders of branded merchandise, (ii)
a 14.3% increase in the revenue of the private label division, resulting from
increased market penetration into the existing account base, and (iii) a 3.7%
increase in the resortwear division resulting from the greater importance of the
resortwear category at the Company's major retail accounts.
Gross Profit. Gross profit declined from $15,196,000 (30.9% of
net sales) in fiscal 1995 to $10,816,000 (22% of net sales) in fiscal 1996, a
decrease of 28.8%, due to a decrease in gross profit margin. The decrease in
gross profit margin was due primarily to (i) a reduction in regular priced
reorders due to reduced consumer traffic in the Spring of 1996 as a result of
adverse weather conditions, (ii) additional reserves provided for inventory of
end of season merchandise of $1,600,000 due to lower than historical wholesale
prices for close-out merchandise after the merger of two of the Company's
largest off-price retail customers, (iii) the unilateral cancellation of a
Mexican production contract by the contractor which caused the Company to source
elsewhere, including domestically, at additional cost, and (iv) a sales mix
which included an increase in sales of the private label division which
generally has a lower gross profit margin than the Company's branded products.
Selling, General and Administrative Expenses. Selling, general
and administrative expenses increased from $11,134,000 (22.6% of net sales) in
fiscal 1995 to $14,304,000 (29.1% of net sales) in fiscal 1996, an increase of
28.5%. This increase in such expenses consisted primarily of (i) increased costs
associated with the expansion of the Company's distribution operations, (ii)
costs associated with the launch in fiscal 1996 of the A-Line Anne Klein and
Sirena Kids divisions, and (iii) costs of a national print advertising campaign
for which there was no comparable expenditure in fiscal 1995.
Interest Expense. Interest expense decreased from $1,033,000
(2.1% of net sales) in fiscal 1995 to $908,000 (1.8% of net sales) in fiscal
1996, a decrease of 12.1%, due primarily to use of the proceeds from the
secondary public stock offering in November 1995, partially offset by additional
working capital requirements.
Net Income. As a result of the foregoing factors, net income
declined from $2,888,000 ($0.93 per common share) in fiscal 1995 to a net loss
of $4,411,000 ($1.05 per common share loss) in fiscal 1996. Net income in fiscal
1995 reflected a 4% tax rate, and the utilization of operating loss carry
forwards, compared to a nominal tax rate in fiscal 1996.
14
<PAGE> 18
VARIABILITY OF QUARTERLY RESULTS AND SEASONALITY
The Company has experienced, and expects to continue to
experience, variability in its net sales and operating results on a quarterly
basis. The Company believes the factors which influence this variability include
(i) the timing of the Company's introduction of new apparel lines, (ii) the
level of consumer acceptance of each new line, (iii) general economic and
industry conditions that affect consumer spending and retailer purchasing, (iv)
the timing of the placement or cancellation of a customer orders, (v) the timing
of expenditures in anticipation of increased sales and customer delivery
requirements, (vi) the weather and (vii) actions of competitors. Accordingly, a
comparison of the Company's results of operations from period to period is not
necessarily meaningful, and the Company's results of operations for any period
are not necessarily indicative of future performance. The Company has sought to
reduce this variability by diversifying its brand names and distribution
channels, expanding its resortwear offerings and introducing intimate apparel.
See "--Factors That May Affect Future Results -- Variability of Quarterly
Results."
In addition, the Company's swimwear business is highly
seasonal. For fiscal 1998, 46.1% of the Company's net sales were generated in
the third fiscal quarter. If the Company's sales during the third quarter are
materially below seasonal norms, the Company's operating results could be
materially and adversely affected. The Company has sought to reduce the effect
of this seasonality by (i) increasing sales of resortwear products which
generally are less seasonal than branded swimwear, (ii) reducing excess
production capacity and increasing overhead absorption by scheduling the
manufacturing of private label swimwear into the slower first quarter of the
fiscal year and (iii) introducing intimate apparel products which generally are
less seasonal than swimwear and resortwear. The Company has traditionally
generated an operating loss in its first fiscal quarter due to limited retailer
demand in advance of the slower Fall selling season. The Company anticipates
that these first quarter losses will continue and may increase in the
foreseeable future.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------------------------
Sept. 30, Dec. 31, March 31, June 30, Sept 30, Dec. 31,
1996 1996 1997 1997 1997 1997
-----------------------------------------------------------------------------------------
(In thousands, except share and per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 2,185 $ 7,042 $ 18,207 $ 16,298 $ 1,533 $ 9,627
Gross profit 54 2,773 6,679 2,832 7 4,098
Income (loss) from (2,101) 465 2,520 (1,953) (2,200) 750
operations
Net income (loss) (2,243) 214 2,254 (2,210) (2,235) 592
=========== =========== =========== =========== =========== ===========
Net income (loss)
per common share
Basic $ (0.48) $ 0.05 $ 0.48 $ (0.48) $ (0.48) $ 0.13
=========== =========== =========== =========== =========== ===========
Diluted $ (0.48) $ 0.05 $ 0.48 $ (0.48) $ (0.48) $ 0.13
=========== =========== =========== =========== =========== ===========
Weighted average
common shares
outstanding
Basic 4,649,230 4,649,230 4,649,230 4,649,230 4,649,230 4,649,230
=========== =========== =========== =========== =========== ===========
Diluted 4,649,230 4,649,230 4,649,230 4,649,230 4,649,230 4,695,462
=========== =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
------------------------------
March 31, June 30,
1998 1998
------------------------------
<S> <C> <C>
Net sales $ 23,520 $ 16,362
Gross Profit 9,362 4,612
Income (loss) from 4,192 335
operations
Net income (loss) 3,794 81
=========== ===========
Net income (loss)
per common share
Basic $ 0.82 $ 0.02
=========== ===========
Diluted $ 0.80 $ 0.02
=========== ===========
Weighted average
common shares
outstanding
Basic 4,649,230 4,854,257
=========== ===========
Diluted 4,736,060 5,143,501
=========== ===========
</TABLE>
15
<PAGE> 19
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary need for funds has been to finance its
growth in receivables and inventory, the development of new product lines and
the improvement of its operating, manufacturing and customer service
capabilities. The Company has financed its working capital requirements from its
cash flow from operations, advances drawn under its factoring and revolving
credit arrangements and proceeds from its initial public offering in 1994 and
secondary public offering in November 1995. The Company believes that its
present sources of working capital will enable it to finance its current and
anticipated growth in sales for the foreseeable future.
Net cash used in operating activities for fiscal 1998 was
$912,000, compared to $517,000 provided by operating activities for fiscal 1997.
At June 30, 1998, working capital was approximately $9,177,000, compared to
$8,013,000 at June 30, 1997.
The Company's inventory generally is highest during November
through April as it prepares for and enters its principal selling season, and
advances under its credit facilities generally are highest during January
through April. Inventory increased from $4,251,000 at June 30, 1997 to
$7,016,000 at June 30, 1998, an increase of 65.0%, as a result of (i) the
aggressive liquidation of prior season inventory in fiscal 1997, and (ii) the
Company's inventory of intimate apparel, which was introduced in fiscal 1998,
and an increase in year end work-in-process to support the Company's effort to
accelerate orders to earlier in fiscal 1999.
The Company has entered into an accounts receivable,
inventory, seasonal overadvance and factoring services arrangement, which was
amended as of June 23, 1997, with Heller Financial ("Heller") pursuant to which
the Company sells to Heller all of the Company's accounts receivable at their
net invoice price less a commission of 0.60% with no minimum or ancillary fees.
Advances are made without recourse for the financial inability of the customer
to pay with respect to all accounts receivable approved by Heller. The Company
bears the entire risk of non-approved receivables and accounts receivable
returned by the factor to the Company. Prior to Heller's payment, the Company
may draw short-term advances from Heller up to 80% of the uncollected
receivables less reserves as determined by Heller, which advances bear interest
at an annual rate of 0.375% over the prime rate established from time to time by
Bank of America (8.5% at June 30, 1998). Additional interest of 1% is due on
excess inventory levels, as defined, over short-term advances. Heller collects
such advances and interest by offsetting against amounts due to the Company upon
the collection of factored receivables. In addition, the Company may draw
short-term advances from Heller of (i) up to 50% of eligible inventory which is
current season inventory and (ii) up to 40% prior to October 31 and up to 25%
during the period between November 1 and June 30, in each case of eligible
inventory which is not current season inventory, less (iii) such reserves as
Heller elects to establish.
The Company's short-term advances are limited to a maximum of
$5,000,000 (in January and February) and ranging downward to a maximum of
$1,000,000 (in June and July) or $1,000,000 in excess of the Company's projected
short-term advance requirements, whichever is less. The Company may also borrow
seasonal overadvances of up to $500,000 from September 1 to September 30,
$1,000,000 from October 1 to October 30, $1,500,000 from November 1 to November
30, $2,000,000 from December 1 to January 31, $1,000,000 from February 1 to
March 31, and $0 from April 1 through August 30 of each year. The inventory
advances and the overadvances bear interest at an annual rate of 2% over the
prime rate established from time to time by Bank of America. Finally, the
Company may request Heller to issue guarantees for the Company's purchase of raw
materials for up to $575,000 at any one time. Under the Company's agreement with
Heller, the maximum credit available to the Company at any time is limited to
$20 million. The Company's agreement with Heller has a term expiring on August
18, 2000, after which time either party may terminate upon 60 days written
notice. The Company's obligations to Heller are secured by the Company's
accounts receivable, inventory, general intangibles, other than trademarks or
trade names, and cash deposit accounts. In addition, the agreement provides for
various financial covenants to be maintained.
The balance of advances from the factor was $4,268,000 at June
30, 1998, compared to $3,532,000 at June 30, 1997. At June 30, 1998, the amount
payable to the Company for factored receivables upon the collection thereof less
the amount of outstanding advances to the Company (the "amount due from factor")
was $7,004,000, compared to $6,276,000 at June 30, 1997. The Company bears the
entire risk of non-approved
16
<PAGE> 20
receivables which increased from $339,000 at June 30, 1997 (3.5% of gross
receivables due from factor) to $971,000 at June 30, 1998 (8.6% of gross
receivables due from factor).
Capital expenditures for the investment in additional
management information and material handling systems totaled $200,000 in 1998,
and the Company anticipates such expenditures will total $400,000 in 1999. For
information on the Company's anticipated capital expenditures with regard to its
Year 2000 compliance program, see "--Year 2000" below.
INFLATION
The Company does not believe that the relatively moderate
rates of inflation in the past three years have had a significant effect on its
net sales or its profitability. Historically, the Company has been able to
offset any inflationary effect by either increasing prices or improving cost
efficiencies.
YEAR 2000
The Year 2000 issue is the result of computer programs being
written using two digits rather than four to define the applicable year. The
Company's computer systems that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions or
engage in normal business activities which may have a material adverse effect on
the Company's financial condition, results of operations or liquidity. At this
time, the Company is unable to predict with any certainty the estimated lost
revenue the Company may experience as a result of such failure or disruption.
Following a comprehensive study of the Company's current
systems and future system requirements, the Company initiated a program in
October 1997 to update or replace existing systems with enhanced hardware and
software applications. The objectives of the new program are to achieve
competitive benefits for the Company, as well as assuring that all systems are
Year 2000 compliant. Implementation of this program is expected to require
expenditures of approximately $1,100,000 and to be completed in three phases by
March 30, 1999, of which the first phase has already been completed. The first
phase of the program, which involved updating the Company's financial systems,
was completed by August 30, 1998 at a cost of $450,000. The second phase
involves updating or replacing the Company's systems relating to distribution
and manufacturing and is expected to be completed by October 1, 1998 at a cost
of $410,000. Under the third and final phase of the program, which is expected
to be completed by March 30, 1999 at a cost of $240,000, the Company will update
the software connecting the Company to its other offices and replace and upgrade
hardware generally. The Company has not yet established a contingency plan in
the event that the Company's Year 2000 program does not successfully convert its
software and hardware to be Year 2000 compliant. However, the Company intends to
establish a contingency plan by May 1999. Funding requirements have been
incorporated into the Company's capital and operating expenditure plans and are
not expected to have a material adverse effect on the Company's financial
condition, results of operations or liquidity. The Company initiated formal
communications with its significant customers, vendors and others in November
1997 to determine the extent to which the Company is vulnerable to those third
parties' failure to remediate their own Year 2000 issue and at this time does
not believe that such third parties' failure will have a material adverse effect
on the Company's financial condition, results of operations or liquidity.
FACTORS THAT MAY AFFECT FUTURE RESULTS
VARIABILITY OF QUARTERLY RESULTS
The Company has experienced, and expects to continue to
experience, a substantial variation in its net sales and operating results from
quarter to quarter. The Company believes that the factors which influence this
variability of quarterly results include the timing of the Company's
introduction of new product lines, the level of consumer acceptance of each new
product line, the general economic and industry conditions that affect consumer
spending and retailer purchasing, the availability of manufacturing capacity,
the seasonability of the markets in which the Company participates, the timing
of trade shows, the product mix of customer orders, the timing of the placement
or cancellation of customer orders, the occurrence of chargebacks in excess of
reserves and the timing of expenditures in anticipation of increased sales and
actions of competitors. Accordingly, a comparison of the
17
<PAGE> 21
Company's results of operations from period to period is not necessarily
meaningful, and the Company's results of operations for any period are not
necessarily indicative of future performance. See "--Variability of Quarterly
Results and Seasonality."
ECONOMIC CONDITIONS
The apparel industry historically has been subject to
substantial cyclical variation, and a recession in the general economy or
uncertainties regarding future economic prospects that affect consumer spending
habits have in the past had, and may in the future have, a materially adverse
effect on the Company's results of operations. In addition, certain retailers,
including some of the Company's customers, have experienced in the past, and may
experience in the future, financial difficulties which increase the risk of
extending credit to such retailers. These retailers have attempted to improve
their own operating efficiencies by concentrating their purchasing power among a
narrowing group of vendors. There can be no assurance that the Company will
remain a preferred vendor for its existing customers. A decease in business from
or loss of a major customer could have a material adverse effect on the
Company's results of operations. The Company has entered into a non-recourse
accounts receivable factoring agreement. There can be no assurance that the
Company's factor will approve the extension of credit to certain retail
customers in the future. If a customer's credit is not approved by the factor,
the Company could either assume the collection risk on sales to the customer
itself, require that the customer provide a letter of credit or choose not to
make sales to the customer.
RELIANCE ON KEY CUSTOMERS
In fiscal 1998, ten customers accounted for 52% of the
Company's net sales. The loss of any such customer could have a material adverse
effect on the Company's results of operations. From time to time, certain of the
Company's major customers have experienced financial difficulties. The Company
does not have long-term contracts with any of its customers and, accordingly,
there can be no assurance that any customer will continue to place orders with
the Company to the same extent it has in the past, or at all. In addition, the
Company's results of operations will depend to a significant extent upon the
commercial success of its major customers.
DEPENDENCE ON CONTRACT MANUFACTURERS
Approximately 54% of the Company's products are manufactured
by independent cutting, sewing and finishing contractors. The use of contract
manufacturers and the resulting lack of direct control over the production of
its products could result in the Company's failure to receive timely delivery of
products of acceptable quality. Although the Company believes that alternative
sources of cutting, sewing and finishing services are readily available, the
loss of one or more contract manufacturers could have a material adverse effect
on the Company's results of operations until an alternative source is located
and has commenced producing the Company's products. See "Item 1. BUSINESS --
Manufacturing."
Although the Company monitors the compliance of its
independent contractors with applicable labor laws, the Company does not control
its contractors or their labor practices. The violation of federal or state
labor laws by one of the Company's contractors can result in the Company being
subject to fines and the Company's goods which are manufactured in violation of
such laws being seized or their sale in interstate commerce being prohibited. To
date, the Company's contractors have not been subject to any sanctions that,
individually or in the aggregate, could have a material adverse effect upon the
Company, and the Company is not aware of any facts on which any such sanctions
could be based. There can be no assurance, however, that in the future the
Company will not be subject to sanctions as a result of violations of applicable
labor laws by its contractors, or that such sanctions will not have a material
adverse effect on the Company. In addition, certain of the Company's customers
require strict compliance by their apparel manufacturers, including the Company,
with applicable labor laws. There can be no assurance that the violation of
applicable labor laws by one of the Company's contractors will not have a
material adverse effect on the Company's relationship with its customers.
PRICE AND AVAILABILITY OF RAW MATERIALS
Although the Company believes that its suppliers will continue
to be able to procure a sufficient supply of the principal fabrics used by the
Company in manufacturing its products, the price and availability of such
fabrics may fluctuate significantly depending on supply, world demand, and
currency fluctuations. There can be no assurance that fluctuations in the price
and availability of fabric or other raw materials used by the Company will not
have a material adverse effect on the Company's results of operations.
MANAGEMENT OF GROWTH
No assurance can be given that the Company will be successful
in maintaining or increasing its sales in the future. Should the Company
experience significant future growth in sales, such growth will require
additional working capital and may place a significant strain on the Company's
management, management information systems, inventory management, production
capability, distribution facilities and receivables management. Any disruption
in the Company's order processing, sourcing or distribution systems could cause
orders to be shipped late and under industry practices, retailers generally
can cancel orders or refuse to accept
18
<PAGE> 22
goods due to late shipment. Such cancellations and returns could result in a
reduction in revenue, increased administrative and shipping costs and a further
burden on the Company's distribution facilities. In addition, the failure to
timely enhance the Company's operating systems, or unexpected difficulties in
implementing such enhancements, could have a material adverse effect on the
Company's results of operations.
FOREIGN MANUFACTURING
Approximately 36% of the Company products were manufactured in
Mexico in fiscal 1998. As a result, the Company's operations are subject to the
customary risks of doing business abroad, including, among other things,
transportation delays, economic or political instability, currency fluctuations,
restrictions on the transfer of funds and the imposition of tariffs, export
duties, quotas and other trade restrictions. See "Item 1. BUSINESS --
Manufacturing."
RISK OF BRAND ACCEPTANCE
The Company's success depends in substantial part on its
ability to correctly anticipate, gauge and respond to rapidly changing consumer
preferences in a timely manner. If the Company materially misjudges the market
for a particular product or product line, the Company may be faced with a
reduction in sales and profitability, excess inventory and diminished customer
loyalty. A substantial portion of the Company's sales are derived from branded
products and, accordingly, any decline in consumer acceptance of the Company's
brands could have a material adverse effect on the Company's results of
operations. There can be no assurance that the Company will be able to correctly
anticipate, gauge and respond to changing consumer preferences in a timely
manner in the future. See "Item 1. BUSINESS -- Products -- Branded Swimwear."
DEPENDENCE ON LICENSED TRADEMARKS
The Company's manufacture and sale of the Anne Klein
collection is pursuant to a license agreement with Anne Klein which terminates
on December 31, 1999. The Anne Klein collection accounted for approximately
18.3% of the Company's net sales for fiscal 1998. The license may be terminated
earlier by Anne Klein under certain circumstances. See "Item 1.
BUSINESS--License Agreements--Anne Klein." The Company's manufacture and sale of
the Liz Claiborne and Elizabeth collections is pursuant to a license agreement
with Liz Claiborne which terminates in June 30, 2000, and may be terminated
earlier by Liz Claiborne under certain circumstances. See "Item 1.
BUSINESS--License Agreements--Liz Claiborne." The Company's manufacture and sale
of the Hang Ten swimwear is pursuant to a license agreement with ILC, which
terminates on December 31, 2001 and may be terminated earlier by ILC under
certain conditions. See "Item 1. BUSINESS--License Agreements--Hang Ten.
Termination of any of these license agreements could have a material adverse
effect on the Company's financial condition and results of operations.
Furthermore, a decline in the consumer appeal of Anne Klein, Liz Claiborne, or
Hang Ten apparel could adversely affect sales of the Company's Anne Klein, Liz
Claiborne, or Hang Ten lines. In addition, the Company is prohibited under the
Anne Klein and Liz Claiborne agreements from manufacturing or marketing women's
swimwear bearing the name of any other well known American designer of high end
products, other than Liz Claiborne and Anne Klein, respectively. The prohibition
may impair the Company's ability to expand its sales of designer swimwear. See
"Item 1. BUSINESS--License Agreements--Anne Klein" and "--Liz Claiborne."
19
<PAGE> 23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K" for the Company's financial statements, and the notes
thereto, and the financial statement schedules filed as part of this Annual
Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the Company's directors and executive
officers is incorporated herein by reference from the section entitled "ELECTION
OF DIRECTORS" of the Company's definitive Proxy Statement to be filed pursuant
to Regulation 14A within 120 days after the end of the last fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated
herein by reference from the section entitled "EXECUTIVE COMPENSATION" of the
Company's definitive Proxy Statement to be filed pursuant to Regulation 14A
within 120 days after the end of the last fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning the security ownership of certain
beneficial owners and management is incorporated by reference from the sections
entitled "SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT" of the
Company's definitive Proxy Statement to be filed pursuant to Regulation 14A
within 120 days after the end of the last fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related
transactions with directors and management is incorporated by reference from the
section entitled "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" of the
Company's definitive Proxy Statement to be filed pursuant to Regulation 14A
within 120 days after the end of the last fiscal year.
20
<PAGE> 24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules. Reference is made to the Index
to Financial Statements and Schedules on page 22 for a list of financial
statements and schedule filed as part of this Annual Report. All other schedules
are omitted because they are not applicable or the required information is shown
in the Company's financial statements or the related notes thereto.
(b) Reports on Form 8-K. The Company filed no reports on Form 8-K
during the fourth quarter of fiscal 1998.
(c) Exhibits. The following is a list of exhibits filed as a part
of this report.
10.1+ Employment Agreement dated as of September 29, 1997,
by and between The Sirena Apparel Group, Inc. and
Maurice B. Newman.
10.2+ Amended and Restated Employment Agreement effective
as of July 1, 1998, by and between The Sirena Apparel
Group, Inc. and Douglas Arbetman.
10.3+ Amendment No. 1 to The Sirena Apparel Group, Inc.
1994 Employee Stock Incentive Plan.
10.4+ Amendment No. 2 to The Sirena Apparel Group, Inc.
1994 Employee Stock Incentive Plan.
10.5 Agreement dated March 31, 1998, by and between JBA
International, Inc. and The Sirena Apparel Group,
Inc.
10.6* License Agreement dated April 27, 1998, by and
between International Licensing (California) Corp.
and The Sirena Apparel Group, Inc.
10.7+ Settlement Agreement and Mutual General Release
effective April 8, 1998, by and among The Sirena
Apparel Group, Inc., Apparel Management, Inc. and
Arthur H. Warshaw.
23.1 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule.
(d) Additional Financial Statements. Not Applicable.
- --------------
* The Company has requested confidential treatment for a portion of this
exhibit.
+ Management contract or compensatory plan or arrangement required to be
filed as an exhibit.
21
<PAGE> 25
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors F-1
Financial Statements
Consolidated Balance Sheets as of June 30, 1997 and
June 30, 1998 F-2
Consolidated Statements of Operations for the fiscal years ended June
30, 1996, 1997 and 1998 F-4
Consolidated Statements of Stockholders' Equity for the fiscal years
ended June 30, 1996, 1997 and 1998 F-5
Consolidated Statements of Cash Flows for the fiscal years ended June
30, 1996, 1997 and 1998 F-6
Notes to Consolidated Financial Statements F-8
Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts F-22
</TABLE>
22
<PAGE> 26
Consolidated Financial Statements
The Sirena Apparel Group, Inc.
and Subsidiary
Years ended June 30, 1997 and 1998
with Report of Independent Auditors
<PAGE> 27
Report of Independent Auditors
Board of Directors
The Sirena Apparel Group, Inc.
We have audited the accompanying consolidated balance sheets of The Sirena
Apparel Group, Inc. and subsidiary as of June 30, 1997 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the three years ended June 30, 1998. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Sirena Apparel
Group, Inc. and subsidiary as of June 30, 1997 and 1998 and the consolidated
results of their operations and their cash flows for the three years ended June
30, 1998, in conformity with generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information set forth herein.
/s/ ERNST & YOUNG LLP
Los Angeles, California
September 9, 1998
F-1
<PAGE> 28
The Sirena Apparel Group, Inc. and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
JUNE 30
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 202,293 $ 95,241
Accounts receivable, net of allowance $1,772,621 (1997) and $1,907,614
(1998) (Note 3) 6,941,649 6,883,380
Inventories (Note 4) 4,250,681 7,016,287
Prepaids and other current assets 384,770 407,839
------------ ------------
Total current assets 11,779,393 14,402,747
Equipment and leasehold improvements:
Furniture, fixtures and equipment 3,415,407 3,917,542
Leasehold improvements 836,177 902,631
Computer projects in progress -- 778,279
------------ ------------
4,251,584 5,598,452
Less accumulated depreciation and amortization (3,133,957) (3,526,098)
------------ ------------
1,117,627 2,072,354
Equipment under capital lease, less accumulated amortization of $36,716 (1997)
and $79,490 (1998) (Note 10) 177,153 134,379
Intangible assets, less accumulated amortization of $973,569 (1997) and
$1,145,095 (1998) 3,486,923 5,271,098
Deposits 127,071 149,038
------------ ------------
Total assets $ 16,688,167 $ 22,029,616
============ ============
</TABLE>
See accompanying notes.
F-2
<PAGE> 29
<TABLE>
<CAPTION>
JUNE 30
1997 1998
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 371,754 $ 920,443
Accounts payable 1,809,980 1,967,851
Note payable (Note 6) -- 236,500
Accrued liabilities (Note 5) 1,544,826 1,854,567
Current portion of capital leases obligations 39,522 46,243
Current portion - note payable to factor (Note 7) -- 199,992
------------ ------------
Total current liabilities 3,766,082 5,225,596
Capital lease obligations, less current portion 137,628 95,088
Note payable to factor (Note 7) -- 216,678
Commitments and contingencies (Note 10)
Stockholders' equity (Note 8):
Common stock, $.01 par value:
Authorized, 20,000,000
Issued and outstanding, 4,649,230
(1997) and 5,019,391 (1998) 46,492 50,194
Additional paid-in capital 32,424,627 33,896,765
Accumulated deficit (19,686,662) (17,454,705)
------------ ------------
Total stockholders' equity 12,784,457 16,492,254
------------ ------------
Total liabilities and stockholders' equity $ 16,688,167 $ 22,029,616
============ ============
</TABLE>
F-3
<PAGE> 30
The Sirena Apparel Group, Inc. and Subsidiary
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 49,206,288 $ 43,731,965 $ 51,041,705
Cost of goods sold 38,390,021 31,393,031 32,962,688
------------ ------------ ------------
Gross profit 10,816,267 12,338,934 18,079,017
Selling, general and administrative expenses 14,029,878 13,123,862 14,626,810
Depreciation and amortization 274,145 284,206 375,034
------------ ------------ ------------
Total operating expenses 14,304,023 13,408,068 15,001,844
------------ ------------ ------------
Income (loss) from operations (3,487,756) (1,069,134) 3,077,173
Interest expense (908,049) (896,183) (755,216)
------------ ------------ ------------
Income (loss) before provision for
income taxes (4,395,805) (1,965,317) 2,321,957
Provision for income taxes (Note 11) 15,000 20,000 90,000
------------ ------------ ------------
Net income (loss) $ (4,410,805) $ (1,985,317) $ 2,231,957
============ ============ ============
Net income (loss) per share (Note 9):
Basic $ (1.05) $ (0.43) $ 0.47
============ ============ ============
Diluted $ (1.05) $ (0.43) $ 0.46
============ ============ ============
Weighted average number of common shares outstanding:
Basic 4,205,946 4,649,230 4,700,514
============ ============ ============
Diluted 4,205,946 4,649,230 4,806,924
============ ============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 31
The Sirena Apparel Group, Inc. and Subsidiary
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock
----------------------------- Additional
Number Paid-In Accumulated
of Shares Par Value Capital Deficit Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1995 3,143,971 $ 31,440 $ 24,027,168 $(13,290,540) $ 10,768,068
Net loss for year ended
June 30, 1996 -- -- -- (4,410,805) (4,410,805)
Secondary offering (Note 6) 1,448,782 14,487 8,129,758 -- 8,144,245
Options exercised (Note 6) 56,477 565 267,701 -- 268,266
------------ ------------ ------------ ------------ ------------
Balance at June 30, 1996 4,649,230 46,492 32,424,627 (17,701,345) 14,769,774
Net loss for year ended June 30, 1997 -- -- -- (1,985,317) (1,985,317)
------------ ------------ ------------ ------------ ------------
Balance at June 30, 1997 4,649,230 46,492 32,424,627 (19,686,662) 12,784,457
Net income for year ended
June 30, 1998 -- -- -- 2,231,957 2,231,957
Options exercised (Note 6) 370,161 3,702 1,445,188 -- 1,448,890
Income tax benefit from
options exercised -- -- 26,950 -- 26,950
------------ ------------ ------------ ------------ ------------
Balance at June 30, 1998 5,019,391 $ 50,194 $ 33,896,765 $(17,454,705) $ 16,492,254
============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE> 32
The Sirena Apparel Group, Inc. and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $(4,410,805) $(1,985,317) $ 2,231,957
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Depreciation and amortization 415,525 470,312 611,409
Change in accounts receivable allowance 528,520 (518,347) (134,993)
Changes in operating assets and liabilities:
Accounts receivable (1,923,748) (1,484,971) (197,404)
Inventories (1,742,869) 3,462,746 (2,011,026)
Prepaids and other current assets (656,847) 703,716 (17,070)
Accounts payable 565,191 (855,738) (893,247)
Accrued liabilities (680,183) 724,426 (501,306)
----------- ----------- -----------
Net cash (used in) provided by operating
activities (7,905,216) 516,827 (911,680)
INVESTING ACTIVITIES
Purchases of property, plant and equipment (610,716) (423,934) (1,294,648)
Acquisition of trademark, intangible assets -- (21,174) (2,647)
Acquisition of Jezebel, net of cash acquired -- -- (274,777)
Decrease (increase) in deposits 9,697 (14,605) (7,955)
----------- ----------- -----------
Net cash used in investing activities (601,019) (459,713) (1,580,027)
FINANCING ACTIVITIES
Proceeds from note payable -- -- 500,000
Payments on note payable -- -- (83,330)
Payments under capital lease obligations (32,487) (36,116) (56,546)
Additional borrowings under capital lease -- 127,882 --
Proceeds from stock issuance 8,412,511 -- --
Proceeds from stock options, including related
tax benefit -- -- 1,475,840
Increase in bank overdraft 84,874 35,449 548,691
----------- ----------- -----------
Net cash provided by financing
activities 8,464,898 127,215 2,384,655
----------- ----------- -----------
(Decrease) increase in cash (41,337) 184,329 (107,052)
Cash at beginning of year 59,301 17,964 202,293
----------- ----------- -----------
Cash at end of year $ 17,964 $ 202,293 $ 95,241
=========== =========== ===========
</TABLE>
F-6
<PAGE> 33
The Sirena Apparel Group, Inc. and Subsidiary
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $908,049 $896,183 $755,216
Income taxes 372,559 32,129 66,943
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
During 1997, the Company incurred an additional capital lease obligation of
$127,882 in connection with a current lease agreement to acquire equipment.
In connection with the 1998 acquisition of Jezebel (See Note 6) the Company
assumed net liabilities of $ 1,678,702.
See accompanying notes.
F-7
<PAGE> 34
The Sirena Apparel Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
June 30, 1998
1. ORGANIZATION
The Sirena Apparel Group, Inc. (the Company), a Delaware corporation, designs,
manufactures and markets branded and private label swimwear, resortwear and
intimate apparel for each principal part of the women's market. On August 12,
1994, the Company completed an initial public offering of 1,400,000 shares of
common stock. On November 9, 1995, the Company completed a secondary offering
for 1,448,782 shares of common stock (see Note 8).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, SIRENAMEX S.A. de C.V., a Mexican corporation. All
significant intercompany accounts and transactions have been eliminated.
INVENTORIES
Inventories are stated at the lower of cost, determined on a first-in first-out
basis, or market.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Depreciation of
equipment is provided using the straight-line method over their estimated useful
lives, which is five years. Amortization of leasehold improvements is provided
for by the straight-line method over the shorter of the useful lives or the
terms of the leases.
INTANGIBLE ASSETS
Goodwill represents the excess of cost over the fair value of net assets
acquired and is amortized using the straight-line method over 15 to 40 years.
The carrying value of goodwill is reviewed if the facts and circumstances
suggest that it may be impaired. If this review indicates that goodwill will not
be recoverable, as determined based on estimated undiscounted cash flows of the
Company over the remaining amortization period,
F-8
<PAGE> 35
The Sirena Apparel Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS (CONTINUED)
the Company's carrying value of the goodwill would be reduced by the estimated
shortfall of cash flows. In addition, costs associated with a trademark of
$1,006,000 are being amortized using the straight-line method over 25 years.
Amortization of intangible assets amounted to approximately $125,000, $124,000
and $172,000 for the years ended June 30, 1996, 1997 and 1998, respectively.
REVENUE RECOGNITION
The Company recognizes revenue as of the date merchandise is shipped to its
customers. Allowance for estimated returns and discounts is provided when the
related revenue is recorded.
FINANCIAL INSTRUMENTS
The fair value of financial instruments is determined by reference to various
market data and other valuation techniques as appropriate. Unless otherwise
described, the fair values of financial instruments approximate their recorded
values.
CONCENTRATION OF CREDIT RISK
The Company manufactures and sells garments to retailers in the United States.
The Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. The Company factors a
majority of all of its receivables (see Note 3) whereby one factor assumes
substantially all the risk of collection on these transactions. Credit losses on
nonfactored receivables are provided for in the financial statements and have
historically been within management's expectations. One customer accounted for
10%, 11% and 15% of the Company's net sales for the years ended June 30, 1996,
1997 and 1998, respectively.
The Company has sewing operations in a facility in Sonora, Mexico. In addition,
certain of the Company's fabric is purchased from foreign suppliers.
Accordingly, the Company's operations are subject to the customary risks of
doing business abroad, including fluctuations in the value of currencies, export
duties, quotas, restrictions on the transfer of funds, work stoppage and
political instability.
F-9
<PAGE> 36
The Sirena Apparel Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company accounts for its income taxes under Financial Accounting Standards
Board Statement No. 109 (FAS 109). FAS 109 provides that the liability method is
used in accounting for income taxes whereby deferred tax assets and liabilities
are determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
ADVERTISING COSTS
The Company expenses nonreimbursable advertising costs as costs are incurred.
The amounts charged to advertising expense during the years ended June 30, 1996,
1997 and 1998 were approximately $1,771,000, $788,000 and $1,130,000,
respectively.
NET INCOME (LOSS) PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board (FASB) issued
"Earnings Per Share" (Statement No. 128) establishing standards for computing
and presenting earnings per share for publicly-held common stock or potential
common stock. Statement No. 128 supersedes the standards for computing earnings
per share previously found in APB Opinion No. 15, "Earnings Per Share" and
simplifies the standards for computing earnings per share. In addition,
Statement No. 128 replaces the presentation of primary earnings per share with a
presentation of basic earnings per share, requires dual presentation of basic
and diluted earnings per share on the face of the income statement for all
entities with complex capital structures and requires a reconciliation of the
numerator and denominator of the basic earnings per share computation to the
numerator and denominator of the diluted earnings per share computation. The
statement is effective for financial statements for both interim and annual
periods ending after December 15, 1997, with earlier application not permitted.
All periods presented reflect the adoption of Statement No. 128. The impact of
amounts previously reported was not material. (see Note 9).
F-10
<PAGE> 37
The Sirena Apparel Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
STOCK-BASED COMPENSATION
The Company accounts for its stock compensation arrangements under the
provisions of APB 25, "Accounting for Stock Issued to Employees," and intends to
continue to do so. In October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123). SFAS 123 established a fair value-based
method of accounting for compensation cost related to stock options and other
forms of stock-based compensation plans. However, SFAS 123 allows an entity to
continue to measure compensation costs using the principles of APB 25 if certain
pro forma disclosures are made. SFAS 123 is effective for fiscal years beginning
after December 15, 1995. The Company adopted the provisions for pro forma
disclosure requirements of SFAS 123 during the year ended June 30, 1997.
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
JUNE 30
1997 1998
------------ ------------
<S> <C> <C>
Receivables assigned to factor:
Nonrecourse $ 9,470,144 $ 10,300,838
Recourse 338,700 971,415
Advances from factor (3,532,369) (4,268,475)
------------ ------------
Due from factor 6,276,475 7,003,778
Nonfactored accounts receivable 2,437,795 1,787,216
Allowance for customer credits and doubtful accounts (1,772,621) (1,907,614)
------------ ------------
$ 6,941,649 $ 6,883,380
============ ============
</TABLE>
F-11
<PAGE> 38
The Sirena Apparel Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
3. ACCOUNTS RECEIVABLE (CONTINUED)
The Company has entered into an accounts receivable, inventory, seasonal
overadvance and factoring services arrangement, as amended, with Heller
Financial, Inc. (Heller) pursuant to which the Company sells to Heller all of
the Company's accounts receivable at their net invoice price less a commission
of 0.60% with no minimum or ancillary fees. Advances are made without recourse
for the financial inability of the customer to pay with respect to all accounts
receivable approved by Heller. The Company bears the entire risk of non-approved
receivables and accounts receivable returned by the factor to the Company. Prior
to Heller's payment, the Company may draw short-term advances from Heller up to
80% of the uncollected receivables less reserves as determined by Heller, which
advances bear interest at an annual rate of .375% over the prime rate
established from time to time by Bank of America (8.50% at June 30, 1998).
Additional interest of 1% is due on excess inventory levels, as defined, over
short-term advances. Heller collects such advances and interest by offsetting
against amounts due to the Company upon the collection of factored receivables.
In addition, the Company may draw short-term advances from Heller of (i) up to
50% of eligible inventory which is current season inventory and (ii) up to 40%
prior to October 31, (iii) and up to 25% during the period between November 1
and June 30, in each case of eligible inventory which is not current season
inventory, less (iv) such reserves as Heller elects to establish.
The Company's short-term advances are limited to a maximum of $5,000,000 (in
January, February and March) and ranging to a maximum of $1,000,000 (in June and
July) or $1,000,000 in excess of the Company's projected short-term advance
requirements, whichever is less. The Company may also borrow seasonal
overadvances of up to $500,000 from September 1 to September 30, $1,000,000 from
October 1 to October 31, $1,500,000 from November 1 to November 30, $2,000,000
from December 1 to January 31, $1,000,000 from February 1 to March 31, and $0
from April 1 through August 30 of each year. The inventory advances and the
overadvances bear interest at an annual rate of 2% over the prime rate
established from time to time by Bank of America. Finally, the Company may
request Heller to issue guarantees for the Company's purchase of raw materials
for up to $575,000 at any one time. Under the Company's agreement with Heller,
the maximum credit available to the Company at any time is limited to $20
million. The Company's agreement with Heller has a term expiring on August 18,
2000, after which time either party may terminate upon 60 days written notice.
The Company's obligations to Heller are secured by the Company's accounts
receivable, inventory, general intangibles, other than trademarks or trade
names, and cash deposit accounts. In addition, the agreement provides for
various financial covenants to be maintained.
F-12
<PAGE> 39
The Sirena Apparel Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30
1997 1998
---------- ----------
<S> <C> <C>
Raw materials $2,400,844 $4,001,514
Work-in-process 133,864 989,191
Finished goods 1,715,973 2,025,582
---------- ----------
$4,250,681 $7,016,287
========== ==========
</TABLE>
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
JUNE 30
1997 1998
---------- ----------
<S> <C> <C>
Accrued payroll $ 227,255 $ 828,949
Accrued vacation and benefits 321,895 334,449
Accrued - other 995,676 691,169
---------- ----------
$1,544,826 $1,854,567
========== ==========
</TABLE>
6. ACQUISITION
On February 4, 1998, the Company acquired substantially all of the assets and
liabilities of Renee of Hollywood (dba: "Jezebel"), a designer and manufacturer
of a broad line of intimate apparel for women. The acquisition was accounted for
using the purchase method of accounting, and accordingly, the purchase price was
allocated to the assets purchased and liabilities assumed based upon estimates
of the fair values at the date of acquisition. The excess of the purchase price
over the fair value of net assets acquired was $1,953,479 and was recorded as
goodwill and is being amortized on a straight-line basis over 15 years. The
purchase price of the acquisition consisted of $175,000 in cash, and the
assumption of certain debt which consisted of two notes payable and a guaranteed
earn-out payable to the former owners of Jezebel for an aggregate of $367,000.
The two notes are payable, interest only at a rate of 10% per annum, with the
principal due and payable thirteen
F-13
<PAGE> 40
The Sirena Apparel Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
6. ACQUISITION (CONTINUED)
months after the acquisition of Jezebel, on March 4, 1999. The guaranteed
earn-out to the former owner, specifies payments equal to diminishing
percentages of the pre-tax profits of the Jezebel Division, but no less than
$130,000, payable from time to time over a period of three years. The Company
has also entered into an employment agreement with the prior owner of Jezebel
which provides for salary and benefits commensurate with the employment benefits
accorded to other Divisional Vice Presidents.
7. NOTE PAYABLE
The Company has entered into a $500,000 term loan with Heller to finance the
acquisition of Jezebel. The loan bears interest at the rate established from
time to time by Bank of America (8.50% at June 30, 1998) plus 1.50%, commencing
on January 29, 1998 and is payable in 29 equal monthly installments of $16,667,
with the remainder paid in full on June 30, 2000. Annual maturities of the note
for the fiscal years ending June 30, 1999 and 2000 are $199,992 and $216,678,
respectively.
8. STOCKHOLDERS' EQUITY
On November 9, 1995, the Company completed a public offering for 1,448,782
shares of common stock (including 198,750 shares issued to the offering
Underwriters upon their exercise of options to purchase such shares to cover
over-allotments) at a price of $6.50 per share. The offering raised
approximately $8,100,000, net of offering costs. In addition to the shares sold
by the Company, 550,000 shares of common stock owned by existing shareholders
were sold to the public at $6.50 per share.
The Company established the 1994 Stock Incentive Plan, and as amended by the
Board of Directors and ratified by the shareholders on March 27, 1996, and
reserved 1,172,465 common shares for issuance under the Plan. Officers,
directors, employees and independent contractors are eligible to receive one
share of the common stock of the Company for each option granted. Options for
shares of common stock are granted at no less than the fair market value of the
shares on the date of grant, with vesting periods ranging from 0 to 3 years. On
July 1, 1997, 299,958 options with exercise prices ranging from $4.75 to $7.00
were repriced at $3.50 per share.
F-14
<PAGE> 41
The Sirena Apparel Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
8. STOCKHOLDERS' EQUITY (CONTINUED)
Pro forma information regarding net loss and earnings per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1997
and 1998; weighted-average risk-free interest rates of 6%; dividend yields of
0%; weighted-average volatility factors of the expected market price of the
Company's common stock of .40 and .52; and a weighted average expected life of
the option of 5 and 3 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimates, in the
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
<TABLE>
<CAPTION>
JUNE 30
1997 1998
------------- -------------
<S> <C> <C>
Pro forma net (loss) income $ (2,013,000) $ 1,872,000
Pro forma earnings per share $ (0.43) $ 0.39
</TABLE>
F-15
<PAGE> 42
The Sirena Apparel Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
8. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the Company's stock option activity and related information
follows:
<TABLE>
<CAPTION>
JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1998
--------------------- --------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- --------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 512,513 $4.83 653,536 $4.54 655,204 $4.53
Granted 203,500 $3.88 15,000 $3.50 272,000 $4.45
Exercised (56,477) $4.75 -- $ -- (370,161) $3.92
Canceled (6,000) $6.00 (13,332) $5.84 (13,417) $4.75
------- ------- --------
Outstanding at end of year 653,536 $4.54 655,204 $4.53 543,626 $4.00
======= ======= =======
Exercisable at end of year 583,869 $4.26 621,871 $4.45 481,626 $3.65
======= ======= =======
Weighted average fair value of options
granted during the year $1.71 $1.54 $2.31
</TABLE>
Exercise prices for options outstanding as of June 30, 1998, ranged from $3.50
to $6.75. The weighted average remaining contractual life of those options is 7
years.
In connection with the initial public offering, the Company granted to the
underwriters warrants to purchase and reserved 70,000 shares of the Company's
common stock during 1995. These warrants are exercisable at $5.70 per share and
expire in August 1999. No warrants have been exercised as of June 30, 1998.
F-16
<PAGE> 43
The Sirena Apparel Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
9. EARNINGS PER SHARE
A reconciliation of the numerator and denominator of basic earnings per share
and diluted earnings per share is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
1996 1997 1998
----------- ----------- -----------
(In Thousands, except shares and per share amounts)
<S> <C> <C> <C>
Basic EPS Computation:
Numerator $ (4,411) $ (1,985) $ 2,232
Denominator:
Weighted average common shares outstanding 4,205,946 4,649,230 4,700,514
----------- ----------- -----------
Total shares 4,205,946 4,649,230 4,700,514
----------- ----------- -----------
Basic EPS $ (1.05) $ (0.43) $ 0.47
=========== =========== ===========
Diluted EPS Computation:
Numerator $ (4,411) $ (1,985) $ 2,232
Denominator:
Weighted average common shares outstanding 4,205,946 4,649,230 4,700,514
Incremental shares from assumed exercise of options -- -- 106,410
----------- ----------- -----------
Total shares 4,205,946 4,649,230 4,806,924
=========== =========== ===========
Diluted EPS $ (1.05) $ (0.43) $ 0.46
=========== =========== ===========
</TABLE>
F-17
<PAGE> 44
The Sirena Apparel Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
10. COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS
The Company leases computer equipment under a capital lease agreement which
expires in 1999. Amortization on the capitalized amounts is included in
depreciation expense. The Company also leases operating facilities, showrooms,
computer equipment and vehicles under operating leases which expire at various
dates through 2005. Total operating rent expense approximated $778,589, $830,947
and $923,388 for the years ended June 30, 1996, 1997 and 1998, respectively.
Future minimum lease payments at June 30, 1998, under both capital and operating
leases having an initial noncancelable term of more than one year, are as
follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEARS ENDING JUNE 30 LEASES LEASES
----------- -----------
<S> <C> <C>
1999 $ 54,988 $ 835,294
2000 51,288 432,332
2001 51,288 248,392
2002 - 248,392
2003 - 161,483
Thereafter - 172,780
-------- ----------
Total minimum lease payments 157,564 $2,098,673
==========
Less imputed interest 16,233
--------
Present value of minimum lease payments 141,331
Less current portion 46,243
--------
$ 95,088
========
</TABLE>
The Company has licenses for the right to use certain trademarks in connection
with the sale of lines of women's and junior's swimwear in the United States and
related territories. The first license terminates on December 31, 1999, the
second license terminates June 30, 2000 and the third license terminates
December 31, 2001. The agreements can be terminated under specified
circumstances, including the Company's failure to achieve certain minimum sales,
the change in control of the Company or a change in management of the Company.
The license agreements require minimum royalty payments.
The Company has entered into an employment agreement expiring in 2001 with an
officer of the Company providing for annual base compensation of $350,000 with a
bonus provision, up to 100% of the base compensation based on performance
targets as
F-18
<PAGE> 45
The Sirena Apparel Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
10. COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS (CONTINUED)
determined by the Board of Directors. In addition, the Company has entered into
a two-year employment agreement expiring in 1999 with another officer of the
Company providing for annual base compensation of $300,000 with a bonus
provision up to $200,000 based upon performance criteria as determined by the
Board of Directors. The agreement is renewed automatically for successive
two-year terms unless terminated by either the Company or the employee.
The Company retained a corporation, owned by a former director of the Company,
to provide management services. Amounts expensed under the agreement were
$211,000, $720,000 and $0 for the years ended June 30, 1996, 1997 and 1998,
respectively. The agreement for management services was terminated during the
year ended June 30, 1998. The estimated amount of the settlement was included in
the amount expensed for the year ended June 30, 1997.
11. INCOME TAXES
The provision for income taxes included in the statements of operations amounted
to:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Current:
Federal $ -- $ -- $50,000
State 3,000 3,000 40,000
Foreign 12,000 17,000 --
------- ------- -------
15,000 20,000 90,000
Deferred:
Federal -- -- --
State -- -- --
------- ------- -------
-- -- --
------- ------- -------
$15,000 $20,000 $90,000
======= ======= =======
</TABLE>
F-19
<PAGE> 46
The Sirena Apparel Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
11. INCOME TAXES (CONTINUED)
The following represents the reconciliation of the tax provision rate to the
U.S. federal income statutory tax rate:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Statutory rate (34.0)% (34.0)% 34.0%
Foreign taxes 0.3 0.3 --
State taxes (net of federal tax) -- -- 1.1
Valuation allowance 32.6 31.2 (39.7)
Permanent items 1.4 2.2 5.7
Alternative minimum tax -- -- 2.2
Other -- -- (1.3)
------ ------ ------
Tax provision rate 0.3% 0.3% 2.0%
====== ====== ======
</TABLE>
The components of deferred tax assets (valuation allowance) as of June 30, 1997
and 1998, respectively, are as follows:
<TABLE>
<CAPTION>
JUNE 30
1997 1998
----------- -----------
<S> <C> <C>
Current deferred tax assets:
Accounts receivable $ 731,542 $ 768,745
Inventory 1,426,313 759,857
Other 131,828 360,239
----------- -----------
2,289,683 1,888,841
Non-current deferred tax assets:
Property and leasehold improvements 119,574 81,693
Net operating loss carryforwards 2,502,238 2,266,000
----------- -----------
2,621,812 2,347,693
Valuation allowance (4,911,495) (4,236,534)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
</TABLE>
F-20
<PAGE> 47
The Sirena Apparel Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
11. INCOME TAXES (CONTINUED)
The Company has available approximately $6,400,000 of operating loss
carryforwards expiring from 2003 to 2012 available for federal income tax
purposes.
12. EMPLOYEE PROFIT SHARING PLAN
The Company has a qualified profit sharing plan (the Plan) covering all
employees with one or more years of service. Contributions to the Plan are on a
discretionary basis. For the years ended June 30, 1996, 1997 and 1998, the
Company has elected not to make any contributions to the Plan. The Plan,
however, is not expected to be terminated. Plan assets will remain in the Plan
to meet future Plan obligations.
F-21
<PAGE> 48
The Sirena Apparel Group, Inc. and Subsidiary
Schedule II
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
ADDITIONS
---------------------------------
BALANCE AT CHARGES TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER ASSETS AT END OF
DESCRIPTION OF PERIOD EXPENSES (DESCRIBE) WRITE-OFFS(a) PERIOD
----------- --------- -------- ---------- ------------- ------
<S> <C> <C> <C> <C> <C>
Accounts receivable allowances:
Year ended June 30, 1996 $ 1,762,448 $ 5,083,370 $ - $ (4,554,850) $ 2,290,968
Year ended June 30, 1997 2,290,968 4,031,306 - (4,549,653) 1,772,621
Year ended June 30, 1998 1,772,621 4,895,779 - (4,760,786) 1,907,614
</TABLE>
(a) Uncollectible accounts written off net of recoveries and charges for
returns, allowances and cash discounts to the allowance account.
The above reserves are deducted from the related assets in the balance sheets.
F-22
<PAGE> 49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized on September
25, 1998.
THE SIRENA APPAREL GROUP, INC.
By /s/ Maurice B. Newman
------------------------------------
Maurice B. Newman, Chairman of the
Board and Chief Executive Officer
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 Company and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Maurice B. Newman Chairman of the Board, Chief Executive September 25, 1998
- -------------------------- Officer and Director (Principal Executive
Maurice B. Newman Officer)
/s/ Douglas Arbetman President and Director September 25, 1998
- ---------------------------
Douglas Arbetman
/s/ Howard H. Hedinger Director September 25, 1998
- ---------------------------
Howard H. Hedinger
/s/ Aneida Cornejo Controller September 25, 1998
- ---------------------------- (Principal Financial and Accounting
Aneida Cornejo Officer)
- ----------------------------- Director September __, 1998
Ellison C. Morgan
</TABLE>
<PAGE> 50
EXHIBIT INDEX
Exhibits.
10.1+ Employment Agreement dated as of September 29,
1997, by and between The Sirena Apparel Group,
Inc. and Maurice B. Newman.
10.2+ Amended and Restated Employment Agreement
effective as of July 1, 1998, by and between The
Sirena Apparel Group, Inc. and Douglas Arbetman.
10.3+ Amendment No. 1 to The Sirena Apparel Group, Inc.
1994 Employee Stock Incentive Plan.
10.4+ Amendment No. 2 to The Sirena Apparel Group, Inc.
1994 Employee Stock Incentive Plan.
10.5 Agreement dated March 31, 1998, by and between JBA
International, Inc. and The Sirena Apparel Group,
Inc.
10.6* License Agreement dated April 27, 1998, by and
between International Licensing (California) Corp.
and The Sirena Apparel Group, Inc.
10.7+ Settlement Agreement and Mutual General Release
effective April 8, 1998, by and among The Sirena
Apparel Group, Inc., Apparel Management, Inc. and
Arthur H. Warshaw.
23.1 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule.
- ----------
* The Company has requested confidential treatment for a portion of this
exhibit.
+ Management contract or compensatory plan or arrangement required to be
filed as an exhibit.
<PAGE> 1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and effective as of the
date set forth in Section 1.4 of the Agreement, by and between THE SIRENA
APPAREL GROUP, INC., a Delaware corporation (the "Company"), and MAURICE B.
NEWMAN (the "Employee"), with respect to the following facts:
A. The Company desires to be assured of the continued association and
services of the Employee in order to take advantage of his experience, knowledge
and abilities in the Company's business, and is willing to employ the Employee,
and the Employee desires to be so employed, on the terms and conditions set
forth in the Agreement.
B. The Employee from time to time in the course of his employment may learn
trade secrets and other confidential information concerning the Company, and the
Company desires to safeguard such trade secrets and confidential information
against unauthorized use and disclosure.
ACCORDINGLY, on the basis of the representations, warranties and
covenants contained herein, the parties hereto agree as follows:
1. EMPLOYMENT
1.1 Employment. The Company hereby employs the Employee as Chief
Operating Officer, and the Employee hereby accepts such employment, on the terms
and conditions set forth below, to perform during the term of the Agreement such
services as are required hereunder. The Employee has, in addition, been elected
as Chairman of the Board of Directors of the Company, and has agreed to serve in
such capacity.
1.2 Duties. The Employee shall render such services to the
Company, and shall perform such duties and acts, as reasonably may be required
by the Company's Board of Directors in connection with any aspect of the
Company's business.
1.3 Service to Others. The Employee shall devote his entire
productive time, ability and attention to, and shall diligently and
conscientiously use his best efforts to further, the Company's business, and
shall not, without the prior written consent of the Company's Board of Directors
in each instance, perform services of any kind, whether or not for compensation,
for any person other than the Company, which services, in the sole opinion of
the Company's Board of Directors, might materially interfere with the
performance of his duties hereunder.
1.4 Effective Date. The Agreement shall be made and effective as
of September 29, 1997 (the "Effective Date").
1
<PAGE> 2
2. COMPENSATION
2.1 Compensation. As the total consideration for the services
which the Employee renders hereunder, the Employee shall be entitled to the
following:
(a) an annual base salary of $300,000, subject to such
periodic increases, if any, as the Company's Board of Directors may deem to be
appropriate in its sole discretion, less income tax and other applicable
withholdings, payable consistent with the payment practices generally applicable
to employees of the Company;
(b) an annual bonus not to exceed $200,000 upon the
realization of performance criteria set by the Compensation Committee of the
Company's Board of Directors, less income tax and other applicable withholdings;
(c) participation in all benefit plans or programs sponsored
by the Company for executive officers in general, including, without limitation,
participation in any group health plan, medical reimbursement plan, dental plan,
disability insurance plan (the costs, including premiums, for each of the
foregoing plans shall be paid exclusively by the Company), life insurance plan
and pension and profit sharing plan;
(d) reimbursement of any and all reasonable and documented
expenses incurred by the Employee from time to time in the performance of his
duties hereunder;
(e) four (4) weeks paid vacation per year, at such time or
times as the Company may authorize, and all paid holidays observed by the
Company; provided, however, that such vacation shall be taken annually and shall
not cumulate from year to year;
(f) an automobile allowance in the amount of $850 per month,
together with reimbursement of all expenses for insurance, fuel and maintenance;
(g) options to purchase up to 25,000 shares of Common Stock
of the Company on the terms and conditions set forth in the Non-Qualified Stock
Option Agreement attached hereto as Exhibit A, and options to purchase up to
80,000 shares of Common Stock of the Company on the terms and conditions set
forth in the Non-Qualified Stock Option Agreement attached hereto as Exhibit B;
and
(h) a special bonus of $30,000 to be paid on January 1,
1998.
2.2 Illness. Subject to the limitations contained in Section
3.2(c) and 3.3(i) of the Agreement, if the Employee shall be unable to render
the services required hereunder on account of personal injury or physical or
mental illness, he shall continue to receive all payments provided for in the
Agreement; provided, however, that any such payments may, at the sole option of
the Company, be reduced by any amount that the Employee receives for the period
covered by
2
<PAGE> 3
such payments as disability compensation under insurance policies, if any,
maintained by the Company or under government programs.
3. TERM OF EMPLOYMENT AND TERMINATION
3.1 Term. Unless sooner terminated pursuant to Section 3.2 of the
Agreement, the term of employment under the Agreement shall be for a period
commencing on the Effective Date and ending on the second anniversary date
thereof; provided, however, that such term of employment automatically shall be
renewed for successive two (2) year terms unless written notice of termination
is given by either the Company or the Employee not less than ninety (90) days
prior to the end of the initial term or any subsequent two (2) year term.
3.2 Termination. Employment under the Agreement shall terminate
prior to the expiration of its term upon the happening of any of the following
events:
(a) the mutual agreement of the Company and the Employee;
(b) the death of the Employee;
(c) at the Company's option if, in the reasonable judgment
of the Company's Board of Directors, the Employee has become so physically or
mentally disabled as to be incapable of substantially performing his duties
hereunder for a period of six (6) consecutive months or an aggregate of 180 days
in any twelve (12) month period;
(d) at the Company's option, in the event of (i) a material
breach of the Agreement by reason of the Employee's continued and willful
failure or refusal to substantially perform his duties in accordance with the
Agreement or (ii) the conviction of the Employee of a felony or of a misdemeanor
involving financial impropriety or (iii) the material breach of the Employee's
fiduciary duty to the Company; provided, however, that no termination shall
occur under clause (i) of this Section 3.2(d) unless the Employee first shall
have received written notice specifying the acts or omissions alleged to
constitute such breach and, if such breach can be corrected, it continues after
the Employee shall have had reasonable opportunity to correct it;
(e) at the Employee's option, in the event of (i) a material
breach of the Agreement by the Company or (ii) the assignment to the Employee of
duties inconsistent with his status as Chief Operating Officer of the Company or
(iii) a substantial alteration in the Employee's reporting responsibility, title
or office or (iv) a move of the Company's principal executive offices outside
the County of Los Angeles; provided, however, that no termination shall occur
under clause (i) of this Section 3.2(e) unless the Company first shall have
received written notice specifying the acts or omissions alleged to constitute
such breach and, if such breach can be corrected, it continues after the Company
shall have had reasonable opportunity to correct it; or
3
<PAGE> 4
(f) at the Company's option by resolution of the Board of
Directors for any reason whatsoever without cause.
3.3 Duties Upon Termination. In the event that employment under
the Agreement is terminated, whether at the expiration of the initial term or
any subsequent two (2) year term or prior thereto pursuant to Section 3.2 of the
Agreement, neither the Company nor the Employee shall have any remaining duties
or obligations hereunder, except that (i) the Company shall pay to the Employee,
or his estate, such compensation as is due pursuant to Section 2.1, prorated
through the date of termination, (ii) the Employee shall continue to be bound by
Section 4 of the Agreement, (iii) in the event that such termination shall occur
pursuant to Section 3.2(a), (b), (c), (e) or (f) of the Agreement or the Company
shall terminate the Agreement under Section 3.1 hereof effective at the end of
the initial term or any renewal term, except for any such termination for any
reason described in Section 3.2(d) hereof, the Company shall pay to the
Employee, or his estate, in cash on the effective date of termination such
compensation as would otherwise be due pursuant to Sections 2.1(a) and (c)
during the period commencing on the effective date of such termination and
ending on the date occurring ninety (90) days after such effective date and (iv)
the Employee shall resign as a Director of the Company, if he then be such,
immediately upon the request of a majority of the Board of Directors (other than
the Employee).
4. TRADE SECRETS
4.1 Trade Secrets. The Employee shall not, without the prior
written consent of the Company's Board of Directors in each instance, disclose
or use in any way, during the term of his employment by the Company and for one
(1) year thereafter, except as required in the course of such employment, any
confidential business or technical information or trade secret of the Company
acquired in the course of such employment, whether or not patentable,
copyrightable or otherwise protected by law, and whether or not conceived of or
prepared by him (collectively, the "Trade Secrets") including, without
limitation, any information concerning designs, patterns, customer lists,
products, procedures, operations, investments, financing, costs, employees,
purchasing, accounting, marketing, merchandising, sales, salaries, pricing,
profits and plans for future development, the identity, requirements,
preferences, practices and methods of doing business of specific parties with
whom the Company transacts business, and all other information which is related
to any product, service or business of the Company, other than information which
is generally known in the industry in which the Company transacts business or is
acquired from public sources; all of which Trade Secrets are the exclusive and
valuable property of the Company.
4.2 Tangible Items. All files, accounts, records, documents,
books, forms, notes, reports, memoranda, studies, compilations of information,
correspondence and all copies, abstracts and summaries of the foregoing, and all
other physical items related to the Company, other than a merely personal item,
whether of a public nature or not, and whether prepared by the Employee or not,
are and shall remain the exclusive property of the Company and shall not be
removed from the premises of the Company, except as required in the course of
4
<PAGE> 5
employment by the Company, without the prior written consent of the Company's
Board of Directors in each instance, and the same shall be promptly returned to
the Company by the Employee on the expiration or termination of his employment
by the Company or at any time prior thereto upon the request of the Company.
4.3 Solicitation of Employees. During the term of his employment
by the Company and for one (1) year thereafter (such period not to include any
period of violation hereof by the Employee or period which is required for
litigation to enforce this paragraph and during which the Employee is in
violation hereof), the Employee shall not, directly or indirectly, either for
his own benefit or purposes or the benefit or purposes of any other person,
employ or offer to employ, call on, solicit, interfere with or attempt to divert
or entice away any employee of the Company in any capacity if that person
possesses or has knowledge of any Trade Secrets of the Company.
4.4 Injunctive Relief. The Employee hereby acknowledges and
agrees that it would be difficult to fully compensate the Company for damages
resulting from the breach or threatened breach of this Section 4 and,
accordingly, that the Company shall be entitled to seek temporary and injunctive
relief, including temporary restraining orders, preliminary injunctions and
permanent injunctions, to enforce such provisions without the necessity of
proving actual damages and without the necessity of posting any bond or other
undertaking in connection therewith. This provision with respect to injunctive
relief shall not, however, diminish the Company's right to claim and recover
damages.
4.5 "Company". For the purposes of this Section 4 of the
Agreement only, the term "Company" shall mean collectively The Sirena Apparel
Group, Inc., a Delaware corporation, and its successors, assigns and nominees,
and all individuals, corporations and other entities that directly, or
indirectly through one or more intermediaries, control or are controlled by or
are under common control with any of the foregoing.
5. RELEASE
5.1 Termination of Prior Agreements. The rights and obligations
of the Company and the Employee, if any, under that certain letter agreement
dated September 12, 1997, a copy of which is attached as Exhibit C hereto (the
"Prior Agreement"), hereby are terminated effective as of the date hereof. From
and after the date hereof, neither the Company nor the Employee shall have any
further rights or obligations whatsoever under the Prior Agreement.
5.2 General Release.
(a) Except as expressly set forth in the Agreement, each
party hereto hereby fully, forever and unconditionally releases, exonerates,
waives, relinquishes, discharges, acquits, relieves and covenants not to sue or
charge each other party hereto and its agents, employees, representatives,
attorneys, stockholders, officers, directors, successors and
5
<PAGE> 6
assigns (collectively, "all related persons"), and all affiliated, parent and
subsidiary corporation, and each of them, and all related persons connected
therewith, from any and all rights, claims, demands, debts, obligations,
liabilities, promises, acts, agreements, costs, expenses (including but not
limited to, attorneys' fees), damages, disputes, controversies, actions and
causes of action, of whatever kind or nature, in law or equity, whether known or
unknown, suspected or unsuspected, potential or actual, based on, arising out
of, or in any way connected with or related to the Prior Agreement.
(b) Except as expressly set forth in the Agreement, each
party hereto acknowledges that no statement, representation, promise or
inducement has been made by any other party hereto in connection with the
Agreement, and each party hereto specifically acknowledges that it has not
relied upon any statement, representation, promise or inducement of any other
party hereto in executing the Agreement. The Agreement supersedes all prior
negotiations and understandings of any kind with respect to the subject matter
hereof and contains all of the agreement of the parties hereto. There are no
oral understandings not incorporated herein. The Agreement shall not be amended,
modified, supplemented or abrogated other than by a written instrument duly
executed by all parties hereto.
(c) Each party hereto understands and agrees that this
Section 5 extends to all claims of whatever nature and kind, known or unknown,
suspected or unsuspected, and they each expressly waive any and all rights under
Section 1542 of the Civil Code of the State of California, which provides as
follows:
A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of
executing the release, which if known by him must have materially
affected his settlement with the debtor.
Each party hereto expressly waives and releases any right or benefit which it
has or may have under Section 1542 of the Civil Code of the State of California,
as well as under the provisions of all comparable or similar statutes,
provisions of common law or other decisional law of any and all states of the
United States. In connection with such waiver and relinquishment, each party
hereto acknowledges that it may hereafter discover claims presently unknown or
unsuspected, or facts in addition to or different from those which it now knows
or believes to be true, with respect to the matters released herein.
Nevertheless, it is the intention of each party hereto through the Agreement, to
fully, finally and forever settle and release all such matters, and all claims
relative thereto, which now exist, may exist or heretofore have existed between
them. In furtherance of such intention, the release herein given shall be and
remain in effect as a full and complete release notwithstanding the discovery or
existence of any such additional or different claims or facts relative thereto,
and each party hereto expressly assumes the risk of any injury, loss or damage
which may arise from this waiver.
6
<PAGE> 7
6. MISCELLANEOUS
6.1 Severable Provisions. The provisions of the Agreement are
severable, and if any one or more provisions may be determined to be illegal or
otherwise unenforceable, in whole or in part, the remaining provisions, and any
partially unenforceable provisions to the extent enforceable, shall nevertheless
be binding and enforceable.
6.2 Successors and Assigns. All of the terms, provisions and
obligations of the Agreement shall inure to the benefit of and shall be binding
upon the parties hereto and their respective heirs, representatives, successors
and assigns. Notwithstanding the foregoing, neither the Agreement nor any rights
hereunder shall be assigned, pledged, hypothecated or otherwise transferred by
the Employee without the prior written consent of the Company's Board of
Directors in each instance.
6.3 Governing Law. The validity, construction and interpretation
of the Agreement shall be governed in all respects by the laws of the State of
California applicable to contracts made and to be performed within that State.
6.4 Arbitration. At the demand of either party any dispute except
under Paragraph 4 arising out of this Agreement shall be resolved through
binding arbitration. The Company shall pay all arbitration costs. Unless the
parties agree on a different arbitration procedure, arbitration shall take place
under the Expedited Labor Arbitration Rules of the American Arbitration
Association of Los Angeles, California. The decision of the Arbitrator shall be
final and binding on both parties.
6.5 Headings. Section and subsection headings are not to be
considered part of this Agreement and are included solely for convenience and
reference and in no way define, limit or describe the scope of the Agreement or
the intent of any provisions hereof.
6.6 Entire Agreement. The Agreement constitutes the entire
agreement between the parties hereto pertaining to the subject matter hereof,
and supersedes all prior agreements, understandings, negotiations and
discussions, whether oral or written, relating to the subject matter of the
Agreement. No supplement, modification, waiver or termination of the Agreement
shall be valid unless executed by the party to be bound thereby. No waiver of
any of the provisions of the Agreement shall be deemed to or shall constitute a
waiver of any other provisions hereof (whether or not similar), nor shall such
waiver constitute a continuing waiver unless otherwise expressly provided.
6.7 Notice. Any notice or other communication required or
permitted hereunder shall be in writing and shall be deemed to have been given
(i) if personally delivered, when so delivered, (ii) if mailed, one (1) week
after having been placed in the United States mail, registered or certified,
postage prepaid, addressed to the party to whom it is directed at the address
set forth below or (iii) if given by telex or telecopier, when such notice or
other communication is
7
<PAGE> 8
transmitted to the telex or telecopier number specified below and the
appropriate answer back or telephonic confirmation is received. Either party may
change the address to which such notices are to be addressed by giving the other
party notice in the manner herein set forth.
6.8 Attorneys' Fees. In the event any party takes legal action to
enforce any of the terms of the Agreement, the unsuccessful party to such action
shall pay the successful party's expenses, including attorneys' fees, incurred
in such action.
6.9 Third Parties. Nothing in the Agreement, expressed or
implied, is intended to confer upon any person other than the Company or the
Employee any rights or remedies under or by reason of the Agreement.
IN WITNESS WHEREOF, the parties hereto have caused the Agreement to be
executed as of the date and year first set forth above.
THE SIRENA APPAREL GROUP, INC.
By /s/ DOUGLAS ARBETMAN
----------------------------------
Authorized Representative
10333 Vacco Street
South El Monte, California 91733
Telecopier No.: (626) 442-2280
/s/ MAURICE B. NEWMAN
------------------------------------
MAURICE B. NEWMAN
24 Westwind Street
Marina del Rey, California 90292
Telecopier No.: (310) 822-8523
8
<PAGE> 1
EXHIBIT 10.2
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
(Restated as of July 1, 1998)
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and effective as
of July 1, 1998, by and between THE SIRENA APPAREL GROUP, INC., a Delaware
corporation (the "Company"), and DOUGLAS ARBETMAN (the "Employee"), with respect
to the following facts:
A. The Company desires to be assured of the continued association and
services of the Employee in order to take advantage of his experience, knowledge
and abilities in the Company's business, and is willing to employ the Employee,
and the Employee desires to be so employed, on the terms and conditions set
forth in the Agreement.
B. The Employee from time to time in the course of his employment may
learn trade secrets and other confidential information concerning the Company,
and the Company desires to safeguard such trade secrets and confidential
information against unauthorized use and disclosure.
C. The Company and the Employee intend this Agreement to be a complete
amendment and restatement of all previous agreements and understandings between
them as to the subject matter hereof and to wholly supersede any and all such
prior agreements and/or understandings.
ACCORDINGLY, on the basis of the representations, warranties and
covenants contained herein, the parties hereto agree as follows:
1. EMPLOYMENT
1.1 Employment. The Company hereby employs the Employee as
President and Vice Chairman of the Company's Board of Directors, and the
Employee hereby accepts such employment, on the terms and conditions set forth
below, to perform during the term of the Agreement such services as are required
hereunder.
1.2 Duties. The Employee shall report to the Company's Chief
Executive Officer and shall render such services to the Company, and shall
perform such duties and acts, as reasonably may be required by the Chief
Executive Officer and by the Company's Board of Directors in connection with any
aspect of the Company's business. Employee's duties shall generally relate to
corporate merchandising, marketing and sales.
1.3 Service to Others. The Employee shall devote his entire
productive time, ability and attention to, and shall diligently and
conscientiously use his best efforts to further, the Company's business, and
shall not, without the prior written consent of the Company's Board of Directors
in each instance, perform services of any kind, whether or not for compensation,
for any person other than the Company, which services, in the sole opinion of
the Company's Board of Directors, might materially interfere with the
performance of his duties hereunder.
1
<PAGE> 2
1.4 Effective Date. The Agreement shall be made and effective
July 1, 1998 and, on said date, shall wholly supersede and replace all prior
agreements or understandings relating to Employee's employment with the Company.
2. COMPENSATION
2.1 Compensation. As the total consideration for the services
which the Employee renders hereunder, the Employee shall be entitled to the
following:
(a) an annual base salary of $350,000, subject to such
periodic increases, if any, as the Company's Board of Directors may deem to be
appropriate in its sole discretion, less income tax and other applicable
withholdings, payable in weekly installments consistent with the payments
practices generally applicable to employees of the Company;
(b) an annual bonus of up to one hundred percent (100%) of
the Employee's annual base salary based upon achievement by the Company of the
performance criteria set forth in Exhibit A, less income tax and other
applicable withholdings; provided, however, that, upon execution of this
Agreement by Employee and the Company, Employee's bonus in respect of the
Company's fiscal year ended June 30, 1998 shall be fixed at $365,000;
(c) participation in all benefit plans or programs sponsored
by the Company for executive officers in general, including, without limitation,
participation in any group health plan, medical reimbursement plan, dental plan,
disability insurance plan (the costs, including premiums, for each of the
foregoing plans shall be paid exclusively by the Company), life insurance plan
(on terms at least as beneficial to the Employee as terms offered Employee on
the date of this Agreement) and pension and profit sharing plan;
(d) reimbursement of any and all reasonable and documented
expenses incurred by the Employee from time to time in the performance of his
duties hereunder;
(e) four (4) weeks paid vacation per year, at such time or
times as the Company's Board of Directors may authorize, and all paid holidays
observed by the Company; provided, however, that such vacation shall be taken
annually and shall not cumulate from year to year (it being understood and
agreed that the Employee's accrued vacation at the inception of this Agreement,
in respect of past service, is four (4) weeks and that Employee is entitled to
time off in respect of accrued vacations earned under the previous terms of
Employee's employment aggregating $55,000 which shall be paid to Employee
without interest upon request by Employee);
(f) an automobile allowance in the amount of $850 per month,
together with reimbursement of all expenses for insurance, fuel and maintenance;
(g) term life insurance in the amount of $500,000 payable as
directed by the Employee; and
2
<PAGE> 3
(h) options to purchase up to 100,000 shares of Common Stock
of the Company of which options to purchase up to 33,333 shares of such stock
shall, upon the terms and subject to the conditions set forth in Exhibit A, be
awarded in respect of each of the first three years of employment under this
Agreement.
2.2 Illness. Subject to the limitations contained in Section
3.2(c) and 3.3(i) of the Agreement, if the Employee shall be unable to render
the services required hereunder on account of personal injuries or physical or
mental illness, he shall continue to receive all payments provided in the
Agreement; provided, however, that any such payments may, at the sole option of
the Company, be reduced by any amount that the Employee receives for the period
covered by such payments as disability compensation under insurance policies, if
any, maintained by the Company or under government programs.
3. TERM OF EMPLOYMENT AND TERMINATION
3.1 Term. Unless sooner terminated pursuant to Section 3.2 of the
Agreement, the term of employment under the Agreement shall be for a period
commencing on July 1, 1998 and ending on June 30, 2001; provided, however, that
such term of employment shall automatically be renewed from year to year for
successive one (1) year terms unless written notice of intent not to renew is
given by either the Company or the Employee on or before December 31 of any year
prior to the June 30 scheduled expiration of the term hereof.
3.2 Termination. Employment under the Agreement shall terminate
prior to the expiration of its term upon the happening of any of the following
events:
(a) the mutual agreement of the Company and the Employee;
(b) the death of the Employee;
(c) at the Company's option if, in the reasonable judgment
of the Company's Board of Directors, the Employee has become so physically or
mentally disabled as to be incapable of substantially performing his duties
hereunder for a period of six (6) consecutive months or an aggregate of 180 days
in any twelve (12) month period;
(d) at the Company's option, for "cause" in the event of (i)
a material breach of the Agreement by reason of the Employee's repeated and
willful failure or refusal to perform his duties in accordance with the
Agreement or (ii) the conviction of the Employee of a felony or of a misdemeanor
involving financial impropriety or (iii) the material breach of the Employee's
fiduciary duty to the Company; provided, however, that no termination shall
occur under clause (i) unless the Employee first shall have received notice
specifying the acts or omissions alleged to constitute such breach and, if such
breach can be corrected, it continues after the Employee shall have had
reasonable opportunity to correct it;
(e) at the Employee's option, in the event of (i) a material
breach of the Agreement by the Company or (ii) the assignment to the Employee of
duties inconsistent with his duties as described in Sections 1.1 and 1.2 above
or (iii) a substantial alteration in the
3
<PAGE> 4
Employee's reporting responsibility, title or office or (iv) a move of the
Company's principal executive offices outside the County of Los Angeles or (v)
within two (2) years from and after the date hereof, there shall occur a "change
of control" of the Company as defined in Exhibit B hereto; provided, however,
that no termination shall occur under clause (i) unless the Company first shall
have received notice specifying the acts or omissions alleged to constitute such
breach and, if such breach can be corrected, it continues after the Company
shall have had reasonable opportunity to correct it; or
(f) at the Company's option by resolution of the Board of
Directors for any reason whatsoever without cause.
3.3 Duties Upon Termination. In the event that employment under
the Agreement is terminated by the Company other than for "cause," as defined
herein, or by the Employee in any circumstance described in Section 3.2(e),
neither the Company nor the Employee shall have any remaining duties or
obligations hereunder, except that (i) the Company shall continue to pay to the
Employee, or his estate, the compensation to which Employee would otherwise be
entitled pursuant to Sections 2.1(a) and (c) during the period commencing on the
effective date of such termination and ending on the date occurring twenty-four
(24) calendar months after such effective date, (ii) the Employee shall continue
to be bound by Section 4 of the Agreement, and (iii) the Employee shall resign
as a director of the Company, if he then be such, immediately upon the request
of a majority of the Board of Directors (other than the Employee). Employee
shall have the right, by giving the Company written notice of his election
within 60 days following termination of employment, to require the Company to
pay any amounts payable pursuant to clause 3.3(i) of this Agreement, in a single
lump sum.
4. TRADE SECRETS
4.1 Trade Secrets. The Employee shall not, without the prior
written consent of the Company's Board of Directors in each instance, disclose
or use in any way, during the term of his employment by the Company or
thereafter, except as required in the course of such employment, any
confidential business or technical information or trade secret of the Company
acquired in the course of such employment, whether or not patentable,
copyrightable or otherwise protected by law, and whether or not conceived of or
prepared by him (collectively, the "Trade Secrets") including, without
limitation, any information concerning designs, patterns, customer lists,
products, procedures, operations, investments, financing, costs, employees,
purchasing, accounting, marketing, merchandising, sales, salaries, pricing,
profits and plans for future development, the identity, requirements,
preferences, practices and methods of doing business of specific parties with
whom the Company transacts business, and all other information which is related
to any product, service or business of the Company, other than information which
is generally known in the industry in which the Company transacts business or is
acquired from public sources; all of which Trade Secrets are the exclusive and
valuable property of the Company.
4.2 Tangible Items. All files, accounts, records, documents,
books, forms, notes, reports, memoranda, studies, compilations of information,
correspondence and all copies, abstracts and summaries of the foregoing, and all
other physical items related to the Company,
4
<PAGE> 5
other than a merely personal item, whether of a public nature or not, and
whether prepared by the Employee or not, are and shall remain the exclusive
property of the Company and shall not be removed from the premises of the
Company, except as required in the course of employment by the Company, without
the prior written consent of the Company's Board of Directors in each instance,
and the same shall be promptly returned to the Company by the Employee on the
expiration or termination of his employment by the Company or at any time prior
thereto upon the request of the Company.
4.3 Solicitation of Employees. During the term of his employment
by the Company and for one (1) year thereafter (such period not to include any
period of violation hereof by the Employee or period which is required for
litigation to enforce this paragraph and during which the Employee is in
violation hereof), the Employee shall not, directly or indirectly, either for
his own benefit or purposes or the benefit of purposes of any other person,
employ or offer to employ, call on, solicit, interfere with or attempt to divert
or entice away any employee of the Company in any capacity if that person
possesses or has knowledge of any Trade Secrets of the Company.
4.4 Injunctive Relief. The Employee hereby acknowledges and
agrees that it would be difficult to fully compensate the Company for damages
resulting from the breach or threatened breach of this Section 4 and,
accordingly, that the Company shall be entitled to seek temporary and injunctive
relief, including temporary restraining orders, preliminary injunctions and
permanent injunctions, to enforce such provisions without the necessity of
posting any bond or other undertaking in connection therewith. This provision
with respect to injunctive relief shall not, however, diminish the Company's
right to claim and recover damages.
4.5 "Company". For the purposes of this Section 4 of the
Agreement only, the term "Company" shall mean collectively The Sirena Apparel
Group, Inc., a Delaware corporation, and its successors, assigns and nominees,
and all individuals, corporations and other entities that directly, or
indirectly through one or more intermediaries, control or are controlled by or
are under common control with any of the foregoing.
5. RELEASE
5.1 Termination of Prior Agreements. The rights and obligations
of the Company and the Employee, if any, under any and all prior agreements,
understandings and arrangements in respect of the Employee's employment by the
Company ("Prior Agreements") hereby are terminated effective as of the date
hereof. From and after the date hereof, neither the Company nor the Employee
shall have any further rights or obligations whatsoever under the Prior
Agreements, except that such termination shall not affect the stock purchase
options granted to the Employee thereunder. Employee acknowledges that he has
been paid and has received all sums and benefits payable under Prior Agreements.
5.2 General Release.
(a) Except as expressly set forth in the Agreement, each
party hereto fully, forever and unconditionally releases, exonerates, waives,
relinquishes, discharges, acquits,
5
<PAGE> 6
relieves and covenants not to sue or charge each other party hereto and its
agents, employees, representatives, attorneys, stockholders, officers,
directors, successors and assigns (collectively, "all related persons"), and all
affiliated, parent and subsidiary corporations, and each of them, and all
related persons connected therewith, from any and all rights, claims, demands,
debts, obligations, liabilities, promises, acts, agreements, costs, expenses
(including but not limited to attorneys' fees), damages, disputes,
controversies, actions and causes of action, of whatever kind or nature, in law
or equity, whether known or unknown, suspected or unsuspected, potential or
actual, based on, arising out of, or in any way connected with or related to the
Prior Agreements.
(b) Except as expressly set forth in the Agreement, each
party hereto acknowledges that no statement, representation, promise or
inducement has been made by any other party hereto in connection with the
Agreement, and each party hereto specifically acknowledges that it has not
relied upon any statement, representation, promise or inducement of any other
party hereto in executing the Agreement. The Agreement supersedes all prior
negotiations and understandings of any kind with respect to the subject matter
hereof and contains all of the agreement of the parties hereto. There are no
oral understandings not incorporated herein. The Agreement shall not be amended,
modified, supplemented or abrogated other than by a written instrument duly
executed by all parties hereto.
(c) Each party hereto understands and agrees that this
Section 5 extends to all claims of whatever kind and nature, known or unknown,
suspected or unsuspected, and they each expressly waive any and all rights under
Section 1542 of the Civil Code of the State of California, which provides as
follows:
A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of
executing the release, which if known by him must have
materially affected his settlement with the debtor.
Each party hereto expressly waives and releases any right or benefit which it
has or may have under Section 1542 of the Civil Code of the State of California,
as well as under the provisions of all comparable or similar statutes,
provisions of common law or other decisional law of any and all states of the
United States. In connection with such waiver and relinquishment, each party
hereto acknowledges that it may hereafter discover claims presently unknown or
unsuspected, or facts in addition to or different from those which it now knows
or believes to be true, with respect to the matters released herein.
Nevertheless, it is the intention of each party hereto through the Agreement, to
fully, finally and forever settle and release all such matters, and all claims
relative thereto, which now exist, may exist or heretofore have existed between
them. In furtherance of such intention, the release herein given shall be and
remain in effect as a full and complete release notwithstanding the discovery or
existence of any such additional or different claims or facts relative thereto,
and each party expressly assumes the risk of any injury, loss or damage which
may arise from this waiver.
6
<PAGE> 7
6. MISCELLANEOUS
6.1 Severable Provisions. The provisions of the Agreement are
severable, and if any one or more provisions may be determined to be illegal or
otherwise unenforceable, in whole or in part, the remaining provisions, and any
partially unenforceable provisions to the extent enforceable, shall nevertheless
be binding and enforceable.
6.2 Successors and Assigns. All of the terms, provisions and
obligations of the Agreement shall inure to the benefit of and shall be binding
upon the parties hereto and their respective heirs, representatives, successors
and assigns. Notwithstanding the foregoing, neither the Agreement nor any rights
hereunder shall be assigned, pledged, hypothecated or otherwise transferred by
the Employee without the prior written consent of the Company's Board of
Directors in each instance.
6.3 Governing Law. The validity, construction and interpretation
of the Agreement shall be governed by the laws of the State of California
applicable to contracts made and to be performed within that state.
6.4 Arbitration. At the demand of either party any dispute except
under Section 4 arising out of this Agreement shall be resolved through binding
arbitration. The Company shall pay all arbitration costs. Unless the parties
agree on a different arbitration procedure, arbitration shall take place under
the Expedited Labor Arbitration Rules of the American Arbitration Association of
Los Angeles, California. The decision of the arbitrator shall be final and
binding on both parties.
6.5 Headings. Section and subsection headings are not to be
considered part of the Agreement and are included solely for convenience and
reference and in no way define, limit or describe the scope of the Agreement or
the intent of any provision hereof.
6.6 Entire Agreement. The Agreement constitutes the entire
agreement between the parties hereto pertaining to the subject matter hereof,
and supersedes all prior agreements, understandings, negotiations and
discussions, whether oral or written, relating to the subject matter of the
Agreement. No supplement, modification, waiver or termination of the Agreement
shall be valid unless executed by the party to be bound thereby. No waiver of
any of the provisions of the Agreement shall be deemed to or shall constitute a
waiver of any other provisions hereof (whether or not similar), nor shall such
waiver constitute a continuing waiver unless otherwise expressly provided.
6.7 Notice. Any notice or other communication required or
permitted hereunder shall be in writing and shall be deemed to have been given
(i) if personally delivered, when so delivered, (ii) if mailed, one (1) week
after having been placed in the United States mail, registered or certified,
postage prepaid, addressed to the party to whom it is directed at the address
set forth below or (iii) if given by telex or telecopier, when such notice of
other communication is transmitted to the telex or telecopier number specified
below and the appropriate answerback or telephonic confirmation is received.
Either party may change the address to
7
<PAGE> 8
which such notices are to be addressed by giving the other party notice in the
manner herein set forth.
6.8 Attorneys' Fees. In the event any party takes legal action to
enforce any of the terms of the Agreement, the unsuccessful party to such action
shall pay the successful party's expenses, including attorneys' fees, incurred
in such action.
6.9 Third Parties. Nothing in the Agreement, expressed or
implied, is intended to confer upon any person other than the Company or the
Employee any rights or remedies under or by reason of the Agreement.
IN WITNESS WHEREOF, the parties hereto have caused the Agreement to be
executed as of the date and year first set forth above.
THE SIRENA APPAREL GROUP, INC.
By: /s/ Maurice B. Newman
---------------------------------
Authorized Representative
10333 Vacco Street
South El Monte, California 91733
Telecopier No.: (818) 442-2280
/s/ Douglas Arbetmen
------------------------------------
DOUGLAS ARBETMAN
3459 Malaga Street
Calabasas, California 91302
8
<PAGE> 9
EXHIBIT A TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT
1. Criteria for Determining Percentage of Maximum Annual Bonus Payable
Employee's entitlement to payment of the maximum annual bonus payable
shall be determined through application of the following weighting criteria,
based upon the Company's financial condition and results of operations during
the fiscal year of the Company with respect to which the bonus shall be
determined, as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
CRITERION MAXIMUM BONUS
<S> <C>
COMPANY CONSOLIDATED PRETAX EARNINGS
* 100% or more of budget 25.0 %
* 90% - 99.9% of budget 20.0 %
* 80% - 89.9% of budget 15.0 %
* 75% - 79.9% of budget 10.0 %
* Below 75% of budget 0.0 %
COMPANY NET SALES
* 100% or more of budget 25.0 %
* 95% - 99.9% of budget 20.0 %
* 90% - 94.9% of budget 15.0 %
* 85% - 89.9% of budget 10.0 %
* Less than 85% of budget 0.0 %
COMPANY INVENTORY LEVELS AT OR BELOW LEVELS
ESTABLISHED IN BUDGET AT FISCAL YEAR END
20.0 %
COMPANY GROSS MARGIN ON SALES EQUAL TO OR GREATER THAN
BUDGET 25.0 %
SOLE DISCRETION OF BOARD OF DIRECTORS 5.0 %
</TABLE>
2. Eligibility for, and Award of, Stock Options
Employee shall be eligible to receive an award of nonqualified options
to purchase up to 33,333 shares of the Company's Common Stock in respect of each
of the first three years of employment pursuant to the Agreement. Awards shall
be made within 90 days following the end of the Company's fiscal year in which
earned. The exercise price shall be 100 percent of the fair
EXHIBIT A
<PAGE> 10
market value of the shares on the date of the award. Vesting and other terms of
the options shall be the same as with respect to other options under the
Company's Stock Incentive Plan. The actual number of shares which shall be the
subject of options in respect of any single year shall be determined by applying
the criteria set forth in paragraph 1 above to the maximum number of shares
which the employee is eligible to receive, viz. 33,333. In no event shall this
Agreement be interpreted to entitle Employee to receive awards of options to
purchase in excess of 100,000 shares. Any of the options which Employee shall be
eligible to earn under paragraph 2.1(h) of the Agreement which shall not be
earned in the first three years of employment under the Agreement shall lapse.
EXHIBIT A
<PAGE> 11
EXHIBIT B TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT
Definition of "Change of Control"
For purposes of this Agreement, a "CHANGE OF CONTROL" of the Company
shall mean the occurrence of any of the following:
1. The acquisition by any person [as such term is defined in Section
13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "1934
Act")] in one or more transfers of beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the 1934 Act of 50 percent or more of the stock of
any class or classes having by the terms thereof ordinary voting power to elect
a majority of the directors of the Company (irrespective of whether at the time
stock of any class or classes of such corporation shall have or might have
voting power by reason of the happening of any contingency).
2. The individuals who, as of the date of this Agreement, are
directors of the Company, cease for any reason to constitute a majority of the
Board of Directors, unless the election or appointment, or nomination for
election or appointment, of any new member of the Board of Directors was
approved by a vote of a majority of the Board of Directors, and such new member
shall, for purposes of this Agreement, be considered as a member of the Board of
Directors.
3. A merger or consolidation involving the Company if the stockholders
of the Company immediately before such merger or consolidation, do not, as a
result of such merger or consolidation, own, directly or indirectly, more than
50 percent of the combined voting power of the entity resulting from such merger
or consolidation in substantially the same proportion as their ownership of the
combined voting power outstanding immediately before such merger or
consolidation.
4. The Company ceases to be directly, or indirectly through one or
more intermediaries, controlled by the same person or persons controlling the
Company as of the date of this Agreement.
EXHIBIT B
<PAGE> 1
EXHIBIT 10.3
AMENDMENT NO. 1
TO
THE SIRENA APPAREL GROUP, INC.
1994 EMPLOYEE STOCK INCENTIVE PLAN
The Sirena Apparel Group, Inc., a corporation organized and existing
under and by virtue of the laws of the State of Delaware (the "Corporation"),
has amended Section 5(a) of the 1994 Employee Stock Incentive Plan of the
Corporation (the "Plan"), duly adopted as of March 27, 1996, to read in full as
follows:
"Section 5. STOCK SUBJECT TO PLAN
(a) At any time, the aggregate number of Common Shares issued or
issuable pursuant to all Awards (including all Incentive Stock Options) granted
under this Plan shall not exceed 822,465 subject to adjustment as provided in
Section 8 hereof."
<PAGE> 1
EXHIBIT 10.4
AMENDMENT NO. 2
TO
THE SIRENA APPAREL GROUP, INC.
1994 EMPLOYEE STOCK INCENTIVE PLAN
The Sirena Apparel Group, Inc., a corporation organized and existing
under and by virtue of the laws of the State of Delaware (the "Corporation"),
has amended Section 5(a) of the 1994 Employee Stock Incentive Plan of the
Corporation (the "Plan"), duly adopted as of November 4, 1997, to read in full
as follows:
"Section 5. STOCK SUBJECT TO PLAN
(a) At any time, the aggregate number of Common Shares issued or
issuable pursuant to all Awards (including all Incentive Stock Options) granted
under this Plan shall not exceed 1,172,465 subject to adjustment as provided in
Section 8 hereof."
<PAGE> 1
EXHIBIT 10.5
AGREEMENT NO.: 119803104
A G R E E M E N T
BETWEEN
JBA INTERNATIONAL, INC. AND THE SIRENA APPAREL GROUP, INC.
(hereinafter called "JBA") (hereinafter called
the "Customer")
Address: Address:
Centerpointe Building 10333 Vacco Street
161 Gaither Drive, Suite 200 South El Monte, CA 91733
Mount Laurel, NJ 08054
The parties accept and agree to the terms and conditions and the contents of the
following Schedule(s) and Exhibit(s) ("Agreement"):
D-1 D-2 E
JBA THE CUSTOMER
Signed for and on behalf of JBA by: Signed for and on behalf of the
Customer by:
Name Michael J. Cornell Name Maurice B. Newman
------------------------------- -------------------------------------
Title President Title Chairman
------------------------------ ------------------------------------
Signature /s/ MICHAEL J. CORNELL Signature /s/ MAURICE B. NEWMAN
-------------------------- --------------------------------
Date 3/31/98 Date 3/31/98
------------------------------- -------------------------------------
<PAGE> 2
JBA GENERAL TERMS AND CONDITIONS
- --------------------------------------------------------------------------------
MUTUAL UNDERTAKINGS
1) CONTENT AND EFFECT
a) This Agreement, including all Schedules, Exhibits and any Addendum
executed by the parties hereto, constitutes the entire and complete
agreement between the parties, and supersedes all prior or contemporaneous
agreements, representations, statements or undertakings between the parties,
whether written or oral. All terms and conditions of any purchase order or
other ordering document of the Customer shall be superseded by the terms and
conditions of this Agreement. The Customer may license additional Software
Product(s) hereunder upon completion of the appropriate schedule(s)
(referencing the number of this Agreement). No such schedule(s) shall be
effective until dually executed by the Customer and an authorized signatory
of JBA. b) Unless otherwise specified in the particular terms and conditions
or in any Schedule, Exhibit or Addendum of or to this Agreement: i) the JBA
General Terms and Conditions shall apply to all software programs, computer
hardware, equipment and services supplied by JBA under this Agreement; ii)
the JBA Software Product(s) Terms and Conditions shall apply to all Software
Product(s) which are licensed by JBA under this Agreement and are specified
in Schedule D and Schedule E; iii) the JBA Services Terms and Conditions
shall apply to all software services which are described in a Service
Estimate Form and are supplied by JBA under this Agreement; iv) the Oracle
Programs Terms and Conditions as set out in Schedule F shall apply to all
Oracle Programs licensed or sublicensed under this Agreement. c) In the
event of any conflict between the terms of any Schedule or Exhibit of or
Addendum to this Agreement and the JBA General Terms and Conditions, the JBA
Software Product(s) Terms and Conditions or the JBA Services Terms and
Conditions, the terms of such Schedule, Exhibit or Addendum shall control.
2) PRICES
All prices specified in this Agreement are net and exclusive of taxes, which
shall be the Customer's responsibility (other than taxes based on JBA's net
income).
3) NON-ASSIGNMENT
The Customer shall not assign, delegate or otherwise transfer this Agreement
or any part of it (by operation of law or otherwise), without the prior
written consent of JBA.
4) NOTICES
Any notice, document or request required to be given or served shall be
given or served by sending it pre-paid first class mail or by facsimile to
the address of JBA or the address of the Customer as set out above. If sent
by first class mail, service shall be deemed to have occurred forty eight
(48) hours after the mailing of such notice, and if sent by facsimile, upon
receipt of appropriate confirmation of transmission. Either party may give
written notice to the other of a change of address and after notice of such
change has been served and received, any notice, document or request given
or served thereafter shall be given to or served upon such party at such
changed address.
5) CLAUSE HEADINGS
Clause headings are inserted for ease of reference only, and do not form
part of this Agreement for the purpose of interpretation.
6) APPLICABLE LAW
This Agreement and all the terms, provisions and conditions of this
Agreement, and all questions of construction, validity and performance under
this Agreement, shall be governed by the laws of New Jersey without regard
to New Jersey conflicts of laws principles.
7) CONFIDENTIALITY
Each of JBA and the Customer hereby undertakes to the other to keep
confidential all information not in the public domain relating to the
business or product(s) of the other party, and shall not, without the
other's written consent, disclose any such information to any other person.
JBA shall be entitled to disclose to its employees, agents and
subcontractors, who have a need to know, confidential information relating
to the Customer, provided that JBA shall have made such persons aware that
such information is confidential and such persons have agreed to keep such
information confidential. The terms of this Clause 7 shall survive the
termination of this Agreement.
Page 1 Version 2.01 US0597 QFM-CD-003 10865 [WOR]
<PAGE> 3
8) LIMITATION OF LIABILITY
JBA SHALL NOT, IN ANY CIRCUMSTANCES, BE LIABLE WHETHER IN CONTRACT, TORT OR
OTHERWISE, FOR ANY INDIRECT, SPECIAL OR CONSEQUENTIAL LOSS OR DAMAGE
HOWSOEVER ARISING AND OF WHATSOEVER NATURE SUFFERED OR INCURRED BY THE
CUSTOMER, INCLUDING (WITHOUT LIMITATION) LOSS OF PROFITS, LOSS OF CONTRACTS,
LOSS OF DATA, LOSS OF OPERATION TIME OR LOSS OF THE USE OF ANY EQUIPMENT OR
PROCESS SUFFERED DIRECTLY OR INDIRECTLY BY THE CUSTOMER AND LOSS OF
ANTICIPATED SAVINGS, WHETHER OR NOT ADVISED OF THE POSSIBILITY OF SUCH LOSS;
OR UPON A DETERMINATION THAT ANY REMEDY HEREUNDER FAILS ITS ESSENTIAL
PURPOSE.
The liability of JBA to the Customer for any direct loss or damage whether
in contract, tort or otherwise, arising out of or in connection with JBA's
performance or JBA's total or partial failure to perform in accordance with
this Agreement shall be limited to and shall not in any circumstances exceed
a sum equal to (i) the amount of license fees paid to JBA by the Customer
under this Agreement, if with respect to the Software Products or (ii) the
amount of services fees paid, if with respect to the services.
9) VALIDITY
This Agreement shall come into force upon the date countersigned by an
authorized signatory of JBA.
10) FORCE MAJEURE
Neither party shall be liable to the other for failure or delay in the
performance of a required obligation (other than the payment of amounts due
hereunder) if such failure or delay is caused by strike, riot, fire, flood,
natural disaster or other similar cause beyond such party's reasonable
control.
11) WAIVER
The waiver by JBA of a breach or default of any of the provisions of this
Agreement by the Customer shall not be construed as a waiver of any
succeeding breach of the same or other provisions, nor shall, any delay or
omission on the part of JBA to exercise or avail itself of any right power
or privilege that it has or may have hereunder operate as a waiver of any
breach or default by the Customer.
12) SEVERANCE
If any provision of this Agreement shall be found by any court or
administrative body of competent jurisdiction to be invalid or
unenforceable, the invalidity or unenforceability of such provision shall
not affect the other provisions of this Agreement, and all provisions not
affected by such invalidity or unenforceability shall remain in full force
and effect. The parties agree to substitute for any invalid or unenforceable
provision a valid or enforceable provision which achieves to the greatest
extent possible the economic, legal and commercial objectives of the invalid
or unenforceable provision.
JBA UNDERTAKINGS
13) STAFF ALLOCATION
JBA reserves the right to determine the allocation of JBA personnel in
furnishing services under this Agreement.
14) PERSONNEL MOVEMENTS
JBA agrees that, for a period of six (6) months from the date the Customer's
employee(s) have left the employment of the Customer, JBA will not approach
or solicit the personnel of the Customer with a view to offering them
employment, without the prior written consent of the Customer, which will
not be unreasonably delayed or withheld.
15) INTELLECTUAL PROPERTY INDEMNITY
a) JBA will defend at its cost any claims brought against the Customer that
any Software Product(s) supplied by JBA to the Customer pursuant to this
Agreement infringe any patent, trademark, copyright or other intellectual
property rights of third parties. JBA will pay those costs and damages
finally awarded against the Customer or settled by negotiations on any
action based on any such claim provided that: i) the Customer promptly
notifies JBA in writing of any such claim; ii) JBA has sole control of the
defense of any such claim and all related settlement negotiations and iii)
the Customer provides JBA with the assistance, information and authority
necessary to perform JBA's obligations under this Clause 15. b) JBA shall
have no liability for any claim of infringement based on: i) use of a
superseded or altered release of the Software Product, if such infringement
would have been avoided by the
Page 2 Version 2.01 US0597 QFM-CD-003 10865 [WOR]
<PAGE> 4
use of at current unaltered release of the Software Product that JBA
provides to the Customer, or ii) the combination, operation or use of any
Software Product supplied under this Agreement with software, hardware or
other materials not supplied by JBA under this Agreement, if such
infringement would have been avoided by the use of the Software Product
without such software, hardware or other materials. c) If a judgment against
JBA for any such claim has occurred, or in JBA's opinion is likely to occur,
the Customer agrees to permit JBA, at its expense, either: i) to procure for
the Customer the right to continue using the Software Product(s); or ii) to
modify the same so that they become non-infringing; or iii) to replace the
same by non-infringing material so that the material as modified or
replaced performs the same functions as the infringing material; or iv) to
terminate the license for the infringing Software Product(s) and refund the
license fees paid for those Software Product(s) prorated over a five (5)
year term from the date of this Agreement. This Clause 15 states JBA's
entire liability and the Customer's exclusive remedy for infringement.
CUSTOMER UNDERTAKINGS
16) PERSONNEL MOVEMENTS
The Customer agrees that, for a period of six (6)months from the date JBA's
employees have left the employment of JBA, the Customer will not approach or
solicit the personnel of JBA with a view to offering them employment without
the prior written consent of JBA, which will not be unreasonably delayed or
withheld.
17) ACKNOWLEDGMENT
The Customer grants to JBA the right to use the Customer's name as a
customer of JBA. However, before JBA uses the Customer's name in publicity,
advertising, releases and other materials prepared by or on behalf of JBA,
prior written approval by the Customer of the wording to be used must be
obtained, such approval not to be unreasonably delayed or withheld.
18) THIRD PARTY SUPPLIED SOFTWARE
The Customer warrants: 1) that is has the necessary permission to enable any
programs owned by third parties, which JBA is not obliged to supply under
the terms of this Agreement and necessary for JBA to fulfill its obligations
to the Customer, to be copied and modified and run on the specified
equipment during the use of the Software Products(s) without infringing
third party copyright or any other rights; and ii) that the disclosure to or
use of such third party programs by JBA will not involve or result in any
breach of confidence or contract. b) The Customer will indemnify and hold
JBA harmless against any such claim and the costs of defending such a claim
arising out of the breach by the Customer of the warranty set out in this
Clause 18.
19) COMPUTER CONTROLS
Unless otherwise expressly agreed in writing by JBA as a specific
responsibility of JBA under this Agreement, the Customer will be responsible
for: a) providing adequate and appropriate machine configuration and system
software product(s); b) providing adequate and appropriate installation and
audit controls; c) implementing sufficient procedures and checkpoints to
satisfy the Customer's requirements in relation to security and accuracy of
input and output data, including restart and recovery in the event of a
computer malfunction; and d) providing suitably qualified user personnel to
run the computer, and backing up all data.
20) PAYMENT
The Customer agrees to pay all invoices submitted by JBA, without setoff or
retention, within the period specified on the invoice. JBA reserves the
right to charge interest an any overdue balance at three percent (3%) per
annum over the prime lending rate as established in The Wall Street Journal
from time to time, or the maximum amount permitted by law. The Customer
acknowledges that payments made pursuant to this Agreement are not
refundable deposits.
21) EXPENSES
The Customer agrees to reimburse JBA for reasonable incidental expenses
incurred, at the rates shown in Schedule C, as a result of work performed
under this Agreement, excepting any work performed under warranty under
Clause 6 of the JBA Software Product(s) Terms and Conditions.
22) NON-JBA ERRORS
If operational problems or errors are attributable to the malfunctions of
the specified computer(s) or the malfunction of software other than any
Software Product(s) supplied under this Agreement, then all work performed
by JBA investigating and/or correcting such problems or errors shall be paid
by the Customer at JBA's
Page 3 Version 2.01 US0597 QFM-CD-003 10865 [WOR]
<PAGE> 5
then current rates. If JBA is requested to correct or corrects any defect,
error or malfunction in any Software Product(s) supplied under this
Agreement caused by any alteration or modification to such Software
Product(s) other than by JBA, or as a result of the Customer's breach of any
term of this Agreement, all work performed by JBA in investigating and/or
correcting such defect, error or malfunction shall be paid by the Customer
at JBA's then current rates, unless the Customer can show that such defect,
error or malfunction has been introduced by JBA or, as the case may be, has
not been caused by any breach by the Customer of any term of this Agreement.
The Customer acknowledges that JBA shall have no liability or obligations
under this Agreement for any breach of warranty or any losses, damages,
costs or expenses to the extent that the breach of warranty or the losses,
damages costs or expenses are caused by the Customer's breach of any term of
this Agreement or by any default, omission or negligence on the part of the
Customer.
Page 4 Version 2.01 US0597 QFM-CD-003 10865 [WOR]
<PAGE> 6
JBA SOFTWARE PRODUCT(S)
TERMS AND CONDITIONS
- --------------------------------------------------------------------------------
DEFINITIONS
"JBA Software Product(s)" means the software product(s) itemized in Schedule
D, as modified, added to or replaced by JBA under the terms of this
Agreement.
"Third Party Application Software Product(s)" means the software product(s)
itemized in Schedule E, as modified, added to or replaced by JBA under the
terms of this Agreement. "Software Product(s)" means the JBA Software
Product(s) and the Third Party Application Software Product(s).
"Seat" means the terminal, workstation or input device being used to access
the Software Product(s) on the computer(s) whose serial number(s) is
specified in Schedule D and E.
"User" means any employee of the Customer accessing the Software Product(s)
on the computer(s) whose serial number(s) is specified in Schedules D and E
from a single processor keyboard terminal or peripheral device or from a
terminal workstation or input device.
JBA UNDERTAKINGS
2) GRANT OF LICENSE
JBA grants to the Customer a non-exclusive, non-transferable license in
perpetuity, but subject to the terms hereof, to use the Software Product(s)
and associated documentation for the Customer's own internal data processing
operations and business use and not in a service bureau environment. The
Software Product(s) are licensed for use only on the computer(s) whose
serial number(s) is specified in Schedules D and E, provided always, that if
there is a limit to the number of Users or Seats specified in Schedule D or
Schedule E or there is any other restriction specified in Schedule D or
Schedule E in respect of any Software Product or the use of any Software
Product or its associated documentation the license to use that Software
Product or its associated documentation she be restricted accordingly. The
license granted does not include any right to grant sublicenses. If any of
the computer(s) whole serial number(s) is specified in Schedule D or
Schedule E becomes temporarily inoperable, than the Customer may transfer
the Software Product(s) an a temporary basis to another computer approved by
JBA, provided that the Customer promptly notifies JBA of such temporary use
and uses all reasonable efforts to repair or replace promptly at its own
expense the computer(s) specified in the Schedule D or Schedule E. JBA shall
not be liable for any loss, damage or expense suffered by the Customer in
the event that the Customer transfers the Software Product(s) on a temporary
basis to another computer as permitted under the terms of this Clause 2. The
Customer agrees not to cause or permit the reverse engineering, disassembly,
decompilation, translation or adaptation of the Software Product(s).
3) DELIVERABLES
JBA shall provide the following items as integral parts of the license
granted in respect of the Software Product(s); a) one copy of the Software
Product(s) in machine readable form; and b) one copy of the documentation
associated with the Software Product(s) where applicable.
4) SPECIFICATION
The "specification" of the Software Product(s) shall be defined as the
functions detailed in the Software Product(s) user manual.
5) ERRORS
"Errors" shall be defined solely as deviations from, the Software
Product(s) specification as defined in Clause 4 above.
6) WARRANTY SERVICES
a) For an initial period of ninety (90) days from the date of delivery JBA
warrants that the Software Product(s) will perform in accordance with the
specification. During such ninety (90) day period, JBA will provide the
support described below for the Software Product(s) free of charge under
warranty. An additional thirty one (31) days warranty from the Customer's
year end will be provided for any JBA Software Product exclusively used in
year end procedures. i) Correction of Errors. JBA will start as soon as is
reasonably practicable given the nature or effect of the Error and continue
remedial work on Errors which seriously affect operation of the Software
Product(s).
ii) Fix Refreshes. JBA will provide magnetic
Page 5 Version 2.01 US0597 QFM-CD-003 10865 [WOR]
<PAGE> 7
media containing fix refreshes to the Software Product(s) plus instructions
on how to apply the fix refreshes to the Software Product(s). Work performed
by JBA at the request of the Customer to apply fix refreshes to the Software
Product(s) is an additional chargeable service. iii) Documentation. JBA will
provide updates to documentation that JBA deems necessary for use of the
Software Product(s). b) JBA's sole obligation under this warranty shall be
to correct the errors in Software Product(s) so that the Software Product(s)
will perform in accordance with the specification. This warranty is limited
to those services set forth above and is in lieu of any and all other
warranties or conditions, express or implied. JBA has authorized no other
warranty with respect to the Software Product(s) and the Customer has not
relied on any other warranty in its decision to execute this Agreement. The
sole remedies of the Customer for any breach of true limited warranty an set
forth herein. c) Notwithstanding the warranties contained herein, JBA shall
have no liability to remedy a breach of warranty to the extent such breach
arises as a result of:
- the improper use, operation or neglect of either the Software
Product(s), the documentation or the specified computer or other central
processing unit.
- the modification of the Software Product(s) or their merger (in whole or
in part) by any person other than JBA with any other software
product(s).
- the use or attempted use of the Software Product(s) on equipment other
then the specified computer(s) whose serial number(s) is specified in
Schedule D or Schedule E
- the Customer's failure to implement recommendations in respect of or
solutions to faults identified by JBA.
- the Customer's breach of any of its obligations under this Agreement.
d) JBA does not warrant merchantability or the fitness for purpose or
suitability of the operation of the Software Product(s), or that the
Software Product(s) or the associated documentation will meet the Customer's
requirements, or that the Software Product(s) will operate in circumstances
which the Customer may select for use, or that the operation of the Software
Product(s) will be uninterrupted or error free.
7) SUPPORT AND NEWS RELEASE SERVICES
Where indicated within Schedule D and/or Schedule F, the following services
are available to the Customer:
a) Standard Software Product Support (SSPS) - JBA will provide those
services detailed in Clause 6 of the JBA Software Product(s) Terms and
Conditions after the expiry of the warranty period set out in that clause,
together with all new releases of the Software Product(s) licensed to the
Customer pursuant to this Agreement. Such new releases will be made
available to the Customer when JBA formally announces their release. This
service is available on a twelve
Page 6 Version 2.01 US0597 QFM-CD-003 10865 [WOR]
<PAGE> 8
(12) month basis and will automatically renew on each anniversary of its
inception, unless the Customer has given at least ninety (90) days prior
written notice to terminate on any anniversary.
b) Extended Software Product Support (ESPS) - JBA will provide these
services detailed in Clause 7a) an a five (5) year basis from the date of
delivery of the Software Product(s) as set forth in Schedule D, and will
automatically terminate on the expiry of the said Five (5) year period.
c) Technology Investment Support (TIS) - JBA will provide the Customer with
the option of receiving a version of the Software Product(s) as set forth in
Schedule D which will operate on a Unix hardware platform (where the
Software Product(s) specified in Schedule D as licensed on an AS/400
hardware platform), or a version of the Software Product(s) specified in
Schedule D which will operate on an AS/400 hardware platform (where the
Software Product(s) specified in Schedule D are licensed on a Unix hardware
Platform), in either case if and when the particular version becomes
available for general customer use, subject to the Customer entering into
JBA's then current agreement. TIS is only available if the Customer has
agreed to purchase ESPS.
d) The Customer may elect to retain use of a prior version of a particular
Software Product. The Customer accepts that JBA shall only continue to
provide, and shall only be obliged under the terms of this Clause 7 to
provide, the services in the Clause 7 in respect of the prior version of any
Software Product for a period of up to twelve (12) months from the date of
the general version of the current release of the Software Product.
8) SERVICES CHARGES
a) i) The charge for the SSPS is as set forth in Schedule D and/or
Schedule F hereof. The charge is payable annually in advance
against invoice plus all applicable taxes.
ii) The charge for ESPS is as set forth in Schedule D. The charge is
payable in advance against invoice, plus all applicable taxes.
iii) The charge for TIS is as set forth in Schedule D. TIS is only
available as part of the five year ESPS and is not
Page 7 Version 2.01 US0597 QFM-CD-003 10865 [WOR]
<PAGE> 9
available under any annual maintenance charge. All applicable
taxes will apply.
b) In the event the Customer, during the term of service pursuant to Clause
7 above, migrates to a processor model with a higher minimum number of Users
or increases the maximum number of Users or Seats, an additional service
charge will be payable forthwith by the Customer in accordance with JBA's
then current price list. The additional charge will be the difference
between the relevant service charge in respect of the original number of
Users or Seats and the annual service charge calculated by reference to
JBA's then current price list on the day of migration to the new processor
model or, as the case may be, on the day of the increase of the additional
number of Users or Seats reduced pro-rata to the amount of the service
period then expired.
c) JBA shall have the right, by giving not less than thirty (30) days
written notice, to change any percentage payment set forth in Schedule D
and/or Schedule E by up to 1% (one percent) in any given twelve (12) month
period. d) Without prejudice to any other right or remedy available to JBA,
JBA shall have the right to suspend the provision of any services under this
Agreement if the Customer fails to make any payment due to JBA under this
Agreement.
9) SOURCE CODE ESCROW
JBA has deposited the source code for certain Software Product(s) set forth
in Schedule D herein with an escrow agent. A copy of the agreement between
JBA and its escrow agent will, upon written request from the Customer, be
made available. The Customer may obtain the benefits under the escrow
arrangements, in accordance with the terms of the escrow agreement, provided
the Customer is under contract to receive SSPS or ESPS and has paid all sums
due in respect thereof.
10) CANCELLATION OF LICENSE
If the Customer fails to pay any sum due under the Agreement within thirty
(30) days of the due date, or if the Customer commits a material breach of
any term of this Agreement and (in case of a breach capable of remedy) has
not remedied the same within thirty (30) days of JBA's request, or if the
Customer permanently discontinues the use of the Software Product(s), or if
the Customer ceases to exist or becomes insolvent, bankrupt, or is deemed to
be unable to pay its debts as they fall due, or has a receiver appointed
over any part of its assets, then in addition to and without detracting from
any other remedy which JBA may have, JBA may forthwith give notice of
cancellation of the license relating to the Software Product(s) and
associated documentation, whereupon the Customer's right to use the Software
Product(s) and associated documentation shall cease. In such event, the
Customer shall deliver the Software Product(s) and associated documentation
to JBA and shall in addition take all such steps as may be necessary to
destroy copies of the Software Product(s) and any record of the same
contained in any data retrieval system under the control of the Customer. An
officer of the Customer shall warrant in writing to JBA that the provisions
of this Clause 10 have been satisfied.
11) UPGRADES
a) The Customer acknowledges that the Software Product(s) license fees
specified in Schedule D and Schedule E have been calculated on a User or
Seat based pricing formula and calculated by reference to an agreed maximum,
number of concurrent Users or Seats and/or by reference to specifying the
computer model/serial number set out in Schedule D and/or Schedule E. In the
event that Schedule D and/or Schedule E specifies a maximum number of Users
or Seats and the Customer increases the maximum number of Users or Seats or
if the Customer wishes to upgrade or upgrades its computer model to a model
with an increased minimum number of Users which would result or results in
an increase in the number of Users required by the Customer, a corresponding
increase in the Software Product(s) license fees shall be made and becomes
due with immediate effect in accordance with JBA's then current price list.
b) If the Customer wishes to upgrade or upgrades any specified computer to a
computer model which involves an increase in the minimum number of Users or
Seats than is specified in Schedule D and/or Schedule E for use with the
existing specified computer, then JBA shall be entitled to increase the
Software Product(s) license fees with immediate effect in accordance with
JBA's then current price list.
c) The Customer acknowledges that the Software Product license fee(s) shown
in Schedule D and
Page 8 Version 2.01 US0597 QFM-CD-003 10865 [WOR]
<PAGE> 10
in Schedule E are for the specific processor model(s) shown. Upgrade to a
processor model(s) with increased relative performance will result in
additional license fee equal to the difference in the Software Product(s)
license fee(s) for the original processor model(s) and the upgraded
processor model(s) indicated in the then current JBA price list. The
additional license fee shall become due and payable on the day of upgrade to
the processor(s) with increased relative performance.
12) SOURCE CODE PROVISION
If Schedule D states that the Customer has acquired the right from JBA to
use the source code of the specified JBA Software Product(s) licensed under
Schedule D of this Agreement, all rights to use are granted subject to the
following additional conditions:
- JBA retains all rights to the modifications made by the Customer to the
JBA Software Product(s).
- Source code will be stored in a secure area controlled by the Customer.
- Source code will be made available only to the Customer's employees on a
need to know basis.
CUSTOMER UNDERTAKINGS
13) TRAINING
The Customer agrees to release personnel for training courses as reasonably
required by JBA to ensure the success of the installation and operation of
the Software Product(s). The courses may be held at the premises of the
Customer, a third party, or JBA as appropriate. The charge for these courses
shall be as set forth in the then current edition of the JBA or the third
party education price list.
14) CONFIDENTIALITY
a) The Customer Agrees that during and after the term of this Agreement it
shall not copy or otherwise provide or make available for use or copying the
Software Product(s) or any portion thereof to any persons other than
employees of the Customer specifically engaged in the use of the Software
Product(s). No copies of the Software Product(s) or its associated
documentation beyond those necessary for security purposes shall be made
without the express written permission of JBA. The Customer acknowledges
that the Software Product(s) are the confidential information and trade
secrets of JBA or its licensor. All archival or back-up copies of the
Software Product(s) are subject to the terms of this Agreement.
b) The Customer shall take such reasonable steps as may be necessary to
ensure that its employees and any persons permitted by this Agreement to
have access to the Software Product(s) and/or associated documentation shall
preserve it's secrecy and confidentiality.
c) The Customer agrees that if a copy of the Software Product(s) is found to
be on an unlicensed computer without the Permission of JBA by reason of the
action of a Customer's employee or person having access to the Software
Product(s), then the Customer agrees, in addition to and without detracting
from any other remedy which JBA my have, to take all reasonable steps:
i) to notify JBA immediately of the circumstances of the unauthorized use
of the Software Product(s);
ii) to attempt to destroy that copy of the Software Product(s);
iii) to persuade the unlicensed user to obtain a license from JBA; and
iv) to take other actions as may be necessary or desirable to stop the
unauthorized use of the Software Product(s).
d) The Customer shall indemnify and hold JBA harmless against any loss or
damage which JBA may suffer or incur as a result of or in connection with
the Customer failing to comply with any of the provisions of this Clause 14.
e) The foregoing obligations of confidentiality shall remain in full force
and effect, notwithstanding the termination of this Agreement for any reason
whatsoever.
15) ACKNOWLEDGMENT OF OWNERSHIP
The Customer hereby acknowledges it has no rights to the Software
Product(s), except that of usage and that JBA or such other person as JBA
designates retains sole ownership of the Software Product(s), including any
modifications or extensions provided for the Customer by JBA. The Customer
agrees to reproduce and include a statement of the ownership and proprietary
rights of JBA (or of such other person, firm or company as may be designated
by JBA) on any copies in whole or in part in any form, including partial
copies and modifications of the Software Product(s) made in accordance with
this Agreement. The Customer further agrees not to remove from any of the
Software Product(s) any statements
Page 9 Version 2.01 US0597 QFM-CD-003 10865 [WOR]
<PAGE> 11
appearing therein concerning copyright and proprietary rights.
Page 10 Version 2.01 US0597 QFM-CD-003 10865 [WOR]
<PAGE> 12
JBA SERVICES TERMS AND CONDITIONS
- --------------------------------------------------------------------------------
1) SCOPE
JBA agrees to supply the Customer with services as described here in as and
when required by the Customer. The nature and cost of these services will be
as agreed between the Customer and JBA and documented in a Service Estimate
Form.
2) DELIVERABLE
JBA shall provide, when available, as integral parts of this Agreement:
- One copy of the functional specifications for the services task to be
provided,
- One copy of any software and control procedures written by JBA for the
Customer in both machine readable and source forms; and
- Software test results as far as is reasonably possible using JBA's
provided data on either JBA's or, by agreement, the Customer's computer.
3) FUNCTIONAL SPECIFICATIONS
The functional specifications for any specific services tasks shall
constitute the complete agreement between the parties with respect to such
functional specifications. As used in these JBA Services Terms and
Conditions, the term "errors" shall mean deviations from the functional
specifications.
4) ACCEPTANCE
a) Promptly after installation of the software, the Customer shall supply
test data which, in the reasonable opinion of the Customer is suitable to
test whether the software is in accordance with the functional
specifications. The Customer shall test the software on the equipment as
agreed with JBA, or subject to the receipt of such data, JBA shall test the
software in the presence of the Customer or its authorized representative on
a JBA computer. Acceptance testing shall be done within seven (7) days after
receipt of the test data, at a time mutually convenient to both parties.
b) The software shall be deemed accepted when it has processed the test data
in accordance with the functional specifications. The Customer shall sign an
acceptance certificate acknowledging such acceptance.
c) If the Customer fails to supply any test data as aforesaid or shall fail
to make itself available to attend acceptance tests or shall fail to test
the data itself within the said period of seven (7) days, then the Customer
shall be deemed to have accepted the software.
5) WARRANTY
JBA warrants that the software will operate in accordance with its
functional specifications. If it does not, JBA will correct errors in the
software for a period of ninety (90) days after acceptance. Any programs
which are used exclusively at year end will be corrected by JBA for a period
of thirty one (31) days after the Customer's year end. The foregoing sets
forth JBA's sole obligation and the Customer's exclusive remedy for breach
of the warranty set forth above.
6) SOFTWARE SERVICES SUPPORT
Subject to payment of the Software Services Support charge set forth below,
JBA will provide on-going software support services upon expiration of the
ninety (90) day limited warranty period. Software Services Support is
offered for a period of twelve (12) months, renewable automatically on each
anniversary date, unless the Customer terminates on-going Software Support
Services with at least thirty (30) days notice prior to such anniversary
date.
Software Services Support consists of the following:
a) JBA will promptly correct any errors which seriously effect operation of
the software.
b) JBA will visit the site where deemed necessary by JBA and the Customer.
7) SOFTWARE SERVICES SUPPORT CHARGE
a) The Software Services Support charge is the percentage set forth in the
relevant Service Estimate Form applied to the cost of the services as
invoiced by JBA to the Customer. b) JBA shall have the right on written
notice to change the percentage referred to above by up to one percent (1%)
on any renewal date.
8) OWNERSHIP
The Customer hereby acknowledges that any software, documentation,
specifications or other materials which may be created or developed by JBA
in Connection with the services hereunder (including any copyright and other
intellectual property rights), shall be the exclusive property of JBA. JBA
grants to
Page 11 Version 2.01 US0597 QFM-CD-003 10865 [WOR]
<PAGE> 13
the Customer with effect from the date of acceptance of the software and its
associated documentation a non-exclusive, non-transferable license to use
such software and its associated documentation in accordance with the terms
of Clause 2 of the JBA Software Produce(s) Terms and Conditions.
9) SPECIFICATION CHANGES
Schedule A outlines common examples of service errors and Schedule B
outlines common examples of programming work that would be a specification
change and as such would be charged separately and additionally by JBA.
10) PROGRESS
The Customer and IDA shall jointly prepare and agree to an implementation
plan for each task performed by JBA. Joint progress meetings shall be held
regularly throughout the project to monitor progress against the
implementation plan and to set objectives for the next period, to clear any
outstanding problems and to review and amend target dates for both JBA's and
the Customer's tasks as required by changing circumstances. These meetings
will normally be held monthly on mutually convenient dates. The work content
of this Agreement may be extended or reduced as agreed jointly, in writing,
by JBA and the Customer. Requested changes to the work content shall be with
written notice to JBA by the Customer. JBA will respond with a Service
Estimate Form that the Customer may reject or countersign.
11) The Customer shall promptly Provide JBA with any cooperation and information
that JBA may require from time to time to enable JBA to perform its
obligations under this Agreement.
12) The Customer shall permit employees, agents and subcontractors of JBA safe
access to the Customer's premises and shall provide adequate free working
space, equipment data, support and such other facilities as may be necessary
to enable JBA to perform its obligations under this Agreement. The Customer
shall also provide to JBA all information services and facilities which are
specified in any implementation plan, Service Estimate Form or such other
similar document which has been agreed to between the Customer and JBA.
13) The Customer shall indemnify JBA and hold JBA harmless from and against all
losses, claims, damages, costs and expenses which JBA may incur as a result
of work done in accordance with instructions supplied by the Customer or the
use by JBA of any information, data or material supplied by the Customer for
the purpose of enabling JBA to perform its obligations under this Agreement
which in either case infringes the intellectual property or other rights of
any third party.
Page 12 Version 2.01 US0597 QFM-CD-003 10865 [WOR]
<PAGE> 14
SCHEDULE A
EXAMPLES OF SERVICE ERRORS
- --------------------------------------------------------------------------------
1) Incorrect calculation (for example a column not adding up to a total).
2) Data printed or displayed from the wrong field, or missing.
3) Spelling mistakes.
4) Incorrect updating of disk records.
5) Messages such as: 'Invalid record update' 'Duplicate add-to' 'Divide by zero
attempted' 'Array index zero' 'Attempted update before input'
6) Data carried from one program to another incorrectly.
7) Error message displayed or printed incorrectly.
8) Fields overlapping on printout of screen display.
9) Selection/exception reports/displays not selecting properly.
10) Other deviations from the specifications created by JBA and agreed by the
Customer.
SCHEDULE B
EXAMPLES OF SPECIFICATION CHANGES
- --------------------------------------------------------------------------------
1) Data missing or wrong on display/reports because data omitted from the
specification in that display/report.
2) Significant changes to the format and positioning of data on printouts and
screen displays.
3) Any situation requiring new data to be introduced into the programs that is
not in the specification.
4) New requirements for calculations or processing involving hitherto
undisclosed or unsuspected sets of circumstances or conditions.
5) New programs not in the specification.
6) Technical assistance (hand-holding) to help determine operating problems, to
help detect data errors or to help customer staff with non-JBA software and
non-JBA messages over and above inclusive support detailed in the Schedule.
7) Additional data (or removal of data) on displays or reports.
8) New selection/exception features on reports/ displays.
9) Addition/removal of edit checks.
10) Changes to catalogued procedures.
11) Changes to edit programs involving new validation checks, new output or new
updating not in the specification.
12) Any changes requiring new files, not in the specification.
SCHEDULE C
INCIDENTAL EXPENSES
- --------------------------------------------------------------------------------
ITEM
Special deliveries by courier
Staff traveling
- - Car
- - Air
- - Taxi
- - Rail
- - Hotel expenses for overnight stays
- - International telephone calls
CHARGE
At Cost
JBA Mileage
Economy
At Cost
Second Class
At Cost
At Cost
Page 13 Version 2.01 US0597 QFM-CD-003 10865 [WOR]
<PAGE> 15
ADDENDUM TO AGREEMENT NO. 119803104 BETWEEN
SIRENA APPAREL GROUP. INC.
AND
JBA INTERNATIONAL, INC.
This addendum shall serve to amend and supplement any terms and/or language
contained in Agreement Number 119803104 and its incorporated Schedule(s).
JBA GENERAL TERMS AND CONDITIONS
11) WAIVER
Additionally:
"The waiver by the Customer of a breach or default of any of the provisions of
the Agreement by JBA shall not be construed as a waiver of any succeeding breach
of the same or other provisions, nor shall any delay or omission on the part of
the Customer to exercise or avail itself of any right power or privilege that it
has or may have hereunder operate as a waiver of any breach or default by JBA."
12) SEVERANCE
Line 9 through line 14 delete the sentence "the parties agree
to..............unenforceable provision."
13) STAFF ALLOCATION
Additionally-.
"The Customer shall have the right to request replacement of JBA staff allocated
in furnishing services under the Agreement. The Customer agrees to give JBA the
opportunity to work out a solution to avoid replacement of JBA Staff. If a
workable solution cannot be reached between the parties, the Customer agrees
that JBA will require a thirty (30) day transition period and such transition
may cause delays in the implementation."
15) INTELLECTUAL PROPERTY INDEMNITY
c)iv) delete "pro-rated over a five (5) year term from the date of this
Agreement."
JBA SOFTWARE PRODUCT(S) TERMS AND CONDITIONS
DEFINITIONS
Line 18 after "employee" insert ", temporaries or independent contractors"
Line 18 after "Customer" Insert "(as long as such temporaries or independent
contractors sign a confidentiality agreement, are not a competitor of JBA's and
are bound by the Terms and Conditions of this Agreement)"
6) WARRANTY SERVICES
c) bullet 4 after "Implement" insert "reasonable"
10) CANCELLATION OF LICENSE Line 29 after "officer" insert" "on behalf"
Additionally: "Notwithstanding the foregoing the license granted hereunder may
not be terminated by JBA if the Customer fails to pay any sum due in respect of
support and maintenance service that is subject to a bonafide dispute."
Initials Date
Customer /s/ MBN 3/31/98
------------------------
JBA /s/ MJC 3/31/98
------------------------
1
<PAGE> 16
ADDENDUM TO AGREEMENT NO. 119803104 BETWEEN
SIRENA APPAREL GROUP. INC.
AND
JBA INTERNATIONAL, INC.
14) CONFIDENTIALITY
Line 10 after "security" insert ", backup, archival or disaster recovery"
JBA SERVICES TERMS AND CONDITIONS
11)
Line 3 after "may" insert "reasonably"
13)
Additionally:
"However, the Customer will indemnify JBA only to the extent that the
instructions contributed to the infringement and not to the extent that improper
execution (given there are alternative solutions) created the infringement."
Initials Date
Customer /s/ MBN 3/31/98
------------------------
JBA /s/ MJC 3/31/98
------------------------
2
<PAGE> 17
THE SIRENA APPAREL GROUP, INC. AGREEMENT NO.: 119803104
SCHEDULE D-1
JBA USER-BASED SOFTWARE PRODUCT(S)
JBA will provide the following software product(s) for installation on the
customer's computer(s) as follows:
<TABLE>
<CAPTION>
EQUIPMENT PROCESSOR MANUFACTURER'S PROCESSOR
LOCATION MANUFACTURER OPERATING SOFTWARE TYPE MODEL NO. SERIAL NO.
--------- ------------ ------------------ --------- --------- ----------
<S> <C> <C> <C> <C> <C>
South El Monte, CA IBM OS400
</TABLE>
SOFTWARE PRODUCT(S)
<TABLE>
<CAPTION>
CODE VERSION DESCRIPTION
- ---- ------- -----------
<S> <C> <C> <C> <C>
FINANCIAL BASE BUNDLE
SL ACCOUNTS RECEIVABLE
GA ADVANCED GENERAL LEDGER (Incl. Fin. Mgr.)
FL ACCOUNTS PAYABLE
FI ADVANCED FINANCIAL INTERGRATOR
CS CASH MANAGEMENT
STYLE PRODUCTION BASE BUNDLE
PC PRODUCTION ORDER CONTROL
MP MASTER PRODUCTION SCHEDULING
MR MATERIAL REQUIREMENTS PLANNING
PD PRODUCT DEFINITION MANAGEMENT
SP STYLE PRODUCTION
STYLE DISTRIBUTION BASE BUNDLE
IN INVENTORY MANAGEMENT
SA SALES ANALYSIS
CR CUSTOMER RETURNS
FC FORECASTING
PM PURCHASE MANAGEMENT
DR DISTRIBUTION REQUIREMENTS PLANNING
RQ PURCHASE REQUISITION
OE SALES ORDER PROCESSING
ST STYLE DISTRIBUTION
WH WAREHOUSE MANAGEMENT
SM SYSTEM 21 AS/SYSTEM MANAGER
AI EDI APPLICATION INTERFACE
------------
NUMBER OF USERS: 100
------------
------------
TOTAL USER LICENSE FEES: $ 518,000.00
=============
</TABLE>
PAYMENT OF TERMS:
25% upon contract execution
50% upon installation of software product(s), no later than
May __, 1998
10% due no later than July 6, 1998
15% due no later than October 16, 1998
Initials Date
JBA /s/ MJC 3/31/98
------------------------
Customer /s/ MBN 3/31/98
-----------------------------
Page 1 of 1 Version 2.01 US0597 QFM-CD-003 10865 [WOR]
<PAGE> 18
THE SIRENA APPAREL GROUP, INC. AGREEMENT NO.: 119803104
SCHEDULE D-2
JBA SEAT-BASED SOFTWARE PRODUCE(S)
JBA will provide the following software product(s) for installation on the
customer's computer(s) as follows:
<TABLE>
<CAPTION>
EQUIPMENT PROCESSOR MANUFACTURER'S PROCESSOR
LOCATION MANUFACTURER OPERATING SOFTWARE TYPE MODEL NO. SERIAL NO.
--------- ------------ ------------------ --------- --------- ----------
<S> <C> <C> <C> <C> <C>
South El Monte, CA IBM OS400
</TABLE>
SOFTWARE PRODUCT(S)
<TABLE>
<CAPTION>
CODE VERSION DESCRIPTION # OF SEATS
---- ------- ----------- ----------
<S> <C> <C> <C> <C> <C>
DG SCREEN DESIGNER 1
VS VISUALISE 1
</TABLE>
FLAT CHARGE SOFTWARE PRODUCT(S):
<TABLE>
<CAPTION>
CODE VERSION DESCRIPTION
---- ------- -----------
<S> <C> <C>
V JBA OBJECTS/VISION FINANCIALS
V JBA OBJECTS/VISION STYLE
CSFN MENTOR SET-FINANCIALS
CSSD MENTOR SET-STYLE DISTRIBUTION
CSSP MENTOR SET-STYLE PRODUCTION
------------
------------
TOTAL LICENSE FEE: $ 20,000.00
============
</TABLE>
PAYMENT TERMS:
25% upon contract execution
50% upon installation of software product(s), no later than May __,
1998
10% due no later than July 6, 1998
15% due no later than October 16, 1998
Initials Date
JBA /s/ MJC 3/31/98
-----------------------------
Customer /s/ MBN 3/31/98
-------------------------
Page 1 of 1 Version 2.01 US0597 QFM-CD-003 10865 [WOR]
<PAGE> 19
THE SIRENA APPAREL GROUP, INC. AGREEMENT NO.: 119803104
SCHEDULE E
THIRD PARTY PRODUCT(S)
JBA WILL PROVIDE THE FOLLOWING SOFTWARE PRODUCT(S) FOR INSTALLATION ON THE
CUSTOMER'S COMPUTER(S) AS FOLLOWS:
<TABLE>
<CAPTION>
EQUIPMENT PROCESSOR MANUFACTURER'S PROCESSOR MODEL SERIAL
LOCATION MANUFACTURER OPERATING SOFTWARE TYPE NO. NO.
<S> <C> <C> <C> <C> <C>
South El Monte, CA IBM OS400
</TABLE>
SOFTWARE PRODUCT(S)
<TABLE>
<CAPTION>
CODE VERSION DESCRIPTION # OF SEATS
---- ------- ----------- ----------
<S> <C> <C> <C> <C> <C>
OP JBA OBJECTS-PERSONAL 10
OL jba objects-enterprise 2
OM JBA OBJECTS-ADMINISTRATOR 1
ONI jba objects-nt smarteerver(1) 1
VG JBA VISION-USER 20
VH JBA VISION-DEVELOPER 2
VNI JBA VISION-NT VISION SERVER(1)-INCL. ONI 1
-----------
-----------
TOTAL THIRD PARTY LICENSE FEE: $ 62,000.00
===========
</TABLE>
PAYMENT TERMS:
25% upon contract execution
50% upon installation of software product(s), no later than May __,
1998
10% due no later than July 6, 1998
15% due no later than October 16, 1998
Initials Date
JBA /s/ MJC 3/31/98
------------------------
Customer /s/ MBN 3/31/98
-----------------------------
Page 1 of 1 Version 2.01 US0597 QFM-CD-003 10865 [WOR]
<PAGE> 1
EXHIBIT 10.6
LICENSE AGREEMENT
THIS LICENSE AGREEMENT is made and entered into as of April 27, 1998 by
and between INTERNATIONAL LICENSING (CALIFORNIA) CORP., a California corporation
("Licensor"), whose address is 3636 Nobel Drive, Suite 400, San Diego,
California 92122, and THE SIRENA APPAREL GROUP., a California corporation
("Licensee"), whose address is 10333 Vacco Street, South El Monte, California
91733, with reference to the following facts:
WHEREAS Licensor has been granted the rights to license and enter into
agreements with third parties to utilize certain trademarks and tradenames owned
by Hang Ten International ("HTI"), a California corporation, including the words
"Hang Ten", designs showing bare footprints, and combinations thereof in
accordance with Licensor's style guide and Trend Books delivered periodically to
Licensees (all of the above shall be hereinafter referred to as the
"Trademarks"); and
WHEREAS Licensee seeks a License from Licensor to design, manufacture,
advertise, sell and promote the items listed in Appendix "A"; said item(s)
hereinafter referred to as the "Licensed Items"; and
WHEREAS The parties hereto agree that Licensor shall grant to Licensee a
license to use the Trademarks in the design, manufacture, advertising, sale and
promotion of the Licensed Items, subject to each of the terms, provisions and
conditions of the Special Provisions (the "S.P.'s") and General Provisions (the
"G.P.'s") hereof. This Agreement consists of the S.P.'s and the G.P.'s, as said
S.P.'s are set forth below, and as said G.P.'s are attached hereto and
incorporated by reference as though fully set forth herein. (Whenever the term
"Agreement" or "License Agreement" is used, it specifically includes both the
S.P.'s and the G.P.'s). In case of a difference, conflict and/or discrepancy
between the S.P.'s and G.P.'s, the S.P.'s shall control and prevail.
NOW, THEREFORE, IT IS AGREED AS FOLLOWS:
SPECIAL PROVISIONS
S.P. 1 GRANT OF LICENSE AND DESIGNATION OF LICENSED ITEMS:
A) Effective May 1, 1998 and subject to Paragraph B below, Licensor grants to
Licensee, for the period hereinafter specified and upon the terms, provisions
and conditions of this License Agreement, the exclusive right and license to use
the Trademarks within the Territory as Territory is defined in Article S.P. 3,
in the design, manufacture, advertising, sale and promotion of the Licensed
Items. In the event of any question regarding the definition of products which
Licensee may wish to produce pursuant to this Agreement, the final decision
shall rest in the sole discretion of Licensor. The rights granted to Licensee
herein are limited to the use of the Trademarks on or in connection with the
Licensed Items and Licensee specifically agrees not to use the Trademarks or
give consent to the use of any of them in any manner or on any product or item,
except as set forth in this Agreement, without the prior written consent of
Licensor, or in any manner inconsistent with Licensor's grant of rights to
Licensee herein.
*Material omitted on pages 3, 4 and 6 of the Special Provisions Section pursuant
to a request for confidential treatment and filed separately with the Securities
and Exchange Commission.
Page 1 of 8 Pages
<PAGE> 2
B) Licensor reserves the exclusive right to use and license the Trademarks with
respect to the Licensed Items for premiums, giveaways and promotional sales,
sales solely within Hang Ten branded retail stores and for direct mail sales to
retail consumers.
S.P. 2 PREVIOUS LICENSEE: Notwithstanding anything contained herein,
Licensee specifically agrees that this exclusive right and license may be
subject to a former third party licensee's prior disposition rights, as
exemplified by Article G.P. 17 hereof, and acknowledges that its rights under
this Agreement are subject thereto, and such disposition rights shall neither
alter nor diminish Licensee's duties and obligations hereunder.
S.P. 3 GEOGRAPHIC AREA: The rights granted to Licensee hereunder may be
exercised by Licensee only within the United States of America and its
territories and possessions, (including the Commonwealth of Puerto Rico, Guam
and all U.S. military bases worldwide) (the "Territory"), and shall be exclusive
therein. Upon Licensee's request, Licensor may, in its sole discretion, extend
the areas in which Licensee may exercise said rights, but any extension shall,
in each instance, be first evidenced by a written and duly executed amendment to
this Agreement for such periods and upon such terms and conditions as shall be
determined by Licensor. Notwithstanding the foregoing, Licensee agrees that it
possesses no rights to and shall not sell the Licensed Items to exporters or
others for resale or reshipment outside of the Territory.
S.P. 4 TERM: The term of this Agreement shall be for three (3) years and
eight (8) months commencing as of May 1, 1998 and ending December 31, 2001
unless sooner terminated or extended pursuant hereto. Each period from January 1
through December 31 during the term hereof is hereafter referred to as the
"(sequential number) Contract Year", with the exception of the "First Contract
Year" which shall be for the period of May 1, 1998 through December 31, 1999;
for example, the period from January 1, 2000 through December 31, 2000 shall be
referred to herein as the "Second Contract Year" and so forth. (When the term
"Contract Year" is used, it shall mean each of the First Contract Year, the
Second Contract Year, and so forth.)
S.P. 5 FAILURE TO MARKET:
A) Notwithstanding the above grant of rights to Licensee, in the event that
Licensee is not actively and substantially producing any of the separately
denoted Licensed Item(s) by August 31, 1998, or fails to have such Item(s)
available to the trade in commercially reasonable quantities during any ninety
(90) day period thereafter (except seasonal items out of season), then Licensor,
at its option, may terminate this Agreement with respect to such Licensed
Item(s) upon giving ten (10) days written notice. Upon such termination,
Licensor shall be free to proceed with any third party for such Licensed
Item(s). Notwithstanding any such termination as provided in this Paragraph, the
balance of this Agreement shall remain unaffected, Licensee's rights and
obligations shall be exactly as provided in this Agreement, and there shall be
no reduction or alteration of any Minimum Royalty or Minimum Net Shipment amount
stated in this Agreement; provided such termination is based on one or more of
the following material breaches by Licensee: i) sales made to discount stores,
ii) failure to pay any amounts due hereunder, or iii) sales made outside of the
Territory granted herein (the foregoing breached defined as "Bad Events").
Licensor acknowledges and agrees that it has a duty to exercise good faith
efforts to mitigate its damages for any termination
Page 2 of 8 Pages
<PAGE> 3
based on the occurrence of a Bad Event, including without limitation, to
exercise good faith efforts to seek and obtain a new license with a third party
for the Licensed Items.
S.P. 6 ROYALTIES: Licensee shall pay to Licensor as royalties for the
rights granted hereunder the greater of the Minimum Royalty set out in Article
S.P. 8 or a sum equal to [*] of Licensee's actual Net Shipments of Licensed
Items, as "Net Shipments" is defined in Article G.P. 1. Such royalties shall be
paid for on a quarterly basis and accounted for on a monthly basis in accordance
with Article G.P. 3.
S.P. 7 MINIMUM ROYALTY: Licensee shall pay a Minimum Royalty to
Licensor as follows:
JUNIORS (SWIMWEAR, COVERUPS, HEADWEAR)
First Contract Year (05/01/98-12/31/99 ) [*]
Second Contract Year (1/1/2000-12/31/2000) [*]
Third Contract Year (1/1/2001-12/31/2001) [*]
GIRLS (SWIMWEAR, COVERUPS, HEADWEAR)
First Contract Year (05/01/98-12/31/99 ) [*]
Second Contract Year (1/1/2000-12/31/2000) [*]
Third Contract Year (1/1/2001-12/31/2001) [*]
however, the Minimum Royalty for the Second Contract Year and each succeeding
Contract Year shall be the amount stated above, or [*] of the preceding Contract
Year's actual royalties due, whichever is greater.
The above Minimum Royalties shall be due and payable on or before the
20th day of each quarter following each Contract Year at the rate of 25% per
quarter for each of the respective Contract Years. In the event actual royalties
paid quarterly are less than the quarterly minimums set forth above, Licensee
will be responsible for the difference between actual royalties paid on Net
Shipments and the cumulative Minimum Royalties due.
For the purpose of this Article S.P. 7, the quarterly minimum payments
as referred to above for Licensee's First Contract Year shall apply to the
twelve (12) month period immediately preceding Licensee's Second Contract Year.
S.P. 8 MINIMUM NET SHIPMENTS OF LICENSED ITEMS: Notwithstanding
anything to the contrary set forth herein, Licensee shall maintain Minimum Net
Shipments as follows:
JUNIORS (SWIMWEAR, COVERUPS, HEADWEAR)
First Contract Year (05/01/98-12/31/99 ) [*]
Second Contract Year (1/1/2000-12/31/2000) [*]
Third Contract Year (1/1/2001-12/31/2001) [*]
Page 3 of 8 Pages
<PAGE> 4
GIRLS (SWIMWEAR, COVERUPS, HEADWEAR)
First Contract Year (05/01/98-12/31/99 ) [*]
Second Contract Year (1/1/2000-12/31/2000) [*]
Third Contract Year (1/1/2001-12/31/2001) [*]
however, the Minimum Net Shipments for the Second Contract Year and each
succeeding Contract Year shall be the amount stated above or [*] of the
preceding Contract Year's actual Net Shipments, whichever is greater.
If Licensee fails to maintain the required Minimum Net Shipments in any
Contract Year, Licensor may terminate this Agreement by written notice delivered
to Licensee within six (6) months after the end of the Contract Year in which
Licensee failed to maintain such required Minimum Net Shipments. Any such
termination shall not affect Licensee's obligations to pay any amounts currently
due to Licensor, or upon the occurrence of any Bad Event, those amounts to
become due by Licensee to Licensor, nor any of the other obligations set forth
herein.
S.P. 9 ADVERTISING REQUIREMENTS:
A) In each Contract Year, Licensee shall expend at least a sum equal to the
greater of [*] of Licensee's Minimum Net Shipments (as Minimum Net Shipments are
defined at Article S.P. 8) or [*] of Licensee's actual Net Shipments (as "Net
Shipments" is defined in Article G.P. 1) for that Contract Year for
institutional advertising and promotion of the Licensed Items. (store co-op
advertising and promotion shall include trade and/or consumer media such as
newspapers, magazines, television and/or radio, but does not include catalogues
and brochures.) Concurrently with the rendition of the annual report required by
Article G.P. 4, Licensee shall submit a report certified as accurate by
Licensee's Chief Financial Officer evidencing the performance of its financial
obligation during the preceding Contract Year for such institutional advertising
and promotion. If said annual report shows that less than the required amount
was spent, the difference between the amount actually spent and the amount to be
spent must be remitted to Licensor within thirty (30) days for use in the Hang
Ten Advertising and Promotion Program Pool.
B) Licensee shall submit to Licensor for prior approval all advertising and
promotional items, programs and materials relating to the Licensed Items at
least twenty (20) days prior to media deadlines. Licensor shall have the right
to disapprove any proposed items which do not meet Licensor's standard
requirements as to image and character. Failure of Licensor to disapprove of
same within fifteen (15) days after Licensor's receipt thereof shall constitute
approval.
S.P.10 ADVERTISING RESTRICTIONS ON THE INTERNET: Licensee
specifically acknowledges and agrees that the right to utilize the trademarks on
the Internet is hereby reserved to Licensor, except that Licensee may use the
Trademarks subject to Licensor's approval as to use in its webpage, if any, to
identify the various brands available to Licensee's customers.
S.P. 11 ADDRESS FOR NOTICES: All notices required under this
Agreement shall be in writing and shall be personally delivered, sent by
registered or certified mail, postage prepaid, return receipt requested, or sent
by an overnight express courier service that provides
Page 4 of 8 Pages
<PAGE> 5
written confirmation of delivery, to Licensee at its address as set forth above
in the introductory Paragraph of this Agreement, and to Licensor at the
following address:
International Licensing (California) Corp.
3636 Nobel Drive
Suite 400
San Diego, CA 92122
Attention: Paul B. Epner, President
Each such notice shall be deemed given, delivered and received upon its actual
receipt, except that if it is sent by mail in accordance with this Paragraph,
then it shall be deemed given, delivered and received five (5) days after the
date such notice or other communication is deposited with the United States
Postal Service in accordance with this Paragraph. Any party to this Agreement
may give notice of a change of its address to the other party to this Agreement.
S.P. 12 TIME IS OF THE ESSENCE IN EXECUTION: Licensee and Licensor
acknowledge that time is of the essence with respect to the Licensee's execution
and delivery to Licensor of this license agreement, which shall occur no later
than May 31, 1998.
This license agreement shall have no force and effect unless and until
signed by both Licensee and Licensor.
S.P. 14 FISCAL YEAR: Licensee's fiscal year is January to
December.
S.P. 15 TRADE SHOWS: Licensee agrees to participate with other U.S.
licensees at trade shows when requested by retailers or where several (3 or
more) licensees in related product areas are involved. Notwithstanding the
foregoing, Licensee agrees to participate and exhibit the Licensed Items at all
ISAM trade shows at Licensee's sole cost. Licensee shall be responsible for its
share of the total exhibition costs, which shall be equal to the total costs for
the booth and space used by Licensee. Licensee agrees to use at least one booth
space at each trade show.
S.P. 16 PRODUCT DISTRIBUTION: Licensee agrees to maintain reasonable
standards to protect the value of the Trademarks and the image of the Licensed
Items. Licensee shall maintain the same or higher standards for the selection of
retail, wholesale and other outlets as those maintained by Licensor, namely
those stores that are commonly referred to in the market as "up-market" stores.
In the event of any question regarding the type of store or stores to which this
requirement applies, Licensee shall first request Licensor's approval of a
proposed store or stores and the final decision regarding same shall be
determined by Licensor. Licensee acknowledges that Licensor may reasonably
change such standards from time to time during the term of this Agreement and
that the changed standards shall apply to Licensee after reasonable written
notice thereof.
Licensor shall have the right, at any time, and from time to time, to
disapprove of the sale of Licensee's Licensed Items to particular wholesale
and/or retail outlets, including the right to disapprove of outlets that were
previously acceptable. Any disapproval of any previously acceptable outlets
shall be prospective only and shall relate only to any previously acceptable
outlets shall be
Page 5 of 8 Pages
<PAGE> 6
prospective only and shall relate only to the subsequent sale or distribution of
the Licensed Items by Licensee to those previously acceptable, now disapproved
outlets. Unless prior written approval is obtained from Licensor, Licensee is
specifically prohibited from the sale and distribution of the Licensed Items
through (i) any disapproved outlets, and (ii) any factory outlet stores,
warehouse sales, parking lot sales, swap meets, flea markets and similar sale or
disposal techniques. Licensee's failure to comply with the requirements of this
Article S.P. 15 shall constitute a material breach of this License Agreement and
Licensor may, at its sole option, terminate Licensee's rights under this
Agreement for failure to adhere to these retailing and marketing standards
and/or obtain specific performance to enjoin any such actions or threatened
actions by Licensee. Licensor's determination as to whether a retail outlet
satisfies the criteria of this Article S.P. 15 shall be final and binding as
between Licensee and Licensor.
S.P. 17 DISTRIBUTION: Licensee agrees to utilize Licensor as its sole
and exclusive distributor of the Licensed Items outside of the Territory (and
any other market in which it maintains a Hang Ten license) and the price of the
Licensed Items to Licensor shall be at manufacturer's cost plus [*].
S.P.18 RETAIL STORE PROTECTION: Licensee shall be obligated to offer the
Licensed Items to any free standing Hang Ten retail stores in any future
locations within the Territory, if any. Such Hang Ten store(s) shall have no
obligation to purchase the Licensed Items unless it is reasonably satisfied with
the quality, delivery and pricing terms (Licensor agrees that Licensee's
wholesale price less [*] shall be deemed reasonable as to pricing) associated
therewith, failing which the Hang Ten store(s) shall have the right to purchase
Licensed Items from any third party of their choosing. Any sales made by
Licensee to such stores shall be royalty-free and shall not be applied against
the Minimum Net Shipments otherwise set forth herein.
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
Page 6 of 8 Pages
<PAGE> 7
IN WITNESS WHEREOF, THE AUTHORIZED OFFICERS OF THE PARTIES HERETO HAVE
EXECUTED THIS AGREEMENT AS OF THE DATE SET FORTH BELOW.
INTERNATIONAL LICENSING (CALIFORNIA) CORPORATION
A California corporation
("Licensor")
By:/s/ PAUL EPNER
-------------------------------
Paul B. Epner, President
Dated: 4/27/98
----------------------------
THE SIRENA APPAREL GROUP
A California corporation
("Licensee")
By: /s/ MAURICE B. NEWMAN
--------------------------------------------
Maurice Newman, Chief Operating Officer
Dated:
-----------------------------
Page 7 of 8 Pages
<PAGE> 8
APPENDIX "A"
Licensed Items
JUNIORS AND GIRLS (SIZES 7-16, 4-6X)
1. Swimwear
2. Swimwear related Coverups to include oversized T-shirts merchandised with
Swimwear
(each of the Licensed Items will be reported separately on Appendix B)
Page 8 of 8 Pages
<PAGE> 9
GENERAL PROVISIONS
THESE GENERAL PROVISIONS AND THE SPECIAL PROVISIONS TO WHICH THEY ARE
ATTACHED CONSTITUTE THE LICENSE AGREEMENT BETWEEN INTERNATIONAL LICENSING
(CALIFORNIA) CORP., ("LICENSOR"), AND THE SIRENA APPAREL GROUP ("LICENSEE")
DATED ________. _______.
THESE GENERAL PROVISIONS ARE OF FULL FORCE AND EFFECT IN CONJUNCTION
WITH THE SPECIAL PROVISIONS HEREOF, PROVIDED, HOWEVER, THAT IN THE EVENT ANY
TERM HEREOF IS INCOMPATIBLE AND/OR AT VARIANCE AND/OR AMBIGUOUS WITH ANY TERM OR
PROVISION OF THE SPECIAL PROVISIONS, THE SPECIAL PROVISIONS SHALL CONTROL AND
PREVAIL.
G.P. 1 DEFINITION OF "NET SHIPMENTS": "Net Shipments" shall mean the
invoice price charged by Licensee for Licensed Items sold and shipped by
Licensee, less refunds, high-low billing specifically set forth in writing,
credits and allowances actually made or allowed to customers for returned
Licensed Items. In the event that Licensee sells to a related party of Licensee,
the pricing structure for said sale shall be uniform for all licensees at a
reasonable discounted price, excluding at least royalties, advertising, sales
commission and discounts.
G.P 2 LICENSEE'S RECORDS: Licensee shall keep and maintain at its
regular place of business, during the term of this Agreement and for twelve
months thereafter, complete books and records of all business transacted by
Licensee in connection with the Licensed Items, including but not limited to
books and records relating to Net Shipments and orders for Licensed Items. Such
books and records shall be maintained in accordance with Generally Accepted
Accounting Principles consistently applied.
G.P. 3 LICENSEE'S MONTHLY REPORT OF NET SHIPMENTS AND ROYALTY PAYMENTS:
On or before the 20th day of each month during the term hereof and any extension
thereof, Licensee shall deliver to Licensor a "Report of Net Shipments and
Royalty Payments" (see Appendix "B" attached hereto), certified to be true and
correct by the Chief Financial Officer of Licensee, setting forth the Gross and
Net Shipments by Licensee during the preceding calendar month for each territory
and/or category for which the License Agreement contains separate Minimum
Royalty guarantees. Full payment of the amounts due under Articles S.P. 6, S.P.
7 and S.P. 9 hereof, and as reported on the Report of Net Shipments and Royalty
Payments, shall be wire transferred to Licensor's bank account as designated at
Appendix "B". The wire transfer amount must agree with the amount recorded on
the Report of Net Shipments an Royalty Payments as "Amount Paid".
In the event of shipments of Licensed Items prior to commencement of the
term hereof, Licensee shall submit monthly reports and royalty payments as if
the term had commenced on the date of the first such shipment. If Licensee fails
to pay any sum due hereunder within ten (10) days after its due date, the amount
owing shall thereupon bear interest until paid at the rate
Page 1 of 11 Pages
<PAGE> 10
of 18% per annum with the amount of such interest calculated from such time as
said amounts were initially due hereunder until they are actually paid. In no
event shall the interest rate charged exceed the maximum rate allowable under
the relevant provisions of the laws of California and Licensee's domicile.
Concurrent with Licensee's delivery of the above-described monthly
report, Licensee shall provide Licensor with a listing of all of Licensee's
accounts and customers showing the completed Net Shipments of Licensed Items
achieved by Licensee for each account and/or each customer for the previous
shipment month. In addition, Licensee shall provide Licensor with a listing, by
account, of all account/bookings (open order dollar volume) open at the time of
the report.
G.P. 4 LICENSEE'S ANNUAL REPORTS AND ANNUAL ROYALTY
PAYMENTS: On or before the 20th day of the third month following the end of
Licensee's fiscal year, Licensee shall render to Licensor a written statement,
certified by a certified public accountant, showing gross shipments, Net
Shipments, royalties due and royalties paid for Licensee's preceding fiscal
year, and for any Contract Year which ended within said fiscal year. If said
statement discloses that the amount of royalties paid during any period to which
said statement relates was less than the amount required to be paid, Licensee
shall pay said deficiency concurrently with the delivery of the statement,
together with interest at 18% per annum, with the amount of such interest
calculated from such time as said amounts were initially due hereunder until
they are actually paid. In no event shall the interest rate charged exceed the
maximum rate allowable under the relevant provisions of the laws of California
and Licensee's domicile. If said statement discloses that Licensee has paid
royalties in excess of the amounts required to be paid, Licensee shall be
entitled to a credit equal to such excess royalties against the royalties next
accruing under this Agreement. In the event of excess royalty payments during
the final year of this Agreement, adjustments shall be made in cash rather than
in the form of a credit.
G.P. 5 AUDIT BY LICENSOR: At all times during the existence of this
Agreement and for twelve (12) months thereafter, Licensor, upon giving Licensee
at least ten (10) days advance written notice of its intention so to do, shall
have the right to inspect or audit all books and records which Licensee is
required to maintain pursuant to Article G.P. 2 above. If any such audit shall
disclose that Licensee has understated Net Shipments or underpaid royalties for
any reporting period, Licensee, upon written demand, shall forthwith pay the
amount, if any, by which the royalties owing exceed royalties paid, with
additionally, interest at 18% per annum from such time as said amounts were
initially due. In the event that Licensee has understated Net Shipments in
excess of 2% or underpaid royalties in excess of 2% of the amount due for any
Contract Year, Licensee shall forthwith and upon written demand also pay all
costs, fees and expenses incurred by Licensor in conducting such audit,
including, without limitation, reasonable travel expenses. Should such audit
disclose that the royalties paid exceed the royalties due, Licensee shall
receive credit equal to such excess royalties against the same royalties next
accruing, except that when such audit is conducted at the expiration of the
Agreement, any excess royalty payments revealed by such audit will be remitted
to Licensee within thirty (30) days thereafter.
G.P. 6 BEST EFFORTS OF LICENSEE: Licensee shall use its best
efforts and skill to design, manufacture, advertise, sell and ship the Licensed
Items and shall continuously and
Page 2 of 11 Pages
<PAGE> 11
diligently during the term hereof produce an inventory of Licensed Items and
procure and maintain facilities and trained personnel sufficient and adequate to
accomplish the foregoing. A cessation of the above for a continuous period of
ninety (90) days shall be grounds for termination, without prior notice.
Licensor shall have the right to inspect Licensee's said facilities during
regular business hours, upon five (5) days prior written notice. Licensor shall
use reasonable efforts to make such inspection in the presence of a
representative of Licensee.
G.P. 7 LICENSED ITEMS TO BE KEPT DISTINCTIVE: Licensee shall take such
reasonable efforts as are necessary to maintain the Licensed Items as separate
and distinct lines in styling, design, advertising and merchandising from any
other product manufactured or sold by Licensee. Licensor agrees to render
reasonable assistance and advice to Licensee concerning style trends and
direction. In the event Licensor shall create any design or style and submit the
same for use by Licensee, Licensee shall not be required to use it, but
regardless of Licensee's election, Licensee shall have no right to such design
or style and shall not use it in connection with any product or service other
than Licensed Items.
G.P. 8 ADDITIONAL OBLIGATIONS OF LICENSEE AS TO QUALITY,
MERCHANDISING AND OTHER ASPECTS OF LICENSED ITEMS:
A) Licensee shall provide and maintain at its sole cost and expense adequate
facilities and qualified personnel to assure and perpetuate the quality of the
Licensed Items consistent with the type, style and price range thereof.
Licensee's accounting records of sales, shipments and returns of Licensed Items
shall be maintained separately from Licensee's accounting records relating to
other items manufactured or sold by Licensee.
B) Licensee shall similarly furnish to Licensor, without request, prior to sale
or shipment of such items, samples of each proposed new and/or introductory
model and material to be utilized so as to insure the consistent high quality of
the image and character of the Licensed Items. Licensor shall have the right to
disapprove any proposed new model or material which does not meet Licensor's
standard requirements as to image, quality and character, but failure of
Licensor to notify Licensee of such disapproval within fourteen (14) days after
receipt of the sample shall constitute Licensor's approval.
C) Upon request, Licensee, at its sole cost, shall furnish to Licensor
photographs and negatives of each previously approved line, samples and finished
production models of Licensed Items for Licensor's further approval as to
styling, materials and manufacturing quality. Licensor shall not arbitrarily or
unreasonably withhold said approval.
D) In addition thereto, prior to submission of such samples to Licensor,
Licensee shall conduct normal tests and verification procedures on each such
sample to assure that the quality of the Licensed Items are at least equal to
the quality of similar competitive non-licensed items manufactured and sold at
retail at comparable prices. In the event that Licensed Items are wearing
apparel, Licensee shall further conduct tests relating to color fastness,
maximum shrinkage, burst strength, curing and the like.
Page 3 of 11 Pages
<PAGE> 12
E) Each Licensed Item shall contain thereon at least one representation of the
Trademarks, to be applied in a reasonable size and manner. All representations
of the Trademarks placed upon any Licensed Item shall be either embroidered,
knitted, screenprinted or flocked thereon unless Licensor gives its prior
written consent to some alternate method. Licensor specifically reserves the
right to withhold approval as to any representation of any of the Trademarks on
the Licensed Items, including without limitation any hang tags, labeling or
packaging thereof (excluding packaging not to be seen by consumer), which does
not conform to Licensor's standard requirements regarding uniformity as to such
Trademark.
G.P. 9 RESTRICTIONS UPON SUBCONTRACTS: Licensee shall have the right to
enter into subcontracts for the manufacture of Licensed Items; provided, however
that Licensee shall first ascertain to its satisfaction that each subcontractor
is able to meet Licensee's quality standards and delivery schedules. In any
event, Licensee shall not permit any subcontractor to further subcontract the
work contracted for and shall discontinue using any subcontractor who shall
consistently fails to comply with the required quality standards and/or delivery
schedules. Licensee, if requested by Licensor, shall provide a list of
subcontractors to Licensor.
G.P. 10 LICENSOR - LICENSEE MEETINGS: Licensor shall have the right to
call meetings to be held at Licensor's primary place of business not more
frequently than once a year, with at least thirty (30) days advance written
notice to Licensee. Such meeting shall be called to generally review matters
relating to the terms and conditions of this Agreement and the compliance of
each of the parties herewith, and to consider policies, planning and performance
relating to quality controls, production, marketing, advertising and promotion
of the Licensed Items and any other matter or matters of concern. In addition
thereto, any party shall have the right to call meetings, as necessary, with at
least thirty (30) days advance written notice to the other party to discuss and
resolve specific matters of concern as they occur. If such meeting requires the
attendance of Licensor then it should be held at Licensor's primary place of
business. All meetings shall be attended by the representatives of the parties
who are responsible for the performance as to those matters to be discussed and
the costs thereof shall be borne by the respective parties. In addition,
Licensor holds an annual Licensee convention and it is intended that the
convention shall, among other things, foster cooperative projects among
licensees, resolve outstanding business matters and provide an opportunity to
review current licensee product and advertising. Due to the importance of this
convention, Licensor expects Licensee to use its best efforts to have its
representative(s) attend and participate.
G.P. 11 SAMPLES, PROMOTIONAL MATERIALS AND ACCOUNT LISTS:
A) Upon completion of the following, Licensee shall make available to
Licensor:
1) Current representative samples of all Licensed Items as well as
findings, as Licensor may reasonably designate. Licensor shall pay Licensee's
normal salespersons sample charges for said Licensed Items. Samples provided to
Licensor for quality and design approval in accordance with the requirements set
forth below shall be provided without cost to Licensor.
Page 4 of 11 Pages
<PAGE> 13
2) Copies of Licensee's advertising, sales and promotional materials
when the material is developed and available. Licensee shall keep a reasonable
supply of such materials in stock to facilitate requests.
3) Two (2) complete sample lines, at the same time as sample lines are
provided to licensee's sales force, at the same price that Licensee charges its
salespeople.
Licensee shall furnish the items specified in Article G.P. 11 (A) 1),
2) and 3) within seven (7) days after said items first become available to
Licensee's sales representatives.
B) Licensee acknowledges that providing the above items to Licensor is of the
essence of this Agreement, Licensor shall be free to incorporate any features,
styling or otherwise, in the manufacture of Licensed Items under other license
agreements with Licensor; provided, however, that nothing herein shall be
construed to alter and/or diminish the exclusive license granted Licensee
hereby.
G.P. 12 PROHIBITION OF ASSIGNMENTS AND TRANSFERS: Without the prior
written consent of Licensor, Licensee shall not voluntarily, involuntarily or by
operation of law assign or transfer this Agreement or any of Licensee's rights
or duties hereunder (except as specifically provided herein) or any interest of
Licensee herein, nor shall Licensee enter into any sublicense for the use of the
Trademarks by others. For the purposes of this G.P.12 a subcontractor as
provided in G.P. shall not be deemed to be a sublicensee. Further, without the
prior written consent of Licensor, Licensee shall not sell or otherwise transmit
or transfer to any party engaged in the design or manufacture of items similar
to any of the Licensed Items, any design, style, know-how, technology or other
item or knowledge of a technical or competitive nature furnished to Licensee by
or through Licensor ("Licensor's Research & Development Material") unless
Licensor's Research & Development materials shall include information which is
known by Licensee at the time of receipt from Licensor). Included within the
prohibitions set forth herein are: (1) any transfer of any interest of Licensee
under this Agreement to any entity in which the present controlling shareholders
of Licensee do not have voting control, and (2) any transfer to any other party
or parties of voting control of Licensee by its present controlling
shareholders. Licensor shall not arbitrarily or unreasonably withhold its
consent to any assignment or transfer of ownership or control of Licensee. It
shall not be arbitrary or unreasonable for the Licensor to withhold its consent
to an assignment or transfer made without its prior permission, even though if
its permission had been sought it would have been arbitrary or unreasonable not
to grant it. The consent of Licensor to one assignment, transfer or sublicense
shall not be deemed to be consent to any subsequent assignment, transfer or
sublicense. Any assignment, transfer or sublicense without Licensor's written
consent shall be void and at the option of the Licensor shall constitute a
default hereunder.
G.P. 13 NO DILUTION OF TRADEMARKS NO ATTACK UPON TRADEMARKS:
A) Licensee shall not at any time use, promote, advertise, display or otherwise
publish any of the Trademarks or any material utilizing or reproducing any of
them in whole or in part, in such a manner as may adversely affect any of
Licensor's rights therein.
Page 5 of 11 Pages
<PAGE> 14
B) Licensee shall cause to appear on all Licensed Items and on all materials on
or in connection with which any of the Trademarks are used, such legends,
markings and notices as may be required by law to give appropriate notice of all
trademark, tradename or other rights therein or pertaining thereto.
C) Licensee shall not contest the validity of the Trademarks or any rights of
Licensor therein, nor will Licensee willingly become an adverse party to
litigation in which others shall contest the Trademarks or Licensor's said
rights. In addition thereto, Licensee shall not in any way seek to avoid its
obligations hereunder because of the assertion or allegation by any person(s) or
government(s) that the Trademarks or any of them are invalid or by reason of any
contest concerning the rights of Licensor therein.
G.P. 14 INFRINGEMENT AND OTHER TRADEMARK LITIGATION:
A) Licensee shall apprise Licensor as soon as practicable of any possible
infringement of the Trademarks which comes to the attention of Licensee.
Licensor at its sole cost and expense, and in its own name, shall prosecute and
defend any action or proceeding which Licensor deems necessary or desirable to
protect the Trademarks, including but not limited to actions or proceedings
involving their infringement. Upon written request by Licensor, Licensee shall
join Licensor at Licensor's sole cost in any such action or proceeding. In no
event shall Licensee commence any action or proceeding to protect the Trademarks
or any action or proceeding alleging infringement thereof without the prior
written consent of Licensor. In addition, Licensee shall not unilaterally defend
any infringement action unless it shall first make written demand upon Licensor
so to do, and Licensor shall fail to do so in a timely manner. Any and all
damages recovered in any action or proceeding commenced by Licensor shall belong
solely and exclusively to Licensor. Notwithstanding the foregoing, Licensee may
prosecute and defend, at its sole cost and expense, and in its own name, any
action or proceeding to protect its designs or styles, provided, however, that,
in connection therewith, Licensee shall indemnify and hold Licensor harmless
from any liability (including attorney's fees and costs of defense) arising from
any such action or proceeding, or from Licensee's creation or use of its designs
or styles.
B) Licensor shall indemnify and hold Licensee harmless from any damage, cost or
liability arising solely from Licensee's use of the Trademarks as authorized
herein. Licensor shall not have any such obligation with regard to damages,
costs or liabilities allegedly or actually arising, in whole or in part, from
any other causes, including violations of laws and statutes governing antitrust
regulation, trade regulation or unfair competition, except to the extent, if
any, that claim is based on any act or refrainment to act required by this
Agreement or by the direction of Licensor. Further, in the event of any
threatened or actual action or proceeding in which they are or may be charged
with jointly violating any antitrust, trade regulation or similar statute,
Licensee may, at its option, choose to be represented in such threatened or
actual action or proceeding by Licensor's counsel at no cost to Licensee for
fees, costs or expenses. Licensor shall maintain full control of such threatened
or actual action or proceeding and such representation of Licensee shall
continue only so long as Licensor's counsel, in its sole discretion, is of the
opinion that it may properly and ethically represent both Licensor and Licensee.
Thereafter, Licensor's counsel shall continue to represent only Licensor and
Licensee's continued defense shall be at its expense with separate
Page 6 of 11 Pages
<PAGE> 15
counsel. Licensee shall, in a timely manner, execute and deliver to Licensor any
pleading or other document necessary to carry out such change in legal
representation.
C) Other than as expressly set forth in this Article G.P. 14, Licensee shall
have no rights against Licensor with respect to any of the matters covered in
this Article G.P. 14. Licensee shall under no circumstances incur legal expenses
on Licensor's account without first obtaining Licensor's specific written
authorization.
G.P. 15 ADDITIONAL RESTRICTIONS UPON USE OF TRADEMARKS:
Licensee shall not use or permit the use on any of the Licensed Items, or on any
carton, container or packaging which is received by the general public (as
opposed to retailers), any tag, label, sticker, or other mark or identification
which includes with any of the Trademarks, including the name "Hang Ten", the
name of Licensee or of any other person, firm or entity (e.g., "Hang Ten by
Licensee") nor shall Licensee include or permit the inclusion, with the name
"Hang Ten" or any of the other Trademarks, in any advertising or promotional
material featuring any of the Licensed Items which is disseminated to the
general public (as opposed to trade advertising) the name of Licensee or of any
other person, firm or entity. In addition to the foregoing, Licensee shall not
use or permit the use of any of the Trademarks, including the name "Hang Ten",
on or in connection with any product or service, other than the Licensed Items,
which are manufactured or sold by Licensee, or which is licensed by Licensee to
others for manufacture or sale (e.g., "Licensed by the makers of Hang Ten"), nor
shall any of the Trademarks be used as part of the company name of Licensee. It
is the intention of the parties hereto and the purpose of this Article G.P. 15
that all of the Licensed Items, and only the Licensed Items, be identified to
the general public solely by one or more of the Trademarks. Licensee also agrees
to use a registration indicator in the form of a circle - R symbol (or any
alternative indicator complying with the trademark laws of the country(s) in
which Licensee uses the marks) in conjunction with the Trademarks, except that
the registration indicator may be omitted from the trademarks where the marks
are used as design elements on the Licensed Items. However, all labels and hang
tags shall include the registration indicator. Licensor represents that it owns
and/ or has the exclusive right to license each of the Trademarks, and that each
of the Trademarks is valid and registered on the Principal Register of the U.S.
Patent and Trademark Office.
G.P. 16 DEFAULTS BY LICENSEE:
A) Except as otherwise expressly provided in this Agreement, i) in the event
Licensee shall default in the performance of any of the terms, obligations and
conditions on the part of Licensee to be performed hereunder, and if such
default involves the payment of money and the same shall not be cured within ten
(10) days after Licensee's receipt of written notice, or if such default
involves performance other than the payment of money and same shall not be cured
within thirty (30) days after Licensee's receipt of written notice, or ii) if a
Receiver is appointed to, or one or more creditors do take possession of all or
substantially all of the assets of Licensee, or iii) if Licensee shall make a
general assignment for the benefit of creditors, or iv) if any action is taken
or suffered by Licensee under any insolvency or bankruptcy act; then, and in any
one or more of such events, and in addition to any other rights which Licensor
may have under this Agreement or at law or in equity, Licensor may immediately
and without prior notice cancel and terminate this Agreement. In the event
Licensee commits three or more defaults and corrections thereof of any nature
during the term
Page 7 of 11 Pages
<PAGE> 16
hereof and any extension, of which Licensor has given written notice, Licensor,
in addition to its other rights hereunder and at law or in equity, may
immediately and without prior notice, cancel and terminate this Agreement. The
time for performance of any act required of either party shall be extended by a
period equal to the period during which such party was actually prevented from
performance by fire, flood, storm, earthquake or other like casualty.
B) The termination of this Agreement shall not relieve Licensee of any accrued
obligations to Licensor. Termination for any Bad Event shall not relieve
Licensee of any obligation or duty to pay Minimum Royalties for any Contract
Years subsequent to the date of such termination.
G.P. 17 DISPOSAL OF INVENTORY OF LICENSED ITEMS UPON TERMINATION OF
LICENSE AGREEMENT: Immediately upon the Termination or Cancellation of this
License Agreement, for any reason whatsoever, Licensee shall discontinue its use
of the Trademarks in connection with the design, manufacture and sale of the
Licensed Items and Licensee shall no longer have the right to use the Trademarks
in any form or manner.
Licensor shall have a right of first refusal to purchase all finished
goods and piece goods (in production or on order) in the possession of Licensee
at a price equal to Licensee's substantiated cost for same. Licensor shall have
fifteen (15) days from Licensor's receipt of a complete list of such inventory
(itemized by style, size and color) of Licensed Items to be disposed of
(including the applicable costs for same), in which to exercise said right of
first refusal. In the event Licensor declines to exercise its right of first
refusal within the stated time period, and if Licensee has fully complied with
the terms of this Agreement, including the payment of all monies due to
Licensor, Licensee shall have one hundred and twenty (120) days from the date of
Termination or Cancellation of this License Agreement to dispose of its
inventory of Licensed Items, provided however, that said disposal shall be
through approved outlets acceptable to Licensor, in accordance with the terms
and conditions stipulated in Article S.P. 15 hereof. If any of the Licensed
Items remain unsold after the expiration of the one hundred and twenty (120) day
disposal period, Licensee shall then remove from the Licensed Items all
identification of the trademarks, including but not limited to any labels, hang
tags, wrappers and packaging on which the Trademarks appear, before they are
further sold or distributed. Any unsold Licensed Items upon which the trademarks
cannot be removed shall be destroyed by Licensee. Such destruction shall be
attested to in a certificate signed by an independent third party, approved by
Licensor, and delivered forthwith to Licensor. In the event that this Agreement
is terminated by Licensor for any Bad Event, Licensee shall be deemed to have
forfeited its sell-off rights hereunder. Licensee agrees that any sales of
Licensed Items following termination for any Bad Event will cause Licensor undue
harm for which monetary damages will not suffice, and Licensor shall be entitled
to seek and obtain injunctive relief prohibiting Licensee from selling any
Licensed Items following such termination.
Licensee shall continue to abide by the terms of this Agreement with
respect to such Licensed Items during the period that they are being disposed of
as aforesaid, including without limitation, the payment of all royalties and
fees in connection therewith. Neither Licensee nor any creditor (judgment or
otherwise), assignee, transferee, trustee, or receiver of Licensee, or similar
person or officer, or purchaser other than in the regular course of Licensee's
business, may sell or
Page 8 of 11 Pages
<PAGE> 17
transfer any of the Licensed Items until and unless all sums due Licensor from
Licensee have been paid.
G.P. 18 ADDITIONAL RIGHTS UPON TERMINATION: During the final
Contract Year of the Term hereof or of any extension thereof, Licensor shall
have the right to design, manufacture, and sell merchandise of the types covered
by this Agreement and to negotiate and conclude such agreements as it desires
pursuant to which it may grant licenses to any party or parties of any of the
rights herein granted to Licensee, except that no merchandise herein identified
as Licensed Items shall be shipped by Licensor, or any third party other than
Licensee, prior to the expiration or termination of this Agreement (exclusive of
the additional six (6) month period for the disposition of the Licensed Items),
but any successor Licensee may at all times solicit orders for shipment
subsequent to the final Contract Year or any extension hereof.
G.P. 19 GOOD WILL: Licensee acknowledges that the Trademarks have
acquired a valuable secondary meaning and good will. Accordingly, Licensee shall
not use the Trademarks in any manner whatsoever which, directly or indirectly,
might derogate or detract from their secondary meaning or good will. Except as
may be otherwise specified in this Agreement, Licensee shall not use any of the
Trademarks or any name or symbol confusingly similar thereto as part of its
company name or symbol or as part of the name or symbol of any company which it
controls or which is affiliated with it.
G.P. 20 INSURANCE: Licensee and its subcontractors and sublicensees, if
any, shall carry product liability insurance with respect to the Licensed Items
with a limit of liability of not less than US$1,000,000, and Licensor, its
agents and affiliated companies shall be named therein as coinsured. Such
insurance may be obtained in conjunction with a policy of product liability
insurance which covers products other than the Licensed Items and shall provide
for at least ten (10) days prior written notice to Licensor of the cancellation
or substantial modification thereof. Licensee shall deliver to Licensor a
certificate evidencing the existence of such insurance policies promptly after
their issuance. Licensee hereby agrees to provide Licensor a copy of said
insurance policy within sixty (60) days from the effective date of the License
Agreement.
G.P. 21 BROKERS: Each of the parties hereby represents and warrants to
the other that it has not employed or dealt with any broker or finder in
connection with this Agreement or the transactions contemplated hereby and
agrees to indemnify the other and hold it harmless from any and all liabilities
including, without limitation, reasonable attorney's fees and disbursements paid
or incurred in connection with any such liabilities for any claimed brokerage
commissions or finders' fees in connection with this Agreement or the
transactions contemplated hereby.
G.P. 22 RESERVED RIGHTS; OWNERSHIP: Rights not herein specifically and
expressly granted to Licensee herein are reserved by Licensor and may be used by
Licensor without limitation. Any use by Licensor of such reserved rights,
including but not limited to the use or authorization of the use of the
Trademarks in any manner whatsoever not inconsistent with Licensee's rights
hereunder, shall not be deemed to be interference with or infringement of any of
Licensee's rights, nor a breach of this Agreement. Licensee agrees that it does
not and shall not possess any right, title or interest in the Trademarks, except
the right to use the Trademarks in
Page 9 of 11 Pages
<PAGE> 18
accordance with the terms and conditions of this Agreement, and that the
Trademarks are and shall be the sole property of Licensor.
G.P. 23 ATTORNEY'S FEES; SITUS OF ACTIONS; APPLICABLE LAW: In the event
any party hereto shall commence any action or proceeding against the other by
reason of any breach or claimed breach in the performance of any of the terms or
conditions of this Agreement, or to seek a judicial declaration of rights
hereunder, the prevailing party in such action or proceeding shall be entitled
to reasonable attorney's fees to be fixed by the trial court. This License
Agreement shall be governed by, and construed in accordance with, the laws of
the State of California. It is further agreed that this License Agreement is
deemed to be consummated in the State of California and the forum for any
dispute shall be the Federal Courts located in the State of California whose
jurisdiction is the County of San Diego or the Superior Court of California for
the County of San Diego, whichever is appropriate.
G.P. 24 NON-AGENCY OF PARTIES: This Agreement does not constitute
Licensee as the agent or legal representative of Licensor, or Licensor as the
agent or legal representative of Licensee, for any purpose whatsoever. Licensee
is not granted any right or authority to assume or create any obligation or
responsibility, express or implied, on behalf of or in the name of Licensor or
to bind Licensor in any manner or thing whatsoever; nor is Licensor granted any
right to authority to assume or create any obligation or responsibility, express
or implied, on behalf of or in the name of Licensee or to bind Licensee in any
manner or thing whatsoever. No joint venture or partnership between the parties
hereto is intended or shall be inferred.
G.P. 25 WAIVER BY LICENSOR: In the event Licensor shall at any
time waive any of its rights under this Agreement or the performance by Licensee
of any of its obligations hereunder, such waiver shall not be construed as a
continuing waiver of the same rights or obligations, or a waiver of any other
rights or obligations, and no waiver shall be effective unless made in writing
by Licensor.
G.P. 26 INTEGRATED AGREEMENT: This Agreement (both S.P.'s and G.P.'s)
constitutes the entire agreement between the parties as to the subject matter
hereof and supersedes and replaces all prior understandings between the parties.
No modifications, amendments or revisions hereof shall be of any force or effect
unless the same are in writing and executed by the parties hereto. No officer,
employee or representative of either party has any authority to make any
representation or promise in connection with this Agreement or the subject
matter hereof which is not contained herein; and each party agrees that it has
not executed this Agreement in reliance upon any such representation or promise.
G.P. 27 SEVERABILITY OF PROVISIONS: Any provisions of this
Agreement which shall be finally determined invalid shall be ineffective but
such invalidity shall not affect the remaining provisions hereof. The titles to
the Articles hereof are for convenience only and have no substantive effect.
Page 10 of 11 Pages
<PAGE> 19
G.P. 28 BINDING UPON SUCCESSORS: This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
successors and assigns. This Article shall not be construed to alter or modify
the prohibitions upon assignments or transfers by Licensee expressed elsewhere
in this Agreement.
Page 11 of 11 Pages
<PAGE> 1
EXHIBIT 10.7
SETTLEMENT AGREEMENT AND MUTUAL GENERAL RELEASE
This Settlement Agreement and Mutual General Release (the
"Agreement") is entered into effective April 8, 1998 by and between The Sirena
Apparel Group, Inc. ("Sirena"), on the one hand, and Apparel Management, Inc., a
New York corporation, and Arthur H. Warshaw, an individual (together, the
"Consultant"), on the other hand, with respect to the following facts:
RECITALS
WHEREAS, the Consultant and Sirena are parties to that certain
Consulting Agreement, dated August 12, 1994, as amended and restated by that
certain Amended and Restated Consulting Agreement, dated August 12, 1995 (the
"Consulting Agreement");
WHEREAS, a dispute has arisen between the parties relating to the
Consulting Agreement; and
WHEREAS, the parties desire to terminate the Consulting Agreement
and to fully and finally resolve any and all claims relating to the Consulting
Agreement, as well as any and all other differences, disputes and disagreements,
of whatever kind or nature, whether known or unknown as between the Consultant
and Sirena, and each of them.
NOW, THEREFORE, in consideration of the mutual benefits to be
derived from this Agreement, and on the basis of the representations, conditions
and promises contained herein, the parties hereto agree as follows:
AGREEMENT
1. Termination of Consulting Agreement. The Consultant and Sirena
agree that the Consulting Agreement shall terminate on the Closing Date as set
forth in Section 9 below, and neither Sirena nor the Consultant shall have any
further obligation to the other with respect to the Consulting Agreement;
provided, however, that the provisions of Section 5 of the Consulting Agreement
regarding disclosure or use of confidential information shall survive the
termination of the Consulting Agreement and the general mutual release provided
for in Section 2 of this Agreement.
2. Mutual General Release of Claims. In consideration of the
provisions hereof, the Consultant and Sirena, and each of them, for themselves,
as well as their respective directors, officers, affiliates, agents, employees,
partners, attorneys, successors and assigns, do hereby absolutely, fully and
forever release, relieve, waive, relinquish and discharge the other from any and
all manner of all claims, causes of action, suits, debts, liabilities, accounts,
accountings, agreements, demands, obligations, costs, expenses, sums of money,
controversies, damages, reckonings and liens of every kind and nature
whatsoever, whether known or unknown, suspected
1
<PAGE> 2
or unsuspected, which either party at any time heretofore had or may have had,
by reason or thing whatsoever occurring, done, omitted or suffered to be done
prior to the date of this Agreement, except as provided in Section 4 below.
3. Waiver of Civil Code Section 1542. It is the intention of the
parties in executing this Agreement that it shall be effective as a bar against
each and every claim, demand, suit or cause of action. In furtherance of this
intention, the parties agree that the release provided for in this Agreement
pursuant to Section 2 above extends to all claims, whether or not known or
suspected by a party, and constitutes a WAIVER of each and all of the provisions
of California Civil Code Section 1542, which reads as follows:
"Section 1542. Certain claims not affected by general
release. A general release does not extend to claims which the
creditor does not know or suspect to exist in his favor at the
time of executing the release, which if known by him must have
materially affected his settlement with the debtor."
The Consultant hereby expressly acknowledges that he has
opportunity to have the effect and import of this provision fully explained to
him by counsel.
4. No Effect on Non-Qualified Stock Options. Nothing contained
herein shall be deemed to affect the Consultant's rights relating to grants of
non-qualified stock options by Sirena on August 12, 1994 and June 28, 1996.
5. Consideration. As the total consideration for this Agreement,
Sirena shall pay to the Consultant by wire transfer the lump sum of two hundred
sixty thousand dollars ($260,000) on the Closing Date (as defined below).
6. Non-Disclosure of Agreement. The terms and conditions of this
Agreement shall remain confidential as between the parties, except as provided
herein or as required by the rules and regulations of the Securities and
Exchange Commission (the "Commission") or as otherwise may be required by law or
court order or as reasonably determined by Sirena's counsel or independent
public auditors. Without limiting the foregoing, neither the Consultant nor
Sirena will disclose to any other person, or respond to or in any way
participate in or contribute to any public discussion concerning, or in any way
relating to, the execution of this Agreement or the events which led to its
execution.
7. No Disparagement. The parties hereto agree that neither will
in any way disparage the other party hereto or any director, officer, affiliate,
agent, employee or partner, or make or solicit any comments or statements or the
like that may be considered to be disparaging, derogatory or detrimental to the
good name, business reputation or business interests of any of the
aforementioned persons or entities.
2
<PAGE> 3
8. Ongoing Obligations Regarding Confidential Information. The
Consultant acknowledges that he has continuing obligations to Sirena regarding
disclosure or use of confidential information pursuant to Section 5 of the
Consulting Agreement. Any violation of those obligations by the Consultant shall
constitute a material breach of this Agreement, as well as a material breach of
the Consulting Agreement, and shall subject the Consultant to forfeiture of all
benefits and payments pursuant to this Agreement. Sirena expressly reserves the
right to pursue all other remedies available to it under the Consulting
Agreement for breach of such agreement.
9. Closing Date. Delivery of the executed Agreement and the
consideration provided for in Section 5 above shall take place on April 8, 1998,
or on such other date as the parties hereto shall agree (the "Closing Date").
10. No Prior Assignment or Settlement of Claims. The parties
represent and warrant that they have not heretofore assigned or transferred to
any person anything whatsoever that is released by this Agreement and each shall
defend, indemnify and hold harmless the other from and against any claim
(including the payment of attorneys' fees and costs actually incurred) based on
or in connection with or arising out of any such assignment or transfer made,
purported or claimed to have been made.
11. No Admissions. Nothing in this Agreement shall be construed
as an admission by any party of any wrongdoing.
12. Advice of Counsel; Voluntary Agreement. Each party signing
this Agreement represents and warrants that he or it has had the opportunity to
receive the advice of counsel prior to executing the Agreement. The Consultant
acknowledges that he has entered into this Agreement voluntarily and without
duress or undue influence on the part of or on behalf of any person.
13. Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto pertaining to the subject matter hereof,
and supersedes all prior agreements, understandings, negotiations and
discussions, whether oral or written, relating to the subject matter of this
Agreement. No supplement, modification, waiver or termination of this Agreement
shall be valid unless executed by the party to be bound thereby. No waiver of
any of the provisions of this Agreement shall be deemed to or shall constitute a
waiver of any other provisions hereof (whether or not similar), nor shall such
waiver constitute a continuing waiver unless otherwise expressly provided.
14. Severability. The various provisions of this Agreement are
severable and if any one or more provisions may be deemed to be illegal or
otherwise unenforceable, in whole or in part, the remaining provisions, and any
partially unenforceable provisions to the extent enforceable, shall nevertheless
be binding and enforceable.
3
<PAGE> 4
15. Headings. Section headings are not to be considered part of
this Agreement and are included solely for convenience and reference and in no
way define, limit or describe the scope of this Agreement or the intent of any
provisions hereof.
16. Counterparts and Facsimiles. This Agreement may be executed
in one or more counterparts, each of which shall be deemed an original, all of
which together shall constitute one and the same instrument. A facsimile of a
signed counterpart shall be deemed an original counterpart, and may be used in
lieu of an original for any purpose.
17. Governing Law; Venue; Jurisdiction. This Agreement shall be
governed by, and construed in accordance with, the laws of the State of
California, without giving effect to its conflicts of laws provisions. In the
event of any litigation among the parties hereto, suit shall be brought in Los
Angeles County, California and the parties hereto hereby submit themselves to
the jurisdiction of the state and federal courts in Los Angeles County,
California.
18. Attorneys' Fees. In the event that any party hereto takes
action to enforce any of the terms of this Agreement, the prevailing party shall
recover from the other party all of such prevailing party's reasonable expenses,
including reasonable attorneys' fees and costs, incurred in such action.
19. Notice. Any notice or other communication required or
permitted hereunder shall be in writing and shall be deemed to have been given
(i) if personally delivered, when so delivered, (ii) if mailed, three (3) days
after having been placed in the United States mail, registered or certified,
postage prepaid, addressed to the party to whom it is directed at the address
set forth below or (iii) if given by telex or telecopier, when such notice or
other communication is transmitted to the telex or telecopier number specified
below and the appropriate answerback or telephonic confirmation is received.
Either party may change the address to which such notices are to be addressed by
giving the other party notice in the manner herein set forth.
20. Third Parties. Nothing in this Agreement, expressed or
implied, is intended to confer upon any person other than Sirena or the
Consultant any rights or remedies under or by reason of this Agreement.
21. Successors and Assigns. All of the terms, provisions and
obligations of this Agreement shall inure to the benefit of and shall be binding
upon the parties hereto and their respective heirs, representatives, successors
and assigns.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first set forth above.
Dated: April 8, 1998 APPAREL MANAGEMENT, INC.
By: /s/ ARTHUR H. WARSHAW
---------------------------------
Arthur H. Warshaw, President
514 Croton Lake Road
Mt. Kisco, New York 10549
Telecopier No.: (914) 232-4642
Dated: April 8, 1998 /s/ ARTHUR H. WARSHAW
------------------------------------
Arthur H. Warshaw
514 Croton Lake Road
Mt. Kisco, New York 10549
Telecopier No.: (914) 232-4642
Dated: April 8, 1998 THE SIRENA APPAREL GROUP, INC.
By: /s/ MAURICE B. NEWMAN
---------------------------------
Maurice B. Newman, Chairman
10333 Vacco Street
South El Monte, California 91733-0307
Telecopier No.: (626) 442-2341
5
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-8 No. 33-91650 and No. 33352517), pertaining to the Employee Stock
Incentive Plan of The Sirena Apparel Group, Inc. of our report dated September
9, 1998, with respect to the financial statements and schedule of The Sirena
Apparel Group, Inc. included in the Annual Report (Form 10-K) for the year ended
June 30, 1998.
/s/ ERNST & YOUNG LLP
Los Angeles, California
September 24, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 95,241
<SECURITIES> 0
<RECEIVABLES> 8,790,994
<ALLOWANCES> (1,907,614)
<INVENTORY> 7,016,287
<CURRENT-ASSETS> 14,402,747
<PP&E> 5,598,452
<DEPRECIATION> (3,526,098)
<TOTAL-ASSETS> 22,029,616
<CURRENT-LIABILITIES> 5,225,596
<BONDS> 0
0
0
<COMMON> 50,194
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 22,029,616
<SALES> 51,041,705
<TOTAL-REVENUES> 51,041,705
<CGS> 32,962,688
<TOTAL-COSTS> 15,001,844
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 755,216
<INCOME-PRETAX> 2,321,957
<INCOME-TAX> 90,000
<INCOME-CONTINUING> 3,077,173
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,231,957
<EPS-PRIMARY> 0.47
<EPS-DILUTED> 0.46
</TABLE>
