SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-KSB
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1998
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission File number: 0-25918
--------
ACTIVE APPAREL GROUP, INC.
(Name of small business issuer in Its Charter)
Delaware 13-3672716
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1350 Broadway, Suite 2300, New York, New York 10018
- ---------------------------------------------- -----
(Address of principal executive offices) Zip Code
Issuer's Telephone Number (212) 239-0990
Securities registered under Section 12(b) of the Exchange Act:
Title Of Each Class Name Of Each Exchange
------------------- On Which Registered
-------------------
None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.002 Par Value
------------------------------
(Title Of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirement for the past 90 days. YES X NO
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained to the best of registrant's knowledge in definitive proxy or
information statement incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [ ]
State issuer's revenue for its most recent fiscal year: $15,011,926
On March 25, 1999 the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $4,947,704 based upon the
average of the highest and lowest bid quotations for such Common Stock as
obtained from the Nasdaq Stock Market on March 25, 1999. Solely for the purpose
of this calculation, shares held by directors and officers of the Registrant
have been excluded. Such exclusion should not be deemed a determination or an
admission by Registrant that such individuals are, in fact, affiliates of the
Registrant.
The number of shares outstanding on March 25, 1999 was 2,492,581 shares of
Common Stock, $.002 par value, and 100,000 shares of Class A Common Stock, $.01
par value.
Documents Incorporated by Reference - None
Transitional Small Business Disclosure Format (Check one): YES NO X
---- ----
<PAGE>
TABLE OF CONTENTS
PAGE
----
PART I
Item 1 Business.........................................................1
Item 2 Properties...................................................... 9
Item 3 Legal Proceedings...............................................10
Item 4 Submission of Matters to a Vote of Security Holders.............10
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters........................................11
Item 6 Management's Discussion and Analysis or Plan of Operation.......12
Item 7 Financial Statements............................................14
Item 8 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................15
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act..........15
Item 10 Executive Compensation..........................................16
Item 11 Security Ownership of Certain Beneficial Owners
and Management ............................................20
Item 12 Certain Relationships and Related Transactions..................22
Item 13 Exhibits and Reports on Form 8-K................................23
Signatures..................................................................27
ii
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Active Apparel Group, Inc. (the "Company"), a Delaware corporation
organized on July 6, 1992, is engaged in the design, manufacture, marketing and
sale of women's activewear, sportswear, swimwear and coverups, and, as of
January 1, 1999, the design, manufacture, marketing and sale of men's
activewear, sportswear and outerwear featuring the widely-recognized Everlast(R)
trademark (the "Everlast Products"). The Company is also engaged in the design,
manufacture, marketing and sale of women's activewear, sportswear (excluding
footwear) featuring the Converse(R) and Converse All Star(R) trademarks (the
"Converse Products") and the design, manufacture, marketing and sales of unisex
activewear and accessories featuring "MTV's THE GRIND" and/or "THE GRIND"
trademarks (the "MTV Products"). Generally, the Company has the exclusive right
to use and distribute the Everlast Products in the United States, its
territories and possessions (collectively, the "United States") and Canada, its
provinces, territories and possessions (collectively, "Canada"), the exclusive
right to use and distribute the Converse Products in the United States. The
Company's exclusive license agreement for the Converse Products expires on March
31, 1999 and the Company has decided that it will not renew the license
agreement. The Company did not design or produce a line of MTV activewear for
sale in 1999. The Company is evaluating the renewal of the MTV license, which
expires on June 30, 1999. SEE "PRODUCTS" AND "LICENSES." The Company is a member
of the Sporting Goods Manufacturers Association, the National Sporting Goods
Association and the Canadian Sporting Goods Association
The Company's strategy is to expand the Company's operations and to become
a leading brand name supplier of women's and men's activewear and sportswear.
Key elements of this strategy include:
o balancing and diversifying the Company's product collections in terms
of style and price range;
o maximizing visibility in the Company's products through focused
advertising and marketing programs;
o expanding its product distribution system by establishing better
relationships with a broader network of retailers worldwide subject to
distribution restrictions of the Everlast Product licenses;
o capitalizing on the Company's strengths through design and manufacture
for private label activewear and sportswear customers.
All of the Company's products are manufactured by third party independent
manufacturing contractors in the United States and abroad. These products are
distributed through a variety of department stores, specialty stores, sporting
goods stores, catalog operations, and better mass merchandisers. The Company has
approximately 500 separate customers in approximately 20,000 retail locations
throughout the United States and Canada. SEE "SALES AND DISTRIBUTION."
PRODUCTS
The Company's product line primarily consists of the Everlast Products,
which are designed and marketed with a goal of a high level of brand name
recognition and consumer preference by combining performance, market appeal and
value. The Company performs extensive market research in attempting
1
<PAGE>
to provide its retail customers and consumers with functionality along with the
most desirable styles, color schemes and fabrics. The Company has actively
pursued a strategy of developing a balanced and diversified mix of products in
order to maximize the brand name recognition and appeal to various demographic
groups and geographic areas. The Company's product line is primarily composed of
the Everlast Collection.
THE EVERLAST COLLECTION. The Company sells a diverse collection of Everlast
Products consisting of women's activewear, sportswear, swimwear and coverups,
and as of January 1, 1999, men's activewear, sportswear and outerwear under the
Everlast trademark and logo. Since 1910, Everlast has gained wide recognition in
professional and amateur boxing. The Company believes that the Everlast name has
become synonymous with quality athletic products. The Everlast Products seek to
continue this tradition, while recognizing that the active person has particular
demands regarding quality, comfort and style in activewear and sportswear. The
Everlast Products consist of approximately 80 separate products with varying
styles and functions. These include fitness apparel and sportswear made of
nylon, fleece, cotton, Lycra spandex and other technical polyester fabrics with
moisture management properties. The Everlast Products are designed to feature
the Everlast trademark and logo and to focus on the use of appropriate fabric
blends to maximize comfort and performance. The retail prices for the Everlast
Products generally range from $15 to $70.
LICENSES
EVERLAST WOMEN'S LICENSE. The Company obtained the license to market and
sell Everlast women's products ("Everlast License") in July 1992. Generally, the
Everlast License grants to the Company the exclusive right and license to use
the Everlast trademark in connection with the manufacture, advertisement and
promotion, packaging, sale and distribution of women's activewear, sportswear,
swimwear and coverups in the United States and Canada during the term of the
Everlast License. Everlast World's Boxing Headquarters ("Everlast") reserved the
right to use or license the Everlast trademark on products other than women's
activewear, sportswear, swimwear and coverups within the United States and
Canada, including, until January 1, 1999, men's apparel, and the right to use or
license such trademark outside the United States or Canada. Everlast has also
reserved the right to sell, in the United States or Canada, women's activewear
and sportswear in Everlast's product catalogs or flyers, but Everlast may not
sell such products for less than the lowest price offered by the Company.
The term of the Everlast License ends on December 31, 2002, but is
renewable at the option of the Company for up to two successive five year
periods commencing January 1, 2003 and January 1, 2008, assuming the Company is
not then in default under the Everlast License and assuming that the Company
achieves net sales in the United States of Everlast women's products of at least
$10,500,000, and in Canada, of at least CN$2,500,000 for the exercise of the
first option and achieves net sales in the United States of at least $14,250,000
and in Canada of at least CN$3,500,000 for the exercise of the second option.
The Everlast License may be terminated in whole, or only as to certain Everlast
women's products, if the Company fails to fulfill its material obligations of
the Everlast License (including payments of royalties or other amounts due),
fails to use diligent efforts to promote, advertise, manufacture, sell or ship
any Everlast Product, or to fill accepted orders for Everlast women's products
to financially secure purchasers. See "MANUFACTURING AND SUPPLIERS." The
Everlast License may also be terminated if net sales of Everlast women's
products do not exceed certain minimum levels, or if the Company voluntarily or
involuntarily enters into a bankruptcy or similar proceeding. To date, the
Company has been in compliance with the Everlast License.
Under the Everlast License, the Company is required to make royalty
payments to Everlast of 6% of net sales (as defined therein), subject to minimum
annual payments, which increase over the term, as amended, of the Everlast
License. The Company is also required to make advertising expenditures of at
2
<PAGE>
least 2.5% of net sales of Everlast women's products, subject to annual minimum
expenditure levels. The minimum annual royalty payments under the Everlast
License for sales in the United States (including swimwear sales) are $555,000
and $630,000 for 1998 and 1999 (CN$150,000 and CN$168,000 with respect to sales
in Canada), respectively. The minimum annual advertising expenditures required
under the Everlast License for sales in the United States (including swimwear
sales) are $231,250 and $262,500 for 1998 and 1999 (CN$62,500 and CN$70,000 with
respect to sales in Canada), respectively. To date, all required levels have
been met or exceeded. Royalty payments and advertising expenditures are not
required with respect to sales of Everlast women's products to Everlast, as
discussed above. The Company is also obligated to maintain product quality
control, obtain prior approval of designs and standards, and marketing,
advertising and distribution programs, and may be required to indemnify Everlast
against any losses resulting from alleged defects in the Everlast women's
products arising out of the Company's performance under the Everlast License or
the manufacture, promotion or sale of such products in violation of applicable
laws or third-party rights. The Everlast License requires that the Company
secure and maintain product liability insurance, which the Company maintains.
Under and subject to the terms of the Everlast License, Everlast is required to
indemnify the Company against any losses arising out of the use of the Everlast
trademark or the exercise by the Company of its rights under the Everlast
License. Everlast is also required, generally, to defend the Company's rights to
use the Everlast trademark pursuant to the Everlast License.
The Everlast License also requires the Company to maintain, during the term
thereof, letters of credit in favor of Everlast for an amount equal to the
minimum annual amounts due to Everlast under the Everlast License from time to
time, or a cash deposit in varying amounts. The Company is in compliance with
this requirement.
EVERLAST MEN'S LICENSE. The Company obtained the license to market and
sell Everlast men's products ("Men's License") effective January 1,1999.
Generally, the Men's License grants to the Company the exclusive right and
license to use the Everlast trademark in connection with the manufacture,
advertisement and promotion, packaging, sale and distribution of men's
activewear, sportswear, swimwear and outerwear in the United States and Canada
during the term of the Men's License. Everlast reserved the right to use or
license the Everlast trademark on products other than men's and women's
activewear, sportswear, swimwear and men's outerwear within the United States
and Canada, and the right to use or license such trademark outside the United
States or Canada. Everlast has also reserved the right to sell, in the United
States or Canada, men's activewear and sportswear in Everlast's product catalogs
or flyers, but may not sell such products for less than the lowest price offered
by the Company.
The term of the Men's License ends on December 31, 2001, but is renewable
at the option of the Company for up to two successive five year periods
commencing January 1, 2002 and January 1, 2007, assuming the Company is not then
in default under the Everlast License and assuming that the Company achieves net
sales in the United States of Everlast men's products of at least $6,500,000,
and in Canada, of at least CN$3,300,000 for the exercise of the first option and
achieves net sales in the United States of at least $9,317,000 and in Canada of
at least CN$4,790,000 for the exercise of the second option. The Men's License
may be terminated in whole, or only as to certain Everlast men's products, if
the Company fails to fulfill its material obligations of the Men's License
(including payments of royalties or other amounts due), fails to use diligent
efforts to promote, advertise, manufacture, sell or ship any Everlast men's
product, or to fill accepted orders for Everlast men's products to financially
secure purchasers. See "MANUFACTURING AND SUPPLIERS." The Men's License may also
be terminated if net sales of Everlast men's products do not exceed certain
minimum levels, or if the Company voluntarily or involuntarily enters into a
bankruptcy or similar proceeding.
Under the Men's License, the Company is required to make royalty payments
to Everlast of 6% of net sales (as defined therein), subject to minimum annual
payments, which increase over the term (as
<PAGE>
extended) of the Men's License. The Company is also required to make advertising
expenditures of at least 2.5% of net sales of Everlast men's products, subject
to annual minimum expenditure levels. The minimum annual royalty payments under
the Men's License for sales in the United States are $180,000 for 1999
(CN$72,000 with respect to sales in Canada). The minimum annual advertising
expenditures required under the Men's License for sales in the United States are
$75,000 for 1999. (CN$30,000 with respect to sales in Canada). Royalty payments
and advertising expenditures are not required with respect to sales of Everlast
men's products to Everlast, as discussed above. The Company is also obligated to
maintain product quality control, obtain prior approval of designs and
standards, and marketing, advertising and distribution programs, and may be
required to indemnify Everlast against any losses resulting from alleged defects
in the Everlast Products arising out of the Company's performance under the
Men's License or the manufacture, promotion or sale of such products in
violation of applicable laws or third-party rights. The Men's License requires
that the Company secure and maintain product liability insurance, which the
Company maintains. Under and subject to the terms of the Men's License, Everlast
is required to indemnify the Company against any losses arising out of the use
of the Everlast trademark or the exercise by the Company of its rights under the
Men's License. Everlast is also required, generally, to defend the Company's
rights to use the Everlast trademark pursuant to the Men's License.
The Men's License also requires the Company to maintain, during the term
thereof, letters of credit in favor of Everlast for an amount equal to the
minimum annual amounts due to Everlast under the Men's License from time to
time, or a cash deposit in varying amounts. The Company is in compliance with
this requirement.
CONVERSE LICENSE. On March 10, 1999 the Company decided not to renew its
Trademark License Agreement, as amended (the "Converse License") which it
entered on May 20, 1994. The Converse License granted the Company the exclusive
right to use the Converse(R) and Converse All Star trademarks described therein
in connection with the manufacture, import, advertisement and promotion, sale
and distribution of women's and girls' activewear and sportswear in the United
States during the term of the Converse License.
As amended, the term of the Converse License ends on March 31, 1999. The
Company believes that not renewing the license will not have a material adverse
effect on the Company's business, financial condition or results of operations.
Under the Converse License, the Company was required to make royalty payments to
Converse of 7% of net sales through March 31, 1999.
MTV LICENSE. The Company and MTV Networks ("MTVN") entered into a License
Agreement in March 1996 (the "MTV License"). Generally, the MTV License grants
to the Company the exclusive right and license to use "MTV's THE GRIND" and/or
"THE GRIND" trademarks, names and logos in connection with the manufacture,
advertisement and promotion, packaging, sale and distribution of unisex and
women's activewear and accessories in the United States and Canada during the
term of the MTV License. The license is non-exclusive with respect to the
licensed products known as t-shirts and caps until such time as MTVN's existing
license agreement with another licensee for such licensed products expires, and
at such time, the MTV License will become an exclusive license. MTVN has
reserved the right to use or license the "MTV's THE GRIND" and/or "THE GRIND"
trademarks on products other than unisex and women's activewear and accessories
in the United States and Canada and the right to use or license such trademarks
outside the United States or Canada. MTVN has also reserved the right to sell
the licensed products in the United States or Canada through premium offers,
combination and giveaway sales, direct response, direct mail, home shopping type
of networks, sales clubs, incentive programs and any MTVN or affiliated
companies' retail outlets. MTVN is permitted to grant a license to any third
party to manufacture, in or outside the United States, unisex and women's
activewear and accessories for distribution outside the United States.
4
<PAGE>
The term of the MTV License, as amended, ends on June 30, 1999 and is
automatically renewable, at the option of the Company, for an additional
two-year period through January 31, 2001 if the Company sold $3,500,000 of MTV
Products during the term of the MTV License and provided that the Company had
satisfactorily performed its obligations under the MTV License. The MTV License
may be terminated if, among other reasons, the Company disposes of all or
substantially all of its business or assets to a third party, George Horowitz is
no longer President of the Company, there is an uncured failure by the Company
to perform, in all material respects, any of its obligations thereunder
(including payments of royalties) or the Company voluntarily or involuntarily
enters into a bankruptcy or similar proceeding.
Under the MTV License, as amended, the Company is required to make royalty
payments to MTVN of 8% of net sales (as defined therein), subject to guaranteed
minimum annual payments, irrespective of net sales, of $183,750 with respect to
the contract term. The Company is also required to make advertising expenditures
of at least 2% of net sales.
The MTV License requires MTVN to indemnify the Company against any losses
arising out of the Company's use of the MTV trademarks or MTVN's wrongful
conduct, although MTVN is not required to take any action relating to any
infringements or counterfeits of, or any unfair competition affecting the MTV
trademarks covered by the MTV License (nor is the Company permitted to take any
such action without the prior approval of MTVN). The MTV License also provides
for the indemnification of MTVN by the Company against all losses arising from
product liability claims, but excluding claims based on alleged design defects.
The MTV License requires the Company to secure and maintain product liability
insurance, which the Company currently maintains. To date, the Company has been
in compliance with the MTV License.
The Company did not achieve sufficient net sales to automatically renew the
license agreement. If the MTV license is canceled at the end of the term, as
amended, on June 30, 1999, the Company believes it will not have a material
adverse effect on the Company's business, financial condition or results of
operation. The Company is evaluating the MTV license for renewal.
PRODUCT DEVELOPMENT. The Company's merchandising and design staff analyzes
demographic, market, style, fashion and fabric and technical developments and
attempts to make the necessary adjustments in product mix, construction, design,
styles, fabrics and colors in response to these developments. Members of the
merchandising and design staff also coordinate their activities with the
Company's production and sales staff, consult with buyers, visit retail outlets
and attend fashion and trade shows to gather additional information during the
design process. Sources of design and prints include, for example, industry
fashion analyses, the Company's products from previous years and freelance
artwork.
After a particular product concept has been designed, members of the design
staff prepare schematics containing the proposed styles, patterns and fabrics,
which are reviewed by senior members of the Company's management prior to
prototype construction. Prototypes of a potential new product are then
constructed and subjected to numerous tests for fit, comfort, quality,
functionality and consumer acceptance. New designs are previewed to buyers and
certain retail accounts for input as to which styles are likely to be the most
popular. In addition, the Company's performance products are given to fitness
professionals for use and evaluation. The Company's goal is to minimize the risk
of changing fashion trends or consumer preferences, although no assurance can be
given that this objective can be achieved.
5
<PAGE>
MARKETING, ADVERTISING AND PROMOTIONS
The Company advertises and promotes its products to different consumer
segments through a variety of trade and consumer print advertising campaigns,
generally in selected magazines and other publications (including SPORTSTYLE,
WOMEN'S WEAR DAILY, SPORTING GOODS BUSINESS, SELF AND SHAPE). THE COMPANY'
ADVERTISING AND PROMOTION PROGRAM WAS CREATED AND designed to achieve high
visibility for its products. The Company's advertising and promotional efforts
are designed to appeal to the demographic customer profile for the Company's
products. The Company maintains its own marketing and advertising staff that
oversees the conception, development and implementation of most aspects of the
Company's advertising and sales promotions. The Company's in-house staff also
develops catalogs for all of its product lines.
The Company uses several methods to advertise and promote its products. The
Everlast Products and the Company have received exposure through coverage in
both the print and television media. Additionally, the Company takes part in
various cooperative advertising programs such as national advertising, in-store
signage, point-of-purchase promotional giveaways and cooperative advertising
arrangements with several of its retail customers. In 1994, the Company
established cooperative advertising programs with DuPont Inc. The Company
believes that its cooperative advertising programs assist in raising consumer
awareness and increasing retail floor space for its products.
The Company also believes that grass roots promotion programs, such as the
limited distribution of samples of its products to local gyms, athletic clubs
and fitness professionals, help to advance the recognition and reputation of its
products. In addition, the Company has focused many of its promotional programs
on charitable and community events, such as "The New York Race for the Cure" of
breast cancer, "The City of Hope Workout For Hope" for AIDS related research and
the "Share-A-Walk" New York Fundraiser to raise awareness in the fight against
cancer. The Company has also sponsored high school and college women's
basketball teams and cheerleading squads.
The Company also attends and participates in the Atlanta Supershow,
National Sporting Goods Association Show, WWDMAGIC and other appropriate trade
shows.
MANUFACTURING AND SUPPLIERS
The Company does not manufacture any of its products, but uses third-party,
independent contractors for all its products. Approximately 80% of the Company's
products are supplied by manufacturers in the United States while the remaining
20% are imported from manufacturers abroad, principally in Asia. Currently, the
Company uses over ten separate manufacturers. While the Company has no written
agreements with any of its contractors, the Company believes that its
relationships with such contractors are good. The Company does not believe that
the loss of any particular contractor would have a material adverse effect on
its business, financial condition or results of operations. If necessary, the
Company believes that alternative sources of products would be readily
available, although no assurance can be given. The supply of the Company's
foreign-sourced products is subject to constraints imposed by bilateral textile
agreements between the United States and foreign nations, which impose quotas on
the amounts and types of goods which can be imported into the United States.
Consequently, some of the Company's source of products may be adversely affected
by political instability resulting in the disruption of trade from foreign
nations in which the manufacturers are located, the imposition of additional
regulations relating to imports or duties and taxes and other charges on
imports. In order to ensure quality control and timely delivery, the Company (or
its agents) conducts on-site inspections at manufacturers' facilities, as more
fully described herein. See "QUALITY CONTROL." The Company's strategy is to find
manufacturers with specific product category expertise (such as fitness apparel,
tee shirts or outerwear) and extensive experience in the major athletic brand
name apparel industry. The Company has no long-term agreements with any of its
manufacturers and competes with other apparel companies for production capacity.
6
<PAGE>
On December 31, 1997, the Company's inventory was $3,847,556 on net sales
during the year ended December 31, 1997 (Fiscal 1997) of $16,687,271, with a
backlog of orders for future delivery of $3,290,333. At December 31, 1998, the
Company's inventory was $3,026,241 on net sales during the year ended December
31, 1998 (Fiscal 1998) of $15,011,926, with a backlog of orders for future
delivery of $4,019,603. The Company has implemented an Electronic Data
Interchange (EDI) Quick Response Replenishment System by which customer orders
are facilitated in seven working days. Higher levels of inventory are required
to operate the EDI Quick Response Replenishment System program. Such levels of
inventory are needed as sales orders are generally received and shipped within a
seven day period. Other than the EDI Quick Response Replenishment System, the
Company practices a "just in time" manufacturing and purchasing program. The
Company makes arrangements with its manufacturers for delivery approximately 30
days before the scheduled shipment of products to the Company's customers. The
objectives of the "just-in-time" system are to decrease the Company's inventory
risk and to allow the Company flexibility to react to consumer responses to its
products and changing consumer preferences. The Company believes that these
objectives are currently being achieved, although no assurance can be given that
such objectives will continue to be partially or fully achieved in the future.
The Company schedules shipments from its manufacturers in a manner that accounts
for possible manufacturing lateness and transport time from manufacturers to the
Company's warehouse facilities. Although manufacturing lateness has not been a
material factor through the present date, the inability or unwillingness of a
manufacturer to ship orders of the Company's products in a timely manner could
adversely affect the Company's ability to deliver products to its customers on
time. Delay in delivery could result in missing certain retailing seasons with
respect to all or some of the Company's products, or could adversely affect the
Company's relationship with its customers, which could have a material adverse
effect on the Company's business.
As of December 31, 1998, the Company's backlog of unfilled orders was
$4,019,603 as compared to $3,290,333 as of December 31, 1997. The Company
expects that substantially all of its current orders will be shipped within 120
days of the receipt of such orders. The Company's backlog can be affected by a
variety of factors, including scheduling of manufacturing, shipment of products
and customer preferences. The Company has an on-line computerized order-entry
system which allows the Company to receive orders by computer and to follow
daily the status of orders received, shipped and unfilled.
SALES AND DISTRIBUTION
The Company's products are distributed through department stores, specialty
stores, sporting goods stores, catalog operations and better mass merchandisers.
The Company distributes its products to approximately 500 separate customers in
approximately 20,000 retail locations throughout the United States and, with
respect to the Everlast Products and MTV Products, Canada. The Company's
products are sold by retailers such as, Sears, Burdines, Bloomingdale's,
Nordstrom, Modell's, Dillards, Oshmans, Gart's, Footlocker, The Sports Authority
and the Army Air Force Exchange and through catalog operations such as
Sears-Canada and Genesis Direct. In Canada, the Company's products are sold by
such retailers as The Bay, Sears-Canada, Superstar Group and Champs. For the
year ended December 31, 1997, four customers accounted for approximately 47% of
sales, and for the year ended December 31, 1998 four customers accounted for
approximately 48% of sales. The Company's strategy is to expand its network of
retailers carrying the Company's products, and is focused on department stores,
specialty stores, sporting goods stores, catalog operations and better mass
merchandisers.
The Company currently has six in-house sales representatives and fourteen
non employee sales representatives. George Horowitz, President and Chief
Executive Officer, and Rita Cinque Kriss, Executive Vice President of the
Company, manage these representatives and coordinate sales to customers. The
Company works closely with its sales representatives to ensure that a consistent
and unified image of the Company is projected to its customers.
7
<PAGE>
The Company cooperates with major retailers to gauge promptly which styles
are the most popular and to track consumer preferences regarding the Company's
products. Based upon its market data, as well as information gained from trade
shows, the Company attempts to shift its production orders towards styles that
are most popular, which shift may take up to a maximum of eight weeks. Many of
the retail stores offering the Company's products rely upon the Company's market
information and solicit the Company's advice regarding the products and
quantities to order. Additionally, most of the Company's products are
manufactured in the United States, reducing, in many instances, the amount of
time between orders placed by the Company with its manufacturers and shipments
by such manufacturers. The Company believes that its market information
gathering and shifting in production efforts toward more popular styles also
reduces inventory risk.
During Fiscal 1997, foreign sales accounted for 8.0% of the Company's net
sales, all of which were in Canada, and during Fiscal 1998, foreign sales
accounted for 8.9% of the Company's net sales, the majority of which were in
Canada.
Consistent with industry practice, the Company generally accepts returns of
any products with defects in materials or workmanship or which do not otherwise
meet the quality standards of the Company or its customers for up to 30 days.
The Company believes that it has experienced historical return levels that are
better than the industry norms, although no assurance can be given that such
levels can be sustained. In addition to returns, customers deduct chargebacks
from the purchase price with or without the Company's consent. Chargebacks have
an adverse effect on the Company's business and results of operations since they
reduce overall gross profit margins on sales of the Company's products. The
Company experienced chargeback levels of approximately 3.5% during 1998, which
is consistent with the industry norms of 3% to 5%. In 1997, the Company
experienced chargeback levels of approximately 4.1%. No assurance can be given
that such levels can be maintained.
QUALITY CONTROL
Because the Company emphasizes fit, performance and quality of its
products, the Company places high priority on quality control. The Company has
established stringent quality control procedures under which domestic and
international production of the Company's products at independent manufacturing
locations is inspected by agents of the Company who visit each independent
manufacturing contractor at such frequency as is necessary to ensure compliance
with the Company's specifications and delivery requirements and in order to meet
the Company's shipping schedules. Prior to manufacture in large quantities, the
Company receives samples of its products for investigation and, if necessary,
alteration. The Company performs various tests, including fit tests on live
models, to ensure that the product meets specifications prior to the shipping of
product by the Company. In addition, senior employees of the Company
periodically personally inspect the manufacturing process and quality of
products.
The Company believes that its relationships with its warehouses, customs
brokers and international consolidators are an important part of its quality
control program. The Company views its service organizations as important
resources in maintaining high standards for its products and assisting in the
reliable and timely delivery of its products to its retail customers.
COMPETITION
The apparel industry is highly competitive. The Company's competitors
include apparel manufacturers
8
<PAGE>
of all sizes, many of whom have greater financial and manufacturing resources
than the Company. The Company believes that it has been able to compete in the
brand name men's and women's activewear and sportswear market because of the
high brand name recognition, high quality and affordability of its products. The
Company's products may also compete with lower-priced men's and women's and
girls' activewear and sportswear products which may or may not be brand name
products. The Company believes that its principal competitors in the brand name
men's and women's activewear and sportswear industry are Nike, Reebok, Adidas
and Fila. In addition, its principal competitors in the brand name women's
activewear and sportswear industry are The Weekend Exercise Company and Danskin.
Competition in the activewear and sportswear segment of the apparel industry is
based on price, design, quality, name recognition and the ability to respond
quickly to changing consumer preferences.
CANADIAN BRANCH
The Company has a Canadian branch that markets Everlast Products in Canada.
During Fiscal 1997, net sales from operations in Canada were U.S. $1,328,319,
and during Fiscal 1998 such net sales were U.S. $1,234,441. With the exception
of exchange rate fluctuations, the Company does not believe that the Canadian
operations are subject to risks which are significantly different from domestic
operations. The Company does not believe that exchange rate fluctuations have
had a material adverse effect on the Company's results of operations, although
there can be no assurance that such fluctuations, with respect to its Canadian
operations, will not have a material adverse effect on the Company's results of
operations in the future.
EMPLOYEES
As of March 25, 1999, the Company had 29 employees, all of whom were
employed by the Company on a full-time basis. In addition, the Company may
employ additional full-time and part-time employees in connection with the
design, marketing and sale of its products as and if the need arises. The
Company currently hires temporary employees from time to time as needed. None of
the Company's employees is covered by a collective bargaining agreement, and the
Company considers its relations with its employees to be satisfactory.
ITEM 2. PROPERTIES
The Company has three leases for approximately 7,160 square feet for a
total annual base rent of $166,629 at its principal executive offices in New
York, New York. The original lease has an annual base rent of $93,672 and
expires January 31, 2000. This space, which occupies approximately 3,981 square
feet, also includes a showroom for the Everlast Products. In July 1994, the
Company increased its space in New York by 2,523 square feet to establish
additional showroom space and to accommodate additional employees. Such lease
provides for an annual base rent of $57,902 and expires January 31, 2000. In
January 1996, the Company increased its space in New York by 656 square feet to
accommodate additional employees. Such lease provides for an annual base rent of
$15,055 and expires January 31, 2000.
The Company leases approximately 1,200 square feet of office and showroom
space in Montreal, Canada at an annual base rent of CN$18,000. The lease expires
in April 2000.
The Company believes that its existing facilities will be adequate to meet
its needs for the foreseeable future. In the event the Company requires
additional facilities in the future, the Company believes additional facilities
would be available at commercially reasonable rates.
9
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material litigation. No legal proceedings
were terminated during the fiscal year ended December 31, 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the last
quarter of 1998.
10
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's common stock had been quoted on the Nasdaq National Market
from August 14, 1996 until December 8, 1998 under the symbol "AAGP." The
Company's common stock has been quoted on the Nasdaq Small Cap Market since
December 9, 1998, and from May 4, 1995 until August 14, 1996 under the same
symbol. The following table sets forth, for the period indicated, the highest
and lowest bid quotations for the common stock, $.002 par value (the "Common
Stock"), as reported by the NASDAQ system. Quotations reflect prices between
dealers, do not reflect retail markups, markdowns or commissions, and may not
necessarily represent actual transactions.
1997
HIGH LOW
---- ---
1st Quarter 15 3/4 14 3/4
2nd Quarter 15 3/4 4 7/8
3rd Quarter 6 1/4 3 5/8
4th Quarter 4 1/8 2 1/16
1998
HIGH LOW
---- ---
1st Quarter 3 1/2 2 1/8
2nd Quarter 2 7/8 1 3/4
3rd Quarter 2 3/8 11/16
4th Quarter 25 1/2
HOLDERS
The closing bid price of the Common Stock as of March 25, 1999 was 2 21/32.
There were 102 record holders of the Company's Common Stock and one record
holder of the Company's Class A Common Stock, $.01 par value (the "Class A
Common Stock"). Based upon information received from some of these record
holders, the Company believes there are more than 600 beneficial holders of the
Company's Common Stock.
DIVIDENDS
The Company has never paid dividends on its Common Stock or its Class A
Common Stock. The Company anticipates that, for the foreseeable future, earnings
will be retained for use in its business and does not anticipate the payment of
dividends.
11
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THIS REPORT ON FORM 10-KSB CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY
CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THE COMPANY'S EXPANSION
INTO NEW MARKETS, COMPETITION, TECHNOLOGICAL ADVANCES AND AVAILABILITY OF
MANAGERIAL PERSONNEL.
GENERAL
The Company is a designer, marketer and supplier of women's and men's
activewear, sportswear, swimwear and accessories. The Company sells its
principal product collections under the EVERLAST brand name through exclusive
licensing arrangements. The Company's products are manufactured by third party
independent manufacturing contractors and are sold to approximately 500 separate
accounts, representing approximately 20,000 retail locations throughout the
United States and Canada, including a variety of department stores, specialty
stores, sporting goods stores, catalog operations and better mass merchandisers.
The financial statements of the Company and the notes thereto contain
detailed information that should be referred to in conjunction with this
discussion.
RESULTS OF OPERATIONS
YEAR END 1998 COMPARED TO YEAR END 1997
---------------------------------------
Net sales decreased to $15,011,926 for the year ended December 31, 1998
from $16,687,271 for the year ended December 31, 1997, a decrease of $1,675,345
or 10.0%. This decrease was principally attributable to decreased sales volume
of the Company's Converse and MTV licensed products.
Gross profit decreased to $5,528,335 for the year ended December 31, 1998
from $6,355,284 for the year ended December 31, 1997, a decrease of $826,949 or
13.0%. Gross profit decreased as a percentage of net sales to 36.8% from 38.1%.
This decrease was primarily due to the lower sales prices received for the
Converse and MTV licensed products.
Selling and shipping expenses decreased to $3,637,729 for the year ended
December 31, 1998 from $3,743,862 for the year ended December 31, 1997, a
decrease of $106,133 or 2.8%. Selling and shipping expenses as a percentage of
net sales increased to 24.2% from 22.4%. This increase was attributable to
greater sales sample expense and an increase in salaries of employees involved
in the sale, shipping and design of the Company's products.
General and administrative expenses increased to $1,911,621 for the year
ended December 31, 1998 from $1,850,203 for the year ended December 31, 1997, an
increase of $61,418 or 3.3%. General and administrative expenses as a percentage
of net sales increased to 12.7% from 11.1%. The increase was primarily
attributable to an increase in outside consulting expense.
12
<PAGE>
Financial expenses decreased to $413,713 for the year ended December 31,
1998 from $417,159 for the year ended December 31, 1997, a decrease of $3,446 or
0.8%. This decrease was primarily attributable to the decrease in the Company's
net borrowings from its factor for the year ended December 31, 1998, versus the
year ended December 31, 1997 and offset by foreign currency transaction losses
in the Canadian branch. Of the total financial expenses, interest expense
decreased to $120,950 for the year ended December 31, 1998 from $171,318 for the
year ended December 31, 1997. Such decrease reflects the decreased level of
borrowings due to lower inventory levels.
Operating income decreased to a loss of $434,728 for the year ended
December 31, 1998 from a profit of $344,060 for the year ended December 31,
1997, a decrease of $778,788 for the reasons stated above. Operating income as a
percentage of net sales was negative 2.9% for the year ended December 31, 1998
as compared to positive 2.1% for the year ended December 31, 1997.
The Company recognized a tax benefit of $194,093 for the year ended
December 31, 1998 as compared to a tax provision of $132,575 for the year ended
December 31, 1997. This income tax reduction is in proportion to the decline in
the Company's income.
The Company had a net loss of $240,635 for the year ended December 31, 1998
as compared to net income of $211,485 for the year ended December 31, 1997, a
decrease of $452,120.
1999 MARKET OUTLOOK
-------------------
While the retail environment remains difficult, management believes the
Company will return to its previous pattern of sales growth, although no
assurance can be given that such growth will occur.
The launching of the Everlast men's activewear and sportswear line, the
penetration of the European market as a designer and supplier for other Everlast
licensees, the expansion of a field sales force and the introduction of an
internet web site are all expected to add to the Company's distribution base.
The Company will now focus on its core Everlast brand and continue to explore
other opportunities for growth.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the year ended December 31,
1998 was $202,937 compared to $49,058 for the year ended December 31, 1997. This
increase was primarily attributable to a decrease in inventory. Net cash used
for investing activities for the year ended December 31, 1998 was $79,414
compared to $223,757 for the year ended December 31, 1997 due to a decline in
capital expenditures. Net cash provided by financing activities was $9,906 for
the year ended December 31, 1998 compared to $70,899 for the year ended December
31, 1997 due to a decline in the proceeds received from the exercise of stock
options.
During the year ended December 31, 1998, the Company's primary need for
funds was to finance working capital due to anticipated growth in net sales of
the Company's products. The Company has relied primarily upon cash flow from
operations and advances drawn against factored receivables to finance its
operations and expansion. At December 31, 1998, working capital was $4,994,000
compared to $5,187,272 at December 31, 1997, a decrease of $193,272. This
decrease was primarily attributable to the Company's net loss for the year ended
December 31, 1998.
Due from factor represents the amount receivable by the Company for
factored receivables less the amount of outstanding advances made by the factor
to the Company under the factoring agreement. At
<PAGE>
December 31, 1998 Due from Factor was $1,887,245 as compared to $1,656,283 at
December 31, 1997 The Company's inventory decreased by 21.3% to $3,026,241 at
December 31, 1998 from $3,847,556 at December 31, 1997.
1999 LIQUIDITY OUTLOOK
----------------------
Management anticipates it will maintain a net surplus position with the
factor, although no assurance to that effect can be given. Positive cash flow,
if it occurs, will provide for further reduction in net borrowings, and create
additional working capital to fund the Company's anticipated growth over the
next 12 months. If a positive cash flow does not occur, borrowings with the
factor will increase.
YEAR 2000 COMPLIANCE
The Company began a Year 2000 compliance project in June 1995 and believes
it currently is Year 2000 compliant. The project encompassed upgrading the
server and all proprietary software and non-proprietary software. The project
was completed September 1997.
The Company is in the process of assessing Year 2000 issues not related to
its internal systems, including issues with suppliers and customers and
warehouse communications. Due to the general uncertainty of the Year 2000
readiness of suppliers and customers, the Company is unable to determine at this
time whether the consequences of Year 2000 failures will have a material impact
on the Company's results of operations, liquidity or financial condition. The
Company believes that interruptions of normal operations will not be affected.
Total expenditures for the Year 2000 project were approximately $200,000 in
fiscal year 1997. There were no Year 2000 related costs in the current fiscal
year.
The company is currently formulating contingency plans in the event of a
Year 2000 failure. The Company expects that a contingency plan will be in place
by September 30, 1999.
ITEM 7. FINANCIAL STATEMENTS.
SEE PAGE 1f
14
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The Company's executive officers and directors are as follows:
Name Age Position
- ---- --- --------
George Horowitz 48 President; Chief Executive
Officer; Chairman of the
Board; Treasurer;
Director(1)
James Anderson 62 Vice Chairman of the Board;
Director(1)(2)
Rita Cinque Kriss 33 Executive Vice President;
Secretary of the Company;
Director(3)
Larry Kring 58 Director(2)(3)
Edward Epstein 59 Director(2)(3)
Angelo Giusti 48 Director(2)
(1) Member of the Executive Committee of the Board of Directors
(2) Member of the Compensation Committee of the Board of Directors
(3) Member of the Audit Committee of the Board of Directors
MR. GEORGE HOROWITZ has been the President, Chief Executive Officer,
Treasurer and a director of the Company since its inception in July 1992. Since
January 1996, he has been Chairman of the Board. From October 1990 to January
1993, Mr. Horowitz was President and a director of Total Impact, Inc., an
activewear apparel company in New York City. From March 1976 to March 1990, Mr.
Horowitz was employed by Golden Touch Imports, Inc. an apparel company in New
York City, where he served as Vice President-Operations. He is currently serving
on the Executive Committee for the Sports Apparel Council of the Sporting Goods
Manufacturers Association.
MR. ANDERSON has been a director of the Company since August 1992 and was
Chairman of the Board from January 1994 through December 1995. Since January
1996, he has been Vice-Chairman of the Board. Since August 1996, he has been
Managing Partner of Millenium Venture Management LLC. Since July 1987 he has
been a management consultant in restructuring businesses. From 1981 to 1987, he
was President of Pacific First Financial Corp. and Pacific First Federal Savings
Bank and, in 1984, also became chairman of the board and CEO of each company. He
has served on the boards of directors of numerous business, civic, arts and
educational organizations and is a member of the Whitman College Board of
Overseers. He is currently a member of the Board of Directors of the Washington
Hospital Insurance Fund and the Washington Casualty Company.
MS. CINQUE KRISS has been Executive Vice President and a director of the
Company since May
15
<PAGE>
1994. From April 1993 to May 1994, she was Vice President-Operations of the
Company, and from August 1992 to April 1993, she served as a consultant to the
Company in operations management. From November 1990 to August 1992, Ms. Cinque
Kriss was the President of ITEW, Ltd., a management consulting company in the
apparel industry. In 1986, she was a founding member of Women in International
Trade, an organization created to promote international trade, where she served
as a director from January 1990 to January 1993.
MR. KRING has been a director of the Company since January 1993. Since
August 1993, Mr. Kring has been a Group Vice President of Esterline
Technologies, a diversified instrumentation, equipment and component
manufacturing company listed on the New York Stock Exchange and located in
Bellevue, Washington. From July 1978 to July 1993, Mr. Kring was the President
and Chief Executive Officer of Heath Tecna Aerospace Company, a manufacturer of
aircraft interior and aerospace components and a division of Ciba-Geigy
Corporation.
MR. EPSTEIN has been a director since January 1, 1996. Mr. Epstein is an
attorney admitted to practice law in both New York and Florida. He is an
experienced litigator, and has represented clients in all aspects of the garment
industry for 30 years. He is a member of the bars of the Supreme Court of the
State of Florida, the Supreme Court of the State of New York, various United
States District Courts and the United States Court of Appeals for the Second
Circuit. He is a member of the Commercial Panel of Arbitrators, American
Arbitration Association, the New York State Trial Lawyers Association,
Association of Trial Lawyers of America and the Florida Academy of Trial
Lawyers.
MR. GIUSTI has been a director since January 3, 1997. He has been Vice
President of Operations at the Company since June 1997. From 1984 until June
1997, Mr. Giusti was President of Universal Business Forms, a printing company
in New York City. From 1978 to 1984, Mr. Giusti was Sales Manager in New York
for Uarco, a national printing company. Mr. Giusti has served on many community
boards and activities. He was a New York City Public School teacher and he has
remained active in local education and in youth sports activities. He is a
former President of the Holmdel (Jersey Shore) Pop Warner Football League.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors and executive officers, and persons who
beneficially own more than ten percent of the Company's Common Stock, to file
with the Securities and Exchange Commission (the "SEC") reports of ownership of
Common Stock and other equity securities of the Company. Officers, directors and
more than ten percent stockholders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) reports they file. To the Company's
knowledge, based solely on review of the copies of such reports furnished to the
Company during the fiscal year ended December 31, 1998 all required Section
16(a) filings by beneficial owners were complied with, except that on January
11, 1999 George Horowitz and Rita Cinque Kriss filed a Form 5 with respect to an
acquisition of 15,000 shares and 7,500 respectively on March 26, 1998, and on
January 11, 1999 Mr. Horowitz's December 1997 Form 5 was amended with respect to
an acquisition of 4,000 shares on December 17, 1997. On January 11, 1999 Angelo
Giusti filed a Form 5 with respect to the acquisition of 2,500 options on June
5, 1998.
ITEM 10. EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth certain
information concerning total annual
16
<PAGE>
compensation paid to George Horowitz, the Company's President, Chief Executive
Officer and Treasurer, Rita Cinque Kriss, the Company's Executive Vice President
and Secretary and Angelo Giusti, Vice President of Operations (the "Named
Executive Officers"), for services rendered in all capacities by them to the
Company during fiscal years 1998, 1997 and, 1996.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation
--------------------------------------
Name And
-------- Other Annual All Other
Principal Positions Year Salary ($) Bonus ($) Compensation Compensation ($)
------------------- ---- ---------- --------- ------------ ----------------
($)
---
<S> <C> <C> <C> <C> <C>
George Horowitz(1) 1998 265,000 12,000 19,534(3) 853(6)
(President; Chief Executive Officer; Treasurer) 1997 265,000 18,000 17,257(4) 595(6)
1996 250,000 24,000 18,635(5) 560(6)
Rita Cinque Kriss(1) 1998 140,000 0 20,308(7) 0
(Executive Vice President; Secretary) 1997 140,000 12,000(2) 9,565(8) 0
1996 125,000 16,000 12,155(9) 0
Angelo Giusti(1)
(Vice President of Operations & Director) 1998 110,000 0 0 0
1997 63,139(10) 0 0 0
</TABLE>
- ------------------
(1) Other than George Horowitz , Rita Cinque Kriss and Angelo Giusti no Named
Executive Officer of the Company was paid more than $100,000 in total
salary and bonus for Fiscal 1998, and accordingly, no other Named
Executive Officers are included in the table above.
(2) The Company has agreed to pay the amount of tax owed on the bonus payment
noted in the column above.
(3) Consists of an aggregate of $19,534 paid to or on behalf of Mr. Horowitz
by the Company in Fiscal 1998 in connection with automobile lease
installment payments ($13,659), related insurance premiums ($1,088) and
parking expenses ($4,787).
(4) Consists of an aggregate of $17,257 paid to or on behalf of Mr. Horowitz
by the Company in Fiscal 1997 in connection with automobile lease
installment payments ($13,660), related insurance premiums ($1,088) and
parking expenses ($2,509).
(5) Consists of an aggregate of $18,635 paid to or on behalf of Mr. Horowitz
by the Company in Fiscal 1996 in connection with automobile lease
installment payments ($13,659), related insurance premiums ($2,176) and
parking expenses ($2,800).
17
<PAGE>
(6) Represents premiums paid by the Company in Fiscal 1998, 1997 and 1996 on
term life insurance policies for the benefit of Mr. Horowitz.
(7) Consists of an aggregate of $12,732 paid to or on behalf of Ms. Cinque
Kriss by the Company in Fiscal 1998 in connection with automobile lease
installment payments ($8,019), related insurance premiums ($3,806) and
parking expenses ($907), and $7,576 for income taxes on 1997 bonus.
(8) Consists of an aggregate of $9,565 paid to or on behalf of Ms. Cinque
Kriss by the Company in Fiscal 1997 in connection with automobile lease
installment payments ($5,601), related insurance premiums ($1,846) and
parking expenses ($2,118).
(9) Consists of an aggregate of $12,155 paid to or on behalf of Ms. Cinque
Kriss by the Company in Fiscal 1996 in connection with automobile lease
installment payments ($5,134), related insurance premiums ($4,216) and
parking expenses ($2,805).
(10) Mr. Giusti has been an employee of the Company since June 1997.
LONG-TERM INCENTIVE AND PENSION PLANS
The Company currently has no long-term incentive or defined pension
plans.
OPTION GRANTS IN LAST FISCAL YEAR
Number of Percent of
Securities Total Options
Underlying Granted To Exercise Or
Options Employees in Base Price
Name Granted Fiscal Year ($/Sh) Expiration Date
---- ------- ----------- ------ ---------------
Angelo Giusti 2,500 15.6% $2 3/32 6/5/08
There were no other option grants to Named Executive Officers during
the year ended December 31, 1998.
COMPENSATION OF DIRECTORS
As compensation for their services as directors of the Company,
effective January 1, 1995, non-employee directors of the Company receive options
to purchase the Company's Common Stock pursuant to the Company's 1995
Non-Employee Director Stock Option Plan. The plan provides for annual automatic
grants of options to purchase 3,000 shares of Common Stock to each director
serving at the time of the grant who is not an officer or employee of the
Company. The Chairman and Secretary of the Board (provided they are not officers
or employees of the Company) also receive an automatic grant of options to
purchase an additional 200 shares, and the chair of a Board committee (provided
he or she is not an officer or employee of the Company) also receives an
automatic grant of options to purchase an additional 100 shares. The exercise
price per share for all such options is the fair market value of the shares of
Common Stock covered by the option on the date of grant of such option. The term
of each option is seven years from the date of grant, and the options vest in
three equal installments on the first,
18
<PAGE>
second and third anniversaries of the date of grant. Effective January 1, 1998,
each non-employee director was to receive an annual fee of $6,000 payable
quarterly at the end of each quarter. As of December 31, 1998, Mr. James
Anderson, Mr. Edward Epstein and Mr. Larry King each received $4,500. Directors
also receive reimbursement of expenses incurred by them in performing their
duties and in attending Board meetings, provided such expenses are reasonable
and evidenced by appropriate documentation.
EMPLOYMENT CONTRACTS
GEORGE HOROWITZ. The Company and George Horowitz are parties to an employment
agreement, dated as of August 1, 1994 (the "Agreement") pursuant to which Mr.
Horowitz serves as the President and Chief Executive Officer of the Company, for
which Mr. Horowitz was paid an annual base salary of $125,000 from August 1,
1994 through December 31, 1994, $165,000 from January 1, 1995 through December
31, 1995, $250,000 from January 1, 1996 through December 31, 1996 and is paid an
annual base salary of $265,000 commencing January 1, 1997 and continuing
thereafter through the Term (as defined below) of the Agreement, unless
increased by the Board of Directors on an annual basis during the Term. The
initial term of the Agreement expires on July 31, 2000 but continues thereafter
for additional one-year periods unless either Mr. Horowitz or the Company gives
the other ninety days' prior written notice of non-renewal (as and if so
extended, the "Term"). At the discretion of the Board of Directors, the Company
may also pay Mr. Horowitz a cash bonus on or before December 31 of any year
during the Term. In addition to such base salary and contingent cash bonuses,
Mr. Horowitz is entitled to receive an automobile allowance which on August 12,
1996 was modified from $12,000 annually to reimbursement for an automobile
commensurate with his position and duties with the Company (to include
appropriate insurance), reimbursement for parking expenses which was modified
from a limit of $6,000 annually to such amount as is reasonably and customarily
charged in the area of the Company's principal offices, health and medical
insurance and is entitled to participate in any retirement, life and disability
insurance, dental insurance and any bonus, incentive or profit-sharing plans
which the Company makes available from time to time to its executives. Mr.
Horowitz is also entitled to receive reimbursement of all reasonable
out-of-pocket expenses that he actually incurs relating to his services under
the Agreement.
The Agreement also restricts, generally, Mr. Horowitz from disclosing
certain confidential information obtained by Mr. Horowitz during the Term for a
period of three years following the termination or expiration of the Term, and
further restricts Mr. Horowitz from competing with the Company (including
soliciting the Company's employees or agents) for a period of one year following
the expiration or termination of the Term. The Agreement may be terminated by
the Company "for cause" (as defined in the Agreement), and in the event of such
termination, or in the event of the voluntary resignation by Mr. Horowitz, the
obligations of the Company under the Agreement will terminate (except with
respect to certain indemnification, confidentiality and "non-compete"
provisions). In the event of the termination of the Agreement by reason of Mr.
Horowitz's death, his estate is entitled to receive an amount equal to twice his
then-current base salary (which, in the case of Mr. Horowitz's death, may be
funded, wholly or partially, by a life insurance policy paid for by the Company,
at its option). If the Agreement is terminated for reasons other than Mr.
Horowitz's death, voluntary resignation or "for cause," Mr. Horowitz will be
entitled to receive an amount equal to twice his then-current base salary, plus
all other amounts due to him under the Agreement through the date of such
termination. The Company is the beneficiary of "key-executive" life insurance
policies on George Horowitz in the amount of $5,000,000.
RITA CINQUE KRISS. The Company and Rita Cinque Kriss are parties to an
employment agreement, dated as of August 1, 1994, pursuant to which Ms. Cinque
Kriss serves as Executive Vice President of the Company, for which Ms. Cinque
Kriss was paid an annual base salary of $70,000 from August 1, 1994 through
December 31, 1994, $90,000 from January 1, 1995 through June 30, 1995, $105,000
from July 1, 1995 through December 31, 1995, $125,000 from January 1, 1996
through December 31, 1996, and is paid an annual base salary of $140,000
commencing January 1, 1997 and continuing thereafter through
19
<PAGE>
the Term (as defined below) of the agreement, unless increased by the Board of
Directors on an annual basis during the Term. The initial term of such agreement
expired on July 31, 1997 but was and will continue to be renewed for additional
one-year periods unless either Ms. Cinque Kriss or the Company gives the other
ninety days' prior written notice of non-renewal (as and if so extended, the
"Term"). At the discretion of the Board of Directors, the Company may also pay
Ms. Cinque Kriss a cash bonus on or before December 31 of any year during the
Term. In addition to such base salary and contingent cash bonuses, Ms. Cinque
Kriss is entitled to receive an automobile allowance of $9,000 annually,
reimbursement for parking expenses up to $4,800 annually, health and medical
insurance, and is also entitled to participate in any retirement, life and
disability insurance, dental insurance and any bonus, incentive or
profit-sharing plans which the Company makes available from time to time to its
executives. Ms. Cinque Kriss is also entitled to receive reimbursement for all
reasonable out-of-pocket expenses that she incurs relating to her services under
such agreement. The Company is the beneficiary of a "key-executive" life
insurance policy on Rita Cinque Kriss in the amounts of $1,000,000.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock and Class A Common Stock as
of March 25, 1999 for (i) each of the Company's directors (ii) each of the
Company's executive officers (iii) each stockholder known to be the beneficial
owner of more than five percent of any class of the Company's voting securities
and (iv) all directors and executive officers as a group:
20
<PAGE>
<TABLE>
<CAPTION>
Beneficial Ownership
Common, and
Class A Common (1)
Percentage Of
Name And Address Of Outstanding
Beneficial Owner Number (2) Stock
---------------- ---------- -----
<S> <C> <C>
George Q. Horowitz 611,794(3) 21.8%
c/o Active Apparel Group, Inc.
1350 Broadway, Suite 2300
New York, NY 10018
James K. Anderson 118,708(4) 4.2%
4903 163rd Ave., N.E.
Redmond, WA 98052
Rita Cinque Kriss 96,700(5) 3.4%
c/o Active Apparel Group, Inc.
1350 Broadway, Suite 2300
New York, NY 10018
Larry Kring 29,742(6) 1.1%
3265 126th Ave., N.E.
Bellevue, WA 98005
Edward R. Epstein 6,000(7) *
915 Middle River Drive
Suite 419
Fort Lauderdale, FL 33304
Angelo Giusti 2,700(8) *
19 Deer Path
Holmdel, NJ 07733
All directors and 865,644(3) (4) 30.9%
executive officers as a group (6 persons) (5) (6) (7) (8)
</TABLE>
- ------------------
(1) Under rules adopted by the Securities and Exchange Commission, a person
is deemed to be a beneficial owner of securities with respect to which
such person has or shares: (i) voting power, which includes the power to
vote or direct the vote of the security, or (ii) investment power, which
includes the power to dispose of or to direct the disposition of the
security. Unless otherwise indicated below, the persons named in the
table above have sole voting and investment power with respect to all
shares beneficially owned.
(2) As of March 25, 1999, there were outstanding 2,492,581 shares of Common
Stock and 100,000 shares of Class A Common Stock. The Class A Common
stock, while held by George Horowitz, as they currently are, entitle
George Horowitz to five (5) votes for each share held. Thus, while there
are 2,592,581 total shares outstanding (not including any unexercised
options) this represents 2,992,581 votes.
(3) Consists of (i) 478,128 shares of Common Stock (500 of which are owned
by minor children) (ii) 100,000 shares of super-voting Class A Common
Stock issued to Mr. George Q. Horowitz in July 1995 in exchange for
112,500 shares of Common Stock and (iii) 33,666 shares of Common Stock
issuable upon exercise of options exercisable currently or within 60
days, including (A) options to purchase 2,000 shares at an exercise
price of $6.25 per share granted by Donald Horowitz, George Horowitz's
brother, which expire on December 31, 1999, and (B) options to purchase
15,000 shares granted by the Company at the exercise price of 11.75 per
share, which expire on November 3, 2005, and (C) options to purchase
16,666 shares at an exercise price $ 14.25 per share, which expire
21
<PAGE>
on November 7, 2006.
(4) Consists of (i) 86,350 shares of Common Stock of which Mr. Anderson owns
80,000 shares of Common Stock with his wife, as joint tenants, and (ii)
32,358 shares of Common Stock issuable upon exercise of options
excercisable currently or within 60 days, including
(A) 839 shares @ $ 1.75 expires December 31, 2004
(B) 839 shares @ $ 3.00 expires December 31, 2004
(C) 839 shares @ $ 5.00 expires December 31, 2004
(D) 839 shares @ $ 6.25 expires December 31, 2004
(E) 4,706 shares @ $ 0.85 expires December 31, 2003
(F) 11,630 shares @ $ 3.30 expires June 30, 1999
(G) 4,200 shares @ $ 5.50 expires December 31, 1999
(H) 3,200 shares @ $ 11.75 expires November 3, 2002
(I) 3,200 shares @ $ 12.50 expires January 2, 2003
(J) 2,066 shares @ $ 14.75 expires January 3, 2004
(5) Consists of (i) 76,200 shares of Common Stock and (ii) 20,500 shares of
Common Stock issuable upon exercise of options exercisable currently or
within 60 days including (A) options to purchase 10,500 shares of Common
Stock at an exercise price of $11.75 per share, which expire on November
3, 2005 and (B) 10,000 shares of Common Stock at an exercise price of
$14.75 per share, which expire on December 13, 2006.
(6) Consists of (i) 10,388 shares of Common Stock and (ii) 19,354 shares of
Common Stock issuable upon the exercise of options currently exercisable
or within 60 days, including (A) 3,100 shares of Common Stock at an
exercise price of $11.75 per share, which expire on November 3, 2002,
(B) 3,100 shares of Common Stock at $12.50 per share, which expire on
January 2, 2003, and (C) options to purchase 2,066 shares at an exercise
price of $14.75 per share, which expire on January 3, 2004. (D) 839
shares @ $ 1.75 expires December 31, 2004, (E) 839 shares @ $ 3.00
expires December 31, 2004, (F) 839 shares @ $ 5.00 expires December 31,
2004, (G) 839 shares @ $ 6.25 expires December 31, 2004, (H) 3,762
shares @ $ 0.85 expires December 31, 2003, (I) 3,970 shares @ $ 3.30
expires June 30, 1999
(7) Consists of (i) 1,000 shares of Common Stock and (ii) 5,000 shares of
Common Stock issuable upon exercise of options exercisable currently or
within 60 days, including (A) options to purchase 3,000 shares of Common
Stock at an exercise price of $12.50 per share, which expire on January
2, 2003 and (B) options to purchase 2,000 shares of Common Stock at an
exercise price of $14.75 per share, which expire on January 3, 2004.
(8) Consists of (i) 700 shares of Common Stock and (ii) 2,000 shares of
Common Stock issuable upon exercise of options exercisable currently or
within 60 days at an exercise price of $14.75 per share which expire on
January 3, 2004.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Edward R. Epstein, a Director, was paid $67,736 for legal services for
the year ending December 31, 1998.
22
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
<TABLE>
<CAPTION>
Exhibit Filed Incorporated By
Index Description Of Document Herewith Reference To:
- ----- ----------------------- -------- -------------
<S> <C> <C>
3.1 Certificate of Incorporation of the Exhibit 3.(i) of Registration
Company ("Certificate of Statement File No.33-87954
Incorporation"). (the "1995 Registration Statement."
3.2 Bylaws of the Company. Exhibit 3.(ii) of the 1995
Registration Statement
10.1 Trademark License Agreement, dated as Exhibit 10.1 of the 1995
of May 20, 1994, between Registration Statement
Converse Inc. and the Company.
10.2 License Agreement, dated as of Exhibit 10.2 of the 1995
June 1, 1992 ("Everlast License"), Registration Statement
between Everlast World's Boxing
Headquarters Corp. ("Everlast")
and Total Impact, Inc. ("Total
Impact").
10.3 First Amendment Agreement to Exhibit 10.3 of the 1995
Everlast License, dated as of Registration Statement
June 1, 1992, between Everlast
and Total Impact.
10.4 Assignment of Everlast License, Exhibit 10.4 of the 1995
dated as of July 7, 1992, between Registration Statement
Everlast and the Company.
10.5 Consent to Assignment of Exhibit 10.5 of the 1995
Everlast License, dated as of Registration Statement
August 18, 1992, by Everlast
to Total Impact.
10.6 Second Amendment Agreement Exhibit 10.6 of the 1995
to Everlast License, dated Registration Statement
as of January 1, 1993 between
Everlast and the Company.
10.7 Third Amendment Agreement to Exhibit 10.7 of the 1995
Everlast License, dated as of Registration Statement
November 15, 1993 between
Everlast and the Company.
10.8 License Agreement (Canada), Exhibit 10.8 of the 1995
dated as of January 1, 1993, Registration Statement
("Canada Everlast License")
between Everlast and the Company.
10.9 First Amendment Agreement Exhibit 10.9 of the 1995
to Canada Everlast License, Registration Statement
dated as of November 5, 1993,
between Everlast and the Company.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Exhibit Filed Incorporated By
Index Description Of Document Herewith Reference To:
- ----- ----------------------- -------- -------------
<S> <C> <C>
10.10 Consulting Agreement, Exhibit 10.10 of the 1995
dated as of September 1, 1993, Registration Statement
between the Company and
Michael Bick.
10.11 Buying Agency Agreement, Exhibit 10.11 of the 1995
dated as of December 1, 1992, Registration Statement
between the Company and
D&P Fashion Collections Ltd.
10.12 Services Agreement, dated as Exhibit 10.12 of the 1995
of July 7, 1992, between Registration Statement
the Company and Total Impact.
10.13 Factoring Agreement, dated as Exhibit 10.13 of the 1995
of August 21, 1992 and as Registration Statement
subsequently amended,
between the Company and
Century Business Credit Corporation.
10.14 Lease Agreement, dated as of Exhibit 10.14 of the 1995
May 16, 1991 ("Lease Agreement"), Registration Statement
between Total Impact and
1350 Broadway Associates.
10.15 Assignment of Lease Agreement, Exhibit 10.15 of the 1995
dated as of September 23, 1992, by Registration Statement
Total Impact to the Company.
10.16 Memorandum of Agreement of Exhibit 10.16 of the 1995
Lease, dated as of September 27, 1993, Registration Statement
between the Company and
433 Building Corporation.
10.17 Lease, dated as of July 20, 1994, Exhibit 10.17 of the 1995
between the Company and 1350 Registration Statement
Broadway Associates.
10.18 Lease, dated as of July 21, 1994, Exhibit 10.18 of the 1995
between the Company and 1350 Registration Statement
Broadway Associates.
10.19 Form of Registration Rights Exhibit 10.19 of the 1995
Agreement, dated as of Registration Statement
August 20, 1992,
between the Company and
the holders of Preferred Stock.
10.20 Form of Registration Rights Exhibit 10.20 of the 1995
Agreement, dated as of Registration Statement
August 20, 1992,
between the Company and the
holders of Common Stock.
10.21 Form of Senior Subordinated Notes Exhibit 10.21 of the 1995
of the Company due December 31, 1994. Registration Statement
10.22 Form of Non-Negotiable Convertible Exhibit 10.22 of the 1995
Promissory Notes of the Company Registration Statement
due May 31, 1995.
24
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Filed Incorporated By
Index Description Of Document Herewith Reference To:
- ----- ----------------------- -------- -------------
<S> <C> <C>
10.23 Employment Agreement, dated as of Exhibit 10.23 of the 1995
August 1, 1994, between the Registration Statement
Company and George Horowitz.
10.24 Employment Agreement, dated as of Exhibit 10.24 of the 1995
September 1, 1994, between the Registration Statement
Company and Donald J Horowitz.
10.25 Employment Agreement, dated as of Exhibit 10.25 of the 1995
August 1, 1994, between the Registration Statement
Company and Rita Cinque Kriss.
10.26 Employment Agreement, dated as of Exhibit 10.26 of the 1995
September 1, 1994, between the Registration Statement
Company and Rita Cinque Kriss.
10.27 Option Agreement, dated as of Exhibit 10.27 of the 1995
November 23, 1994, between Century Registration Statement
Business Credit Corporation
and the Company.
10.28 1993 Stock Option Plan of the Company. Exhibit 10.28 of the 1995
Registration Statement
10.29 1995 Non-Employee Director Stock Exhibit 10.29 of the 1996
Option Plan of the Company, Form 10-KSB for the year ended
adopted on October 6, 1995. December 31, 1995
10.30 Amendment to 1993 Stock Option Exhibit 10.30 of the 1996
Plan of the Company, adopted on Form 10-KSB for the year ended
October 6, 1995. December 31, 1995
10.31 Amendment dated October 3, 1995 Exhibit 10.31 of the 1996
of Trademark License Agreement Form 10-KSB for the year ended
dated May 20, 1994 between Exhibit 10.31 of the 1996
the Company and Converse Inc.
10.32 Amendment dated April 28, 1995 Exhibit 10.32 of the 1996
to amend Lease dated September, Form 10-KSB for the year ended
1993 between the Company and December 31, 1995
433 Building Corporation.
10.33 Amendment of Lease, made as Exhibit 10.33 of the 1996 Form
of November 1, 1995 between the 10-KSB for the year ended
Company and 1350 Broadway Associates. December 31, 1995
10.34 Consolidated Amendment Agreement Exhibit 10.1 of the Form
to Everlast License, dated as of 8-K filed on January 17, 1997
January 1, 1997 between Everlast
and the Company.
10.35 Consolidated Amendment Agreement Exhibit 10.2 of the Form
to Canada Everlast License, dated 8-K filed on January 17, 1997
as of January 1, 1997 between
Everlast and the Company.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Exhibit Filed Incorporated By
Index Description Of Document Herewith Reference To:
- ----- ----------------------- -------- -------------
<S> <C> <C>
10.36 Third Amendment to the Trademark Exhibit 10.36 of the 1997
License Agreement, dated as of Form 10-KSB for the year ended
January 7, 1997 between the Company December 31, 1996
and Converse Inc.
10.37 Fourth Amendment to the Exhibit 10.37 of the 1997 Form 10-KSB
Trademark License Agreement, for the year ended December 31, 1996
dated as of January 22, 1997 between
the Company and Converse Inc.
10.38 Employment Agreement, dated as of Exhibit 10.38 of the 1997
September 1, 1996 between the Form 10-KSB for the year ended
Company and Donald Horowitz December 31, 1996
10.39 Amendment to Employment Agreement, Exhibit 10.39 of the 1997
dated as of August 9, 1996 Form 10-KSB for the year ended
between the Company and George Horowitz December 31, 1996
10.40 Fifth Amendment to the Trademark X
License Agreement, dated as of
September 19, 1997 between
the Company and Converse Inc.
10.41 Sixth Amendment to the Trademark X
License Agreement, dated as of
April 15, 1998 between the Company
and Converse Inc.
10.42 Amendment to MTV License agreement Exhibit 10.1 of the Form 10-QSB
dated as of May 26, 1998 for the Quarter ended
between the Company and MTV Networks September 30, 1998
10.43 Amendment to MTV License agreement X
dated as of October 22, 1998
between the Company and MTV Networks
10.44 License Agreement, dated as of X
October 23, 1998 ("Men's License"),
between Everlast World's Boxing
Headquarters Corp. ("Everlast")
and the Company
10.45 License Agreement, dated as
of October 23, 1998 ("Men's
License-Canada"), between
Everlast World's Boxing
Headquarters Corp. ("Everlast") and the X
Company
27 Financial Data Schedule X
</TABLE>
(b) Reports On Form 8-K
-------------------
No Current Reports on Form 8-K were filed by the Company during the
last quarter of 1998.
26
<PAGE>
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ACTIVE APPAREL GROUP, INC.
By: /S/ George Horowitz
------------------------------------
George Horowitz
Chairman and Chief Executive Officer
Dated: March 29, 1999
In accordance with the Exchange Act this report has been signed
below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.
March 29, 1999 /S/ George Horowitz
--------------------------------
George Horowitz (Chairman; Chief
Executive Officer; Chief Financial
Officer; principal executive officer, and
principal accounting officer)
March 29, 1999
/S/ James Anderson
--------------------------------
James Anderson (Director)
March 29, 1999 /S/ Rita Cinque Kriss
--------------------------------
Rita Cinque Kriss
(Executive Vice President and Director)
March 29, 1999 /S/ Larry Kring
--------------------------------
Larry Kring (Director)
March 29, 1999 /S/ Edward Epstein
--------------------------------
Edward Epstein (Director)
March 29, 1999 /S/ Angelo Giusti
--------------------------------
Angelo Giusti (Director)
<PAGE>
ACTIVE APPAREL GROUP, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1998
<PAGE>
ITEM 7: FINANCIAL STATEMENTS
ACTIVE APPAREL GROUP, INC.
TABLE OF CONTENTS
PAGE
Independent Auditors' Report 1f
Balance Sheet 2f
Statements of Operations 3f
Statements of Changes in Stockholders' Equity 4f
Statements of Cash Flows 5f
Notes to Financial Statements 6f-15f
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Active Apparel Group, Inc.
New York, NY
We have audited the accompanying balance sheet of Active Apparel Group, Inc. as
of December 31, 1998, and the related statements of operations, changes in
stockholders' equity, and cash flows for the years ended December 31, 1998 and
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Active Apparel Group, Inc. as
of December 31, 1998 and the results of its operations and its cash flows for
the years ended December 31, 1998 and 1997 in conformity with generally accepted
accounting principles.
Berenson & Company LLP
New York, NY
January 29, 1999
<PAGE>
Page 2f
ACTIVE APPAREL GROUP, INC.
BALANCE SHEET
DECEMBER 31, 1998
A S S E T S
Current assets:
Cash and cash equivalents $ 192,870
Refundable income taxes 284,478
Due from factor 1,887,245
Inventory 3,026,241
Prepaid expenses and other current assets 354,822
Deferred tax asset 106,130
----------
Total current assets 5,851,786
Note receivable, officer 120,000
Property and equipment, net 360,233
Security deposits and other assets 270,343
----------
$6,602,362
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 822,119
Accrued expenses and other current liabilities 35,667
----------
Total liabilities, all current 857,786
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.002; 10,000,000 shares
authorized; 2,666,581 issued; 2,492,581
outstanding 5,333
Class A common stock, par value $.01; 100,000 shares
authorized; 100,000 shares issued and outstanding 1,000
Paid-in capital 6,136,341
Retained earnings 329,121
----------
6,471,795
Less treasury stock, at cost (174,000 common shares) 727,219
----------
5,744,576
$6,602,362
==========
The accompanying notes are an integral part of the financial statements.
<PAGE>
Page 3f
ACTIVE APPAREL GROUP, INC.
STATEMENTS OF OPERATIONS
Years ended
December 31,
-----------------------------
1 9 9 8 1 9 9 7
------------ -----------
Net sales $ 15,011,926 $16,687,271
Cost of goods sold 9,483,591 10,331,987
------------ -----------
Gross profit 5,528,335 6,355,284
------------ -----------
Operating expenses:
Selling and shipping 3,637,729 3,743,862
General and administrative 1,911,621 1,850,203
Financial expenses 413,713 417,159
------------ -----------
5,963,063 6,011,224
------------ -----------
Income (loss) before provision
for (recovery of ) income taxes (434,728) 344,060
Provision for (recovery of) income taxes (194,093) 132,575
------------ -----------
Net income (loss) $ (240,635) $ 211,485
============ ===========
Basic earnings per share $ (.09) $ .08
============ ===========
The accompanying notes are an integral part of the financial statements.
<PAGE>
ACTIVE APPAREL GROUP, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Class A
Common Stock common stock
------------ ------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance, January 1, 1997 2,447,737 $5,240 100,000 $1,000
Stock options exercised 21,638 43 - -
Net income, year ended December 31, 1997 - - - -
--------- ------ ------- -----
Balance, December 31, 1997 2,469,375 5,283 100,000 1,000
Stock options exercised 24,706 50 - -
Purchase of treasury stock (1,500) - - -
Net loss, year ended December 31, 1998 - - - -
--------- ------ ------- -----
2,492,581 $5,333 100,000 $1,000
========= ====== ======= ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
Page 4f
<TABLE>
<CAPTION>
Treasury Stock
Paid-in Retained --------------
Capital Earnings Shares Amount Total
------- -------- ------ ------ -----
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $ 6,054,035 $ 358,271 172,500 $ (725,625) $ 5,692,921
----------- ----------- ------- ----------- -----------
Stock options exercised 70,856 -- -- -- 70,899
Net income, year ended December 31, 1997 -- 211,485 -- -- 211,485
----------- ----------- ------- ----------- ----------
Balance, December 31, 1997 6,124,891 569,756 172,500 (725,625) 5,975,305
Stock options exercised 11,450 -- -- -- 11,500
Purchase of treasury stock -- -- 1,500 (1,594) (1,594)
Net loss, year ended December 31, 1998 -- (240,635) -- -- (240,635)
----------- ----------- ------- ----------- -----------
$ 6,136,341 $ 329,121 174,000 $ (727,219) $ 5,744,576
=========== =========== =========== =========== ===========
</TABLE>
<PAGE>
Page 5f
ACTIVE APPAREL GROUP, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended
December 31,
------------------------------
1 9 9 8 1 9 9 7
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (240,635) $ 211,485
Adjustments to reconcile net income (loss)
to net cash provided operating activities:
Depreciation 125,873 109,842
Changes in assets (increase) decrease:
Refundable income taxes (130,978) (153,500)
Due from factor (230,962) 1,239,990
Inventory 821,315 (1,089,856)
Prepaid expenses and other current assets (3,849) (206,706)
Deferred tax asset (18,077) (57,000)
Security deposits and other assets (9,002) 78,627
Changes in liabilities increase (decrease):
Accounts payable and accrued expenses and
other current liabilities (110,748) (83,824)
----------- -----------
Net cash provided by operating activities 202,937 49,058
----------- -----------
Cash flows used by investing activities:
Acquisition of property and equipment (79,414) (223,757)
----------- -----------
Cash flows from financing activities:
Purchase of treasury stock (1,594) --
Proceeds from stock options exercised 11,500 70,899
----------- -----------
Net cash provided by financing activities 9,906 70,899
----------- -----------
Net increase (decrease) in cash and cash equivalents 133,429 (103,800)
Cash and cash equivalents, beginning of year 59,441 163,241
----------- -----------
Cash and cash equivalents, end of year $ 192,870 $ 59,441
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 120,950 $ 171,318
Income taxes 88,584 653,761
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
Page 6f
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
1. Nature of business:
Active Apparel Group, Inc. (the "Company") is a distributor of licensed
women's and girl's sportswear, activewear and swimwear, as well as unisex
activewear and accessories, throughout the United States and Canada.
Commencing January 1, 1999, the Company will also be a distributor of
men's outerwear, activewear, swimwear and casualwear (note 6).
2. Significant accounting policies:
a. Inventory:
Inventory, consisting solely of finished goods, is stated at the lower
of cost (first-in, first-out basis) or market.
b. Property and equipment:
Property and equipment are stated at cost. Depreciation is computed by
the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the terms of the
respective leases or estimated life of the assets, whichever is
shorter. Expenditures for maintenance and repairs are charged to
operations as incurred.
c. Cash and cash equivalents:
The Company maintains its cash and cash equivalents accounts at
various commercial banks. The cash balances are insured by the Federal
Deposit Insurance Corporation (FDIC) up to $100,000, at each bank.
For purposes of the statements of cash flows, the Company considers
all short-term investments with an original maturity of three months
or less to be cash equivalents.
d. Fair value of financial instruments:
i. Cash and cash equivalents:
The carrying amount reflected in the balance sheet for cash and
cash equivalents, none of which are held for trading purposes,
approximates fair value due to the short maturity of these
instruments.
<PAGE>
Page 7f
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
2. Significant accounting policies: (Continued)
ii. Due from factor and accounts payable:
The carrying amounts of due from factor and accounts payable
approximates its fair values because of the short maturities of
these instruments.
e. Advertising expense:
The Company expenses advertising costs as they are incurred.
As of December 31, 1998 and 1997, the Company had incurred advertising
and promotional expenses of $657,505 and $905,918, respectively.
f. 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 year. Actual results could differ
from those estimates.
g. Accounting for stock based compensation:
The Company applies APB Opinion 25 to account for employee stock
option plans (note 8). Accordingly, no compensation cost has been
recognized in 1998 and 1997. Had compensation cost been determined on
the basis of FASB Statement 123, net income (loss) and earnings per
share would have been reduced as follows:
1 9 9 8 1 9 9 7
---------- ---------
Net income (loss):
As reported $(240,635) $211,485
========= ========
Pro forma $(297,068) $156,713
========= ========
Basic earnings per share:
As reported $(.09) $.08
===== ====
Pro forma $(.12) $.06
===== ====
<PAGE>
Page 8f
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
2. Significant accounting policies: (Continued)
g. Accounting for stock based compensation: (Continued)
The fair value of compensation was computed using an option-pricing
model which took into account the following factors as of the grant
date:
o the exercise price and expected life of the option
o the current price of the stock and its expected volatility
o expected dividends, if any
o the risk-free interest rate for the expected term of the option
using Treasury Note rates with a remaining term equal to the
expected life of the options
3. Due from factor:
Substantially all of the Company's accounts receivable are assigned
without recourse to a commercial factor. The amount due from the factor
represents net sales assigned in excess of advances received. The amount
due from the factor is net of a provision for future chargebacks of
$50,983 at December 31, 1998. Interest is charged at 1 1/2% above prime on
advances. This factoring arrangement is collateralized by the Company's
accounts receivable.
4. Property and equipment:
Furniture and fixtures $129,409
Machinery and equipment 525,943
Leasehold improvements 52,564
----------
707,916
Less accumulated depreciation
and amortization 347,683
$360,233
========
5. Note receivable, officer:
The Company has a promissory note dated December 23, 1996 with the
President and Chief Executive Officer in the amount of $120,000. The
unpaid principal bears interest at prime plus 1 1/2%. The note is due on
or before July 31, 2000.
<PAGE>
Page 9f
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
6. Commitments and contingencies:
a. License agreements:
Revenues are generated principally from the sale of licensed
merchandise. The Company is the licensee on six agreements which
provide for certain royalty payments and charges. Pursuant to four of
the agreements (with the same licensor), the Company is required to
pay a royalty of 6% of net sales, on licensed merchandise sold in the
U.S. and Canada, and to spend 2 1/2% of annual net sales on
advertising. The original two agreements with this licensor expired
December 31, 1996. Effective January 1, 1997, the agreements were
amended to reflect a new expiration date of December 31, 2002 with two
five year renewal options, subject to minimum sales requirements,
available to the Company. Effective January 1, 1999, the Company
entered into two new agreements with this licensor covering the period
January 1, 1999 to December 31, 2001 with two five-year renewal
options, subject to minimum sales requirements, available to the
Company. The agreements provide for minimum guaranteed payments
annually. Future minimum guaranteed payments are approximately as
follows:
United States Canada
---------------------- -------------------
Royalty Advertising Royalty Advertising
------- ----------- ------- -----------
Twelve months ending
December 31, 1999 $ 810,000 $338,000 $159,000 $ 66,000
2000 980,000 408,000 279,000 91,000
2001 1,149,000 479,000 279,000 116,000
2002 779,000 325,000 147,000 61,000
The amounts for Canada are presented in U.S. dollars assuming an
exchange rate of $.6634. The Company is required to maintain a standby
letter of credit equal to the annual minimum royalties due per the
licensing agreements. The standby letter of credit outstanding as of
December 31, 1998 is $555,000, based on minimum royalties due for
1998.
The fifth license agreement expires March 31, 1999. The Company does
not intend to renew this agreement. The license fee is 7% of net
sales. The Company is required to spend 2% of net sales on
advertising. The Company has prepaid a royalty of $8,750 covering the
remaining term of this agreement.
<PAGE>
Page 10f
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
6. Commitments and contingencies: (Continued)
a. License agreements: (Continued)
The sixth license agreement expires on June 30, 1999. The Company has
the option to renew the agreement for an additional two years if net
sales during the term of the agreement exceed $3.5 million. The
Company is required to pay a royalty of 8% of net sales on licensed
merchandise sold in the U.S. and Canada, and to spend 2% of annual net
sales on advertising. The agreement provides for minimum guaranteed
payments annually.
Royalty expense for the years ended December 31, 1998 and 1997 was
approximately $809,000 and $1,028,000, respectively.
b. Lease commitments:
The Company has four leases for office and showroom space, three of
which expire January 31, 2000 and the fourth expires April 30, 2000.
At December 31, 1998, future minimum rental payments required under
the noncancelable leases are approximately as follows:
Twelve months ending December 31, 1999 $180,000
2000 18,000
Rent expense for the years ended December 31, 1998 and 1997 was
approximately $197,000 and $201,000, respectively.
c. Employment agreements:
i. The Company has an employment agreement with its President and
Chief Executive Officer at an annual base salary of $265,000
through the term (as defined) of the agreement. The initial term
of the agreement expires on July 31, 2000 but continues
thereafter for additional one-year periods unless either the
President and Chief Executive Officer of the Company or the Board
of Directors gives the other ninety days prior written notice of
nonrenewal. At the discretion of the Board of Directors, the
Company may pay the President and Chief Executive Officer a bonus
on or before December 31, of any year during the term.
<PAGE>
Page 11f
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
6. Commitments and contingencies: (Continued)
i. (Continued)
The agreement also includes a noncompete clause for a period of
one year following its expiration or termination.
ii. The Company has an employment agreement with a Director of the
Company, whereby the Company has agreed to employ her as the
Executive Vice-President at an annual compensation of $140,000.
The agreement with the Executive Vice-President has restrictive
covenants similar to those of the President and Chief Executive
Officer.
7. Class A common stock:
The holder of the Class A common stock is entitled to five votes on all
matters upon which each holder of common stock is entitled to vote. After
the effective date of the initial public offering, the Board of Directors
issued 100,000 shares of the Class A common stock exclusively to the
President and Chief Executive Officer in order to permit him to maintain
approximately the same voting power after the initial public offering as
held prior to the offering. In exchange for the shares of Class A common
stock issued to him, he surrendered 112,500 shares of common stock.
8. Stock options:
The Company has three stock option plans; the stock option plan, the 1993
stock option plan and the 1995 non-employee director stock option plan.
Pursuant to the stock option plan, grants were awarded in 1993 to four
individuals for services performed regarding the private offering of
preferred stock. These options are exercisable at $.375 for a term of five
years through September 30, 1998. Under the 1993 stock option plan, a
maximum of 443,900 shares may be granted by the Company.
The option price of shares designated as nonqualified shall be determined
by the Board of Directors each year for the following year at 85% of fair
market value and in the case of incentive stock options will be no less
than the fair market value of the shares on the date of the grant.
<PAGE>
Page 12f
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
8. Stock options (Continued):
On October 6, 1995, the stockholders approved the 1995 non-employee
director stock option plan. The plan provides for automatic grants of
options to purchase 3,000 shares and thereafter yearly grants to purchase
3,000 shares of common stock to each active director serving on the Board
at the time of the grant who is not an officer or employee of the Company.
The Director Plan provides additional grants of options to non-employee
directors of 100 shares to the Chairman of a committee and 200 shares to
the Chairman and Secretary of the Board of Directors.
Effective August 22, 1997, the Company granted 23,199 nonqualified options
pursuant to the 1993 stock option plan to certain key employees. The
options were granted in exchange for the employees' cancelling the same
number of previously granted options which had a higher exercise price.
The options granted have an effective exercise price of $5.38 (one dollar
above the stock price on August 22, 1997).
The exercise price for options granted (except for the August, 1997 grant
noted above) is the fair market value of the shares of common stock on the
date of the grant. The term of each option is seven years from the date of
the grant.
<TABLE>
<CAPTION>
S H A R E S
1993 1995
Stock stock Non-employee
option option director stock Option exercise
1 9 9 8 Plan Plan Option Plan Total Prices
------------------- -------- ---------- --------------- --------- -----------------------
<S> <C> <C> <C> <C> <C>
Outstanding at January 1, 48,700 243,187 27,800 319,687 $ .375 - $14.75
Granted - 16,000 7,900 23,900 $ 2.094 - $3.590
Cancelled 28,700 58,502 - 87,202 $ .375 - $5.375
Exercised 20,000 4,706 - 24,706 $ .375 - $ .850
------ -------- ------ --------
Outstanding at December 31, - 195,979 35,700 231,679 $ .850 - $14.75
======= ======= ====== =======
Exercisable at December 31, - 165,647 16,567 182,214 $ .850 - $14.75
======= ======= ====== =======
</TABLE>
<PAGE>
Page 13f
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
8. Stock options: (Continued)
<TABLE>
<CAPTION>
S H A R E S
1993 1995
Stock stock Non-employee
option option director stock Option exercise
1 9 9 7 Plan Plan Option Plan Total Prices
------------------- -------- ---------- ---------------- --------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1, 54,700 271,705 21,700 348,105 $ .375 - $14.75
Granted - 26,399 12,200 38,599 $ 5.38 - $14.75
Cancelled - 43,829 1,550 45,379 $11.750 - $14.75
Exercised 6,000 11,088 4,550 21,638 $ .375 - $12.50
------- ------- ------ -------
Outstanding at December 31, 48,700 243,187 27,800 319,687 $ .375 - $14.75
====== ======= ====== =======
Exercisable at December 31, 48,700 196,657 7,304 252,661 $ .375 - $12.50
====== ======= ====== =======
</TABLE>
9. Income taxes:
For the year ended December 31, 1998 and 1997, the Company had a provision
for (recovery of) income taxes consisting of the following:
1 9 9 8 1 9 9 7
----------- --------
Current tax provision (recovery):
Federal $(123,815) $136,580
State and local (53,891) 46,723
Foreign 1,690 6,272
----------- ----------
(176,016) 189,575
Deferred tax benefit:
Federal (13,015) (42,544)
State and local (5,062) (14,456)
----------- ---------
Income tax provision (recovery) $(194,093) $132,575
========= ========
<PAGE>
Page 14f
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
9. Income taxes (Continued):
The difference between the statutory Federal income tax rate of 34% and
effective income tax rates of 45% and 39% for the years ended December 31,
1998 and 1997, respectively, is presented below as a percentage of pre-tax
income:
1998 1997
---- ----
Federal statutory rate 34% 34%
Increases (reductions) in taxes
resulting from:
State and local income tax (net
of federal tax benefit) 13 10
Foreign tax 1 2
Temporary differences (6) (11)
Permanent differences 3 4
--- ----
Effective rate 45% 39%
=== ==
10. Economic dependency:
For the years ended December 31, 1998 and 1997 four customers
accounted for approximately 48% and 47% of sales, respectively.
11. Geographic data:
Geographic information for net sales is as follows:
1998 1997
---- ----
U.S. $13,503,023 $15,452,830
Canada 1,328,819 1,234,441
Other foreign countries 180,584 -
----------- -----------
$15,011,926 $16,687,271
=========== ===========
12. Earnings per share:
Basic earnings per share amounts are computed based on the weighted
average number of shares actually outstanding during the year.
<PAGE>
Page 15f
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
12. Earnings per share (Continued):
Diluted earnings per share is not presented for December 31, 1998 because
it is anti-dilutive. Diluted earnings per share is not presented for
December 31, 1997 because it is not materially dilutive.
<TABLE>
<CAPTION>
1 9 9 8 1 9 9 7
----------- ------------
<S> <C> <C>
Basic earnings per share:
Net income (loss) available for common stock $ (240,635) $ 211,485
========== ===========
Weighted average common stock outstanding 2,592,155 2,564,106
========== ===========
Basic earnings per share $(.09) $.08
===== ====
</TABLE>
13. Financial expenses:
Included in financial expenses is interest expense of $120,950 and
$171,318 for the years ended December 31, 1998 and 1997, respectively.
FIFTH AMENDMENT
---------------
THIS FIFTH AMENDMENT, made as of this 19th day of September, 1997 by and
between CONVERSE INC., a corporation organized and existing under the laws of
the State of Delaware, having its principal place of business at One Fordham
Road, North Reading, Massachusetts 01864 (hereinafter called "Converse" or
"Licensor");
AND
ACTIVE APPAREL GROUP, INC., a corporation organized and existing under the laws
of the State of New York, having its principal place of business at 1350
Broadway, Suite 2300, New York, New York, 10018 (hereinafter called "Licensee").
WITNESSETH
WHEREAS, the Licensor and the Licensee entered into a Trademark License
Agreement dated May 20, 1994, as amended on October 3, 1995, June 1, 1996,
January 7, 1997 and January 22, 1997, with respect to the license of certain of
the Licensor's trademarks in the United States (the "Agreement"); and
WHEREAS, Converse and Licensee desire to further amend the Agreement.
NOW, THEREFORE, the parties agree as follows:
1. Paragraph 5.1(b) shall be revised to read as follows:
"(b) The Licensee will pay to Licensor a guaranteed minimum annual
license fee commencing May 20, 1994, regardless of its Net Sales of Finished
Articles sold under this Agreement for each Accounting Year commencing with the
year 1994 (the "Guaranteed Minimum Fee"), in the amount set forth herein:
ACCOUNTING YEAR GUARANTEED MINIMUM LICENSE FEE
--------------- ------------------------------
1 May 20, 1994 to September 30, 1996 $280,000.00
2 October 1, 1996 to September 30, 1997 $280,000.00
3 October 1, 1997 to September 30, 1998 $210,000.00"
2. As amdned hereby, the Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Fifth Amendment as of
the date first above written.
WITNESS: CONVERSE INC.
/s/ illegible /s/ illegible
- ------------------------------------ By---------------------------------
WITNESS: ACTIVE APPAREL GROUP, INC.
/s/ illegible /s/ Gordon Horowitz, President
- ------------------------------------ By---------------------------------
SIXTH AMENDMENT
---------------
THIS SIXTH AMENDMENT, made as of this 15th day of April, 1998 by and
between CONVERSE INC., a corporation organized and existing under the laws of
the State of Delaware, having its principal place of business at One Fordham
Road, North Reading, Massachusetts 01864 (hereinafter called "Converse" or
"Licensor");
AND
ACTIVE APPAREL GROUP, INC., a corporation organized and existing under the laws
of the State of New York, having its principal place of business at 1350
Broadway, Suite 2300, New York, New York, 10018 (hereinafter called "Licensee").
WITNESSETH
WHEREAS, the Licensor and the Licensee entered into a Trademark License
Agreement dated May 20, 1994, as amended on October 3, 1995, June 1, 1996,
January 7, 1997, January 22, 1997 and September 19, 1997, with respect to the
license of certain of the Licensor's trademarks in the United States (the
"Agreement"); and
WHEREAS, Converse and Licensee desire to further amend the Agreement.
NOW, THEREFORE, the parties agree as follows:
1. Accounting Year 3 shall be revised to commence October 1, 1997 and end
March 31, 1999.
2. Paragraph 5.1(b) shall be revised to read as follows:
"(b) The Licensee will pay to Licensor a guaranteed minimum annual
license fee commencing May 20, 1994, regardless of its Net Sales of Finished
Articles sold under this Agreement for each Accounting Year commencing with the
year 1994 (the "Guaranteed Minimum Fee"), in the amount set forth herein:
ACCOUNTING YEAR GUARANTEED MINIMUM LICENSE FEE
--------------- ------------------------------
1 May 20, 1994 to September 30, 1996 $280,000.00
2 October 1, 1996 to September 30, 1997 $280,000.00
3 October 1, 1997 to March 31, 1999 $ 52,500.00"
3. As amdned hereby, the Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Fifth Amendment as of
the date first above written.
WITNESS: CONVERSE INC.
/s/ illegible /s/ illegible
- ------------------------------------ By---------------------------------
WITNESS: ACTIVE APPAREL GROUP, INC.
/s/ illegible /s/ Gordon Horowitz, President
- ------------------------------------ By---------------------------------
[MTV Letterhead]
Active Apparel Group, Inc. May 26, 1998
1350 Broadway, Suite 2300
New York, NY 10018
Attn: Edward R. Epstein, Esq.
Reference is made to the agreement dated March 28, 1996, and as amended as of
October 21, 1997, with respect to "MTV's THE GRIND" (the "Licensed Property")
between MTV Networks, a division of Viacom International Inc., ("MTVN") and
Active Apparel Group, Inc. ("Licensee") (the "Agreement"). Capitalized terms
used without definition herein shall have the respective definitions set forth
in the Agreement.
Effective as of the date hereof, MTVN and Licensee hereby agree that the Basic
Provisions of the Agreement shall be amended as follows:
1) With respect to the LICENSE TERM of the Agreement, the Agreement shall be
extended until June 30, 1999. The LICENSE TERM shall be deleted and replaced by
the following:
April 30, 1996 through June 30, 1999
3) With respect to GUARANTEED MINIMUM ROYALTY, the installment due on January
1, 1999, shall be deleted and the GUARANTEED MINIMUM ROYALTY shall be reduced to
the sum of US$183,750.00. The GUARANTEED MINIMUM ROYALTY payment scheduled shall
be deleted and replaced by the following:
The Guaranteed Minimum Royalth for the Licensee Term is US$183,750.00
and shall be payable as follows:
$37,500.00 upon Licnesee's execution hereof ("Advance")
$16,250.00 on or before October 1, 1996,
$16,250.00 on or before January 1, 1997,
$16,250.00 on or before April 1, 1997,
$16,250.00 on or before July 1, 1997,
$16,250.00 on or before October 1, 1997,
$48,750.00 on or before October 1, 1998, and
$16,250.00 on or before December 15, 1998.
<PAGE>
Except as otherwise herein amended, the Agreement is hereby ratified and
confirmed in all respects.
Please indicate your acceptance of the foregoing by signing in the space
provided below.
Very truly yours,
MTV NETWORKS, A DIVISION OF
VIACOM INTERNATIONAL INC.
By:/s/ illegible
--------------------------------
Title: VP
----------------------------
ACCEPTED AND AGREED TO:
ACTIVE APPAREL GROUP, INC.
By:/s/ George Horowitz
--------------------------------
Title: President/CEO
----------------------------
[MTV Letterhead]
Active Apparel Group, Inc. October 22, 1998
1350 Broadway, Suite 2300
New York, NY 10018
Attn: Edward R. Epstein, Esq.
Reference is made to the agreement dated March 28, 1996, and as amended as of
October 21, 1997, and May 26, 1998, with respect to "MTV's THE GRIND" (the
"Licensed Property") between MTV Networks, a division of Viacom International
Inc., ("MTVN") and Active Apparel Group, Inc. ("Licensee") (the "Agreement").
Capitalized terms used without definition herein shall have the respective
definitions set forth in the Agreement.
Effective as of the date hereof, MTVN and Licensee hereby agree that the Basic
Provisions of the Agreement shall be amended as follows:
1) With respect to the GUARANTEED MINIMUM ROYALTY payment schedule shall be
deleted and replacedby the following:
The Guaranteed Minimum Royalth for the Licensee Term is US$183,750.00
and shall be payable as follows:
$37,500.00 upon Licnesee's execution hereof ("Advance")
$16,250.00 on or before October 1, 1996,
$16,250.00 on or before January 1, 1997,
$16,250.00 on or before April 1, 1997,
$16,250.00 on or before July 1, 1997,
$16,250.00 on or before October 1, 1997,
$48,750.00 on or before November 1, 1998,
$16,250.00 on or before January 1, 1999, and
$16,250.00 on or before April, 1999.
Except as otherwise herein amended, the Agreement is hereby ratified and
confirmed in all respects.
<PAGE>
Please indicate your acceptance of the foregoing by signing in the space
provided below.
Very truly yours,
MTV NETWORKS, A DIVISION OF
VIACOM INTERNATIONAL INC.
By:/s/ illegible
--------------------------------
Title: VP
----------------------------
ACCEPTED AND AGREED TO:
ACTIVE APPAREL GROUP, INC.
By:/s/ George Horowitz
--------------------------------
Title: President/CEO
----------------------------
LICENSE AGREEMENT
between
EVERLAST WORLD'S BOXING HEADQUARTERS CORP.
and
ACTIVE APPAREL GROUP, INC.
LICENSEE
(Men's Apparel)
(United States)
Lesser & Harrison
Two West 45th Street
New York, New York 10036
<PAGE>
TABLE OF CONTENTS
-----------------
Section Title Page
------------------
1. Definitions 2
2. Grant of Rights 2
3. Term 5
4. Royalties 6
5. Payments 10
6. Books and Records 11
7. Manufacture of Licensed Products
Quality Control, Approvals 12
8. Samples for Everlast 14
9. Sales Promotion 14
10. Advertising 16
11. Default 17
12. Rights After Termination 18
13. Inventory of Licensed Products
On Termination 19
14. Trademarks 20
15. Copyright Ownership 25
16. Indemnity 25
17. Notices 27
18. Waiver 27
19. Bankruptcy 27
20. Assignment 28
21. Arbitration 28
22. Significance of Headings 29
23. Entire Agreement 30
24. Governing Law 30
25. No Joint Venture 30
26. Execution and Delivery Required 30
27. Force Majeure 31
28. No Representations 31
Licensed Marks Exhibit A
<PAGE>
TABLE OF CONTENTS
Paragraph Description Page
1. Definitions.................................. 2
1.1 Licensed Products................... 2
1.2 Contract Territory.................. 2
1.3 Net Sales........................... 2
2. Grant of Rights.............................. 2
2.1 Scope of Rights..................... 2
2.2 Export from the Territory........... 3
2.3 Sale of Licensed Products by
Everlast ........................... 3
2.4 Resolution of Conflicts............. 4
2.5 Extraterritorial Licenses........... 4
2.6 Vitamins and Nutritional
Supplements....................... 5
3. Term......................................... 6
3.1 Contract Period..................... 6
3.2 Options to Renew.................... 6
4. Royalties.................................... 7
4.1 Royalty Payments.................... 7
4.2 Initial Minimum Royalty............. 9
4.3 Minimums during Option Periods...... 9
4.4 Credits Against Royalty............. 9
4.5 Sales Requirement................... 10
4.6 Security Deposit.................... 10
4.7 Accountant's Statements............. 11
5. Payments..................................... 12
5.1 Interest............................ 12
5.2 Payments Medium..................... 12
5.3 Withholding Taxes................... 12
6. Books and Records............................ 12
7. Manufacture of Licensed Products;
Quality Control, Approvals................... 13
7.1 Licensor Approval of Designs,
Products, Packaging; Delivery
of Approval Samples................. 13
7.2 Inspection of production
Facilities.......................... 14
7.3 Use of Licensed marks; Approval
of All Printed Matter............... 14
8. Samples for Everlast......................... 15
9. Sales Promotion.............................. 15
9.1 Responsibility for Promotion........ 15
<PAGE>
9.2 Sales Representatives and
Trade Shows.......................... 16
9.3 Licensee's Marketing Programs........ 16
9.4 Catalogs and Price Lists............. 16
9.5 Sale of Licensed products to
Everlast............................. 17
10. Advertising................................... 17
10.1 Minimum Advertising Expenditures..... 17
10.2 Verification of Advertising
Expenditures......................... 18
10.3 Approval of Advertising.............. 18
11. Defaults...................................... 19
11.1 Licensee Defaults in Payments........ 19
11.2 Other Defaults....................... 19
11.3 Remedies Cumulative.................. 19
12. Rights After Termination...................... 20
13. Inventory of Licensed Products
on Termination................................ 20
13.1 Disposal of Inventory................ 20
13.2 Payment of Royalties................. 21
13.3 Everlast's Right to Purchase
Inventory............................ 21
14. Trademarks.................................... 21
14.1 Ownership of Licensed Marks.......... 21
14.2 Registration and Protection
of Licensed Marks.................... 22
14.3 Reservation of All Rights to
Licensed Marks by Everlast........... 22
14.4 Notification of Third Party
Infringement......................... 23
14.5 Legal Actions........................ 23
14.6 Defense of Adverse Claims............ 24
14.7 Licensee Cooperation................. 25
15. Copyright Ownership........................... 26
16. Indemnity..................................... 26
16.1 Licensee's Indemnity................. 26
16.2 Product Liability Insurance.......... 27
16.3 Primary and Umbrella Coverage........ 27
16.4 Insurance Adjustment................. 27
17. Notices....................................... 28
18. Waiver........................................ 29
19. Bankruptcy.................................... 29
20. Assignment.................................... 29
21. Arbitration................................... 30
21.1 American Arbitration Association..... 30
21.2 Arbitration in New York.............. 31
<PAGE>
21.3 Enforcement in New York.............. 31
21.4 Service of Notice.................... 31
22. Significance of Headings...................... 31
23. Entire Agreement.............................. 31
24. Governing Law................................. 31
25. No Joint Venture.............................. 32
26. Execution and Delivery Required............... 32
27. Force Majeure................................. 32
28. No Representations............................ 33
Licensed Marks................................ Exhibit A
<PAGE>
LICENSE AGREEMENT
THIS AGREEMENT made and entered into as of the 23rd day of October,
1998 by and between Everlast World's Boxing Headquarters, Corp., a New York
corporation of 750 East 132nd Street, Bronx, NY 10454 ("Everlast"), and Active
Apparel Group, Inc. a Delaware corporation having its principal place of
business at 1350 Broadway, Suite 2300, New York, New York ("Licensee").
W I T N E S S E T H
WHEREAS, Everlast is the sole owner of and has the right to license the
trademarks shown and described on Exhibit A hereto (hereinafter referred to as
"Licensed Marks"); and
WHEREAS, Licensee desires to obtain the right to use the Licensed Marks
in conjunction with the advertisement, promotion and sale of various articles to
be manufactured by Licensee hereunder; and
WHEREAS, Everlast is willing to grant such rights to Licensee.
NOW, THEREFORE, for and in consideration of the premises and
of the mutual promises and conditions herein contained, the parties
do hereby agree as follows:
<PAGE>
1. DEFINITIONS.
-----------
As used herein, the following terms shall be defined as set forth
below:
1.1 "Licensed Products" shall mean men's (a) outerwear, (b)
activewear/swimwear, (c) and casualwear, excluding rainwear, jeanswear, and
leather apparel, with or without genuine or simulated fur.
1.2 "Contract Territory" shall mean the United States, its territories
and possessions, including Puerto Rico.
1.3 "Net Sales" shall mean the gross sales price of all Licensed
Products shipped and invoiced by Licensee pursuant to this Agreement, less trade
discounts, shipping charges, returns and allowances, and sales taxes (or any
use, value-added or similar taxes, but in no event to include any income or
franchise taxes) included therein whether or not separately stated on the
invoice.
2. GRANT OF RIGHTS.
---------------
2.1 Everlast grants to Licensee the exclusive right and license to use
the Licensed Marks only within the Contract Territory during the Contract Period
as defined in Paragraph 3.1 below in connection with the manufacture,
advertisement, promotion, packaging, labeling, sale and distribution of Licensed
Products. Everlast represents that it has the right to grant said right and
license and further, that there is no previous license of similar import
presently in existence covering the Contract Territory. It is understood that
Everlast may use the Licensed Marks on the products other than the Licensed
Products within the Contract
2
<PAGE>
Territory and may also use the Licensed Marks outside the Contract Territory on
the same classification of products as the Licensed Products.
2.2 Licensee shall not export Licensed Products from the Contract
Territory or sell Licensed Products to any distributor which it knows intends to
export Licensed Products from the Contract Territory. In addition, if Licensee
learns that any of its customers or any sub-contractor has exported Licensed
Products from the Contract Territory, it shall cease selling Licensed Products
to such customer, or buying from such sub-contractor, unless such
customer/sub-contractor agrees not to export Licensed Products thereafter.
Nothing herein shall be deemed to preclude Licensee from having Licensed
Products manufactured for Licensee by subsidiaries, affiliates or
sub-contractors located outside of the Contract Territory for distribution
solely within the Contract Territory.
2.3 Notwithstanding the provisions of subparagraph 2.1 of this
Agreement, Everlast may sell and deliver to customers in the Contract Territory
any Licensed Products which are at the time listed or portrayed in any Everlast
Product Catalog or Everlast flyers. Everlast may fulfill any orders for any
products, including Licensed Products received from any customers within the
Contract Territory, provided that the Licensed Products specified in such orders
are listed or portrayed in any such Everlast Product Catalog or flyer. Everlast
shall not sell any such Licensed Products for less than the lowest price and
terms offered by
3
<PAGE>
Licensee to any person, firm or corporation, as reflected in Licensee's
quarterly reports.
2.4 Licensee hereby recognizes and acknowledges that Everlast is a
party to license agreements with other licensees for the manufacture and
distribution of various products in numerous categories, product classifications
and territories of the world and that evolving changes make it difficult to
define with absolute specificity the various products covered by different
licenses granted by Everlast. Everlast and Licensee agree to use their best
efforts to avoid any conflicts between Licensed Products and products covered by
other licenses granted by Everlast. In the event of conflict between this
Agreement and other license agreements to which Everlast is or becomes a party,
Everlast reserves the right to resolve such conflicts in its absolute
discretion, taking into account the intent of this Agreement with respect to the
license granted to Licensee for Licensed Products and the protection of the
Everlast trademarks. Everlast's decisions in resolving any conflicts shall be
final and binding.
2.5 In the performance of its obligations under this Agreement, and the
design, formulation, marketing, advertising, labeling, sale and distribution of
the Licensed Products, the Licensee shall at all times observe and satisfy
completely the requirements of all statutes, laws, ordinances, regulations and
the like of every national, state, provincial, or local government or
governmental agency having or claiming jurisdiction.
4
<PAGE>
3. TERM.
----
3.1 The initial term ("Contract Period") of this Agreement shall be
three (3) years months commencing January 1, 1999 and continuing through
December 31, 2001. The term "Contract Year" shall refer initially to the period
commencing January 1, 1999 and continuing through December 31, 1999, and
thereafter to each twelve (12) month period commencing on each January 1st
during the term of this Agreement, whether the same shall occur during the
Contract Period or during any Option Period as defined in Paragraph 3.2 below.
The term "Contract Year Quarter" shall refer initially to the period commencing
January 1, 1999 and continuing through March 31, 1999 and thereafter to each
successive calendar three month period during each Contract Year commencing
April 1, 1999 and thereafter.
3.2 Provided Licensee is not in default hereunder, Licensee shall have
the option to renew this Agreement for two (2) successive terms of five (5)
years each commencing on January 1, 2002 and January 1, 2007 respectively (each
an "Option Period") upon giving to Everlast written notice as provided in
Paragraph 17 of its intention to do so at least one hundred twenty (120) days
prior to the expiration of the then existing term hereof. The exercise of each
of said options shall be effective only if: (i) this Agreement shall be in full
force and effect at the time of exercise by Licensee of any of said options;
(ii) Licensee shall not be in default in the performance of any of its
obligations under this Agreement at the time of exercise of any of said
5
<PAGE>
options; and (iii) during the twelve month period ending September 30, 2001 in
the Third Contract Year Licensee's Net Sales of Licensed Products in the
Contract Territory shall amount to at least $6,500,000 for the exercise of the
first option granted herein and such Net Sales for the twelve month period
ending on September 30th in the last Contract Year of each Option Period after
the Contract Period shall amount to at least the annual guaranteed minimum
royalty for such Contract Year under subparagraph 4.3 divided by .06 with
respect to the exercise of the option for each successive Option Period. During
each Option Year the annual guaranteed minimum royalty shall be calculated and
paid in accordance with the provisions of subparagraph 4.3.
4. ROYALTIES.
---------
4.1 Within thirty (30) days following the conclusion of each Contract
Year Quarter, Licensee shall deliver to Everlast, in the same manner as required
for notices under Paragraph 17, an itemized statement setting forth the total
Net Sales of Licensed Products during said Contract Year Quarter and, at the
same time, shall pay to Everlast a royalty at the rate of six (6%) percent of
Net Sales of all Licensed Products. The itemized statement referred to above
shall contain two (2) separate tabulations: (i) a listing by style, number of
the total units and Net Sales thereof for the Contract Year Quarter for which
the statement is given; and (ii) a listing by customer showing the customer's
name, address and Net Sales for the Contract Year Quarter for which the
statement is submitted.
4.2 Licensee shall pay to Everlast a guaranteed minimum
6
<PAGE>
royalty for each Contract Year as follows:
Annual Guaranteed
Contract Year Minimum Royalty Minimum Sales
------------- --------------- -------------
First $180,000 $3,000,000
Second 300,000 5,000,000
Third 420,000 7,000,000
The annual guaranteed minimum royalty shall be paid in twelve (12) equal
installments on the first day of each month during each Contract Year, so that
the first payment of annual guaranteed minimum royalty amounting to $15,000
shall be paid on January 1, 1999.
4.3 If Licensee exercises the options granted to it in subparagraph 3.2
of this Agreement, the annual guaranteed minimum royalty for each Contract Year
of each Option Period shall be the greater of (i) seventy-five (75%) percent of
the actual royalties payable for the prior Contract Year (whether or not falling
within the Contract Period or an Option Period) or (ii) an amount equal to the
annual guaranteed minimum royalty for the prior Contract Year plus ten (10%)
percent thereof. The annual guaranteed minimum royalty shall be paid in twelve
(12) equal installments on the first day of each month during each Contract Year
of each Option Period.
4.4 The foregoing payments shall constitute a non-refundable annual
guaranteed minimum royalty for the then Contract Year and shall not be credited
towards royalties for succeeding Contract Years. Notwithstanding the foregoing,
during any Contract Year the total amounts actually paid during such Contract
Year to date (both
7
<PAGE>
guaranteed and overages) may be deducted from all installments of the annual
minimum guaranteed royalty due to date, and if the difference is less than the
annual guaranteed minimum royalty payment then becoming due, the amount payable
towards the annual guaranteed minimum royalty then due shall be such difference.
4.5 In the event that the total royalties payable to Everlast based
upon Net Sales for any Contract Year commencing on or after January 1, 2000
shall be less than the annual guaranteed minimum royalty payable under
subparagraph 4.2 or 4.3 above for such Contract Year, Everlast shall have the
right to terminate this Agreement by notice to Licensee given within one hundred
twenty (120) days from the end of such Contract Year. If Licensee fails to
submit its report of Net Sales for any Contract Quarter when due, Everlast may
terminate this Agreement within sixty (60) days after the end of such Contract
Quarter as though Licensee had failed to achieve the required royalty volume for
the current Contract Year, except that Licensee shall have the opportunity to
cure such default within thirty (30) days after receipt of notice from Everlast
that such Report of Net Sales has not been received.
4.6. In the event that the royalties actually earned with respect to
Net Sales of (a) men's outerwear, (b) men's activewear/swimwear or (c) men's
casualwear, each considered as a separate category, shall be equal to less than,
ten (10%) percent of the annual guaranteed minimum royalty as hereinbefore
provided during the second Contract Year, or twenty (20%) thereof during any
subsequent Contract Year, then Everlast may elect to terminate this
8
<PAGE>
License Agreement as to such category only, by written notice given no later
than ninety (90) days after Everlast has actually received from the Licensee the
statement referred to in subparagraph 4.1 for the final Contract Quarter of such
Contract Year. If Everlast shall make such an election, then (a) for each
subsequent Contract Year the guaranteed annual minimum royalty provided in
subparagraphs 4.2 and 4.3 as the case may be shall be reduced by twenty (20%)
percent thereof, and (b) the Licensee's inventory of Licensed Products in the
category which has been so terminated shall be subject to the provisions of
paragraph 13 hereof.
4.7 Simultaneously with the execution of this Agreement the Licensee
shall pay to Everlast with respect to the First Contract Year, and on or before
the first day of each subsequent Contract Year, an amount equal to three (3)
times the monthly annual guaranteed royalty to be paid pursuant to subparagraphs
4.2 and 4.3 of this Paragraph during the relevant Contract Year. The amount to
be paid upon the execution of this agreement shall be $45,000. Such amount shall
be held as security for the faithful performance of the obligations on the part
of the Licensee to be performed under this Agreement. The amount of the security
then held by Everlast and not otherwise previously applied will be carried over
to the next Contract Year and shall serve to reduce the payment required to be
made upon the first day of the next Contract Year pursuant to this subparagraph
4.6. Upon the expiration or other termination of this Agreement, the remaining
balance held by Everlast pursuant to this subparagraph 4.6 shall be repaid
without
9
<PAGE>
interest to the Licensee, provided that the Licensee has fully performed each of
the obligations on its part to be performed hereunder.
4.8 Within ninety (90) days after the close of each Contract Year,
Licensee will deliver to Everlast a financial statement of the Licensee prepared
by a Certified Public Accountant, containing a balance sheet as at the end of
the fiscal year of the Licensee ending during such Contract Year, an income
statement for such fiscal year and a source and application of funds analysis
for such fiscal year, together with such explanatory notes as may be
appropriate, all prepared in accordance with Generally Accepted Accounting
Principles consistently applied. Failure to provide such financial statement on
a timely basis shall be a material breach of this Agreement.
5. PAYMENTS.
--------
5.1 Past due payments hereunder shall bear interest at the rate of one
and one-half (1 1/2%) percent per month commencing fifteen (15) days after the
same shall fall due.
5.2 All payments by Licensee to Everlast under this Agreement shall be
made in United States Dollars by checks drawn on a United States bank to the
order of Everlast and delivered to Everlast in the manner set forth in Paragraph
17 hereof or (b) wire transfer to Chemical Bank, Bay Plaza Branch, 2100 Bartow
Avenue, Bronx, NY 10475 ABA no. 021000128, for the account of Everlast, a.c no.
616-00-1886, or to such other account as Everlast may designate from time to
time.
10
<PAGE>
5.3 Any withholding tax levied by any governmental agency in connection
with the payment of sales royalties or annual guaranteed minimum royalty to be
paid to Everlast under this Agreement shall be borne by Everlast, but only if
actually paid by Licensee to the appropriate taxing authority. Licensee shall
deduct any required withholding tax from the amount of such payments, and shall
send to Everlast without delay an appropriate certificate showing the payment of
such withholding tax. Failure to make such payment as due and to send such
certificate shall require immediate repayment to Everlast of any amounts so
deducted.
6. BOOKS AND RECORDS.
-----------------
Licensee agrees that it will keep accurate and complete records and
books of account showing all Licensed Products shipped by it and the price
thereof in accordance with Generally Accepted Accounting Principles. Everlast or
its independent Certified Public Accountant shall have the right at all
reasonable times during normal business hours and on reasonable notice to
Licensee (prior to the expiration of two (2) years after the termination of the
Contract Year) to inspect and make copies of the books and records of Licensee
insofar as they relate to the computation of royalties to be paid to Everlast
hereunder and the shipment of Licensed Products pursuant to this Agreement. If,
upon any such inspection, it shall appear that the royalty previously reported
for any Contract Year Quarter has been understated by five (5%) percent or more,
the expense of any such audit shall be borne by the Licensee.
11
<PAGE>
7. MANUFACTURE OF LICENSED PRODUCTS; QUALITY CONTROL, APPROVALS.
------------------------------------------------------------
7.1 Licensee recognizes that Everlast has a reputation for high quality
and that Licensee must, therefore, maintain such quality on all Licensed
Products. Licensee agrees that Everlast shall have the right to disapprove: (i)
the quality, style and design of all Licensed Products (including packaging);
(ii) the presentation or style of the Licensed Marks used in connection
therewith; and (iii) production samples of all Licensed Products (all such
samples being required to be submitted to Everlast, freight prepaid, prior to
sale). In connection with the foregoing, Licensee shall submit to Everlast
"story boards", fabric samples and sketches for initial approval and, when
prepared, prototype samples and not less than one (1) production sample of each
style of each of the Licensed Products (as provided in Paragraph 8). Any items
submitted for approval hereunder at Everlast's address set forth herein shall be
deemed to have been approved if same are not disapproved by notice to Licensee
in writing within ten (10) business days after receipt thereof by Everlast.
Everlast agrees that any item submitted will not be unreasonably disapproved
and, if it is disapproved, that Licensee will be advised in writing of the
specific grounds therefor.
7.2 Everlast shall have the right to inspect at all reasonable times
the production facilities of Licensee or its subcontractors and to receive from
the Licensee production samples of Licensed Products without charge and make
tests thereof so as to reasonably
12
<PAGE>
assure Everlast that the nature and quality of Licensed Products are in
accordance with the requirements of this Agreement. Any items submitted for
approval under this Article 7 at Everlast's address set forth herein shall be
deemed to have been approved if same are not disapproved by notice to Licensee
in writing within twenty working (20) days after receipt thereof by Everlast.
Everlast agrees that any item submitted will not be unreasonably disapproved
and, if it is disapproved, that Licensee will be advised in writing of the
specific grounds therefor. Licensee further agrees to: (i) sell Licensed
Products bearing the Licensed Marks only to retail stores of the type generally
offering products bearing the "Everlast" label in the U.S.A., or products of
comparable quality, and (ii) remove the Licensed Marks from "irregulars" to the
extent practicable or, where not practicable, to affix with a stamp the word
"Irregular" on the label.
7.3 Licensee will cause to appear on the Licensed Products' containers
and labels and the like, and on all advertising or promotional material used in
connection therewith, such legends, markings and notices as Everlast may
reasonably request, including without limitation the legend "LICENSED TRADEMARK
OF EVERLAST WORLD'S BOXING CORP." Such legend shall also appear on any other
printed matter in which the Everlast name or logo is used. Printed matter shall
include but not be limited to stationery, letterheads, invoices, envelopes,
credit memo, shipping labels and business cards. Before use, Licensee shall
submit copies thereof to Everlast for its approval. Everlast shall have the
absolute right
13
<PAGE>
to edit, alter or amend such material and the form and manner in which the
Licensed Marks are displayed.
8. SAMPLES FOR EVERLAST.
--------------------
During the Contract Period, Licensee shall supply to Everlast, at no
charge, freight prepaid two samples representative of each item of Licensed
Products for Everlast's use in connection with Everlast's museum collection.
Each sample shall be tagged with the style number and wholesale selling price.
During the first Contract Year Quarter of each Contract Year Licensee shall
furnish to Everlast without charge two production samples of each style of
Licensed Product then offered for sale by the Licensee. Each sample shall be
tagged with the style number and wholesale selling price.
9. SALES PROMOTION.
---------------
9.1 Licensee agrees that it will, during the Contract Period: (i) make
diligent effort to promote, develop, manufacture, advertise, sell and ship the
Licensed Products; (ii) continuously and diligently fill all accepted purchase
orders for Licensed Products (Licensee not being required to fill such orders
received from customers lacking financial capacity therefor); and (iii) procure
and maintain facilities and trained personnel sufficient and adequate to
accomplish the foregoing. A cessation of the above with respect to any category
listed in the definition of Licensed Products for a continuous period of ninety
(90) days shall be grounds for immediate termination of such category at any
time thereafter at Everlast's option.
14
<PAGE>
9.2 In fulfilling its obligations hereunder, Licensee shall engage such
sales representatives and other personnel and shall display the Licensed
Products at merchandise markets and trade shows (which can take place at
Licensee's showroom) as will maximize sales of Licensed Products.
9.3 Licensee agrees to provide Everlast with written descriptions of
its marketing programs in such detail as may be reasonably requested from time
to time by Everlast prior to their implementation and as they may be modified
from time to time. Licensee shall not proceed with its initial marketing
programs without the prior written approval of Everlast. Licensee shall not
proceed with any modification of its marketing programs if Everlast notifies
Licensee in writing that Everlast disapproves of such modification. The
marketing plan or any modifications thereof shall be deemed to have been
approved if same are not disapproved by notice to Licensee in writing within
twenty (20) working days after receipt thereof by Everlast. Everlast agrees that
any plan submitted will not be unreasonably disapproved and, if it is
disapproved, that licensee will be advised in writing of the specific grounds
therefor.
9.4 On February 1st and August 1st of each Contract Year Licensee shall
promptly submit to Everlast all current written or printed materials utilized
with respect to the Licensed Products showing an illustration of each Licensed
Product being sold by Licensee, the style number and a sales description thereof
together with Licensee's wholesale selling price therefor.
15
<PAGE>
9.5 Licensee agrees to sell to Everlast such quantities of Licensed
Products as Everlast may order for its own account for resale or distribution by
Everlast for promotional purposes only. The price of such Licensed Products
shall be no greater than the lowest price offered by Licensee to any person,
firm or corporation, less twenty-five (25%) percent of the selling price of such
Licensed Products with sales terms net 10 EOM. Such purchases shall not be
subject to royalty or advertising requirements. Everlast will not sell Licensed
Products below the lowest price offered by Licensee to any person, firm or
corporation as reflected in Licensee's quarterly reports.
10. ADVERTISING.
-----------
10.1 Licensee agrees to expend on advertising in each Contract Year, an
amount equal to not less than two and one-half (2.5%) percent of Net Sales. Such
advertising expenditures shall be exclusive of advertising production costs,
tags, packaging, point of sale displays, compensation to Licensee's employees,
or travel expenses. The minimum advertising expenditure for this Agreement shall
be not less than $75,000 during the First Contract Year, $125,000 during the
Second Contract Year, and $175,000 during the Third Contract Year. During each
Option Year such amount shall be equal to 41.67% of the annual guaranteed
minimum royalty payable pursuant to subparagraph 4.3. Together with each
quarterly statement submitted pursuant to Paragraph 4, Licensee shall submit to
Everlast a detailed schedule of such expenditures made during the said quarter
together with copies of invoices, tear sheets, and
16
<PAGE>
all other substantiating documents.
10.2 Licensee shall certify the amount actually expended for the above
advertising by a written statement certified to be correct by the President,
Chief Operating Officer, or Chief Financial Officer of the Licensee. If the
required amount has not been spent, the unspent balance shall be spent within
ninety (90) days after the close of such Contract Year and shall be deemed to be
an advertising expenditure for such Contract Year. This expenditure shall in no
way affect or be credited to the required amount to be spent for any subsequent
Contract Year. If the required expenditures shall not have been spent by the end
of such ninety (90) day period, the deficiency shall be paid to Everlast as
additional royalties hereunder.
10.3 Licensee agrees that no use of the Licensed Marks or of any item
used in connection therewith will be made unless and until the same has been
approved by Everlast. Everlast agrees that any material, advertising or
otherwise, submitted for approval hereunder at Everlast's address set forth
herein shall be deemed to have been approved if the same is not disapproved by
notice to Licensee in writing given within ten (10) working days after receipt
thereof by Everlast. Everlast agrees that any item submitted will not be
unreasonably disapproved, and, if it is disapproved, that Licensee will be
advised in writing of the specific grounds therefor.
11. DEFAULT.
-------
11.1 If Licensee at any time shall be in default of payment
17
<PAGE>
of sales royalties or any guaranteed minimum royalty payments and such default
is not cured within ten (10) days after receipt of written notice from Everlast
specifying such default and Licensee has failed to cure the default within ten
(10) days after receipt of such notice, Everlast may terminate this Agreement,
notice of which shall specify a termination date not sooner than ten (10) days
after the date such default should have been cured.
11.2 If Licensee at any time shall fail to perform any other material
undertaking or obligation hereunder and if such default is not cured within
thirty (30) days after Everlast shall have given Licensee written notice
specifying such default (provided, however, that in the event such default
cannot reasonably be cured within such thirty (30) days, and Licensee commences
to cure the default and continues diligently therewith until the default has
been cured, Licensee shall not be deemed during such period to be in default)
then in such event, Everlast may terminate this Agreement, notice of which shall
specify a termination date not earlier than thirty (30) days after the date of
the notice of termination.
11.3 The termination rights set forth in subparagraphs 11.1 and 11.2
shall not constitute the exclusive remedy of Everlast hereunder. Everlast may
resort to such other cumulative remedies as it would have been entitled to if
this Paragraph had been omitted from this Agreement, including the right to seek
damages.
12. RIGHTS AFTER TERMINATION.
------------------------
From and after the termination of this Agreement, all of the
rights of Licensee to the use of the Licensed Marks, except as
18
<PAGE>
hereinafter expressly provided in the Paragraph next following, shall cease
absolutely and Licensee shall not thereafter advertise, promote, distribute or
sell any item whatsoever bearing any Licensed Mark. As used in this Agreement,
"termination" shall include "expiration" of the Agreement. Before the
termination of this Agreement, licenses for the Licensed Marks may be granted by
Everlast to others in connection with the advertisement, promotion and sale of
the Licensed Products, the shipment of which is made after the termination of
this Agreement.
13. INVENTORY OF LICENSED PRODUCTS ON TERMINATION.
---------------------------------------------
13.1 Within ten (10) days after the notice of termination, Licensee
shall submit to Everlast a written statement (as of the termination date)
indicating:
(i) the quantity and description of each model or style number of
Licensed Products in inventory or on hand;
(ii) the quantity and description of each model or style number of
merchandise on order, incoming or in the process of being manufactured;
(iii) the quantity and description of all open orders from customers
together with the name of each such customer(s); and
(iv) within ten (10) days after the termination date, Licensee shall
meet with a representative of Everlast to work out a full payment schedule of
royalties payable to the date of termination which is acceptable to Everlast.
Only after all the terms and conditions of this subparagraph 13.1
have been satisfied will Everlast grant to Licensee the right
19
<PAGE>
to sell such inventory of Licensed Products within one-hundred and twenty (120)
days after the termination date.
13.2 Such sales are to be reported by Licensee in the same manner as
set forth in subparagraph 4 within ten (10) days after the end of each calendar
month and such statement shall be accompanied by a check in payment of royalties
for such sales.
13.3 In addition to Licensee's obligations in the event of the
expiration of this Agreement or the termination of this Agreement prior to the
expiration date of the Contract Period or any Option Period Everlast may, at its
option, purchase from Licensee any part of such inventory on hand on such
termination date for a purchase price of sixty (60%) percent of Licensee's
lowest actual selling price (excluding "seconds" or "irregulars"), and the
amount due to Licensee on any such purchase by Everlast may be applied against
any sum then owing to Everlast by the Licensee. Such purchase shall be packed
and shipped pursuant to Everlast's instructions, F.O.B. shipping point within
the United States.
14. TRADEMARKS.
----------
14.1 Licensee recognizes the proprietary interest of Everlast in the
names "Everlast" and "Choice of Champions" and in the logo style in which the
names are registered as a trademark in the United States and elsewhere. Licensee
will not make any use thereof nor authorize anyone else to do so within or
outside the Contract Territory except as specifically permitted by this
Agreement. Everlast represents that it is the sole owner of the Licensed Marks
and has full power and authority to grant the
20
<PAGE>
license covered by this Agreement.
14.2 Should Everlast, at any time or times during the Contract Period,
desire to register an additional trademark or trademarks (exclusive of product
names or designations utilized by Licensee) which would cover Licensed Products
and/or to register Licensee as a user thereof, Licensee shall without charge
execute any and all documents which Everlast reasonably believes to be necessary
or desirable for registration or protection of such trademark or trademarks in
the name of Everlast. Upon registration of any such trademark: (i) Everlast
shall grant to Licensee a license for the use of such registered trademark on or
in connection with the advertisement, promotion and sale of Licensed Products,
which license shall be coextensive and coterminous with the rights granted
hereunder with respect thereto and shall require no increase in the payments set
forth herein; and (ii) Licensee shall thereafter include on subsequent printing
or manufacture of materials bearing the Licensed Marks the appropriate trademark
notice. In the event that Everlast and the Licensee shall agree to the expansion
of the definition of Licensed Products pursuant to this Agreement, the Licensee
shall bear Everlast's costs of registering the Licensed Marks in all categories
which cover all products added to the definition of Licensed Products.
14.3 All use of any such trademark or trademarks by Licensee on or in
connection with Licensed Products produced hereunder shall inure to the benefit
of Everlast. All rights to such trademark or trademarks other than those
specifically granted hereunder are
21
<PAGE>
reserved by Everlast for its own use and benefit. Upon the expiration or other
termination of this Agreement for any reason whatsoever, all rights in the
Licensed Marks shall automatically revert to Everlast and Licensee shall not
thereafter use the Licensed Marks or any similar mark or name except as
specifically permitted by Paragraph 13. Licensee shall at any time whether
during or after the term of this Agreement execute any documents reasonably
required by Everlast to confirm Everlast's ownership of all such rights.
14.4 In the event that either party to this Agreement shall learn of
any use by any person of a trademark or trademarks confusingly similar to the
Licensed Marks in the Contract Territory, such party shall promptly notify the
other in writing of such use. In such event, if requested by Everlast, Licensee
shall join with Everlast, at Everlast's expense, in such action as Everlast in
its reasonable discretion may deem advisable for the protection of its rights in
and to the Licensed Marks.
14.5 In the event that any person other than Licensee or a customer
shall use the Licensed Mark in a manner which infringes upon the exclusive
license hereby granted, Everlast shall, following written notice thereof from
Licensee, initiate any action which it deems appropriate to restrain such
infringement with respect to the Licensed Products. In such event, if requested
by Everlast, Licensee shall join with Everlast, at Everlast's expense in such
action as Everlast in its reasonable discretion may deem advisable for the
protection of the respective rights of the
22
<PAGE>
Licensed Marks. If Everlast decides to take no action to protect the Licensed
Marks in a particular case of a use thereof by a third party in any part of the
Contract Territory and disapproving of any such action by Licensee, Everlast
shall so advise Licensee in writing. If there should be a disagreement between
the parties as to the reasonableness of such decision by Everlast to withhold
its approval of any action by Licensee, then no such action shall be taken by
Licensee, and Everlast shall compensate Licensee for losses actually sustained
as a result of the failure to take any such action if it is held that the
withholding of approval by Everlast was in fact unreasonable or, in the
alternative, Licensee shall have the right to terminate this Agreement on thirty
(30) days notice to Everlast without any liability on the part of Everlast.
Neither party shall, without the consent of the other, voluntarily settle any
claim or suit of the kind referred to in this Article 14 in a manner which might
in any way adversely affect or be in derogation of any rights of the other under
this Agreement. In the event of disagreement between the parties as to any such
settlement, the party thus denied the right to make such settlement shall have
the right, within thirty (30) days after receipt of notice of refusal to consent
by the other party, to terminate this Agreement and upon any such termination,
all rights and obligations of both parties hereunder shall terminate except for
any monies due from either party to the other.
14.6 Everlast shall, at its own cost and expense, defend and indemnify
Licensee, any third party claiming under it, and any
23
<PAGE>
direct or indirect customer of Licensee, from and against any and all claims,
loss, damage, expense, liability, suits, actions, proceedings and judgments and
any cost whatsoever including reasonable attorneys fees arising, sustained,
rendered or incurred, by reason of use of the Licensed Marks, or the exercise of
any other rights under this Agreement, whether based upon a claim of
infringement or any facts which constitute a breach or violation of any of
Everlast's representations in this Agreement, and whether such claims, suits,
actions or proceedings, are rightfully or wrongfully made, brought or filed;
provided that Licensee shall promptly advise Everlast of any such claim, suit,
action or proceeding and afford Everlast the opportunity to defend any such
claim or action through counsel of its own choosing and at its own expense. If
requested by Everlast, Licensee shall join with Everlast, at Everlast's expense,
in such defense. Licensee shall execute any papers necessary or desirable in
connection with any such suit and shall testify in any such suit whenever
required to do so by Everlast, all, however, at the expense of Everlast with
respect to travel expenses and similar out-of-pocket disbursements.
14.7 The Licensee agrees to execute, acknowledge and deliver, without
cost to Everlast, such additional documents as may be necessary in the opinion
of counsel for Everlast under the laws of each jurisdiction within the Contract
Territory to protect the Trademark rights of Everlast including, but not limited
to, Registered User Agreements.
24
<PAGE>
15. COPYRIGHT OWNERSHIP.
-------------------
Any and all copyrights which may exist, or come into being with respect
to any and all designs of or with the Licensed Marks for any of the Licensed
Products, labels, hang tags, advertising or promotional materials used pursuant
to this Agreement shall be the property of Everlast. However, notwithstanding
the foregoing exclusive designs and the like (and their respective copyrights)
created by and for Licensee which do not include or refer to the Licensed Marks,
are and shall remain the property of Licensee. Licensee shall place appropriate
copyright notices thereon. Licensee shall furnish Everlast with copies of all
copyright filings.
16. INDEMNITY.
----------
16.1 Licensee shall, at its own cost and expense, defend, indemnify and
save harmless Everlast from and against; (i) any and all claims, loss, damage,
expense, liability, suits, actions, proceedings and judgments, and any costs
whatsoever, including reasonable attorneys' fees, arising out of or in any way
connected with or sustained, rendered or incurred by reason of any claim or
action for property damage, personal injury, death or otherwise, involving or
related to alleged defects in Licensed Products or based on Licensee's
performance under this Agreement or that of Licensee's customers and whether
such claims, suits, actions or proceedings are rightfully or wrongfully made,
brought or filed; and (ii) the production, manufacture, sale, distribution,
promotion or advertisement of any Licensed Products by or for Licensee, its
25
<PAGE>
agents or employees in violation of any applicable law or regulation or the
rights of third parties, provided in each case that Licensee shall be given
prompt notice of any such action or claim. Licensee shall not voluntarily settle
any such claim or action in a manner which might in any way adversely affect or
be in derogation of any rights of Everlast in and to any Licensed Marks or
Licensed Products or which may constitute any adverse admission in respect
thereof.
16.2 Licensee agrees to provide, at its own expense, Product Liability
Insurance written by insurance carriers reasonably satisfactory to Licensee, in
amounts no less than two and one-half ($2,500,000) million dollars and within
thirty (30) days from the date hereof, Licensee shall submit to Everlast fully
paid policies or certificates of insurance naming Everlast as an insured party,
and requiring that the insurer shall not terminate or materially modify such
insurance without written notice to Everlast at least twenty (20) days in
advance thereof. Such insurance (which may be included as part of Licensee's
blanket insurance policy covering other divisions of Licensee) shall remain in
full force and effect during the entire Contract Period and any renewal or
extension thereof.
16.3 The insurance coverage required by Paragraph 16.2 may be provided
by one or more Product Liability Insurance Policies, provided that all primary
and umbrella coverage shall aggregate not less than two and one half million
($2,500,000) Dollars.
26
<PAGE>
17. NOTICES.
-------
All reports, approvals, requests, demands and notices required or
permitted by this Agreement to be given to a party shall be in writing and shall
be deemed to be duly given on the date: (i) personally delivered; ii) mailed by
certified or registered mail, return receipt requested; (iii) delivered by
Express Mail or courier service (such as Federal Express) which requires the
addressee to acknowledge, in writing, the receipt thereof; or (iv) sent by
telefax and confirmed by hard copy mailed by certified or registered mail,
return receipt requested or acknowledged by return telefax to the party
concerned at its address set forth on Page 1 above (or at such other address as
the party may specify by notice to the other). Copies of all notices to Everlast
shall be sent to Lesser & Harrison, Two West 45th Street, New York, New York
10036.
18. WAIVER.
------
The failure of either party at any time or times to demand strict
performance by the other of any of the terms, covenants or conditions set forth
herein shall not be construed as a continuing waiver or relinquishment thereof
and each may at any time demand strict and complete performance by the other of
said terms, covenants and conditions.
19. BANKRUPTCY.
----------
If Licensee is adjudicated bankrupt or insolvent, or if its business
shall be placed in the hands of a Receiver, Assignee or Trustee, whether by
voluntary act or otherwise or if a committee (formal or informal) of creditors
shall be formed for the purpose
27
<PAGE>
of arranging settlement or payment of Licensee's debts and such condition
(except where voluntary) is not terminated within ninety (90) days, Everlast may
terminate this Agreement by written notice as provided in Paragraph 11.
20. ASSIGNMENT.
----------
This Agreement shall bind and inure to the benefit of Everlast, and the
successors and assigns of Everlast. The rights granted to Licensee hereunder
shall be exclusive to it and shall not, without the prior written consent of
Everlast, be transferred, sub-licensed, or assigned by it to any other person,
firm or corporation. Notwithstanding any such assignment, the Licensee shall
remain fully liable hereunder, and shall be responsible for the payment of all
royalties, advertising, and any other amounts which shall become due from the
assignee. In addition, the provisions hereof shall be deemed to preclude
assignment by operation of law and shall be deemed to restrict the
hypothecation, pledge, granting of a security interest or in any manner taking
steps or permitting the integrity of this Agreement between the parties to be
affected in any manner or form. Any assignment, transfer, or sublicense of any
of the rights granted to the Licensee hereunder which does not conform to the
requirements of this Agreement shall be null and void.
21. ARBITRATION.
-----------
21.1 Except as specifically set forth in this Agreement, any and all
disputes, controversies and claims arising out of or relating to this Agreement
or concerning the respective rights or
28
<PAGE>
obligations hereunder of the parties hereto, shall be settled and determined by
arbitration in New York, New York, before the American Arbitration Association
in accordance with and pursuant to its then obtaining Rules for Commercial
Arbitration. The arbitrators shall have the power to award specific performance
or injunctive relief and reasonable attorneys' fees and expenses to any party in
such arbitration. However, in any arbitration proceeding arising under this
Agreement, the arbitrators shall not have the power to change, modify or alter
any express condition, term or provision of this Agreement, and to that extent
the scope of their authority is limited. The arbitration award shall be final
and binding upon the parties.
21.2 The parties shall have such right to interim relief in any Court
sitting in the City of New York as may be provided by law.
21.3 Any action to enforce an arbitration award or for interim relief
hereunder may be brought only in a Court of general original jurisdiction
sitting in the City of New York and the parties do hereby submit to the
jurisdiction of each such Court.
21.4 The service of any notice, process, motion or other document in
connection with any arbitration under this Agreement or for interim relief or
the enforcement of any arbitration award hereunder may be effectuated in the
manner in which notices are to be given to a party pursuant to Paragraph 17
above.
22. SIGNIFICANCE OF HEADINGS.
------------------------
Paragraph headings contained herein are solely for the purpose
29
<PAGE>
of aiding in speedy location of subject matter and are not in any sense to be
given weight in the construction of this Agreement. Accordingly, in case of any
question with respect to the construction of this Agreement, it is to be
construed as though such Paragraph headings had been omitted.
23. ENTIRE AGREEMENT.
----------------
This writing constitutes the entire agreement between the parties
hereto and may not be changed or modified except by a writing signed by the
party or parties to be charged thereby.
24. GOVERNING LAW.
-------------
This Agreement shall be governed and construed according to the laws of
the State of New York, and Licensee shall in all cases be deemed to have agreed
to submit to the jurisdiction thereof and to venue therein.
25. NO JOINT VENTURE.
----------------
This Agreement does not constitute and shall not be construed as
constituting a partnership, joint venture or agency between Everlast and
Licensee. Neither party shall have any right to obligate or bind the other party
in any manner whatsoever, and nothing herein contained shall give, or is
intended to give, any rights of any kind to any third party.
26. EXECUTION AND DELIVERY REQUIRED.
-------------------------------
This instrument shall not be considered to be an agreement or contract
nor shall it create any obligation whatsoever on the part of Everlast and
Licensee, or either of them, unless and until it has been signed on behalf of
both Everlast and Licensee and
30
<PAGE>
delivery has been made of a fully signed original.
27. FORCE MAJEURE.
-------------
Neither party shall be in default hereunder by reason of its delay in
the performance of or failure to perform any of its obligations under this
Agreement if such delay or failure is caused by strikes, act of God or the
public enemy, riots, incendiaries, interference by civil or military
authorities, compliance with governmental law, rules and regulations, delays in
transit or delivery or any default beyond its control or without its fault or
negligence.
28. NO REPRESENTATIONS.
------------------
The Licensee represents and acknowledges that neither Everlast nor any
of its representatives have made any warranties or representations of any nature
whatsoever to induce the Licensee to enter into this License Agreement, except
as expressly set forth herein. All prior discussions, understandings and
agreements between the parties have been merged into this License, it being
intended that this shall constitute the complete agreement between the parties.
This License Agreement may be modified or amended only by a writing duly
executed by both parties hereto.
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of
the day and year first above written.
EVERLAST WORLD'S BOXING HEADQUARTERS CORP.,
By: /s/ Ben Nadorf, President
--------------------------------------------
Ben Nadorf, President
ACTIVE APPAREL GROUP, INC.
Licensee
By: /s/ George Q. Horowitz, President
--------------------------------------------
George Q. Horowitz, President
31
LICENSE AGREEMENT
between
EVERLAST WORLD'S BOXING HEADQUARTERS CORP.
and
ACTIVE APPAREL GROUP, INC.
LICENSEE
(Men's Apparel)
(Canada)
Lesser & Harrison
Two West 45th Street
New York, New York 10036
<PAGE>
TABLE OF CONTENTS
-----------------
Section Title Page
1. Definitions 1
2. Grant of Rights 2
3. Term 4
4. Royalties 6
5. Payments 10
6. Books and Records 11
7. Manufacture of Licensed Products
Quality Control, Approvals 12
8. Samples for Everlast 14
9. Sales Promotion 14
10. Advertising 16
11. Default 18
12. Rights After Termination 19
13. Inventory of Licensed Products
On Termination 19
14. Trademarks 21
15. Copyright Ownership 25
16. Indemnity 26
17. Notices 27
18. Waiver 28
19. Bankruptcy 28
20. Assignment 28
21. Arbitration 29
22. Significance of Headings 30
23. Entire Agreement 30
24. Governing Law 31
25. No Joint Venture 31
26. Execution and Delivery Required 31
27. Force Majeure 31
28. No Representations 32
Licensed Marks Exhibit A
<PAGE>
TABLE OF CONTENTS
Paragraph Description Page
1. Definitions..............................
1.1 Licensed Products...................
1.2 Contract Territory..................
1.3 Net Sales...........................
2. Grant of Rights..........................
2.1 Scope of Rights.....................
2.2 Export from the Territory...........
2.3 Sale of Licensed Products by
Everlast ...........................
2.4 Resolution of Conflicts.............
3. Term.....................................
3.1 Contract Period.....................
3.2 Options to Renew....................
4. Royalties................................
4.1 Royalty Payments....................
4.2 Initial Minimum Royalty.............
4.3 Minimums during Option Periods......
4.4 Credits Against Royalty.............
4.5 Sales Requirement...................
4.6 Security Deposit....................
4.7 Accountant's Statements.............
5. Payments.................................
5.1 Interest............................
5.2 Payments Medium.....................
5.3 Withholding Taxes...................
5.4 Conversion of Foreign Currency......
6. Books and Records........................
7. Manufacture of Licensed Products;
Quality Control, Approvals................
7.1 Licensor Approval of Designs,
Products, Packaging; Delivery
of Approval Samples..................
7.2 Inspection of production
Facilities...........................
7.3 Use of Licensed marks; Approval
of All Printed Matter................
8. Samples for Everlast......................
<PAGE>
9. Sales Promotion...........................
9.1 Responsibility for Promotion.........
9.2 Sales Representatives and
Trade Shows..........................
9.3 Licensee's Marketing Programs........
9.4 Catalogs and Price Lists.............
9.5 Sale of Licensed products to
Everlast.............................
10. Advertising...............................
10.1 Minimum Advertising Expenditures.....
10.2 Verification of Advertising
Expenditures.........................
10.3 Approval of Advertising..............
11. Defaults..................................
11.1 Licensee Defaults in Payments........
11.2 Other Defaults.......................
11.3 Remedies Cumulative..................
12. Rights After Termination
13. Inventory of Licensed Products
on Termination............................
13.1 Disposal of Inventory................
13.2 Payment of Royalties.................
13.3 Everlast's Right to Purchase
Inventory............................
14. Trademarks................................
14.1 Ownership of Licensed Marks..........
14.2 Registration and Protection
of Licensed Marks....................
14.3 Reservation of All Rights to
Licensed Marks by Everlast...........
14.4 Notification of Third Party
Infringement.........................
14.5 Legal Actions........................
14.6 Defense of Adverse Claims............
14.7 Licensee Cooperation.................
15. Copyright Ownership.......................
16. Indemnity.................................
16.1 Licensee's Indemnity.................
16.2 Product Liability Insurance.........
16.3 Primary and Umbrella Coverage........
17. Notices...................................
18. Waiver....................................
<PAGE>
19. Bankruptcy................................
20. Assignment................................
21. Arbitration...............................
21.1 American Arbitration Association.
21.2 Arbitration in New York..........
21.3 Enforcement in New York..........
21.4 Service of Notice................
22. Significance of Headings..................
23. Entire Agreement..........................
24. Governing Law.............................
25. No Joint Venture..........................
26. Execution and Delivery Required...........
27. Force Majeure.............................
28. No Representations........................
Licensed Marks.......................Exhibit A
<PAGE>
LICENSE AGREEMENT
THIS AGREEMENT made and entered into as of the 23rd day of October,
1998 by and between Everlast World's Boxing Headquarters Corp., a New York
corporation of 750 East 132nd Street, Bronx, New York 10454 ("Everlast"), and
Active Apparel Group, Inc., a Delaware corporation having its principal place of
business at 1350 Broadway, Suite 2300, New York, New York ("Licensee").
W I T N E S S E T H
WHEREAS, Everlast is the sole owner of or has the right to license the
trademarks shown and described on Exhibit A hereto (hereinafter referred to as
"Licensed Marks"); and
WHEREAS, Licensee desires to obtain the right to use the Licensed Marks
in conjunction with the advertisement, promotion and sale of various articles to
be manufactured by Licensee hereunder; and
WHEREAS, Everlast is willing to grant such rights to Licensee.
NOW, THEREFORE, for and in consideration of the premises and
of the mutual promises and conditions herein contained, the parties
do hereby agree as follows:
1. DEFINITIONS.
As used herein, the following terms shall be defined as set forth
below:
<PAGE>
1.1 "Licensed Products" shall mean mens (a) outerwear, (b)
activewear/swimwear, and (c) casualwear, excluding rainwear, jeanswear and
leather apparel, with or without genuine or simulated fur.
1.2 "Contract Territory" shall mean Canada, its Provinces and
possessions.
1.3 "Net Sales" shall mean the gross sales price of all Licensed
Products shipped and invoiced by Licensee pursuant to this Agreement, less trade
discounts, shipping charges, returns and allowances, and sales taxes (or any
use, value-added or similar taxes, but in no event to include any income or
franchise taxes) included therein whether or not separately stated on the
invoice.
2. GRANT OF RIGHTS.
---------------
2.1 Everlast grants to Licensee the exclusive right and license to use
the Licensed Marks only within the Contract Territory during the Contract Period
as defined in Paragraph 3.1 below in connection with the manufacture,
advertisement, promotion, packaging, labeling, sale and distribution of Licensed
Products. Everlast represents that it has the right to grant said right and
license and further there is no previous license of similar import presently in
existence covering the Contract Territory. It is understood that Everlast may
use the Licensed Marks on products other than the Licensed Products within the
Contract Territory and may also use the Licensed Marks outside the Contract
Territory on the same classification of products as the Licensed Products.
2
<PAGE>
2.2 Licensee shall not export Licensed Products from the Contract
Territory or sell Licensed Products to any distributor which it knows intends to
export Licensed Products from the Contract Territory. In addition, if Licensee
learns that any of its customers or any sub-contractor has exported Licensed
Products from the Contract Territory, it shall cease selling Licensed Products
to such customer, or buying from such sub-contractor, unless such
customer/sub-contractor agrees not to export Licensed Products thereafter.
Nothing herein shall be deemed to preclude Licensee from having Licensed
Products manufactured for Licensee by subsidiaries, affiliates or
sub-contractors located outside of the Contract Territory for distribution
solely within the Contract Territory.
2.3 Notwithstanding the provisions of subparagraph 2.1 of this
Agreement, Everlast may sell and deliver to customers in the Contract Territory
any Licensed Products from time to time listed or portrayed in any Everlast
Product Catalog or Everlast flyers. Everlast may fulfill any orders for any such
products received from any customers within the Contract Territory, provided
that the Licensed Products specified in such orders are listed or portrayed in
any such Everlast Product Catalog or flyer.
2.4 Licensee hereby recognizes and acknowledges that Everlast is a
party to license agreements with other licensees for the manufacture and
distribution of various products in numerous categories, product classifications
and territories of the world
3
<PAGE>
and that evolving changes make it difficult to define with absolute specificity
the various products covered by different licenses granted by Everlast. Everlast
and Licensee agree to use their best efforts to avoid any conflicts between
Licensed Products and products covered by other licenses granted by Everlast. In
the event of conflict between this Agreement and other license agreements to
which Everlast is or becomes a party, Everlast reserves the right to resolve
such conflicts in its absolute discretion, taking into account the intent of
this Agreement with respect to the license granted to Licensee for Licensed
Products and the protection of the Everlast trademarks. Everlast's decisions in
resolving any conflicts shall be final and binding.
2.5 In the performance of its obligations under this Agreement, and the
design, formulation, marketing, advertising, labeling, sale and distribution of
the Licensed Products, the Licensee shall at all times observe and satisfy
completely the requirements of all statutes, laws, ordinances, regulations and
the like of every national, state, provincial, or local governmental or
governmental agency having or claiming jurisdiction.
3. TERM.
----
3.1 The initial term ("Contract Period") of this Agreement shall be
three (3) years and commencing January 1, 1999 and continuing through December
31, 2001. The term "Contract Year" shall refer initially to the period
commencing January 1, 1999 and continuing through December 31, 1999 and
thereafter to each twelve
4
<PAGE>
(12) month period commencing on each January 1st during the term of this
Agreement, whether the same shall occur during the Contract Period or during any
Option Period as defined in Paragraph 3.2 below. The term "Contract Year
Quarter" shall refer initially to the period commencing January 1, 1999 and
continuing through March 31, 1999 and thereafter to each successive three month
period during each Contract Year commencing April 1, 1999 and thereafter.
3.2 Provided Licensee is not in default hereunder, Licensee shall have
the option to renew this Agreement for two (2) successive additional terms of
five (5) years each commencing on January 1, 2002 and January 1, 2007
respectively (each an "Option Period") upon giving to Everlast written notice as
provided in Paragraph 17 of its intention to do so at least one hundred twenty
(120) days prior to the expiration of the then existing term hereof. The
exercise of each of said options shall be effective only if: (i) this Agreement
shall be in full force and effect at the time of exercise by Licensee of any of
said options; (ii) Licensee shall not be in default in the performance of any of
its obligations under this Agreement at the time of exercise of any of said
options; and (iii) during the twelve month period ending September 30, 2001 in
the Third Contract Year Licensee's Net Sales of Licensed Products in the
Contract Territory shall amount to at least $3,300,000 for the exercise of the
first option granted herein and such Net Sales for the twelve month period
ending on September 30th in the last Contract Year of each Option Period after
5
<PAGE>
the Contract Period shall amount to at least the annual guaranteed minimum
royalty for such Contract Year under subparagraph 4.2 or subparagraph 4.3,
whichever shall be applicable, divided by .06 with respect to the exercise of
the option for each successive Option Period. During each Option Year the annual
guaranteed minimum royalty shall be calculated and paid in accordance with the
provisions of subparagraphs 4.2 and 4.3.
4. ROYALTIES.
---------
4.1 Within thirty (30) days following the conclusion of each Contract
Year Quarter, Licensee shall deliver to Everlast, in the same manner as required
for notices under Paragraph 17, an itemized statement setting forth the total
Net Sales of Licensed Products during said Contract Year Quarter and, at the
same time, shall pay to Everlast a royalty at the rate of six (6%) percent of
Net Sales of all Licensed Products. The itemized statement referred to above
shall contain two (2) separate tabulations for each Country in the Contract
Territory: (i) a listing by style number of the total units and Net Sales
thereof for the Contract Year Quarter for which the statement is given; and (ii)
a listing by customer showing the customer's name, address and Net Sales for the
Contract Year Quarter for which the statement is submitted.
4.2 Licensee shall pay to Everlast a guaranteed minimum royalty for
each Contract Year as follows:
6
<PAGE>
Annual Guaranteed Annual Minimum
Contract Year Minimum Royalty Net Sales
------------- ----------------- --------------
First $72,000 $1,200,000
Second 144,000 2,400,000
Third 216,000 3.600,000
The guaranteed minimum royalty shall be paid in twelve (12) equal installments
on the first day of each month during each Contract Year, so that, the first
payment of annual guaranteed minimum royalty amounting to $6,000 shall be paid
on January 1, 1999.
4.3 If Licensee exercises the options granted to it in subparagraph 3.2
of this Agreement, the annual guaranteed minimum royalty for each Contract Year
of each Option Period shall be the greater of (i) seventy-five (75%) percent of
the actual royalties payable for the prior Contract Year (whether or not falling
within the Contract Period or an Option Period) or (ii) an amount equal to the
annual guaranteed minimum royalty for the prior Contract Year plus ten (10%)
percent thereof. The annual guaranteed minimum royalty shall be paid in twelve
(12) equal installments on the first day of each month during each Contract Year
of each Option Period.
4.4 The foregoing payments shall constitute a non-refundable annual
guaranteed minimum royalty for the then Contract Year and shall not be credited
towards royalties for succeeding Contract Years. Notwithstanding the foregoing,
during any Contract Year the total amounts actually paid during such Contract
Year to date (both
7
<PAGE>
guaranteed and overages) may be deducted from all installments of the annual
minimum guaranteed royalty due to date, and if the difference is less than the
annual guaranteed minimum royalty payment then becoming due, the amount payable
towards the annual guaranteed minimum royalty then due shall be such difference.
4.5 In the event that the total royalties payable to Everlast based
upon Net Sales for any Contract Year commencing on or after January 1, 2000
shall be less than the annual guaranteed minimum royalty payable under
subparagraph 4.2 or 4.3 above for such Contract Year, Everlast shall have the
right to terminate this Agreement by notice to Licensee given within one hundred
twenty (120) days from the end of such Contract Year. If Licensee fails to
submit its report of Net Sales for any Contract Quarter when due, Everlast may
terminate this Agreement within sixty (60) days after the end of such Contract
Year Quarter as though Licensee had failed to achieve the required royalty
volume for the current Contract Year, except that Licensee shall have the
opportunity to cure such default within thirty (30) days after receipt of notice
from Everlast that such Report of Net Sales has not been received.
4.6 In the event that the royalties actually earned with respect to Net
Sales of (a) men's outerwear, (b) men's activewear/swimwear or (c) men's
casualwear, each considered as a separate category, shall be equal to less than,
ten (10%) percent of the annual guaranteed minimum royalty as hereinbefore
provided during the second Contract Year, or twenty (20%) thereof during any
8
<PAGE>
subsequent Contract Year, then Everlast may elect to terminate this License
Agreement as to such category only, by written notice given no later than ninety
(90) days after Everlast has actually received from the Licensee the statement
referred to in subparagraph 4.1 for the final Contract Quarter of such Contract
Year. If Everlast shall make such an election, then for each subsequent Contract
Year the guaranteed annual minimum royalty provided in subparagraphs 4.2 and 4.3
as the case may be shall be reduced by twenty (20%) thereof, and (b) the
Licensee's inventory of Licensed Products in the category which has been so
terminated shall be subject to the provisions of paragraph 13 hereof.
4.7 Simultaneously with the execution of this Agreement Licensee shall
pay to Everlast with respect to the First Contract Year, and on or before the
first day of each subsequent Contract Year, an amount equal to three (3) times
the monthly payment with respect to the annual guaranteed royalty to be paid
pursuant to subparagraphs 4.2 and 4.3 of this Paragraph during the relevant
Contract Year. The amount to be paid upon the execution of this agreement shall
be $18,000. Such amount shall be held as security, without interest, for the
faithful performance of the obligations on the part of the Licensee to be
performed under this Agreement. The amount of the security then held by Everlast
and not otherwise previously applied will be carried over to the next Contract
Year and shall serve to reduce the payment required to be made upon the first
day of the next Contract Year pursuant to this subparagraph
9
<PAGE>
4.6. Upon the expiration or other termination of this Agreement, the remaining
balance held by Everlast pursuant to this subparagraph 4.6 shall be repaid
without interest to the Licensee, provided that the Licensee has fully performed
each of the obligations on its part to be performed hereunder.
4.8 Within ninety (90) days after the close of each Contract Year,
Licensee will deliver to Everlast a financial statement of Licensee prepared by
a Certified Public Accountant or similar professional licensed under the laws of
the jurisdiction where its prinicpal office shall be located, containing a
balance sheet as at the end of the fiscal year of Licensee ending during such
Contract Year, an income statement for such fiscal year and a source and
application of funds analysis for such fiscal year, together with such
explanatory notes as may be appropriate, all prepared in accordance with
Generally Accepted Accounting Principles consistently applied. Failure to
provide such financial statement on a timely basis shall be a material breach of
this Agreement.
5. PAYMENTS.
--------
5.1 Past due payments hereunder shall bear interest at the rate of one
and one-half (1-1/2%) percent per month commencing fifteen (15) days after the
same shall fall due.
5.2 All payments by Licensee to Everlast under this Agreement shall be
made in Canadian Dollars by (a) check drawn on a Canadian bank to the order of
Everlast Sports International, Inc.and delivered to Everlast at P.O.Box 3343,
Commerce Court Postal
10
<PAGE>
Station, Toronto, Ontario M5L 1K1 in the manner set forth in Paragraph 17 hereof
or (b) wire transfer to Canadian Imperial Bank of Commerce, Main Branch,
Commerce Court, Toronto, Ontario M5L 1G9, ABA No. 00002010, for the account of
Everlast Sports International Inc.., a/c no. 30-57313, or to such other address
or account as Everlast may designate from time to time.
5.3 Any withholding tax levied by any government or governmental agency
in connection with the payment of sales royalties or annual guaranteed minimum
royalty to be paid to Everlast under this Agreement shall be borne by Everlast
but only if actually paid by Licensee to the appropriate taxing authority.
Licensee shall deduct any required withholding tax from the amount of such
payments, and shall send to Everlast without delay an appropriate certificate
showing the payment of such withholding tax. Failure to make such payment as due
and to send such certificate shall require immediate repayment to Everlast of
any amounts so deducted.
5.4 All references to currency throughout this Agreement shall refer to
Canadian dollars, except as otherwise specifically provided herein.
6. BOOKS AND RECORDS.
-----------------
Licensee agrees that it will keep accurate and complete records and
books of account showing all Licensed Products shipped by it and the price
thereof in accordance with Generally Accepted Accounting Principles. Everlast or
its independent Certified
11
<PAGE>
Public Accountant shall have the right at all reasonable times during normal
business hours and on reasonable notice to Licensee (prior to the expiration of
two (2) years after the termination of the Contract Year) to inspect and make
copies of the books and records of Licensee insofar as they relate to the
computation of royalties to be paid to Everlast hereunder and the shipment of
Licensed Products pursuant to this Agreement. If, upon any such inspection, it
shall appear that the royalty previously reported for any Contract Year Quarter
has been understated by five (5%) percent or more, the expense of any such audit
shall be borne by the Licensee.
7. MANUFACTURE OF LICENSED PRODUCTS; QUALITY CONTROL, APPROVALS.
------------------------------------------------------------
7.1 Licensee recognizes that Everlast has a reputation for high quality
and that Licensee must, therefore, maintain such quality on all Licensed
Products. Licensee agrees that Everlast shall have the right to approve or
disapprove: (i) the quality, style and design of all Licensed Products
(including packaging); (ii) the presentation or style of the Licensed Marks used
in connection therewith; and (iii) production samples of all Licensed Products
(all such samples being required to be submitted to Everlast, duly documented
with duty and freight prepaid, prior to sale). In connection with the foregoing,
Licensee shall submit to Everlast "story boards", fabric samples and sketches
for initial approval and, when prepared, prototype samples and not less than
12
<PAGE>
one (1) production sample of each style (together with all fabric swatches) of
each of the Licensed Products (as provided in Paragraph 8).
7.2 Everlast shall have the right to inspect at all reasonable times
the production facilities of Licensee or its subcontractors and to receive from
Licensee production samples of Licensed Products without charge and make tests
thereof so as to reasonably assure Everlast that the nature and quality of
Licensed Products are in accordance with the requirements of this Agreement. Any
items submitted for approval hereunder at Everlast's address set forth herein
shall be deemed to have been approved if same are not disapproved by notice to
Licensee in writing within twenty (20) days after receipt of shipment thereof by
Everlast. Everlast agrees that any item submitted will not be unreasonably
disapproved and, if it is disapproved, that Licensee will be advised in writing
of the specific grounds therefor. Licensee further agrees to: (i) sell Licensed
Products bearing the Licensed Marks only to retail stores of the type generally
offering products bearing the "Everlast" label in the U.S.A., or products of
comparable quality, and (ii) remove the Licensed Marks from "irregulars" to the
extent practicable or, where not practicable, to affix with a stamp the word
"Irregular" on the label.
7.3 Licensee will cause to appear on the Licensed Products and on their
containers and labels and the like, and on all advertising or promotional
material used in connection therewith, such legends,
13
<PAGE>
markings and notices as Everlast may reasonably request, including without
limitation the legend "MADE UNDER LICENSE FROM TRADEMARK OWNER EVERLAST WORLD'S
BOXING HEADQUARTERS CORP." Such legend shall also appear on any other printed
matter in which the Everlast name or logo is used. Printed matter shall include
but not be limited to stationery, letterheads, invoices, envelopes, credit
memos, shipping labels and business cards. Before use, Licensee shall submit
copies thereof to Everlast for its approval. Everlast shall have the absolute
right to edit, alter or amend such material and the form and manner in which the
Licensed Marks are displayed.
8. SAMPLES FOR EVERLAST.
--------------------
During the Contract Period, Licensee shall supply to Everlast, at no
charge, duly documented with duty and freight prepaid, two samples
representative of each style of Licensed Products for Everlast's use in
connection with Everlast's museum collection. Each sample shall be tagged with
the style number and wholesale selling price. During the first Contract Year
Quarter of each Contract Year Licensee shall furnish to Everlast without charge
two production samples of each style of Licensed Product then offered for sale
by Licensee. Each sample shall be tagged with the style number and wholesale
selling price.
9. SALES PROMOTION.
---------------
9.1 Licensee agrees that it will, during the Contract Period: (i) make
diligent effort to promote, develop, manufacture, advertise, sell and ship the
Licensed Products; (ii) continuously
14
<PAGE>
and diligently fill all accepted purchase orders for Licensed Products (Licensee
not being required to fill such orders received from customers lacking financial
capacity therefor); and (iii) procure and maintain facilities and trained
personnel sufficient and adequate to accomplish the foregoing. A cessation of
the above with respect to any category listed in the definition of Licensed
Products for a continuous period of ninety (90) days shall be grounds for
immediate termination of such category at any time thereafter at Everlast's
option.
9.2 In fulfilling its obligations hereunder, Licensee shall engage such
sales representatives and other personnel and shall display the Licensed
Products at merchandise markets and trade shows (which can take place at
Licensee's showroom) as will maximize sales of Licensed Products.
9.3 Licensee agrees to provide Everlast with written descriptions of
its marketing and distribution programs in such detail as may be reasonably
requested from time to time by Everlast prior to their implementation and as
they may be modified from time to time. Licensee shall not proceed with its
initial marketing and distribution programs without the prior written approval
of Everlast. Licensee shall not proceed with any modification of its marketing
and distribution programs if Everlast notifies Licensee in writing that Everlast
disapproves of such modification. The marketing and distribution plan or any
modifications thereof shall be deemed to have been approved if same are not
disapproved by
15
<PAGE>
notice to Licensee in writing within twenty (20) working days after receipt
thereof by Everlast. Everlast agrees that any plan submitted will not be
unreasonably disapproved and, if it is disapproved, that licensee will be
advised in writing of the specific grounds therefor.
9.4 On February 1st and August 1st of each Contract Year Licensee shall
promptly submit to Everlast a catalog of all current Licensed Products showing
an illustration of each Licensed Product being sold by Licensee, the style,
number and a sales description thereof together with Licensee's wholesale
selling price therefor.
9.5 Licensee agrees to sell to Everlast such quantities of Licensed
Products as Everlast may order for its own account for resale or distribution by
Everlast and the price of such Licensed Products shall be no greater than the
lowest price offered by Licensee to any person, firm or corporation, less
twenty-five (25%) percent of the selling price of such Licensed Products with
sales terms net 10 EOM. Such purchases shall not be subject to royalty or
advertising requirements. Everlast will not sell Licensed Products below the
lowest price offered by Licensee to any person, firm or corporation as reflected
in Licensee's quarterly reports.
10. ADVERTISING.
-----------
10.1 Licensee agrees to expend on advertising in each Contract Year, an
amount equal to not less than two and one-half (2.5%) percent of Net Sales. Such
advertising expenditures shall be exclusive of advertising production costs,
tags, packaging, point
16
<PAGE>
of sale displays, compensation to Licensee's employees, or travel expenses. The
minimum advertising expenditure for this Agreement shall be not less than
$30,000 during the First Contract Year, $60,000 during the Second Contract Year,
and $90,000 during the Third Contract Year. During each Option Year such amount
shall be equal to 41.67% of the annual guaranteed minimum royalty payable
pursuant to subparagraph 4.3. Together with each quarterly statement submitted
pursuant to Paragraph 4, Licensee shall submit to Everlast a detailed schedule
of such expenditures made during the said quarter together with copies of
invoices, tear sheets, and all other substantiating documents.
10.2 Licensee shall certify the amount actually expended for the above
advertising by a written statement certified to be correct by the President,
Chief Operating Officer, or Chief Financial Officer of Licensee. If the required
amount has not been spent, the unspent balance shall be spent within ninety (90)
days after the close of such Contract Year and shall be deemed to be an
advertising expenditure for such Contract Year. This expenditure shall in no way
affect or be credited to the required amount to be spent for any subsequent
Contract Year. If the required expenditures shall not have been spent by the end
of such ninety (90) day period, the deficiency shall be paid to Everlast as
additional royalties hereunder.
10.3 Licensee agrees that no use of the Licensed Marks or of any item
used in connection therewith will be made unless and until
17
<PAGE>
the same has been approved by Everlast. Everlast agrees that any material,
advertising or otherwise, submitted for approval hereunder at Everlast's address
set forth herein shall be deemed to have been approved if the same is not
disapproved by notice to Licensee in writing given within twenty (20) working
days after receipt thereof by Everlast. Everlast agrees that any item submitted
will not be unreasonably disapproved, and, if it is disapproved, that Licensee
will be advised in writing of the specific grounds therefor.
11. DEFAULT.
-------
11.1 If Licensee at any time shall be in default of payment of sales
royalties or any guaranteed minimum royalty payments and such default is not
cured within ten (10) days after receipt of written notice from Everlast
specifying such default and Licensee has failed to cure the default within ten
(10) days after receipt of such notice, Everlast may terminate this Agreement,
notice of which shall specify a termination date not sooner than ten (10) days
after the date such default should have been cured.
11.2 If Licensee at any time shall fail to perform any other material
undertaking or obligation hereunder and if such default is not cured within
thirty (30) days after Everlast shall have given Licensee written notice
specifying such default (provided, however, that in the event such default
cannot reasonably be cured within such thirty (30) days, and Licensee commences
to cure the default and continues diligently therewith until the default has
been
18
<PAGE>
cured, Licensee shall not be deemed during such period to be in default) then in
such event, Everlast may terminate this Agreement, notice of which shall specify
a termination date not earlier than thirty (30) days after the date of the
notice of termination.
11.3 The termination rights set forth in subparagraphs 11.1 and 11.2
shall not constitute the exclusive remedy of Everlast hereunder. Everlast may
resort to such other cumulative remedies as it would have been entitled to if
this Paragraph had been omitted from this Agreement, including the right to seek
damages.
12. RIGHTS AFTER TERMINATION.
------------------------
From and after the termination of this Agreement, all of the rights of
Licensee to the use of the Licensed Marks, except as hereinafter expressly
provided in the Paragraph next following, shall cease absolutely and Licensee
shall not thereafter advertise, promote, distribute or sell any item whatsoever
bearing any Licensed Mark. As used in this Agreement, "termination" shall
include "expiration" of this Agreement. Before the termination of this
Agreement, licenses for the Licensed Marks may be granted by Everlast to others
in connection with the advertisement, promotion and sale of the Licensed
Products, the shipment of which is made after the termination of this Agreement.
13. INVENTORY OF LICENSED PRODUCTS ON TERMINATION.
---------------------------------------------
13.1 Within ten (10) days after the notice of termination, Licensee
shall submit to Everlast a written statement (as of the termination date)
indicating:
19
<PAGE>
(i) the quantity and description of each model or style number of
Licensed Products in inventory or on hand;
(ii) the quantity and description of each model or style number of
merchandise on order, incoming or in the process of being manufactured;
(iii) the quantity and description of all open orders from customers
together with the name of each such customer(s); and
(iv) within ten (10) days after the termination date, Licensee shall
meet with a representative of Everlast to work out a full payment schedule of
royalties payable to the date of termination which is acceptable to Everlast.
Only after all of the terms and conditions of this subparagraph 13.1
have been satisfied will Everlast grant to Licensee the right to sell such
inventory of Licensed Products within one-hundred and twenty (120) days after
the termination date.
13.2 Such sales are to be reported by Licensee in the same manner as
set forth in subparagraph 4, but within ten (10) days after the end of each
calendar month and such statement shall be accompanied by a check in payment of
royalties for such sales.
13.3 In addition to Licensee's obligations in the event of the
expiration of this Agreement or the termination of this Agreement prior to the
expiration date of the Contract Period or any Option Period Everlast may, at its
option, purchase from Licensee any part of such inventory on hand on such
termination date for a purchase
20
<PAGE>
price of sixty (60%) percent of Licensee's lowest actual selling price
(excluding "seconds" or "irregulars"), and the amount due to Licensee on any
such purchase by Everlast may be applied against any sum then owing to Everlast
by Licensee. Such purchase shall be packed and shipped pursuant to Everlast's
instructions, F.O.B. shipping point within the United States.
14. TRADEMARKS.
----------
14.1 Licensee recognizes the proprietary interest of Everlast in the
names "Everlast" and "Choice of Champions" and in the logo style in which the
names are registered as a trademark in the United States and elsewhere. Licensee
will not make any use thereof nor authorize anyone else to do so within or
outside the Contract Territory except as specifically permitted by this
Agreement. Everlast represents that it is the sole owner of the Licensed Marks
and has full power and authority to grant the license covered by this Agreement.
14.2 Should Everlast, at any time or times during the Contract Period,
desire to register an additional trademark or trademarks which would cover
Licensed Products and/or to register Licensee as a user thereof, Licensee shall
without charge execute any and all documents which Everlast reasonably believes
to be necessary or desirable for registration or protection of such trademark or
trademarks in the name of Everlast. Upon registration of any such trademark: (i)
Everlast shall grant to Licensee a license for the use of such registered
trademark on or in connection with the
21
<PAGE>
advertisement, promotion and sale of Licensed Products, which license shall be
coextensive and coterminous with the rights granted hereunder with respect
thereto and shall require no increase in the payments set forth herein; and (ii)
Licensee shall thereafter include on subsequent printing or manufacture of
materials bearing the Licensed Marks the appropriate trademark notice.
14.3 All use of any such trademark or trademarks by Licensee on or in
connection with Licensed Products produced hereunder shall inure to the benefit
of Everlast. All rights to such trademark or trademarks other than those
specifically granted hereunder are reserved by Everlast for its own use and
benefit. Upon the expiration or other termination of this Agreement for any
reason whatsoever, all rights in the Licensed Marks shall automatically revert
to Everlast and Licensee shall not thereafter use the Licensed Marks or any
similar mark or name except as specifically permitted by Paragraph 13. Licensee
shall at any time whether during or after the term of this Agreement execute any
documents reasonably required by Everlast to confirm Everlast's ownership of all
such rights.
14.4 In the event that either party to this Agreement shall learn of
any use by any person of a trademark or trademarks confusingly similar to the
Licensed Marks in the Contract Territory, such party shall promptly notify the
other in writing of such use. In such event, if requested by Everlast, Licensee
shall
22
<PAGE>
join with Everlast, at Everlast's expense, in such action as Everlast in its
reasonable discretion may deem advisable for the protection of its rights in and
to the Licensed Marks.
14.5 In the event that any person other than Licensee or a customer
shall use the Licensed Mark in a manner which infringes upon the exclusive
license hereby granted, Everlast shall, following written notice thereof from
Licensee, initiate any action which it deems appropriate to restrain such
infringement with respect to the Licensed Products. In such event, if requested
by Everlast, Licensee shall join with Everlast, at Everlast's expense in such
action as Everlast in its reasonable discretion may deem advisable for the
protection of the respective rights in the Licensed Marks. If Everlast decides
to take no action to protect the Licensed Marks in a particular case of a use
thereof by a third party in any part of the Contract Territory and disapproving
of any such action by Licensee, Everlast shall so advise Licensee in writing. If
there should be a disagreement between the parties as to the reasonableness of
such decision by Everlast to withhold its approval of any action by Licensee,
then no such action shall be taken by Licensee and Everlast shall compensate
Licensee for losses actually sustained as a result of the failure to take any
such action if it is held that the withholding of approval by Everlast was in
fact unreasonable or, in the alternative, Licensee shall have the right to
terminate this Agreement on thirty (30) days notice to Everlast without any
liability on the part of Everlast.
23
<PAGE>
Neither party shall, without the consent of the other, voluntarily settle any
claim or suit of the kind referred to in this Article 14 in a manner which might
in any way adversely affect or be in derogation of any rights of the other under
this Agreement. In the event of disagreement between the parties as to any such
settlement, the party thus denied the right to make such settlement shall have
the right, within thirty (30) days after receipt of notice of refusal to consent
by the other party, to terminate this Agreement and upon any such termination,
all rights and obligations of both parties hereunder shall terminate except for
any monies due from either party to the other.
14.6 Everlast shall, at its own cost and expense, defend and indemnify
Licensee, any third party claiming under it, and any direct or indirect customer
of Licensee, from and against any and all claims, loss, damage, expense,
liability, suits, actions, proceedings and judgments and any cost whatsoever
including reasonable attorneys fees arising, sustained, rendered or incurred, by
reason of use of the Licensed Marks, or the exercise of any other rights under
this Agreement, whether based upon a claim of infringement or any facts which
constitute a breach or violation of any of Everlast's representations in this
Agreement, and whether such claims, suits, actions or proceedings, are
rightfully or wrongfully made, brought or filed; provided that Licensee shall
promptly advise Everlast of any such claim, suit, action or proceeding and
afford Everlast the opportunity to defend any such
24
<PAGE>
claim or action through counsel of its own choosing and at its own expense. If
requested by Everlast, Licensee shall join with Everlast, at Everlast's expense,
in such defense. Licensee shall execute any papers necessary or desirable in
connection with any such suit and shall testify in any such suit whenever
required to do so by Everlast, all, however, at the expense of Everlast with
respect to travel expenses and similar out-of-pocket disbursements.
14.7 Licensee agrees to execute, acknowledge and deliver, without cost
to Everlast, such additional documents as may be necessary in the opinion of
counsel for Everlast under the laws of each jurisdiction within the Contract
Territory to protect the Trademark rights of Everlast including, but not limited
to, Registered User Agreements.
15. COPYRIGHT OWNERSHIP.
-------------------
Any and all copyrights which may exist, or come into being with respect
to any and all designs of or with the Licensed Marks for any of the Licensed
Products, labels, hang tags, advertising or promotional materials used pursuant
to this Agreement shall be the property of Everlast. However, notwithstanding
the foregoing exclusive designs and the like (and their respective copyrights)
created by and for Licensee which do not include or refer to the Licensed Marks,
are and shall remain the property of Licensee. Licensee shall place appropriate
copyright notices thereon. Licensee shall furnish Everlast with copies of all
copyright filings.
25
<PAGE>
16. INDEMNITY.
---------
16.1 Licensee shall, at its own cost and expense, defend, indemnify and
save harmless Everlast from and against; (i) any and all claims, loss, damage,
expense, liability, suits, actions, proceedings and judgments, and any costs
whatsoever, including reasonable attorneys' fees, arising out of or in any way
connected with or sustained, rendered or incurred by reason of any claim or
action for property damage, personal injury, death or otherwise, involving or
related to alleged defects in Licensed Products or based on Licensee's
performance under this Agreement or that of Licensee's customers and whether
such claims, suits, actions or proceedings are rightfully or wrongfully made,
brought or filed; and (ii) the production, manufacture, sale, distribution,
promotion or advertisement of any Licensed Products by or for Licensee, its
agents or employees in violation of any applicable law or regulation or the
rights of third parties, provided in each case that Licensee shall be given
prompt notice of any such action or claim. Licensee shall not voluntarily settle
any such claim or action in a manner which might in any way adversely affect or
be in derogation of any rights of Everlast in and to any Licensed Marks or
Licensed Products or which may constitute any adverse admission in respect
thereof.
16.2 Licensee agrees to provide, at its own expense, Product Liability
Insurance written by insurance carriers reasonably satisfactory to Licensee, in
amounts no less than two and one half
26
<PAGE>
million ($2,500,000) United States Dollars and within thirty (30) days from the
date hereof, Licensee shall submit to Everlast fully paid policies or
certificates of insurance naming Everlast as an insured party, and requiring
that the insurer shall not terminate or materially modify such insurance without
written notice to Everlast at least twenty (20) days in advance thereof. Such
insurance (which may be included as part of Licensee's blanket insurance policy
covering other divisions of Licensee) shall remain in full force and effect
during the entire Contract Period and any renewal or extension thereof.
16.3 The insurance coverage required by Paragraph 16.2 may be provided
by one or more Product Liability Insurance Policies, provided that all primary
and umbrella coverage shall aggregate not less than two and one half
($2,500,000) United States Dollars.
17. NOTICES.
-------
All reports, approvals, requests, demands and notices required or
permitted by this Agreement to be given to a party shall be in writing and shall
be deemed to be duly given on the date: (i) personally delivered; (ii) mailed by
certified or registered mail, return receipt requested; (iii) delivered by
Express Mail or courier service (such as Federal Express) which requires the
addressee to acknowledge, in writing, the receipt thereof; or (iv) sent by
telefax and confirmed by hard copy mailed by certified or registered mail,
return receipt requested or acknowledged by return telefax to the party
concerned at its address set forth on Page 1
27
<PAGE>
above (or at such other address as the party may specify by notice to the
other). Copies of all notices to Everlast shall be sent to Lesser & Harrison,
Two West 45th Street, New York, New York 10036.
18. WAIVER.
------
The failure of either party at any time or times to demand strict
performance by the other of any of the terms, covenants or conditions set forth
herein shall not be construed as a continuing waiver or relinquishment thereof
and each may at any time demand strict and complete performance by the other of
said terms, covenants and conditions.
19. BANKRUPTCY.
----------
If Licensee is adjudicated bankrupt or insolvent, or if its business
shall be placed in the hands of a Receiver, Assignee or Trustee, whether by
voluntary act or otherwise or if a committee (formal or informal) of creditors
shall be formed for the purpose of arranging settlement or payment of Licensee's
debts and such condition (except where voluntary) is not terminated within
ninety (90) days, Everlast may terminate this Agreement by written notice as
provided in Paragraph 11.
20. ASSIGNMENT.
----------
This Agreement shall bind and inure to the benefit of Everlast, and the
successors and assigns of Everlast. The rights granted to Licensee hereunder
shall be exclusive to it and shall not, without the prior written consent of
Everlast, be transferred, sub-licensed or assigned by it to any other person,
firm or
28
<PAGE>
corporation. Notwithstanding any such assignment, Licensee shall remain fully
liable hereunder, and shall be responsible for the payment of all royalties,
advertising, and any other amounts which shall become due from the assignee. In
addition, the provisions hereof shall be deemed to preclude assignment by
operation of law and shall be deemed to restrict the hypothecation, pledge,
granting of a security interest or in any manner taking steps or permitting the
integrity of this Agreement between the parties to be affected in any manner or
form. Any assignment, transfer, or sublicense of any of the rights granted to
Licensee hereunder which does not conform to the requirements of this Agreement
shall be null and void.
21. ARBITRATION.
-----------
21.1 Except as specifically set forth in this Agreement, any and all
disputes, controversies and claims arising out of or relating to this Agreement
or concerning the respective rights or obligations hereunder of the parties
hereto, shall be settled and determined by arbitration in New York, New York,
before the American Arbitration Association in accordance with, and pursuant to,
its then obtaining Rules for Commercial Arbitration. The arbitrators shall have
the power to award specific performance or injunctive relief and reasonable
attorneys' fees and expenses to any party in such arbitration. However, in any
arbitration proceeding arising under this Agreement, the arbitrators shall not
have the power to change, modify or alter any express condition,
29
<PAGE>
term or provision of this Agreement, and to that extent the scope of their
authority is limited. The arbitration award shall be final and binding upon the
parties.
21.2 The parties shall have such right to interim relief in any Court
sitting in the City of New York as may be provided by law.
21.3 Any action to enforce an arbitration award or for interim relief
hereunder may be brought only in a Court of general original jurisdiction
sitting in the City of New York and the parties do hereby submit to the
jurisdiction of each such Court.
21.4 The service of any notice, process, motion or other document in
connection with any arbitration under this Agreement or for interim relief or
the enforcement of any arbitration award hereunder may be effectuated in the
manner in which notices are to be given to a party pursuant to Paragraph 17
above.
22. SIGNIFICANCE OF HEADINGS.
------------------------
Paragraph headings contained herein are solely for the purpose of
aiding in speedy location of subject matter and are not in any sense to be given
weight in the construction of this Agreement. Accordingly, in case of any
question with respect to the construction of this Agreement, it is to be
construed as though such Paragraph headings had been omitted.
23. ENTIRE AGREEMENT.
----------------
This writing constitutes the entire agreement between the
parties hereto and may not be changed or modified except by a
30
<PAGE>
writing signed by the party or parties to be charged thereby.
24. GOVERNING LAW.
-------------
This Agreement shall be governed and construed according to
the laws of the State of New York, and Licensee shall in all cases be deemed to
have agreed to submit to the jurisdiction thereof and to venue therein.
25. NO JOINT VENTURE.
----------------
This Agreement does not constitute and shall not be construed as
constituting a partnership, joint venture or agency between Everlast and
Licensee. Neither party shall have any right to obligate or bind the other party
in any manner whatsoever, and nothing herein contained shall give, or is
intended to give, any rights of any kind to any third party.
26. EXECUTION AND DELIVERY REQUIRED.
-------------------------------
This instrument shall not be considered to be an agreement or contract
nor shall it create any obligation whatsoever on the part of Everlast and
Licensee, or either of them, unless and until it has been signed on behalf of
both Everlast and Licensee and delivery has been made of a fully signed
original.
27. FORCE MAJEURE.
------------
Neither party shall be in default hereunder by reason of its delay in
the performance of or failure to perform any of its obligations under this
Agreement if such delay or failure is caused by strikes, act of God or the
public enemy, riots, incendiaries, interference by civil or military
authorities, compliance with
31
<PAGE>
governmental law, rules and regulations, delays in transit or delivery or any
default beyond its control or without its fault or negligence.
28. NO REPRESENTATIONS.
------------------
The Licensee represents and acknowledges that neither Everlast nor any
of its representatives have made any warranties or representations of any nature
whatsoever to induce the Licensee to enter into this License Agreement, except
as expressly set forth herein. All prior discussions, understandings and
agreements between the parties have been merged into this License Agreement, it
being intended that this shall constitute the complete agreement between the
parties. This License Agreement may be modified or amended only by writing duly
executed by both parties hereto.
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of
the day and year first above written.
EVERLAST WORLD'S BOXING HEADQUARTERS CORP,
By: /s/ Ben Nadorf, President
----------------------------------------
Ben Nadorf, President
ACTIVE APPAREL GROUP, INC,
Licensee
By: /s/ George Q. Horowitz, President
----------------------------------------
George Q. Horowitz, President
32
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FOR 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 192,870
<SECURITIES> 0
<RECEIVABLES> 1,887,245
<ALLOWANCES> 0
<INVENTORY> 3,026,241
<CURRENT-ASSETS> 5,851,786
<PP&E> 707,916
<DEPRECIATION> 347,683
<TOTAL-ASSETS> 6,602,362
<CURRENT-LIABILITIES> 857,786
<BONDS> 0
0
0
<COMMON> 5,333
<OTHER-SE> 1,000
<TOTAL-LIABILITY-AND-EQUITY> 6,602,362
<SALES> 15,011,926
<TOTAL-REVENUES> 15,011,926
<CGS> 9,483,591
<TOTAL-COSTS> 9,483,591
<OTHER-EXPENSES> 5,963,063
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 120,950
<INCOME-PRETAX> (434,728)
<INCOME-TAX> (194,093)
<INCOME-CONTINUING> (434,728)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (240,635)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
