-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Lkf8EFHQnS0grVwA/dUayS2TQa6WzTzM3ssfnnvvz7Wvs0KpfE67Hn/bpIOXa4Tl 2pKCwo01+00COj7ulfj41g== 0000898430-96-003200.txt : 19960718 0000898430-96-003200.hdr.sgml : 19960718 ACCESSION NUMBER: 0000898430-96-003200 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960715 DATE AS OF CHANGE: 19960717 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: YES CLOTHING CO CENTRAL INDEX KEY: 0000856979 STANDARD INDUSTRIAL CLASSIFICATION: 2330 IRS NUMBER: 953768671 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-18064 FILM NUMBER: 96595123 BUSINESS ADDRESS: STREET 1: 1380 WEST WASHINGTON BLVD CITY: LOS ANGELES STATE: CA ZIP: 90007 BUSINESS PHONE: 2137657800 MAIL ADDRESS: STREET 1: 1380 WEST WAHINGTON BLVD CITY: LOS ANGELES STATE: CA ZIP: 90007 10-K405 1 FORM 10-K PERIOD ENDED MARCH 31, 1996 SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the Fiscal Year Ended March 31, 1996 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the Transition Period from ________________ To __________________ Commission File Number 0-18064 YES CLOTHING CO. (Exact name of registrant as specified in its charter) CALIFORNIA 95-3768671 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1380 WEST WASHINGTON BOULEVARD LOS ANGELES, CALIFORNIA 90007 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (213) 765-7800 Securities registered pursuant to Section 12 (b) of the Act: Name of exchange Title of each class on which registered NONE NONE Indicate by check mark whether the registrant [1] has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and [2] has been subject to such filing requirements for the past 90 days. YES [X] NO [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock of the registrant held by non- affiliates of the registrant on June 25, 1996 based on the average bid and asked price on such date was $10,132,000. Number of shares of Common Stock outstanding as of June 25, 1996: 7,036,492 DOCUMENTS INCORPORATED BY REFERENCE: The information required by Part III of Form 10-K is incorporated herein by reference to the registrant's definitive Proxy Statement relating to its 1996 Annual Meeting of Stockholders which will be filed with the Commission within 120 days after the end of the registrant's fiscal year. YES CLOTHING COMPANY INDEX TO ANNUAL REPORT ON FORM 10-K
PAGE NO. PART I. Item 1. Business................................................................. 3 Item 2. Properties............................................................... 7 Item 3. Legal Proceedings........................................................ 7 Item 4. Submission of Matters to a Vote of Security Holders...................... 7 PART II. Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 8 Item 6. Selected Financial Data.................................................. 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 10 Item 8. Financial Statements and Supplementary Data ............................. 14 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............................................. 15 PART III. Item 10. Directors and Executive Officers of the Registrant....................... 15 Item 11. Executive Compensation................................................... 15 Item 12. Security Ownership of Certain Beneficial Owners and Management........... 15 Item 13. Certain Relationships and Related Transactions........................... 15 PART IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........ 16
2 PART I ITEM 1. BUSINESS YES Clothing Co.(R), "the Company" designs, contracts for the manufacture of and markets diversified lines of apparel for women in junior sizes, young men and kids. The Company sells its apparel to retail department stores and specialty chains and stores. The Company's garments are made in the United States and to a lesser extent in the Far East. The Company was incorporated in California in 1982. Its principal executive offices are located at 1380 West Washington Boulevard, Los Angeles, California 90007, and its telephone number at that address is (213) 765-7800. SALE TRANSACTION On June 4, 1996, Georges Marciano and affiliates sold to Guy Anthome 3,515,000 shares of common stock at a purchase price of $0.01 per share. Mr. Marciano resigned as a director and Chairman of the Board and agreed to cancel the option and warrant issued in his favor. Mr. Anthome agreed to become Chairman of the Board and Chief Executive Officer at a salary of $150,000 per year. This transaction is known herein as the Sale Transaction. ACQUISITION TRANSACTION In November 1994, former Company Chairman of the Board and Chief Executive Officer, George Randall, and former President, Moshe Tsabag, signed an agreement to sell their holdings in the Company to affiliates of Georges Marciano, founder and former chairman of Guess, Inc.. The transaction closed on January 31, 1995, resulting in the acquisition by Marciano affiliates of approximately 80% of the outstanding common stock of the Company. As a result of the Acquisition Transaction, George Randall resigned his positions with the Company in January 1995 and Moshe Tsabag resigned as President in January 1995 and as a Board Member and employee in April 1995. This transaction is known herein as the Acquisition Transaction. BUSINESS STRATEGY Subsequent to the Acquisition Transaction by affiliates of Georges Marciano on January 31, 1995, the Company has changed its product focus in styles produced, the price of its products and targeted gross margins. The Company licensed a number of trademarks and designs from Mr. Marciano. However, the strategy was not successful and upon the close of the Sale Transaction the Company has reconsidered its design and marketing strategy. Subsequent to the Sale Transaction, the Company changed its merchandising and design direction and assembled a new management team. Most of its senior executive officers have been replaced and its design staff has been supplemented. The Company's business strategy is now to increase sales by reintroducing the YES label as a mass market line and by licensing branded lines of apparel. 3 Immediately before the Sale Transaction, Mr. Marciano, through an affiliated company, agreed to advance to the Company $3,100,000 to pay off liabilities associated with three $1,000,000 letters of credit issued on behalf of the Company in favor of Republic Factors and to purchase certain assets approximating $1,463,000 in value. Mr. Marciano also agreed to cancel debts owed to him and his affiliates by the Company totaling $2,767,000 in exchange for a payment of $250,000 on June 4, 1996 and a note payable of $250,000 due on January 31, 1997. On June 25, 1996, the Company signed a five-year licensing agreement to design, manufacture and market men's and boy's sportswear for Body Glove International. The Company will pay a royalty on net sales of 6% on men's and 5% on boy's apparel. APPAREL AND APPAREL DESIGN The Company offers clothing for the women's "junior" market and for young men's and children's markets. The Company's business is generally divided among five retail selling seasons: Spring, Summer, Fall, Back-to-School; and Holiday. For each selling season, the Company introduces a separate apparel collection each year. Seasonal factors can cause some variance in production and sales levels among fiscal quarters in any fiscal year, but the Company does not regard its overall business as highly seasonal. JUNIOR'S. The Company's clothing for the "junior" market incorporates current styles, fabrics and colors with a look that is designed to appeal to a broad cross-section of young women. Clothing for the junior market is characterized by sizes tailored for youthful figured women, The Company uses primarily denim and, to a lesser degree, twill, for shirts, pants, shorts, vests, jackets and dresses and knit and woven cotton for T-shirts, sweatshirts and other types of shirts. In addition, the Company has developed novelty knits for tops, using fabrics such as second skin satin, printed mesh and printed nylon. YOUNG MEN'S. The company markets under the YES U.S.A.(TM) and YES Men(R) labels, denim jeans, shorts, jackets, and vests and cotton and denim shirts, T- shirts and sweatshirts. The men's line, with its distinctive look, uses denim, flannel, polar fleece, corduroy, cotton and rayon twill, wool and rayon gabardine, cotton pique and nylon in the production of T-shirts, sweatshirts, shirts, shorts, vests, jackets and pants. CHILDREN'S WEAR. Prior to fiscal 1994, the Company had manufactured children's wear, mainly for girls aged to 7 to 14. In fiscal 1994, the Company discontinued the manufacture of children's wear and licensed out the YES name for the production of children's apparel. Subsequent to the Acquisition Transaction, the Company reacquired the children's wear license and began marketing, under the YES Kids(R) label, denim jeans, overalls, shorts, shortalls, skirts, skirtalls, vests, and jackets, cotton T-shirts and sweatshirts and denim and cotton shirts. PRODUCTION MANUFACTURING. The Company manufactures its garments using independent cutting and sewing contractors located principally in the Los Angeles area. The Company seeks to produce high quality garments through the use of quality fabrics, insistence on quality workmanship and use of comprehensive fabric and garment inspection programs. 4 The Company acquires fabric from suppliers and supplies such fabric, together with the garment pattern, to an independent contractor for cutting. The cut fabric and any buttons, zippers and other trim to be used on the garments are then delivered to independent sewing contractors. Under the Company's supervision, these contractors assemble and sew the fabric and add trim in accordance with production samples. The Company also employs a production coordinator and two full-time production assistants who regularly visit the Company's contractors to review the quality of the work in progress. Prior to distribution, the garments are delivered to the Company's warehouse for final inspection in the Quality Control Department. The lead time to fill new orders placed by the Company with its manufacturing contractors generally ranges from three to four weeks for domestically produced garments. The Company generally schedules the manufacture of apparel based on orders received to reduce the risk of obsolescence of its garment inventory. The Company continuously monitors for obsolete and damaged inventory. Such inventory is usually sold to customers who specialize in merchandising off-price clothing or sold through a company owned factory outlet store. The Company has long-standing relationships with its cutting contractor and many of its sewing production contractors but does not have written agreements with any of its contractors. For its domestically produced garments, the Company currently utilizes only one cutting contractor (who is located in the Company's facility and who works mainly for the Company) and approximately 15 sewing contractors (all of whom are located in the Los Angeles area). The Company believes that its relationships with its cutting and sewing contractors are satisfactory. The Company does not believe that the loss of any contractor would have material adverse effect on the Company's operations as there are a number of domestic and foreign cutting and sewing contractors who can manufacture the Company's garments. FABRICS. The fabrics primarily used by the Company are denim, cotton knits (jersey) and woven cotton (chambray and poplin), which are purchased domestically. The Company believes that during the fiscal year ended March 31, 1996, its total (100%) expenditures for fabrics used in its domestically produced garments were paid to suppliers located in the United States. For the fiscal year ended March 31, 1996, approximately 10% of the Company's expenditures for domestically purchased fabrics was accounted for by its largest domestic fabric supplier, approximately 22% of such expenditures was accounted for by the Company's four largest domestic suppliers and approximately 29% of such expenditures was accounted for by the Company's ten largest domestic suppliers. The Company does not have any long-term arrangements with any of its fabric suppliers. To date, the Company has not experienced any difficulty in satisfying its fabric requirements and it believes that the large number and diversity of potential suppliers minimizes the risk of the loss of any one supplier. The Company believes that the effect of the loss of one or a few of its fabric suppliers on the Company's operations would be minimal due to the large number and diversity of potential suppliers and the relative ease with which new supplier relationship may be established. SALES AND MARKETING The Company sells its apparel throughout the United States to retail department stores, specialty chains and specialty stores. For the fiscal year ended March 31, 1996, the Company sold its 5 apparel to over 800 retailing customers. Approximately 86.3% of sales were made to the Company's 100 largest customers. Sales of the Company's garments are made through independent sales organizations and directly by the Company's sales staff. The Company maintains showrooms in New York City and Los Angeles for women's and men's apparel. The Company also engages the services of an independent sales organization in Miami which operates a showroom displaying the Company's products. Sales representatives at each showroom are responsible for marketing the Company's apparel within an assigned territory. Each sales representative meets with customers in the showroom, makes sales calls to customers and represents the Company at trade shows within the assigned territory. The sales organizations are retained on non-exclusive basis. The Company's independent sales organization is compensated on a commission basis on terms consistent with industry practice. The Company does not sell its garments on consignment. The Company generally sells its products on net-30 day terms, except for Misfits and GMSurf(TM) Junior products which are sold on 8/10 end of month terms. The Company no longer has the right to use these trademarks. The Company's backlog consists of purchase orders that have been received but not shipped, and amounted to approximately $1,100,000, $3,200,000 and $9,137,000 as of June 20, 1996, June 20, 1995 and June 20, 1994, respectively. The Company expects to ship all of the orders comprising the backlog prior to September 30, 1996. While the failure to fill orders on a timely basis could have material adverse effect on the Company's sales, the Company has generally not experienced difficulty in shipping orders by the dates requested by its customers. The company does not generally accept returns except for damaged or defective garments or with respect to late deliveries. However, the Company does grant markdown money for slow moving goods. ADVERTISING AND PROMOTION The Company's advertising strategy is to promote an image associated with a fashionable look and youthful style and to promote the YES Clothing Co.(R) brands. The Company did not advertise extensively in 1996 and anticipates increasing its advertising budget in 1997. The Company had no cooperative advertising program for its retailers although it did, with advance approval, reimburse its customers for advertising the Company's products. The Company's expenditures for advertising and promotion were approximately $155,000 during fiscal 1996 (2.0% of net sales), $442,000 during fiscal 1995 (1.5% of net sales), and approximately $524,000 during fiscal 1994 (1.9% of net sales). BRANDS AND TRADEMARKS The Company's principal trademarks, YES Clothing Co.(R), YES(R), YES Men(R), YES Kids(R) and YES Jeans(R) are registered with the United States Patent and Trademark Office. The Company also has registered or has trademark applications pending, for these trademarks in other countries. The Company believes that these trademarks have significant value in the marketing of its apparel. There are other companies in the apparel and apparel-related industries that incorporate the word "yes" in their trademarks, and there can be no assurance that these or future trademarks which may be granted will not diminish the value of the Company's "YES Clothing Co.(R)" or "YES(R)" trademarks. Subsequent to the Acquisition 6 Transaction, the Company applied for domestic and foreign trademarks for YES U.S.A.(TM) in a diamond design. Guess Inc. has filed oppositions and cancellations to certain of the Company's trademarks. In addition to the YES(R) brand, the Company marketed apparel under the GM Surf(TM) and Misfits(R) labels which were licensed to the Company under an agreement with Marble Sportswear, Inc., a company controlled by Georges Marciano (see Related Party Transactions). These license agreements were terminated on May 1, 1996. COMPETITION The segments of the apparel industry in which the Company competes are highly fragmented. The Company competes with numerous other apparel manufacturers, which vary in size and in the products with which they design and manufacture. In addition, department stores, including some of the Company's customers, sell competing apparel under their own labels. Many of the Company's competitors are larger and have greater financial resources than the Company. The marketing of apparel is highly competitive. The Company believes that the ability to gauge effectively and to respond to changes in consumer demands and tastes as well as the ability to produce and deliver its products on a timely basis are necessary to compete successfully in the apparel industry. The Company believes that consumer acceptance depends on the image, design, quality and price of its garments, and that its continuity will depend on its ability to remain competitive in these areas. The failure to design garments that meet with acceptance in the marketplace in the future could result in the material deterioration of customer loyalty and the Company's image and could adversely affect the Company's business. EMPLOYEES As of March 31, 1996, the Company employed 41 persons. None of the Company's employees are represented by a labor union. The Company considers its relations with employees to be satisfactory. ENVIRONMENTAL REGULATION The cost and effect of complying with environmental regulations are not material due to the nature of the Company's business. ITEM 2. PROPERTIES Effective May 1, 1992, the Company's executive offices, merchandising, production, shipping and warehousing facilities became located in a facility in Los Angeles totaling approximately 75,000 square feet, occupied pursuant to a lease expiring in May 1997. The Company also leases the following showrooms pursuant to leases expiring as indicated: Los Angeles (August 1997) and New York City showroom (June 2000). Management expects that in the normal course of business, such leases will be renewed or replaced by other leases. The Company believes its current facilities are generally in good operating condition and are suitable and adequate for its foreseeable needs. The Company does not believe the loss of any of these facilities would have a material adverse effect on its operations as equivalent facilities are readily available. 7 The Company also operates an Outlet Store located in Park City, Utah for the sale of slow moving/off season merchandise. ITEM 3. LEGAL PROCEEDINGS The Company is not involved in any legal proceedings the outcome of which could have a material effect on the company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted during the fourth quarter of fiscal year 1996 to a vote of security holders. 8 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK The Company's Common stock is traded on the NASDAQ SmallCap Market under the symbol YSCO. The following table sets forth the range of high and low sales prices of the Common stock, as reported by NASDAQ for each quarterly period during the past three fiscal years: MARKET PRICES
QUARTERS ENDING March 31 Dec. 31 Sept. 30 June 30 -------- ------- -------- ------- Fiscal 1996 ----------- Low $ 1.06 $1.13 $2.50 $1.00 High 2.38 3.13 4.88 8.75 Fiscal 1995 ----------- Low $ 3.25 $1.75 $1.37 $1.12 High 10.50 4.12 3.00 1.75 Fiscal 1994 ----------- Low $ 1.31 $1.75 $2.03 $2.00 High 2.38 2.50 3.00 2.88
APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK SECURITIES The Company had approximately 51 holders of record of Common stock as of March 31, 1996. DIVIDENDS The Company has never paid cash dividends on its common equity. The Company is not restricted from making any cash dividend payments under its current credit agreement with its factor. However, the Company intends to retain any earnings within the Company for the foreseeable future. ITEM 6. SELECTED FINANCIAL DATA The following selected financial data of the Company as of and for each of the five years in the period ended March 31, 1996 are derived from the audited Financial Statements of the Company and should 9 be read in conjunction with such Financial Statements and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this report.
(000's omitted) Year ended March 31 ------------------------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- INCOME STATEMENT DATA Net Sales $ 7,551 $28,580 $27,883 $37,940 $35,110 Gross profit (1,519) 3,370 3,673 8,052 9,627 Income (loss) before income taxes (7,835) (4,652) (2,784) (1,430) (1,043) Net income (loss) (7,835) (4,652) (2,934) (998) (722) Earnings (loss) per share (1.28) (1.22) (.77) (.26) (.19) Dividends per share - - - - - Weighted average number of shares used in computation (a) 6,144 3,821 3,821 3,821 3,821 BALANCE SHEET DATA Inventory 1,398 2,158 3,213 3,243 2,985 Working capital (3,233) 866 5,250 8,171 9,374 Long-term liabilities - 657 171 214 - Total assets 2,652 4,630 9,077 12,784 12,966 Total liabilities 4,892 3,095 2,805 3,578 2,762 Shareholders' equity (2,240) 1,535 6,272 9,206 10,204
(a) Weighted average number of shares have been computed based on the number of shares outstanding each period. The effect of options granted but not exercised has not been included as the effect would have either been immaterial or antidilutive. 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage of net sales represented by certain items in the Company's statements of operations.
Percentage of Net Sales Year ended March 31, -------------------------- 1996 1995 1994 ------ ------ ------ Net sales 100.0 100.0 100.0 Cost of sales 120.0 88.2 86.8 ------ ----- ----- Gross profit (20.0) 11.8 13.2 Commission income .4 1.3 2.5 Royalty income - .2 .2 ------ ----- ----- Gross operating income (19.6) 13.3 15.9 Selling, general and administrative expenses 80.0 27.9 31.7 ------ ----- ----- Loss from operations (99.6) (14.6) (15.8) Other income - insurance - .2 6.0 Other expense (4.1) (0.9) (0.2) License reacquisition .- (1.0) - ------ ----- ----- Loss before income taxes (benefit) (103.7) (16.3) (10.0) Income taxes (benefit) - - 0.5 ------ ----- ----- Net loss (103.7)% (16.3)% (10.5)% ====== ===== =====
FISCAL YEARS 1996, 1995 AND 1994 NET SALES decreased by $21,029,000 or 73.5% to $7,551,000 in fiscal 1996 due to a lack of acceptance of the Company's new marketing and design direction after the Acquisition Transaction and the termination of the Company's prior business practices. In fiscal 1995, net sales increased by $697,000 or 2.5% to $28,580,000 due to the addition of the GMSurf(TM) and Misfits(R) lines at the end of the fourth quarter of that fiscal year. GROSS PROFIT as a percentage of net sales decreased significantly to minus 20.0% in fiscal 1996 from 11.8% in fiscal 1995 due to a number of factors, including decreased sales volume, significant price competition, increased materials costs and markdown of inventory as a result of poor sales and an excessive inventory level. Gross profit as a percentage of net sales decreased to 11.8% in fiscal 1995 from 13.2% in fiscal 1994 due to higher levels of markdowns and a reduction in prices negotiated by retailers in response to cost conscious consumers. COMMISSION INCOME decreased by $352,000 or 91.9% to $31,000 due to the discontinuation of commission transactions. Commission income is generated from shipments of goods manufactured in the 11 Orient to domestic and overseas customers. In fiscal 1995, commission income decreased $306,000 or 44.4% to $383,000 from $689,000 in fiscal 1994 due to a general decline in sales. The Company had no ROYALTY INCOME in fiscal 1996. Royalty income decreased by $9,000 to $51,000 in fiscal 1995 from $60,000 in fiscal 1994 due to the termination of licensee agreements in Canada and the United States. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") decreased to $6,039,000 in fiscal 1996 from $7,972,000 in fiscal 1995, which represented 80.0% and 27.9% of net sales, respectively. (When commission and royalty income is added to net sales, the percentage of SG&A is reduced to 79.6% and 27.5%, respectively.) The main factors reducing SG&A in fiscal 1996 were as follows: 1) Payroll and payroll tax decreased to $1,704,000 in fiscal 1996 from $2,795,000 in fiscal 1995 due to a reduction in the number of employees and levels of compensation paid to officers. 2) Sales commission and factor expense decreased to $202,000 in fiscal 1996 from $747,000 in fiscal 1995 due to the reduction in sales. 3) Advertising and travel expenses were reduced to $775,000 in fiscal 1995 from $1,064,000 in fiscal 1994 in order to conserve working capital. SG&A expenses decreased to $7,972,000 in fiscal 1995 from $8,816,000 is fiscal 1994 primarily due to decreases in insurance, advertising, travel, payroll, payroll tax and profit sharing expenses. OTHER INCOME - INSURANCE - Subsequent to March 31, 1992, the Company incurred the loss of substantially all of its finished goods inventory in connection with civil disturbances in the City of Los Angeles. During the fiscal year ended March 31, 1993 the Company recovered, from one insurance company, the cost of the inventory lost and its normal gross profit which would have been derived from the sales of those goods. During the fiscal year ended March 31, 1994 the Company recovered $1,658,000, net of costs, from a second insurance company for business interruption losses related to the civil disturbance. INTEREST INCOME decreased to $1,000 in fiscal 1996 from $3,000 in fiscal 1995. Interest income decreased to $3,000 in fiscal 1995 from $74,000 in fiscal 1994 due to a change in the Company's factoring agreement. (See CAPITAL RESOURCES AND LIQUIDITY). INTEREST EXPENSE increased to $284,000 in fiscal 1996 from $255,000 in fiscal 1995 due to increased working capital requirements and borrowings from the Company's Factor. Interest expense increased to $255,000 in fiscal 1995 from $128,000 in fiscal 1994 due to increased borrowings from the Company's Factor. INCOME TAXES in fiscal 1995 includes a valuation allowance of $6,377,000 which is equal to 100% of the net deferred tax asset. This valuation allowance is considered appropriate since the Company cannot conclude that it is more likely than not that the net deferred tax asset will be realized. CAPITAL RESOURCES AND LIQUIDITY 12 The Company had an agreement with a factor and through June 1994 with a bank, whereby the factor purchased accounts receivable from the Company on a non-recourse basis and remitted the funds on a maturity basis. The bank provided the Company with an unsecured $3,000,000 facility for commercial letters of credit and at March 31, 1994, the Company had $1,618,000 of letters of credit outstanding. Under the facility agreement, the Company was prohibited from declaring or paying any dividends on any class of its stock. The Company entered into a new factoring agreement with Republic Factors and a letter of credit facility with Republic National Bank of New York on May 15, 1995 (the financing bank) effective through March 1997. Both the old and new agreements are non-recourse (i.e., the factor purchases the Company's accounts receivable that it has preapproved, without recourse, except in cases where there are merchandise disputes in the normal course of business). Under the new factoring agreement, the Company sells substantially all of its trade accounts receivable, without recourse, and may request advances, up to 80% on the net sales factored at any time before their maturity date. The factor is responsible for the accounting and collection of all accounts receivable sold to it by the Company and receives a commission of 0.6% of purchased net receivables on a guaranteed minimum volume for the contract year of $30,000,000. The commission rate will increase to 0.75% of total invoices factored and be applied retroactively for the contract year if the guaranteed minimum volume is not attained. As a result of not meeting its guaranteed minimum sales, the Company has accrued for the commission rate increase in Fiscal 1996. Under the letter of credit facility, the financing bank provides a credit line for letters of credit, ledger debt and factor guaranties up to the 80% advance rate provided under the factoring agreement. There were no letters of credit outstanding as of March 31, 1996. Commitments outstanding under the letter of credit facility as of March 31, 1995 amounted to $652,000. The agreements are collateralized by accounts receivable and inventory imported under letters of credit. The Company or the factor may terminate the credit agreement on the anniversary date of the agreement with at least 60 days prior written notice. On June 17, 1995, Georges Marciano agreed to provide $3,300,000 in additional capital to the Company in exchange for 2,640,000 shares of common stock and to convert additional shares of common stock at $1.25 per share in exchange of approximately $700,000 owed by the Company to Mr. Marciano and his affiliates for advances and expenses incurred by them on the Company's behalf. Without the infusion of these funds and due to continuing losses, the Company would have completely depleted its working capital by June of 1995. On June 4, 1996, as part of the Sale Transaction, Mr. Marciano, through an affiliated company, agreed to advance to the Company $3,100,000 to pay off liabilities associated with three $1,000,000 letters of credit issued on behalf of the Company in favor of Republic Factors and to purchase certain assets approximating $1,463,000 in value. Mr. Marciano also agreed to cancel debts owed to him and his affiliates by the Company totaling $2,767,000 in exchange for a payment of $250,000 on June 4, 1996 and a note payable of $250,000 due on January 31, 1997. As of March 31, 1996, the Company had net working capital deficit of $3,233,000, as compared to a surplus of $866,000 as of March 31, 1995. The Company's current ratio as of March 31, 1996 was (0.3), as compared to 1.4 as of March 31, 1995. The decreases in working capital and current ratio are primarily due to continued operating losses. The factoring position had a net overadvance of $3,232,000 as compared 13 to $678,000 in available funds as of March 31, 1995. This change is due to increased working capital requirments. Inventories at March 31, 1996 were $1,398,000 as compared to $2,158,000 at March 31, 1995, a decrease of $760,000. The decrease was due to a reduction of inventories to levels consistent with reduced order backlog and the markdown of slow-moving and obsolete merchandise. The Company has funded its activities principally from advances and letters of credit provided by its principal shareholder. In June 1996, the Company entered into an agreement with Imperial Bank which provides the Company with a $1,200,000 credit facility secured by a letter of credit provided by an unaffiliated third party. The Company believes that the credit lines under current lending agreements and other financial sources available to it will provide sufficient resources to finance the Company's currently anticipated working capital needs and capital expenditures through the end of summer of 1996. Continued financial difficulties encountered by the Company would require additional borrowings and infusions of capital to avoid a negative impact on the Company's continued future operations after that time period. The Company has continued to cut its payroll and reduce its operating costs. Notwithstanding the foregoing measures, the Company anticipates that it will not be profitable for the fiscal year ending March 31, 1997 and absent additional capital or additional third party credit, the Company will exhaust its available capital by October 1996. 14 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 15 REPORT OF CERTIFIED PUBLIC ACCOUNTANTS -------------------------------------- Board of Directors Yes Clothing Co. We have audited the accompanying balance sheet of Yes Clothing Co. as of March 31, 1996 and 1995 and the related statements of operations, changes in shareholders' equity and cash flows for the years then ended. We have also audited the financial statement schedule for the year ended March 31, 1996, listed under item 14. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Yes Clothing Co. as of March 31, 1996 and 1995, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. In our opinion, the schedule for the year ended March 31, 1996 and 1995 presents fairly, in all material respects, the information set forth therein. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred operating losses, has a deficit of working capital and tangible net worth, and other adverse financial indicators. These conditions raise substantial doubt about its ability to continue as a going concern. Management's plans regarding those matters also are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. MOSS ADAMS LLP Los Angeles, California May 30, 1996 (except for Note 10, as to which the date is June 4, 1996) 1 REPORT OF CERTIFIED PUBLIC ACCOUNTANTS -------------------------------------- Board of Directors Yes Clothing Co. We have audited the balance sheet of Yes Clothing Co., as of March 31, 1994, and the accompanying related statement of operations, changes in shareholders' equity and cash flows for year then ended. We have also audited the financial statement schedules listed under Item 14. These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Yes Clothing Co., as of March 31, 1994 and the results of its operations and its cash flows for year then ended, in conformity with generally accepted accounting principles. Also, in our opinion, the schedules for the year ended March 31, 1994 present fairly, in all material respects, the information set forth therein. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in the "Financial Condition" section of Note 1 to the financial statements, the Company has incurred operating losses, has a deficit of working capital and tangible net worth, and other adverse financial indicators. These conditions raise substantial doubt about its ability to continue as a going concern. Management's plans regarding those matters also are discussed in the "Financial Condition" section of Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ BDO Seidman, LLP BDO SEIDMAN, LLP Los Angeles, California May 27, 1994 (except for the "Financial Condition" section of Note 1 which is as of July 12, 1996) YES CLOTHING CO. BALANCE SHEET MARCH 31, 1996 AND 1995 ASSETS
1996 1995 ------------ ----------- CURRENT ASSETS Cash $ 103,000 $ 232,000 Due from factor - 678,000 Accounts receivable 1,000 209,000 Other receivables 2,000 152,000 Inventories 1,398,000 2,158,000 Prepaid expenses 94,000 83,000 ------------ ----------- Total current assets 1,598,000 3,512,000 PROPERTY AND EQUIPMENT, at cost, net of accumulated depreciation and amortization 978,000 1,034,000 OTHER ASSETS 76,000 84,000 ------------ ----------- TOTAL ASSETS $ 2,652,000 $ 4,630,000 ============ =========== LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY CURRENT LIABILITIES Due to factor $ 3,232,000 $ - Accounts payable 881,000 2,145,000 Accrued expenses 292,000 243,000 Contracts payable 57,000 50,000 Due to related party 369,000 - ------------ ----------- Total current liabilities 4,831,000 2,438,000 CONTRACTS PAYABLE, net of current portion 61,000 119,000 DUE TO RELATED PARTY - 538,000 COMMITMENTS SHAREHOLDERS' (DEFICIT) EQUITY Preferred stock, no par; 2,000,000 shares authorized; no shares issued - - Common stock, no par; 20,000,000 shares authorized; 7,036,000 and 3,821,000 shares issued and outstanding 8,573,000 4,513,000 Accumulated deficit (10,813,000) (2,978,000) ------------ ----------- TOTAL SHAREHOLDERS' (DEFICIT) EQUITY (2,240,000) 1,535,000 ------------ ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,652,000 $ 4,630,000 ============ ===========
The accompanying notes are an integral part of these financial statements 2 YES CLOTHING CO. STATEMENT OF OPERATIONS YEARS ENDED MARCH 31, 1996, 1995, AND 1994
1996 1995 1994 ----------- ----------- ----------- NET SALES $ 7,551,000 $28,580,000 $27,883,000 COST OF SALES 9,070,000 25,210,000 24,210,000 ----------- ----------- ----------- Gross profit (loss) (1,519,000) 3,370,000 3,673,000 COMMISSION INCOME 31,000 383,000 689,000 ROYALTY INCOME - 51,000 60,000 ----------- ----------- ----------- Operating income (loss) (1,488,000) 3,804,000 4,422,000 ----------- ----------- ----------- OPERATING EXPENSES Selling 1,894,000 3,345,000 3,783,000 General and administrative 4,145,000 4,627,000 5,033,000 ----------- ----------- ----------- 6,039,000 7,972,000 8,816,000 ----------- ----------- ----------- Loss from operations (7,527,000) (4,168,000) (4,394,000) OTHER INCOME (EXPENSE) Insurance income, net - 63,000 1,658,000 Interest expense (284,000) (255,000) (128,000) Interest income 1,000 3,000 74,000 License acquisition - (295,000) - Other (25,000) - 6,000 ----------- ----------- ----------- (308,000) (484,000) 1,610,000 ----------- ----------- ----------- LOSS BEFORE INCOME TAXES (7,835,000) (4,652,000) (2,784,000) INCOME TAX PROVISION - - 150,000 ----------- ----------- ----------- NET LOSS $(7,835,000) $(4,652,000) $(2,934,000) ----------- ----------- ----------- LOSS PER SHARE (1.28) $(1.22) $(.77) ----------- ----------- ----------- WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 6,144,000 3,821,000 3,821,000 ----------- ----------- -----------
The accompanying notes are an integral part of these financial statements 3 YES CLOTHING CO. STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT YEARS ENDED MARCH 31, 1996, 1995 AND 1994
COMMON STOCK -------------------------- RETAINED SHARES AMOUNT EARNINGS (DEFICIT) TOTAL --------- ---------- ------------------ ----------- BALANCE, March 31, 1993 3,821,000 $4,598,000 $ 4,608,000 $ 9,206,000 Net loss - - (2,934,000) (2,934,000) --------- ---------- ------------ ----------- BALANCE, March 31, 1994 3,821,000 4,598,000 1,674,000 6,272,000 Repurchase of stock options - (330,000) - (330,000) Capital contribution - 245,000 - 245,000 Net loss - - (4,652,000) (4,652,000) --------- ---------- ------------ ----------- BALANCE, March 31, 1995 3,821,000 4,513,000 (2,978,000) 1,535,000 Exercise of stock options 30,000 80,000 - 80,000 Capital contribution 3,185,000 3,980,000 - 3,980,000 Net loss - - (7,835,000) (7,835,000) --------- ---------- ------------ ----------- BALANCE, March 31, 1996 7,036,000 $8,573,000 $(10,813,000) $(2,240,000) ========= ========== ============ ===========
The accompanying notes are an integral part of these financial statements 4 YES CLOTHING CO. STATEMENT OF CASH FLOWS YEARS ENDED MARCH 31, 1996, 1995 AND 1994
1996 1995 1994 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(7,835,000) $(4,652,000) $(2,934,000) Reconciliation of net loss to net cash flows from operating activities Depreciation and amortization 504,000 341,000 298,000 Increase (decrease) in credits due customers and allowance for doubtful accounts (258,000) 364,000 (23,000) Increase (decrease) in cash due to changes in assets and liabilities Due from factor 3,748,000 (887,000) 2,117,000 Accounts receivable 339,000 77,000 904,000 Other receivables 147,000 413,000 378,000 Inventories 761,000 1,055,000 30,000 Prepaid expenses (11,000) 23,000 (45,000) Deferred income taxes - - 378,000 Other assets 1,000 10,000 (1,000) Accounts payable (1,264,000) (161,000) (612,000) Accrued expenses 49,000 (41,000) (128,000) ----------- ----------- ----------- Net cash (used) provided by operating activities (3,819,000) (3,458,000) 362,000 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (441,000) (276,000) (241,000) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Payments on contracts payable (52,000) (47,000) (33,000) Advances from factor, net 291,000 3,116,000 - Contribution of capital 3,980,000 245,000 - Borrowing (repayment) from/to related party (168,000) 538,000 - Exercise (repurchase) of stock options 80,000 (330,000) - ----------- ----------- ----------- Net cash provided (used) by financing activities 4,131,000 3,522,000 (33,000) ----------- ----------- ----------- NET (DECREASE) INCREASE IN CASH (129,000) (212,000) 88,000 CASH BALANCE Beginning of year 232,000 444,000 356,000 ----------- ----------- ----------- End of year $ 103,000 $ 232,000 $ 444,000 ----------- ----------- ----------- SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for Interest $ 284,000 $ 255,000 $ 128,000 ----------- ----------- ----------- Income taxes - - 182,000 ----------- ----------- -----------
The accompanying notes are an integral part of these financial statements 5 YES CLOTHING CO. NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996 AND 1995 NOTE 1 - ORGANIZATION AND FINANCIAL CONDITION ORGANIZATION - Yes Clothing Co.(R) (the "Company") was incorporated on July 1, 1982, in the State of California. The Company designs, manufactures and markets a diversified line of apparel primarily for women and young men. The Company sells its garments throughout the United States and Canada to retail department stores, specialty chains and specialty stores. The Company also arranged for the manufacture, in the Orient, of certain of its styles, which are shipped directly from the manufacturer to customers in the United States, Europe and Japan. In connection there within, the Company received a percentage of the sales price charged by the manufacturer and recognized this amount as commission income in the accompanying statement of operations. Subsequent to the acquisition transaction as described below, the Company discontinued these commission transactions. In January 1995, control of the Company changed when its two principal shareholders sold all of their shares, amounting to approximately 80% of the Company's outstanding stock, to affiliates of an individual. This transaction is herein referred to as the "Acquisition Transaction" and the collective new majority interest as the "Principal Shareholder". The principal shareholder currently holds approximately 88% of the Company's outstanding stock. FINANCIAL CONDITION - The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplates continuation of the Company as a going concern. The Company sustained a substantial loss for the year ended March 31, 1996 and has experienced operating and net losses each year since 1992. The operating results for the three months ended June 30, 1996 are anticipated to reflect continued net losses. At this time, the Company is not able to sustain operations without an infusion of capital. As described in Note 10, effective June 4, 1996, the Company's principal shareholder sold approximately 50% of the Company's outstanding shares to an individual who has assumed the position of Chairman and Chief Executive Officer of the Company. This transaction infused substantial capital in the Company, significantly improving its financial condition. Under new management, the Company has the following plans to return to profitability and continue as a going concern: * Increase sales by reintroducing the "YES" label as a mass market line of apparel and by licensing branded lines of apparel. * Increase gross margin through the use of controls on manufacturing costs and design and production overhead. * Assemble an experienced team of apparel professionals with strengths in management, sales and marketing. * Actively seek additional equity funding. 6 YES CLOTHING CO. NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996 AND 1995 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INVENTORIES - Inventories are stated at the lower of cost (first-in, first- out basis) or market. DEPRECIATION AND AMORTIZATION - Depreciation and amortization of property and equipment are provided principally by the straight-line method over the following estimated useful lives: Furniture and fixtures 5 years Machinery and equipment 10 years Leasehold improvements Life of lease The Financial Accounting Standards Board has recently issued Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets." This standard will become effective for the year ending March 31, 1997, although earlier application is permitted. The Company has determined that it will implement the new standard in 1997. Long- lived assets such as plant and equipment are recorded at cost, and the cost is reduced over time by depreciation and amortization. SFAS 121 will require that long-lived assets be periodically evaluated and a loss recognized should the carrying amount of the asset be considered unrecoverable. The Company has not determined the impact, if any, that adoption of the new standard will have on the financial condition and results of operations. However, management believes the effect of the new accounting standard will not be significant. INCOME TAXES - Income taxes are accounted for using an asset and liability approach. Deferred income taxes are provided for temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. Income taxes are further explained in Note 9. LOSS PER SHARE - Loss per share is based on the weighted average number of shares of common stock outstanding during each period. Stock options have not been considered in the loss per share calculations since the effect would be antidilutive. STATEMENT OF CASH FLOWS - For purposes of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. FINANCIAL INSTRUMENTS AND RISK CONCENTRATION - Financial instruments which potentially subject the Company to concentrations of credit risk consist of accounts receivable. Concentrations of credit risk with respect to receivables are limited due to the use of a factor. Statement of Financial Accounting Standard No. 107, "Disclosures About Fair Value of Financial Instruments" (SFAS 107), became effective in the Company's year ended March 31, 1996. SFAS 107 requires the disclosure of the fair market value of financial instruments for which it is practicable to estimate fair value. Financial instruments include cash, receivables and debt instruments. The Company considers the carrying amounts in the financial statements to approximate fair value for these financial instruments and their expected realization. 8 YES CLOTHING CO. NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996 AND 1995 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) USE OF ESTIMATES - The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. STOCK-BASED COMPENSATION - The Financial Accounting Standards Board has recently issued Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based Compensation. This standard will become effective for the year ending March 31, 1997, although earlier application is permitted. The Company has determined that it will implement the new standard in 1997. Under SFAS 123, a fair value method is used to determine compensation cost for stock options or similar equity instruments. Compensation is measured at the grant date and is recognized over the service or vesting period. Under the current accounting standard, compensation cost is the excess, if any, of the quoted market price of the stock at a measurement date over the amount that must be paid to acquire the stock. The new standard would allow the Company to continue to account for stock- based compensation under the current standard, with disclosure of the effects of the new standard, or adopt a fair value based method of accounting. The Company has not yet decided which method will be utilized, nor has it determined the impact, if any, that adoption of the new standard will have on the financial condition and results of operations. However, management believes the effect of the new accounting standard will not be significant. NOTE 3 - TRANSACTIONS WITH FACTOR AND BANK BORROWING The Company has an agreement with a factor and a letter of credit facility with a related financing bank through March 1997. Under the factoring agreement, the Company sells substantially all of its trade accounts receivable, without recourse, and may request advances, up to 80%, on the net sales factored at any time before their maturity date. Under the letter of credit facility, the financing bank provides a credit line for letters of credit, ledger debt and factor guarantees up to the 80% advance rate provided under the factoring agreement with an additional over advance facility of $1,050,000. The factor charges a commission on the net sales factored and interest on advances at prime plus a negotiated rate. The agreements are collateralized by accounts receivable and inventory imported under letters of credit. 9 YES CLOTHING CO. NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996 AND 1995 NOTE 3 - TRANSACTIONS WITH FACTOR AND BANK BORROWING (Continued) There were no outstanding open letters of credit at March 31, 1996. Included in accounts payable at March 31, 1996 is $39,000 due to the factor for piece goods purchases. Due to/from factor consists of the following:
1996 1995 ----------- ----------- Unmatured receivables Without recourse $ 561,000 $ 4,297,000 With recourse 99,000 111,000 ----------- ----------- 660,000 4,408,000 Advances (3,406,000) (3,115,000) Open credits (486,000) (615,000) ----------- ----------- $(3,232,000) $ 678,000 =========== ===========
In conjunction with the transaction described in Note 10, subsequent to March 31, 1996, advances from the factor were repaid. During fiscal 1996, the maximum amount of advances outstanding was approximately $3,571,000. The average advances based upon month-end balances was approximately $2,579,000. The average cost of borrowing, which includes factoring commission and interest, was approximately 10.9% during 1996. NOTE 4 - INVENTORIES
1996 1995 ---------- ---------- Raw materials $ 401,000 $ 560,000 Work-in-progress 82,000 339,000 Finished goods 915,000 1,259,000 ---------- ---------- $1,398,000 $2,158,000 ========== ==========
NOTE 5 - PROPERTY AND EQUIPMENT
1996 1995 ---------- ---------- Furniture and fixtures $ 427,000 $ 203,000 Machinery and equipment 1,400,000 1,311,000 Leasehold improvements 950,000 822,000 ---------- ---------- 2,777,000 2,336,000 Less accumulated depreciation and amortization 1,799,000 1,302,000 ---------- ---------- $ 978,000 $1,034,000 ========== ==========
10 In conjunction with the transaction described in Note 10, property and equipment with an aggregate net book value of $260,000 was sold after March 31, 1996. 11 YES CLOTHING CO. NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996 AND 1995 NOTE 6 - CONTRACTS PAYABLE The Company leases equipment under capital leases which expire on various dates through March 1998. The remaining obligations under these capital leases for future years ended March 31 are as follows: 1997 $ 68,000 1998 69,000 -------- 137,000 Amount representing interest (19,000) -------- Present value of minimum lease payments 118,000 Less current portion 57,000 -------- Long-term portion $ 61,000 ========
Equipment under capital leases and related accumulated depreciation as of March 31, 1996 amounts to $248,000 and $138,000, respectively. NOTE 7 - DUE TO RELATED PARTY A $369,000 unsecured note payable to the principal shareholder bears interest at the lessor of 8% or the prime rate of interest less 1%. This note was terminated in connection with the transaction described in Note 10. NOTE 8 - COMMITMENTS The Company leases its office, warehouse, retail store and showrooms under various operating leases expiring through August 1999. Minimum payments under non-cancelable operating leases for future years ending March 31 are as follows: 1997 $563,000 1998 208,000 1999 142,000 2000 28,000 -------- $941,000 ========
12 Rent expense for the years ended March 31, 1996, 1995 and 1994, was approximately $656,000 (net of $96,000 sublease income), $609,000 and $593,000, respectively. 13 YES CLOTHING CO. NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996 AND 1995 NOTE 9 - INCOME TAXES Income taxes are summarized as follows:
1996 1995 1994 -------- -------- --------- Currently payable Federal $ - $ - $(211,000) State - - 4,000 -------- -------- --------- - - $(207,000) -------- -------- --------- Deferred Federal - - 357,000 -------- -------- --------- $ - $ - $ 150,000 ======== ======== =========
The primary difference between the income tax benefit or expense computed at the U.S. statutory corporate income tax rate and the effective income tax rate is due to the limitations on the utilization of net operating losses and the valuation allowance established due to the uncertainty of realization of a future tax benefit. Deferred income taxes arise from temporary differences between financial and tax reporting. The effects of these differences on income taxes are as follows:
1996 1995 1994 ----------- ---------- ---------- Tax effect of net operating losses $(3,366,000) $(1,857,000) $ (867,000) Inventory basis (29,000) 32,000 16,000 16,000 Valuation and other reserves 104,000 (146,000) (61,000) Other, net 23,000 (14,000) 145,000 Valuation allowance 3,268,000 1,985,000 1,124,000 ----------- ---------- ---------- Provision for deferred income taxes $ - $ - $ 357,000 =========== ========== ==========
14 YES CLOTHING CO. NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996 AND 1995 NOTE 9 - INCOME TAXES (Continued) At March 31, 1996 and 1995, deferred tax assets and liabilities are comprised of the following elements:
1996 1995 ----------- ----------- Gross deferred assets Reserve for chargebacks $ 194,000 $ 246,000 Provision for doubtful accounts 35,000 87,000 Inventory basis 94,000 65,000 Accrued expenses 12,000 50,000 Tax effect of net operating losses 6,090,000 2,724,000 ----------- ----------- Gross deferred asset 6,425,000 3,172,000 ----------- ----------- Deferred liability Accumulated depreciation (48,000) (63,000) ----------- ----------- Net deferred asset before valuation allowance 6,377,000 3,109,000 Valuation allowance (6,377,000) (3,109,000) ----------- ----------- $ - $ - =========== ===========
The Federal and State net operating loss carryforwards of approximately $15,035,000 and $16,304,000, respectively, expire from the years 2007 through 2011. Because ownership of the Company changed control during 1996, a portion of the net operating loss carryforwards will be limited. Approximately $5,896,000 and $7,630,000 of Federal and State net operating losses, respectively, are subject to a maximum annual utilization totaling approximately $522,000. 15 YES CLOTHING CO. NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996 AND 1995 NOTE 10 - SHAREHOLDERS' EQUITY STOCK OPTION PLAN - The Company has a stock option plan (the "Plan") for key employees, directors, officers and consultants of the Company. The plan provides for the issuance of up to 400,000 shares of common stock. Outstanding options are exercisable for a period of up to ten years and one week from the date of grant. Activity under this plan for 1994 through 1996 is as follows:
Number of Exercise Shares Price ---------- ----------------- Outstanding, March 31, 1993 350,000 $2.00 - $8.75 Granted 20,000 1.88 - 2.00 -------- ----------------- Outstanding, March 31, 1994 370,000 1.88 - 8.75 Granted 15,000 6.00 Repurchased and canceled (260,000) 2.00 - 8.75 -------- ----------------- Outstanding, March 31, 1995 125,000 1.88 - 6.00 Granted 80,000 2.13 - 3.38 Exercised (30,000) 1.88 - 3.00 Repurchased and canceled (145,000) 2.13 - 6.00 -------- ----------------- Outstanding, March 31, 1996 30,000 $2.13 - $3.38 ======== =================
REPURCHASE OF STOCK OPTIONS - In conjunction with the change of principal ownership in February 1995, the Company repurchased various stock options for a total of $330,000. Funds for this transaction were provided by the principal shareholder (Note 7). REPURCHASE OF LICENSE AGREEMENTS - In connection with the change in principal ownership in 1995, the Company reacquired certain licenses for a total of $295,000. This amount is reflected as an "other expense" in the statement of operations. SIGNIFICANT CAPITAL TRANSACTION - Effective June 4, 1996, the Company's principal shareholder sold approximately 50% of the Company's outstanding shares in a private transaction. Concurrent with this transaction, a Company affiliated through substantially common ownership advanced $3,100,000 to the Company. In addition, the affiliate purchased from the Company certain inventory and equipment for $1,463,000 at a gain of $471,000. The Company used the funds to repay factor advances and related party debt. The affiliate which advanced the funds has agreed to forgive payment on all but $500,000 (including $369,000 which was owed as of March 31, 1996), which shall be repaid in two installments of $250,000 each by January 31, 1997. The balance of the advances of approximately $1,977,000 will be considered a contribution of capital., 16 YES CLOTHING CO. NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996 AND 1995 NOTE 10 - SHAREHOLDERS' EQUITY (Continued) The selling shareholder returned to the Company for cancellation options to purchase 2,000,000 shares of common stock and warrants to purchase 2,000,000 shares of common stock of the Company. In addition, the Company surrendered its right and licenses to use certain trademarks and names associated with the selling shareholder and the affiliated Company. The following condensed proforma balance sheet presents the financial condition of the Company as of March 31, 1996, giving effect to these transactions as they occurred on or before March 31, 1996.
Historical Basis Proforma Effects Proforma Basis ---------------- ---------------- -------------- Current Assets Inventories $1,398,000 $ (732,000) $ 666,000 Other 200,000 - 200,000 ---------- ---------- ---------- 1,598,000 (732,000) 866,000 Property and Equipment 978,000 (260,000) 718,000 Other Assets 76,000 - 76,000 ---------- ---------- ---------- $2,652,000 $ (992,000) $1,660,000 ========== ========== ========== Current Liabilities Due to factor $3,232,000 $(3,100,000) $ 132,000 Due to related party 369,000 131,000 500,000 Other 1,230,000 - 1,230,000 ---------- ----------- ---------- 4,831,000 (2,969,000) 1,862,000 Contracts Payable 61,000 - 61,000 Shareholders' Equity (Deficit) (2,240,000) 1,977,000 (263,000) ---------- ----------- ---------- $2,652,000 $ (992,000) $1,660,000 ========== =========== ==========
17 YES CLOTHING CO. NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996 AND 1995 NOTE 11 - INSURANCE RECOVERIES Subsequent to March 31, 1992, the Company incurred the loss of substantially all of its finished goods inventory in connection with civil disturbances in the City of Los Angeles. During the fiscal year ended March 31, 1993 the Company recovered from one insurance company, the cost of the inventory lost and its normal gross profit which would have been derived from the sale of those goods. For the years ended March 31, 1995 and 1994, the Company recovered a net $63,000 AND $1,658,000, respectively, from a second insurance company for business interruptions losses related to the civil disturbances. NOTE 12 - OTHER RELATED PARTY TRANSACTIONS A law firm in which one member of the Board of Directors is a partner, was paid $93,000 and $62,000 for legal services for the years ended March 31, 1995 and 1994, respectively. This Board member resigned effective May 16, 1995. One former member of the Board of Directors served as a consultant to the Company and was paid $111,000 for consulting services for the year ended March 31, 1994, $100,000 for which was special bonus in connection with the settlement of the Company's business interruption claim (Note 11), and $6,000 annually for the year ended March 31, 1995. Another former member of the Board of Directors served as a consultant to the Company and was paid $4,000 for consulting services for the year ended March 31, 1994. 18 YES CLOTHING CO. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED MARCH 31, 1996, 1995 AND 1994
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - - ------------------------ ---------- ---------- ------------ ---------- ADDITIONS BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND ADDITIONS END OF DESCRIPTION OF PERIOD EXPENSES (DEDUCTIONS) PERIOD - - ------------------------ ---------- ---------- ------------ ---------- YEAR ENDED MARCH 31, 1996: Allowance for doubtful accounts on nonfactored accounts receivable $216,000 $ (90,000) $ (39,000)(a) $ 87,000 -------- --------- --------- -------- Reserve for estimated returns, allowances and discounts on factored accounts $615,000 $(129,000) $ - $486,000 -------- --------- --------- -------- YEAR ENDED MARCH 31, 1995: Allowance for doubtful accounts on nonfactored accounts receivable $221,000 $ 158,000 $(163,000)(a) $216,000 -------- --------- --------- -------- Reserve for estimated returns, allowances and discounts on factored accounts $247,000 $ 368,000 $ - $615,000 -------- --------- --------- -------- YEAR ENDED MARCH 31, 1994: Allowance for doubtful accounts on nonfactored accounts receivable $225,000 $ (23,000) $ 19,000(a) $221,000 -------- --------- --------- -------- Reserve for estimated returns, allowances and discounts on factored accounts $395,000 $ - $(148,000)(b) $247,000 -------- --------- --------- --------
(a) Represents net write-offs of uncollectible accounts against the allowance. (b) Represents write-offs of uncollectible accounts against the reserve. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this item is hereby incorporated by reference to the Company's proxy statement to be filed pursuant to Regulation 14A which involves the election of Directors. ITEM 11. EXECUTIVE COMPENSATION Information required by this item is hereby incorporated by reference to the Company's proxy statement to be filed pursuant to Regulation 14A which involves the election of Directors. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this item is hereby incorporated by reference to the Company's proxy statement to be filed pursuant to Regulation 14A which involves the election of Directors. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this item is hereby incorporated by reference to the Company's proxy statement to be filed pursuant to Regulation 14A which involves the election of Directors. 16 PART IV ITEM 14. EXHIBIT, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K FINANCIAL STATEMENTS AND SCHEDULES The following financial statements of Yes Clothing Co.(R) are included in Item 8: Balance sheet Statement of operations Statement of changes in shareholders' equity Statement of cash flows Notes to financial statements Financial Statement Schedule: II - Valuation and qualifying accounts EXHIBITS See index to exhibits. REPORTS ON FORM 8-K The Company filed a report on Form 8K on June 18, 1996 with respect to the June 4, 1996 transaction between Marciano, the Company and Anthome. 17 REPORT OF MANAGEMENT The accompanying financial statements have been prepared by management in conformity with generally accepted accounting principles, and necessarily include some amounts that are based on management's best estimates and judgments. Yes Clothing Co.(R) maintains a system of internal accounting controls designed to provide management with reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition, and that transactions are executed in accordance with management's authorization and recorded properly. The concept of reasonable assurance is based on the recognition that the cost of a system of internal control should not exceed the benefits derived and that the evaluation of those factors requires estimates and judgments by management. Further, because of inherent limitations in any system of internal accounting control, errors or irregularities may occur and not be detected. Nevertheless, management believes that a high level of internal control is maintained by Yes Clothing Co. through the selection and training of qualified personnel, and the establishment and communication of accounting and business policies. The Audit Committee of the Board of Directors, composed solely of outside directors, meets periodically with management and with Yes Clothing Co.(R)'s independent auditors to review matters relating to the quality of financial reporting and internal accounting control, and the nature, extent and results of their audits. Yes Clothing Co.'s independent auditors have free access to the Audit Committee. Guy Anthome Guy Anthome Jeffrey Busse Chairman, President Chief Financial Chief Executive Officer Officer SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. YES Clothing Co. By: /s/ GUY ANTHOME ------------------------- Chairman of the Board and Chief Executive Officer July 12, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ Guy Anthome Chairman of the Board - - --------------------------- Chief Executive Officer July 12, 1996 Guy Anthome and Director Principal Executive Officer 18 /s/ Guy Anthome - - --------------------------- President Guy Anthome and Director July 12, 1996 /s/ Jeffrey P. Busse - - --------------------------- Chief Financial Officer Jeffrey P. Busse and Director July 12, 1996 Principal Financial and Accounting Officer /s/ Irving B. Kroll - - --------------------------- Director July 12, 1996 Irving B. Kroll /s/ Maurice Schoenholz - - --------------------------- Director July 12, 1996 Maurice Schoenholz 19 INDEX TO EXHIBITS
PAGE SEQUENTIALLY ITEM NO. DESCRIPTION NUMBERED - - -------- ----------- -------- 3.1 Restated Articles of Incorporation of the Company. /(1)/ 3.2 Restated Bylaws of the Company./(1)/ 4.1 Specimen Common Stock Certificate./(1)/ 10.1 1989 Stock Option Plan with forms of stock option agreements thereunder./(1)/* 10.2 Profit Sharing Plan dated March 22, 1995.*/(5)/ 10.3 Consultant Agreement dated as of April 21, 1989 between the Company and Alexander Menke./(1)/* 10.4 Employment Agreement dated as of November 1, 1990 between the Company and Daniel V. Goodstein./(2)/* 10.5 Form of Indemnification Agreement entered into with the Company's Directors and Executive Officers./(1)/ 10.6 Sublease dated May 3, 1989 between the Company and D.G.P. Limited Partnership./(1)/ 10.7 Lease dated August 15, 1991 between the Company and California Mart./(4)/ 10.8 Lease dated February 14, 1992 between the Company and Jody Apparel, Inc./(3)/ 10.9 Lease dated November 4, 1992 between the Company and California Mart./(4)/ 10.10 Lease dated May 10, 1993 between the Company and 1466 Broadway Associates./(4)/ 10.11 Lease dated September 17, 1990 between the Company and Gettinger Associates, as renewed pursuant to a letter dated September 22, 1993 from Gettinger Associates to the Company./(5)/ 10.12 Contract for the purchase of assets, including the Sedan trademark, between the Company and Camden Place, Ltd. dated March 9, 1992./(4)/ 10.13 Factoring Agreement dated May 15, 1994 between the Company and Republic Factors Corp., and related agreements./(5)/ 10.14 Form of Continuing Indemnity and Security Agreement between the Company and Republic Bank California N.A., and related agreements./(5)/ 10.15 Promissory Note dated March 9, 1995 between the Company and Georges Marciano/(6)/ 10.16 Lease Assignment and First Amendment to lease between the Company and R.R. Park City, Inc./ (6)/ 10.17 Lease dated April 3, 1995 between the Company and 1466 Broadway Associates/(6)/ 10.18 License Agreement dated as of April 1, 1995 between the Company and Marble Sportswear, Inc./ (6)/ 10.19 Amendment to Factoring Agreement dated March 2, 1995 between the Company and Republic Factors Corp./ (6)/ 10.20 Retainer Agreement dated June 17, 1995 between the Company and Houlihan Lokey Howard and Zukin/(6)/ 10.21 Indemnification Agreement dated May 3, 1995 between the Company and Georges Marciano/(6)/. 10.22 Indemnification Agreement dated May 3, 1995 between the Company and Irving B. Kroll/(6)/ 10.23 Indemnification Agreement dated May 3, 1995 between the Company and Maurice Schoenholz/(6)/ 10.24 Indemnification Agreement dated May 18, 1995 between the Company and Guy Anthome/(6)/. 10.25 Indemnification Agreement dated May 18, 1995 between the Company and Jeffrey P. Busse/(6)/ 10.26 Employment Agreement dated as of June 17, 1995 between the Company and Georges Marciano.*/(6)/ 10.27 Stock Option Agreement dated June 17, 1995 between the Company and Georges Marciano.*/ (6)/ 10.28 Warrant Agreement dated June 17, 1995 between the Company and Georges Marciano(R)/(6)/. 10.29 Three Party Agreement between the Company, Republic Factors Corp. and Georges Marciano dated June 12, 1995/(6)/. 10.30 Three Party Agreement between the Company, Republic Factors Corp. and Georges Marciano dated June 21, 1995/(6)/.
20 10.31 Agreement among Marciano, the Company and Anthome dated June 4, 1996 incorporated by reference to Exhibit A on Form 13-d filed with the Securities and Exchange Commission on June 6, 1996. 10.32 Body Glove license agreement between Dive N' Surf, Inc. (dba Body Glove) and the Company dated June 25, 1996. 27 Financial Data Schedule. 99.1 Valuation and Fairness Opinion of Houlihan Lokey Howard and Zukin dated July 10, 1995/(6)/.
_______________________ * Management contract or executive compensation plan or arrangement. (1) Filed as an exhibit to the annual Report on Form 10-K for the fiscal year ended March 31, 1990, and incorporated herein by this reference. (2) Filed as an exhibit to the annual Report on Form 10-K for the fiscal year ended March 31, 1991 and incorporated herein by this reference. (3) Filed as an exhibit to the Annual Report on Form 10-K for the fiscal year ended March 31, 1992, and incorporated herein by this reference. (4) Filed as an exhibit to the Annual Report on Form 10-K for the fiscal year ended March 31, 1993 and incorporated herein by this reference. (5) Filed as an exhibit to the Annual Report on Form 10-K for the fiscal year ended March 31, 1994. (6) Filed as an exhibit to the Annual Report on Form 10-K for the fiscal year ended March 31, 1995. 21 EX-10.32 2 LICENSE AGREEMENT EXHIBIT 10.32 LICENSE AGREEMENT ----------------- This License Agreement (hereinafter referred to as "Agreement") is effective as of July 1, 1996, by and between DIVE N' SURF, INC., a California corporation having offices at 530 Sixth Street, Hermosa Beach, California 90254 (hereinafter referred to as "DNS") and YES Clothing Co. (hereinafter referred to as "LICENSEE"), located at 1380 West Washington Boulevard, Los Angeles, CA 90007. WHEREAS, DNS has used for many years the trademarks BODY GLOVE and the HAND DESIGN and has developed certain intellectual property rights in connection therewith, which marks are the subject of U.S. and foreign registrations; WHEREAS, LICENSEE desires to secure the right and license to use said trademarks and intellectual property rights in connection with the design, manufacture, advertisement, promotion, distribution and sale of certain Licensed Products as defined hereinafter; WHEREAS, DNS is willing to grant LICENSEE such license, upon the terms and conditions set forth below. NOW, THEREFORE, in consideration of the mutual covenants and promises contained herein, the parties hereto agree as follows: 1. Definitions ----------- The following terms shall have the meanings set forth below: a. "Marks" shall mean the BODY GLOVE and the HAND DESIGN trademarks, whether alone or in combination, and any other trademarks (if any) as set forth in Schedule A attached hereto and incorporated herein by this reference; provided, however, that the appearance and/or style of the Marks may vary from time to time as specified by DNS. b. "Property" shall mean the intellectual property rights which DNS deems to be desirable or necessary for LICENSEE to enjoy the fruits of the license granted herein. Such property shall include, but not be limited to, certain product styles, designs, samples, patterns, colors, materials, fabrics, titles, trademarks, names, logos, symbols, copyrights, art work, inventions, trade secrets (patentable or unpatentable), patents and pending patent applications. c. "Territory" shall mean solely the geographic area specifically set forth and described in Schedule B, attached hereto and incorporated herein by this reference. d. "Licensed Products" shall mean solely the products specified in Schedule C, attached hereto and incorporated herein by this reference. e. "Licensed Rights" shall mean solely the combination of the Marks and Property. f. "Net Sales" shall mean the total of gross dollar amounts invoiced or charged to others by LICENSEE for all Licensed Products sold, distributed, or transferred under the Licensed Rights, reduced by the amount of any bona fide ---- ---- trade quantity discounts and actual returns plus any co-op or advertising discounts given to customers not to exceed three percent (3%) of gross sales, only, no deduction shall be made for uncollectible accounts. No costs incurred in the manufacture, sale, distribution, advertisement or promotion of the Licensed Products or in the payment by LICENSEE of any local, State or Federal taxes of any nature whatsoever shall be deducted from the gross sales amounts or from any royalty payable to DNS by LICENSEE. Any sales or transfers of Licensed Products made by LICENSEE to any person or entity that does not deal at arm's length with LICENSEE shall be computed, for the purpose of determining Net Sales, at an amount equal to the price at which LICENSEE would have invoiced or charged purchasers which deal at arm's length with LICENSEE. g. "Show Date" shall mean the date by which LICENSEE agrees to have samples of the Licensed Products ready to show to DNS, which date, for purposes of this Agreement, is set forth in Schedule D attached hereto and incorporated herein by this reference. h. "Marketing Date" shall mean the date by which LICENSEE agrees to actually start taking orders from customers for all items defined as Licensed Products, which date, for purposes of this Agreement, is set forth in Schedule E attached hereto and incorporated herein by this reference. i. "Shipping Date" shall mean the date by which LICENSEE agrees to begin shipping Licensed Products, which date, for purposes of this Agreement, is set forth in Schedule F attached hereto and incorporated herein by this reference. j. "Contract Year" shall mean a twelve (12) month period beginning on the Shipping Date and each anniversary thereof. Said Contract Year shall define the periods in which LICENSEE shall be obligated to pay to DNS royalties, other payments, and minimum royalties, as defined herein. 2. Rights Granted -------------- a. DNS hereby grants to LICENSEE, and LICENSEE accepts, upon the terms and conditions set forth herein, a limited exclusive, non-transferable right and license to use the Licensed Rights solely on or in connection with the design, manufacture, advertisement, promotion, distribution and sale of Licensed Products solely within the Territory. b. The parties acknowledge and agree that this Agreement is an intellectual property rights license agreement and does not constitute, and shall not be construed as, a franchise agreement. The parties further acknowledge and agree that State and Federal franchise laws do not and will not apply to this Agreement or to the relationship between LICENSEE and DNS and the respective rights and obligations hereunder since the parties agree that, due to their respective business backgrounds and prior licensing experience, they do not need the protection of State or Federal franchise laws. c. LICENSEE shall not have the right to sublicense without DNS's prior written consent. d. LICENSEE shall not have the right to use the Licensed Rights in any manner that conflicts with the rights of any third party. If the use of the Licensed Rights on any or all of the Licensed Products infringes the rights of any third party or weakens or impairs DNS's interest in the Licensed Rights, then LICENSEE agrees to immediately terminate or modify such use in accordance with DNS's instructions. However, the parties agree to arbitrate any determination made pursuant to this paragraph. e. LICENSEE shall not sell or cause to be sold, directly or indirectly, any Licensed Products to any party which LICENSEE knows, or has reason to know, is likely to resell or distribute such Licensed Products outside of the Territory. 3. Transfer and Ownership of Property ---------------------------------- LICENSEE acknowledges that DNS has expended considerable sums in establishing a worldwide reputation for the products sold under the Licensed Rights and for creating a certain unique style or look. Accordingly, LICENSEE agrees that, during the term of this Agreement, it shall not use the Property in connection with the sale of any products other than the Licensed Products and that the Property will be used solely in association with the Marks. Following termination of this Agreement, LICENSEE agrees that it shall terminate any and all use of the Property and deliver that property to DNS. 4. Quality Standards and Inspection -------------------------------- a. The parties acknowledge and agree that great value is placed on the Licensed Rights and the goodwill associated therewith, that the consuming public and the industry now associate the Licensed Rights with products of consistently high quality, and that the terms and conditions of this Agreement are necessary and reasonable to assure the consuming public and the industry that all Licensed Products sold hereunder are of the same consistently high quality as products sold by others who are or may hereafter be licensed to sell any products under the Licensed Rights. b. As early as possible, and in any event prior to each season, LICENSEE shall furnish to DNS, at no expense to DNS, one (1) pre-production sample of each Licensed Product that LICENSEE intends to manufacture under the Licensed Rights. Additionally, at the same time LICENSEE shall provide Beach Brokers an identical pre-production sample line. DNS shall have the right to exercise quality control and line content over the Licensed Products manufactured and sold by LICENSEE under the Licensed Rights by making any changes or corrections in said samples as may be required prior to production, in DNS's sole determination, to maintain the high quality standard prescribed by DNS. c. LICENSEE shall make no material changes in any sample after it has been approved without resubmitting the sample for approval. d. LICENSEE agrees to exercise its best efforts to cooperate with DNS at all times in the coordination of Licensed Products so that they are consistent with the style, image, and quality of other products sold under the Licensed Rights. -2- e. DNS and its representatives may, at all reasonable business hours and without prior notice to LICENSEE, inspect the operations and facilities of LICENSEE with respect to this Agreement, except any facilities that are restricted to Licensees employees only. f. Substandard merchandise shall be defined as second or third quality merchandise, not meeting the first quality standards of DNS. LICENSEE agrees to limit the sales of substandard merchandise to not greater than five percent (5%) of sales per year, and LICENSEE further agrees to destroy all excess substandard merchandise. g. In order to protect and foster the value and reputation of the Licensed Rights, LICENSEE agrees to sell Licensed Products only to better stores, such as sporting goods stores, department stores, specialty stores, etc., as determined by DNS in its sole discretion. Any sales to other distribution levels including warehouse clubs must be approved by DNS in writing before any orders are solicited. Any violation of this paragraph constitutes a material breach of this Agreement. h. LICENSEE agrees to comply with all applicable local, State and Federal labeling laws, and at all times to conduct its activities under this Agreement in a lawful manner. 5. Duration -------- (a) This Agreement shall commence on the effective date set forth above and in Schedule G attached hereto and incorporated herein by this reference, and shall continue in effect for the number of Contract Years set forth in Schedule G. This Agreement shall terminate upon the termination date set forth in Schedule G, unless terminated sooner in accordance with the terms and conditions set forth herein. (b) If LICENSEE wishes to exercise its option as set forth in Schedule G, LICENSEE must notify DNS of such intent in writing no less than one (1) year prior to the expiration of the first term of this Agreement. 6. Deposit, Royalties, Advertising, and Trade Show Fees ---------------------------------------------------- a. Upon execution of this Agreement, LICENSEE agrees to pay to DNS a deposit, which sum is set forth in Schedule H attached hereto and incorporated herein by this reference. The deposit shall be held as security for LICENSEE's faithful performance of the provisions of this Agreement. If LICENSEE fails to pay royalties or other charges due hereunder, or otherwise defaults with respect to any provision of this Agreement, DNS may use the deposit, or any portion of it, to reimburse DNS for any amounts so owing and for all costs sustained by DNS resulting from LICENSEE's default including, but not limited to, attorneys' fees and costs. LICENSEE shall immediately on demand pay to DNS the sum equal to that portion of the deposit expended or applied by DNS as provided in this paragraph so as to maintain the deposit in the sum initially deposited with DNS. DNS shall not be required to keep the deposit separate from its general account nor shall DNS be required to pay LICENSEE any interest on the deposit. The deposit, or that portion thereof which has not been previously applied by DNS, shall be returned to LICENSEE within thirty (30) days after the expiration of the term of this Agreement, except as otherwise provided in Paragraph 20.f. below. The application or use of the deposit by DNS as provided in this Paragraph 6 shall not act as a waiver of DNS's right to terminate this Agreement or to exercise any other rights or remedies provided in this Agreement or otherwise permissible under law. b. LICENSEE further agrees to pay to DNS during the term of this Agreement, a "Combined Payment" as set forth on Schedule H equal to the sum of: (i) royalties; (ii) advertising fees, for use by DNS, in its sole discretion, for expenditures relating to advertising, public relations, and institutional brand name promotion; (iii) trade show fees, for use by DNS, in its sole discretion, for trade show and related administrative costs and expenses, both direct and indirect; and c. The Combined Payment shall be computed by applying the sum of the percentage rates set forth on Exhibit H ("Combined Rate") to the Net Sales and shall be paid in accordance with Paragraphs 7 and 8 below. 7. Minimum Shipments and Monthly Payments -------------------------------------- a. In order to induce DNS to enter into this Agreement, as well as to demonstrate its good faith, satisfy the demand for Licensed Products in the Territory, and to further enhance the image and reputation of the Licensed Rights among consumers, LICENSEE agrees to meet the minimum levels of performance defined below and set forth in Schedule H. -3- b. During each Contract Year, LICENSEE agrees to ship not less than the minimum dollar volume of Net Sales of Licensed Products ("Minimum Shipments"). In addition, LICENSEE agrees to pay, on a Contract Year basis, a "Minimum Annual Combined Payment" which shall be calculated by multiplying the Combined Rate percentage times the dollar volume of Annual Minimum Shipments. Notwithstanding the payment by LICENSEE of the Minimum Annual Combined Payment, if LICENSEE does not meet the Annual Minimum Shipments requirement in any Contract Year, DNS shall have the right to terminate this Agreement. c. In order to ensure that the Minimum Annual Combined Payment is met during each Contract Year, LICENSEE shall pay to DNS each month a "Minimum Monthly Payment" in the amount of one twelfth (1/12) of the Minimum Annual Combined Payment. Where the actual Combined Payment for a particular month is less than the Minimum Monthly Payment, LICENSEE shall pay to DNS the Minimum Monthly Payment. Where the actual Combined Payment for a particular month exceeds the Minimum Monthly Payment, the actual Combined Payment shall be paid to DNS, and the excess of the actual Combined Payment over the Minimum Monthly Payment shall be credited toward the Minimum Monthly Payment for any subsequent months in that Contract Year. Such excess shall not be credited toward the Minimum Monthly Payment in any subsequent Contract Years. 8. Payment ------- a. The Combined Payment shall be based upon Net Sales of Licensed Products in each month during each Contract Year. Either the Combined Payment or the Minimum Monthly Payment shall be due and payable to DNS by LICENSEE by the twentieth (20th) day of the following month. b. At the time of each such payment, LICENSEE shall provide to DNS a written statement illustrating the calculation of the Combined Payment. The statement shall be certified, under penalty of perjury by an officer of LICENSEE, to be correct and shall set forth a detailed accounting of the aggregate number and Net Sales of all Licensed Products. All royalty reports shall be submitted by LICENSEE to DNS on the Dive N' Surf Inc. Royalty Computation Form, a copy of which is attached hereto as Exhibit A. c. All payments required under this Agreement shall be in U.S. dollars and made payable to the order of "Dive N' Surf Incorporated." d. Acceptance by DNS of any payments under this Agreement shall not prevent DNS at any later date from disputing the amount owed or from demanding more information from LICENSEE regarding payments finally due, and such acceptance of any payment by DNS shall not constitute a waiver of any breach of any term or provision of this Agreement by LICENSEE if any such breach shall have occurred. e. Time is of the essence with respect to the payments due to DNS by LICENSEE hereunder. LICENSEE acknowledges and agrees that any manner of payment other than that stated herein, including without limitation, payment into any escrow account or to any other third party, shall constitute a material breach of this Agreement. 9. Books and Records ----------------- a. LICENSEE shall keep complete and accurate records of all Licensed Products manufactured, distributed and sold under the Licensed Rights and of LICENSEE's activities and of all transactions relating to LICENSEE's activities under this Agreement, and shall make the same readily available to DNS, and its agents or representatives, at such reasonable times as DNS may from time to time request for inspection, copying and extracting. b. Such books of account and records shall be kept in accordance with generally accepted accounting principles, consistently applied, and shall be retained by LICENSEE and kept available for at least three (3) years after the termination of each year of this Agreement for possible inspection, copying, extracting and/or audit by DNS. All financial information obtained by DNS regarding LICENSEE shall be kept confidential except in the event that such information is necessary to resolve a bona fide dispute between the parties. c. DNS or its duly authorized agents or representatives shall have the right to conduct audits with respect to the books, records, and all other documents and material in the possession or custody, or under the control of LICENSEE relating to this Agreement, the cost of which shall be borne by the party conducting the audit. If any such audit, however, discloses that payments due to DNS under this Agreement exceed the amount of payments actually made to DNS by an amount greater than ten percent (10%) of the payments made, LICENSEE shall immediately pay the cost of the audit, plus unpaid royalties plus interest calculated from the date such payment(s) were actually due until the date when such payment is, in fact, actually made, plus any applicable late penalties. -4- d. No later than ninety (90) days after the close of LICENSEE's fiscal year, LICENSEE shall provide DNS with its annual financial statements, audited or unaudited, prepared by an independent certified accountant of LICENSEE's choice, which statements shall include an income statement and a balance sheet of LICENSEE prepared in accordance with generally accepted accounting principles, consistently applied. If unaudited, a senior officer of LICENSEE shall certify under penalty of perjury that the financial statements are true and correct, and have been prepared in accordance with generally accepted accounting principles, consistently applied. 10. Advertising and Promotion ------------------------- a. LICENSEE shall submit to DNS for approval all copy, scripts, comps, actuals, proofs, press releases, interviews, magazine and newspaper articles and other advertising materials prior to the placement of such advertising materials. Such approval shall not be unreasonably withheld and if DNS fails to reject the submission within five (5) business days of receipt by DNS, it shall be deemed "approved." Expenditures for any advertising materials which are not so submitted and approved in advance of placement shall not be credited against the mandatory advertising allowance which is provided for in paragraph 10.a. DNS shall only approve for such credit bona fide trade and consumer advertising in either print, radio, television or other media. DNS shall not approve for such credit model's fees, public relations charges, tradeshows, memberships, sponsorships or meetings. b. LICENSEE agrees that it shall not knowingly or intentionally engage, participate or otherwise become involved in any activity or course of action that, in DNS's opinion, diminishes and/or tarnishes the image and/or reputation of the Licensed Rights. In order to maintain the image and reputation of the Licensed Rights, LICENSEE further agrees to abide by the policies and procedures established by DNS from time to time, regarding, without limitation, trademark usage, trademark notices, advertising, promotion activities and media relations. DNS agrees not to unreasonably alter such policies and procedures during the term of this Contract. c. LICENSEE acknowledges that it is important to maintain within the relevant industry a consistent and uniform image among all licensees of the Licensed Rights. Accordingly, LICENSEE agrees to participate, in good faith, in trade shows to the extent and in the manner that DNS shall reasonably direct. d. DNS reserves the right to approve or disapprove the sales force utilized by LICENSEE to sell the Licensed Products. Such approval shall not be unreasonably withheld. 11. Consultation ------------ LICENSEE agrees to consult with DNS on a regular basis regarding all new styles and designs, manufacturing schedules, distribution schedules, or any other substantive changes, new developments or other matters, which would materially affect the rights, obligations and benefits of either party to this Agreement. 12. Best Efforts ------------ a. LICENSEE agrees to use its best reasonable efforts to manufacture, distribute and sell Licensed Products under the Licensed Rights in order to meet the demand for the Licensed Products in the marketplace and to uphold, protect and defend the image and reputation of the Licensed Rights. In this regard, and without limitation, LICENSEE agrees to have its line ready to show to DNS by the Show Date, to have started taking orders from customers for all items defined as Licensed Products by the Marketing Date, and to have Licensed Products ready to ship to customers in substantial quantities by the Shipping Date. Furthermore if, at any time after such dates, LICENSEE, for a period of three (3) consecutive months, fails to manufacture, offer to sell, or distribute any of the Licensed Products (or any class or category thereof), DNS, in addition to all of the remedies available to it hereunder, may terminate this Agreement with respect to such Licensed Products. b. LICENSEE agrees that it will sell and distribute the Licensed Products in the Territory outright and not on approval, consignment, guaranteed sale or return basis, or as a premium, promotional tie-in, or give-away. LICENSEE further agrees to sell and distribute the Licensed Products only to merchants for sale and distribution directly to the public and only to wholesalers and distributors for sale and distribution to retail stores. c. Upon the failure of LICENSEE to manufacture and ship eighty percent (80%) of confirmed, approved orders during the course of any Contract Year, and upon thirty (30) days' written notice from DNS to LICENSEE, DNS may demand of LICENSEE, in writing, an amount equal to the Combined Rate percentage as applied to all such unfilled, confirmed orders, and LICENSEE agrees to pay the same. d. DNS and LICENSEE agree that maintenance of the good name and reputation of the trademark BODY GLOVE and the HAND DESIGN, and the timely performance of LICENSEE's obligations under this Agreement are of utmost importance. Accordingly, notwithstanding the provisions of this Agreement and in lieu of all other -5- remedies available to DNS under this Agreement or applicable law, should DNS conclude that LICENSEE has defaulted in the performance of its obligations under this Agreement, including but not limited to (i) the failure to manufacture or cause to be manufactured the Licensed Products in a timely fashion; (ii) the failure to distribute or cause to be distributed the Licensed Products in a timely fashion, or; (iii) the failure to deliver or to cause to be delivered the Licensed Products in accordance with purchase orders in a timely fashion, cause a party other than Licensee (including DNS) to perform the acts otherwise required of LICENSEE under this Agreement for such period or periods and in such volume as DNS deems necessary. 13. Insurance --------- a. LICENSEE agrees to obtain and keep in full force and effect, during the term of this Agreement, at its sole cost and expense, policies of insurance insuring against those risks customarily insured under comprehensive general liability policies, including, but not limited to, "product liability" and "completed operations." Such policies of insurance shall have endorsements or coverage with combined single limits of not less than Three Million Dollars ($3,000,000) and shall name DNS as an additional insured thereunder. Such insurance policies shall provide that they cannot be canceled without thirty (30) days' prior written notice to DNS. It is also agreed that the "other insurance" clause, if any, will be deleted from such policy, that the insurance under such policy shall be primary, and that other insurance in force is neither primary nor contributing. b. LICENSEE shall provide to DNS, within thirty (30) days of the effective date of this Agreement, a certificate showing proof that such policies of insurance are in effect. In no event shall LICENSEE manufacture, offer for sale, sell, advertise, promote, ship and/or distribute the Licensed Products prior to the receipt by DNS of such certificates of insurance. c. LICENSEE agrees to give DNS thirty (30) days' prior written notice of any reduction in limits or termination of such policies of insurance, or of any intention on the part of LICENSEE not to pay the premiums thereof. 14. Use and Display of the Marks ---------------------------- a. LICENSEE agrees and acknowledges that the presentation and image of the Licensed Rights should be uniform and consistent with respect to all products bearing the Licensed Rights, including Licensed Products. Accordingly, LICENSEE agrees to use the Licensed Rights solely in the manner which DNS shall, from time to time, specify. Labels bearing the Licensed Rights and the required legal notices must be permanently affixed to the Licensed Products manufactured, distributed and/or sold by LICENSEE. b. LICENSEE agrees to use, in connection with Licensed Products, only labels which are provided by or approved in writing by DNS. With respect to the use by LICENSEE of other forms of identification for the Licensed Rights, including, but not limited to, tags, signs, banners, stationery, order forms and business cards, LICENSEE agrees to obtain the prior written approval of DNS. It is expressly agreed that LICENSEE shall not have the right to use the Licensed Rights as a trade name, company name, trade style, fictitious name or d.b.a., or any portion thereof. c. LICENSEE will submit to DNS, for its prior written approval, any trademark, service mark or name which is to be used in connection with the Licensed Rights, and DNS shall have the right to refuse to permit the use of any such marks or names. d. All Licensed Products manufactured, distributed or sold by LICENSEE shall state that the Licensed Rights are owned by DNS of Hermosa Beach, California. LICENSEE agrees to use the following form of such notice which DNS may change from time to time, in its sole discretion: Copyright 19__ Body Glove All Rights Reserved BODY GLOVE and the HAND DESIGN are trademarks of Dive N' Surf, Inc., Hermosa Beach, California, U.S.A. e. LICENSEE agrees to use the proper trademark and copyright notices in connection with the Licensed Rights and any associated copyrightable works, which notices DNS shall from time to time specify. Such notices shall appear in the screen for any screen-printed design, in the neck label or waist label of any Licensed Products, in the salvage of any fabric, or on any label or tag affixed to the Licensed Products. -6- 15. Ownership of the Marks and Copyrights ------------------------------------- a. LICENSEE acknowledges that the Licensed Rights are owned solely and exclusively by DNS. b. LICENSEE agrees that nothing contained in this Agreement shall give to LICENSEE any right, title or interest in the Licensed Rights, that such Licensed Rights are the sole and exclusive property of DNS and that all such uses by LICENSEE of the Licensed Rights shall inure only to the benefit of DNS. c. Although such use is unauthorized as set forth above, LICENSEE agrees that any unauthorized use of the Licensed Rights as a trade name, service mark, business name, trade style, fictitious business name or d.b.a. shall also inure to the benefit of DNS, and that such use by LICENSEE shall not give to LICENSEE any right, title or interest in the Licensed Rights. d. LICENSEE agrees that it will not seek or obtain any registration of the Licensed Rights in any name or participate directly or indirectly in such registration without DNS's prior written permission. Subject solely to the rights and interest granted herein, LICENSEE further agrees and acknowledges that, if it has obtained or obtains in the future, in any country, any right, title or interest in the Licensed Rights, or in any marks which are confusingly similar to the Licensed Rights, or in any other trademark or service mark owned by DNS, that LICENSEE has acted or will act as an agent and for the benefit of DNS for the limited purpose of obtaining such registrations and assigning them to DNS. LICENSEE further agrees to execute any and all instruments deemed by DNS and/or its attorneys or representatives to be necessary to transfer such right, title or interest to DNS. e. LICENSEE agrees not to take any action challenging or opposing, or to raise or cause to be raised, either during the term of this Agreement or after its termination, on any grounds whatsoever, any questions concerning, or objections to, the validity of the Licensed Rights or DNS's rights therein, or any other trademarks or service marks owned by DNS. f. LICENSEE agrees to assist DNS in obtaining any registration for the Licensed Rights by providing, without limitation, information and samples regarding the Licensed Rights; provided, however, the failure to obtain such registrations shall not affect the validity of this Agreement. 16. Nontransferability of Rights ---------------------------- LICENSEE shall not grant, assign, sublicense or otherwise convey or transfer any rights inuring to LICENSEE or any obligation or duties owed by LICENSEE to DNS under this Agreement, without the prior written consent of DNS and any attempted transfer or assignment shall be null and void. DNS, however, may assign or transfer any and/or all of its rights or obligations under this Agreement without prior notice to, or approval of, LICENSEE. 17. Independent Contractor ---------------------- The parties hereby agree that LICENSEE is and shall be an independent contractor and that no agency (except for that provided for in Paragraph 15.d), joint venture or partnership is created by this Agreement. The legal relationship of any person or entity performing services for LICENSEE shall be one solely between said parties. LICENSEE shall incur no obligation in the name of DNS without the prior written consent of DNS. 18. Indemnification --------------- a. LICENSEE will indemnify, defend and hold DNS and its directors, officers, agents and employees harmless from any and all liabilities, claims, obligations, suits, judgments and expenses whatsoever, including court costs and attorneys' fees, which DNS may incur or which may be asserted against DNS, and which arise or occur with respect to the operation of LICENSEE's business as it relates to this Agreement. Such indemnity shall extend to all Licensed Products, notwithstanding the approval of samples thereof by DNS, and to any and all liabilities and claims incurred after the termination of this Agreement but which are based on acts or events of which proximate cause arose during this Agreement. DNS shall have the right to defend any such action or proceeding with attorneys of its own selection. b. DNS will indemnify, defend and hold LICENSEE and its directors, officers, agents and employees harmless from any and all liabilities, claims, obligations, suits judgments and expenses whatsoever, including court costs and attorneys' fees, which LICENSEE may incur or which may be asserted against LICENSEE which arise or occur with -7- respect to DNS' own acts or omissions. DNS shall not be held liable or obligated to indemnify LICENSEE for any liabilities, claims, etc. caused by any third party including other DNS Licensees. 19. Breach and Cure --------------- Except where the notice requirement is specifically waived, and in the event of any breach of this Agreement, the party alleging such breach shall give written notice of the breach to the breaching party and, except as otherwise specifically set forth in this Agreement, shall specify a reasonable period of time within which the breaching party is to cure the breach. For purposes of payments due under Paragraph 8 above, five (5) days shall be deemed a reasonable time to cure any breach thereof. In the event that a noticed breach, if required, has not been cured within the specified period, the non-breaching party may terminate this Agreement upon written notice to the breaching party. Termination shall be effective upon receipt of the written notice. 20. Termination ----------- a. Upon termination of this Agreement, for any reason, all rights of LICENSEE to use the Licensed Rights shall forthwith cease, and LICENSEE shall immediately: (i) Cease the manufacture, sale, and distribution of the Licensed Products except in accordance with this Paragraph; (ii) Cease all use of the Licensed Rights; (iii) Delete any reference to the Licensed Rights from any advertising, promotional, or directory materials, including any reference to having been previously a licensee of DNS under the Licensed Rights; (iv) Deliver all packaging, labels, tags and other materials and property (other than actual Licensed Products) relating to this Agreement to DNS for destruction or disposal as DNS shall elect; and (v) Within seven (7) days of termination, furnish DNS with a full and complete statement setting forth (a) the inventory of Licensed Products manufactured or in the process of manufacture, including the wholesale price thereof, (b) the number of orders received, accepted, and approved, which orders shall be irrevocably assigned to DNS, (c) production and distribution schedules, and (d) advertising and promotional schedules. b. DNS shall have the option to purchase any portion of the inventory of Licensed Products at cost. c. Should DNS not exercise said option to purchase the inventory or any portion thereof, LICENSEE shall be entitled to sell any portion for which said option has not been exercised, on a nonexclusive basis, for a period of ninety (90) days from the date of termination, such sales to be governed by the terms of this Agreement. After expiration of said ninety (90) day period, LICENSEE shall completely remove the Licensed Rights from any products not sold or distributed before the expiration of said ninety (90) day period. d. If permitted under any applicable laws, including U.S. bankruptcy laws, DNS may terminate this Agreement immediately upon (i) the insolvency of LICENSEE; (ii) the filing of a voluntary petition in bankruptcy by LICENSEE: (iii) the filing of an involuntary petition in bankruptcy against LICENSEE that is not dismissed within thirty (30) days from date of filing; (iv) the appointment of a receiver or trustee for LICENSEE, provided that such appointment is not vacated within thirty (30) days from the date of such appointment; (v) the execution by LICENSEE of an assignment for the benefit of creditors; or (vi) the attachment, execution or other judicial seizure of substantially all of the assets of LICENSEE where such seizure is not discharged within thirty (30) days thereof. e. The termination of this Agreement, for any reason whatsoever, shall not relieve LICENSEE of any duties and obligations contained herein, including, but not limited to, the obligation to pay royalties, advertising fees, furnish royalty statements, etc; nor shall termination extinguish any rights of DNS necessary to ensure an expeditious conclusion of this Agreement, including, without limitation, the right to inspect the books, records, and facilities of LICENSEE, and the right to obtain prior written consents. f. LICENSEE acknowledges that, if this Agreement is terminated by reason of LICENSEE's material breach, incalculable damage will result to the image, reputation and goodwill associated with the Licensed Rights because of the inability of DNS to meet the demand for the Licensed Products in the marketplace. In addition, in the event of such termination, the parties acknowledge that DNS will lose revenues and incur expenses in locating another licensee and in assisting in bringing the Licensed Products to market. Therefore, in the event of termination of this Agreement, for cause, LICENSEE agrees to pay to DNS, within thirty (30) days of the date of such termination, in addition to -8- all other payments previously made and those due at the time of termination, liquidated damages in the amount an amount equal to the Minimum Annual Combined Payment for the Contract Year in which such termination occurs. The parties hereby agree that these amounts comprise a reasonable estimate of the damages that DNS would suffer as a result of such termination for cause, that the amount of actual damages would be impossible or extremely difficult to calculate, and that these liquidated damages are not in the nature of a penalty. DNS may apply all or any portion of LICENSEE's deposit as set forth in Paragraph 6 above in full or partial payment of such liquidated damages. g. DNS shall be entitled to negotiate for and conclude a licensing agreement with a third party for the Licensed Products within 180 days prior to the expiration of this Agreement, provided that, and except as provided in Paragraph 12.e. above, the proposed new licensee does not distribute any Licensed Products within the Territory prior to the expiration hereof. It is acknowledged by DNS and LICENSEE that such new licensee shall have the right to attend tradeshows, advertise, take orders for licensed products, and otherwise sell Licensed Products within the Territory prior to the expiration of this Agreement. 21. Equitable Relief ---------------- a. LICENSEE acknowledges that there will be no adequate remedy at law for its failure to comply with the terms hereof, including its obligation to cease the manufacture, sale, advertisement, promotion, or distribution of the Licensed Products upon termination. b. Accordingly, in the event LICENSEE fails to comply with the terms of this Agreement, LICENSEE acknowledges and agrees that DNS shall have the right to have any breach of this Agreement remedied by equitable relief by way of a temporary restraining order, preliminary injunction, permanent injunction, and such other alternative relief as may be appropriate without the necessity of DNS posting any bond or proving any damages. 22. Legal Actions ------------- a. LICENSEE agrees to cooperate with and assist DNS in protecting and defending the Licensed Rights, and shall promptly notify DNS in writing of any infringements, claims or actions by others in derogation of the Licensed Rights; provided, however, that DNS shall have the sole right to determine whether any action shall be taken on account of such infringement, claims or actions. LICENSEE shall not take any action on account of any such infringement, claim or action without the prior written consent of DNS. In the event DNS grants written permission to LICENSEE to take action on account of any such infringement, claim or action, LICENSEE shall bear all costs and expense related thereto. b. In the event DNS initiates any legal proceedings on account of any infringements, claims or actions by others in derogation of the Licensed Rights (including, without limitation, unfair competition or other actions which inhibit the ability of DNS and/or LICENSEE to advertise, promote or sell the Licensed Products under the Licensed Rights), LICENSEE agrees to cooperate with and assist DNS to the extent reasonably necessary to protect the Licensed Rights, including, but not limited to, being joined as a necessary or desirable party to such proceedings. c. In the event DNS determines that it is not in the best interest of DNS and LICENSEE to initiate any legal proceedings on account of any such infringements, claims or actions, or in the event DNS settles or resolves any such proceedings which may be initiated, LICENSEE shall have no claim against DNS for damages or otherwise, nor shall the same affect the validity or enforceability of this Agreement. 23. Notice ------ All notices, approvals, consents, requests, demands or other communication to be given to either party shall be in writing, by certified mail, return receipt requested, or by other means where receipt is acknowledged, and shall be effective on the date of receipt thereof. If undeliverable, or if receipt is not acknowledged, such communication shall be effective on the date mailed or sent. Such communication shall be addressed to LICENSEE and DNS at their respective addresses set forth in the preamble above, or at any other address that each party shall provide to the other in writing. 24. Governing Law and Resolution of Disputes ---------------------------------------- a. This Agreement shall be construed in accordance with the laws of the State of California, U.S.A., and the parties agree that it is executed and delivered in the State of California. In the event any legal action becomes necessary to enforce or interpret the terms of this Agreement, the parties agree that such action will be brought in the Los Angeles or Orange County Superior Court or in the U.S. District Court for the Central District of California, and the parties hereby submit to the jurisdiction of said courts. b. However, in order to expedite the resolution of legal disputes, DNS may, at its sole option, elect to have this Agreement construed in accordance with the laws and regulations of the Territory or any portion thereof, and/or may elect to have such disputes arising in connection with this Agreement finally settled under the Rules of -9- Conciliation and Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with said Rules, whose decision shall be binding on the parties. DNS shall have the right to select, in its sole discretion, the place of arbitration. c. In any dispute between the parties, the prevailing party shall be entitled to recover its reasonable costs and fees, including attorneys' fees, from the non-prevailing party. 25. Binding Effect -------------- This Agreement shall be binding on the parties, their affiliated companies, successors and assigns (if any), and they each warrant that the undersigned are authorized to execute this Agreement on behalf of their respective parties. This Agreement is also binding upon the officers, directors, agents, employees and shareholders of the parties, and any other person acting in concert with them. 26. Manufacture of Licensed Products by Others ------------------------------------------ LICENSEE represents that any third party manufacturers, sub-contractors, etc., shall operate their facilities in a manner that complies with all State and Federal labor and business codes. 27. Security Interest ----------------- a. In order to induce DNS to enter into this Agreement and to secure the complete and timely performance of LICENSEE's obligations hereunder, LICENSEE hereby grants to DNS a security interest in the license granted under this Agreement. 28. General Provisions ------------------ a. No waiver or modification of any of the terms or provisions of this Agreement shall be valid unless contained in a single written document signed by both parties. No course of conduct or dealing between the parties shall act as a waiver of any provision of this Agreement. b. This Agreement, including Schedules A through H attached hereto, contains the entire understanding of the parties, and there are no representations, warranties, promises or undertakings other than those contained herein. This Agreement supersedes and cancels all previous agreements between the parties hereto. c. In the event any legal action becomes necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled, in addition to its court costs or arbitration fees, to such reasonable attorneys' fees as shall be fixed by a court of competent jurisdiction or by an arbitrator(s). d. This Agreement, its terms, conditions and provisions, and the trade secrets, confidential information and property of DNS are confidential and shall not be disclosed by LICENSEE to any other person or entity without the prior written consent of DNS. e. The subject headings of the paragraphs and subparagraphs of this Agreement are included for convenience only, and shall not affect the construction or interpretation of its provisions. f. If any provision of this Agreement should be held to be void or unenforceable, such provision will be treated as severable, leaving valid the remainder of this Agreement. g. Wherever necessary to carry out the intent of the parties, certain provisions of this Agreement, including, without limitations, Paragraphs 3, 9, 15, 18, 20 and 21 shall survive the expiration or termination of this Agreement and shall continue in full force and effect. h. The parties agree to execute promptly any documents necessary to effectuate the purpose and intent of this Agreement. LICENSEE further represents and warrants that entering into this Agreement does not violate any agreements, rights or obligations existing between LICENSEE and any other entity. -10- i. The parties represent and warrant that they have made no agreements that are inconsistent with this Agreement or that would prevent them from entering into this Agreement. The parties further represent and warrant that entering into this Agreement does not violate any agreements, rights or obligations existing between them and any other entity. IN WITNESS WHEREOF, the parties agree that this Agreement shall take effect as of the date first written above. DIVE N' SURF, INC. Dated: ________________________ By: --------------------------- Russell F. Lesser President Dated: ________________________ By: --------------------------- Randy Meistrell Vice President LICENSEE Dated: _______________________ By: --------------------------- Guy Anthome Chairman and CEO -11- SCHEDULES --------- A: Marks: BODY GLOVE AND THE HAND DESIGN B: Territory: USA, including its territories and possessions C: Licensed Products: Men's Sportswear including: (1) Walkshorts (2) Knit tops (with the exception of screen printed t-shirts, tank tops and fleece) (3) Woven shirts (4) Pants Boy's Sportswear including all 8 to 20 and 4 to 7 apparel with the exception of swimwear. D: Show Date: September 1, 1996. E: Marketing Date: September 1, 1996. F: Shipping Date: January 1, 1997. G: Effective Date: July 1, 1996. Duration/Contract Years:
Contract Years Beginning Ending -------------- --------- ------ 1 7/1/96 12/31/97 2 1/1/98 12/31/98 3 1/1/99 12/31/99 4 1/1/00 12/31/00 5 1/1/01 12/31/01 6 1/1/02 12/31/02 Option Period 1/1/03 12/31/07 -------------
H: Deposit, Combined Rate, Fees, Minimum Performance Levels Deposit: $5,000.00
Combined Rate: Men's Apparel Boy's Apparel Royalty Rate 6% 5% Advertising Fee 2% 2%
-12- Trade Show Fee 1%* 1%* Combined Rate: 9%* 8%*
In addition, a one time fee of $30,000.00 for brand advertising shall be paid one half on or before June 30, 1997 and the other half on or before December 31, 1997. Minimum Performance Levels (U.S. Dollars):
Minimum Minimum Contract Minimum Combined Annual Monthly/ Year Shipments Rate Payment Payment - - ------------------------------------------------------------------------------ 1 0 varies 0 0 2 $ 500,000 varies $ 40,000 $ 3,333 3 $1,000,000 varies $ 80,000 $ 6,667 4 $1,500,000 varies $120,000 $10,000 5 $2,000,000 varies $160,000 $13,333 6 $2,500,000 varies $200,000 $16,667
Option Period 75% of shipments in 6th contract year -13- EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH 31, 1996 FINANCIAL STATEMENT OF YES CLOTHING CO. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS MAR-31-1996 APR-01-1995 MAR-31-1996 103,000 0 88,000 87,000 1,398,000 1,598,000 2,777,000 1,799,000 2,652,000 4,831,000 0 0 0 8,573,000 0 2,652,000 7,551,000 7,582,000 9,070,000 15,109,000 308,000 0 284,000 (7,835,000) 0 (7,835,000) 0 0 0 (7,835,000) (1.28) (1.28)
-----END PRIVACY-ENHANCED MESSAGE-----