-----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, QGD0cDsCXyptnvOSVI8LosvSoyiLslVWo2Z/UbGkV2r6iYgKexBqY3xLgq77pE19 CPWg/xVrTso3oER1VF75fg== 0000912057-97-024216.txt : 19970716 0000912057-97-024216.hdr.sgml : 19970716 ACCESSION NUMBER: 0000912057-97-024216 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970715 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: YES CLOTHING CO CENTRAL INDEX KEY: 0000856979 STANDARD INDUSTRIAL CLASSIFICATION: WOMEN'S, MISSES', AND JUNIORS OUTERWEAR [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: 97640583 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 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1997 / / 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 90007 LOS ANGELES, CALIFORNIA (Zip Code) (Address of principal executive offices)
Registrant's telephone number, including area code: (213) 765-7800 ------------------------ Securities registered pursuant to Section 12 (b) of the Act: TITLE OF EACH CLASS NAME OF EXCHANGE 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 27, 1997 based on the average bid and asked price on such date was $1,548,028. Number of shares of Common Stock outstanding as of June 27, 1997: 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 1997 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.............................................................................. 6 Item 3. Legal Proceedings....................................................................... 6 Item 4. Submission of Matters to a Vote of Security Holders..................................... 6 PART II. Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters............... 7 Item 6. Selected Financial Data................................................................. 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations... 9 Item 8. Financial Statements and Supplementary Data............................................. 11 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.... 27 PART III. Item 10. Directors and Executive Officers of the Registrant...................................... 27 Item 11. Executive Compensation.................................................................. 27 Item 12. Security Ownership of Certain Beneficial Owners and Management.......................... 27 Item 13. Certain Relationships and Related Transactions.......................................... 27 PART IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................ 27
2 PART I ITEM 1. BUSINESS YES Clothing Co.-Registered Trademark- (the "Company") designs, contracts for the manufacture of and markets diversified lines of apparel for women in junior sizes, and for young men. The Company's garments are manufactured predominantly in the United States, and are sold to retail department stores and specialty chains and stores throughout North America. The Company's apparel is distinguished by its fashionable look, youthful style and quality workmanship. 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. This transaction is known herein as the Sale Transaction. BUSINESS STRATEGY Prior to the Sale Transaction, the Company licensed a number of trademarks and designs (including the GM SURF and MISFITS brands) from Marble Sportswear, Inc., a company controlled by Mr. Marciano. These licenses were terminated on May 1, 1996. Upon the close of the Sale Transaction, the Company reformulated its design and merchandising strategy. The Company's strategy now is to increase sales by reintroducing the YES-Registered Trademark- label into the junior market, by shifting its product focus from shirts, pants, shorts, vests, T-shirts and sweatshirts made principally with denim and knit/woven cotton, to production of dresses, skirts, pants, jackets and tank tops made primarily with cotton/spandex knits and cotton jersey. APPAREL AND APPAREL DESIGN The Company offers clothing for the women's "junior" market and young men'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. Prior to the Sale Transaction, the Company used 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. Following the Sale Transaction, the Company returned to using classic junior fabrics, primarily cotton and spandex knit, cotton jersey and denim, in the production of dresses, skirts, pants, tank tops and jackets. The Company had previously sought to diversify by licensing branded lines of apparel, such as AUDIENCE and INTO REALITY. The AUDIENCE license was terminated by the Company on April 11, 1997, and the INTO REALITY license was terminated effective as of July 31, 1997. YOUNG MEN'S. The company markets casual apparel for young men under the BODY GLOVE label. The young men's line, with its distinctive and contemporary look, uses corduroy, cotton and rayon twill and nylon in the production of T-shirts, sweatshirts, shirts, shorts and pants. The Company terminated its BODY GLOVE license on May 9, 1997. 3 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. 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 six 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. The Company has long-standing relationships with its cutting contractors 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 two cutting contractors and approximately seven 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 a 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 novelty nylon/spandex, cotton/spandex and stretch laces, all of which are purchased domestically. The Company believes that during the fiscal year ended March 31, 1997, 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, 1997, approximately 6% of the Company's expenditures for domestically purchased fabrics was accounted for by its largest domestic fabric supplier, approximately 21% of such expenditures was accounted for by the Company's four largest domestic suppliers and approximately 35% 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 relationships may be established. SALES AND MARKETING The Company sells its apparel throughout the United States and to a lesser extent in Mexico and Canada. Its customers are retail department stores, specialty chains and specialty stores. For the fiscal year ended March 31, 1997, the Company sold its apparel to over two hundred retailing customers. Approximately 98% of sales were made to the Company's one hundred largest customers. 4 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 independent sales organizations in Los Angeles, New York and Miami which operate showrooms 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 a non-exclusive basis. The Company's independent sales organizations are compensated on a commission basis on terms consistent with industry practice. The Company does not sell its garments on consignment. The Company's backlog consists of purchase orders that have been received but not shipped, and amounted to approximately $650,000, $1,100,000 and $3,200,000 as of June 20, 1997, June 20, 1996 and June 20, 1995, respectively. The Company expects to ship all of the orders comprising the backlog prior to September 30, 1997. While the failure to fill orders on a timely basis could have a 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.-Registered Trademark- brands. The Company did not advertise extensively in 1997 and does not anticipate increasing its advertising budget in 1998. 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 $6,000 during fiscal 1997 (0.2% of net sales), $155,000 during fiscal 1996 (2.0% of net sales) and $442,000 during fiscal 1995 (1.5% of net sales). BRANDS AND TRADEMARKS The Company's principal trademarks, YES Clothing Co.-Registered Trademark-, YES-Registered Trademark-, YES Men-Registered Trademark-, YES Kids-Registered Trademark- and YES Jeans-Registered Trademark- 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.-Registered Trademark-" or "YES-Registered Trademark-" trademarks. Guess Inc. previously filed oppositions and cancellations to certain of the Company's trademarks, and has since withdrawn the same. 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 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. 5 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, 1997, the Company employed thirty-nine 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. This real property is occupied pursuant to a lease originally due to expire in May 1997, and later amended to expire upon the earlier occurrence of either the expiration of sixty days' written notice of the sale of the building, or December 31, 1997. The Company also leases the following showrooms pursuant to leases expiring as indicated: Los Angeles (November 2001) and New York City (December 1999). 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. In January 1997, the Company ceased operating its Outlet Store located in Park City, Utah. 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 1997 to a vote of security holders. 6 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 began trading on the Over-the-Counter (OTC) Bulletin Board on September 23, 1996, after the Company was delisted from the NASDAQ SmallCap Market on September 20, 1996. The Company's stock trades 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 1997 Low..................................................................... $ 0.07 $ 0.07 $ 0.38 $ 0.75 High.................................................................... 0.13 0.62 1.50 2.13 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
APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK SECURITIES The Company had approximately 51 holders of record of Common stock as of March 31, 1997. 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. 7 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, 1997, are derived from the audited Financial Statements of the Company and should 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 ---------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- INCOME STATEMENT DATA Net Sales........................................... $ 3,416 $ 7,551 $ 28,580 $ 27,883 $ 37,940 Gross profit........................................ 471 (1,519) 3,370 3,673 8,052 Income (loss) before income taxes................... (2,656) (7,835) (4,652) (2,784) (1,430) Net income (loss)................................... (1,685) (7,835) (4,652) (2,934) (998) Earnings (loss) per share........................... (0.24) (1.28) (1.22) (0.77) (0.26) Dividends per share................................. -- -- -- -- -- Weighted average number of shares used in computation (a)................................... 7,036 6,144 3,821 3,821 3,821 BALANCE SHEET DATA Inventory........................................... 644 1,398 2,158 3,213 3,243 Working capital..................................... (1,804) (3,233) 866 5,250 8,171 Long-term liabilities............................... -- -- 657 171 214 Total assets........................................ 1,459 2,652 4,630 9,077 12,784 Total liabilities................................... 2,649 4,892 3,095 2,805 3,578 Shareholders' equity................................ (1,190) (2,240) 1,535 6,272 9,206
- ------------------------ (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. 8 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, -------------------- 1997 1996 1995 ----- ------ ----- Net sales............... 100.0 100.0 100.0 Cost of sales........... 86.2 120.0 88.2 ----- ------ ----- Gross profit/(loss)..... 13.8 (20.0) 11.8 Commission income....... 0.0 0.4 1.3 Royalty income.......... 0.0 0.0 0.2 ----- ------ ----- Gross operating income/(loss)......... 13.8 (19.6) 13.3 Selling, general and administrative expenses.............. 88.9 80.0 27.9 ----- ------ ----- Loss from operations.... (75.1) (99.6) (14.6) Other income--insurance..... 0.0 0.0 0.2 Other expense........... (4.2) (4.1) (0.9) License reacquisition... 0.0 0.0 (1.0) Gain on sale of assets................ 1.6 0.0 0.0 ----- ------ ----- Loss before income taxes (benefit)............. (77.7) (103.7) (16.3) Income taxes (benefit)............. (28.4) 0.0 0.0 ----- ------ ----- Net loss................ (49.3)% (103.7)% (16.3)% ----- ------ ----- ----- ------ -----
FISCAL YEARS 1997, 1996 AND 1995 NET SALES decreased by $4,135,000 (54.8%) to $3,416,000 in fiscal 1997 as a result of the lag caused by the Company's reintroduction of the YES-Registered Trademark- label into the junior market. In fiscal 1996, net sales decreased by $21,029,000 (73.5%) to $7,551,000 due to a lack of market acceptance of the Company's then marketing and design direction. GROSS PROFIT as a percentage of net sales increased to 13.8% in fiscal 1997 from (20.0)% in fiscal 1996 as a result of controls on manufacturing costs and design and production overhead. Gross profit as a percentage of net sales decreased significantly to (20.0)% in fiscal 1996 from 11.8% in fiscal 1995 due to a number of factors, including decreased sales volume, increased materials costs and markdown of inventory as a result of poor sales and an excessive inventory level. The Company had no COMMISSION INCOME in fiscal 1997. In fiscal 1996, commission income decreased by $352,000 (91.9%) to $31,000 from $383,000 in fiscal 1995, due to the discontinuation of commission transactions. Commission income is generated from shipments of goods manufactured in the Orient to domestic and overseas customers. The Company had no ROYALTY INCOME in fiscal 1997 or fiscal 1996. Royalty income decreased by $9,000 to $51,000 in fiscal 1995. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") decreased to $3,039,000 in fiscal 1997 from $6,039,000 in fiscal 1996, which represented 88.9% and 80.0% of net sales, respectively. (When commission and royalty income is added to net sales, the percentage of SG&A is reduced to 88.9% and 79.6%, respectively). 9 The main factors reducing SG&A in fiscal 1997 were as follows: 1) Payroll and payroll tax decreased to $1,804,000 in fiscal 1997 from $2,928,000 in fiscal 1996 due to a reduction in the number of employees. 2) Rent and insurance expense decreased to $545,000 in fiscal 1997 from $1,099,000 in fiscal 1996 due to renegotiation of Company leases and a reduction in insurance rates and coverages. 3) Advertising and travel expenses were reduced to $78,000 in fiscal 1997 from $351,000 in fiscal 1996 in order to conserve working capital. 4) Legal, accounting and professional fees decreased to $227,000 in fiscal 1997 from $653,000 in fiscal 1996 primarily due to a reduction in trademark, legal, public relations and accounting fees. SG&A expenses decreased to $6,039,000 in fiscal 1996 from $7,972,000 in fiscal 1995 primarily due to decreases in insurance, advertising, travel, payroll, payroll tax and profit sharing expenses. INTEREST INCOME increased to $12,000 in fiscal 1997 from $1,000 in fiscal 1996, and decreased to $1,000 in fiscal 1996 from $3,000 in fiscal 1995. INTEREST EXPENSE decreased to $183,000 in fiscal 1997 from $284,000 in fiscal 1996 due to reduced working capital requirements and borrowings from the Company's factor. Interest expense increased to $284,000 in fiscal 1996 from $255,000 in fiscal 1995 due to increased borrowings from the factor. INCOME TAXES in fiscal 1997 includes a valuation allowance of $5,845,000 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 The Company entered into a factoring agreement with Republic Factors and a letter of credit facility with Republic National Bank of New York on May 15, 1994 (the "financing bank") effective through March 31, 1998, and which are renewable annually thereafter. The agreements are non-recourse (in other words, 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 factoring agreement, the Company sells substantially all of its trade accounts receivable, without recourse, and may request advances 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 on purchased net receivables. Prior to June 5, 1997, the factor advanced up to 80% of the Company's net sales, for which the factor received a commission of 0.75% of total invoices factored. On June 5, 1997, the Company and the factor amended the factoring agreement, raising to 2.0% the commission payable to the factor, and also entered into a supplemental security agreement whereby the factor was granted a security interest in all of the Company's inventory and receivables (both factored and unfactored). This security interest is evidenced by a financing statement which was recorded pursuant to the California Uniform Commercial Code. The factor also agreed, on June 5, 1997, to increase to 100% of the Company's net sales the amount of the advances the Company may request from the factor. 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 amount of the advance rate provided under the factoring agreement. There were no letters of credit outstanding as of either March 31, 1997 or March 31, 1996. The agreements are collateralized by all of the Company's accounts receivable and inventory. The Company or the factor may terminate the factoring agreement on the anniversary date of the agreement with at least 60 days' prior written notice. 10 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. The principal amounts of both of the foregoing notes have been paid by the Company. In June 1996, the Company entered into an agreement with Imperial Bank which supplied the Company with a $1,200,000 credit facility secured by a standby letter of credit provided by an unaffiliated third party. The referenced credit facility will be paid off and extinguished upon negotiation of the letter of credit by Imperial Bank. The Company and the unaffiliated third party are currently negotiating the terms of a replacement obligation. As of March 31, 1997, the Company had a net working capital deficit of $1,804,000, as compared to a deficit of $3,233,000 as of March 31, 1996. The Company's current ratio was (0.3) as of both March 31, 1997, and March 31, 1996. The increase in working capital is primarily due to the reduction in operating losses in fiscal 1997. The factoring position had a positive balance of $49,000 as of March 31, 1997, as compared to a net overadvance of $3,232,000 as of March 31, 1996. This change in the factoring position is due to decreased borrowings as a result of decreased working capital requirements. Inventories at March 31, 1997 were $644,000 as compared to $1,398,000 at March 31, 1996, a decrease of $754,000. The decrease in inventory levels is consistent with the reduced open order backlog. The Company filed for and received, on November 20, 1996, a federal income tax refund of $971,000. On April 15, 1997, the Internal Revenue Service notified the Company that it would audit the Company's net operating loss carryback claim for fiscal 1996. The audit is still pending. The Company has funded its business activities principally from factor advances, the referenced tax refund and the Imperial Bank credit facility. The Company believes that the financial sources available to it will not provide sufficient resources to finance the Company's currently anticipated working capital needs and capital expenditures beyond the end of the summer of 1997. The Company will 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, 1998. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 11 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, 1997 and the related statements of operations, changes in shareholders' deficit and cash flows for the year then ended. We have also audited the financial statement schedule for the year ended March 31, 1997, 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 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, 1997, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. In our opinion, the schedule for the year ended March 31, 1997 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. Grobstein, Horwath & Company LLP GROBSTEIN, HORWATH & COMPANY LLP Sherman Oaks, California June 2, 1997 (except for Note 14 which is as of June 5, 1997) 12 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 the related statements of operations, changes in shareholders' equity and cash flows for the years ended March 31, 1996 and 1995. We have also audited the financial statement schedule for the years ended March 31, 1996 and 1995, 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 the results of its operations and its cash flows for the years ended March 31, 1996 and 1995, 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(9)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 12, as to which the date is June 4, 1996) 13 YES CLOTHING CO. BALANCE SHEETS MARCH 31, 1997 AND 1996
1997 1996 -------------- -------------- ASSETS CURRENT ASSETS Cash............................................................................ $ 80,000 $ 103,000 Due from factor 49,000 -- Accounts receivable, non-factored--net.......................................... 1,000 1,000 Due from officers 4,000 -- Other receivables............................................................... 7,000 2,000 Inventories..................................................................... 644,000 1,398,000 Prepaid expenses................................................................ 34,000 94,000 -------------- -------------- Total Current Assets.............................................................. 819,000 1,598,000 PROPERTY AND EQUIPMENT, at cost, net of accumulated depreciation and amortization.................................................................... 447,000 978,000 DUE FROM OFFICERS, net of current portion 120,000 -- OTHER ASSETS...................................................................... 73,000 76,000 -------------- -------------- TOTAL ASSETS...................................................................... $ 1,459,000 $ 2,652,000 -------------- -------------- -------------- -------------- LIABILITIES AND SHAREHOLDERS' DEFICIT CURRENT LIABILITIES Due to factor................................................................... $ -- $ 3,232,000 Note payable to bank............................................................ 1,175,000 -- Accounts payable................................................................ 954,000 881,000 Accrued expenses................................................................ 345,000 292,000 Contracts payable............................................................... 84,000 57,000 Due to related party............................................................ 65,000 369,000 -------------- -------------- Total Current Liabilities......................................................... 2,623,000 4,831,000 -------------- -------------- CONTRACTS PAYABLE, net of current portion......................................... 26,000 61,000 -------------- -------------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' DEFICIT Preferred stock, no par; 2,000,000 shares authorized; no shares issued.............................................................. -- -- Common stock, no par; 20,000,000 shares authorized; 7,036,000 shares issued and outstanding....................................... 11,308,000 8,573,000 Accumulated deficit............................................................. (12,498,000) (10,813,000) -------------- -------------- Total Shareholders' Deficit....................................................... (1,190,000) (2,240,000) -------------- -------------- TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT....................................... $ 1,459,000 $ 2,652,000 -------------- -------------- -------------- --------------
See accompanying reports of certified public accountants and notes to financial statements. 14 YES CLOTHING CO. STATEMENTS OF OPERATIONS YEARS ENDED MARCH 31, 1997, 1996 AND 1995
1997 1996 1995 ------------- ------------- ------------- NET SALES............................................................ $ 3,416,000 $ 7,551,000 $ 28,580,000 COST OF SALES........................................................ 2,945,000 9,070,000 25,210,000 ------------- ------------- ------------- Gross profit (loss)................................................ 471,000 (1,519,000) 3,370,000 COMMISSION INCOME.................................................... -- 31,000 383,000 ROYALTY INCOME....................................................... -- -- 51,000 ------------- ------------- ------------- Operating income (loss)............................................ 471,000 (1,488,000) 3,804,000 ------------- ------------- ------------- OPERATING EXPENSES Selling............................................................ 655,000 1,894,000 3,345,000 General and administrative......................................... 2,384,000 4,145,000 4,627,000 ------------- ------------- ------------- 3,039,000 6,039,000 7,972,000 ------------- ------------- ------------- Loss from operations............................................... (2,568,000) (7,527,000) (4,168,000) ------------- ------------- ------------- OTHER INCOME (EXPENSE) Interest expense................................................... (183,000) (285,000) (258,000) Interest income.................................................... 12,000 1,000 3,000 License acquisition................................................ -- -- (295,000) Gain on sale of assets............................................. 54,000 -- -- Other.............................................................. 29,000 (24,000) 66,000 ------------- ------------- ------------- (88,000) (308,000) (484,000) ------------- ------------- ------------- LOSS BEFORE INCOME TAXES............................................. (2,656,000) (7,835,000) (4,652,000) INCOME TAX BENEFIT................................................... 971,000 -- -- ------------- ------------- ------------- NET LOSS............................................................. $ (1,685,000) $ (7,835,000) $ (4,652,000) ------------- ------------- ------------- ------------- ------------- ------------- NET LOSS PER SHARE................................................... $ (.24) $ (1.28) $ (1.22) ------------- ------------- ------------- ------------- ------------- ------------- WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING........................ 7,036,000 6,144,000 3,821,000 ------------- ------------- ------------- ------------- ------------- -------------
See accompanying reports of certified public accountants and notes to financial statments. 15 YES CLOTHING CO. STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT YEARS ENDED MARCH 31, 1997, 1996 AND 1995
COMMON STOCK RETAINED ------------------------- EARNINGS SHARES AMOUNT (DEFICIT) TOTAL ---------- ------------- -------------- ------------- 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) Capital contribution................................ -- 2,735,000 -- 2,735,000 Net loss............................................ -- -- (1,685,000) (1,685,000) ---------- ------------- -------------- ------------- BALANCE, March 31, 1997............................... 7,036,000 $ 11,308,000 $ (12,498,000) $ (1,190,000) ---------- ------------- -------------- ------------- ---------- ------------- -------------- -------------
See accompanying reports of certified public accountants and notes to financial statements. 16 YES CLOTHING CO. STATEMENTS OF CASH FLOWS MARCH 31, 1997, 1996 AND 1995
1997 1996 1995 ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss........................................................... $ (1,685,000) $ (7,835,000) $ (4,652,000) Reconciliation of net loss to net cash flows used in operating activities: Depreciation and amortization.................................... 329,000 504,000 341,000 Increase (decrease) in credits due customers and allowance for doubtful accounts............................ (219,000) (258,000) 364,000 Gain on sale of property and equipment........................... (54,000) -- -- Increase (decrease) in cash due to changes in operating assets and liabilities: Due from factor................................................ (150,000) 3,748,000 (887,000) Accounts receivable............................................ 46,000 339,000 77,000 Other receivables.............................................. (5,000) 147,000 413,000 Inventories.................................................... 754,000 761,000 1,055,000 Prepaid expenses............................................... 61,000 (11,000) 23,000 Accounts payable............................................... 73,000 (1,264,000) (161,000) Accrued expenses............................................... 53,000 49,000 (41,000) ------------- ------------- ------------- NET CASH USED IN OPERATING ACTIVITIES................................ (797,000) (3,820,000) (3,468,000) ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Due from officers.................................................. (124,000) -- -- Proceeds from sale of property and equipment....................... 317,000 -- -- Purchases of property and equipment................................ (62,000) (441,000) (276,000) Decrease in other assets........................................... 3,000 1,000 10,000 ------------- ------------- ------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES.................. 134,000 (440,000) (266,000) ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Advances from factor, net.......................................... (2,958,000) 291,000 3,116,000 Note payable to bank............................................... 1,175,000 -- -- Payments on contracts payable...................................... (8,000) (52,000) (47,000) Borrowing (repayment) from/to related party........................ (304,000) (168,000) 538,000 Contribution to capital............................................ 2,735,000 3,980,000 245,000 Exercise (repurchase) of stock options............................. -- 80,000 (330,000) ------------- ------------- ------------- NET CASH PROVIDED BY FINANCING ACTIVITIES............................ 640,000 4,131,000 3,522,000 ------------- ------------- ------------- NET DECREASE IN CASH................................................. (23,000) (129,000) (212,000) CASH BALANCE Beginning of year.................................................. 103,000 232,000 444,000 ------------- ------------- ------------- End of year........................................................ $ 80,000 $ 103,000 $ 232,000 ------------- ------------- ------------- ------------- ------------- ------------- SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for: Interest......................................................... $ 183,000 $ 284,000 $ 255,000 ------------- ------------- ------------- ------------- ------------- ------------- Income taxes..................................................... $ -- $ -- $ -- ------------- ------------- ------------- ------------- ------------- -------------
See accompanying reports of certified public accountants and notes to financial statements. 17 YES CLOTHING CO. NOTES TO FINANCIAL STATEMENTS MARCH 31, 1997 AND 1996 NOTE 1--ORGANIZATION AND FINANCIAL CONDITION ORGANIZATION--Yes Clothing Co. (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. The Company received a percentage of the sales price charged by the manufacturer and recognized this amount as commission income in the accompanying statements of operations. Subsequent to the acquisition transaction 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." At the date of the "Acquisition Transaction," the principal shareholder held approximately 88% of the Company's outstanding stock. In June 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 is herein referred to as the "Sale Transaction," and is discussed in Note 12. 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 has experienced operating and net losses each year since 1992. The operating results for the three months ended June 30, 1997 are anticipated to reflect continued net losses. Under new management, the Company has made significant reductions in payroll and operating expenses while increasing its gross margin. The Company has the following plans to return to profitability and continue as a going concern: - Actively seek additional equity funding. - Increase sales by focusing the Company's marketing on the "YES" brand label. - Increase gross margin through the use of controls on manufacturing costs and design and production overhead. 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 Life of Leasehold improvements........................................ lease
18 YES CLOTHING CO. NOTES TO FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1997 AND 1996 NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Based upon management's assessment, the carrying values of property and equipment at March 31, 1997 was not impaired. 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 11. 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. The Financial Accounting Standards Board has recently issued Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share." This standard will become effective for the quarter ending December 31, 1997, with earlier application not permitted. Management believes the effect of the new accounting standard will not be significant. 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 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. 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. 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 is effective for the year ended March 31, 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 prior accounting standard, compensation cost is the excess, if any, of the quoted market price of the stock at the measurement date over the amount that must be paid to acquire the stock. The new standard allows the Company to continue to account for stock-based compensation under the prior standard, with disclosure of the effects of the new standard, or adopt a fair value based method of accounting. The Company has determined to continue to account for stock-based compensation under the prior standard, as management believes the effect of the new accounting standard will not be significant. NOTE 3--TRANSACTIONS WITH FACTOR AND BANK BORROWINGS (ALSO SEE NOTE 14) The Company has an agreement with a factor through March 1998. Under the factoring agreement, the Company sells substantially all of its trade accounts receivable, without recourse, and may request 19 YES CLOTHING CO. NOTES TO FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1997 AND 1996 NOTE 3--TRANSACTIONS WITH FACTOR AND BANK BORROWINGS (ALSO SEE NOTE 14) (CONTINUED) advances, up to 80%, on the net sales factored at any time before their maturity date. The factor charges a commission on the net sales factored and interest on advances at prime plus a negotiated rate. The agreement is collateralized by accounts receivable and inventory imported under letters of credit. Included in accounts payable at March 31, 1997 is $95,000 due to the factor for raw materials purchases. There are no outstanding open letters of credit at March 31, 1997. Due to/from factor consists of the following:
1997 1996 ----------- ------------- Unmatured receivables Without recourse................................................ $ 759,000 $ 561,000 With recourse................................................... 51,000 99,000 ----------- ------------- 810,000 660,000 Advances.......................................................... (448,000) (3,406,000) Open credits...................................................... (313,000) (486,000) ----------- ------------- $ 49,000 $ (3,232,000) ----------- ------------- ----------- -------------
During the year ended March 31, 1997, the maximum amount of factor advances outstanding was approximately $3,488,000. The average advances based upon month-end balances was approximately $659,000. The average cost of borrowing, which includes factoring commissions and interest, was approximately 10.2% during 1997. The Company also has a credit facility with a bank, consisting of a $1,200,000 note payable secured by a standby letter of credit provided by RSH Marketing, a major customer. This note bears interest at the prime rate plus 1.5% per annum (10% at March 31, 1997), and is due in June 1997 (see Note 14). NOTE 4--DUE FROM OFFICERS Due from officers consists of the following: Unsecured note receivable bearing interest at 8% per annum, unpaid principal due in June 2001...................................... $ 98,000 Unsecured note receivable bearing interest at 8% per annum, with monthly principal and interest payments of $500 through July 2002............................................................ 26,000 --------- $ 124,000 --------- ---------
NOTE 5--INVENTORIES
1997 1996 ---------- ------------ Raw materials....................................................... $ 176,000 $ 401,000 Work-in-progress.................................................... 277,000 82,000 Finished goods...................................................... 191,000 915,000 ---------- ------------ $ 644,000 $ 1,398,000 ---------- ------------ ---------- ------------
20 YES CLOTHING CO. NOTES TO FINANCIAL STATEMENTS NOTE 6--PROPERTY AND EQUIPMENT
1997 1996 ------------- ------------- Furniture and fixtures.......................................... $ 207,000 $ 427,000 Machinery and equipment......................................... 1,364,000 1,400,000 Leasehold improvements.......................................... 950,000 950,000 ------------- ------------- 2,521,000 2,777,000 Less accumulated depreciation and amortization.................. (2,074,000) (1,799,000) ------------- ------------- $ 447,000 $ 978,000 ------------- ------------- ------------- -------------
NOTE 7--CONTRACTS PAYABLE The Company has acquired equipment under capital leases and purchase contracts which expire on various dates through August 2000. The remaining obligations under these capital leases and purchase contracts for future years ended March 31 are as follows: 1998.............................................................. $ 87,000 1999.............................................................. 16,000 2000.............................................................. 10,000 2001.............................................................. 3,000 --------- 116,000 Amount representing interest...................................... (6,000) --------- Present value of minimum lease payments........................... 110,000 Less current portion.............................................. (84,000) --------- Long-term portion................................................. $ 26,000 --------- ---------
Equipment under capital leases and related accumulated depreciation as of March 31, 1997 amounts to $279,000 and $171,000, respectively. NOTE 8--DUE TO RELATED PARTY A $369,000 unsecured note payable to the principal shareholder bears interest at the lesser of 8% or the prime rate of interest less 1%. This note was terminated in connection with the Sale Transaction described in Note 12. A new note was created in the amount of $500,000 bearing interest at 8% per annum. The interest rate increased to 10% per annum as the note was not paid by its maturity date of January 31, 1997. The $65,000 balance as of March 31, 1997 was paid in April 1997. NOTE 9--MAJOR CUSTOMERS Customers comprising 10% or greater of the Company's net sales are summarized as follows:
1997 1996 1995 --------- --------- --------- GO USA Streetware, Inc.................................................. 29% 4.1% -- RSH Marketing........................................................... 22% -- --
21 YES CLOTHING CO. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 10--COMMITMENTS AND CONTINGENCIES The Company leases its office, warehouse and showrooms under various operating leases expiring through November 2001. The Company subleases a portion of its warehouse facilities on a month to month basis through the term of the Company's lease. Minimum payments under noncancelable operating leases for future years ending March 31 are as follows: 1998.............................................................. $ 129,000 1999.............................................................. 53,000 2000.............................................................. 41,000 2001.............................................................. 14,000 2002.............................................................. 10,000 --------- $ 247,000 --------- ---------
Rent expense for the years ended March 31, 1997, 1996 and 1995 was approximately $364,000 (net of $66,000 sublease income), $656,000 (net of $96,000 of sublease income), and $609,000, respectively. During the year ended March 31, 1997, the Company entered into several royalty agreements with apparel companies for the use of their brand names. Royalty rates range from 3% - 9% of net sales with one agreement requiring a minimum monthly royalty payment of $30,000. Subsequent to March 31, 1997, the agreement requiring the minimum monthly royalty payment was terminated. Based on the termination agreement, the Company is committed to pay a minimum royalty payment of $30,000 for each of the four months ending July 31, 1997. The Company has been named as a defendant in lawsuits incident to the ordinary course of business. Management believes that the probable outcome of these contingencies will not have a material effect on the Company's financial position or results of operations. NOTE 11--INCOME TAXES Income taxes are summarized as follows:
1997 1996 1995 ----------- ----------- ----------- Currently payable Federal benefit (Note 14)............................ $ (971,000) $ -- $ -- State................................................ -- -- -- ----------- ----------- ----------- (971,000) -- -- ----------- ----------- ----------- Deferred Federal.............................................. -- -- -- ----------- ----------- ----------- $ (971,000) $ -- $ -- ----------- ----------- ----------- ----------- ----------- -----------
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. 22 YES CLOTHING CO. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 11--INCOME TAXES (CONTINUED) Deferred income taxes arise from temporary differences between financial and tax reporting. The effects of these differences on income taxes are as follows:
1997 1996 1995 ----------- ------------- ------------- Tax effect of net operating losses................. $ 375,000 $ (3,366,000) $ (1,857,000) Inventory basis.................................... 77,000 (29,000) 32,000 Valuation and other reserves....................... 96,000 104,000 (146,000) Other, net......................................... (16,000) 23,000 (14,000) Valuation allowance................................ (532,000) 3,268,000 1,985,000 ----------- ------------- ------------- Provision for deferred income taxes................ $ -- $ -- $ -- ----------- ------------- ------------- ----------- ------------- -------------
At March 31, 1997 and 1996, deferred tax assets and liabilities consist of the following elements:
1997 1996 ------------- ------------- Gross deferred assets Reserve for chargebacks....................................... $ 117,000 $ 194,000 Provision for doubtful accounts............................... 16,000 35,000 Inventory basis............................................... 17,000 94,000 Accrued expenses.............................................. 11,000 12,000 Tax effect of net operating losses............................ 5,715,000 6,090,000 ------------- ------------- Gross deferred asset........................................ 5,876,000 6,425,000 ------------- ------------- Deferred liability Accumulated depreciation...................................... (31,000) (48,000) ------------- ------------- Net deferred asset before valuation allowance................... 5,845,000 6,377,000 Valuation allowance............................................. (5,845,000) (6,377,000) ------------- ------------- $ -- $ -- ------------- ------------- ------------- -------------
23 YES CLOTHING CO. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 11--INCOME TAXES (CONTINUED) The Federal and state net operating loss carryforwards of approximately $14,510,000 and $14,369,000, respectively, expire during the years 2007 through 2011. Because ownership of the Company changed control during 1996, utilization of a substantial portion of the net operating loss carryforwards may be limited. NOTE 12--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 1,000,000 shares of common stock. Outstanding options are exercisable for a period of up to ten years and one week from the date of grant. The weighted-average remaining contractual life of options outstanding and exercisable as of March 31, 1997 was 9.84 years. Activity under this plan for 1995 through 1997 is as follows:
RANGE OF EXERCISE WEIGHTED-AVERAGE SHARES PRICES EXERCISE PRICE ---------- -------------- ----------------- Outstanding and exercisable, March 31, 1994........................ 370,000 $ 1.88 - $8.75 $ 2.84 Granted.......................................................... 15,000 6.00 6.00 Repurchased and canceled......................................... (260,000) 2.00 - 8.75 2.81 ---------- -------------- Outstanding and exercisable, March 31, 1995........................ 125,000 1.88 - 6.00 3.11 Granted.......................................................... 80,000 2.13 - 3.38 2.28 Exercised........................................................ (30,000) 1.88 - 3.00 2.63 Repurchased and canceled......................................... (145,000) 2.13 - 6.00 2.87 ---------- -------------- Outstanding and exercisable, March 31, 1996........................ 30,000 2.13 - 3.38 2.60 Granted.......................................................... 610,000 0.07 0.07 Expired.......................................................... (20,000) 2.13 2.13 ---------- -------------- Outstanding and exercisable, March 31, 1997........................ 620,000 $ 0.07 - $3.38 0.12 ---------- -------------- ---------- --------------
The Company has not presented the pro forma impact on net loss and net loss per share for each of the years in the three year period ended March 31, 1997, as if the fair value of the stock options granted were measured under SFAS 123, as substantially all of the options granted in prior years have been repurchased, canceled or expired. In addition, options granted during the year ended March 31, 1997 have a nominal value and are subject to significant uncertainty due to the Company's current financial condition. 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. 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, which was used to pay off liabilities associated with three $1,000,000 letters of credit and related 24 YES CLOTHING CO. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 12--SHAREHOLDERS' EQUITY (CONTINUED) party debt. In addition, the affiliate purchased certain inventory and equipment from the Company for $1,463,000. The excess of the affiliate's purchase price over the asset's net book value of $421,000 was treated as a contribution to capital. The affiliate which advanced the funds agreed to forgive payment on all but $500,000 (including $369,000 which was owed as of March 31, 1996), which was subsequently repaid in two installments of $250,000 each. The balance of the advances of approximately $2,314,000 was treated as a contribution to capital. 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. CAPITAL STRUCTURE--The Financial Accounting Standards Board has recently issued Statement of Financial Accounting Standards No. 129 (SFAS 129), "Disclosure of Information about Capital Structure." This standard will become effective for the quarter ending December 31, 1997. Management believes the effect of the new disclosure standard will not be significant, as the Company is already required to provide such disclosures. NOTE 13--OTHER RELATED PARTY TRANSACTIONS A law firm in which one member of the Board of Directors is a partner, was paid $93,000 for legal services for the year ended March 31, 1995. 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 $6,000 for the year ended March 31, 1995. NOTE 14--SUBSEQUENT EVENTS The standby letter of credit provided by RSH Marketing will be drawn upon to repay the Company's note payable to bank. The Company and RSH Marketing are currently negotiating the terms of the replacement obligation. On April 15, 1997, the Company was notified by the Internal Revenue Service that it will be auditing the Company's net operating loss carryback claim. On June 5, 1997, the Company and its factor amended the terms of the factoring agreement by increasing the advance rate to 100% of net sales factored. The Company has also granted the factor a security interest in all of the Company's inventories and receivables (both factored and unfactored). 25 YES CLOTHING CO. VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED MARCH 31, 1997, 1996 AND 1995
BALANCE AT CHARGED TO BEGINNING COSTS AND ADDITIONS BALANCE AT OF PERIOD EXPENSES (DEDUCTIONS) END OF PERIOD ---------- ----------- ------------ ------------- Year ended March 31, 1997: Allowance for doubtful accounts on nonfactored accounts receivable............................................. $ 87,000 $ (46,000) $ -- $ 41,000 ---------- ----------- ------------ ------------- ---------- ----------- ------------ ------------- Reserve for estimated returns, allowances and discounts on factored accounts................................... $ 486,000 $ -- $ (173,000)(a) $ 313,000 ---------- ----------- ------------ ------------- ---------- ----------- ------------ ------------- 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 ---------- ----------- ------------ ------------- ---------- ----------- ------------ -------------
- ------------------------ (a) Represents net writeoffs of uncollectible accounts against the allowance. 26 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company filed a report on Form 8K on December 23, 1996 reporting a change in its independent accounting firm. There are no disagreements with respect to accounting or financial disclosure between the Company and either its predecessor or current accounting firms. 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. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K FINANCIAL STATEMENTS AND SCHEDULES The following financial statements of YES Clothing Co.-Registered Trademark- are included in Item 8: Balance sheets Statements of operations Statements of changes in shareholders' equity Statements 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. The Company also filed a report on Form 8K on December 23, 1996 with respect to a change in its independent accounting firm. 27 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.-Registered Trademark- 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.-Registered Trademark- through the selection and training of qualified personnel, and the establishment and communication of accounting and business policies. /s/ GUY ANTHOME /s/ JEFFREY P. BUSSE - --------------------------------- --------------------------------- GUY ANTHOME JEFFREY P. BUSSE CHAIRMAN CHIEF FINANCIAL OFFICER CHIEF EXECUTIVE OFFICER PRESIDENT
28 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 ----------------------------------------- Guy Anthome CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER June 30, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ GUY ANTHOME - ------------------------------ Chairman of the Board Guy Anthome Chief Executive Officer June 30, 1997 PRINCIPAL EXECUTIVE OFFICER President and Director /s/ JEFFREY P. BUSSE - ------------------------------ Jeffrey P. Busse Chief Financial Officer June 30, 1997 PRINCIPAL FINANCIAL AND and Director ACCOUNTING OFFICER /s/ KRISTINA ALTAMIRANO - ------------------------------ Director June 30, 1997 Kristina Altamirano 29 INDEX TO EXHIBITS
PAGES 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)
30
PAGES SEQUENTIALLY ITEM NO. DESCRIPTION NUMBERED - ----------- ------------------------------------------------------------------------------------------ ------------- 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(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) 10.31 Agreement among Marciano, the Company and Anthome dated June 4, 1996 incorporated by reference to Exhibit A on Form 13D filed with the Securities and Exchange Commission on June 6, 1996(7) 10.32 Body Glove license agreement between Body Glove International and the Company dated June 25, 1996(7) 10.33 Audience license agreement between Stephen Resnick and the Company dated February 12, 1997 10.34 Into Reality license agreement between C.S. Sportswear and the Company dated February 14, 1997 10.35 Employment Agreement between Guy Anthome and the Company dated as of June 6, 1996* 10.36 Non-qualified Stock Option Agreement between Guy Anthome and the Company dated January 28, 1997* 10.37 Amendment to Factoring Agreement and Supplemental Security Agreement between the Company, Guy Anthome and Republic Business Credit Corporation, both dated June 5, 1997 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, and incorporated herein by this reference. (6) Filed as an exhibit to the Annual Report on Form 10-K for the fiscal year ended March 31, 1995, and incorporated herein by this reference. (7) Filed as an exhibit to the Annual Report on Form 10-K for the fiscal year ended March 31, 1996, and incorporated herein by this reference. 31 EX-10.33 2 EXHIBIT 10.33--AUDIENCE LICENSE AGREEMENT LICENSE AGREEMENT This License Agreement (hereinafter referred to as "Agreement") is effective as of February 12, 1997, by and between Steven Resnick, an individual located at 1425 Belfast Drive, Los Angeles, CA 90069 ( herein referred to as "LICENSOR") and YES Clothing Co., a California corporation located at 1380 West Washington Boulevard, Los Angeles, CA 90007 (hereinafter referred to as "LICENSEE"). 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, LICENSOR 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 trademarks set forth in Schedule A attached hereto and incorporated herein by this reference. b. "Territory" shall mean solely the geographic area specifically set forth and described in Schedule B, attached hereto and incorporated herein by this reference. c. "Licensed Products" shall mean solely the products specified in Schedule C, attached hereto and incorporated herein by this reference. d. "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. e. "Contract Period" shall mean a sixty (60) day period beginning on the Effective Date, plus a right to sell off any goods produced during the Contract Period for three (3) months thereafter. 1 2. RIGHTS GRANTED a. LICENSOR hereby grants to LICENSEE, and LICENSEE accepts, upon the terms and conditions set forth herein, an 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 LICENSOR 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. On or before the end of the Contract Period, LICENSOR gives LICENSEE exclusive right to purchase the marks at a price set forth in Exhibit F. 3. DURATION This Agreement shall commence on the effective date set forth above and in Schedule D attached hereto and incorporated herein by this reference. 4. ROYALTIES a. LICENSEE agrees to pay to LICENSOR a "Combined Payment" as set forth on Schedule E equal to the sum of: (i) royalties; and (ii) purchase order sales commission. b. The Combined Payment shall be computed by applying the sum of the percentage rates set forth in Exhibit E ("Combined Rate") to the Net Sales. Licensee shall reserve Combined Payment for potential chargebacks Licensee may incur which are unknown and not related to sales of licensed Products by the Licensee. 5. 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 LICENSOR, and its agents or representatives, at such reasonable times as LICENSOR may from time to time request for inspection, copying and extracting. 2 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 the Contract Period of this Agreement for possible inspection, copying, extracting and/or audit by LICENSOR. All financial information obtained by LICENSOR regarding LICENSEE shall be kept confidential except in the event that such information is necessary to resolve a BONA FIDE dispute between the parties. 6. INDEPENDENT CONTRACTOR The parties hereby agree that LICENSEE is and shall be an independent contractor and that no agency, 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 LICENSOR without the prior written consent of LICENSOR. 7. INDEMNIFICATION a. LICENSEE will indemnify, defend and hold LICENSOR and its agents and employees harmless from any and all liabilities, claims, obligations, suits, judgments and expenses whatsoever, including court costs and attorneys' fees, which LICENSOR may incur or which may be asserted against LICENSOR, and which arise or occur with respect to the operation of LICENSEE's business as it relates to this Agreement. b. LICENSOR will indemnify, defend and hold LICENSEE and its 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 respect to LICENSOR' own acts or omissions. 8. 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 LICENSOR 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. 9. GOVERNING LAW AND RESOLUTION OF DISPUTES a. This Agreement shall be construed in accordance with the laws of the State of California, 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 Superior Court or in the U.S. 3 District Court for the Central District of California, and the parties hereby submit to the jurisdiction of said courts. b. 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. 10. 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. 11. 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. 12. 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 F 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. 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. e. 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. 4 f. 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. LICENSOR February 12, 1997 /s/Stephen Resnick Dated: ---------------------------- --------------------------- STEPHEN RESNICK An Individual LICENSEE (Yes Clothing Co.) February 12, 1997 /s/ Guy Anthome Dated: By: ---------------------------- --------------------------- GUY ANTHOME Chairman and CEO 5 SCHEDULES A: Marks: Audience B: Territory: Worldwide C. Licensed Products: Men's, Women's and Kids Apparel D. Effective Date: February 12, 1997 Duration/Contract Period: Contract Period Beginning Ending --------------- --------- -------- 1 2/12/97 04/11/97 E: Combined Rate Rate: ------------ Combined Rate: All types of Apparel Royalty Rate 3.0% Purchase Order Commission 6.0% Combined Rate: 9.0% F. Purchase Option Price: Ten Thousand U.S. Dollars ($10,000.00) 6 EX-10.34 3 EXHIBIT 10.34--INTO REALITY LICENSE AGREEMENT EXHIBIT 10.34 LICENSE AGREEMENT This License Agreement (hereinafter referred to as "Agreement") is effective as of February 14, 1997, by and between CS SPORTSWEAR INC., a California corporation with offices at 1429 E. 15th Street, Los Angeles, California 90021, (hereinafter referred to as "CS") and YES Clothing Co., a California corporation located at 1380 West Washington Boulevard, Los Angeles, CA 90007 (hereinafter referred to as "LICENSEE"). 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, CS 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 trademarks set forth in Schedule A attached hereto and incorporated herein by this reference. b. "Territory" shall mean solely the geographic area specifically set forth and described in Schedule B, attached hereto and incorporated herein by this reference. c. "Licensed Products" shall mean solely the products specified in Schedule C, attached hereto and incorporated herein by this reference. d. "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. e. "Contract Period" shall mean the period beginning on the Effective Date, as specified in Schedule D, attached hereto and incorporated herein by this reference. -1- 2. RIGHTS GRANTED a. CS 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 CS 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. 3. DURATION (a) This Agreement shall commence on the effective date set forth above and in Schedule D attached hereto and incorporated herein by this reference. (b) This agreement shall be automatically renewed on the anniversary date unless either party give sixty days prior written notice to terminate this agreement. (c) Either party may terminate this agreement during the initial contract period by giving sixty days prior written notice to terminate. 4. ROYALTIES a. LICENSEE agrees to pay to CS during the term of this Agreement, a "Combined Payment" as set forth on Schedule E equal to the sum of: (i) royalties; and (ii) design, sales & production management fee b. The Combined Payment shall be computed by applying the sum of the percentage rates set forth in Exhibit E ("Combined Rate") to the Net Sales. c. Licensee agrees to pay to CS a minimum royalty of $30,000 per month during the initial contract period d. Licencee agrees to pay to CS an amount equal to fifty percent of the net profit generated by the sale of the licensed product. -2- 5. 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 CS, and its agents or representatives, at such reasonable times as CS 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 period of this Agreement for possible inspection, copying, extracting and/or audit by CS. All financial information obtained by CS regarding LICENSEE shall be kept confidential except in the event that such information is necessary to resolve a bona fide dispute between the parties. 6. INDEPENDENT CONTRACTOR The parties hereby agree that LICENSEE is and shall be an independent contractor and that no agency, 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 CS without the prior written consent of CS. 7. INDEMNIFICATION a. LICENSEE will indemnify, defend and hold CS 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 CS may incur or which may be asserted against CS, and which arise or occur with respect to the operation of LICENSEE's business as it relates to this Agreement. b. CS 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 respect to CS own acts or omissions. 8. 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 -3- date mailed or sent. Such communication shall be addressed to LICENSEE and CS 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. -4- 9. GOVERNING LAW AND RESOLUTION OF DISPUTES a. This Agreement shall be construed in accordance with the laws of the State of California, 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. 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. 10. 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. 11. 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. 12. 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 F 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). -5- d. 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. e. 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. f. 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. CS SPORTSWEAR INC. February 18, 1997 /s/ Char Stitzer Dated: By: ------------------------ ----------------------- CHAR STITZER President LICENSEE (YES CLOTHING CO.) February 17, 1997 /s/ Guy Anthome Dated: By: ------------------------ ----------------------- GUY ANTHOME Chairman and CEO -6- SCHEDULES A: Marks: Into Reality, CS Sportswear and any other mark used B: Territory: Worldwide C. Licensed Products: Men's, Women's and Kids Apparel D. Effective Date: February 14, 1997 Duration/Contract Period: Contract Period Beginning Ending --------------- --------- ------ 1 2/14/97 12/31/97 Option year 1 -2 1/1/98 12/31/98 Option year 2- 3 1/1/99 12/31/99 Option year 3- 4 1/1/00 12/31/00 E: Combined Rate Rate: --------------------- Combined Rate: All types of Apparel Royalty Rate 5.0% Design,sales&production management fee 5.0% Combined Rate: 10.0% -7- EX-10.35 4 EXHIBIT 10.35--EMPLOYMENT AGREEMENT YES CLOTHING CO. 1380 WEST WASHINGTON BOULEVARD LOS ANGELES, CALIFORNIA 90007-1233 As of June 6, 1996 Mr. Guy Anthome 1380 West Washington Boulevard Los Angeles, California 90007-1233 Re: Employment Agreement Dear Mr. Anthome: When executed by you ("Executive") and by a duly authorized representative of YES Clothing Co., a California corporation ("Company"), this will constitute the agreement between us in connection with your employment and set forth the terms and conditions thereof. 1. Services. 1.1 Employment. Company employs Executive during the Term (as hereinafter defined) to serve as Chairman of the Board of Directors and Chief Executive Officer of Company, and to render such other services ("Services") as Company may from time to time reasonably request which are consistent with the duties Executive is to perform and Executive's stature and experience. Executive has been appointed to the Board of Directors of Company and shall thereafter be included in management's slate of directors nominated for approval by Company's shareholders. The Services shall be generally performed in Los Angeles, California. In addition, the Services may be performed by Executive from time to time on a temporary travel basis at such other locations as Company shall reasonably request consistent with its reasonable business needs. 1.2 Reporting Requirements and Authority. Executive shall report to the Board of Directors of Company or the Executive Committee thereof. Except for those officers and employees subject to election by the Board of Directors of Company, Executive shall have the authority to select and employ all staff necessary to conduct the business of Company and each of its subsidiaries and associated entities, and all such staff shall ultimately report to, and be subject to the control and direction of Executive. 1.3 Term/Exclusivity. 1.3.1 The Term of this Agreement shall commence and this Agreement shall become effective as of June 6, 1996, and shall continue for a period of five (5) years through and including June 6, 2001, unless extended or sooner terminated in accordance with the provisions hereof (the "Term"). Guy Anthome Employment Agreement As of June 6, 1996 Page Two 1.3.2 The Services of Executive shall be exclusive to Company. Executive acknowledges that Executive's performance and services hereunder are of a special, unique, unusual, extraordinary and intellectual character which gives them peculiar value, the loss of which cannot be reasonably or adequately compensated in an action at law for damages. 1.4 Confidentiality Executive acknowledges that the Services will, throughout the Term, bring Executive into close contact with many confidential affairs of Company, including information about costs, profits, markets, sales, products, key personnel, pricing policies, operational methods, technical processes and other business affairs and methods and other information not readily available to the public, and plans for future development. Executive further acknowledges that the business of Company is international in scope, that its products are marketed throughout the world, that Company competes with other organizations and individuals which are or could be located in any part of the world and that the nature of Executive's Services, position and expertise are such that he is capable of competing with Company from any location in the world. In recognition of the foregoing, Executive covenants and agrees to keep secret all material confidential matters of Company which are not otherwise in the public domain and will not intentionally disclose them to anyone outside of Company, either during or after the Term, except with Company's express prior written consent and except for such minimum disclosure as is necessary in the performance of the Services and Executive's other duties during the Term. 1.5 Indemnification Executive shall be entitled throughout the Term to the benefit of the indemnification provisions contained on the date hereof in the Bylaws of Company notwithstanding any future changes therein, to the extent permitted by applicable law at the time of the assertion of any liability against Executive, and to the most favorable indemnification provisions or agreements available to any other senior executive of Company. 2. Compensation As compensation and consideration for all Services provided by Executive during the Term pursuant to this Agreement, Company agrees to pay to Executive the compensation set forth below: 2.1 Fixed Annual Compensation Executive shall initially receive Fixed Annual Compensation in the amount of One Hundred Fifty Thousand Dollars ($150,000.00). Any proposed modifications or adjustments (prospective and/or retroactive) to Fixed Annual Compensation shall be negotiated in good faith between Executive and Guy Anthome Employment Agreement As of June 6, 1996 Page Three Company. In addition to Fixed Annual Compensation, Executive may also from time to time receive performance bonuses, the frequency, criteria and amounts therefor to be determined at the discretion of Company. 2.2 Stock Options As an inducement to Executive, Company may from time to time offer and grant to Executive options to acquire shares of Company's common stock on terms and conditions to be determined by Company. Executive acknowledges and agrees that the grant of any such stock options is subject to approval by Company's shareholders. 2.3 Loans As a further inducement to Executive, Executive shall be entitled, at his discretion, to borrow funds from Company (at a reasonable rate of interest) up to a maximum total amount of One Hundred Thousand Dollars ($100,000.00). Any such borrowed funds shall be repaid to Company and/or otherwise offset by compensation payable to Executive hereunder, not later than the expiration or sooner termination of this Agreement. 2.4 Additional Benefits Executive shall be entitled to participate in any profit sharing, pension, health, vacation, insurance or other plans, benefits or policies available to the senior executive employees of Company and not duplicative of those provided herein on the terms determined by Company from time to time, and will be entitled to reimbursement of his reasonable and customary business expenses (including first class travel) incurred on behalf of Company ("Additional Benefits"). 3. Termination Company or Executive shall have the right to terminate the Term at any time by written notice to the other to that effect. Should the Term be terminated by either party, Executive shall have no right to any further Fixed Annual Compensation from and after termination or to any Additional Benefits accruing for the fiscal year of termination or thereafter. 4. General 4.1 Applicable Law Controls Nothing contained in this agreement shall be construed to require the commission of any act contrary to law and wherever there is any conflict between any provisions of this Agreement and any material Guy Anthome Employment Agreement As of June 6, 1996 Page Four statute, law, ordinance or regulation contrary to which the parties have no legal right to contract, then the latter shall prevail; provided, however, that in any such event the provisions of this Agreement so affected shall be curtailed and limited only to the extent necessary to bring them within applicable legal requirements, and provided further that if any obligation to pay the Fixed Annual Compensation or any other amount due Executive hereunder is so curtailed, then such compensation or amount shall be paid as soon thereafter, either during or subsequent to the Term, as practicable. 4.2 Waiver/Estoppel Any party hereto may waive the benefit of any term, condition or covenant in this Agreement or any right or remedy at law or in equity to which any party may be entitled but only by an instrument in writing signed by the party to be charged. No estoppel may be raised against any party except to the extent the other party relies on an instrument in writing, signed by the party to be charged, specifically reciting that the other party may rely thereon. The parties' rights and remedies under and pursuant to this Agreement or at law or in equity shall be cumulative and the exercise of any rights or remedies under one provision hereof or rights or remedies at law or in equity shall not be deemed an election of remedies; and any waiver or forbearance of any breach of this Agreement or remedy granted hereunder or at law or in equity shall not be deemed a waiver of any preceding or succeeding breach of the same or any other provision hereof or of the opportunity to exercise such right or remedy or any other right or remedy, whether or not similar, at any preceding or subsequent time. 4.3 Notices Any notice either party is required or may desire to give to the other hereunder shall be in writing and may be served by delivering it personally, or by sending it by mail (effective three (3) days after mailing) or overnight delivery of same (effective the next business day), or by facsimile (effective twelve (12) hours after confirmation), at the addresses set forth on page one hereof or such substitute addresses either party may from time to time designate by notice to the other party. 4.4 Governing Law This Agreement shall be governed by, construed and enforced and the legality and validity of each term and condition shall be determined in accordance with the internal, substantive laws of the State of California applicable to agreements fully executed and performed entirely in California. 4.5 Captions The section headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. Guy Anthome Employment Agreement As of June 6, 1996 Page Five 4.6 No Joint Venture Nothing herein contained shall constitute a partnership between or joint venture by the parties hereto or appoint any party the agent of any other party. No party shall hold itself out contrary to the terms of this paragraph 4.6 and, except as otherwise specifically provided herein, no party shall become liable for the representation, act or omission of any other party. This Agreement is not for the benefit of any third party who is not specifically referred to herein and shall not be deemed to give any right or remedy to any such third party. 4.7 Modification/Entire Agreement This Agreement may not be altered, modified or amended except by an instrument in writing signed by all of the parties hereto. No person, whether or not an officer, agent, employee or representative of any party, has made or has any authority to make for or on behalf of that party any agreement, representation, warranty, statement, promise, arrangement or understanding not expressly set forth in this Agreement. This Agreement constitutes the entire agreement between the parties and supersedes all express or implied, prior or concurrent, parol agreements and prior written agreements with respect to the subject matter hereof. The parties acknowledge that in entering into this agreement, they have not relied and will not in any way rely upon any parol agreements. Please confirm your agreement to the foregoing by signing below where indicated. Very truly yours, YES Clothing Co. /s/ Jeffrey P. Busse --------------------------------- Jeffrey P. Busse Chief Financial Officer Agreed to and Accepted: /s/ Guy Anthome - ------------------------- Guy Anthome EX-10.36 5 EXHIBIT 10.36--STOCK OPTION AGREEMENT NONQUALIFIED STOCK OPTION AGREEMENT THIS NONQUALIFIED STOCK OPTION AGREEMENT is effective this 28th day of January, 1997, by and between YES CLOTHING CO., a California corporation (the "Company"), and GUY ANTHOME (the "Optionee") pursuant to the Company's 1989 Stock Option Plan dated September 11, 1989 (the "Plan"). In consideration of the covenants herein set forth, and pursuant to authorization by the Board of Directors of the Company (the "Board"), the parties agree as follows: 1. OPTION; NUMBER OF SHARES; PRICE. The Company grants to the Optionee the right ("Option") to purchase Two Hundred Fifty Thousand (250,000) shares of the Common Stock of the Company ("Stock") at a purchase price of Seven Cents ($0.07) per share (the "Option Price"). This Option is subject to the terms and conditions stated in this Agreement and in the Plan, including but not limited to the provisions of Section 10 of the Plan under which this Option shall be subject to modification when certain events occur. 2. TERM OF AGREEMENT. This Agreement shall expire when the first of the following occurs: (a) the expiration of ten (10) years from the date of this Agreement; (b) the termination of the Option under Section 10 of the Plan; (c) the expiration of one (1) year from the date of an Optionee's termination of employment or other relationship with the Company (other than by reason of death); provided, however, that the Board may in its discretion extend these periods for up to five (5) years, provided that such extension shall not extend the period during which the Option may be exercised beyond the original term of the Option; (d) the expiration of one (1) year from the date of an Optionee's termination of employment or other relationship with the Company (other than by reason of death) if the Optionee is then disabled (within the meaning of Section 105(d)(4) of the Internal Revenue Code); provided, however, that the Board may in its discretion extend these periods for up to five (5) years, provided that such extension shall not extend the period during which the Option may be exercised beyond the original term of the Option; or (e) the expiration of one (1) year from the date of the death of an Optionee if his death occurs while he is, or not later than three (3) months after he has ceased to be, employed by or engaged in another relationship with the Company or any of its subsidiaries; provided, however, that the Board may in its discretion extend these periods for up to five (5) years, provided that such extension shall not extend the period during which the Option may be exercised beyond the original term of the Option. 3. EXERCISE OF OPTION. This Option may be exercised by the Optionee (or, after his death, by the person designated in Section 5) only in accordance with the following provisions: (a) this Option shall be deemed fully vested one hundred percent (100%) and be exercisable, in whole or in part, by Optionee immediately upon execution of this Agreement by both parties hereto; (b) this Option may be exercised, if at all, by the Optionee upon delivery of the following to the Company at its principal executive offices: (i) a written notice of exercise which identifies this Agreement and states the number of shares of Stock then being purchased; (ii) a check or cash in the amount of the purchase price (or payment of the purchase price in such other form of lawful consideration as the Company's Board of Directors may approve from time to time under the provisions of Section 7 of the Plan); (iii) a letter or agreement, if requested by the Company, in such form and substance as the Company may require, setting forth the investment intent of the Optionee and such other agreements and representations as described in Section 8 of the Plan; and (iv) a check or cash, if requested by the Company either before or after the Company's receipt of the notice of exercise, in the amount of any taxes (other than stock issue or transfer taxes) which the Company is obligated to collect or withhold by reason of the exercise of this Option. / / 4. TERMINATION. The termination of the Optionee as an employee, consultant or Director with the Company by death, disability or otherwise shall not accelerate or otherwise affect the number of shares with respect to which this Option may be exercised. 5. NONTRANSFERABILITY; DISABILITY OR DEATH OF OPTIONEE. The Option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable only by Optionee or the Optionee's guardian or legal representative during his lifetime. After death, the persons to whom Optionee's rights under the Option shall have passed by order of a court of competent jurisdiction, by will or by the applicable laws of descent and distribution or the executor or administrator of Optionee's estate, shall have the right to exercise the Option, pursuant to the terms of this Agreement and the Plan. Except as permitted by the preceding sentence, no option granted hereunder may be transferred. assigned, pledged, hypothecated or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process. Upon any attempt to so transfer, assign, pledge, hypothecate or otherwise dispose of any option granted hereunder. such option and all rights thereunder shall immediately become null and void. 6. NO RIGHTS AS SHAREHOLDER. The Optionee shall have no rights as a shareholder of any shares of Stock covered by this Option until the date (the "Exercise Date") an entry evidencing such ownership is made in the stock transfer books of the Company. Except as may be provided under Section 10 of the Plan, the Company will make no adjustment for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the Exercise Date. 7. HOLDING OF STOCK AFTER EXERCISE OF OPTION. Optionee hereby represents and covenants that (a) any share of Stock purchased upon exercise of the Option will be purchased for investment and not with a view to the distribution thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), unless such purchase has been registered under the Securities Act or applicable state securities law; (b) any subsequent sale of any such shares shall be made either pursuant to an effective registration statement under the Securities Act and any applicable state securities laws, or pursuant to an exemption from registration under the Securities Act and such state securities laws; and -C- if requested by the Company, Optionee shall submit a written statement, in form satisfactory to counsel for the Company, to the effect that such representation (x) is true and correct as of the date of purchase of any shares hereunder, or (y) is true and correct as of the date of any sale of any such shares, as applicable. A legend to the foregoing effect shall be placed upon any shares received upon exercise of this Option. As a further condition precedent to any exercise of the Option, Optionee shall comply with all regulations and requirements of any regulatory authority having control of or supervision over the issuance of the shares and, in connection therewith, shall execute any documents which the Board or any committee authorized by the Board shall in its sole discretion deem necessary or advisable. 8. THIS AGREEMENT SUBJECT TO PLAN. This Agreement is made under the provisions of the Plan and shall be interpreted in a manner consistent with it. Any provision in this Agreement inconsistent with the Plan shall be superseded and governed by the Plan. A copy of the Plan is available to the Optionee at the Company's principal executive offices upon request and without charge. 9. SUCCESSORS. This Agreement shall be binding upon and inure to the benefit of any successor or successors of the Company and any person or persons who shall, upon the death of Optionee, acquire any rights hereunder. 10. NOTICES. Any notice to the Company provided for in this Agreement shall be addressed to it in care of its Chief Financial Officer with a copy to the Chairman of the Board at its main office, and any notice to Optionee shall be addressed to Optionee's address on file with the Company or a subsidiary corporation, or to such other address as either may designate to the other in writing. Any notice shall be deemed to be duly given if and when enclosed in a properly sealed enveloped and addressed as stated above, and deposited, postage prepaid, in a post office or branch post office regularly maintained by the United States government. In lieu of giving notice by mail as aforesaid, any written notice under this Agreement may be given to Optionee in person, and to the Company by personal delivery to its Chief Financial Officer with a copy to the Chairman of the Board. 11. GOVERNING LAW. This Agreement shall be governed by, and interpreted in accordance with, the internal laws of the State of California. The Company and the Optionee have executed this Agreement effective as of the date set forth in the first paragraph hereof. YES CLOTHING CO. By /s/ Jeffrey P. Busse ---------------------------- Jeffrey P. Busse Company Director /s/ Guy Anthome ---------------------------- Guy Anthome (Optionee) EX-10.37 6 EXHIBIT 10.37--AMENDMENT TO FACTORING AGREEMENT CONSENT TO SECURITY AGREEMENT (SUPPLEMENT TO FACTORING AGREEMENT) June 5, 1997 Republic Business Credit Corporation 1000 Wilshire Boulevard Suite 400 Los Angeles, California 90017 Re: Yes Clothing Co. Gentlemen: The undersigned acknowledge receipt of the Security Agreement (Supplement to Factoring Agreement) (the "Agreement") being entered into concurrently herewith by and between you and Yes Clothing Co. (the "Client"). The undersigned acknowledge that their consent to the foregoing Agreement is not required, but the undersigned nevertheless do hereby consent to the foregoing Agreement and to the documents and agreements referred to therein and to all future modifications and amendments thereto, and any termination thereof. Sincerely yours, /s/ GUY ANTHOME ---------------------------------- Guy Anthome [LOGO] REPUBLIC BUSINESS CREDIT SECURITY AGREEMENT (SUPPLEMENT TO FACTORING AGREEMENT) CLIENT: YES CLOTHING CO. DATE: JUNE 5, 1997 This Security Agreement between Republic Business Credit Corporation ("Republic") and the client named above ("Client"), is a supplement to the Factoring Agreement between Republic and Client dated May 15, 1994 (the "Factoring Agreement"). This Supplement is hereby incorporated into the Factoring Agreement and made a part thereof and is subject to the other terms, conditions, covenants and warranties thereof. All terms (including capitalized terms) used herein shall have the meanings ascribed to them in the Factoring Agreement, unless otherwise defined in this Supplement. 1. GRANT OF SECURITY INTEREST. As security for the unconditional payment and performance when due of all of the Client's "Obligations" (as defined in Factoring Agreement), including without limitation, any and all liabilities, indebtedness, obligations, guarantees, representations, warranties and covenants now existing or hereafter arising under this Security Agreement or otherwise, the client hereby grants Republic a continuing security interest in all of Client's right, title and interest in the following types of property, whether now owned or existing or hereafter acquired or arising, and wherever located (collectively, the "Collateral"): (i) All inventory and goods, including without limitation, all inventory and goods held for sale or lease or to be furnished under contracts of service, raw materials, work in process, finished goods, goods in transit, advertising, packaging and shipping materials, and all designs, creations, patterns, styles, samples and all other materials, and supplies (collectively, the "Inventory"); (ii) All documents, including without limitation, documents of transport, payment and title relating to any of the foregoing and all such other documents as are made available to Client for the purpose of ultimate sale or exchange of goods or for the purpose of loading, unloading, storing, shipping, transhipping, manufacturing, processing or otherwise dealing with goods in a manner preliminary to their sale or exchange; (iii) All rights, claims, rights of offset, rights of return, actions and causes of action, against any person, including without limitation, those arising out of the purchase by Client of any of its Inventory, and all rights of stoppage in transit, replevin, reclamation and rights of an unpaid vendor or as a lienor; (iv) All other collateral described in the Factoring Agreement; and (v) All proceeds, insurance proceeds, products and accessions of or to any and all of the foregoing, and all collateral and security for, and guarantees of, any and all of the foregoing, and all books and records relating to any and all of the foregoing (including without limitation, any and all microfilm, microfiche, computer programs and records, source materials, tapes and discs) and all equipment containing said books and records. The term "Collateral" as used in the Factoring Agreement shall be deemed to include all of the Collateral described above, for all purposes of the Factoring Agreement. Nothing herein shall be deemed to constitute a commitment or agreement on the part of Republic to make loans or other advances to Client or to permit Client to incur Obligations, all of which remain a matter of Republic's sole and absolute discretion. 2. REPRESENTATIONS AND WARRANTIES. Client represents and warrants to Republic that all of the following representations and warranties are 1 true and correct on the date hereof and will continue to be true and correct throughout the term of this Security Agreement. (a) Client, if a corporation, is duly authorized, existing and in good standing under the laws of the jurisdiction of its incorporation. Client is and will continue to be qualified and licensed in all jurisdictions in which the nature of the business transacted by it, or the ownership or leasing of its property, make such qualification or licensing necessary, and Client has all the requisite power and authority to carry on its business as it is now, or may hereafter be, conducted. (b) The execution, delivery and performance of this Security Agreement, the Factoring Agreement and all other documents, instruments and agreements between Republic and the Client (collectively, the "Factoring Documents") have been duly authorized by all necessary corporate and other action, are enforceable against Client in accordance with their terms, and do not conflict with any instrument or agreement to which Client is a party or to which any of its property is subject. (c) Set forth in the heading to this Security Agreement is Client's true and correct name, and set forth on Exhibit A hereto is each prior name of Client and each fictitious name, trade name and trade style by which Client has been, or is now, known or has previously, or now, transacts business. Client shall provide Republic with ten (10) business days advance written notice before doing business under any other name, fictitious name, trade name or trade style. Client has complied, and will hereafter comply, with all laws relating to the conduct of business under, and the continuation of the right to use, a corporate, fictitious or trade name or trade style. (d) Client has places of business, and Inventory and other Collateral is kept only at the locations identified on Exhibit A hereto. Client will give Republic ten (10) business days' prior written notice of any discontinuance, or change in location, of any place of business, or the establishment of any new place of business, or any change in the location of the places where Inventory or other Collateral is or is to be kept. (e) Client is the sole owner of all of the Collateral, free and clear of all liens, claims, security interests and encumbrances, except a security interest in favor of Republic and/or Republic National Bank of New York ("Republic Bank") and/or Republic Bank California N.A. (f) None of the Collateral is affixed to any real property in such a manner, or with such intent, as to make it a fixture or a part of the real property. Client is not a lessee under any real property lease pursuant to which the lessor has obtained or may obtain any rights to the Collateral, and no such lease prohibits, restrains, or impairs Client's right to remove any Collateral from the leased premises, whether such removal is to be accomplished prior or subsequent to any default by Client under any such real property lease or any termination thereof. Client shall, whenever requested by Republic, cause the owner and lessor of any premises on which Collateral is located, and any person having a lien, mortgage or deed of trust on any such premises to execute and deliver to Republic, in form and substance acceptable to Republic, whatever waivers and subordinations that Republic in its sole discretion requires, so as to ensure that Republic's rights in and to the Collateral are, and will continue to be, prior and superior to the rights of any such owner, lessor or lienor. Client will keep in full force and effect, and will comply with all the terms of, any lease of real property where any of the Collateral now is or hereafter may be located. (g) All of Client's assets useful or necessary in the conduct of Client's business and all Collateral is in good working order and condition. Client will not use the Collateral or any of Client's other assets in any unlawful business or for any unlawful purpose and will not secrete or abandon the Collateral or any other assets. Client will immediately advise Republic in writing of any loss of, or material adverse change in the condition of any of the Collateral or of any of Client's other assets. (h) Client has complied, and will hereafter comply, with all provisions of all laws, rules and regulations relating to Client, including, but not limited to, those relating to environmental matters, hazardous and waste materials, Client's ownership of real or personal property, conduct or licensing of Client's business, payment and withholding of taxes, and payment of minimum wages and other matters relating to employment of Client's personnel. (i) There is no claim, litigation, proceeding or investigation pending or threatened by or against or affecting Client (or any basis therefor known to Client) which might result, either separately or in the aggregate, in any material adverse change in the business, prospects or condition of Client, or in any impairment in the ability or right of Client to carry on its business in substantially the same manner as it is now being conducted. Client will immediately inform Republic in writing of any claim, proceeding, litigation or investigation hereafter threatened or instituted by or against Client involving amounts in excess of $25,000. (j) Client has not, and will not, engage in any activity which constitutes or may constitute a pattern of racketeering activity within the meaning of, or may be illegal under, any statute of the United States or any other governmental authority, and Client has not, and will not, engage in any activity which may subject any of the Collateral or any of its other assets to any forfeiture or other adverse claim. (k) There is no fact which Client has not disclosed to Republic in writing which could materially adversely affect the properties, business or financial condition of Client or any of the Collateral or which it is necessary to disclose in order to keep the foregoing representations and warranties from being misleading. 2 3. COVENANTS. Client shall at all times comply with the following covenants, at its sole cost: (a) Client will have and maintain, at its sole cost and expense, insurance at all times with respect to all Inventory and all other insurable Collateral, against risk of fire (including extended coverage), theft, and all other usual risks and such special risks as Republic may designate and in the case of motor vehicles, collision insurance, all such insurance to be in such form and amounts, for such periods and written by such companies as may be satisfactory to Republic, such insurance proceeds to be payable to Republic and Client as their interest may appear; and all policies of insurance shall provide for a minimum of twenty (20) days prior written cancellation notice to Republic, and Client shall provide Republic with proof, satisfactory to it, of full payment of all premiums thereon. All such policies shall have endorsements thereon designating Republic as a secured party thereunder and shall have lender's loss payee endorsements in favor of Republic in such form as Republic may require. In addition, at the request of Republic, the originals of such policies shall be delivered to and held by Republic. In the event of failure to provide insurance as herein provided, Republic may, at its option, but without any obligation, obtain such insurance and Client shall pay to Republic, on demand, the cost thereof. The cost of any such insurance which Republic may obtain shall be added to the Obligations. Client's liability to Republic hereunder shall not be affected, impaired, released, or discharged, in whole or in part, by reason of any loss, theft, or destruction of, or depreciation or damage to, any Collateral, regardless of the cause of any such loss, theft, destruction, depreciation or damage, or absence or non-receipt of insurance proceeds and whether such non-receipt of insurance proceeds is caused by the failure of the insurer to pay claims or otherwise. (b) So long as any of the Obligations are outstanding, Client shall maintain Collateral so that the total "value" of the Collateral shall at all times be not less than 150% of the total amount of the outstanding Obligations, and, for purposes of this covenant, the term "value" with respect to the Inventory shall mean the lower of wholesale cost or wholesale market value. Client acknowledges that the foregoing covenant is a material part of the consideration to Republic for entering into this Security Agreement, and extending credit pursuant thereto, and that one of the reasons for the foregoing covenant is to provide an equity cushion and adequate protection to Republic caused by the delays, difficulty and expense which can occur in liquidation of the Collateral, and probability of rapid deterioration in the value of the Collateral in a liquidation, and other circumstances. (c) Client shall not sell, exchange, trade, lease or otherwise transfer any of the Inventory, or any other Collateral, without Republic's specific prior written consent, except for sales of finished Inventory for fair consideration in the ordinary course of business, and not in satisfaction of any pre existing debt. (d) Client shall: (i) perform any and all steps requested by Republic to perfect its security interest in the Inventory and other Collateral, such as placing and maintaining signs, appointing custodians and transferring Inventory to warehouses under the control of Republic or its designee. If any Inventory is in the possession or control of Client's agents or processors, Client shall notify such agents or processors of Republic's security interest therein, and upon request instruct them to hold all such Inventory for Republic's account and subject to Republic's instructions; (ii) execute and deliver to Republic, each month, or at any time upon Republic's request, a written certification of Inventory, in such form as Republic may from time to time request; (iii) allow Republic through any of its officers or agents, at all reasonable times, to examine and inspect the Inventory and any of the other Collateral and to examine, inspect, utilize, and make copies and/or extracts from all of Client's books and records, relating to the Collateral; (iv) promptly notify Republic in writing of any change of Client's officers, directors and key employees, a death of any co-partner or joint venturer (if Client is a partnership or joint venture), any sale or purchase out of the regular course of Client's business, and any material adverse change in the business or financial affairs of Client; (v) make available Client and its officers, employees, and agents and Client's books, computer discs, runs and printouts, records and files to the extent that Republic may deem necessary in order to prosecute or defend any such suit or proceeding relating to Client or the Collateral; (vi) pay when due all brokers' fees, freight, cargo insurance, demurrage charges, warehousing and/or storage charges, duties, taxes and assessments upon the Collateral, or for its use or operation, or upon the proceeds thereof, or upon this Security Agreement, or upon any instrument or instruments evidencing the Obligations. Republic may, at its option, but without obligation and without waiving any of its rights and remedies, discharge any of the foregoing, and Client agrees to reimburse Republic on demand for any payment made or any expense incurred by Republic pursuant to the foregoing authorization; and any such payment made or expense incurred shall be deemed to be Obligations. 4. EVENTS OF DEFAULT; REMEDIES. (a) The occurrence of any of the following events with respect to Client or any obligor, maker, endorser, acceptor, surety or guarantor of, or any other party to, any of the Obligations or the Collateral (each and all of whom, including Client, are included in the term "Obligor" as hereinafter used in this Section 4) shall constitute a "default" under this Security Agreement: failure to pay or perform when due any of the Obligations (including without limitation, any breach of the Factoring Agreement or this Security Agreement or any other present or future instrument or agreement with Republic); failure to pay when due any sum payable 3 with respect to any of the Collateral; the occurrence of any default or event of default under or as specified in the Factoring Agreement with respect to the Client or any other Obligor; failure of any Obligor, after demand, to furnish any financial information to Republic or to permit Republic to inspect any books or records of any Obligor; any loss, theft, or substantial damage to or destruction of any or all of the Collateral; any levy, assessment, attachment, seizure, lien or encumbrance for any cause or reason whatsoever, shall be made upon all or any part of the Collateral or any other asset of Client; institution against Client of any criminal proceedings, including without limitation, any criminal proceedings with respect to which forfeiture of any or all of the property of the Client is a penalty provided by law; if, in the judgment of Republic, any impairment occurs in the value of the Collateral or in the financial responsibility of any Obligor or in the prospect of payment or performance of any of the Obligations; or death of any guarantor or revocation or termination of any guarantee of any or all of the Obligations or the Collateral; or Republic, acting in good faith and in a commercially reasonable manner, deems itself insecure. Upon the occurrence of any such default, all of the Obligations shall, without notice or demand, at the election of Republic, forthwith become and be immediately due and payable, notwithstanding any time or credit allowed under any of the Obligations, or under any instruments evidencing the same. (b) Upon the occurrence of any default and at any time thereafter, Republic may, at its option, do any or all of the following: (i) cease advancing money or extending credit to or for the benefit of Client; (ii) exercise all of the rights and remedies granted to secured parties by the provisions of the applicable Uniform Commercial Code and all other applicable law; (iii) institute legal proceedings to foreclose upon the security interests granted in and by the Factoring Agreement and this Security Agreement, to recover judgment for all Obligations, and to collect the same out of any of the Collateral; (iv) institute legal proceedings for the recovery of possession of any or all of the Collateral and for the specific performance of any covenant or agreement herein contained or in aid of the execution of any power herein granted, and Client waives any bond or surety otherwise required in connection therewith, any demand for possession prior to the institution of any such proceedings and any requirement that Republic not dispose of any of the Collateral until after trial or judgment; (v) institute legal proceedings for sale, under the judgment or decree of any court of competent jurisdiction, of any of the Collateral; (vi) institute legal proceedings for the appointment of a receiver pending foreclosure hereunder or the sale of any of the Collateral under the order of a court of competent jurisdiction or under other legal process, and Client hereby consents to the appointment of a receiver in any such proceedings and waives any and all bonds in connection therewith; (vii) personally or by agents or representatives or employees or attorneys, enter any premises where Collateral is or may be, without hindrance, and take possession of any part or all of the Collateral at any time, wherever the same may be, with or without process of law and without being responsible for loss or damage; keep or store any or all of the Collateral on Client's premises and remain on such premises or cause a custodian to remain thereon, in exclusive control thereof, without charge, for so long as Republic deems necessary; process or complete the processing, manufacturing or repair of any or all of the Collateral, and in connection therewith Republic shall have the exclusive right to utilize any or all of the Client's premises, machinery, equipment, fixtures, and other assets without charge; and Republic may demand, sue for, collect or receive any money or property at any time payable or receivable on account of or in exchange for, or make any compromise or settlement deemed desirable with respect to, any of the Collateral and/or sell or dispose of all or any part of the same, free from any and all claims of Client or of any other party claiming by, through or under Client, at law or in equity, at one or more public or private sales, in such place or places (including without limitation, the premises of Client), in lots or in bulk, at such time or times, in such order, and upon such terms as Republic shall determine in its sole discretion, in its condition at the time Republic obtains possession or after further processing or repair, with or without any previous demand or notice to Client or advertisement of any such sale or other disposal except as may be required by law. Republic shall have the right to conduct such disposition on Client's premises without charge for such time or times as Republic deems fit, or on Republic's premises, or elsewhere and the Collateral need not be located at the place of disposition. Republic may directly or through any affiliated company purchase or lease any Collateral at any such disposition and, if permissible under applicable law, at any private disposition. Any sale or other disposition of Collateral shall not relieve Client of any liability Client may have if any Collateral is defective as to title or physical condition or otherwise at the time of sale. The power of sale hereunder shall not be exhausted by one or more sales, and Republic may from time to time adjourn any sale to be made pursuant to this Section, by oral announcement at the time of the sale, without any further notice or publication. If Republic shall demand possession of the Collateral or any part thereof pursuant to this Security Agreement, Client shall, at its own expense, forthwith cause such Collateral or any part thereof designated by Republic to be assembled and made available or delivered to Republic at any place reasonably designated by Republic. In the event that any mandatory requirement of applicable law shall obligate Republic to give prior written notice to Client of any of the foregoing acts, Client hereby covenants and agrees that a notice sent to it, in writing, by first class or certified United States mail, addressed to it at its address set forth below, and deposited in the United States mail at least five (5) days before the date of any such act, shall be deemed to be reasonable notice of such act and, specifically, reasonable notification of the time and place of any public or private sale hereunder 4 and reasonable notification of the time after which any intended sale or disposition thereof is to be made. Any and all attorneys' fees, expenses, costs, liabilities and obligations incurred by Republic with respect to the foregoing shall be added to and become part of the Obligations. (c) Client and Republic agree that the following conduct by Republic with respect to any disposition of Collateral shall conclusively be deemed commercially reasonable (but other conduct by Republic including, but not limited to, Republic's use in its sole discretion of other or different times, places and manners of noticing, and conducting any disposition of Collateral shall not be deemed unreasonable): Any public or private disposition as to which on no later than the fifth calendar day prior thereto written notice thereof is mailed or personally delivered to Client and, with respect to any public disposition, on no later than the fifth calendar day prior thereto notice thereof describing in general, non-specific terms the Collateral to be disposed of is published in the Los Angeles Daily Journal, the Metropolitan News or the Los Angeles Times; which is held in Los Angeles County at any place designated by Republic with or without the Collateral being present and which commences at any time between 8:00 A.M. and 5:00 P.M. Without limiting the generality of the foregoing, Client expressly agrees that, with respect to any disposition of accounts, receivables and general intangibles (collectively "Intangibles") it shall be commercially reasonable for Republic to direct any prospective purchaser thereof to ascertain directly from Client any and all information (and Republic shall not be required to maintain records of, or answer any inquiries) concerning the Intangibles offered for disposition including, but not limited to, the terms of payment, aging and delinquency, if any, of the Intangibles, the financial condition of any maker or guarantor thereof or debtor thereunder, any collateral therefor and the condition and location of the goods, if any, that are the subject of any of the Intangibles. (d) All proceeds realized as the result of any disposition of the Collateral shall be applied by Republic first to the costs, expenses, liabilities, obligations and attorneys' fees incurred by Republic in the exercise of its rights under this Security Agreement, second to the interest due upon any of Client's Obligations and third to the principal of Client's Obligations in such order as may be determined by Republic in its sole discretion. In the event that, as a result of the disposition of any of the Collateral, Republic directly or indirectly enters into a credit transaction with any third party, Republic shall have the option, exercisable at any time, in its sole discretion, of either reducing the Obligations by the principal amount of such credit transaction or deferring the reduction thereof until the actual receipt by Republic of cash therefor from such third party. The surplus, if any, shall be paid to Client or other persons legally entitled thereto; if any deficiency shall arise, Client shall remain liable to Republic therefor. 5. FURTHER ASSURANCES; POWER OF ATTORNEY. Client will at any time or from time to time, upon request of Republic, sign such financing statements, continuation statements and amendments thereto and such trust receipts, security agreements and other agreements or instruments as Republic determines to be necessary or desirable to preserve and protect any of Republic's rights hereunder. Client hereby agrees to pay all filing fees and reimburse Republic for all costs and expenses of any kind incurred in any way in connection with the Collateral. Client hereby grants to Republic an irrevocable power of attorney coupled with an interest, authorizing Republic (through any of its officers, employees, attorneys or agents), at any time and from time to time, at its option but without obligation, with or without notice to Client, and at Client's sole expense, to do any or all of the following, in Client's name or otherwise: (i) execute, deliver, present, file, record, endorse (with full recourse to Client), assign, and take control of any and all warehouse, shipping, dock and other receipts, letters of credit (including without limitation of the foregoing, applications for letters of credit, red clause letters of credit, agreements to letters of credit, letters of indemnity to steamship companies, ship-side bonds, air releases to airline companies and/or freight forwarders and indemnification agreements in favor of issuers of letters of indemnity to steamship companies, ship-side bonds and air releases, and waivers of discrepancies in documentation), notes, tax refund checks or warrants from any and all governmental agencies, instruments, acceptances, checks, drafts, money orders, customs duty drawbacks, chattel paper, invoices, trust receipts, bills of lading, title documents, and evidence of indebtedness, and any and all financing statements, continuation financing statements, financing statement amendments, security agreements, assignments, certificates of title, application for vehicle title, affidavits, reports, notices, schedules, claims, proofs of claim in bankruptcy and all other documents and instruments, and take all such other and further action, as Republic may, in its sole and absolute discretion, deem advisable in order to perfect, maintain, improve or protect Republic's security interest in the Collateral, or to carry out or enforce any of Republic's rights and remedies under Factoring Agreement and/or this Security Agreement, or to collect any sums owed to Republic or for which Client may be or become liable, or to carry out or consummate any transaction contemplated by this Security Agreement and any documents or instruments executed in connection herewith or relating hereto; (ii) pay, contest or settle any lien, charge, encumbrance, security interest and adverse claim in or to any of the Collateral, or any judgment based thereon, or otherwise take any action to terminate or discharge the same; (iii) grant extensions of time to pay, compromise and/or settle any claims for less than face value, and execute and deliver all releases and other documents in connection therewith; (iv) pay any sums required on account of Client's taxes or to secure the release of any liens therefor, or both; 5 (v) upon the occurrence of any default, to receive, and open and examine all mail addressed to Client, and in the exercise of such right, Republic shall have the right, in the name of Client, to notify the Post Office authorities to change the address for the delivery of mail addressed to Client to such other address as Republic may designate, including without limitation, Republic's own address, in which event Republic shall turn over to Client all of such mail not relating to the Collateral; (vi) upon any default, direct any financial institution to pay to Republic all monies on deposit by Client with said financial institution, regardless of any loss of interest, charge or penalty as a result of payment before maturity; (vii) settle and adjust, and give releases with respect to, any insurance claim that relates to any of the Collateral, and obtain payment therefore directly to Republic, and make all determinations and decisions with respect to any such insurance and any such insurance claim, and endorse Client's name on any check, draft, instrument or other item of payment or the proceeds of such insurance; and (viii) take any action or pay any sum required of Client pursuant to this Security Agreement and any other present or future agreements. Any and all sums paid and any and all costs, expenses, liabilities, obligations, accounting fees, adjustors' fees, consulting fees, appraisal fees, and attorneys' fees incurred by Republic with respect to the foregoing shall be added to and become part of the Obligations and shall be payable on demand. Republic shall have no liability to Client for any action taken or omitted to be taken by it pursuant to the foregoing power of attorney. In no event shall Republic's rights under this Security Agreement or any other documents or agreements be deemed to indicate that Republic is in control of the Client or Client's business or management or that Republic has control over the daily management functions or operating decisions of Client. 6. GENERAL. (a) Republic shall not be deemed to have waived any of its rights hereunder or under the Factoring Agreement or any other agreement, instrument or paper signed by Client unless such waiver is in writing and signed by Republic and specifically refers to the right being waived. No delay or omission on the part of Republic in exercising any right shall operate as a waiver of such right or of any other right. A waiver upon any occasion shall not be construed as a bar or waiver of any right or remedy on any future occasion. All of the rights and remedies of Republic, under Factoring Agreement, this Security Agreement and under any other agreement, instrument or document, shall be cumulative and may be exercised singularly or concurrently. (b) Client hereby assents to any agreement Republic may elect to enter into with any other party providing for the sharing or the participation of said party with Republic in the Obligations and/or the Collateral or any realizations thereon. Republic shall have no obligation to give any credit references for or with respect to Client to any third party. (c) This Security Agreement shall continue in full force and effect until all of the Obligations have been paid and performed in full and the Factoring Agreement has been terminated. Notwithstanding any termination of this Security Agreement and payment and performance of all Obligations, Republic shall not be required to deliver a termination statement with respect to any financing statement filed by it until Client has executed and delivered to Republic a General Release, in form acceptable to Republic, whereby Client releases any and all known and unknown claims of Client against Republic. (d) All notices to be given hereunder shall be in writing and may be served either personally or by telecopy, or by depositing the same in the United States mail, first-class postage prepaid, or ordinary, registered or certified mail addressed to Republic or Client at the addresses shown in the Factoring Agreement or herein, or at any other address as shall be designated by one party in a written notice to the other party. Any such notice shall be deemed to have been given upon delivery in the case of notices personally delivered or sent by telecopy, or at the expiration of two (2) business days following the deposit thereof in the United States mail (except that any notice of disposition of Collateral pursuant to Section 4 above that is mailed shall be deemed given at the time of deposit thereof in the United States mail). (e) Client shall defend, indemnify and hold Republic, and its directors, officers, employees, agents, attorneys and affiliates harmless from and against any and all claims, costs (including without limitation, attorneys' fees), losses, demands, actions, causes of action, lawsuits, damages, penalties, fines, judgments and liabilities of any kind or nature in any manner relating to Client's business, assets or operations, or otherwise relating to Client, including (but not limited to) any of the foregoing arising from any breach of any representation, warranty, covenant or provisions contained in this Security Agreement or any other document or agreement between Client and Republic, or any other transaction contemplated thereby or relating hereto or thereto, and including (but not limited to) any of the foregoing arising from any law, rule or regulation relating to hazardous or toxic materials or waste or the environment, or relating to the withholding or payment of income or other taxes, or relating to wages or hours of Client's employees. Defense of any action or proceeding with respect to which Republic or others are entitled to indemnity hereunder shall be by attorneys of Republic's choice, at Client's expense. This indemnity agreement shall continue in full force and effect notwithstanding any termination of this Security Agreement or termination of the security interests granted herein. (f) As used in this Security Agreement, the term "affiliate" of any party shall mean and include any person, firm or corporation controlling, 6 controlled by or under common control with such party, but in no event shall Republic be deemed to be an "affiliate" of Client for purposes of this Security Agreement or for any other purpose whatsoever. As used in this Security Agreement, the term "Client" shall be deemed to include the individual or individuals, association, partnership or corporation named herein as "Client," and (a) any successor, and any association, partnership, corporation or other person to which all or substantially all of the business or assets of Client shall have been transferred, and (b) in the case of a partnership, any general or limited partnership which shall have been created by reason of, or continue in existence after the admission of any new partner or partners therein, or the dissolution of the existing partnership by, or the condition thereof after the death, resignation or other withdrawal of any partner. (g) Client shall reimburse Republic for all attorneys' fees, accounting fees, and investigation fees, and for all filing, recording, publication, search and other costs and expenses which Republic may incur pursuant to or in connection with this Security Agreement or any transaction contemplated hereby or with respect to any of the Collateral or in connection with the defense or enforcement of its rights, remedies and interests (whether or not any suit is brought or judgment obtained). Without limiting the generality of the foregoing, Client will pay all such expenses and attorneys' fees incurred by Republic in connection with the enforcement of payment and performance of all Obligations and in any litigation relating to, or affecting this Security Agreement, and in any case or proceeding under any provision of the Bankruptcy Code (including without limitation, Chapter 7 or 11, thereof), or any successor statute thereto, the negotiating of this Security Agreement and any other agreements or documents relating to Client, the enforcement of any of its rights; the filing or prosecution of a claim in any action or proceeding (including without limitation, any probate claim, bankruptcy claim, third-party claim, secured creditor claim or reclamation complaint); the protection of, obtaining possession of, or enforcement of its security interest in the Collateral, or the representation of Republic in any litigation with respect to Client or its affairs. All attorneys' fees and costs to which Republic may be entitled pursuant to this Section shall immediately become part of Client's Obligations. (h) If this Security Agreement be signed by more than one party, their obligations hereunder shall be joint and several. This Security Agreement does not create, and shall not be construed as creating, any rights enforceable by any person not a party to this Security Agreement. If any provision of this Security Agreement is held by a court of competent jurisdiction to be invalid, illegal or unenforceable, the remaining provisions of this Security Agreement shall nevertheless remain in full force and effect. (i) Neither Republic, nor any of its directors, officers, employees, agents, attorneys or any other person affiliated with or representing Republic shall be liable for any claims, demands, losses or damages, of any kind whatsoever, made, claimed, incurred or suffered by the undersigned or any other party through the ordinary negligence of Republic, or any of its directors, officers, employees, agents, attorneys or any other person affiliated with or representing Republic. (j) This Security Agreement and the Factoring Agreement, and the other written documents and instruments between Republic and Client set forth in full the terms of agreement between the parties, are intended as the full, complete and exclusive contract governing the relationship between the parties, and supersede all prior and contemporaneous oral discussions, promises, representations, warranties, agreements and understandings between the parties. This Security Agreement may not be modified or amended, nor may any rights hereunder be waived, except in a writing signed by the party against whom enforcement of the modification, amendment or waiver is sought. No course of dealing between the parties, no usage of trade, and no parol or extrinsic evidence of any nature shall be used or be relevant to supplement, explain or modify any term or provision of this Security Agreement or any supplement or amendment thereto. This Security Agreement shall be construed in an even-handed manner and not strictly against or in favor of any party hereto, nor shall any ambiguities in this Security Agreement be construed strictly against or in favor of any party hereto. (k) Client agrees that any claim or cause of action by Client against Republic, or any of Republic's directors, officers, employees, agents, accountants or attorneys, based upon, arising from, or relating to this Security Agreement, or any other present or future agreement, or any other transaction contemplated hereby or thereby or relating hereto or thereto, or any other matter, cause or thing whatsoever, whether or not relating hereto or thereto, occurred, done, omitted or suffered to be done by Republic, or by Republic's directors, officers, employees, agents, accountants or attorneys, whether sounding in contract or in tort or otherwise, shall be barred unless asserted by Client by the commencement of an action or proceeding in a court of competent jurisdiction by the filing of a complaint within twelve months after the first act, occurrence or omission upon which such claim or cause of action, or any part thereof, is based and service of a summons and complaint on an officer of Republic or any other person authorized to accept service of process on behalf of Republic, within thirty (30) days thereafter. Client agrees that such twelve-month period of time is a reasonable and sufficient time for a Client to investigate and act upon any such claim or cause of action. The twelve-month period provided herein shall not be waived, tolled, or extended except by a specific written agreement of Republic. This provision shall survive any termination of this Security Agreement or any other agreement. 7 (l) As a material part of the consideration to Republic for entering into this Security Agreement, Client agrees that all actions and proceedings arising out of or relating to this Security Agreement or to any transaction in connection herewith shall, at the option of Republic, be litigated exclusively in courts located in the State of California, and that, at the option of Republic, the exclusive venue therefore shall be in Los Angeles County, California; Client hereby consents and submits to the jurisdiction of any such court and hereby waives personal service of any summons and complaint or other process or papers to be issued therein and hereby agrees that service of such summons and complaint or process may be made by registered or certified mail addressed to Client at its address as set forth below; failure on the part of Client to appear or answer within thirty (30) days after the mailing of such summons, complaint or process shall constitute a default entitling Republic to enter a judgment or order as demanded or prayed for therein. Client further waives any right to transfer or change the venue of any such action or proceeding. Client, in any litigation in which Republic and Client shall be adverse parties, waives the right to interpose any defense based upon any Statute of Limitations or any claims of laches and any set-off or counterclaim of any nature or description. This Security Agreement is being entered into in the State of California. This Security Agreement shall be governed by the internal laws (and not the conflict of law rules) of the State of California. (m) REPUBLIC AND CLIENT EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO: (i) THIS SECURITY AGREEMENT OR THe FACTORING AGREEMENT; OR (ii) ANY OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN REPUBLIC AND CLIENT; OR (iii) ANY CONDUCT, ACTS OR OMISSIONS OF REPUBLIC OR CLIENT OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH REPUBLIC OR CLIENT; IN EACH OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. Client: YES CLOTHING CO. /s/ GUY ANTHOME By ------------------------------------ Chairman & CEO /s/ JEFFREY BUSSE By ------------------------------------ Secretary Republic: REPUBLIC BUSINESS CREDIT CORPORATION /s/ DAVID LANDY By ------------------------------------ Senior (Vice) President 8 EXHIBIT A Client's prior names, fictitious names, trade names and trade styles, past and present (Section 2(c)): Carol Ames, Inc., Carol Ames, Michael B, Elegant Miss, Tangerine, Pinc-Coconuts, Sedan, Misfits-Men, GMS-Junior, GMS-Men, Body Glove, Audience, CS Sportswear, Yes Wear, Into Reality, Locations of Collateral (Section 2(d)): 1380 W. Washington Blvd. Los Angeles, CA 90007 9 AMENDMENT TO FACTORING AGREEMENT June 5, 1997 Republic Business Credit Corporation 1000 Wilshire Boulevard, Suite 400 Los Angeles, California 90017 Gentlemen: Reference is made to the Factoring Agreement between us dated May 15, 1994 (the "Factoring Agreement"). This will confirm that the Factoring Agreement is amended as follows, effective June 1, 1997: 1. CHANGE IN INTEREST RATE. The first sentence of Section 5.B. is amended to read as follows: "All interest charges to our account shall be at 2% above the reference rate of Republic National Bank of New York ("Republic Reference Rate"), computed on the basis of a 360-day year for the actual number of days elapsed and charged to our account at the end of each month." This Amendment, the Factoring Agreement, any prior written amendments to the Factoring Agreement signed by you and us, and the other written documents and agreements between you and us set forth in full all of your and our representations and agreements with respect to the subject matter hereof and supersede all prior discussions, representations, agreements and understandings between us with respect to the subject hereof. As herein expressly amended, all of the terms and provisions of the Factoring Agreement (as the same may have been previously amended), and all other documents and agreements between you and us shall continue in full force and effect and the same are hereby ratified and confirmed. Please confirm the foregoing by signing the enclosed copy of this letter and returning it to us. Sincerely yours, YES CLOTHING CO. By /s/ GUY ANTHOME ------------------------------------- Title Chairman & CEO ---------------------------------- ACCEPTED AND AGREED: REPUBLIC BUSINESS CREDIT CORPORATION By /s/ DAVID LANDY ------------------------------------ Title Senior Vice President --------------------------------- CONSENT The undersigned guarantor acknowledges that his consent is not required to the foregoing Amendment, but the undersigned nevertheless does consent to the foregoing Amendment. /s/ GUY ANTHOME - --------------------------------------- Guy Anthome 2 EX-27 7 EXHIBIT 27 --FDS
5 12-MOS MAR-31-1997 APR-01-1996 MAR-31-1997 80,000 0 0 0 644,000 819,000 2,521,000 2,074,000 1,459,000 2,623,000 0 0 0 11,308,000 (12,498,000) 1,459,000 3,416,000 3,416,000 2,945,000 2,945,000 0 0 183,000 (2,656,000) (971,000) (1,685,000) 0 0 0 (1,685,000) (0.24) (0.24)
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