-----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, SSYsA7lW0HgAwY2ciZ7cZu7zvEcg0hMsZ80Chwajxsw+5p/Fg3Vm4IDNswsnto0N qVYYW4B6QfdV+9WayxhR4A== 0000844143-99-000023.txt : 19990318 0000844143-99-000023.hdr.sgml : 19990318 ACCESSION NUMBER: 0000844143-99-000023 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19981130 FILED AS OF DATE: 19990316 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INNOVO GROUP INC CENTRAL INDEX KEY: 0000844143 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FABRICATED TEXTILE PRODUCTS [2390] IRS NUMBER: 112928178 STATE OF INCORPORATION: DE FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-18926 FILM NUMBER: 99566565 BUSINESS ADDRESS: STREET 1: 27 N MAIN ST CITY: SPRINGFIELD STATE: TN ZIP: 37172 BUSINESS PHONE: 6153840100 MAIL ADDRESS: STREET 1: 27 N MAIN ST CITY: SPRINGFIELD STATE: TN ZIP: 37172 FORMER COMPANY: FORMER CONFORMED NAME: ELORAC CORP DATE OF NAME CHANGE: 19901009 10-K/A 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended November 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission file number: 0-18926 INNOVO GROUP INC. (Exact name of registrant as specified in its charter) Delaware 11-2928178 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 1808 North Cherry Street, Knoxville, Tennessee 37917 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (423) 546-1110 Securities registered pursuant to Section 12 (b) of the Act: NONE Securities registered pursuant to Section 12 (g) of the Act: Common Stock, $.10 par value per share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months or (for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] As of February 16, 1999, 5,432,113 shares of common stock were outstanding. The aggregate market value of the voting stock held by non- affiliates of the registrant was approximately $10 million at the close of business on February 16, 1999. Documents incorporated by reference: Registrant's definitive Proxy Statement for its 1999 Annual Meeting of Stockholders to be filed with the Commission within 120 days of November 30, 1998 is incorporated by reference into Part III of this Report. INNOVO GROUP INC. FORM 10-K TABLE OF CONTENTS PART I Page Item 1. Business 3 Item 2. Properties 10 Item 3. Legal Proceedings 11 Item 4. Submission of Matters to a Vote of Security Holders 12 PART II Item 5. Market for the Company's Common Equity and Related Stockholder Matters 12 Item 6. Selected Consolidated Financial Data 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 8. Financial Statements and Supplementary Data 18 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures 40 PART III Item 10. Directors and Executive Officers of the Registrant 40 Item 11. Executive Compensation 42 Item 12. Security Ownership of Certain Beneficial Owners and Management 40 Item 13. Certain Relationships and Related Transactions 40 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 41 SIGNATURES 47 PART I ITEM 1. BUSINESS Introduction Innovo Group Inc. ("Innovo Group"), operating through its wholly-owned subsidiaries (which, collectively with Innovo Group are referred to as the "Company"), designs, manufactures and domestically markets and distributes various cut and sewn canvas and nylon consumer products, such as tote bags and insulated lunch bags and coolers, along with aprons and vests, for sale in the premium and advertising specialty market and to retailers including Wal-Mart, K- Mart, Michael's, Hobby Lobby, Dollar General, Goody's and Joanne's. The Company internationally markets and distributes sport bags, backpacks waistpacks and other stationary bags. Many of the Company's products include licensed NFL, NBA, NHL, Major League Baseball, collegiate teams and NASCAR drivers, custom artwork and other artwork designed in house. The Company's overseas products also include bags utilizing the characters of Walt Disney Co. and Warner Bros. Looney Tunes and the new NFL European football teams under a new license with NFL Europe. From April 1996 through September 1998, the Company also manufactured and domestically marketed ladies ready-to-wear, at-home sleep and lounge wear for sale to retailers and through mail order distribution. The Company's operations were classified into two industry segments prior to its fiscal year ended November 30, 1998: "Canvas and Nylon Consumer Products" and "Apparel Products." See Note 13 of Notes to Consolidated Financial Statements for financial information on industry segments. The Company discontinued all operations relating to the Apparel Products segment in September 1998 as described below in "Discontinued Operations." See Note 11 of Notes to Consolidated Financial Statements for financial information on industry segments. The principal executive offices of the Company are located at 1808 North Cherry Street, Knoxville, Tennessee 37917. Its telephone number is (423) 546-1110. Principal Operating Subsidiaries The Company's continuing operations are currently conducted primarily through two wholly owned subsidiaries: Innovo, Inc. ("Innovo") designs, markets and distributes domestically cut and sewn canvas and nylon consumer products for the utility, craft, sports licensed and advertising specialty markets. Innovo's products are primarily domestically manufactured at facilities owned or leased by the Company, although some products are obtained from foreign suppliers. NASCO Products International, Inc. ("NP International") markets and distributes overseas, principally in Europe and the Middle East, products similar to some of those marketed domestically by Innovo, as well as licensed sports bags and backpacks, which the Company generally obtains from foreign suppliers. Products Domestic Product Lines. Innovo designs, manufactures, markets and distributes a wide variety of cut and sewn canvas and nylon consumer products in the United States. Following are the principal products that Innovo manufactures and distributes in the United States to the utility, craft and licensed product markets: Utility Craft Licensed tote bags tote bags travel and tote bags gift bags aprons and smocks waist packs laundry bags banners duffel bags shoe bags vests stadium totes/cushions duffel bags Christmas stockings insulated lunch bags and soft coolers aprons and smocks Stonewashed denim Backpacks Product Design. Innovo develops the designs and artwork for its utility market products in-house. Innovo manufactures its craft market products without artwork to be sold (sometimes packaged with paints or other supplies)for finishing by retail craft customers. Innovo's licensed products are produced with the logos or other designs licensed from the four major professional sports leagues and colleges. Beginning in September 1998, the Company added a licensed NASCAR driver product line. See "Licensing Agreements" below. International Product Lines. NP International designs and distributes licensed sports products internationally, principally in Europe and the Middle East, to distributors that in turn sell to sporting goods, department and mass merchandise chains, hypermarkets, through mail order and to grocery and drug store chains. Its line of products consists of a variety of insulated soft lunch bags and coolers, backpacks and sport, gym, equipment and duffel bags. NP International's products are generally imprinted or embroidered with logos licensed from the four major professional sports leagues, colleges, the characters licensed from Walt Disney and Warner Bros. or, beginning in September 1998, motor sports logos and artwork. Sales to foreign customers, principally in Europe, accounted for 21.2%, 19.4% and 14.8% of net sales in fiscal 1998, 1997 and 1996, respectively. Advertising Specialty Market. Innovo also markets each of its products to the advertising specialty market. Those products include the customer's logo, design or slogan for use in connection with a customer or employee promotion or as a premium sale item. Licensing Agreements The Company's sports-licensed, Walt Disney Co. and Warner Bros. Studios Looney Tunes products display logos, insignia, names, slogans or cartoon characters licensed from the various licensors. Innovo and NP International hold licenses for the use of the logos and names of the teams of the National Football League, the National Basketball Association, Major League Baseball, the National Hockey League, NFL Europe and over 130 colleges on various products. For the year ended November 30, 1998, the sale of licensed products represented 35.65% of the Company's net sales. During September 1998, the Company entered into an agreement with the Fan Fueler division of Action Performance Companies, Inc. ("AP") providing the Company with exclusive manufacturing and non-exclusive distribution rights with respect to seat cushions, soft lunch bags and coolers, waist packs, tote bags and backpacks bearing motorsports-related trademarks and copyrights under AP's control. Among the NASCAR drivers represented by AP are Dale Earnhardt, Dale Earnhardt, Jr., Jeff Gordon, Rusty Wallace and Dale Jarrett. The following sets forth certain information concerning the license agreements currently held by the Company. Licensor Types of Products Geographical Areas National Basketball Tote, lunch, shoe and laundry bags; United States; Association stadium seat cushions, European Union Coolers, garment bags Backpacks, sportbags and ("UK") waistpacks. Major League Baseball Tote, lunch, shoe and laundry bags, United States; stadium seat cushions, UK; Sport bags and backpacks. EU National Football Tote, lunch, shoe and laundry bags, United States; League stadium seat cushions, UK; Sports bags and backpacks. EU National Hockey Tote, lunch, shoe and laundry bags, United States; League stadium seat cushions. UK; Sports bags and backpacks. EU Colleges/logos of Tote, lunch, shoe and laundry bags; United States; approximately 130 seat cushions; sports bags and UK; colleges backpacks. EU Walt Disney/Walt Tote, sport, gym and other bags; UK; Disney characters backpacks, waistpacks; wallets and other stationary bags Warner Bros Tote, sport, gym and other bags; EU; Middle East backpacks and waistpacks. Fan Fueler Seat cushions; soft lunch bags and United States; EU coolers; waist packs; tote bags and backpacks. Each license agreement grants the Company either an exclusive or non- exclusive license for use in connection with specific products and/or specific territories. The license agreements with the major professional sports licensing organizations are generally non-exclusive. However, the Company's experience has been that while the licenses are non-exclusive, the licensing entities generally limit the number of licenses they grant for any particular line of products. Thus, direct competition is limited by the availability of licenses. Typically, a license agreement is effective for a one or two-year term for the use of particular characters or designs of the licensor on some or all of the Company's products. A royalty is paid to the licensor that is usually a percentage of net sales, with a minimum annual guarantee for the license period. The royalty rates range from 9% to 17% and the minimum annual guarantees range from $5,000 to $200,000. Some license agreements grant the licensor broad termination rights, and most of the license agreements grant the licensor the right to terminate the license in the event minimum sales targets are not reached, if the Company does not diligently market the licensed products, or for the breach of any material term of the license agreement by the Company. The Company believes that it is in substantial compliance with the terms of all material licenses. The expiration dates of most of the current license agreements range from 1999 to 2000. Generally, the renewal provisions of the license agreements provide that the licensee may, at its option, renew the license for an additional one- or two-year term, provided certain conditions are satisfied. Historically, licenses have been terminated by the Company due to decreased sales or popularity, rather than by the licensors, and to date the Company has generally been able to obtain the renewal of licenses it wished to continue. The Company believes that it will continue to be able to obtain the renewal of all material licenses; however, there can be no assurance that competition for an expiring license from another entity, or other factors will not result in the non-renewal of a license. Company History Innovo began operations in April 1987. In August 1990, Innovo merged into Elorac Corporation, a so called "blank check" company that changed its name to "Innovo Group Inc." pursuant to the merger. In fiscal 1991, the Company acquired the business of NASCO, Inc., a manufacturer, importer and distributor of sports-licensed sports bags, backpacks and other sporting goods that had its headquarters approximately 30 miles north of Nashville in Springfield, Tennessee. NASCO, Inc., which was subsequently renamed "Spirco", was also engaged in the marketing of fundraising programs to school and youth organizations. The fundraising programs involved the sale of magazines, gift wraps, food items and seasonal gift items. Effective April 30, 1993, the Company sold Spirco's youth and school fundraising business. Its business of importing and distributing sports-licensed products was retained by NASCO Products, Inc. ("NASCO Products"), a wholly-owned subsidiary. Spirco had incurred significant trade debt and losses during its 1992 fiscal year in its fundraising business and from undisclosed liabilities incurred by Spirco prior to its acquisition. On August 27, 1993, Spirco filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Innovo Group and its other subsidiaries were not parties to the filing. Spirco's plan of reorganization was confirmed by the court on August 5, 1994, and became effective on November 7, 1994. Under the Spirco plan of reorganization, administrative claims were paid in cash from funds borrowed under the Company's bank credit facility. Leasall Management, Inc. ("Leasall"), a newly formed subsidiary of Innovo Group, acquired Spirco's equipment and plant and assumed the related equipment and mortgage debt (which Innovo Group had previously guaranteed), and Spirco was merged into Innovo Group. Spirco claims were paid either by issuing common stock of the Company to creditors or, in the case of claims for federal, state and local taxing authorities, by issuing shares to a trust which sold the stock and distributed the proceeds to such claimants. Unsecured claims did not receive any distribution and were extinguished under the plan of reorganization. On July 31, 1995, NASCO Products sold to Accessory Network Group, Inc. ("ANG") its business of importing into and distributing within the United States sports bags, backpacks and equipment bags bearing the logos of the teams of the four major professional sports leagues. NASCO Products discontinued all of its operations following the sale to ANG. For the licenses, ANG paid NASCO Products $750,000 in installments through December 1997. In addition, ANG will make ongoing annual payments for up to forty years to NASCO Products of 2% of sales under each of the National Football League, Major League Baseball and National Hockey League licenses, and 1% of sales under the NBA license, up to aggregate sales of $15 million, and 1.5% and 0.5% of sales, respectively, thereafter. The payments will continue unless a license expires or is terminated and is not renewed or reinstated within twelve months. In April 1996, the Company acquired Thimble Square, Inc. ("Thimble Square"). Thimble Square manufactured and marketed ladies' ready- to-wear at- home, sleep and lounge wear and provided "sew-only" manufacturing for other distributors of private-label sleep and lounge wear. It had three manufacturing facilities, one facility it owned in Pembroke, Georgia, and two leased facilities in Baxley, Georgia. See "Discontinued Operations" below. Discontinued Operations From 1996 through 1998, Thimble Square contributed a declining percentage of the Company's net sales, from approximately 18.5% in 1996 to 16.5% and 13.0% in 1997 and 1998, respectively. At the same time, the Thimble Square apparel products segment of the Company's business generated operating losses of approximately $110,000 in fiscal 1997 and $346,000 in fiscal 1998. See Notes 11 of Notes to Consolidated Financial Statements. Based on Thimble Square's deteriorating operating results, an ongoing operating capital drain of more than $20,000 per month and management's need to focus on the Company's core business, on September 13, 1998 the Company entered into an agreement with Confident Colors LLC (a company formed by a former officer of the Company, the chief operating officer of Thimble Square and others) ("Confident Colors") to lease to Confident Colors one of Thimble Square's Baxley, Georgia facilities and equipment and to allow it to succeed to all of Thimble Square's business and operations. Upon execution of the lease, Thimble Square discontinued all operations. In October 1998, the lease on Thimble Square's second Baxley facility expired. The Company sold Thimble Square's Pembroke facility on December 10, 1998 for net proceeds of $122,354 and the equipment in the Baxley facility for $30,000 on January 13, 1999. The Company recorded losses totaling $1,400,165 (including $639,000 of goodwill) as the result of the sale of Thimble Square during the fourth quarter of fiscal 1998. Summary of Significant 1998 Developments 1998 brought numerous changes to the Company. In March, Sam Furrow joined the Board of Directors of the Company. Jay Furrow joined the Company as Vice President of Corporate Development and in-house counsel in August. Later in August, Robert Talbott joined the Board. Also in August, the Board directed management to dispose of all non-core product lines and assets of the Company in order to concentrate the Company's capital and its management efforts on core business operations. In early September 1998, a reverse stock split of which one share of new Common Stock was exchanged for ten shares of old Common Stock, was effectuated in order to help maintain the Company's Nasdaq listing. In mid- September, the business of Thimble Square was discontinued. Thimble Square's principal Baxley, Georgia manufacturing facility and equipment were leased to Confident Colors and Confident Colors' succeeded to Thimble Square business. In October, the lease on Thimble Square's second Baxley, Georgia facility expired. In early October 1998, the Company leased an office, warehouse and manufacturing facility in Knoxville, Tennessee from Furrow-Holrob Development II, LLC, a company owned by Board members Sam Furrow and Robert Talbott. The facility had previously been used by Levi Strauss for manufacturing and distribution of its products. A few weeks later, a capital infusion of $1,798,000 was made through the purchase of 899,000 shares of Common Stock at $2.00 per share by Furrow-Holrob Development II, LLC. In November 1998, the Company began the move of its offices, warehouse and manufacturing operations from Springfield to the Knoxville facility. Also in November, Bradley White, CPA, joined the Company as Controller, and Patricia Anderson-Lasko, the founder of Innovo and Company President, was authorized to focus solely on Company sales, marketing and product development functions. Finally, George Bell was employed in November as Southeastern Regional Sales Manager for the Company. Significant Recent Developments In December 1998, the Company's move to its Knoxville facility was completed and is expected to provide the Company with a more efficient manufacturing facility. In addition, Thimble Square's Pembroke facility was sold. Finally, in December, Karen Thomas was employed as National Sales Manager for the Company. During February 1999, the Company obtained from Sam Furrow, the Company's CEO, and Dan Page, the Company's COO, separate lines of credit in the amount of $50,000 each. Additionally, these officers, together with other principals, have committed to provide additional credit as may be needed from time to time of up to an aggregate of $500,000. The lines will remain available until June, 1999, a time of year during which the Company would normally experience greater cash flow and liquidity due to the seasonal nature of the Company's business. See "Seasonality." Growth Strategy and Product Development The Company believes that growth in its business can be accomplished both by the expansion of the sales of its existing products with new and existing customers, and through the development or acquisition of new product designs and the acquisition of new licenses. The Company also continually evaluates the market potential for the sale of products bearing licensed logos, characters or artwork. Those evaluations involve both situations where a license has been offered to the Company, and where the Company itself identifies a logo or character that may have market potential. Where such an evaluation indicates a sufficient likelihood of market acceptance, the Company attempts to negotiate and obtain a license from the owner of the logo or character. In general, a period of from four to six months is required, once a license is obtained, to develop and obtain the approval for the art and the products for the new license, to produce samples and to begin marketing. The Company began the product development for its Action Performance Fan Fueler licenses in the fourth quarter of fiscal 1998. Shipments under these new licenses began in January 1999. However, there can be no assurance that the Company will be able to obtain other new licenses or renew existing licenses on favorable terms in the future. Marketing and Customers During fiscal 1998, the Company's Innovo operations sold products to a mix of mass merchandisers such as K Mart and Wal-Mart, department, sporting goods, grocery, craft and drug store chains, mail order retailers and other retail accounts. NP International's operations sold to 12 foreign distributors which in turn resell to retail accounts. The Company estimates that its products are carried in over 8,000 retail outlets in the United States and numerous retail outlets in Europe. Generally the Company's domestic accounts are serviced by the Company's sales personnel working with marketing organizations that have sales representatives which are compensated on a commission basis. NP International's marketing is conducted by the Company's European Sales and Marketing Manager selling directly to foreign distributors for resale to its retail customers which NPII assists in presentations to European retailers. In marketing its products the Company attempts to emphasize the competitive pricing and quality of its products, its ability to assist customers in designing marketing programs, its short lead times, and the high sell-through its products have historically achieved. To assist customers in achieving a higher sell-through of its sports team (professional and college) logoed products, the Company tracks the retail sales by team logo for various geographic areas. The Company then uses this information to assist customers in selecting the optimum mix of team logos for their market. The Company has an electronic data interchange system that allows certain larger customers to place orders directly. The Company also continues to solicit customers whose buying seasons are contrary to the Company's existing seasonality. See "Seasonality." For fiscal 1998, two customers accounted for sales in excess of 10% of net sales: Wal-Mart, a customer of Innovo which accounted for 37.4% of net sales, and Crown-Tex, a customer of Thimble Square, accounted for 92.0% of its sales. The loss of Wal-Mart as a customer would have a material adverse effect on the Company. Backlog Although the Company may at any given time have significant business booked in advance of purchase orders, customers' purchase orders are typically filled and shipped within two to six weeks. As of November 30, 1998, there were no significant backlogs. Seasonality The Company's business is seasonal. The majority of the marketing and sales activities take place from late fall to early spring. The greatest volume of shipments and sales are generally made from late spring through the summer, which coincides with the Company's second and third fiscal quarters and the Company's cash flow is strongest in its third and fourth fiscal quarters. See Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations - Seasonality." Manufacturing Innovo's products are either manufactured domestically in facilities operated by the Company or obtained from foreign suppliers through manufacturing agreements. The Company manufactures its domestic products from an inventory of unfinished fabric rolls using cutting, sewing and finishing equipment owned or leased by the Company. Innovo utilizes silk- screening machines to permanently imprint designs onto its various products. Using its in-house design staff and its computer graphic equipment, the Company has the capacity to rapidly produce new products. The principal materials used in Innovo's products include denim, canvas, plain and printed rolls of nylon, polyester and cotton, mesh and webbing. The Company buys raw materials in bulk for the products it manufactures domestically. The Company has generally concentrated its purchases of each type of raw materials for domestic manufacturing among a small number of suppliers, and during fiscal 1998 purchased the majority of each type of raw material it used from one or two suppliers. Although the Company does not have any long-term agreements with these or other suppliers, it has to date been able to obtain supply to satisfy its raw material requirements. Management believes that if its current suppliers were unable to supply the necessary raw materials in sufficient quantities or on acceptable price terms, alternative suppliers would be available on comparable price terms and delivery schedules. In the event the Company was unable to find such alternative suppliers at competitive prices and on a timely basis, its operations could be materially adversely affected. The sport and gym bags and backpacks marketed overseas by NP International and lunch bags, coolers and sport bags for Innovo for domestic distribution are generally obtained from overseas manufacturers in order to reduce the cost of these labor intensive products. The independent overseas contractors that manufacture these products are responsible for obtaining the necessary supply of raw materials and for manufacturing the products to the Company's specifications. The Company generally uses one independent contractor to fulfill all of its requirements in order to maximize its control over production quality and scheduling. Although the Company uses this, and other methods, to reduce the risk that the independent contractor will fail to meet the Company's requirements, the use of independent overseas contractors does reduce the Company's control over production and delivery and exposes the Company to the other usual risks of sourcing products abroad. The Company does not have any long-term supply agreements with independent overseas contractors, but believes that there are a number of contractors that could fulfill the Company's requirements. The Company has generally utilized overseas contractors that employ production facilities located in China. As a result, the products manufactured for the Company are subject to export quotas and other restrictions imposed by the Chinese government. To date the Company has not been adversely affected by such restrictions; however, there can be no assurance that future changes in such restrictions by the Chinese government would not adversely affect the Company, even if only temporarily while the Company shifted production to other countries or regions such as Mexico, Korea, Taiwan or Latin America. In the past, substantially all of the products manufactured overseas for the Company were shipped directly to customers outside the United States, but the Company is now importing more products for domestic distribution. It is anticipated that in fiscal 1999 more than 50% of the Company's domestic sales will be imported products which are subject to United States import quotas, inspection or duties. In 1998, the Company entered into a manufacturing arrangement with Sunwaki Industrial Company LTD pursuant to which Sunwaki provided a $500,000 trade credit to Innovo. Management expects this arrangement to substantially lower receiving, packing and shipping costs on those orders handled by Sunwaki. See also Item 7- Management's Discussion and Analysis -- Liquidity and Capital Resources. Competition The industries in which the Company operates are fragmented and highly competitive. The Company competes against a large number of baggage manufacturers and importers, and other generally small companies that distribute products similar to Innovo's and NP International's. NP International's sports-licensed products also compete with those of sporting goods manufacturers, such as Reebok, Nike and Adidas, that produce or license the manufacture of sports bags bearing their names and logos. The Company does not hold a dominant competitive position, and its ability to sell its products is dependent upon the anticipated popularity of its designs, the logos or characters its products bear, the price and quality of its products and its ability to meet its customers' delivery schedules. The Company believes that it is competitive in each of the above- described areas with companies producing goods of like quality and pricing, and that new product development, product identity through marketing, promotions and low price points will allow it to maintain its competitive position. In addition, the Company's ability to manufacture its products domestically and fill orders more promptly than companies whose sole or predominant source of products are outside the United States is an important aspect of remaining competitive. However, some of the Company's competitors possess substantially greater financial, technical and other resources than the Company, including the ability to implement more extensive marketing campaigns. Intellectual Property Innovo's utility line includes tote bags imprinted with the E.A.R.T.H. ("EVERY AMERICAN'S RESPONSIBILITY TO HELP") BAG trademark. E.A.R.T.H. Bags are marketed as a reusable bag that represents an environmentally conscious alternative to paper or plastic bags. Sales of E.A.R.T.H. Bags, while significant in Innovo's early years, have not been significant in the last five years. The Company still considers the trademark to be a valuable asset, and has registered it with the United States Patent and Trademark Office. Employees As of February 18, 1999, the Company employed 83 full-time personnel at the Knoxville, Tennessee facility, comprised of 4 persons in management, 14 persons in general administration and 65 persons in manufacturing and production. The Company continued to employ 1 full-time management employee in Springfield, Tennessee. Due to varying seasonal demands and redesign of the Company's manufacturing facilities, the Company's total work force reached a high of 356 employees during 1998, including 164 Thimble Square employees prior to discontinuing those operations. Management considers its relationship with its employees to be excellent. None of the Company's employees is party to a collective bargaining agreement. There has never been any material interruption of operations due to labor disagreements. ITEM 2. PROPERTIES The Company's headquarters, manufacturing and distribution facilities were located in Springfield, Tennessee, where Leasall owned three buildings throughout fiscal 1998 and until December 1998. The main Springfield complex was situated on seven acres of land with approximately 220,000 square feet of usable space, including 30,000 square feet of office space and 35,000 square feet of cooled manufacturing area. A warehouse annex contained 30,000 square feet. First Independent Bank of Gallatin, Tennessee holds a First Deed of Trust on the real property located in Springfield. The Springfield facilities are currently held for lease or sale, and approximately 25% of the facilities had been leased as of February 15, 1999. The Company's headquarters and manufacturing and distribution facilities were moved to a 78,000 square foot facility located in Knoxville, Tennessee during November and the first half of December 1998. The Knoxville facility provides approximately 65,000 square feet for manufacturing and distribution operations, as well as approximately 13,000 square feet of office spaces. The Company believes that the Knoxville facilities are adequate for its current and anticipated executive, administrative, sales and domestic manufacturing and distribution needs. Manufacturing capacity could be increased by approximately 50% in the Knoxville facility. To the extent that additional manufacturing capacity is required, management believes that additional facilities and capacity are available at reasonable cost, both domestically and overseas. Innovo also leased a 5,000 square foot sewing facility in Red Boiling Springs, Tennessee under a three year lease having an annual rental of $24,000 and expiring in August 1999. The facility was used to allow the Company to avoid the effects of labor shortages through the second quarter of fiscal 1997. In August 1997, as the result of increases in the production efficiencies of the Company's main plant in Springfield, Tennessee, the Company idled this additional plant. The Red Boiling Springs facility has been subleased at a monthly rent of $1,000 through the term of Innovo's lease. Thimble Square leased two facilities in Baxley, Georgia. The principal facility was a 21,000 square foot manufacturing facility with an annual rental of $36,000. The lease runs through August 2000 and provided Thimble Square with a purchase option. The second lease was for a 7,000 square foot cutting facility with annual lease payments of $10,000 which expired in October 1998. The primary Baxley facility was sub-leased to Confident Colors on September 14, 1998 as part of the discontinuation of the former Thimble Square operations by the Company. The terms of the lease provide for a $3,500 rental payable monthly and an option to purchase the 21,000 square foot facility. In addition, the lessees have exercised a right to purchase the production equipment located in the Baxley facilities for $30,000. Thimble Square also owned a 40,000 square foot manufacturing and distribution facility in Pembroke, Georgia, which was subject to liens held by the First Bank of Coastal Georgia, the Bryan County Development Authority, Inc. and the Business Development Corporation of Georgia, Inc. This plant was idled and sewing capacity was absorbed by Baxley in August 1997. In December 1997, the Pembroke, Georgia cutting operation was moved to Baxley. The Pembroke property was sold in December 1998 for approximately $122,000 net of selling expenses. The Company acquired a Florida retail property with approximately 32,000 square feet of rentable space, operated as the "Good Deal Mall," in fiscal 1995. Through August 1997 the Company was engaged in readying the property to operate as an indoor multiple vendor open space mall in which retailers operate from permanent booths. The property was initially opened in August 31, 1997 with approximately 24% of its available space leased. After several lease terminations the Company closed the facility in November 1997. The property is currently held for lease. ITEM 3. LEGAL PROCEEDINGS The Company is a party to lawsuits in the ordinary course of its business. While the damages sought in some of these actions are material, the Company does not believe that it is probable that the outcome of any individual action will have a material adverse effect, or that it is likely that adverse outcomes of individually insignificant actions will be sufficient enough, in number or magnitude, to have a material adverse effect in the aggregate. In May 1996, a foreign manufacturer that had previously supplied imported products to NASCO Products filed suit against NASCO Products asserting that it is owed approximately $470,000, which is $300,000 in excess of the amount presently recorded on the books of NASCO Products (Pannoy Enterprises Corporation v. NASCO Products, Inc., Case No. 12948, in the Chancery Court for Robertson County, Tennessee). The Company contends that NASCO Products and the supplier had previously reached an agreement on the balance owed (which is the balance recorded), as well as an arrangement under which the schedule for NASCO Products' payments reducing the balance would be based on future purchases by NP International. The Company has denied the supplier's claims, and has asserted affirmative defenses, including the supplier's late shipment of the original products, the supplier's refusal to accept and fill NP's International orders on agreed terms, and the supplier's agreement to a lesser balance owed and a payment arrangement. NASCO Products sold its operations in July 1995, and has no ongoing business operations. See Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations - General and - Liquidity and Capital Resources." In December 1991, a former employee filed suit against the Company, Patricia Anderson-Lasko and others alleging breach of an employment agreement and conversion of his interest in certain property rights (Michael J. Tedesco v. Innovo, Inc.., et al., Case No. 91-64033, District Court of Harris County, Texas, 164th Judicial Circuit). Following an appeal and a second trial, a final judgment was rendered against Innovo for $194,045.62 on August 17, 1998. Thereafter, 20,000 shares of Common Stock which has been held in the registry of the court, as security during the appeal and subsequent trial, were released to the plaintiff. If the sale of that stock does not generate sufficient net proceeds to pay the judgment, then Innovo will be liable for any shortfall. In July 1992, a former employee filed suit against the Company and Spirco for alleging breach of an employment agreement and asserting other related claims (Wayne Copelin v. Innovo Group, Inc., et al., Case No. 11950, in the Chancery Court of Robertson County, Tennessee). When Spirco went into bankruptcy in August 1993, the case proceeded against Innovo Group and a summary judgment of $100,000 was entered against it in March 1995. However, because the Copelin judgment was classified as a Class 8 Claim in the Spirco bankruptcy, the Company believed that the judgment was fully paid when it issued 35,211 shares of Common Stock to Copelin, in compliance with the confirmed Plan of Reorganization. When Copelin sought to enforce the judgment, Innovo Group, as the successor by merger to Spirco, brought a motion in the Spirco bankruptcy to enforce the terms of the Plan of Reorganization against Copelin. The bankruptcy judge granted the motion and permanently enjoined Copelin from enforcing the judgment in an order entered on October 18, 1996. Copelin appealed to the United States District Court and on April 13, 1998, the District Court reversed. The case is now on appeal to the United States Third Circuit Court of Appeals. Unless the Circuit Court reverses, Innovo Group will be liable for $100,000 plus accrued interest since March 1995. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the Company's fourth fiscal quarter. PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock is currently traded on the Nasdaq SmallCap Market maintained by The Nasdaq Stock Market, Inc under the symbol "INNO." The following sets forth the high and low bid quotations for the Common Stock in such market for the periods indicated. This information reflects inter-dealer prices, without retail mark-up, mark-down or commissions, and may not necessarily represent actual transactions. No representation is made by the Company that the following quotations necessarily reflect an established public trading market in the Common Stock. The following information (as all other information herein) is adjusted to reflect a reverse stock split in which one- share of new Common Stock with a par value of $.10 per share was exchanged for every ten shares of old common stock having a par value of $.01 per share (the "Reverse Split"). The Reverse Stock Split was completed effective September 11, 1998). Fiscal 1997 High Low First Quarter $5.00 $1.5625 Second Quarter 3.125 1.5625 Third Quarter 9.6875 1.40625 Fourth Quarter 8.4375 4.6875 Fiscal 1998 First Quarter $6.875 $5.625 Second Quarter 6.25 4.063 Third Quarter 4.375 1.875 Fourth Quarter 2.813 1.156 As of February 25, 1999, there were approximately 862 record holders of the Common Stock. The Company has never declared or paid a cash dividend and does not anticipate paying cash dividends on its Common Stock in the foreseeable future. In deciding whether to pay dividends on the Common Stock in the future, the Company's Board of Directors will consider factors it deems relevant, including the Company's earnings and financial condition and its capital expenditure requirements. In July 1997, the SEC and Nasdaq announced revised standards for listing on the Nasdaq SmallCap Market that required that a company's listed securities trade for not less than $1.00 and that the company have net tangible assets (total assets, excluding goodwill, minus total liabilities) of at least $2,000,000. The change became effective in February 1998. On February 27, 1998, Nasdaq notified the Company that it was not in compliance with the revised standards and was given to May 28, 1998 to come into compliance. The Common Stock generally traded at prices below $1.00 beginning in November 1995 and until the Reverse Split was completed effective September 11, 1998. The Company had been able to maintain its Nasdaq SmallCap listing by complying with an alternative $2,000,000 stockholder's equity requirement that is no longer available. Under the new Nasdaq requirements, the Company faced delisting unless the bid price on its stock increased to a minimum of $1.00 through normal markets or such other steps as deemed necessary by the Company. Following the Reverse Split, the bid price on the Company's stock has consistently exceeded $1.00. However, as the result of the losses incurred during the fourth quarter of fiscal 1998, the Company has net tangible assets of approximately $1,722,000 as of November 30, 1998 and did not meet the $2,000,000 net tangible asset requirement. During February 1999, the Company issued an aggregate of 150,000 shares of Common Stock to two officers, for total aggerate proceeds of $300,000. The shares were issued pursuant to the exemption provided by Section 4(2) of the Securities Act of 1933, as amended, and are restricted for purposes of Rule 144 promulgated under that Act. On a pro forma basis, the Company's net tangible assets as of November 30, 1998 would therefore be approximately $2,022,000 after giving effect to the sale of shares. Although the Company believes that this sale of shares will forestall any delisting of the Common Stock based on the Company's net tangible asset level as of November 30, 1998, the Company expects to incur operating losses during the first quarter of 1999 and that additional sales of Common Stock or other steps to increase tangible net assets will be necessary to maintain net tangible assets of at least $2,000,000. See also Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources. Although the Company will continually use its best efforts to maintain its Nasdaq SmallCap listing, there can be no assurance that it will be able to do so. If in the future, the Company is unable to satisfy the Nasdaq criteria for maintaining listing, its securities would be subject to delisting, and trading, if any, the Company's securities would thereafter be conducted in the over-the- counter market, in the so-called "pink sheets" or on the National Association of Securities Dealers, Inc. ("NASD") "Electronic Bulletin Board." As a consequence of any such delisting, a stockholder would likely find it more difficult to dispose of, or to obtain accurate quotations as to the prices, of the Common Stock. During the fourth quarter of fiscal 1998, the Company issued 899,000 shares of Common Stock in a private placement for $1,798,000 in gross cash proceeds. No commissions or other discounts were paid. The shares were issued in reliance upon the exemption under Section 4(2) of, and Rule 506 promulgated under, the Securities Act of 1933. ITEM 6. SELECTED FINANCIAL DATA The table below (includes the notes hereto) sets forth a summary of selected consolidated financial data. The selected consolidated financial data should be read in conjunction with the related consolidated financial statements and notes thereto. Years Ended (3) 11/30/98 11/30/97 11/30/96 10/31/95 10/31/94 (000's except per share data) Net Sales $6,790 $7,901 $6,023 $5,276 $8,028 Costs of Goods Sold 4,493 5,303 3,981 3,808 5,044 Gross Profit 2,297 2,598 2,042 1,468 2,984 Operating Expenses (5) 4,203 4,007 4,008 3,134 5,389 Income (Loss) from Operations (1,906) (1,009) (1,966) (1,666) (2,405) Interest Expense (503) (657) (870) (511) (821) Other Income (Expense) (4) 142 337 (147) 2,110 (1,000) Income (Loss) Before Income Taxes (2,267) (1,729) (2,983) (67) (7,905) Income Taxes (6) 0 0 0 0 3,679 Loss from Continuing Operations (2,267) (1,729) (2,983) (67) (7,905) Discontinued Operations (1) (1,747) (110) (105) (626) (685) Extraordinary Item (2) 0 524 0 (258) 699 Net Loss $(4,014) $(1,315) $(3,088) $(951) $(7,891) Loss per share from Continuing Operations $ (0.49) $ (0.50) $ (2.19) $(0.26) $(39.92) Weighted Average Shares Outstanding 4,618 3,438 1,361 261 198 Balance Sheet Data: Total Assets $7,232 $9,168 $9,433 $5,667 $11,143 Long-Term Debt 2,234 1,854 3,303 1,565 1,514 Stockholder s' Equity 1,722 3,791 2,275 (230) (2,372) (1) The amounts for 1998, 1997 and 1996 represent the operations of Thimble Square. Thimble Square's operations were discontinued during the fourth fiscal quarter of 1998 and most of its assets have since been leased or sold. The 1995 and 1994 amounts reflect the operations and July 1995 sale of the import operations of NASCO Products. (2) Represents gains (losses) from extinguishment of debt. (3) Effective November 1, 1995 the Company changed its fiscal year to end on November 30. Previously the Company's fiscal year ended October 31. (4) Amounts include, $1.9 million from the settlement of litigation in 1995. (5) Amount includes a $300,000 write down of long-term assets in 1998. (6) Amount includes $3,679,000 in deferred tax valuation allowance in 1994. ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The following discussion analyzes the Company's financial condition and results of operations for years ended November 30, 1998, 1997 and 1996 and their likely impact on 1999. The Company has incurred losses from continuing operations in each of the last three fiscal years, principally as a result of lower sales and a lack of adequate working capital. Management is addressing both of these shortfalls and taking steps to boost sales and the profitability of the Company. During 1998, the Company shed itself of the assets of Thimble Square, Inc., effectively taking the Company out of the apparel segment of the industry. Thimble Square had not achieved profitability since it was acquired in 1996 and no longer fit into the long-term operating plan of the Company. The Company also decided to move its operations to Knoxville, Tennessee into a more efficient and advanced production facility. The move to Knoxville was completed on December 15, 1998. In addition to the steps to minimize continued operating losses and cut costs, the Company has created a sales and marketing department around Patricia Anderson-Lasko. During December 1998 and January 1999, a National Sales Manager was hired to focus on the grocery and drugstore market and a National Marketing Manager was hired to facilitate a new product development program and work closely with the packaging, displaying and sales materials/promo's for existing products. Results of Operations The following table sets forth the Statement of Operations for the years ended November 30, 1998, 1997 and 1996. Years Ended 11/30/98 11/30/97 11/30/96 Net Sales $6,790 $7,901 $6,023 Costs of Goods Sold 4,493 5,303 3,981 Gross Profit 2,297 2,598 2,042 Selling, General & Administrative 3,638 3,740 3,498 Write down of long-term assets 300 -- -- Depreciation & Amortization 265 267 510 Income (Loss) from Operations (1,906) (1,009) (1,966) Interest Expense (503) (657) (870) Other Income (Expense) 142 337 (147) Income (Loss) Before Income Taxes (2,267) (1,729) (2,983) Income Taxes 0 0 0 Income (Loss) from Continuing Operations (2,267) (1,729) (2,983) Discontinued Operations (1,747) (110) (105) Extraordinary Item 0 524 0 Net Loss $(4,014) $(1,315) $(3,088) Comparison of Fiscal Year Ended November 30 1998 to Fiscal Year Ended November 30, 1997 Net Sales for the year ended November 30 decreased $1.1 million or 14% from $7.9 million in 1997 to $6.8 million in 1998. This decrease is primarily the result of the loss of programs with two significant customers. The gross margin percentage increased one point from 32.9% in 1997 to 33.8% in 1998 due to improved material pricing and a reduction in production costs. The Company anticipates a further reduction in material costs in 1999 from favorable pricing on imported items and domestic goods due to improved vendor selection and cost reduction strategies. Selling, General and Administrative costs decreased $100,000 or 2.7% from 1997 to 1998 due to decreased royalties from the reduced sales. The reductions in royalties were offset by an increase in legal and professional fees that resulted from the work performed on two potential acquisitions during 1998 and from a one time charge of $187,000 for the settlement of a lawsuit. Under the guidelines of SFAS 121 the Company recorded a $300,000 impairment loss representing a valuation adjustment on the Good Deal Mall facility as of November 30, 1998. Depreciation and Amortization expenses were not significantly different from 1997 to 1998 due to the lack of significant purchases of fixed assets and intangible assets during 1998. Interest expense for the year ended November 30 decreased $154,000 or 23% from 1997 to 1998 due to the payoff of debt in 1997 from the proceeds of the private placement to the Smith Group as well as a reduction in interest rates for new debt instruments placed during 1998. Comparison of Fiscal Year Ended November 30 1997 to Fiscal Year Ended November 30, 1996 Net Sales for the year ended November 30 increased $1,900,000 or 31.2% from $6.0 million in 1996 to $7.9 million in 1997 primary due to the introduction of new items into the Company's craft product line. The gross margin percentage decreased one point from 33.9% in 1996 to 32.9% in 1997 due to increases in sewing costs. Selling, General and Administrative costs decreased $200,000 or 3.9% from 1996 to 1997 due to reduced head count in the marketing, customer service and shipping departments. Depreciation and Amortization expense decreased $300,000 or 55% from 1996 to 1997. The decrease resulted from the disposal of a significant amount of assets in 1996. Interest expense for the year ended November 30 decreased $300,000 or 32% from 1996 to 1997 due to the payoff of debt in 1997 from the proceeds of the private placement to the Smith Group. Seasonality The Company's business is seasonal. The majority of the marketing and sales activities take place from late fall to early spring. The greatest volume of shipments and sales are generally made from late spring through the summer, which coincides with the Company's second and third fiscal quarters and the Company's cash flow is strongest in its third and fourth fiscal quarters. During the first half of the calendar year, the Company incurs the expenses of maintaining corporate offices, administrative, sales and production employees, and developing the marketing programs and designs for and conducting the majority of its sales campaigns. Inventory levels also increase during the first half of the year. Consequently, during the first half of each calendar year, corresponding to the Company's first and second fiscal quarters, the Company utilizes substantial working capital and its cash flows are diminished, whereas the second half of the calendar year, corresponding to the Company's third and fourth fiscal quarters, generally provides increased cash flows and the build-up of working capital. Liquidity and Capital Resources Innovo Group is a holding company and its principal assets are the common stock of the operating subsidiaries. As a result, to satisfy its obligations Innovo Group is dependent on cash obtained from the operating subsidiaries, either as loans, repayments of loans made by Innovo Group to the subsidiary, or distributions, or on the proceeds from the issuance of debt or equity securities by Innovo Group. Leasall's first mortgage loan contains restrictions on its ability to make advances or distributions to Innovo Group; however, Leasall's activities are limited to the ownership of the Company's real property and the servicing of the mortgage debt thereon. The debt agreements of the other subsidiaries do not restrict advances or distributions to Innovo Group. Cash flows from operations were a negative $1,238,000 for the year ended November 30, 1998. The primary reason was a net loss from continuing operations of $2,267,000, offset by $626,000 of non-cash charges principally for depreciation and amortization and an asset impairment charge. There were also decreases in receivables, inventories and prepaid expenses totaling $539,000 which were offset by a corresponding net decrease in payables and accrued expenses of $273,000. The Company has continued to generate losses throughout the first quarter of 1999. However, these losses are in line with expectations due to the seasonal nature of the Company's business (see discussion above). The Company anticipates improved financial performance for fiscal year 1999 due to additional product lines and an improved marketing effort. The improved financial performance should allow the Company to generate positive cash flows from operations for the year ended November 30, 1999. The Company's principal credit facility for working capital is its December 1997 factoring agreement with First American National Bank ("First American"). Under this facility, First American advances up to 90% of approved invoices. There is no established limit on the facility. first American charges Innovo 1% for the first 15 days an inovice is outstanding and .05% per day thereafter until paid, up to a maximum of 6%. The facility is secured by a first position on accounts receiveable and inventory and personal guarantees of certain members of the Board of Directors and management. Prior to the agreement with First American, the Company factored its receivables with another lender. The facility can be terminated upon thirty day written notice by either party. The Company has taken a number of steps to improve its liquidity in 1999, as more fully discussed below, including Obtaining a trade credit facility of up to $500,000 from a key vendor; Paying off in December 1998 a $126,000 short term note and a $179,000 long-term note from the proceeds of the sale of the Pembroke facility as it completed its disposal of the Thimble Square operations; Obtaining in February 1999 an extension to February 2000 on a $350,000 line of credit that had expired in December 1998; Obtaining in February 1999 $300,000 in cash from the proceeds of a sale of common stock to two officers, who also committed to provide an aggregate of $100,000 in additional credit. As a reult of recent efforts with vendors, the Company believes it has made progress in reestablishing normalized trade relationships. In 1998, the Company entered into an agreement with Sunwaki Industrial Company, Ltd. of Hong Kong to produce the Company's licensed products for both domestic and international distribution. Sunwaki has the capability to meet a substantial portion of the Company's needs for such products. In connection with this arrangement, Sunwaki agreed to extend up to $500,000 of trade credit to Innovo for fiscal year 1999. Management expects the arrangement to lower production and other related costs for 1999. In connection with the Company's discontinuance of its apparel manufacturing operations it disposed of its former Thimble Square operations and its assets. On December 10, 1998, the Company completed the sale of Thimble Square's Pembroke facility from which it realized net proceeds of approximately $122,000 which together with available cash was used to pay a $179,000 long- term mortgage and a $126,000 short term note. In December 1997, the Company negotiated a line of credit at First Independent Bank for $350,000 collateralized by the equipment of Innovo and Leasall and the guarantees of certain officers. A total of $349,000 had been drawn under this facility which matured on December 30, 1998. In February 1999, the bank renewed the facility extneding its due date to February 27, 2000. During February 1999, the Company issued $300,000 in Common Stock to Sam Furrow, the Company's CEO, and Dan Page, the Company's COO. In addition to the placement of stock, the officers made available to the Company separate lines of credit in the amount of $50,000 each. the lines will remain available until June, 1999, a time of year during which the Company would normally experience greater cash flow and liquidity due to the seasonal nature of the Company's business. See "Seasonality." In addition to these steps, the Company has entered into negotiation for an inventory-based credit facility to supplement its current receivable factoring facility. The Company believes that the lending base represented by these assets has not been effectively leveraged in the recent past and that the steps taken to restore the Company's credit capacity will facilitate these traditional borrowing sources. Additionally, the Company is in negotiations to sell a $703,000 promissory note receivable due from its President which had been received in conneciton with the President's exercise of a stock purchase award and has been reflected in the Company's financial statements as a reduction of equity. Proceeds from the sale of this note receivable would be used to repay an existing not payable in the amount of $650,000 which would increase the Company's borrowing capacity. Additionally, collection of the note receivable would serve to increase the Company's tangible net assets. Based on the foregoing, the Company believes that working capital will be sufficient to fund operations and required debt reductions during fiscal 1999. However, due to the seasonality of the Company's business and likely negative cash flow during the first half of the year, the Company may be required to obtain additional capital through debt or equity financing. The Company has received a commitment from certain of its officers for additional credit in an amount not to exceed $500,000 to fund short-term cash requirements as may be required from time to time during 1999. The Company believes that nay additional capital, to the extent needed, oculd be obtained from the sale of equity securities or short-term working capital loans. However, there can be no assurance that this or other financing will be available if needed. The inability of the Company to be able to fulfill any interim working capital requirements would force the Company to contrict its operations. Year 2000 In 1998, the Company assessed its computer systems and determined that much of the hardware that runs the critical software will need to be updated as well as the operating systems that support the critical software. The software used for billing, inventory, job costing and other accounting functions is currently year 2000 compliant. The Company purchased new computer hardware and operating systems in December 1998 for approximately $10,000. The Company estimates that it will spend an additional $20,000 to $30,000 to convert the critical systems to the new hardware and upgrade end-user equipment. The Company plans to have the conversion complete by the end of the second quarter or beginning of the third quarter of 1999. If the Company should not be able to successfully convert its computer hardware and operating systems to be in compliance with the year 2000, the Company will use a manual order processing system to continue to make and order customer product. Due to the mechanical nature of the equipment used in the production process, no interruption of production is anticipated. New Accounting Pronouncements SFAS No. 130, "Reporting Comprehensive Income" is effective for years beginning after December 15, 1997. This statement establishes standards for reporting and display of comprehensive income, its components and accumulated balances. This pronouncement is not expected to have a material impact on the Company's financial statements when adopted. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" is effective for years beginning after December 15, 1997. This statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements. It also establishes standards for related disclosures about products and services, geographic areas, nd major customers. This pronouncement is not expected to have a material impact on the Company's financial statements when adopted. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities is effective for all fiscal years beginning after June 15, 1999. This statement requires recognition of all derivative contracts as either assets or liabilities in the balance sheet and the measurement of them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of any gains or losses on the hedge with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. Historically, the Company has not entered into derivative contracts either to hedge existing risks or for speculative purposes. The adoption of the new standard on January 1, 2000 will not affect the Company's financial statements. ITEM 8. FINANCIAL STATEMENTS Innovo Group Inc. Index to Consolidated Financial Statements Report of Independent Certified Public Accountants 19 Consolidated Balance Sheets 20 Consolidated Statements of Operations 21 Consolidated Statements of Stockholders' Equity 22 - 23 Consolidated Statements of Cash Flows 24 - 25 Notes to Consolidated Financial Statements 26 - 39 Financial Statement Schedules are included at Item 14. Report of Independent Certified Public Accountants Board of Directors Innovo Group Inc. We have audited the accompanying consolidated balance sheets of Innovo Group Inc. and subsidiaries as of November 30, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years ended November 30, 1998, 1997 and 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the 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 presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Innovo Group Inc. and subsidiaries as of November 30, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the years ended November 30, 1998, 1997 and 1996, in conformity with generally accepted accounting principles. /s/BDO SEIDMAN, LLP BDO SEIDMAN, LLP Atlanta, Georgia February 10, 1999, except for Note 13 which is as of March 10, 1999 INNOVO GROUP INC AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (000's except for share data) 11/30/98 11/30/97 ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,078 $ 469 Accounts receivable net of allowance ($67,000 for 1998 and $123,000 for 1997) (Note 5) 708 895 Inventories (Note 5) 1,101 1,582 Prepaid expenses 267 398 TOTAL CURRENT ASSETS 3,154 3,344 PROPERTY, PLANT and EQUIPMENT, net 4,037 5,071 OTHER ASSETS 41 753 TOTAL ASSETS $ 7,232 $ 9,168 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable (Note 5) $ 914 $ 1,131 Current maturities of long-term debt (Note 6) 270 211 Accounts payable 1,139 1,412 Accrued expenses 906 769 TOTAL CURRENT LIABILITIES 3,229 3,523 LONG-TERM DEBT, less current maturities (Note 6) 2,234 1,854 OTHER 47 - TOTAL LIABILITIES 5,510 5,377 COMMITMENTS AND CONTINGENCIES (Note 10) STOCKHOLDERS' EQUITY (Note 9) Common stock, $0.10 par - shares authorized 7,000,000 in 1998 and 1997; issued 5,387,113 in 1998 and 4,459,613 in 1997 538 446 Additional paid-in capital 30,282 28,429 Promissory note - officer (703) (703) Deficit (25,969) (21,955) Treasury stock (2,426) (2,426) TOTAL STOCKHOLDERS' EQUITY 1,722 3,791 TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $ 7,232 $ 9,168 See accompanying notes to consolidated financial statements INNOVO GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (000's except per share data) Year Ended November 30, 1998 1997 1996 NET SALES $6,790 $7,901 $6,023 COST OF GOODS SOLD 4,493 5,303 3,981 Gross profit 2,297 2,598 2,042 OPERATING EXPENSES Selling, general and administrative 3,638 3,740 3,498 Write down of long-term assets 300 -- -- Depreciation and amortization 265 267 510 4,203 4,007 4,008 LOSS FROM OPERATIONS (1,906) (1,009) (1,966) INTEREST EXPENSE (503) (657) (870) OTHER INCOME (EXPENSE), net 142 337 (147) LOSS BEFORE INCOME TAXES (2,267) (1,729) (2,983) INCOME TAXES (BENEFIT) - - - LOSS FROM CONTINUING OPERATIONS (2,267) (1,729) (2,983) DISCONTINUED OPERATIONS Results from Thimble Square operations (346) (110) (105) Loss on disposal of Thimble Square (1,401) - - (1,747) (110) (105) LOSS BEFORE EXTRAORDINARY ITEM (4,014) (1,839) (3,088) EXTRAORDINARY ITEM (Note 7) - 524 - NET LOSS $ (4,014) $(1,315) $(3,088) LOSS PER SHARE: Continuing operations $(0.49) $(0.50) $(2.19) Discontinued operations $(0.38) $(0.03) $(0.08) Net loss $(0.87) $(0.38) $(2.27) WEIGHTED AVERAGE SHARES OUTSTANDING 4,618 3,438 1,361 See accompanying notes to consolidated financial statements INNOVO GROUP INC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (000's except for share data) Additional Promissory Stock Paid-in Note Treasury Shares Amount Subscription Capital Deficit Officer Stock Total Balance, November 30, 1995 387,886 $ 39 $ 292 $ 20,138 $(17,552) $ - $(2,389) $ 528 Issuance of common stock Cash 731,628 73 - 1,737 - - - 1,810 Subscription agreements 31,136 3 (292) 289 - - - - Spirco reorganization 31,299 3 - 295 - - - 298 Manufacturing agreement 120,000 12 - 388 - - - 400 Thimble Square acquisition 124,118 12 - 621 - - - 633 Extinguishment of debt 126,947 13 - 410 - - - 423 Conversion of debentures 752,191 75 - 915 - - - 990 Exercise of warrants and options 337,273 34 - 412 - - - 446 Loan fees 10,580 1 - 31 - - - 32 Debt settlement - - - - - - (37) (37) Issuance of warrants - - - 40 - - - 40 Issuance costs - - - (200) - - - (200) Net Loss - - - - (3,088) - - (3,088) Balance, November 30, 1996 2,653,058 265 - 25,076 (20,640) - (2,426) 2,275 Issuance of common stock - - - - - - - - Smith group purchase 675,000 68 - 1,282 - - - 1,350 Cash 150,000 15 - 660 - - - 675 Conversion of debentures 412,793 41 - 359 - - - 400 Exercise of stock purchase right400,000 40 - 1,085 - (1,125) - - Conversion of convertible notes 210,000 21 - 383 - - - 404 Exercise of warrants 76,500 8 - 135 - - - 143 Debt settlement 75,000 1 - 50 - - - 51 Other 24,762 2 - 41 - - - 43 Costs of issuance - - - (85) - - - (85) Retire shares subject to stock purchase right (150,000) (15) - (407) - 422 - - Warrant repurchase - - - (150) - - - (150) Net Loss - - - - (1,315) - - (1,315) Balance, November 30, 1997 4,459,613 446 - 28,429 (21,955) (703) (2,426) 3,791 Issuance of common stock Furrow-Holrob Development purchase 899,000 89 - 1,709 - - - 1,798 Issuance for compensation 16,450 2 - 96 - - - 98 Issuance for debt service 8,550 1 - 55 - - - 56 Exercise of warrants and options 3,500 - - 9 - - - 9 Cost of issuance - - - (16) - - - (16) Net loss - - - - (4,014) - - (4,014) Balance, November 30, 1998 5,387,113 $ 538 $ - $30,282 $(25,426) $(703) $(2,426) $1,722 See accompanying notes to consolidated financial statements
INNOVO GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (000's) Year Ended November 30, 1998 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(4,014) $(1,315) $(3,088) Adjustment to reconcile net loss to cash used in operating activities from continuing operations: Loss on disposal of discontinued operations 1,401 - - Loss from discontinued operations 346 520 105 Compensatory stock options 100 - - Depreciation and amortization 265 267 510 Asset impairment charge 300 - - Provision for uncollectable accounts (39) (49) 78 Extraordinary gain - (524) - Other - - 6 Changes in assets and liabilities: Accounts receivable 226 392 (430) Inventories 137 167 (406) Prepaid expenses and other 176 (66) 560 Accounts payable (273) (173) 558 Accrued expenses 137 (134) (598) Other - (14) (11) Cash used in operating activities of continuing operations (1,238) (929) (2,716) Cash used in operating acivities of discontinued operations (202) (318) (27) Cash used in operating activities (1,440) (1,247) (2,743) CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (18) (469) (379) Increase (decrease) in other assets - 43 - Proceeds from sale of discontinued operations - - 257 Disposal of fixed assets - 216 - Cash used in investing activities (18) (210) (122) CASH FLOWS FROM FINANCING ACTIVITIES: Addition of notes payable 7,865 869 - Repayments of notes payable (8,027) (221) (444) Additions to long-term debt 650 - 1,675 Debt issue costs - - (285) Repayments of long-term debt (212) (729) (226) Proceeds from issuance of common stock 1,807 2,168 2,256 Stock issuance costs (16) (85) (200) Warrant repurchase - (150) - Other - 43 - Cash provided by financing activities 2,067 1,895 2,776 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 609 438 (89) CASH AND CASH EQUIVALENTS, at beginning of period 469 31 120 CASH AND CASH EQUIVALENTS, at end of period $1,078 $ 469 $ 31 SUPPLEMENTAL DISCLOSURES OF CASH FLOWS Cash paid for interest 555 767 618 Cash paid for income taxes - - - See accompanying notes to consolidated financial statements INNOVO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Nature of business Innovo Group Inc. ("Innovo Group") is a holding company, the principal assets of which are the outstanding securities of three operating subsidiaries, Innovo, Inc. ("Innovo"), NASCO Products International, Inc. ("NP International") and Thimble Square, Inc. (Thimble Square"). Certain assets of Thimble Square were disposed of and its operations ceased on September 13, 1998 (see Note 12). The Innovo Group and its wholly owned subsidiaries are referred to as "the Company". Innovo is a domestic manufacturer of cut and sewn canvas and nylon consumer products, such as tote and other bags and aprons, which are sold to the utility, craft, sports licensed and advertising specialty markets. Innovo is also an importer of sports licensed products produced with logos or other designs licensed from various sports licensors. These items such as coolers, seat cushions and back packs are sold to the sports licensed and advertising specialty markets. Innovo grants credit to customers, substantially all of which are retail merchandisers or are in the premium incentive industry. NP International distributes in foreign, principally European markets, nylon sports bags and backpacks, imprinted or embroidered with logos or other designs licensed from various sports and entertainment related licensors. Thimble Square manufactured and marketed ladies' ready-to-wear at home, sleep and lounge wear. Its products were sold to mail order companies, retailers and through mail order distribution. Thimble Square also provided "sew-only" manufacturing for other distributors of private-label sleep and lounge wear; in those instances, the customer provided the raw materials and Thimble Square manufactured the products to the customer's specifications. The Company operated in two business segments throughout the majority of fiscal 1998. See Note 11. Sales to two customers (one a customer of Innovo, and one a customer of Thimble Square) accounted for 37.4%, and 92.0% of the net sales of each company respectively for the year ended November 30, 1998. Sales to foreign customers of Nasco Products Internationa, principally in Europe, accounted for 18.4%, 16.4% and 12.1% of net sales in fiscal 1998, 1997 and 1996, respectively. (b) Principles of consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated. (c) Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and dis- closure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates most significantly affect the amortization of goodwill, the evaluation of contingencies, and the determination of allowances for accounts receivable and inventories. INNOVO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (d) Revenue recognition Revenues are recorded on the accrual basis of accounting when the Company ships products to its customers. Sales returns must be approved by the Company and are typically only allowed for damaged goods. Such returns are typically not material. The Company provides an allowance ($67,000 and $123,000 at year ended November 30, 1998 and 1997, respectively) for estimated losses to be incurred in the collection of accounts receivable. (e) Loss per share Loss per share is computed using weighted average common shares and dilutive common equivalent shares outstanding. Potentially dilutive securities consist of outstanding options and warrants. Potentially dilutive securities were not considered in the computation of weighted average common shares as their effect would have been antidilutive. On September 13, 1998 the Company declared a reverse stock split of which one share of new Common Stock was exchanged for ten shares of old Common Stock. All share and per share amounts have been restated to reflect the effects of the reverse stock split. (f) Capitalization policy Cost incurred in the issuance of debt securities or to obtain bank financing are capitalized and are amortized as a component of interest expense using the level yield method. The Company charges to expense in the year incurred costs to develop new products and programs. Amounts charged to expense approximated $ 2,000, $182,000 and $363,000 in fiscal 1998, 1997 and 1996, respectively. (g) Financial Instruments The fair values of the Company's financial instruments (consisting of cash, accounts receivable, accounts payable, notes payable, long- term debt and notes payable officer) do not differ materially from their recorded amounts. The Company neither holds, nor is obligated under, financial instruments that possess off-balance sheet credit or market risk. (h) Impairment of Long-Lived Assets Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. (i) New Accounting Pronouncements SFAS No. 130, "Reporting Comprehensive Income" is effective for years beginning after December 15, 1997. This statement establishes standards for reporting and display of comprehensive income, its components and accumulated balances. This pronouncement is not expected to have a material impact on the Company's financial statements when adopted. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" is effective for years beginning after December 15, 1997. This statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This pronouncement is not expected to have a material impact on the Company's financial statements when adopted. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities is effective for all fiscal years beginning after June 15, 1999. This statement requires recognition of all derivative contracts as either assets or liabilities in the balance sheet and the measurement of them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of any gains or losses on the hedge with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. Historically, the Company has not entered into derivative contracts either to hedge existing risks or for speculative purposes. The adoption of the new standard on January 1, 2000 will not affect the Company's financial statements. NOTE 2 - INVENTORY Inventories are stated at the lower of cost, as determined by the first- in, first-out method, or market. Inventories consisted of the following: November 30, 1998 1997 (000's) (000's) Finished goods $ 766 $ 680 Work-in-process 18 246 Raw materials 353 692 1,137 1,618 Less inventory reserve (36) (36) $1,101 $1,582 INNOVO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 3 PROPERTY, PLANT & EQUIPMENT Property, plant and equipment, including assets utilized under capital leases, are stated at cost. Depreciation and amortization are provided in amounts sufficient to allocate the cost of depreciable assets to operations over their estimated useful lives using the straight-line method. Leasehold improvements are amortized over the lives of the respective leases or the estimated service lives of the improvements, whichever is shorter. On sale or retirement, the asset cost and related accumulated depreciation or amortization are removed from the accounts, and any related gain or loss is included in the determination of income. Property and equipment consisted of the following: Useful Lives November 30, (Years) 1998 1997 (000's) (000's) Buildings, land and improvements 8-38 $ 3,250 $ 4,575 Machinery and equipment 5-10 1,153 1,526 Furniture and fixtures 3-8 637 674 Transportation equipment 5 56 65 Leasehold improvements 5-8 3 3 5,099 6,843 Less accumulated depreciation and amortization (1,841) (1,772) 3,258 --- Net property, plant and equipment of discontinued operations 779 --- Net property and equipment $4,037 $5,071 The cost and accumulated depreciation for assets utilized under capital leases were $577,000 and $137,000, respectively, at November 30, 1998. The Thimble Square facility in Pembroke, Georgia was sold on December 10, 1998 for approximately $122,000 net of selling expenses. This sale resulted in a $278,000 loss on disposal. Under the provision of SFAS 121, the value of the Pembroke property was adjusted to net realizable value as of November 30, 1998. Fixed assets and fixed assets to be disposed of are accounted for under Statement of Financial Accounting Standards ("SFAS") No. 121. Under the standard, where there is a significant change in use or value of a long-lived asset, the asset is written down to recoverable value if it is determined that recoverable value is less than the Company's cost basis. Under the provisions of SFAS 121, the Florida property's value was adjusted downward by $300,000 in 1998. INNOVO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 4 OTHER ASSETS Other assets consisted of the following: November 30, 1998 1997 (000's) (000's) Goodwill, net of accumulated amortization $ --- $ 702 Debt issue costs, net 23 8 Other 18 43 _____ ______ $ 41 $ 753 The goodwill, which arose in the Company's acquisition of Thimble Square, was written off when Thimble Square was disposed (see Note 11). NOTE 5 - NOTES PAYABLE Notes payable consisted of the following: November 30, 1998 1997 (000's) (000's) Accounts receivable factoring facility $ 439 $ 504 Bank credit facility 349 273 NP International loan --- 251 Other 126 103 ______ ______ $ 914 $1,131 Innovo and Thimble Square previously borrowed under an accounts receivable factoring facility with Riviera Finance ("Riviera") under which Riviera advanced 90% and 80% of assigned accounts receivable, respectively. The factoring facility provided for advances up to $1,500,000. Riviera charged .75% of each invoice assigned plus 1.5% per month of outstanding advances. Borrowings under the facility were collateralized by assigned accounts receivable, which aggregated $603,000 at November 30, 1997. In December 1997 the Company replaced this factoring facility with a new accounts receivable factoring facility with First American National Bank ("First American"). Under the facility, First American advances 90% of approved invoices. There is no established limit on the total facility. First American charges Innovo 1% for the first 15 days an invoice is outstanding and .05% per day thereafter until paid, up to a maximum of 6%. Thimble Square was charged 1.5% for the first 30 days an invoice is outstanding and .033% per day thereafter, also to a maximum of 6%. The facility is secured by first position on accounts receivable and inventory and personal guarantees of certain members of the Board of Directors and management. The agreement with First American terminates upon thirty day written notice from either party. As of November 30, 1998, Thimble Square had a note payable to a local bank that used the Pembroke, Georgia facility as collateral. This loan bears interest at the rate of 2.75 points over the prime rate per annum. The loan balance of approximately $126,000 was paid off when the Pembroke facility was sold in December 1998. INNOVO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 5 - NOTES PAYABLE (continued) In December 1997 the Company entered into a revolving line of credit with a bank for $350,000 at a fixed rate of 9.5%. The line is secured by equipment and the personal guarantees of certain members of management. The line of credit had an outstanding balance of $349,000 as of November 30, 1998 and expired on December 30, 1998. The Company renewed the line of credit through February 27, 2000 at an interest rate of 10.75%. In October 1997 Innovo Group obtained a secured bank line of credit of $762,000. $273,000 was outstanding on the line at November 30, 1997. This loan was paid during 1998 from the proceeds of the private placement of common stock. The weighted average interest rate on outstanding short-term borrowings was 11.1% and 17.7% at November 30, 1998 and 1997, respectively. NOTE 6 - LONG-TERM DEBT Long-term debt consisted of the following: November 30, 1998 1997 (000's) (000's) First mortgage loan $ 754 $ 783 Non-recourse first mortgage on Florida property 727 759 Thimble Square SBA loan 179 194 Thimble Square first mortgage loan ---- 112 Capital lease obligation 194 211 Bank promissory note secured by receivable from an officer of the Company 650 ---- Other ---- 6 ______ ______ Total long-term debt 2,504 2,065 Less current maturities (270) (211) ______ ______ $2,234 $ 1,854 The first mortgage loan is collateralized by a first deed of trust on real property in Springfield, Tennessee and by an assignment of key-man life insurance on the president of the Company in the amount of $950,000. The loan bears interest at 2.75% over the lender's prime rate per annum (which was 8.50% at November 30, 1998) and requires monthly payments of $9,900. In order for the loan to be guaranteed by the Small Business Administration ("SBA"), Innovo Group, Innovo, NASCO Products, and the president of the Company agreed to act as guarantors for the obligations under the loan agreement. INNOVO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 6 - LONG-TERM DEBT (continued) In November 1995 the Company acquired a facility which it developed as an indoor retail outlet featuring antique and flea market shops. The $1.5 million purchase price was paid by the issuance to the seller of (i) warrants to purchase 1 million shares of the Company's common stock, exercisable at $.01 per share through March, 1998, and (ii) an $800,000 first lien non- recourse mortgage secured by the property. The mortgage is payable $25,500 quarterly; all unpaid principal, and interest (which accrues at the rate of 9.5% per annum) is due January, 2006. Construction period interest of $79,000 was capitalized during fiscal 1996. The stock option was exercised in March, 1996. The Company also issued a warrant, exercisable for the purchase of 100,000 shares at $.01 per share, as a finder's fee on the property acquisition. The warrant was exercised in April, 1996. Thimble Square's SBA loan is collateralized by a lien on that company's Pembroke, Georgia plant. This loan was repaid in conjunction with the December 1998 sale of the Pembroke facility. The loan bears interest at 2.75%, over the prime rate and was paid in full in conjunction with the December 1998 sale of the Pembroke plant. The capital lease obligation represents the lease on Thimble Square's Baxley, Georgia plant. Interest on the capital lease is imputed at the rate of 10% per annum. In April 1998, Innovo Group entered into a secured note with a bank for $650,000 at a rate of 13.5% per annum. A $703,000 note receivable that the Company holds from an officer and 250,000 shares owned by Pat Anderson-Lasko serve as collateral for the note. The secured note is also guaranteed by certain members of management. The secured note requires monthly payments of interest only. The principal amount of the secured note is due on April 1, 2003. In fiscal 1996, the Company privately placed $1,625,000 of 8% Convertible Debentures due September 30, 1998. As of November 30, 1996, $1,205,000 of the debentures had been converted into 752,191 shares of common stock. During fiscal 1997 the remaining convertible debentures were converted into 412,793 shares of common stock. Principal maturities of long-term debt of continuing operations as of November 30, 1998 are as follows: Year ending November 30, Amount 1999 90,000 2000 86,000 2001 102,000 2002 112,000 2003 774,000 Thereafter 1,160,000 The current maturities of long term debt for discontinued operations is $180,000 in 1999. NOTE 7 - DEBT SETTLEMENTS In the fourth quarter of 1997 the Company settled debts with 44 creditors recorded at $930,000. The Company made cash payments totaling $406,000 and recognized an extraordinary gain in the amount of $524,000. INNOVO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 8 - INCOME TAXES No provision for income tax for any of the last three fiscal years has been provided for, as income tax benefits arising from net operating losses are offset by corresponding increases in the deferred tax asset valuation. Net deferred tax assets result from the following temporary differences between the book and tax bases of assets and liabilities: November 30, 1998 1997 (000's) (000's) Deferred tax assets: Allowance for doubtful accounts $ 23 $ 36 Inventory reserves 12 18 Property and equipment -- 111 Other -- 31 Benefit of net operating loss carryforwards 3,773 3,664 ______ ______ Gross deferred tax assets 3,808 3,860 Deferred tax assets valuation allowance (3,808) (3,860) ______ ______ Net deferred tax assets $ - $ - ______ ______ The reconciliation of the effective income tax rate to the federal statutory rate is as follows: Year ended November 30, 1998 1997 1996 (000's) (000's) (000's) Computed tax (benefit) at the statutory rate (34%) (34%) (34%) State income tax - - - Change in valuation allowance 34% 34% 34% ______ ______ ______ - - - ______ ______ ______ The Company has consolidated net operating loss carryforwards of approximately $31.6 million expiring through the year 2013. However, as the result of "changes in control" as defined in Section 382 of the Internal Revenue Code, approximately $25 million of such carryforwards may be subject to an annual limitation, which is currently estimated to be a minimum of $432,000, subject to adjustment. Such limitation would have the effect of limiting to approximately $12.7 million the future taxable income which the Company may offset through the year 2013 through the application of its net operating loss carryforwards. Any changes in control subsequent to the aforementioned one may have the effect of further limiting the utilization of the net operating loss carryforwards. A subsidiary of the Company has state tax net operating loss carryforwards of approximately $12.1 million to offset state taxable income. These carryforwards expire in varying amounts between the years 1999 and 2006. INNOVO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 9 - STOCKHOLDERS' EQUITY (a) Common Stock On September 13, 1998, the Company's Board of Directors approved a reverse ten for one stock split. All references to the number of shares and price per share have been adjusted to reflect the reverse split. The Company adopted a Stock Option Plan (the "1991 Plan") in December 1991 (amended in April 1992) under which 10,000 shares of the Company's common stock have been reserved for issuance to officers, directors, consultants and employees of the Company under the terms of the 1991 Plan. The 1991 Plan will expire on December 10, 2001. In September 1993 the Company issued 18,976 shares of restricted common stock to extinguish notes payable and accrued interest of $1,423,000. The holders of such shares hold options ("put options") that allowed them, until April, 1995, to require that the Company repurchase any or all of the shares at a price of $75 per share. The put options continue to be exercisable at $300 per share, in the event of certain "changes in control" not approved by the board of directors. The put options grant the Company a right of first refusal to purchase any of the related shares upon the payment of the same price offered to the holders by another party. Also, the Company can cancel the put options by paying nominal consideration. During fiscal 1996 the Company issued common stock to acquire Thimble Square, to extinguish an aggregate of $423,000 in liabilities, as a loan fee extension, and to convert $1,205,000 of 8% Convertible Debentures (see Notes 4 and 11). The Company also issued warrants and a mortgage note to acquire property for $1.5 million (see Note 7). During the third quarter of fiscal 1996, the Company completed a private placement of 175,152 shares of its common stock for net cash proceeds of $560,000. The placements included the issuance of warrants for the purchase of 77,576 shares of the Company's common stock exercisable for five years at an exercise price of $5.20 per share. In connection with the third quarter fiscal 1996 placements of common stock and the 8% Convertible Debentures, the Company issued to the placement agent warrants (Class I warrants) for the purchase of an aggregate of 122,059 shares of its common stock, subject to adjustment, exercisable for a period of five years at an exercise price of $1.70 per share. In the third quarter of fiscal 1997 all the outstanding Class I warrants were repurchased by the Company for $150,000. During the first quarter of fiscal 1997 the Company issued $271,000 in 10% unsecured convertible promissory notes due January 1998. The notes were convertible into 210,000 shares of common stock. Also, in connection therewith, the Company issued 50,000 Class J warrants exercisable at $1.25 per share which expired in January 1998. In the second quarter of fiscal 1997 the notes were converted and the warrants were exercised for net cash proceeds of $63,000. On April 4, 1997 the Company's stockholders approved an increase in the number of authorized shares of common stock to 7 million. On August 4, 1997, the Company's president exercised a stock purchase right (the "Purchase Right") awarded her by the board of directors on February 12, 1997. The Purchase Right entitled her to purchase up to 400,000 shares of the Company's common stock during the period April 30, 1997, to April 30, 2002 at a price of $2.8125 per share. The president paid for the shares by the delivery of a non-recourse promissory note, bearing no interest, due April 30, 2002. The promissory note is collateralized by the shares purchased therewith, which shares would be forfeited to the extent the note is not paid on or before maturity, and would be payable (including prepayable), in whole or in part, by the delivery to the Company INNOVO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 9 - STOCKHOLDERS' EQUITY (continued) of (i) cash or (ii) other shares of the Company's common stock that the president has owned for a period of at least six months, which shares would be credited against the note on the basis of the closing bid price for the Company's common stock on the date of delivery. Any dividends or distributions made with respect to shares collateralizing any unpaid note will be held in an escrow to be established for such shares and note until such time, if any, as the related promissory note is paid. In November 1997, 150,000 shares subject to this Purchase Right were returned to the Company for a pro-rata reduction in the note. Concurrently, the President relinquished any further rights to such 150,000 shares of common stock. At November 30, 1998, $703,000 remains outstanding under this promissory note. The promissory note, and the shares securing it, have been pledged by the Company to secure a 650,000 loan. See Note 6. On August 13, 1997, the Company issued 675,000 shares of common stock to a group of investors ("the Smith Group") for $1,350,000 pursuant to a stock purchase agreement also dated August 13, 1997 between members of the Smith group, the Company and Patricia Anderson-Lasko. Concurrent with the execution of the stock agreement and in conjunction with employment agreements with key executives, the Company granted 292,500 in non-qualified stock options to those executives. Subject to vesting provisions, the options remain exercisable until August, 2002 at a price of $3.315 per share. At November 30, 1998 183,000 options were vested. During the fourth quarter of fiscal 1997, 1,500 Class G warrants and all 25,000 Class E warrants were exercised. In connection therewith, the Company extinguished $66,000 in indebtedness and received $14,000 in cash. Additionally, in the fourth quarter of fiscal 1997 the Company received net proceeds of $645,000 in a private placement for 150,000 shares of common stock. In fiscal 1997, an aggregate of 427,793 shares of common stock were issued to extinguish a total of $482,000 in indebtedness, including the remaining amounts outstanding of the 8% convertible debentures. During fiscal 1997 the Company issued stock to extinguish an aggregate of $855,000 of liabilities. As of November 30, 1998 the Company has outstanding common stock purchase warrants as follows: Class Exercise Price Shares Expiration _____ ______________ ______ __________ H $5.20 77,576 August 2001 On October 8, 1998, the Company sold 899,000 shares of common stock in a private placement to Furrow-Holrob Development II, L.L.C. for $1,798,000. During 1998, the Company issued options to acquire 200,000 shares of common stock to two members of the Board of Directors. These shares are exercisable at $4.75 per share and vest at the rate of 2,083 per month for 48 months. As of November, 30, 1998, total number of shares vested under these option agreements was 37,494. These options were accounted for as employee grants. The options were issued at prices equal to fair market value at the time of the grant. The fair value of the options granted during the year ended November 30, 1998 ranges from $1.39 to $1.99 per share. INNOVO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 9 - STOCKHOLDERS' EQUITY (continued) During 1998, the Company also issued options to acquire 25,000 shares of common stock to a member of management. These shares are exercisable at $3.33 per share and vest at the rate of 2,083 per month for 12 months. As of November 30, 1998, the total number of shares vested under this option agreement was 8,332. The Company has reserved 620,076 shares for issuance upon the exercise of the outstanding common stock purchase warrants and options. (b) Stock based compensation plans The Company follows the guidance set forth in APB No. 25 as it pertains to the recording of expenses from the issuance of incentive stock options. The Company has adopted the disclosure-only provisions of SFAS No. 123. Accordingly, no compensation cost has been recorded in conjunction with options issued to employees. Had compensation cost been determined based on the fair value of the options at the grant date, consistent with the method prescribed y SFAS No. 123, the Company's net earnings would have been reduced to the pro forma amounts indicated below: (000's except per share information) 1998 1997 Net income (loss) - as reported $(4,014) $(1,315) Net income (loss) - pro forma (4,325) (1,496) Net income (loss) per common share - as reported (.87) (.38) Net income (loss) per common share - pro forma (.94) (.44) The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 1997; expected volatility of 40%; risk-free interest rate of 5.8%; and expected lives from one to five years. Used for grants in 1998; expected volatility of 35%; risk-free interest rate of 6.5%; and expected lives from one to four years. Stock option activity during the periods indicated is as follows: Number Weighted- average of shares exercise price Balance at November 30, 1996 --- --- Granted 292,500 $3.32 Forfeited --- --- Balance at November 30, 1997 292,500 $3.32 Granted 225,000 $4.14 Forfeited --- $ --- Balance at November 30, 1998 17,500 $3.68 NOTE 10 - COMMITMENTS AND CONTINGENCIES The Company leases certain property, buildings and equipment. Rental expense for the years ended November 30, 1998, 1997 and 1996 was approximately $40,000, $63,000 and $54,000 respectively. The minimum rental commitments under noncancellable operating leases as of November 30, 1998 are as follows: 1999, $190,000; 2000, $169,055; 2001, $168,000; 2002, $158,000 and 2003, $158,000. During October of 1998, the Company entered into a lease agreement with a related party (Furrow-Holrob Development II, L.L.C.) to lease a production facility. The lease term began December 15, 1998 and runs for five years at a lease rate of $2 per square foot for 78,900 square feet. INNOVO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 10 - COMMITMENTS AND CONTINGENCIES (continued) The Company displays characters, names and logos on its products under license agreements that require royalties ranging from 7% to 17% of sales. The agreements expire through 1999 and require annual advance payments (included in prepaid expenses) and certain annual minimums. Royalties were $346,000, $363,000 and $441,000 for fiscal 1998, 1997 and 1996, respectively. Four executive officers of the Company have entered into employment agreements that expire in August 1999. The Company or the employee may terminate the agreement at any time for cause, or without cause with 60 days notice and 12 months severance. Annual salaries under the employment agreements are $157,500, $70,000, $30,000 and $30,000. In May, 1996, a foreign manufacturer that had previously supplied imported products to a nonoperating subsidiary, NASCO Products, filed suit against NASCO Products asserting that it is owed approximately $470,000, which was approximatly $300,000 in excess of the amount presently recorded on the books of NASCO Products. NASCO Products and the supplier had previously reached an agreement on the balance owed (which is the balance recorded), as well as an arrangement under which the schedule for NASCO Products' payments reducing the balance would be based on future purchases from that supplier of products distributed internationally by NP International. The Company has denied the supplier's claims, and has asserted affirmative defenses, including the supplier's late shipment of the original products, and the supplier's refusal to accept and fill NP International orders on terms contained in the agreement. NASCO Products sold its operations in July, 1995, and that company currently has no operations or unencumbered assets. No provisions for the additional amount sought has been recorded in the consolidated financial statements. In December 1991, a former employee filed suit against the Company, Patricia Anderson-Lasko and others alleging breach of an employment agreement and conversion of his interest in certain property rights (Michael J. Tedesco v. Innovo, Inc.., et al., Case No. 91-64033, District Court of Harris County, Texas, 164th Judicial Circuit). Following an appeal and a second trial, a final judgment was rendered against Innovo for $194,045.62 on August 17, 1998. Thereafter, 20,000 shares of Common Stock which has been held in the registry of the court, as security during the appeal and subsequent trial, were released to the plaintiff. If the sale of that stock does not generate sufficient net proceeds to pay the judgment, then Innovo will be liable for any shortfall. The Company will monitor the price of its stock in the market and make adjustments to the amount recorded in the financial statements if necessary. In July 1992, a former employee filed suit against the Company and Spirco for alleging breach of an employment agreement and asserting other related claims (Wayne Copelin v. Innovo Group, Inc., et al., Case No. 11950, in the Chancery Court of Robertson County, Tennessee). When Spirco filed for bankruptcy in August 1993, the case proceeded against Innovo Group and a summary judgment of $100,000 was entered against it in March 1995. However, because the Copelin judgment was classified as a Class 8 Claim in the Spirco bankruptcy, the Company believed that the judgment was fully paid when it issued 35,211 shares of Common Stock to Copelin, in compliance with the confirmed Plan of Reorganization. When Copelin sought to enforce the judgment, Innovo Group, as the successor by merger to Spirco, brought a motion in the Spirco bankruptcy to enforce the terms of the Plan of Reorganization against Copelin. The bankruptcy judge granted the motion and permanently enjoined Copelin from enforcing the judgment in an order entered on October 18, 1996. Copelin appealed to the United States District Court and on April 13, 1998, the District Court reversed. The case is now on appeal to the United States Third Circuit Court of Appeals. Unless the Circuit Court reverses, Innovo Group will be liable for $100,000 plus accrued interest since March 1995. The Company does not have the $100,000 recorded as a liability as of November 30, 1998. Management feels that the Circuit Court will revese on the grounds that the claim was released in bankruptcy. INNOVO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 10 - COMMITMENTS AND CONTINGENCIES (continued) Management is currently taking steps to improve profits by increasing the number of marketing personnel, introducing new products and product lines and by attempting to keep fixed costs low. The Company has also taken several steps to increase liquidity in 1999. In 1998 the Company obtained a trade credit facility with a key vendor. In February 1999, the Company obtained an extension until February 2000 on a $350,000 line of credit that expired in December 1998. Also in February 1999, the Company received $300,000 of proceeds from the sale of common stock of two officers who also committed to provide an aggregate of $100,000 in additional credit. Additionally, the Company received in 1999 a commitment from certain officers to fund short-term cash requirements to the extent needed up to an amount not to exceed $500,000 in the aggregate. Also, in 1999 the Company is in negotiations to sell a $703,000 not receivable from an officer. No assurances can be made that those efforts will be successful or that the Company will achieve profitability in the near future. The inability of the Company to achieve the foregoing could require the Company to constrict its operations. NOTE 11-SALE OF THIMBLE SQUARE (DISCONTINUED OPERATIONS) On September 13, 1998 Thimble Square entered into a sale agreement with Confident Colors, LLC. Under the terms of the agreement, Confident Colors leased the Baxley, Georgia, facility and equipment for $3,000 monthly and succeeded to the business of Thimble Square. Thimble Square ceased all operations following the lease to Confident Colors. The Pembroke, Georgia, facility was sold on December 10, 1998 to H.N. Properties L.L.C. for $122,354 net of selling expenses. As a result of the cessation of the Thimble Square business and the sale of the Pembroke, Georgia, building to H.N. Properties, L.L.C., the Company recorded a loss totaling $1,401,000 including write off of unamortized goodwill and adjustment of property and equipment and assets under capital lease to their estimated net realizable values. Thimble Square's operations for the years ending November 30, 1998, 1997 and 1996 have been reclassified as discontinued operations on the statement of operations for those years. In conjunction with the disposition of assets of Thimble Square, the Company paid off, in December 1998, an aggregate of approximately $306,000 of debt collateralized by Thimble Square assets. The net assets of Thimble Square as of 1998 and 1997 are as follows: 1998 1997 Accounts Receivable $ 0 $ 65,000 Inventory 12,000 207,000 Other Current Liabilities 0 61,000 Property, Plant and Equipment 1,020,000 1,526,000 Accumulated Depreciation (241,000) (196,000) Goodwill 0 702,000 Other Long-term Assets 0 12,000 Current debt (327,000) (287,000) Accounts Payable (19,000) (45,000) Accrued Expenses (55,000) (76,000) Long-term debt (173,000) (365,000) ________ _________ $ 217,000 $2,377,000 NOTE 12 - RELATED PARTY TRANSACTIONS During 1998, the Company employed a consultant to assist the Company with its public filings and accounting statements. This consultant was also an executive of Confident Colors. The person chiefly responsible for the operations of the Thimble Square was also an officer of Confident Colors. The transactions between Confident Colors and the Company were arms length and valued at market. NOTE 13 - SUBSEQUENT EVENTS In February 1999, the Company sold 75,000 shares of common stock each to two officers, or 150,000 shares in the aggregate, for proceeds of $300,000 which approximated fair value of the common stock. In February 1999, the Company obtained an extension until February 2000 on a $350,000 line of credit that expired in December 1998. On March 10, 1999 the Company received a commitment from certain of its officers to fund short-term cash requirements, in an amount not to exceed $500,000, as may be required from time to time in fiscal 1999. ITEM 9. CHANGES IS AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The information set forth under the captions Directors and Executive Officers contained in the Company's 1999 Proxy Statement is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information set forth under the captions Compensation and Employment and Stock Option Agreements contained in the Company's 1999 Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth under the caption Beneficial Ownership of Common Stock contained in the Company's 1999 Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under the caption Certain Relationships and Related Transactions contained in the Company's 1998 Proxy Statement is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) Financial Statements. See Item 8. (2) Financial Statement Schedules Schedule Page Reference Report of Independent Certified Public Accountants on Financial Statement Schedules 76 Schedule II - Valuation and Qualifying Accounts 77 (3) Exhibits Exhibit Reference Number Description No. 3.1 Form of Amended and Restated Certificate of Incorporation of Registrant. 3.1 (12) 3.2 Amended and Restated Bylaws of Registrant.* 4.2 (5) 4.1 Article Four of the Registrant's Amended and Restated Certificate of Incorporation (included in Exhibit 3.1)* 10.1 Registrant's 1991 Stock Option Plan.* 10.5 (2) 10.2 NASCO, Inc. Amended Stock Bonus Plan dated as of December 31, 1991.* 10.6 (2) 10.3 Note executed by NASCO, Inc. and payable to First Independent Bank, Gallatin, Tennessee in the principal amount of $950,000 dated August 6, 1992.* 10.21 (2) 10.4 Deed of Trust between NASCO, Inc. and First Independent Bank, Gallatin, Tennessee dated August 6, 1992.* 10.22 (2) 10.5 Authorization and Loan Agreement from the U.S. Small Business Administration, Nashville, Tennessee dated July 21, 1992.* 10.23 (2) 10.6 Indemnity Agreement between NASCO, Inc. and First Independent Bank, Gallatin, Tennessee.* 10.24 (2) 10.7 Compliance Agreement between NASCO, Inc. and First Independent Bank, Gallatin, Tennessee dated August 6, 1992.* 10.25 (2) 10.8 Assignment of Life Insurance Policy issued by Hawkeye National Life Insurance Company upon the life of Patricia Anderson-Lasko to First Independent Bank, Gallatin, Tennessee dated July 31, 1992.* 10.26 (2) 10.9 Guaranty of Patricia Anderson-Lasko on behalf of NASCO, Inc. in favor of First Independent Bank, Gallatin, Tennessee dated August 6, 1992.* 10.27 (2) 10.10 Guaranty of Innovo Group Inc. on behalf of NASCO, Inc. in favor of First Independent Bank, Gallatin, Tennessee dated August 6, 1992.* 10.28 (2) 10.11 Guaranty of Innovo, Inc. on behalf of NASCO, Inc. in favor of First Independent Bank, Gallatin, Tennessee dated August 6, 1992.* 10.29 (2) 10.12 Guaranty of NASCO Products, Inc. on behalf of NASCO, Inc. in favor of First Independent Bank, Gallatin, Tennessee dated August 6, 1992.* 10.30 (2) 10.13 Note executed by NASCO, Inc. and payable to ICON Cash Flow Partners, L.P., Series D, in the principal amount of $750,000 dated August 7, 1992.* 10.36 (2) 10.14 Security Agreement between NASCO, Inc. and ICON Cash Flow Partners, L.P., Series D dated August 7, 1992.* 10.37 (2) 10.15 Guaranty of Innovo Group Inc. on behalf of NASCO, Inc. in favor of ICON Cash Flow Partners, L.P., Series D dated July 30, 1992.* 10.38 (2) 10.16 Guaranty of Innovo, Inc. on behalf of NASCO, Inc. in favor of ICON Cash Flow Partners, L.P., Series D dated July 30, 1992.* 10.39 (2) 10.17 Guaranty of NASCO Products, Inc. on behalf of NASCO, Inc. in favor of ICON Cash Flow Partners, L.P., Series D dated July 30, 1992.* 10.40 (2) 10.18 Guaranty of NASCO Sportswear, Inc. on behalf of NASCO, Inc. in favor of ICON Cash Flow Partners, L.P., Series D dated July 30, 1992.* 10.41 (2) 10.19 1993-1996 U.S. Olympic Merchandise Agreement between United States Olympic Committee and Innovo Group Inc. dated April 29, 1993.* 10.51 (6) 10.20 Non-Competition and Non-Solicitation Agreement dated May 10, 1993 among QSP, Inc., NASCO, Inc. and Innovo Group Inc.* 10.45 (4) 10.21 Employment Agreement dated September 30, 1993 between Innovo Group Inc. and Patricia Anderson-Lasko.* 10.56 (6) 10.22 Form of Common Stock Put Option.* 10.61 (6) 10.23 Form of Debt Conversion Agreement between Innovo Group Inc. and certain holders of notes payable or Subordinated Notes Payable.* 10.63 (6) 10.24 Form of Agreement between Innovo Group Inc. and Purchasers under the June 11, 1993 Unit Purchase Agreement.* 10.64 (6) 10.25 Agreement dated April 29, 1994 between C.I. Sports, Inc. and NASCO Products, Inc.* 10.65 (7) 10.26 Amended Plan of Reorganization of Spirco, Inc.* 10.67 (8) 10.27 $600,000 Secured Promissory Note and Security Agreement dated July 20, 1994 between Innovo Group Inc., Innovo, Inc. and NASCO Products, Inc. and certain individual lenders.* 10.68 (8) 10.28 License Agreement dated January 24, 1994 between NFL Properties Europe B.V. and NASCO Marketing, Inc.* 10.66 (9) 10.29 License Agreement dated July 7, 1997 between National Football League Properties, Inc. and Innovo Group Inc. 10.30 First Amendment to $600,000 Secured Promissory Note and Security Agreement dated April 15, 1995.* 10.70 (9) 10.31 Security Agreement dated April 28, 1995 between Innovo, Inc. and Riviera Finance.* 10.71 (9) 10.32 Form of Amendment to Common Stock Put Option.* 10.72 (9) 10.33 Agreement dated July 31, 1995 between NASCO Products, Inc. and Accessory Network Group, Inc.* 10.1 (11) 10.34 License Agreement dated November 14, 1995 between Innovo Group Inc., United States Olympic Committee and Warner Bros. Studios* 10.47 (12) 10.35 Agreement dated December 11, 1995 between Innovo Group Inc., United States Olympic Committee and Original Appalachian Artworks, Inc.* 10.48 (12) 10.36 License Agreement dated August 9, 1995 between Innovo, Inc. and NHL Enterprises, Inc.* 10.49 (12) 10.37 License Agreement dated August 9, 1995 between NASCO Products International, Inc. and NHL Enterprises, B.V.* 10.50 (12) 10.38 License Agreement dated December 15, 1995 between Major League Baseball Properties, Inc. and Innovo Group Inc.* 10.51 (12) 10.39 License Agreement dated October 6, 1995 between Major League Baseball Properties and NASCO Products International, Inc.* 10.52 (12) 10.40 License Agreement dated August 1, 1997 between NBA Properties, Inc. and Innovo, Inc. 10.41 License Agreement dated August 1, 1997 between NBA Properties, Inc. and NASCO Products International, Inc. 10.42 Merger Agreement dated April 12, 1996 between Innovo Group Inc. and TS Acquisition, Inc. and Thimble Square, Inc. and the Stockholders of Thimble Square, Inc.* 10.1 (13) 10.43 Property Acquisition Agreement dated April 12, 1996 between Innovo Group Inc., TS Acquisition, Inc. and Philip Schwartz and Lee Schwartz.* 10.2 (13) 10.44 License Agreement between Innovo, Inc. and Anheuser-Busch Cos., Inc.* 10.57(14) 10.45 License Agreement between Innovo Group Inc. and Warner Bros. dated June 25, 1996.* 10.45(15) 10.46 License Agreement between Innovo Group Inc. and Walt Disney dated September 12, 1996.* 10.46(15) 10.47 Indenture of Lease dated October 12, 1993 between Thimble Square, Inc. and Development Authority of Appling County, Georgia* 10.47(15) 10.48 Lease dated October 1, 1996 between Innovo, Inc. and John F. Wilson, Terry Hale, and William Dulworth* 10.48(15) 10.49 Incentive Stock Option between Samuel J. Furrow, Jr. and Innovo Group Inc. 10.49 10.50 Incentive Stock Option between Samuel J. Furrow and Innovo Group Inc. 10.50 10.51 Incentive Stock Option Between Robert S. Talbott and Innovo Group Inc. 10.51 10.52 Real Property and Asset Lease Agreement between Thimble Square and Confident Colors 10.52 10.53 Manufacturing and Distribution Agreement between Nasco Products International and Action Performance Companies, Inc. 10.53 10.54 Auction Agreement between Innovo Group, Inc. and Furrow Auction Company 10.54 10.55 Auction Agreement between Innovo Group, Inc. and Furrow Auction Company 10.55 10.56 Sale Agreement of Property in Pembroke, GA between Thimble Square and H.N. Properties, L.L.C. 10.56 10.57 Lease Agreement between Furrow-Holrob Development, L.L.C. and Innovo Group, iNc. 10.57 10.58 Marketing Agreement between Coulver Marketing Group and 10.58 Innovo Group, Inc. 10.59 Amendment to License Agreement with National Football League 10.59 10.60 Amendment to License Agreement with Warner Bros. 10.60 10.61 License agreement with NBA Properties and Innovo, Inc 10.61 10.62 License agreement with NBA Properties and Nasco Prducts International 10.62 10.63 License agreement with Major League Baseball and Nasco Products Internatonal 10.63 10.64 License agreement with Major League Baseball and Innovo, Inc. 10.64 10.65 License agreement with Walt Disney and Nasco Products International, Inc. 10.65 21 Subsidiaries of the Registrant 21 (13) 23.1 Consent of BDO Seidman, LLP (incorporated by reference as Exhibit 23.2 to Registration Statements No. 33-71576 and No. 333-12527). 27 Financial Data Schedule (appears only in electronically filed version of this report). _________________________ * Certain of the exhibits to this Report, indicated by an asterisk, are incorporated by reference to other documents on file with the Securities and Exchange Commission with which they were physically filed, to be part hereof as of their respective dates. Documents to which reference is made are as follows: (1) Amendment No. 4 Registration Statement on Form S-18 (No. 33- 25912-NY) of ELORAC Corporation filed October 4, 1990. (2) Amendment No. 2 to the Registration Statement on Form S-1 (No. 33-51724) of Innovo Group Inc. filed November 12, 1992. (3) Annual Report on Form 10-K of Innovo Group Inc. (file no. 0- 18926) for the year ended October 31, 1993. (4) Current Report on Form 8-K of Innovo Group Inc. (file no. 0- 18926) dated May 10, 1993 filed May 25, 1993. (5) Registration Statement on Form S-8 (No. 33-71576) of Innovo Group Inc. filed November 12, 1993. (6) Annual Report on Form 10-K of Innovo Group Inc. (file 0-18926) for the year ended October 31, 1993. (7) Amendment No. 2 to the Registration Statement on Form S-1 (No. 33-77984) of Innovo Group Inc. filed July 25, 1994. (8) Amendment No. 4 to the Registration Statement on Form S-1 (No. 33-77984) of Innovo Group Inc. filed August 18, 1994. (9) Annual Report on Form 10-K of Innovo Group Inc. (file 0-18926) for the year ended October 31, 1994. (10) Registration Statement on Form S-8 (No. 33-94880) of Innovo Group Inc. filed July 21, 1995. (11) Current Report on Form 8-K of Innovo Group Inc. (file 0-18926) dated July 31, 1995 filed September 13, 1995. (12) Annual Report on Form 10-K of Innovo Group Inc. (file 0-18926) for the year ended October 31, 1995. (13) Current Report on Form 8-K of Innovo Group Inc. (file 0-18926) dated April 12, 1996, filed April 29, 1996. (14) Registration Statement on Form S-1 (No. 333-03119) of Innovo Group Inc., as amended June 28, 1996. (15) Annual Report on Form 10-K of Innovo Group Inc. (file 0-18926) for the year ended November 30, 1996. (b) Reports on Form 8-K 1. On September 15, 1998, the Company filed a Current Report on Form 8-K to report pursuant to Item 5, Other Events, that the Company had completed a reverse one-for-ten stroke split effective September 11, 1998 and to file the press release with respect to such reverse split as an exhibit. 2. On October 15, 1998, the Company filed a Current Report on Form 8-K to report pursuant to Item 5, Other Events, that the Company had entered into an agreement to dispose of the Thimble Square business, and to file the press release with respect to such event. 3. On October 15, 1998, the Company filed a Current Report on Form 8-K to report pursuant to Item 5, Other Events, that the Company would relocate its operations to Knoxville, Tennessee, and to file the press release with respect to such event. 4. On October 22, 1998, the Company filed a Current Report on Form 8-K to report pursuant to Item 5, Other Events, that the Company once again satisfied the tangible net worth requirements for listing on the Nasdaq SmallCap Market and to file the press release with respect to such qualification as an exhibit. 5. On October 22, 1998, the Company filed a Current Report on Form 8-K to report pursuant to Item 5, Other Events, that the Company had sold 599,000 shares of common stock for aggregate consideration of $1,798,000 and to file the press release with respect to such sale as an exhibit. 6. On November 3, 1998, the Company filed a Current Report on Form 8- K/A pursuant to Item 5, Other Events, containing a pro forma balance sheet as of September 30, 1998 reflecting the effect on the Company's net tangible assets of the sale of common stock for aggregate proceeds of $1,798,000 and filing the press release with respect to such pro forma balance sheet as an exhibit. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. INNOVO GROUP INC. By:__\s\ Samuel J. Furrow____________________________ Samuel J. Furrow Chairman of the Board and Chief Executive Officer March 15, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Signature and Title Date _\s\ Samuel J. Furrow Chief Executive Officer March 15, 1999 Samuel J. Furrow Chairman of the Board, Chief Executive Officer and Director \s\ Dan Page___ March 15, 1999 Dan Page Chief Operating Officer and Director \s\ Paticia Anderson-Lasko March 15, 1999 Patricia Anderson-Lasko President and Director _______________________ March 15, 1999 J. Eric Hendrickson Vice President, Treasurer and Director \s\ L.E. Smith March 15, 1999 L.E. Smith Director ____________________________ March 15, 1999 Herb Newton Director \s\ Samuel J. Furrow, Jr. March 15, 1999 Samuel J. Furrow, Jr. Vice President and Director ___________________________ March 15, 1999 Marc B. Crossman Director \s\ Bradley White Chief Financial Officer March 15, 1999 Bradley T. White Controller \s\ Bradley White Chief Accounting Officer March 15, 1999 Bradley T. White Controller \s\ Robert S. Talbott March 15, 1999 Robert S. Talbott Director Report of Independent Certified Public Accountants on Financial Statement Schedules Board of Directors Innovo Group Inc. The audits referred to in our report to Innovo Group Inc. and subsidiaries, dated February 9, 1999 which is contained in Item 8, included the audits of the schedule listed under Item 14(a)(2). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such schedule presents fairly, in all material respects, the information set forth therein. /s/BDO SEIDMAN, LLP BDO SEIDMAN, LLP Atlanta, Georgia February 10, 1999, except for Note 13 which is as of March 10, 1999.
INNOVO GROUP INC AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS Additions Balance at Charged Charged to Balance Beginning to Costs Other Accounts- Deductions- at End Description of Period And Expense Describe Describe of Period Allowance for doubtful accounts: Year ended November 30, 1998 $ 106,000 $132,000 $ - $ 171,000 (A) $ 67,000 Year ended November 30, 1997 66,000 153,000 - 113,000 (A) 106,000 Year ended November 30, 1996 99,000 78,000 - 111,000 (A) 66,000 Allowance for inventories: Year ended November 30, 1998 $ 36,000 $ - $ - $ - (B) $ 36,000 Year ended November 30, 1997 73,000 - - 37,000 (B) 36,000 Year ended November 30, 1996 18,000 55,000 - - (B) 73,000 Allowance for deferred taxes: Year ended November 30, 1998 $ 3,860,000 $ - $ - $ 52,000 $3,808,000 Year ended November 30, 1997 3,415,000 - 445,000 - 3,860,000 Year ended November 30, 1996 8,815,000 - - 5,400,000 3,415,000 Note A - Uncollected receivables written off, net of receivables. Note B - Recovery of valuation reserve.
EXHIBIT 10.49 NEITHER THIS OPTION NOR THE UNDERLYING COMMON SHARES HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THE CORPORATION WILL NOT TRANSFER THIS OPTION OR THE UNDERLYING COMMON SHARES UNLESS (I) THERE IS AN EFFECTIVE REGISTRATION COVERING SUCH OPTION OR SUCH SHARES. AS THE CASE MAY BE, UNDER THE SECURITIES ACT OF 1933 AND APPLICABLE STATES SECURITIES LAWS, (ii) IT FIRST RECEIVES A LETTER FROM AN ATTORNEY, ACCEPTABLE TO THE BOARD OF DIRECTORS OR ITS AGENTS, STATING THAT IN THE OPINION OF THE ATTORNEY THE PROPOSED TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933 AND UNDER ALL APPLICABLE STATE SECURITIES LAWS, OR (iii) THE TRANSFER IS MADE PURSUANT TO RULE 144 UNDER THE SECURITIES ACT OF 1933. INNOVO GROUP, INC. NON-QUALIFIED SHARE OPTION AGREEMENT This Agreement is entered into this day by and between INNOVO GROUP INC., a Delaware corporation with its offices located at 27 North Main Street, Springfield, Tennessee 37172, (Corporation), and Samuel J. Furrow, Jr. (Furrow), a Tennessee resident whose principal residence address is 5817 Toole Dr., Knoxville Tennessee 37919. WHEREAS, the Corporation desires to obtain Furrow's services as V.P. of Corporate Development and Spokesperson; WHEREAS, this Option will provide equity incentives for Samuel J. Furrow, Jr. to become and remain a member of the Corporation, by granting such person options to purchase shares of the Corporation's common stock (Shares); WHEREAS, the Board has determined to grant to Furrow a non-qualified share option (Option) to purchase 250,000 upon and subject to the terms and conditions stated in this Agreement. NOW THEREFORE, IT IS AGREED AS FOLLOWS: Section 1. Grant of Option. Subject to the terms and conditions of this Agreement, the Corporation hereby grants to Furrow, during the period ending 5:00 p.m. Springfield, Tennessee time on August 31, 2003 (Expiration Date), the option to purchase from the Corporation, from time to time, at a price of $0.33 per Share (Exercise Price), up to, but not to exceed, an aggregate of 250,000 Shares (Option Shares). Section 2. Exercise of Option. 2.1 Date Exercisable. This Option shall become exercisable by Furrow with respect to 20,834 Shares per month for the next 12 months after the date of this Agreement during which Furrow continues to serve as an employee of the Corporation up to a maximum of 250,000 Shares. 2.2 Manner of Exercise. This Option may be exercised in whole or in part by delivery to the Corporation, from time to time, of a written notice in substantially the form set forth in Exhibit A hereto, signed by Furrow, specifying the number of Option Shares that Furrow then desires to purchase, together with cash, certified check, or bank draft payable to the order of the Corporation, or other form of payment acceptable to the Corporation, for an amount of United States dollars equal to the Exercise Price of such shares. If the Corporation, in its sole discretion, elects to allow payment of all or a portion of the Exercise Price secured by a pledge, also in form satisfactory to the Corporation, of the Shares purchased by such exercise of this Option. 2.3 Certificates. Promptly after any exercise in whole or in part of this Option by Furrow, the Corporation shall deliver to Furrow a certificate or certificates for the number of Option Shares with respect to which this Option was so exercised, registered in Furrow's name. 2.4 Duration of Option. This Option, to the extent not previously exercised, shall terminate upon the earliest of the following dates: 2.4.1 the Expiration Date 2.4.2 immediately upon Furrow's resignation from the Board or upon failure to be re-nominated or reelected to the Board. 2.4.3 three months after Furrow's termination as an employee, if such termination is by reason of Furrow's disability (as defined in IRC 22(e)(3)) or death. Section 3. Nontransferability. 3.1 Restriction. This Option is not transferable by Furrow otherwise than by testamentary will or the laws of descent and distribution and, during Furrow's lifetime, may be exercised only by Furrow or Furrow's guardian or legal representative. Except as permitted by the preceding sentence, neither this Option nor any of the rights and privileges conferred thereby shall be transferred, assigned, pledged, or hypothecated in any way (whether by operation of law or otherwise), and no such option, right, or privilege shall be subject to execution, attachment, or similar process. Upon any attempt to transfer this Option, or of any right or privilege conferred thereby, contrary to the provisions hereof, , or upon the levy of any attachment or similar process upon such option, right, or privilege, this Option and any such rights and privileges shall immediately become null and void. 3.2 Exercise in Event of Death or Disability. Whenever the word Furrow is used in any provision of this Agreement under circumstances when the provision should logically be construed to apply to Furrow's guardian, legal representative, executor, administrator, or the person or persons to whom this Option may be transferred by testamentary will or by the laws of descent and distribution, the word Furrow shall be deemed to include such person or persons. 3.3. No Rights As Shareholder Prior To Exercise. Furrow shall not, by virtue hereof, be entitled to any rights of a shareholder in the Corporation, either at law or equity, unless and until this Option is exercised. The rights of Furrow are limited to those expressed in this Option and are not enforceable against the Corporation except to the extent set forth herein. Section 4. Anti-Dilution Provisions. 4.1 The number and kind of Shares purchasable upon the exercise of this Option and the Exercise Price shall be subject to adjustment from time to time as follows: 4.1.1 In case the Corporation shall (i) pay a dividend or make a distribution on the outstanding Shares payable in Shares, (ii) subdivide the outstanding Shares into a greater number of Shares, (iii) combine the outstanding Shares into a lesser number of Shares, or (iv) issue by reclassification of the Shares any Shares of the Corporation, Furrow shall thereafter be entitled, upon exercise, to receive the number and kind of shares which, if this Option had been exercised immediately prior to the happening of such event, Furrow would have owned upon such exercise and been entitled to receive upon such dividend, distribution, subdivision, combination, or reclassification. Such adjustment shall become effective on the day next following (v) the record date of such dividend or distribution or (vi) the day upon which such subdivision, combination, or reclassification shall become effective. 4.1.2 In case the Corporation shall consolidate or merge into or with another corporation, or in case the Corporation shall sell or convey to any other person or persons all or substantially all the property of the Corporation, Furrow shall thereafter be entitled, upon exercise, to receive the kind and amount of shares, other securities, cash, and property receivable upon such consolidation, merger, sale, or conveyance by a holder of the number of Shares which might have been purchased upon exercise of this Option immediately prior to such consolidation, merger, sale, or conveyance, and shall have no other conversion rights. In any such event, effective provision shall be made, in the certificate or articles of incorporation of the resulting or surviving corporation, in any contracts of sale and conveyance, or otherwise so that, so far as appropriate and as nearly as reasonable may be, the provisions set forth herein for the protection of the rights of Furrow shall thereafter be made applicable. 4.1.3 Whenever the number of Shares purchasable upon exercise of this Option is adjusted pursuant to this Section, the Exercise Price per Share in effect immediately prior to such adjustment by a fraction, of which the numerator shall be the number of Shares purchasable upon exercise of this Option immediately prior to such adjustment, and of which the denominator shall be the number of Shares so purchasable immediately after such adjustment, so that the aggregate Exercise Price of this Option remains the same. 4.1.4 No adjustment in the number of Shares which may be purchased upon exercise of this Option shall be required unless such adjustment would require an increase or decrease of more than 1/100 of a Share in the number of Shares which may be so purchased, provided, however, that any adjustment which by reason of this Section is not required to be made shall be carried forward cumulatively and taken into account in any subsequent calculation. All calculations under this Section shall be made to the nearest cent or to the nearest one-hundredth of a Share, as the case may be. 4.1.5 In the event that at any time, as a result of an adjustment made pursuant to this Section, Furrow shall become entitled to receive upon exercise of this Option cash, property, or securities. 4.1.6 Irrespective of any adjustments in the Exercise Price or in the number or kind of Shares purchasable upon exercise of this Option, the form of Options theretofore or thereafter issued may continue to express the same price and number and kind of shares as are stated in this Option. Section 5. Officer's Certificate. Whenever the number or kind of securities purchasable upon exercise of this Option or the Exercise Price shall be adjusted as required by the provisions of Section 4, the Corporation shall forthwith file with its Secretary or its Assistant Secretary at its principal office and with its stock transfer agent, if any, an officer's certificate showing the adjusted number of kind of securities purchasable upon exercise of this Option and the adjusted Exercise Price determined as herein provided and setting forth in reasonable detail such facts as shall be necessary to show the reason for and the manner of computing such adjustments. Each such officer's certificate shall be made available at all reasonable times for inspection by Furrow and the Corporation shall, forthwith after each such adjustment, mail by certified mail a copy of such certificate to Furrow. Section 6. No Effect On Powers of Corporation. The existence of this Option shall not affect in any way the right or power of the Corporation or its shareholders to make or authorize any adjustments, recapitalizations, reorganization, or other changes in the Corporation's capital structure or its business, or any merger or consolidation of the Corporation, or any issue of bonds, debentures, preferred shares with rights greater than or affecting the Shares, or the dissolution or liquidation of the Corporation, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. Section 7. No Waiver of Corporation's Right to Terminate Employment. Nothing in this Agreement shall be construed to confer or shall be deemed to confer on Furrow any right to continue as an employee of the Corporation, or to continue any other relationship with, the Corporation or any parent or subsidiary of the Corporation, or limit in any way the right of the Corporation or its shareholders to terminate Furrow's employment or other relationship at any time, with or without cause. If Furrow is terminated without cause, this agreement shall not be effected by such termination. Section 8. Compliance With Securities Laws. 8.1 No Exercise Until Compliance. If the Corporation at any time determines that registration or qualification of the Shares or this Option under state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable, then this Option may not be exercised, in whole or in part, until such registration, qualification, consent, or approval shall have been effected or obtained free of any conditions not acceptable to the Corporation.. 8.2 Investment Interest. If required by the Corporation at the time of any exercise of this Option as a condition to such exercise, Furrow shall enter into an agreement with the Corporation in form satisfactory to counsel for the Corporation by which Furrow (I) shall represent that the Shares are being acquired for Furrow's own account for investment and not with a view to, or for sale in connection with, any resale or distribution of such Shares, and (ii) shall agree that, if Furrow should decide to sell, transfer, or otherwise, dispose of any of such Shares, Furrow may do so only if the shares are registered under the Securities Act of 1933 and the relevant state securities laws, unless, in the opinion of counsel for the Corporation, such registration is not required, or the transfer in pursuant to the Securities and Exchange Commission Rule 144; provided, however, that the Corporation agrees to use its best efforts to cause a Registration Statement on Form S-8 with respect to the Shares issuable upon exercise of this Option to be filed and declared effective as soon as is practicable, and to maintain the effectiveness of such Registration Statement until such time as the Option has been fully exercised or terminated. Section 9. Violation. Any provision of this Agreement to the contrary notwithstanding, this Option shall not be exercisable at any time, in whole or in part, if issuance and delivery of the Option Shares would violate any law or registration. Section 10. Representations of Furrow. Furrow represents that he has been advised that he is not being represented in this transaction by the corporation's attorneys and that Furrow has been advised to seek separate legal counsel for advice in this matter. Section 11. Notices. Any notice under this Agreement shall be in writing and shall be effective when actually delivered in person or three days after being deposited in the U.S. mail, registered or certified, postage prepaid and addressed to the party at the address stated in this Option or such other address as either party may designate by written notice to the other. Section 12. Law Governing. This Option shall be governed by and construed in accordance with the laws of the State of Delaware. IN WITNESS WHEREOF, the undersigned have executed this agreement as of the date first above written. INNOVO GROUP INC. By: _________________________________ Sam Furrow, Chairman and CEO __________________________________ Samuel J. Furrow, Jr. EXHIBIT A INNOVO GROUP INC. NOTICE OF EXERCISE OF SHARE OF OPTION I hereby exercise my Non-Qualified Share Option granted by INNOVO GROUP INC. (Corporation) and seek to purchase _____________ shares of common shares of the Corporation pursuant to said Option. I understand that this exercise is subject to all the terms and provisions of my Non-Qualified Share Option Agreement. Enclosed is my check in the sum of $_________________ in payment for such shares. Dated:_____________,________ ___________________________ Signature ___________________________ Address ___________________________ ___________________________ ___________________________ Social Security Number Receipt is hereby acknowledged of the delivery to me by INNOVO GROUP INC. of certificates for ______________________ common shares of the Corporation purchased by me pursuant to the terms and conditions of Non- Qualified Share Option Agreement referred to above. Date:_____________,________ __________________________ Signature EXHIBIT 10.50 NEITHER THIS OPTION NOR THE UNDERLYING COMMON SHARES HAVE BBEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THE CORPORATION WILL NOT TRANSFER THIS OPTION OR THE UNDERLYING COMMON SHARES UNLESS (I) THERE IS AN EFFECTIVE REGISTRATION COVERING SUCH OPTION OR SUCH SHARES. AS THE CASE MAY BE, UNDER THE SECURITIES ACT OF 1933 AND APPLICABLE STATES SECURITIES LAWS, (ii) IT FIRST RECEIVES A LETTER FROM AN ATTORNEY, ACCEPTABLE TO THE BOARD OF DIRECTORS OR ITS AGENTS, STATING THAT IN THE OPINION OF THE ATTORNEY THE PROPOSED TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933 AND UNDER ALL APPLICABLE STATE SECURITIES LAWS, OR (iii) THE TRANSFER IS MADE PURSUANT TO RULE 144 UNDER THE SECURITIES ACT OF 1933. INNOVO GROUP, INC. NON-QUALIFIED SHARE OPTION AGREEMENT This Agreement is entered into this day by and between INNOVO GROUP INC., a Delaware corporation with its offices located at 27 North Main Street, Springfield, Tennessee 37172, (Corporation), and Samuel J. Furrow (Furrow), a Tennessee resident whose principal residence address is 5300 Turtle Point Ln., Knoxville TN, 37919. WHEREAS, the Corporation desires to obtain Furrow's services as a member of the Corporation's Board of Directors; WHEREAS, this Option will provide equity incentives for Samuel J. Furrow to become and remain a member of the Board of Directors (Board) of the Corporation, by granting such person options to purchase shares of the Corporation's common stock (Shares); WHEREAS, the Board has determined to grant to Furrow a non-qualified share option (Option) to purchase 1,000,000 upon and subject to the terms and conditions stated in this Agreement. NOW THEREFORE, IT IS AGREED AS FOLLOWS: Section 1. Grant of Option. Subject to the terms and conditions of this Agreement, the Corporation hereby grants to Furrow, during the period ending 5:00 p.m. Springfield, Tennessee time on March 31, 2003 (Expiration Date), the option to purchase from the Corporation, from time to time, at a price of $0.475 per Share (Exercise Price), up to, but not to exceed, an aggregate of 1,000,000 Shares (Option Shares). Section 2. Exercise of Option. 2.3 Date Exercisable. This Option shall become exercisable by Furrow with respect to 20,834 Shares during each of the first 48 calendar months after the date of this Agreement during which Furrow continues to serve as a member of the Board up to a maximum of 1,000,000 Shares. 2.4 Manner of Exercise. This Option may be exercised in whole or in part by delivery to the Corporation, from time to time, of a written notice in substantially the form set forth in Exhibit A hereto, signed by Furrow, specifying the number of Option Shares that Furrow then desires to purchase, together with cash, certified check, or bank draft payable to the order of the Corporation, or other form of payment acceptable to the Corporation, for an amount of United States dollars equal to the Exercise Price of such shares. If the Corporation, in its sole discretion, elects to allow payment of all or a portion of the Exercise Price secured by a pledge, also in form satisfactory to the Corporation, of the Shares purchased by such exercise of this Option. 2.3 Certificates. Promptly after any exercise in whole or in part of this Option by Furrow, the Corporation shall deliver to Furrow a certificate or certificates for the number of Option Shares with respect to which this Option was so exercised, registered in Furrow's name. 2.4 Duration of Option. This Option, to the extent not previously exercised, shall terminate upon the earliest of the following dates: 2.4.4 the Expiration Date 2.4.5 immediately upon Furrow's resignation from the Board or upon failure to be re-nominated or reelected to the Board. 2.4.6 three months after Furrow's termination of membership on the Board, if such termination is by reason of Furrow's disability (as defined in IRC 22(e)(3)) or death. Section 3. Nontransferability. 3.1 Restriction. This Option is not transferable by Furrow otherwise than by testamentary will or the laws of descent and distribution and, during Furrow's lifetime, may be exercised only by Furrow or Furrow's guardian or legal representative. Except as permitted by the preceding sentence, neither this Option nor any of the rights and privileges conferred thereby shall be transferred, assigned, pledged, or hypothecated in any way (whether by operation of law or otherwise), and no such option, right, or privilege shall be subject to execution, attachment, or similar process. Upon any attempt to transfer this Option, or of any right or privilege conferred thereby, contrary to the provisions hereof, , or upon the levy of any attachment or similar process upon such option, right, or privilege, this Option and any such rights and privileges shall immediately become null and void. 3.2 Exercise in Event of Death or Disability. Whenever the word Furrow is used in any provision of this Agreement under circumstances when the provision should logically be construed to apply to Furrow's guardian, legal representative, executor, administrator, or the person or persons to whom this Option may be transferred by testamentary will or by the laws of descent and distribution, the word Furrow shall be deemed to include such person or persons. 3.4. No Rights As Shareholder Prior To Exercise. Furrow shall not, by virtue hereof, be entitled to any rights of a shareholder in the Corporation, either at law or equity, unless and until this Option is exercised. The rights of Furrow are limited to those expressed in this Option and are not enforceable against the Corporation except to the extent set forth herein. Section 4. Anti-Dilution Provisions. 4.1 The number and kind of Shares purchasable upon the exercise of this Option and the Exercise Price shall be subject to adjustment from time to time as follows: 4.1.7 In case the Corporation shall (i) pay a dividend or make a distribution on the outstanding Shares payable in Shares, (ii) subdivide the outstanding Shares into a greater number of Shares, (iii) combine the outstanding Shares into a lesser number of Shares, or (iv) issue by reclassification of the Shares any Shares of the Corporation, Furrow shall thereafter be entitled, upon exercise, to receive the number and kind of shares which, if this Option had been exercised immediately prior to the happening of such event, Furrow would have owned upon such exercise and been entitled to receive upon such dividend, distribution, subdivision, combination, or reclassification. Such adjustment shall become effective on the day next following (v) the record date of such dividend or distribution or (vi) the day upon which such subdivision, combination, or reclassification shall become effective. 4.1.8 In case the Corporation shall consolidate or merge into or with another corporation, or in case the Corporation shall sell or convey to any other person or persons all or substantially all the property of the Corporation, Furrow shall thereafter be entitled, upon exercise, to receive the kind and amount of shares, other securities, cash, and property receivable upon such consolidation, merger, sale, or conveyance by a holder of the number of Shares which might have been purchased upon exercise of this Option immediately prior to such consolidation, merger, sale, or conveyance, and shall have no other conversion rights. In any such event, effective provision shall be made, in the certificate or articles of incorporation of the resulting or surviving corporation, in any contracts of sale and conveyance, or otherwise so that, so far as appropriate and as nearly as reasonable may be, the provisions set forth herein for the protection of the rights of Furrow shall thereafter be made applicable. 4.1.9 Whenever the number of Shares purchasable upon exercise of this Option is adjusted pursuant to this Section, the Exercise Price per Share in effect immediately prior to such adjustment by a fraction, of which the numerator shall be the number of Shares purchasable upon exercise of this Option immediately prior to such adjustment, and of which the denominator shall be the number of Shares so purchasable immediately after such adjustment, so that the aggregate Exercise Price of this Option remains the same. 4.1.10 No adjustment in the number of Shares which may be purchased upon exercise of this Option shall be required unless such adjustment would require an increase or decrease of more than 1/100 of a Share in the number of Shares which may be so purchased, provided, however, that any adjustment which by reason of this Section is not required to be made shall be carried forward cumulatively and taken into account in any subsequent calculation. All calculations under this Section shall be made to the nearest cent or to the nearest one-hundredth of a Share, as the case may be. 4.1.11 In the event that at any time, as a result of an adjustment made pursuant to this Section, Furrow shall become entitled to receive upon exercise of this Option cash, property, or securities. 4.1.12 Irrespective of any adjustments in the Exercise Price or in the number or kind of Shares purchasable upon exercise of this Option, the form of Options theretofore or thereafter issued may continue to express the same price and number and kind of shares as are stated in this Option. Section 5. Officer's Certificate. Whenever the number or kind of securities purchasable upon exercise of this Option or the Exercise Price shall be adjusted as required by the provisions of Section 4, the Corporation shall forthwith file with its Secretary or its Assistant Secretary at its principal office and with its stock transfer agent, if any, an officer's certificate showing the adjusted number of kind of securities purchasable upon exercise of this Option and the adjusted Exercise Price determined as herein provided and setting forth in reasonable detail such facts as shall be necessary to show the reason for and the manner of computing such adjustments. Each such officer's certificate shall be made available at all reasonable times for inspection by Furrow and the Corporation shall, forthwith after each such adjustment, mail by certified mail a copy of such certificate to Furrow. Section 6. No Effect On Powers of Corporation. The existence of this Option shall not affect in any way the right or power of the Corporation or its shareholders to make or authorize any adjustments, recapitalizations, reorganization, or other changes in the Corporation's capital structure or its business, or any merger or consolidation of the Corporation, or any issue of bonds, debentures, preferred shares with rights greater than or affecting the Shares, or the dissolution or liquidation of the Corporation, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. Section 7. No Waiver of Corporation's Right to Terminate Employment. Nothing in this Agreement shall be construed to confer or shall be deemed to confer on Furrow any right to continue as a member of the Board of, or to continue any other relationship with, the Corporation or any parent or subsidiary of the Corporation, or limit in any way the right of the Corporation or its shareholders to terminate Furrow's membership on the Board or other relationship at any time, with or without cause. Section 8. Compliance With Securities Laws. 8.3 No Exercise Until Compliance. If the Corporation at any time determines that registration or qualification of the Shares or this Option under state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable, then this Option may not be exercised, in whole or in part, until such registration, qualification, consent, or approval shall have been effected or obtained free of any conditions not acceptable to the Corporation.. 8.4 Investment Interest. If required by the Corporation at the time of any exercise of this Option as a condition to such exercise, Furrow shall enter into an agreement with the Corporation in form satisfactory to counsel for the Corporation by which Furrow (i) shall represent that the Shares are being acquired for Furrow's own account for investment and not with a view to, or for sale in connection with, any resale or distribution of such Shares, and (ii) shall agree that, if Furrow should decide to sell, transfer, or otherwise, dispose of any of such Shares, Furrow may do so only if the shares are registered under the Securities Act of 1933 and the relevant state securities laws, unless, in the opinion of counsel for the Corporation, such registration is not required, or the transfer in pursuant to the Securities and Exchange Commission Rule 144; provided, however, that the Corporation agrees to use its best efforts to cause a Registration Statement on Form S-8 with respect to the Shares issuable upon exercise of this Option to be filed and declared effective as soon as is practicable, and to maintain the effectiveness of such Registration Statement until such time as the Option has been fully exercised or terminated. Section 9. Violation. Any provision of this Agreement to the contrary notwithstanding, this Option shall not be exercisable at any time, in whole or in part, if issuance and delivery of the Option Shares would violate any law or registration. Section 10. Representations of Furrow. Furrow represents that he has been advised that he is not being represented in this transaction by the corporation's attorneys and that Furrow has been advised to seek separate legal counsel for advice in this matter. Section 11. Notices. Any notice under this Agreement shall be in writing and shall be effective when actually delivered in person or three days after being deposited in the U.S. mail, registered or certified, postage prepaid and addressed to the party at the address stated in this Option or such other address as either party may designate by written notice to the other. Section 12. Law Governing. This Option shall be governed by and construed in accordance with the laws of the State of Delaware. IN WITNESS WHEREOF, the undersigned have executed this agreement as of the date first above written. INNOVO GROUP INC. By: _________________________________ L.E. Smith, Chairman and CEO __________________________________ Samuel J. Furrow EXHIBIT A INNOVO GROUP INC. NOTICE OF EXERCISE OF SHARE OF OPTION I hereby exercise my Non-Qualified Share Option granted by INNOVO GROUP INC. (Corporation) and seek to purchase _____________ shares of common shares of the Corporation pursuant to said Option. I understand that this exercise is subject to all the terms and provisions of my Non-Qualified Share Option Agreement. Enclosed is my check in the sum of $_________________ in payment for such shares. Dated:_____________,________ ___________________________ Signature ___________________________ Address ___________________________ ___________________________ ___________________________ Social Security Number Receipt is hereby acknowledged of the delivery to me by INNOVO GROUP INC. of certificates for ______________________ common shares of the Corporation purchased by me pursuant to the terms and conditions of Non- Qualified Share Option Agreement referred to above. Date:_____________,________ __________________________ Signature EXHIBIT 10.51 NEITHER THIS OPTION NOR THE UNDERLYING COMMON SHARES HAVE BBEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THE CORPORATION WILL NOT TRANSFER THIS OPTION OR THE UNDERLYING COMMON SHARES UNLESS (I) THERE IS AN EFFECTIVE REGISTRATION COVERING SUCH OPTION OR SUCH SHARES. AS THE CASE MAY BE, UNDER THE SECURITIES ACT OF 1933 AND APPLICABLE STATES SECURITIES LAWS, (ii) IT FIRST RECEIVES A LETTER FROM AN ATTORNEY, ACCEPTABLE TO THE BOARD OF DIRECTORS OR ITS AGENTS, STATING THAT IN THE OPINION OF THE ATTORNEY THE PROPOSED TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933 AND UNDER ALL APPLICABLE STATE SECURITIES LAWS, OR (iii) THE TRANSFER IS MADE PURSUANT TO RULE 144 UNDER THE SECURITIES ACT OF 1933. INNOVO GROUP, INC. NON-QUALIFIED SHARE OPTION AGREEMENT This Agreement is entered into this day by and between INNOVO GROUP INC., a Delaware corporation with its offices located at 27 North Main Street, Springfield, Tennessee 37172., (Corporation), and Robert S. Talbott (Talbott), a Tennessee resident whose principal residence address is 7016 Old Kent Dr., Knoxville Tennessee 37919. WHEREAS, the Corporation desires to obtain Talbott's services as a member of the Corporation's Board of Directors; WHEREAS, this Option will provide equity incentives for Robert S. Talbott to become and remain a member of the Board of Directors (Board) of the Corporation, by granting such person options to purchase shares of the Corporation's common stock (Shares); WHEREAS, the Board has determined to grant to Talbott a non- qualified share option (Option) to purchase 1,000,000 upon and subject to the terms and conditions stated in this Agreement. NOW THEREFORE, IT IS AGREED AS FOLLOWS: Section 1. Grant of Option. Subject to the terms and conditions of this Agreement, the Corporation hereby grants to Talbott, during the period ending 5:00 p.m. Springfield, Tennessee time on August 31, 2003 (Expiration Date), the option to purchase from the Corporation, from time to time, at a price of $0.475 per Share (Exercise Price), up to, but not to exceed, an aggregate of 1,000,000 Shares (Option Shares). Section 2. Exercise of Option. 2.5 Date Exercisable. This Option shall become exercisable by Talbott with respect to 20,834 Shares during each of the first 48 calendar months after the date of this Agreement during which Talbott continues to serve as a member of the Board up to a maximum of 1,000,000 Shares. 2.6 Manner of Exercise. This Option may be exercised in whole or in part by delivery to the Corporation, from time to time, of a written notice in substantially the form set forth in Exhibit A hereto, signed by Talbott, specifying the number of Option Shares that Talbott then desires to purchase, together with cash, certified check, or bank draft payable to the order of the Corporation, or other form of payment acceptable to the Corporation, for an amount of United States dollars equal to the Exercise Price of such shares. If the Corporation, in its sole discretion, elects to allow payment of all or a portion of the Exercise Price secured by a pledge, also in form satisfactory to the Corporation, of the Shares purchased by such exercise of this Option. 2.3 Certificates. Promptly after any exercise in whole or in part of this Option by Talbott, the Corporation shall deliver to Talbott a certificate or certificates for the number of Option Shares with respect to which this Option was so exercised, registered in Talbott's name. 2.4 Duration of Option. This Option, to the extent not previously exercised, shall terminate upon the earliest of the following dates: 2.4.7 the Expiration Date 2.4.8 immediately upon Talbott's resignation from the Board or upon failure to be re-nominated or reelected to the Board. 2.4.9 three months after Talbott's termination of membership on the Board, if such termination is by reason of Talbott's disability (as defined in IRC 22(e)(3)) or death. Section 3. Nontransferability. 3.1 Restriction. This Option is not transferable by Talbott otherwise than by testamentary will or the laws of descent and distribution and, during Talbott's lifetime, may be exercised only by Talbott or Talbott's guardian or legal representative. Except as permitted by the preceding sentence, neither this Option nor any of the rights and privileges conferred thereby shall be transferred, assigned, pledged, or hypothecated in any way (whether by operation of law or otherwise), and no such option, right, or privilege shall be subject to execution, attachment, or similar process. Upon any attempt to transfer this Option, or of any right or privilege conferred thereby, contrary to the provisions hereof, , or upon the levy of any attachment or similar process upon such option, right, or privilege, this Option and any such rights and privileges shall immediately become null and void. 3.2 Exercise in Event of Death or Disability. Whenever the word Talbott is used in any provision of this Agreement under circumstances when the provision should logically be construed to apply to Talbott's guardian, legal representative, executor, administrator, or the person or persons to whom this Option may be transferred by testamentary will or by the laws of descent and distribution, the word Talbott shall be deemed to include such person or persons. 3.5. No Rights As Shareholder Prior To Exercise. Talbott shall not, by virtue hereof, be entitled to any rights of a shareholder in the Corporation, either at law or equity, unless and until this Option is exercised. The rights of Talbott are limited to those expressed in this Option and are not enforceable against the Corporation except to the extent set forth herein. Section 4. Anti-Dilution Provisions. 4.1 The number and kind of Shares purchasable upon the exercise of this Option and the Exercise Price shall be subject to adjustment from time to time as follows: 4.1.13 In case the Corporation shall (i) pay a dividend or make a distribution on the outstanding Shares payable in Shares, (ii) subdivide the outstanding Shares into a greater number of Shares, (iii) combine the outstanding Shares into a lesser number of Shares, or (iv) issue by reclassification of the Shares any Shares of the Corporation, Talbott shall thereafter be entitled, upon exercise, to receive the number and kind of shares which, if this Option had been exercised immediately prior to the happening of such event, Talbott would have owned upon such exercise and been entitled to receive upon such dividend, distribution, subdivision, combination, or reclassification. Such adjustment shall become effective on the day next following (v) the record date of such dividend or distribution or (vi) the day upon which such subdivision, combination, or reclassification shall become effective. 4.1.14 In case the Corporation shall consolidate or merge into or with another corporation, or in case the Corporation shall sell or convey to any other person or persons all or substantially all the property of the Corporation, Talbott shall thereafter be entitled, upon exercise, to receive the kind and amount of shares, other securities, cash, and property receivable upon such consolidation, merger, sale, or conveyance by a holder of the number of Shares which might have been purchased upon exercise of this Option immediately prior to such consolidation, merger, sale, or conveyance, and shall have no other conversion rights. In any such event, effective provision shall be made, in the certificate or articles of incorporation of the resulting or surviving corporation, in any contracts of sale and conveyance, or otherwise so that, so far as appropriate and as nearly as reasonable may be, the provisions set forth herein for the protection of the rights of Talbott shall thereafter be made applicable. 4.1.15 Whenever the number of Shares purchasable upon exercise of this Option is adjusted pursuant to this Section, the Exercise Price per Share in effect immediately prior to such adjustment by a fraction, of which the numerator shall be the number of Shares purchasable upon exercise of this Option immediately prior to such adjustment, and of which the denominator shall be the number of Shares so purchasable immediately after such adjustment, so that the aggregate Exercise Price of this Option remains the same. 4.1.16 No adjustment in the number of Shares which may be purchased upon exercise of this Option shall be required unless such adjustment would require an increase or decrease of more than 1/100 of a Share in the number of Shares which may be so purchased, provided, however, that any adjustment which by reason of this Section is not required to be made shall be carried forward cumulatively and taken into account in any subsequent calculation. All calculations under this Section shall be made to the nearest cent or to the nearest one-hundredth of a Share, as the case may be. 4.1.17 In the event that at any time, as a result of an adjustment made pursuant to this Section, Talbott shall become entitled to receive upon exercise of this Option cash, property, or securities. 4.1.18 Irrespective of any adjustments in the Exercise Price or in the number or kind of Shares purchasable upon exercise of this Option, the form of Options theretofore or thereafter issued may continue to express the same price and number and kind of shares as are stated in this Option. Section 5. Officer's Certificate. Whenever the number or kind of securities purchasable upon exercise of this Option or the Exercise Price shall be adjusted as required by the provisions of Section 4, the Corporation shall forthwith file with its Secretary or its Assistant Secretary at its principal office and with its stock transfer agent, if any, an officer's certificate showing the adjusted number of kind of securities purchasable upon exercise of this Option and the adjusted Exercise Price determined as herein provided and setting forth in reasonable detail such facts as shall be necessary to show the reason for and the manner of computing such adjustments. Each such officer's certificate shall be made available at all reasonable times for inspection by Talbott and the Corporation shall, forthwith after each such adjustment, mail by certified mail a copy of such certificate to Talbott. Section 6. No Effect On Powers of Corporation. The existence of this Option shall not affect in any way the right or power of the Corporation or its shareholders to make or authorize any adjustments, recapitalizations, reorganization, or other changes in the Corporation's capital structure or its business, or any merger or consolidation of the Corporation, or any issue of bonds, debentures, preferred shares with rights greater than or affecting the Shares, or the dissolution or liquidation of the Corporation, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. Section 7. No Waiver of Corporation's Right to Terminate Employment. Nothing in this Agreement shall be construed to confer or shall be deemed to confer on Talbott any right to continue as a member of the Board of, or to continue any other relationship with, the Corporation or any parent or subsidiary of the Corporation, or limit in any way the right of the Corporation or its shareholders to terminate Talbott's membership on the Board or other relationship at any time, with or without cause. Section 8. Compliance With Securities Laws. 8.5 No Exercise Until Compliance. If the Corporation at any time determines that registration or qualification of the Shares or this Option under state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable, then this Option may not be exercised, in whole or in part, until such registration, qualification, consent, or approval shall have been effected or obtained free of any conditions not acceptable to the Corporation.. 8.6 Investment Interest. If required by the Corporation at the time of any exercise of this Option as a condition to such exercise, Talbott shall enter into an agreement with the Corporation in form satisfactory to counsel for the Corporation by which Talbott (i) shall represent that the Shares are being acquired for Talbott's own account for investment and not with a view to, or for sale in connection with, any resale or distribution of such Shares, and (ii) shall agree that, if Talbott should decide to sell, transfer, or otherwise, dispose of any of such Shares, Talbott may do so only if the shares are registered under the Securities Act of 1933 and the relevant state securities laws, unless, in the opinion of counsel for the Corporation, such registration is not required, or the transfer in pursuant to the Securities and Exchange Commission Rule 144; provided, however, that the Corporation agrees to use its best efforts to cause a Registration Statement on Form S-8 with respect to the Shares issuable upon exercise of this Option to be filed and declared effective as soon as is practicable, and to maintain the effectiveness of such Registration Statement until such time as the Option has been fully exercised or terminated. Section 9. Violation. Any provision of this Agreement to the contrary notwithstanding, this Option shall not be exercisable at any time, in whole or in part, if issuance and delivery of the Option Shares would violate any law or registration. Section 10. Representations of Talbott. Talbott represents that he has been advised that he is not being represented in this transaction by the corporation's attorneys and that Talbott has been advised to seek separate legal counsel for advice in this matter. Section 11. Notices. Any notice under this Agreement shall be in writing and shall be effective when actually delivered in person or three days after being deposited in the U.S. mail, registered or certified, postage prepaid and addressed to the party at the address stated in this Option or such other address as either party may designate by written notice to the other. Section 12. Law Governing. This Option shall be governed by and construed in accordance with the laws of the State of Delaware. IN WITNESS WHEREOF, the undersigned have executed this agreement as of the date first above written. INNOVO GROUP INC. By: _________________________________ Sam Furrow, Chairman and CEO __________________________________ Robert S. Talbott EXHIBIT A INNOVO GROUP INC. NOTICE OF EXERCISE OF SHARE OF OPTION I hereby exercise my Non-Qualified Share Option granted by INNOVO GROUP INC. (Corporation) and seek to purchase _____________ shares of common shares of the Corporation pursuant to said Option. I understand that this exercise is subject to all the terms and provisions of my Non-Qualified Share Option Agreement. Enclosed is my check in the sum of $_________________ in payment for such shares. Dated:_____________,________ ___________________________ Signature ___________________________ Address ___________________________ ___________________________ ___________________________ Social Security Number Receipt is hereby acknowledged of the delivery to me by INNOVO GROUP INC. of certificates for ______________________ common shares of the Corporation purchased by me pursuant to the terms and conditions of Non- Qualified Share Option Agreement referred to above. Date:_____________,________ __________________________ Signature EXHIBIT 10.52 REAL PROPERTY AND ASSET LEASE AGREEMENT This Real Property and Asset Lease Agreement (the Lease) is made and entered into this the 14th day of September, 19998, by and between Thimble Square, Inc. (Lessor) and Confident Colors, LLC (Lessee). WITNESSETH WHEREAS, Lessor is the owner and operator of a commercial sewing enterprise located in Baxley, Georgia know as Thimble Square, Inc (the Business); and WHEREAS, Lessor desires to lease to Lessee, and Lessee desires to lease from Lessor upon the terms and conditions hereto, the Business, including the real property, physical plant, equipment, assets, contracts, good will and other tangible and intangible property associated with said Business. NOW, THEREFORE, in consideration of the following covenants and agreements, the parties hereby contract and agree as follows; 1. Leased Real Property and Assets. Lessor, for and in consideration of the rents, covenants, agreements, and stipulations hereinafter mentioned, provided for and contained to be paid, kept and performed by Lessee, hereby leases, hires and rents unto Lessee, and Lessee hereby leases, hires, rents and takes from Lessor upon the terms and conditions which hereinafter appear, the following real property and assets, together with all replacements thereof and additions thereto, as follows: (a) Real Property: 230 Frost Industrial Blvd., Baxley, Georgia 31513, as more specifically set forth in the legal description attached as Exhibit A hereto (the Real Property); (b) Building: all improvements upon the Real Property, including without limitation that certain building consisting of approximately 21,000 square feet of space, together with all systems, fixtures and other improvements located therein, all as more specifically described in the floor plan attached as Exhibit B hereto (the Building); (c) Equipment and Assets: all equipment and other tangible assets used and useful in the ownership and operation of the Business [and located at the Plant], including without limitation all assets identified on Exhibit C hereto (the Tangible Assets); (d) Licenses: all of Lessor's right, title and interest in and to the licenses, permits, authorizations, qualifications, orders, franchises, certificates, consents and approvals issued to Lessor by any governmental or regulatory agency or authority, whether Federal, state or local, and used in connection with the operation of the Business (the Licenses); (e) Intangible Assets: all of Lessor's right, title and interest in and to the copyrights, trademarks, trade names, logos, service marks and other intangible assets used in connection with the Business, together with all good will associated with the Business (the Intangible Assets and, together with the Real Property, Building, Tangible Assets and Licenses, the Business Assets); and (f) Contracts: all of Lessor's rights and privileges under those contracts, leases and agreements necessary or relating to Lessor's ownership and operation of the Business, including Without limitation (I) those contract listed on Exhibit D (unless specifically excluded therein), (ii) that certain lease and option agreement for the Real Property and Building dated October 12, 1993, by and between the Development Authority of Appling County, Georgia and Thimble Square, Inc., a Georgia Corporation (the Capital Lease), and (iii) that certain production agreement between Lessor and Crown Tex (the Contracts). 2. Term. Lessee shall have and hold the Business Assets for the term of two (2) years beginning on the _____ day of September, 1998 (the Commencement Date), and ending at midnight on the 30th day of September, 2000, unless earlier terminated as hereinafter provided (the Term). 3. Continuation of Business. The Lessee agrees to continue the Business operations without interruption and to offer continued employment, either directly or through an employee leasing company, to substantially all of the employees of the Lessor. It is Lessee's current intention to continue the Business operations throughout the Term and to expand the Business and operations conducted on the Real Property and the Building. 4. Capital Lease. As an inducement to Lessee entering into this Lease, Lessor hereby represents, warrants and covenants with respect to the Capital Lease as follows: (i) that the term of the Capital Lease expires on September 30, 2000; (ii) that Lessor's rental obligation under the Capital Lease (which includes both the Real Property and Building) is $3,000 per month; (iii) that Lessor has the right, which is valid and in force, to purchase the Real Property and Building at the expiration of the Capital Lease for consideration of $158,000; (iv) that Lessor has paid all rent due and is current on all of its obligations under the Capital Lease; (v) that no breaches or violations exist under the terms of the Capital Lease, and no conditions exist which do or might cause a default thereunder or otherwise provide the landlord the right to terminate the Capital Lease; (vi) that the Capital Lease is valid and in full force ad effect as of the date hereof, and will remain so as of the Effective Date; and (vii) that Lessor shall do all things necessary to ensure that the Capital Lease remains in full force and effect during the Term hereof. Lessor hereby grants to Lessee the unconditional right to cure any default by Lessor under the Capital Lease which might occur during the Term hereof. Upon any exercise by Lessee of said right to cure, Lessee shall notify Lessor of the same in writing and may deduct all costs of said cure from rental payments otherwise owing to Lessor under Section 5 hereof. 5. Rental; Late Charges. During the Term of this Lease, Lessee agrees to pay to Lessor, at 27 North Main Street, Springfield, Tennessee 37172, or any other person or place at the written direction of Lessor, without demand, deduction or set off, except as provided herein, the rental payments set forth herein, payments being due on the 1st day of each month in advance during the Term: (a) On the Commencement Date, Lessee shall pay Lessor the sum of $3,000 plus a pro-rata portion of the first month's rent. (b) During the period beginning on the first day of the next calendar month immediately following the Commencement Date, and through the ten (10) months after the Commencement Date, base rent of $4,500 per month, payable as follows: $3,000 paid directly by Lessee to the landlord under the Capital Lease, and $1,500 paid to Lessor at the address indicated herein. (c) During the period beginning on the first day of the eleventh (11th) calendar month after the Commencement Date and through the period including twenty-two (22) months after the Commencement Date, base rent of $5,000 per month, payable as follows: 43,000paid directly by Lessee to the landlord under the Capital Lease, and $2,000 paid to Lessor at the address indicated herein. (d) During the period beginning on the first day of the twenty-third (23rd) calendar month after the Commencement Date and through the period including the expiration of the Term, base rent of $3,000 per month, payable as follows: $3,000 paid directly by Lessee to the landlord under the Capital Lease. (e) During the Term hereof, in addition to the base rent specified in paragraphs (a), (b), (c) and (d) above (Base Rent), Lessee shall also pay to Lessor additional rental payments (Percentage Rent) equal to two percent (2%) of any annual gross revenues in excess of five Million Dollars ($5,000,000) earned by Lessee from the operation of the Business during the Term. The Percentage Rent shall be calculated at the end of the twelfth (12th) and twenty fourth (24th) months after the Commencement Date, and shall be payable two (2) months in arrears. Upon the payment of any Percentage Rent due hereunder, Lessee shall provide Lessor with a written calculation of said Percentage Rate. Lessor shall also have the right on an annual basis to inspect the books and records of Lessee to verify same. The time and place of such inspection shall be convenient to Lessee ad at Lessee's principle office. (f) If Lessor or Lessor's appointed agent or representative fails to receive any Base Rent or Percentage Rent payment due hereunder within ten (10) days after it becomes due, Lessee shall pay Lessor, as additional rental, a late charge equal to five percent (5%) of the overdue amount. An additional five percent (5%) will accrue for each additional ten (10) days such payment is late. The parties agree that the Lessor's damages by reason of late payments will be difficult to ascertain, that such late charge represents a fair and reasonable estimate of the costs and damages Lessor would incur by reason of any such late payment and represents liquidated damages and not a penalty. 6. Use of Business Assets. The Business Assets shall be used by Lessee (or any sublessee) in the operation of the Business or any lawful purpose related thereto. The Business Assets shall not be used by Lessee for any illegal purposes, nor in any manner to create any nuisance or trespass, nor in any manner to vitiate the insurance or increase the rate of insurance on the Business Assets. Unless approved by Lessor, which approval shall not be unreasonably withheld, Lessee and sublessees agree to keep all Tangible Assets in the operation facilities in Baxley, Georgia. Lessee hereby assumes all of the Lessor's obligations under the Licences and the Contracts and agrees to comply, in all respects, with the terms and conditions thereof, except only those obligations which are expressly undertaken by Lessor hereunder. 7. Utilities. Lessee shall pay all charges for utilities used in the operation and maintenance of the Business Assets and Business, including electricity, light, water, sewer, gas, heat, fuel, garbage collection, sanitary and other services relating to the operation of the Business. 8. Abandonment of Business Assets. Lessee agrees not to abandon or vacate the Business Assets during the Term of this Lease, and agrees to use the Business Assets for the purposes herein leased until the expiration hereof. 9. Repairs and Maintenance by Lessor. Lessor agrees to keep in good repair the roof, foundation and exterior walls of the Building, including glass and exterior doors, and underground utility and sewer pipes outside the exterior wall of the Building, except repairs rendered necessary by the negligence or intentional wrongful acts of Lessee, its agents, employees or invitees. Lessor gives Lessee exclusive control of the Real Property and Building, and shall be under no obligation to inspect the same. Lessee shall promptly report in writing to Lessor any defective condition on or about the Real Property or Building known to lessee which Lessor is required to repair, and failure to report such conditions shall make Lessee responsible to lessor for any liability incurred by Lessor by reason of such conditions. Lessee agrees to pay any insurance deductible for any damage caused directly by Lessee. 10. Repairs and Maintenance by Lessee. Lessee accepts the business Assets in their present condition as being suited for the use intended by Lessee. Lessee shall maintain in good working order and repair all heating and air conditioning systems serving the Building (including but not limited to replacement of parts, compressors, air handling units and heating units). Further, Lessee shall, throughout the Term of this Lease, maintain in good order and repair all of the Business Assets, and any additions to or replacements thereof, except those repairs expressly required to be made by Lessor hereunder. Lessee agrees to return the Business Assets to Lessor at the expiration or earlier termination of the Lease in as good condition and repair as when first received, ordinary wear and tear, damage by storm, fire, lightning, earthquake or other casualty alone excepted. 11. Destruction of or Damages to Business Assets. If the Business Assets indicated in item nine (9) above are completely or substantially destroyed by storm, fire, lightning, earthquake or other casualty, this Lease shall terminate as of the date of such destruction and renal shall be accounted for as between Lessor and Lessee as of that date. If the Business Assets indicated in item (9) above are damaged but not wholly or substantially destroyed by any such casualties, rental shall abate in such proportion as Lessee's use of the Business Assets to substantially the same condition as before said damages occurred as soon as is practicable, whereupon full retal shall recommence. 12. Insurance and Indemnification. (a) Indemnification. (i) Lessee agrees to, and hereby does, indemnify and save Lessor harmless against all claims or damages to persons or property by reason of Lessee'S use or occupancy of the Business Assets and operation of the Business from and after the Commencement Date (exclusive of any claims or damages resulting from maintenance to be performed in or on the Business Assets by Lessor or its agents hereunder), and expenses incurred by Lessor as a result thereof, including reasonable attorneys' fees and costs. (ii) Lessor agrees to, and hereby does, indemnify and save Lessee harmless against all claims or damages to persons or property by reason of Lessee's ownership, use or occupancy of the Business Assets and the operation of the Business prior to the Commencement Date, and all expenses incurred by Lessee as a result thereof, including reasonable attorneys' fees and costs. (b) Liability insurance. (i) Lessee shall, at Lessee's sole expense, maintain in effect throughout the Term of this Lease personal injury liability insurance covering the Business Assets and its appurtenances in the amount of not less than Two Hundred Fifty Thousand Dollars ($250,000), for injury to or death of any one person, and One Million Dollars ($1,000,000) aggregate for each incident. Such insurance shall specifically insure Lessee against all liability assumed by it or by Lessor hereunder, as well as liability imposed by law upon Lessee or Lessor, and shall name Lessor as an additional insured thereunder. Such insurance policy, or certificate thereof, shall contain an endorsement expressly waiving any right of the insurer of subrogation against Lessor, and shall provide that Lessor will be given ten (10) days written notice prior to cancellation or expiration of the insurance evidenced thereby. Within a reasonable period of time following the Commencement Date, Lessee shall provide the foregoing certificate and endorsement required hereby to Lessor. (ii) Lessor shall, at Lessor's sole expense, maintain property damage liability insurance in the amount of Four Hundred Fifty Thousand Dollars ($450,000). Such insurance shall specifically insure Lessor against all liability assumed by it or by Lessee hereunder, as well as liability imposed by law upon Lessee or Lessor, and shall name Lessee as an additional insured thereunder. Such insurance policy, or certificate thereof, shall contain an endorsement expressly waiving any right of the insurer of subrogation against Lessee, and shall provide that Lessee will be given ten (10) days written notice prior to cancellation or expiration of the insurance evidenced thereby. Within a reasonable period of time following the Commencement Date, Lessor shall provide the foregoing certificate and endorsement required hereby to Lessee. 13. Governmental Orders. Lessee agrees, at its own expense, promptly to comply with all codes, rules, regulations, ordinances, laws, orders and other requirements of any legally constituted public authority having jurisdiction over the Business Assets (requirements) made necessary by reason of Lessee's occupancy of the Real property and Building, use of the Business Assets and operation of the Business. Lessor agrees promptly to comply with any such requirements if the same are not made necessary by reason of Lessee's occupancy. It is mutually agreed, however, between Lessor and Lessee, that if in order to comply with such requirements, the cost to Lessor or Lessee, as the case may be, shall exceed a sum equal to one year's rent hereunder, then the party hereto obligated to comply with such requirements may terminate this Lease by giving written notice of termination to the other party, which termination shall become effective sixty (60) days after receipt of such notice and which notice shall eliminate necessity of compliance with such requirements unless the party giving such notice of termination, shall, before termination becomes effective, pay to the party giving notice all costs of compliance in excess of one year's rent, or secure payment of said sum in any manner satisfactory to the party giving notice. Condemnation. If the whole of the Business Assets shall Be taken under the power of eminent domain by any public or quasi-public authority, or conveyance shall be made in lieu thereof, or if a portion of the Business Assets is so taken or conveyed and the remainder of the Business Assets shall not, in the opinion of Lessee, be suitable for Lessee's use, or if access to the remainder of the Business Assets from an adjoining public thoroughfare shall be eliminated or substantially impaired, this Lease shall terminate as of the date of such taking or conveyance, the parties shall be released from any further liability hereunder, and the rental otherwise due shall be prorated as of such date. If this Lease is not terminated pursuant to this Section and if a portion of the Business Assets has been taken or conveyed, rental shall be reduced by an amount which represents the percentage by which Lessee's use of the Business Assets, as a whole, is reduced by such taking or conveyance. If any condemnation proceeding, Lessee and Lessor shall have the right to seek all compensation and damages due to each party under the laws of the State of Georgia as a result of such taking. 15. Assignment and Subletting. Subject to obtaining the consent of the Lessor under the Capital Lease, Lessee may sublease portions of the Business Assets to other persons, provided any such sublessee's operation is either (i) part of the general operation of the Business, or (ii) is under the supervision and control of Lessee, and provided such operation is within the purposes for which the Business Assets shall be used hereunder; and further provided that the annual gross revenues of such sublessee shall be included in the calculation of additional rent under Section 5 (e) hereof, except to the extent such revenues are derived from sale of goods or services to the Lessee. Except as provided in the preceding sentence, Lessee shall not, without the prior written consent of Lessor, which consent shall not be unreasonably withheld, conditioned, or delayed, assign this Lease or any interest hereunder or sublet the Business Assets or any part thereof, or permit the use of the Business Assets by any party other than Lessee. Consent by Lessor to any assignment or sublease shall not impair this provision, and all later assignment or subleases, except as herein provided, shall be made likewise only on the prior written consent of Lessor. Assignee of Lessee, at the option of Lessor, shall become directly liable to Lessor for all obligation of Lessee hereunder; provided, however, no sublease or assignment y lessee shall relieve Lessee of any liability hereunder. 16. Removal of Trade Fixtures and Equipment. At the termination of this Lease, Lessee may (if not in default hereunder)remove any of the trade fixtures, equipment and other unattached items which Lessee may have installed or stored in or on the Real Property or Building. Lessee shall repair any damage to the Business Assets caused by its removal of such items. The failure of Lessee to remove such items at the end of this Lease shall be deemed an abandonment thereof at the option of Lessor. If Lessee fails to so remove such items as herein provided, or fails to repair any damage caused to the Business Assets by such removal, then Lessor may do so and charge Lessee with the cost and expense thereof and all such cost and expense shall be paid by Lessee to Lessor on demand. Lessee shall not remove any plumbing or electrical fixtures or equipment, any central heating, ventilating or air conditioning equipment, floor coverings, walls or ceilings, or any other property which may and shall be deemed to constitute a part of the Real Property and Building. 17. Peaceful Possession. Upon payment by Lessee of the rent herein provided, and upon the observance and performance of all other covenants and conditions on Lessee's part to be observed and performed, Lessee shall peaceably ad quietly hold and enjoy the leased Business Assets for the Term hereby demised, without hindrance or interruption. 18. Default by lessee. If: (a) Lessee fails to pay any rental when due, and if such default is not remedied within ten (10) days after receipt of written notice by lessee from Lessor; Lessee defaults in any of the other covenants, terms, conditions, provisions or agreements of this Lease on the part of the Lessee to be kept, observed or performed and such default is not remedied within twenty (20) days after notice from Lessor, provided, however, if the action require to cure the default is of such a nature that it can not be cure within twenty (20) days, Lessee shall not be in default if, within such twenty (20) day period, Lessee commences to cure such default. The time for Lessee to cure shall be extended for such reasonable period as may be required to complete such cure with all diligence; (c) a petition in bankruptcy is filed by, or against, Lessee; (d) the interest of Lessee in this Lease is levied upon by execution or other legal process; (e) the Lessee is declared insolvent according to law; (f) Lessee makes an assignment to, or for the benefit of creditors, or petitions any court to make such an arrangement; (g) Lessee abandons the Business assets or any material part thereof or vacates the Building; or (h) a permanent receiver is appointed for Lessee's property and such receiver is not removed within sixty (60) days after written notice from Lessor to Lessee to obtain such removal; then, and in any of such events of default, Lessor shall have the following rights in addition to the any other rights or remedies available to Lessor at law, in equity or under other provisions of this Lease: (i) to terminate this Lease and to re-enter and repossess the Business Assets, or (ii) without terminating this Lease, to re-enter and repossess the Business Assets. If Lessor takes possession of the Business Assets pursuant tot he preceding option of this Section 18(ii), Lessor shall rent the Business Assets at the best rental obtainable by its good faith best efforts and for any term and on such conditions as Lessor deems reasonably proper. Lessee shall be liable to Lessor for any deficiency, if any, between the rental due hereunder and the remainder of the rent obtained by Lessor upon reletting after deduction of all expenses reasonable incurred by Lessor in connection with such reletting. Lessee agrees to be responsible for any attorney fees incurred by Lessor to cure any default hereunder. 19. Default by Lessor. In the event of Lessor's obligations hereunder, Lessee must give Lessor notice thereof and allow Lessor thirty (30) days from Lessor's receipt of such notice to cure such default, or, in the event of a default which can not be cured within thirty (30) days, to commence curing such default. In the event of any default by Lessor under the Capital Lease, Lessee shall have the right to cure said default on behalf of Lessor pursuant to Section 4 hereof. In the event of any material default by Lessor hereunder which is not cured by Lessor within 30 days after Lessor receives notice from lessee, Lessee may, at its sole option, terminate this Lease at no further liability to Lessee, and may recover any and all damages entitled to Lessee under applicable law on account of lessor default, including without limitation Lessee's actual attorneys' fees incurred as a result of thereof. 20. Exterior Signs. Lessee shall place no signs upon the outside walls or roof of the Building except with the written consent of the Lessor, which consent will not be unreasonably withheld. Any and all signs placed on the Real Property by Lessee shall be maintained in compliance with applicable laws, rules and regulations governing such signs, and Lessee shall be responsible to Lessor for any damage caused by installation, use or maintenance of said signs, and all damages incident to such removal. 21. Representations and Warranties. Lessor's Representations and Warranties. Lessor hereby represents and warrants to Lessee, as an inducement to lessee to enter into this Lease, as follows: 21A.1 Organization; Good Standing. Lessor (i) is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Georgia; (ii) is qualified to do business and is in good standing under the laws of the State of Georgia; and (iii) has all requisite corporate power and authority to own and operate the Business Assets, to carry on its business as now being conducted, to enter into this Agreement and to perform its obligations hereunder. 21A.2 Authority. Lessor has the full right and authority to execute and deliver this Lease, to perform its obligations hereunder, and to consummate the transactions provided for herein. All required corporate action with respect to Lessor has been taken to approve this Agreement and the transactions contemplated hereby. This Lease has been duly executed and delivered by Lessor and constitutes the valid and binding obligation of Lessor, enforceable against Lessor in accordance with its terms, except as such enforceability may be limited by bankruptcy and similar laws affecting the rights of creditors generally and general principles of equity. Except as expressly provided in this Agreement, the execution and delivery of this Agreement, the consummation of the transactions contemplated hereby and the performance by Lessor of this Agreement in accordance with its terms will not require the approval or consent of or notice to any foreign, federal, state, county, local or other governmental, financial or regulatory body. 21A.3 Title to Tangible Assets. Except as set forth on Exhibit C, Lessor has good and marketable title to the Tangible Assets, free and clear of all liabilities, obligations, security interests, liens, rights and encumbrances of others whatsoever. 21A.4 No Breach or Violation. The execution and delivery by Lessor of this Lease, the consummation by Lessor of the transactions contemplated hereby, and compliance by Lessor with the terms hereof, does not and will not: (i) violate or result in the breach of or contravene any of the terms, conditions or provisions of, or constitute a default under, Lessor's Articles of Incorporation or Bylaws, or any law, regulation, order, writ, injunction, decree, determination or award of any court, governmental department, board, agency or instrumentality, decree, determination or award of any court, governmental department, board, agency or instrumentality, domestic or foreign, or any arbitrator, applicable to Lessor or its assets and properties; or (ii) result in prohibited action under any term or provision of, the material breach of any term or provision of, the termination of, or the acceleration or permitting the acceleration of the performance required by the terms of, or constitute a default under or require the consent of any party to any loan agreement, indenture, mortgage, deed of trust or other contract, agreement or instrument, to which Lessor is a party or by which it is bound; or (iii) cause the suspension or revocation of any authorization, consent, approval or License currently in effect with respect to Lessor. 21A.5 Approvals. No authorizations, approvals or consents from any governmental or regulatory authorities or agencies are necessary to permit Lessor to execute and deliver this Agreement and to perform its obligations hereunder. 21A.6 No Litigation. There are no actions, suits, investigations or proceedings pending or, to the best of Lessor's knowledge, threatened against or affecting the Business Assets, in any court or before any arbitrator, or before or by any governmental department, commission, bureau, board, agency or instrumentality, domestic or foreign, which, if adversely determined, would impair the ability of Lessor to perform its obligations hereunder or would impair or hinder the ability or right of Lessee to operate the Business after the Commencement Date in the manner heretofore operated by Lessor. 21A.7 Brokerage. Lessor has not dealt with any broker or finder in connection with any of the transactions contemplated by this Agreement, and, to the best of Lessor's knowledge, no other person is entitled to any commission or finder's fee in connection with any of these transactions. 21A.8 Condition of Tangible Assets. Tangible Assets are leased as is without any express or implied warranty of any kind, including without limitation any warranty of merchantability or fitness for a particular purpose. 21A.9 Contracts. All of the leases, contracts and agreements to which Lessor is a party with respect to the Business are listed on Exhibit D. Lessor has performed all of its duties and obligations under each of the Contracts in all material respects, the failure to perform which would have a material adverse effect on the business, operations or financial condition of the Business. There are no material defaults under any of the Contracts by Lessor or, to best of Lessor's knowledge, by any other party, or any events, which with notice, the passage of time or both, would constitute a material default under any of the Contracts. All Contracts are in full force and effect and are valid and enforceable in accordance with their respective terms. Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hererby does or will result in a breach or default under, or permit any party to modify any obligations under, or cause or permit any termination, cancellation or loss of benefits under, any of the Contracts. Lessor has obtained any necessary consent to this Lease required under the Capital Lease. 21A.10 Personnel. Lessor has performed, in all material respects, all obligations required to be performed by it under its agreements and plans with or for the benefit of its employees at the Business, and is not in material breach or in material default of any of the terms thereof. There is no material dispute between Lessor and any of its former or current employees at the Business related to compensation, severance pay, vacation or pension benefits, or discrimination. 21A.11 No Union Contract. Lessor is not a party to any collective bargaining agreement covering any of its employees at the Business. Within the past three years, to the knowledge of Lessor, there have not been any jurisdictional disputes or organizing activities by or with respect to the employees of the Business. Within the past three years, there have not been any, and to the knowledge of Lessor there are not now any6 threatened strikes, lockouts, work stoppages, or slowdowns with respect to employees of the Business. 21A.12 Rights in Intangible Assets. (i) All of the Intangible Assets are owned by Lessor free and clear of adverse claims and none of such Intangible Assets infringes on the rights of others; (ii) no proceedings are pending against Lessor or, to the best of Lessor's knowledge, are threatened which challenge the validity of the ownership of the Intangible Assets by lessor; and (iii) Lessor has not with respect to the Business violated any of the provisions of the Copyright Act of 1976, 17 U.S.C. Section 101, et seq. 21A.13 Compliance with Laws. Lessor has all licenses, permits or other authorizations of governmental, regulatory or administrative agencies required to conduct its business with respect to the Business as currently conducted. No judgment, decree, order or notice of violation has been issued by any such agency or authority which permits, or would permit, revocation, modification or termination of any of governmental permit, license or authorization or which results or could result in any material impairment of any rights thereunder. With respect 4to the Business, Lessor is in compliance with all applicable federal, state, local or foreign laws, regulations, statutes, rules, ordinances, directives and orders and any other requirements of any governmental, regulatory or administrative agency or authority or court or other tribunal applicable to it. 21A.14 Environmental matters. The Real Property and Building are free of any substantial amounts of (1) waste or debris; (2) hazardous waste as defined by the Resource Conservation and Recovery Act as amended from time to time (RCRA), or any hazardous substance as defined in the statutes of Georgia, as amended from time to time, and regulations promulgated thereunder, or as defined by the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended from time to time (CERCLA), and regulations promulgated thereunder; (3) any substance the presence of which is prohibited by any law similar to those set forth in this subparagraph; and (4) any materials which, under federal, state, or local law, statute, ordinance or regulation, or court or administrative order or decree, or private agreement, require special handling in collection, storage, treatment or disposal (the wastes, substances and materials referred to in items (1)- (4) being hereafter collectively referred to as Hazardous Materials). 21A.15 Insurance. The insurable properties relating to the Business and the conduct of the Business are, and will be until the Commencement Date, in the reasonable judgement of Lessor, adequately insured. 21A.16 Operating Statements. All financial and operating statements which have been previously provided by Lessor to Lessee, were prepared in accordance with the books and records of Lessor in conformity with generally accepted accounting principles consistent with past practices (except for normal year-end adjustments) and fairly present the results of operations of the Business for the respective periods covered thereby. 21A.17 Bulk Transfers. The provisions of the Bulk Transfer laws of the State of Georgia will be complied with by Lessor, if applicable, upon the exercise by Lessee of its option to purchase under Section 24. 21A.18 Employee Benefits. Schedule 21.18 identifies each personnel policy, summary plan description, profit sharing plan or other employee benefit plan or document (whether written or oral) providing for insurance coverage or for deferred compensation, bonuses, stock options or other forms of incentive compensation, severance benefits, post-retirement compensation or benefits, welfare or similar plans or profit sharing plans (Benefit Plans) which (i) are administered, entered into or maintained as the case may be, by Lessor and (ii) cover any employee of Lessor at the Business. True and correct copies or descriptions of each such document (and, if applicable, any related trust agreements or descriptions, in the case or oral arrangement) are also attached as part of such Schedule 21.18. Each such Benefit Plan has been maintained in compliance with the requirements prescribed by any and all statutes, order, rules and regulations applicable to it, including, but not limited to, the Employee Retirement Income Security Act of 1974, as amended (ERISA), and the Internal Revenue Code of 1986, as amended (Code). 21A.19 Accuracy of Information Furnished. No statement by Lessor contained in this Lease or in any Schedule or Exhibit hereto contains any material untrue statement of a material fact, or omits to state any material fact which is necessary to make the statements contained herein, in light of the circumstances under which they were made, not materially misleading. Lessee's Representations and Warranties. Lessee hereby represents and warrants to Lessor, as an inducement to Lessor to enter into this Lease, as follows: 21B.1 Organization; Good Standing. Lessee (i) is a limited liability company duly incorporated, validly existing and in good standing under the laws of the State of Georgia; (ii) is qualified to do business and is in good standing under the laws of the State of Georgia; and (iii) has all requisite corporate power and authority to own and operate the Business Assets, to carry on its business as now being conducted, to enter into this Agreement and to perform its obligations hereunder. 21B.2 Authority. Lessee has the full right and authority to execute and deliver this Lease, to perform its obligations hereunder, and to consummate the transactions provided for herein. All required corporate action with respect to Lessee has been taken to approve this Agreement and the transactions contemplated hereby. This Lease has been duly executed and delivered by Lessee and constitutes the valid and binding obligation of Lessee, enforceable against Lessee in accordance with its terms, except as such enforceability may be limited by bankruptcy and similar laws affecting the rights of creditors generally and general principles of equity. Except as expressly provided in this Agreement, the execution and delivery of this Agreement, the consummation of the transactions contemplated hereby and the performance by Lessee of this Agreement in accordance with its terms will not require the approval or consent of or notice to any foreign, federal, state, county, local or other governmental, financial or regulatory body. 22. Lessor's Entry of Real Property and Building. Lessor may card the Real Property and Building For Rent or For Sale ninety (90) days before the expiration of the Term of this Lease (subject to Lessee's option to purchase pursuant to Section 24). Lessor may enter the Real Property and Building at reasonable hours to exhibit the same to prospective lessees or purchasers and to make repairs required of Lessor under the term hereof. 23. Effect of Termination of Lease. No termination of this Lease prior to the normal ending thereof, by lapse of time or otherwise, shall effect Lessor's right to collect rent for the period prior to termination thereof. 24. Purchase Option. At any time during the Term of this Lease, Lessor hereby grants and Lessee hereby accepts, the option to purchase all of Lessor's interest in the Business (the Option), including without limitation the Business Assets (including all rights under and subject to the terms of the Capital Lease). In the event Lessee elects to exercise the Option, Lessee shall provide Lessor with written notice thereof no later than sixty (60) days, or the required time period required by the Lessor's Capital Lease, whichever is longer, prior to the exercise of the Option. The purchase price for the Option shall be Four Hundred Eighty Thousand Dollars ($480,000), less thirty-three and one-third percent (33 1/3%) of all Base Rent and fifty percent (50%) of all Percentage Rent paid by Lessee during the Term hereof, and shall be payable by Lessee on the Option Date in U.S. cash or certified funds or other form of payment reasonably accepted by Lessor. In the event Lessee exercises its Option hereunder, Lessor shall timely notify the landlord under the terms of the Capital Lease of Lessor's intention to exercise its option to purchase the Real Property ad Building. Lessor hereby covenants and agrees to take all actions necessary to exercise and close upon its option under the Capital Lease in the time and manner required thereby, in order that Lessor shall acquire marketable, fee simple title to the Real Property and Building on or prior to the Option Date hereunder. On the Option Date, Lessor shall execute and deliver to Lessee, in form and substance reasonably acceptable to Lessee, a warranty deed for the Real Property and Building, a bill of sale for the Tangible Assets, and such other documents as may reasonably be required by Lessee to effectuate its exercise of the Option and the transfer of all the Business Assets to Lessee. 25. Mortgagee's Rights. Lessee's rights hereunder shall be subject to the Capital lease or any bona fide mortgage or deed to secure debt which is now in place or to be placed upon the Business Assets by Lessor. Lessee shall, if requested by Lessor, execute a separate agreement reflecting such subordination. 26. No Estate in Land. This Lease shall create the relationship of Lessor and Lessee between the parties hereto. No estate shall pass out of Lessor. Lessee has only usufruct not subject to levy and sale, which is assignable only pursuant to the terms if this Lease. 27. Holding Over. If lessee remains in possessior of the Business Assets after expiration of the Term hereof, with Lessor's acquiescence and without any express agreement of parties, Lessee shall be a tenant at will at the rental rate which is in effect at the end of such Term, and there shall be no renewal of the Lease by operation of law. If Lessee remains in the Business Assets after expiration of the Term hereof without Lessor's acquiescence, the Lessee shall be a tenant at sufferance and commencing on the date following the date of such expiration, the monthly rental payable under Section 5 hereof shall, for each month or fraction thereof during which Lessee so remains in possession of the Premises, be twice the monthly Base Rent otherwise payable under Section 5 hereof. Percentage Rent otherwise due under Section 5 hereof will remain due for any period Lessee holds over. 28. Attorneys' Fees and Homestead. If any rent or other sum of owing under this Lease is collected by or through any attorney, Lessee agrees to pay the reasonable attorneys' fees incurred by Lessor as a result thereof. Lessee waives all homestead rights and exemptions which Lessee may have under any law as against any obligation owing under this Lease. Lessee hereby assigns Lessor Lessee's homestead exemption. 29. Rights Cumulative. All rights, powers and privileges conferred hereunder upon parties hereto shall be cumulative and no restrictive to those given by law. 30. Notice. All notices required or permitted under this Lease shall be in writing and shall be personally delivered or sent by telefax, overnight delivery (next day service) by a national delivery service, or by U.S. certified mail, return receipt requested, postage prepaid, to the following addresses: Lessor: Thimble Square, Inc. 27 North Main Street Springfield, TN 37172 Attn: L.E. Smith, Chairman and CEO Telefax No. (615) 384-2911 Lessee: Confident Colors, LLC 230 Frost Industrial Blvd. Baxley, GA 31513 Attn: Scott Parliament, Vice President and Treasurer Telefax No. (912) 367-1320 Either party hereto may, upon written notice to the other, change such parties' address for notices hereunder. For purposes of this Lease, any notice received by Lessor or Lessee from the Lessor under the Capital Lease shall be deemed to have been received from the other party to this Lease. 31. Waiver of Rights. No failure to Lessor to exercise any power given to Lessor hereunder or to insist upon strict compliance by Lessee of his obligations hereunder, and no custom or practice of the parties at variance with the terms hereof, shall constitute a waiver of Lessor's right to demand exact compliance with the terms hereof. 32. Time of Essence. Time is of the essence in this Lease. 33. Definitions. Lessor as used in this Lease shall include first party, its heirs, representatives, assigns, and successors in title to the Business Assets. Lessee shall include second party, its heirs and representatives, and if this Lease shall be validly assigned or sublet, shall include also Lessee's assignees or sublessees as to the Business Assets covered by such an assignment or sublease. Lessor and Lessee include male and female, singular and plural, corporation, partnership or individual, as may fit the particular parties. 34. Exhibits. All Exhibits attached to this Lease are incorporated into, and made a part of, this Lease. In the event of a conflict between an Exhibit and any of the foregoing provisions of this Lease, said Exhibit shall control. 35. Merger. This Lease contains the entire agreement of the parties hereto, and o representations, inducements, promises or agreements, oral or otherwise, between the parties not embodies herein shall be of any force or effect. 36. Governing Law. The terms of this Lease and interpretation thereof shall be governed by the laws of the State of Georgia, without reference to conflicts of law principles. 37. Consent of Lessor under Capital Lease. This Lease shall not be effective unless or until the Lessor under the Capital Lease gas given its written consent to this Lease and the subtenancy created hereunder. IN WINTESS WHEREOF, the parties hereunto have set their hands and seals, intending to be bound thereby, as of the date and year first above written. Signed, sealed and delivered as to Lessor, in the presence of: LESSOR: Thimble Square, Inc. /s/ Scott Parliament By: /s/ L.E. Smith CEO -------------------- -------------- (Unofficial Witness) Name Title /s/ Jennifer Gregory -------------------- Notary Public Signed, sealed and delivered as to Lessor, in the presence of: LESSEE: Confident Colors, LLC /s/ Scott Parliament /s/ L. Winston Biggs -------------------- -------------------- Unofficial Witness Name Title /s/ Jennifer Gregory -------------------- Notary Public EXHIBIT A LEGAL DESCRIPTION EXHIBIT B BUILDING FLOOR PLAN EXHIBIT C LIST OF TANGIBLE ASSETS EXHIBIT D LIST OF CONTRACTS MUTUAL RELEASE AGREEMENT On this 15th day of September, 1998 Thimble Square, Inc. (Employer) and Jane Silk (Employee) mutually agree to release each other from any further contractual obligations related to an Employment Agreement (Agreement) dated 4/12/96. This release is conditioned on the binding execution of a lease agreement for Thimble Square real and personal property between Confident Colors, LLC and Thimble Square, Inc. Such lease is expected to become effective the week of September 14, 1998. Subject to the execution of the lease above, this release shall become effective beginning September 14, 1998. This release shall include all aspects of the Agreement including, but not limited to, salary, benefits and agreement not to compete. /s/ Jane Silk - ------------- Employee Jane Silk Thimble Square, Inc. - -------------------- For Employer L.E. Smith, CEO /s/ L.E. Smith CEO MUTUAL RELEASE AGREEMENT On this 15th day of September, 1998 Thimble Square, Inc. (Employer) and Ron Silk (Employee) mutually agree to release each other from any further contractual obligations related to an Employment Agreement (Agreement) dated 4/12/96. This release is conditioned on the binding execution of a lease agreement for Thimble Square real and personal property between Confident Colors, LLC and Thimble Square, Inc. Such lease is expected to become effective the week of September 14, 1998. Subject to the execution of the lease above, this release shall become effective beginning September 14, 1998. This release shall include all aspects of the Agreement including, but not limited to, salary, benefits and agreement not to compete. /s/ Ronald Silk - --------------- Employee Ron Silk Thimble Square, Inc. - -------------------- For Employer L.E. Smith, CEO /s/ L.E. Smith CEO CERTIFICATE OF ORGANIZATION I, Lewis A. Massey, the Secretary of State from the State of Georgia, do hereby certify under the seal of my office that CONFIDENT COLORS, L.L.C. A GEORGIA LIMITED LIABILITY COMPANY Has been duly organized under the laws of the State of Georgia on the effective date stated above by the filing of articles of organization in the office of the Secretary of State and by the paying of fees as provided by Title 14 of the Official Code of Georgia Annotated. WITNESS my hand and official seal in the City of Atlanta and the State of Georgia on the date set forth above. /s/ Lewis A. Massey - ------------------- Lewis A. Massey Secretary of State ARTICLES OF ORGANIZATION OF CONFIDENT COLORS, L.L.C. Pursuant to Section 14-11-100 et seq. Of the Georgia Limited Liability Act (the Act), the following Articles of Organization for the instant Georgia limited liability company (the Company) are set forth as follows: Article I. The name of the Company is Confident Colors, L.L.C.". Article II. The initial registered office of the Company is 230 Frost Industrial Blvd., Baxley, Georgia 31513. The Company's initial registered agent for service of process is Scott Parliament, an individual resident of the State of Georgia, who is located at the same address as the initial registered office of the Company. Article III. The purpose for organization of the Company is to engage in any and all lawful business in which corporations for profit formed in the State of Georgia may engage. Article IV. The principal office of the Company where the records required by Section 14-11-313 of the Act will be maintained is located at 230 Frost Industrial Blvd., Baxley, Georgia 31513. Article V. The period of duration for the Company shall be until (i) the date of dissolution thereof pursuant to either Section 14-11-602 of the Act or the Company's effective operating agreement, or (ii) December 31, 2028, whichever date first occurs. Article VI. Management of the Company shall be vested in one (1) manager, who shall be selected and shall govern the operations of the Company in accordance with the provisions of the Company's Operating Agreement to be executed by the Members following the effective date hereof. Article VII. In accordance with the provisions of O.C.G.A. Section 14-11-306, the Company shall indemnify and hold harmless each of its Members and Manager from and against any and all claims, demands and liabilities whatsoever arising in connection with the Company; provided, however, that the Company shall not indemnify any Member or Manager for any liability arising out of or relating to (i) intentional misconduct or a knowing violation of law by said Member or Manager, or (ii) any transaction for which said Member or Manager received a personal benefit in violation or breach of any provision of the Company's written Operating Agreement then in effect. The foregoing Articles executed this 10th day of September, 1998. /s/ Jay D. Brownstein - --------------------- Jay D. Brownstein Organizer CONFIDENT COLORS, LLC Unanimous Consent The undersigned, representing all members of Confident Colors, LLC, hereby agree unanimously to the following: That Winston Biggs is authorized as Manager and President of Confident Colors, LLC to execute a certain lease agreement between Thimble Square, Inc. and Confident Colors, LLC as to certain real estate and equipment located in Baxley, Georgia, to be dated at or near September 14, 1998. /s/ Winston Biggs 9/15/98 - ----------------- ------- Winston Biggs /s/ Scott Parliament 9/15/98 - -------------------- ------- Scott Parliament /s/ Jane Silk 9/14/98 - ------------- ------- Jane Silk /s/ Jerry Stewart 9/15/98 - ----------------- ------- Jerry Stewart MEMO TO: Scott Parilament FROM: Eric Hendrickson SUBJECT: Authorization for the negotiation and lease of Thimble Square, Inc. This memorandum is to affirm that Mr. L.E. Smith, CEO and Chairman for Innovo Group, Inc., and subsidiaries, has been authorized to negotiate and consummate the lease/purchase of the Thimble Square, Inc. land, building and equipment. Following is the appropriate section from the August 31, 1998 Board of Directors meeting authorizing the transaction: Smith introduced a proposal from Scott Parliament for the lease/purchase of the Thimble Square, INC. land, building and equipment. The discussed proposal is attached and is made a part of the corporate minutes. Authorization to further negotiate and consummate the transaction was given to Smith. The motion was made by Furrow and seconded by Anderson. The affirmative vote was unanimous. Eric Hendrickson---------------- Eric Henrickson, Secretary, Treasurer and V.P. CORPORATE SEAL EXHIBIT 10.53 THIS AGREEMENT is made this 20th day of August, 1998, between, NASCO PRODUCTS INTERNATIONAL, INC., INNOVO GROUP, INC., and any and all subsidiaries, successors and assigns (hereinafter referred to as Innovo), whose business address is 27 North Main Street, Springfield, Tennessee 37172, and ACTION PERFORMANCE COMPANIES, INC. and any and all subsidiaries, successors and assigns (hereinafter referred to as AP), whose business address is 4707 E. Baseline Road, Phoenix, AZ 85040. WHEREAS, Innovo is a manufacturer and distributor, as well as a seller and marketer, of various products; WHEREAS, AP operates a division known as Fan Fueler, and has requested that Innovo manufacture and distribute certain products it produces in the manner herein provided; WHEREAS, Fan Fueler is a discrete business unit of AP, separate and distinct from AP's other business units, including, but not limited to, such operations currently known as Sports Image, Action Racing Collectibles and Image Works; WHEREAS, Fan Fueler maintains its own methods of product distribution maintained by each of AP's other business units; NOW, THEREFORE, in consideration of the mutual promises contained herein, Innovo and AP agree as follows: 1. Exclusive Distributorship/Manufacturing Rights. AP hereby appoints Innovo as exclusive manufacturer and as a non-exclusive distributor along with AP's own Fan Fueler division, or any successor thereof, and its method of distribution; and AP hereby grants to Innovo an exclusive right to manufacture and a right to distribute certain Products (as defined in Section 3, below) within the Territory (as defined below). In consideration for the rights granted to Innovo by AP, Innovo shall not distribute, or manufacture for distribution, within the Territory, any products which are the same as, or substantially similar to, Products and which bear any trademark, copyright or other mark or any driver, team, team sponsor or sanctioning body involved in Motorsports. For purposes of this Agreement, Motorsports shall mean any international or domestic professional motorsports association including, but not limited to, NASCAR, NHRA, IRL, CART, Formula One, World of Outlaws, AMA, IHRA, Slim Jim, ARCA, Goody's Dash Series and USAC. 2. Sale. Innovo hereby agrees, as the exclusive manufacturer and as a distributor of Products, to manufacture, sell and distribute Products to retailers, during the term of this Agreement, in accordance with the provisions of this Agreement, in the quantities set forth in purchase orders submitted to Innovo, at the prices, subject to the provision of Section 9, Possible Price Modifications, specified in Exhibit A, attached hereto (hereinafter referred to as a Retail Sale); Innovo shall also be the exclusive manufacturer for sales to AP, competitively priced with the market, of the Products referred to herein, during the term of this Agreement, in accordance with the provisions of this Agreement, in quantities set forth in purchase orders submitted to Innovo at the prices also specified in Exhibit B (hereinafter referred to as a Sale to AP). All division of AP will purchase the various Products at the price contained in Exhibit B, except for AP's Fan Fueler division, or any successor thereof, which will pay the prices listed as the "Selling Price in Exhibit A. 3. Products. As used in this Agreement, the term Products shall include the products, bearing motorsports related trademarks and copyrights under the control of AP, manufactured and/or sold by Innovo in the following categories: Cush-n-Carry Cooler Lunch Pack Waist Pack Tote Bag Back Pack Products, as defined by this section shall, from time to time, be subject to the deletion of the product categories listed above and the addition of other product categories, as the parties many agree, in writing, during the term of this Agreement. 4. Territory. Innovo shall have the right to distribute Products throughout the United States and, to the extent allowed by reference to individual license agreements through which AP controls the trademarks and copyrights, additional countries throughout the European Union Territory. Innovo shall not distribute, or manufacture for distribution, Products outside the Territory. 5. Method and Place of Delivery. With regard to retail Sales, Innovo, as manufacturer/distributor, shall be responsible for negotiating terms for delivery and the payment thereof with each retailer. In a Sale to AP, AP shall be responsible for all shipping and delivery charges. 6. Allocation of Risk. All risks arising under this Agreement with respect to any casualty to the goods in a Sale to AP as defined herein are to be borne by the titleholder of the goods. Once title passes, as defined by the terms of each sale, risk passes therewith. Allocation of risk in a Retail Sale made by Innovo shall be negotiated between Innovo and the retailer as described in paragraph 4 above. 7. Right of Inspection. For each driver, AP shall have the right to inspect each new Product, including new designs of existing product (New Product), and any and all artwork including, but not limited to advertisements, packaging and promotion materials (Artwork) pertaining to said New Product. Within ten (10) days of receipt, AP shall approve or disapprove of said New Product and Artwork. Grounds for disapproval include, but are not limited to, failure of any New Product to meet AP's production specification requirements or failure of any Artwork to meet the stated artistic requirements of AP. AP shall specify in detail the basis of any disapproval. In the event that AP disapproves of any New Product or Artwork, Innovo shall promptly work to modify such submittal to conform to the requirements of AP and shall resubmit such New Product or Artwork for review and approval of AP. Innovo shall not manufacture, distribute, market, sell or use New Product or Artwork prior to approval by AP. AP shall not unreasonably withhold approval of New Product or Artwork. Unreasonable delay in approval or disapproval of New Product or Artwork by AP shall constitute approval of the New Product submission provided Innovo gives AP ten (10) days written notice of its intent to deem delay as constituting an approval. Notwithstanding the preceding paragraph, Innovo acknowledges that, in accordance with the terms and conditions of their license agreements, AP is obligated to provide samples, in certain cases pre-production samples as well as production samples (Samples), of any and all New Product and Artwork to the impacted licensors (Impacted Licensors) for their review and approval. AP shall be allowed a reasonable period of time, as determined by reference to the individual agreements with Impacted Licensors, to obtain the requisite approval of Impacted Licensors, in addition to the ten (10) days provided for in the preceding paragraph for AP to review and approve said New Product and Artwork on its own behalf. Innovo shall provide, at no additional cost to AP, two (2) Samples of any and all New Product and Artwork in addition to the number of said New Product and Artwork that AP is required to provide to the Impacted Licensors. If through best efforts AP fails to obtain approval of New Product or Artwork from the Impacted Licensors, Innovo agrees to work with AP to modify such submittal to conform to the requirements of the Impacted Licensors. In the even any Impacted Licensor disapproves of any New Product or Artwork, Innovo shall not manufacture, distribute, market, sell or use said New Product of Artwork in any capacity whatsoever. At the request of any Impacted Licensor, Innovo shall destroy or turn over to AP any disapproved New Product or Artwork. AP shall be responsible for informing Innovo within seven (7) working days of any and all approvals, disapprovals or other instruction received from Impacted Licensors relating to New Product or Artwork. 8. Terms of Payment. Within seven (7) days of the end of each month, Innovo agrees to issue one purchase order to AP representing all Retail Sales and inventory increases of AP items during such period. With regard to Retail Sales, Innovo shall make payment, within thirty (30) days of the issuance of a purchase order, to AP for the Reimbursement to AP specified in Exhibit A, attached hereto. With regard to all Sales to AP, other than Fan Fueler or any successor thereof, AP shall make payment, within thirty (30) days of shipment, to Innovo at the price established in Exhibit B attached hereto. 9. Possible Price Modification. The prices contained in Exhibit A may be adjusted by Innovo upon thirty (30) days notice to AP. In the event that AP does not agree to any price adjustment, Innovo shall cease to be the exclusive manufacturer of said Product and AP shall be entitled to seek any and all alternative means necessary for the manufacture of said Product. 10. Cancellation of Purchase Orders. In the event that Any AP purchase order is canceled, AP hereby agrees to purchase the Product manufactured by Innovo at the prevailing price at which Innovo is selling the Product to AP at the time of cancellation (a Sale to AP). Innovo agrees to use all efforts to minimize costs to AP in the event of a canceled AP Sale. 11. Duration of Contract. Except in the case of Termination of this Agreement as defined in 16, this Agreement shall continue in effect for a period of three (3) years from the date of the execution of this Agreement (Initial Term). If Innovo is not then in default under this Agreement at the end of the Initial Term, Innovo shall have the right of first refusal to negotiate for the extension of the Agreement, on a year-to-year basis (Extension). Upon Innovo's exercise of its right(s) of first refusal, the parties hereto shall use their best efforts to negotiate in good faith any modification or amendments that may be reasonably necessary to continue the parties' rights and obligations under the Agreement. In the event that Innovo desires to exercise its right(s) of first refusal, it shall do so by providing written notice to AP at any time prior to sixty (60) days before the expiration of the Initial Term or Extension, as the case may be. If Innovo is in default under the terms of the Agreement at the end of any Extension, Innovo shall forfeit its rights of first refusal for future Extensions and any Extensions agreed to for future years shall be null and void. 12. Marketing. Innovo is authorized to enter into agreements with retailers relating to the Products identified in this Agreement. Innovo will use its best efforts to sell Products to retailers. 13. Product Warranty Policies. a. Innovo's Products are sold to retailers and AP at prices that contemplate that such Products are free from defects in manufacture and workmanship at the time of sale. In the event that any Product is defective at the time of sale, neither AP nor any retailer shall be under any obligation to purchase said Product unless Innovo, at Innovo's cost, cures any and all defects. With regard to sales to AP, Innovo and AP shall work together, in good faith, to determine whether any Product is defective. With regard to Retail Sales, Innovo and the retailer shall work together, in good faith to determine whether any product is defective. To the extent any Product does not meet AP's production specification requirements or stated artistic requirements, upon proof to Innovo's satisfaction of the defect, that Product shall be deemed defective. b. For any and all defective Product claims or demands made against AP, Innovo agrees to protect AP and hold AP harmless from any loss or claim arising out of inherent defects in any of Innovo's Product existing at the time such Product is sold by Innovo or any retailer. AP and Innovo shall give each other immediate notice of any such loss or claim and cooperate fully with each other in the handling thereof. AP agrees to protect Innovo and hold Innovo harmless for any loss or claim arising out of negligence of AP or AP's agents. 14. Tooling. All tools or molds created by Innovo exclusively to produce the Products referenced herein for AP will be detailed in AP's purchase orders and the cost of said tools/molds will be billed to AP. Once purchased by AP, AP will own the tools and molds, but allow Innovo to use the tools and molds in the manufacture and production of the Product. Other tools or molds may follow and may be specifically added by agreement of the parties to this Agreement by way of addendum from time to time. Tools or molds used by Innovo in the production of AP's Products which are not used exclusively for AP's Products will not be billed to AP and will not become the possession of AP. For any and all tools built exclusively for and billed to AP, Innovo shall at no later time use said tools on a non-exclusive basis without prior permission from AP. 15. Order Processing and Shipment Policies. Innovo shall use best efforts to meet its delivery commitments with regard to Retail Sales and shall at all times conduct its business in a manner which enhances the reputation of AP and Fan Fueler in the marketplace. In order to meet these commitments, Innovo shall build and maintain within the United States, inventory in amounts reasonably expected to meet the needs of its customers, including AP (hereinafter Inventory on Hand). Innovo will employ its best efforts to fill AP's orders promptly on acceptance, but reserves the right to allow Inventory on Hand as it deems best. However, to the extent that AP's orders of Product identified in 3 of this Agreement cannot be fulfilled with Inventory on Hand, Innovo commits to manufacturing or, upon written approval of AP, effecting the manufacturing of said product in quantities sufficient to fulfill AP's orders prior to producing additional amounts of the same Product or Products for purposes of Retail Sales. Innovo warrants that it shall use best efforts to fulfill AP's orders within (I) four weeks to the extent that sufficient quantities of Inventory on Hand exist to fulfill said orders, or (ii) seventy-five days to the extent that fulfillment of said orders specially require overseas production of Products. Notwithstanding the preceding sentence, Innovo shall not be liable for failure to ship Innovo's Products specified in the accepted order because of strikes, differences with workers, inability to secure transportation facilities or other circumstances beyond its control. AP shall not be liable for failure to accept shipments of Products ordered from Innovo when such failure is due to strikes, or any other cause beyond AP's control, provided Innovo receives notice in writing to suspend such shipments prior to delivery to carrier. 16. Termination. The following provisions shall govern the termination of this Agreement: a. The parties may terminate this Agreement by mutual written agreement. b. If Innovo becomes unable to pay its debts as they become due, or if Innovo files or has filed against it a petition in bankruptcy, reorganization or for the adoption of an arrangement under any present or future bankruptcy, reorganization or similar law (which petition, if filed against Innovo, is not dismissed within 30 days after the filing date), or if a receiver, trustee, liquidator or sequestrator of all or substantially all of Innovo's property is Appointed, or if Innovo discontinues its business, this Agreement automatically shall terminate forthwith upon written notice to Innovo. c. If Innovo or AP fail to meet the terms of payment outlined in Section 8 and continue to fail to render such payment then due during the 20 business days immediately following written notice of such default, Innovo or AP, as the case may be, may terminate this Agreement upon final written notice to the other party. d. If Innovo's business is sold or transferred by operation of law or otherwise, and if there is a substantial change in Innovo's management, AP in its sole and absolute discretion, shall have the right, upon written notice to Innovo, to convert this Agreement to a non-exclusive manufacturing and distribution agreement having a yearly term cancelable by AP upon written notice given at least 30 days prior to the end of each calendar year. e. If (A) Innovo (I) manufactures, offers to sell, sells, distributes or otherwise disposes of articles in any way utilizing any of the Products which are not Approved as provided herein; (ii) registers or attempts to register any claim to copyright, trademark, service mark, design patent or any other right in or to any element of the Products; (iii) fails to obtain or maintain insurance coverage as required hereunder; or (iv) materially breaches the terms and conditions of this Agreement in any manner, and (B) Innovo fails to cure any such condition within 30 days written notice of the occurrence thereof from AP, AP may terminate this Agreement upon written notice to Innovo. f. Upon termination of this Agreement, AP shall purchase from Innovo all new, current, unused and saleable Product, exclusive of parts, on hand or in transit that may have been delivered to AP under this Agreement which are represented on a current or forthcoming purchase order. The price to be paid by AP shall be controlled by the prevailing price in a Sale to AP at the time of termination, plus transportation costs previously paid or incurred by Innovo, and less any cash or other discounts that may have been allowed or paid by AP. Innovo may dispose of any other remaining Product through its retail distribution channels. g. Innovo shall not accept any purchase orders for the sale of any Products covered by this Agreement after the termination or expiration of the distributorship created by this Agreement, unless Products have previously been manufactured. However, purchase orders received prior to termination of this Agreement may be fulfilled after said termination and shall be governed in the same manner as are ordinary purchase orders placed with Innovo pursuant to this Agreement. 17. Notice of Changes or Cancellations. AP agrees to notify Innovo of any driver changes, cancellations or any other changes which may have any affect on Innovo's production, sales, marketing or distribution of any of the products which are or shall be the subject of this Agreement. Said notice shall be given to Innovo no later than sixty (60) days prior to the close of each calendar year. 18. Insurance. Innovo and AP, each at its sole cost, will obtain and maintain throughout the Initial Term and extensions, and will provide the Other Party (hereinafter defined) written evidence from the insurance carrier of commercial general liability insurance including broad form coverage for contractual liability, products liability and personal injury (including bodily injury and death), and advertiser's liability insurance, each from a legally qualified insurance company reasonably acceptable to the Other Party; (1) in an amount, with respect to the Products Liability Insurance, not less than $2,000,000 combined single limited for each single occurrence and with a deductible no greater than $10,000; (2) in an amount, with respect to the other general liability insurance, no less than $1,000,000/$3,000,000 with a deductible no greater than $10,000; (3) naming the Other Party (and its designees from time to time) as an additional insured and requesting that each such insurance company shall waive any rights of subrogation against the Other Party (and its designees from time to time); (4) non-cancelable except on 30 days prior written notice to the Other Party and only if replaced so that there is no lapse in coverage as required herein; (5) providing that such insurance shall be primary insurance notwithstanding the existence or coverage of any other policy of insurance maintained by the Other Party or by any other insured or third party; (6) as proof of such insurance, fully paid certificates of insurance shall be submitted to the Other Party for their prior written approval before any product is distributed or sold, not later than thirty (30) days after the date of this Agreement. Each such certificate shall provide for no less than thirty (30) days prior written notice to the Other Party of any lapse, cancellation or termination of such insurance, and any proposed change in any certificate of insurance shall be submitted to the Other Party for its prior written approval. For purposes of this section, the term "Other Party shall, in the case of Innovo, mean AP and, in the case of AP, mean Innovo. 19. Entire Agreement. This Agreement constitutes the entire agreement between the parties pertaining to the subject matter contained in it and supersedes all prior and contemporaneous agreements, representations and understandings of the parties. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by all the parties to this Agreement. No waiver of any of the provisions of this Agreement shall be deemed, or shall constitute, a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. No waiver shall be binding unless executed in writing by the party making the waiver. 20. Notices. All notices and other communications hereunder shall be in writing and shall be delivered personally or shall be sent by registered mail, certified mail, or express mail service, postage prepaid and return receipt requested, or by nationally utilized over night delivery service, addressed to the parties as follows: As to Innovo: Innovo, Inc. 1808 N. Cherry St. Knoxville, TN 37917 As to AP: Action Performance Companies, Inc. Attn: Paul Oursler 4707 E. Baseline Road Phoenix, AZ 85040 21. Severability and Operation of Law If any provision of this Agreement is prohibited by the laws of any jurisdiction as those laws Apply to this Agreement, that provision is ineffective to the extent of such prohibition and/or is modified to conform with such laws, without invalidating the remaining provisions hereto. Any such prohibition in any jurisdiction shall not invalidate such provision in any other jurisdiction. 22. Attorney Fees. If any legal action or other proceeding is brought for the enforcement of this Agreement, or because of an alleged dispute, breach, default or misrepresentation in connection with any of the provisions of this Agreement, the successful or prevailing party or parties shall be entitled to recover reasonable attorney fees and other costs incurred in that AP or proceeding, in addition to any other relief to which it may be entitled. 23. Indemnification. a. Indemnification of AP: Innovo shall indemnify and hold harmless AP and any of its affiliates, shareholders, agents, employees or directors and Innovo hereby indemnifies and holds harmless AP from and against all damages, claims, losses, expenses, costs, obligations and liabilities, including, without limitation, liabilities for attorney's fees (hereinafter collectively referred to as Loss and Expense) suffered or incurred by AP directly or indirectly as a result of (I) subject to the exception noted in subparagraph (b)(ii), any injury to or death or any person or persons directly or indirectly arising out of or resulting from any goods or services manufactured, finished, distributed, sold or offered by Innovo, its employees, agents or representatives (ii) any damage to or loss of any property directly or indirectly arising out of or resulting from any goods or services manufactured, finished, distributed, sold or offered by Innovo, its employees, agents or representatives (iii) any injury or loss to AP resulting from violation of any of its license agreement directly or indirectly arising out of or resulting from any goods or services manufactured, finished, distributed, sold or offered by Innovo, its employees, agents or representatives, which are not approved by AP pursuant to Section 7 of this Agreement. b. Indemnification of Innovo: AP shall indemnify and hold harmless Innovo and any of its affiliates, partners, shareholders, agents, employees or directors and AP hereby indemnifies and holds harmless Innovo from and against any Loss and Expense suffered or incurred by Innovo directly or indirectly as a result of any person making a claim for (I) any injury or damage arising out of false advertising, trademark or copyright infringement arising out of Innovo's manufacture, distribution, marketing, sale or use of any product and any and all related Artwork so long as said products and Artwork are approved by AP in the manner set forth in Section 7 of this Agreement (ii) any physical injury or death of any officer, agent or employee of AP, arising out of or in connection with products to be provided under this Agreement so long as said injury or death relates to the products to which title has passed to AP, or (iii) any injury or damage arising out of Innovo's use of any tool or mold owned and provided to Innovo by AP which results from defect of said tool or mold. 24. Governing Law, Consent to Jurisdiction, Venue. The parties agree that this Agreement is made under and governed by the laws of Arizona. The parties agree and consent to the jurisdiction of any state or federal court in the State of Arizona over its person in connection with any AP or proceeding brought by either party. The parties also agree that venue for any such AP or proceeding brought by either party shall be proper in Maricopa County, Arizona. Such consent to jurisdiction and acknowledgment of venue shall be in addition to any other jurisdiction or venue available at law. 25. Alterations. Unless otherwise state in this Agreement, this Agreement shall not be terminated, amended or altered except by written documentation signed by all parties hereto. 26. Assignability. Upon written agreement of the parties, this Agreement may be assigned by any of the undersigned parties. Notwithstanding the preceding sentence, either party may, upon written notice to the other party, assign its rights and obligations hereunder, subject to the same terms and conditions, to any wholly owned subsidiary of the party. Notwithstanding the preceding sentence, AP may assign its rights or obligations hereunder to any subsidiary owned one hundred percent (100%) by AP. 27. Counterparts. This Agreement may be executed in any number of counterparts and such counterparts, after execution by all parties hereto shall be treated for all purposes as one instrument. 28. Authority to Bind. Each person executing this Agreement hereby warrants that the person has full and legal authority to execute this agreement for and on behalf of the respective corporation and to bind such corporations. 29. Press Releases. The content of all press releases and other communications relating to this Agreement shall be subject to the mutual agreement of AP and INNOVO, and the existence of this Agreement and the provisions hereof shall not be disclosed to any person except upon the mutual agreement of AP and INNOVO; provided, however, the existence of this Agreement and the provisions hereof and any other information relating to this Agreement may be disclosed by AP or INNOVO without the agreement of the other party (but AP or INNOVO, as the case may be, shall consult with the other party regarding the contents of such disclosure) to the extent determined by AP or INNOVO to be required by applicable securities laws or the rules, regulations and interpretations of the Securities and Exchange Commission or NASDAQ. From and after the date of this Agreement, copies of all disclosures made by AP of INNOVO, as the case may be, with respect to the existence of this Agreement and the provisions hereof shall be furnished to the other party at the time of the disclosure or, if impracticable, promptly thereafter. IN WITNESS WHEREOF, the parties hereto have set their hands and seals on the same day first written above. IN THE PRESENCE OF: INNOVO GROUP, INC. _____________________________ By:_____________________________ _____________________________ Its:____________________________ ACTION PERFORMANCE COMPANIES, INC. _____________________________ By:______________________________ _____________________________ Its:_____________________________ EXHIBIT 10.54 DATE THIS AGREEMENT, made the 6th day of October, 1998 by and between Innovo Group, Inc. MAILING ADDRESS Attn: Mr. Butch Smith, CEO 27 North Main Street Springfield, TN 37172 Telephone (561) 833-1661 (hereinafter called OWNER) and FURROW AUCTION COMPANY, 1022 Elm Street, Knoxville, Tennessee 37921, (423) 546-3206 (hereinafter called AUCTIONEER) witnesseth that it is agreed by and between the parties as follows; OWNER does hereby irrevocably commission AUCTIONEER to sell to the highest bidder(s) the following described property at Absolute Auction, without minimum or reservation, to wit: PROPERTIES Property located at 2425 North Dixie Highway, Lake Worth, Palm Beach County, FL LOCATION said property located at above location said sale to be held at above location DATE and to be sold on or about the 12th day of November, 1998 WARRANTY OF TITLE OWNER warrants to AUCTIONEER that he is the OWNER of the above described property, or that he is authorized by the OWNER thereof to execute this agreement, and further warrants that he has full authority and right to transfer said property free and clear of all liens and encumbrances including, without limitation,unrecorded liens, tax liens, mechanic's and materialman's liens, and claims of creditor under any BULK SALES LAW, except Utility and Roadway rights-of-way, zoning by governmental bodies, and current year property taxes, which will be prorated as of closing, and mortgages as shown on title commitment will so transfer said property to the purchaser thereof when same is sold by AUCTIONEER. Signing of this Agreement authorizes AUCTIONEER to obtain a title search/commitment and provide a title commitment at OWNER'S expense. OWNER further agrees to indemnify and defend AUCTIONEER against, and hold AUCTIONEER harmless from, any and all loss and liability which AUCTIONEER may sustain or incur as a result of a breach of the foregoing warranty, or a failure by OWNER to transfer said property free and clear of liens and claims. AUCTIONEER shall have the right, after receiving his compensation and expenses as provided herein, to use the residue of funds to first pay any bona fide liens necessary to give clear title to property sold. OWNER further agrees to indemnify and defend AUCTIONEER against, and hold AUCTIONEER harmless from, any and all loss and liability which AUCTIONEER may sustain or incur as a result of any misrepresentations and/or warranties made by OWNER to AUCTIONEER. HAZARDOUS WASTE WARRANTY OWNER warrants to AUCTIONEER and any purchaser that neither he (it), nor, to his (its) knowledge any predecessor in title to the property, disposed of or discharged on the property any hazardous waste or substance, as defined by any federal or state law. Further, the OWNER warrants that there are not now located or stored on the property any hazardous wastes or substances, except, Owner will advise (description of hazardous waste or substance), which OWNER warrants will be removed in accordance with law prior to the sale. OWNER authorizes AUCTIONEER to disclose to any potential purchaser of the property the fact of the location and storage of the material on the property, and further agrees to indemnify and defend AUCTIONEER against, and hold AUCTIONEER harmless from, any and all loss and liability which AUCTIONEER may sustain or incur as a result of a breach of the foregoing warranties. PREPARATION FOR SALE OWNER agrees to prepare the property for sale to include all painting, reconditioning, mowing, and repairing at OWNER'S expense. SURVEY OWNER agrees to furnish a current survey of said property at OWNER'S expense. OWNER shall be responsible for the costs of any soil mapping, health department evaluation, and related work, i.e., perk tests, etc.; stakes (large stakes at $2.75/stake; small stakes at $2.25/stake); parcel signs at $7.50 each. TITLES OWNER agrees to furnish deeds of title for all properties sold in this sale. MARKETING OWNER agrees to pay the cost of advertising and promotion of this sale in the amount of $24,405.01 (PER ATTACHED SCHEDULE "A") and, OWNER agrees to pay all other expenses as shown on Schedule "A", which shall be billed at AUCTIONEER'S cost which shall be substantiated by paid receipts. AUCTIONEER agrees to promote the attendance of the best buyers for this sale. SALE LOCATION OWNER agrees to furnish a location on which the auction sale can be conducted at OWNER'S expense. Toilet facilities and refreshments are available upon OWNER'S request and at OWNER'S expense. Tent and chairs will be furnished at OWNER'S expense to include cost of erection, dismantling, and staging not to exceed $ at cost per tent to be paid in full at closing of the property. PAYMENT OF AUCTIONEER'S FEE AND EXPENSES OWNER hereby grants to the AUCTIONEER a first position security interest in all proceeds of any sale conducted by the AUCTIONEER to secure the payment of all expenses incurred by the AUCTIONEER pursuant to this agreement, and to secure the payment of all commissions earned by the AUCTIONEER under this agreement. In the event proceeds do not exceed commissions and expenses, OWNER agrees to reimburse AUCTIONEER in full. OWNER agrees to reimburse AUCTIONEER for sale day staff in the amount of $ @ cost to be paid in full at closing of the property. COMMISSIONS For and in consideration of AUCTIONEER'S service in selling said property, OWNER agrees to pay to AUCTIONEER'S the following commissions, to wit: 10(see special conditions) % on the TOTAL GROSS SALES PRICE of all property sold during the period covered by this contract to be paid in full at the closing of the property. This constitutes an exclusive contract to sell and receive commission on the listed property from date until sold. CONTINUING AGENCY TO SELL In the event the auction sale is not confirmed by OWNER, or for any reason the sale is not closed, AUCTIONEER shall be granted an exclusive 90-day listing in which to continue to offer the property for sale under the same terms and conditions as herein described at mutually agreeable prices. BREACH OF AGREEMENT This contract is irrevocable and OWNER cannot remove any item from said sale without the express consent of AUCTIONEER. In the event such consent be given, OWNER agrees to pay to AUCTIONEER 10 % of the fair market value of the items withdrawn, as liquidated damages, and agrees that said sum is a fair amount to be paid to AUCTIONEER for the breach of this agreement by OWNER. It is further agreed that AUCTIONEER may institute suit to enforce the performance of such damages heretofore set out, together with reasonable attorney's fees. The intent of this paragraph is to make AUCTIONEER the EXCLUSIVE AGENT for the OWNER, and all transactions regarding these properties prior to the said sale will be conducted by and through AUCTIONEER. OWNER further agrees that should AUCTIONEER'S consent be given that OWNER will provide AUCTIONEER a letter stating that OWNER will indemnify and hold AUCTIONEER harmless from any and all claims arising out of the removal of these items from said sale. CANCELLATION In the event the auction is canceled for any reason ohter than sale of property to third parties, OWNER shall reimburse AUCTIONEER for all expenses as outlined, in addition to all out-of-pocket personnel expenses associated with this auction. OWNER shall also pay AUCTIONEER a cancellation fee of $ to be determined .OWNER further agrees to indemnify AUCTIONEER against any and all claims which may arise due to cancellation. CLOSING AND SETTLEMENT All checks shall be drawn payable to Furrow Auction Company, Escrow Account who shall collect all checks and accounts. Settlement shall be made within twenty (20) days after sale with respect to all checks and other items collected at that time. Final settlement shall not be made until all outstanding checks and other items have been finally settled. Closing to be conducted by title company and Buyer to incur one-half of title company's closing fee. AUCTIONEER'S fees,expenses, and commissions shall be paid in full at closing. In the event the property does not sell and/or does not close, all aforementioned fees shall be paid in full to AUCTIONEER within twenty (20) days of said sale. RISK OF LOSS AUCTIONEER agrees to exercise due care in the protection of said property while same is under the provisions of this contract. The risk of fire, damage, and other loss prior to the delivery to the purchaser thereof shall be with OWNER and OWNER agrees to obtain insurance or self-insure therefor, and to hold AUCTIONEER harmless for any such loss. SPECIAL CONDITIONS RE: Commission: Auctioneer shall pay listing co-broker a 3% commission from the sale of these assets by auction. OWNER'S ACCEPTANCE If fewer than all OWNERS of the Premises have executed this Agreement, those OWNERs whose signatures appear below warrant full authority to act for any other OWNERS, accept personal responsibility and obligate themselves to pay all sale or lease commissions due AUCTIONEER. This Agreement shall be binding upon and inure to the benefit of AUCTIONEER and OWNER and their respective heirs, successors, assigns, executors and/or administrators. This Agreement applies to all or any parts of the Premises. If not executed, the terms and conditions of this contract are void after thirty (30) days. SIGNATURES IN TESTIMONY WHEREOF the parties hereto have caused this instrument to be executed on the day and year first above written. OWNER: FURROW AUCTION COMPANY ____________________________ 1022 Elm Street Knoxville, Tennessee 37921 (423) 546-3206 by________________________________ Title_____________________________ by______________________________ by_______________________________ Title_____________________________ Title_______________________________ EXHIBIT 10.55 DATE THIS AGREEMENT, made the 6th day of October, 1998 by and between Innovo Group, Inc. MAILING ADDRESS Attn: Mr. Butch Smith, CEO 27 North Main Street Springfield, TN 37172 Telephone (561) 833-1661 (hereinafter called OWNER) and FURROW AUCTION COMPANY, 1022 Elm Street, Knoxville, Tennessee 37921, (423) 546-3206 (hereinafter called AUCTIONEER) witnesseth that it is agreed by and between the parties as follows; OWNER does hereby irrevocably commission AUCTIONEER to sell to the highest bidder(s) the following described property at Absolute Auction, without minimum or reservation, to wit: PROPERTIES Property located in J. Dixie Harn Industrial Park, Pembroke, Bryan County, GA LOCATION said property located at above location said sale to be held at above location DATE and to be sold on or about the 11th day of November, 1998 WARRANTY OF TITLE OWNER warrants to AUCTIONEER that he is the OWNER of the above described property, or that he is authorized by the OWNER thereof to execute this agreement, and further warrants that he has full authority and right to transfer said property free and clear of all liens and encumbrances including, without limitation,unrecorded liens, tax liens, mechanic's and materialman's liens, and claims of creditor under any BULK SALES LAW, except Utility and Roadway rights-of-way, zoning by governmental bodies, and current year property taxes, which will be prorated as of closing, and mortgages as shown on title commitment will so transfer said property to the purchaser thereof when same is sold by AUCTIONEER. Signing of this Agreement authorizes AUCTIONEER to obtain a title search/commitment and provide a title commitment at OWNER'S expense. OWNER further agrees to indemnify and defend AUCTIONEER against, and hold AUCTIONEER harmless from, any and all loss and liability which AUCTIONEER may sustain or incur as a result of a breach of the foregoing warranty, or a failure by OWNER to transfer said property free and clear of liens and claims. AUCTIONEER shall have the right, after receiving his compensation and expenses as provided herein, to use the residue of funds to first pay any bona fide liens necessary to give clear title to property sold. OWNER further agrees to indemnify and defend AUCTIONEER against, and hold AUCTIONEER harmless from, any and all loss and liability which AUCTIONEER may sustain or incur as a result of any misrepresentations and/or warranties made by OWNER to AUCTIONEER. HAZARDOUS WASTE WARRANTY OWNER warrants to AUCTIONEER and any purchaser that neither he (it), nor, to his (its) knowledge any predecessor in title to the property, disposed of or discharged on the property any hazardous waste or substance, as defined by any federal or state law. Further, the OWNER warrants that there are not now located or stored on the property any hazardous wastes or substances, except, Owner will advise (description of hazardous waste or substance), which OWNER warrants will be removed in accordance with law prior to the sale. OWNER authorizes AUCTIONEER to disclose to any potential purchaser of the property the fact of the location and storage of the material on the property, and further agrees to indemnify and defend AUCTIONEER against, and hold AUCTIONEER harmless from, any and all loss and liability which AUCTIONEER may sustain or incur as a result of a breach of the foregoing warranties. PREPARATION FOR SALE OWNER agrees to prepare the property for sale to include all painting, reconditioning, mowing, and repairing at OWNER'S expense. SURVEY OWNER agrees to furnish a current survey of said property at OWNER'S expense. OWNER shall be responsible for the costs of any soil mapping, health department evaluation, and related work, i.e., perk tests, etc.; stakes (large stakes at $2.75/stake; small stakes at $2.25/stake); parcel signs at $7.50 each. TITLES OWNER agrees to furnish deeds of title for all properties sold in this sale. MARKETING OWNER agrees to pay the cost of advertising and promotion of this sale in the amount of $9,078.63 (PER ATTACHED SCHEDULE "A") and, OWNER agrees to pay all other expenses as shown on Schedule "A", which shall be billed at AUCTIONEER'S cost which shall be substantiated by paid receipts. AUCTIONEER agrees to promote the attendance of the best buyers for this sale. SALE LOCATION OWNER agrees to furnish a location on which the auction sale can be conducted at OWNER'S expense. Toilet facilities and refreshments are available upon OWNER'S request and at OWNER'S expense. Tent and chairs will be furnished at OWNER'S expense to include cost of erection, dismantling, and staging not to exceed $ at cost per tent to be paid in full at closing of the property. PAYMENT OF AUCTIONEER'S FEE AND EXPENSES OWNER hereby grants to the AUCTIONEER a first position security interest in all proceeds of any sale conducted by the AUCTIONEER to secure the payment of all expenses incurred by the AUCTIONEER pursuant to this agreement, and to secure the payment of all commissions earned by the AUCTIONEER under this agreement. In the event proceeds do not exceed commissions and expenses, OWNER agrees to reimburse AUCTIONEER in full. OWNER agrees to reimburse AUCTIONEER for sale day staff in the amount of $ @ cost to be paid in full at closing of the property. COMMISSIONS For and in consideration of AUCTIONEER'S service in selling said property, OWNER agrees to pay to AUCTIONEER'S the following commissions, to wit: 6% Buyer's Premium to be paid by Buyer (see special conditions) on the TOTAL GROSS SALES PRICE of all property sold during the period covered by this contract to be paid in full at the closing of the property. This constitutes an exclusive contract to sell and receive commission on the listed property from date until sold. CONTINUING AGENCY TO SELL In the event the auction sale is not confirmed by OWNER, or for any reason the sale is not closed, AUCTIONEER shall be granted an exclusive 90- day listing in which to continue to offer the property for sale under the same terms and conditions as herein described at mutually agreeable prices. BREACH OF AGREEMENT This contract is irrevocable and OWNER cannot remove any item from said sale without the express consent of AUCTIONEER. In the event such consent be given, OWNER agrees to pay to AUCTIONEER 10 % of the fair market value of the items withdrawn, as liquidated damages, and agrees that said sum is a fair amount to be paid to AUCTIONEER for the breach of this agreement by OWNER. It is further agreed that AUCTIONEER may institute suit to enforce the performance of such damages heretofore set out, together with reasonable attorney's fees. The intent of this paragraph is to make AUCTIONEER the EXCLUSIVE AGENT for the OWNER, and all transactions regarding these properties prior to the said sale will be conducted by and through AUCTIONEER. OWNER further agrees that should AUCTIONEER'S consent be given that OWNER will provide AUCTIONEER a letter stating that OWNER will indemnify and hold AUCTIONEER harmless from any and all claims arising out of the removal of these items from said sale. CANCELLATION In the event the auction is canceled for any reason other than sale of property to third parties, OWNER shall reimburse AUCTIONEER for all expenses as outlined, in addition to all out-of-pocket personnel expenses associated with this auction. OWNER shall also pay AUCTIONEER a cancellation fee of $ to be determined. OWNER further agrees to indemnify AUCTIONEER against any and all claims which may arise due to cancellation. CLOSING AND SETTLEMENT All checks shall be drawn payable to Furrow Auction Company, Escrow Account who shall collect all checks and accounts. Settlement shall be made within twenty (20) days after sale with respect to all checks and other items collected at that time. Final settlement shall not be made until all outstanding checks and other items have been finally settled. Closing to be conducted by title company and Buyer to incur one- half of title company's closing fee. AUCTIONEER'S fees,expenses, and commissions shall be paid in full at closing. In the event the property does not sell and/or does not close, all aforementioned fees shall be paid in full to AUCTIONEER within twenty (20) days of said sale. RISK OF LOSS AUCTIONEER agrees to exercise due care in the protection of said property while same is under the provisions of this contract. The risk of fire, damage, and other loss prior to the delivery to the purchaser thereof shall be with OWNER and OWNER agrees to obtain insurance or self-insure therefor, and to hold AUCTIONEER harmless for any such loss. SPECIAL CONDITIONS RE: Commission: Auctioneer shall pay a 2% commission from the sale of these assets at auction to any qualified broker whose buyer is the high bidder and consummates the sale. OWNER'S ACCEPTANCE If fewer than all OWNERS of the Premises have executed this Agreement, those OWNERs whose signatures appear below warrant full authority to act for any other OWNERS, accept personal responsibility and obligate themselves to pay all sale or lease commissions due AUCTIONEER. This Agreement shall be binding upon and inure to the benefit of AUCTIONEER and OWNER and their respective heirs, successors, assigns, executors and/or administrators. This Agreement applies to all or any parts of the Premises. If not executed, the terms and conditions of this contract are void after thirty (30) days. SIGNATURES IN TESTIMONY WHEREOF the parties hereto have caused this instrument to be executed on the day and year first above written. OWNER: FURROW AUCTION COMPANY ______________________ 1022 Elm Street Knoxville, Tennessee 37921 (423)546-3206 by____________________ Title_______________________ by__________________________ by____________________ Title___________________ Title_______________________ EXHIBIT 10.56 Brown & Livingston, P.C. 26 North Main Street Statesboro, GA 30458 GEORGIA, BRYAN COUNTY WARRANTY DEED THIS INDENTURE, made this 15th day of December, in the year One Thousand Nine Hundred Ninety-eight, between THIMBLE SQUARE, INC., a Georgia corporation, as party of the first part, hereinafter called Grantor, and H.N. PROPERTIES, L.L.C., a Georgia limited liability company, as party of the second part, hereinafter called Grantee (the words Grantor and Grantee to include their respective heirs, successors and assigns where the context requires or permits.) WITNESSETH that: Grantor, for and in consideration of the sum of ONE HUNDRED FORTY FIVE THOUSAND SEVEN HUNDRED FIFTY ($145,750.00) DOLLARS and other valuable consideration in hand paid at and before the sealing and delivery of these presents, the receipt whereof is hereby acknowledged, has granted, bargained, sold aliened, conveyed and confirmed, and by these presents does grant, bargain, sell, alien, convey and confirm unto the said Grantee, all of the following described property, to wit: All that certain tract or parcel of land lying and being in the 19th G.M. District of Bryan County, and in the City of Pembroke, containing 8.24 acres, as depicted on a plat prepared for Thimble Square, Inc., Furrow Auction Company (Agent), by Eason Land Surveying, dated October 28, 1998, recorded in Plat Book ____, Page _____, Bryan County Records, which tract is located at the northeast corner of intersection of South Industrial Blvd. and West Industrial Blvd. and fronts westerly on South Industrial Blvd. Said tract is bound now or formerly as follows: North by Property of Bryan County Industrial Authority Road a distance of 500.97'; East by Pembroke Steel Company a distance of 717.26'; South by West Industrial Blvd. a distance of 500.00'; and West by South Industrial Blvd. a distance of 717.00'. The aforesaid plat and the description thereon are by reference incorporated herein and made a part of this description. THIS PROPERTY IS SOLD AS IS, AS INSPECTED" CONDITION WITH NO WARRANTIES EITHER IMPLIED OR EXPRESS EXCEPT WARRANTY OF TITLE. TO HAVE AND TO HOLD the said tract or parcel of land, with all and singular the rights, members and appurtenances thereof, to the same being, belonging, or in anywise appertaining, to the only proper use, benefit and behoof of the said Grantee forever in FEE SIMPLE. AND THE SAID Grantor will warrant and forever defend the right and title to the above described property unto the said Grantee against the claims of all person whomsoever. IN WITNESS WHEREOF, the Grantor has signed and sealed this deed, the day and year above written. THIMBLE SQUARE, INC. BY:________________________SEAL ATTEST:____________________SEAL Signed, sealed and delivered in the presence of: ____________________________Witness ____________________________Notary EXHIBIT 10.57 WAREHOUSE LEASE AGREEMENT THIS WAREHOUSE LEASE AGREEMENT is made and entered into this _____ day of ________________, 1998, by and between FURROW-HOLROB DEVELOPMENT II, LLC, a Tennessee limited liability company (referred to as "Landlord"), and INNOVO GROUP, INC., a Delaware corporation (referred to as "Tenant"). W I T N E S S E T H: 1. Premises: Landlord hereby leases to Tenant, and Tenant leases and accepts, the Premises containing approximately 78,900 square feet of warehouse space with such warehouse space outlined and designated on the site plan attached hereto as Exhibit A which is incorporated herein by reference (such space is referred to collectively hereinafter as the "Leased Premises"). The Leased Premises are part of the approximately 300,000 square foot warehouse complex (which includes the warehouse space shown on the att 2. Term: The original term of this Lease shall be for a period of five (5) year (the "Base Term") from the Commencement Date hereinafter provided unless sooner terminated hereby. Said term, and Tenant's obligation to pay rent, shall commence on the earlier of the following days (referred to as "Commencement Date"): (a) the date which is thirty (30) days after Tenant has been notified in writing by Landlord that the Leased Premises are ready for occupancy, or (b) the date on which Tenant shall open the Lea 3. Minimum Rent: Tenant shall pay to the Landlord as minimum rent an annual amount equal to $2.00 times the total square footage of the Leased Premises (the "Minimum Rent"). All Minimum Rent shall be paid in advance in equal monthly installments on the first day of each month at the address of the Landlord stated herein without demand, setoff or deduction. Minimum Rent for any partial months shall be prorated. 4. Pro-rata Share of Real Estate Taxes, Insurance Premiums and Maintenance Expenses: Tenant shall remit to Landlord as additional rent its Pro-Rata Share, as hereinafter defined, multiplied by the Real Estate Taxes, Insurance Premiums, and Common Expenses incurred by the Landlord in connection with the operation of the Project. Tenant's "Pro-Rata Share" shall be a fraction, (i) the numerator of which shall be the number of square feet of the Warehouse leased by Tenant and (ii) the denominator of which sha The term "Real Estate Taxes" shall mean all taxes and assessments (special or otherwise) levied or assessed against the Project (land, buildings and improvements), and other taxes arising out of the use and/or occupancy of the Project imposed by federal, state or local governmental authority or any other taxing authority having jurisdiction over the Project (including expenses directly incurred by Landlord in contesting the validity of, in seeking a reduction in, or seeking to prevent an increase in any such tax(es) or assessment(s)), but shall exclude franchise, capital stock, estate or inheritance taxes personal in nature to Landlord. In addition to Tenant's proportionate share of Real Estate Taxes, Tenant shall pay any and all sales, excise, gross receipts and other taxes (not including, however, Landlord's income taxes) levied, imposed or assessed by the state in which the Project is situated or any political subdivision thereof or other taxing authority (be it federal, state, local or otherwise) upon any amounts payable hereunder. The term "Insurance Premiums" shall mean the premiums charged for fire and extended coverage insurance on the Warehouse and the improvements constructed as part of the Leased Premises and/or installed by the Landlord in the Leased Premises and for rent insurance thereon, together with premiums charged for liability insurance on the common areas in the Project, and any other reasonable insurance costs related to the Project and incurred in the normal course of business. The term "Common Expenses" shall mean the total cost and expense incurred in operating, maintaining, cleaning and repairing the Common Areas and the Warehouse including, without limitation, utilities, landscaping and gardening, maintenance, repair and replacement of the parking lot, line painting, lighting, sanitary control, removal of snow, trash, rubbish and garbage, security and police service, maintenance and repair costs of the plumbing, electrical, sprinkler and HVAC systems in the Project and a reasonable sum to cover the administravtive and personnel costs relative to the operation of the said Common Areas. 5. Estimation of Taxes, Insurance and Maintenance Charges: Landlord may, at its option, estimate for each succeeding calendar year the Tenant's Pro-Rata Share of the expenses enumerated in Paragraph 4 hereof (the "Tenant's Estimated Share"), and Landlord may require the Tenant to pay, with each monthly installment of rent for such succeeding calendar year, one- twelfth (1/12) of the Tenant's Estimated Share. Within sixty (60) days after the expiration of such calendar year, the Landlord shall forward to the Tenant an itemized statement showing the Tenant's actual share of such expenses ("Tenant's Actual Share"). Should the Tenant's Actual Share differ from the Tenant's Estimated Share, then, within thirty (30) days after the date of Landlord's itemized statement, either Landlord shall refund to Tenant any amount paid in excess of the Tenant's Actual Share, or Tenant shall remit to Landlord any amount by which the Tenant's Estimated Share was deficient. 6. Triple Net Lease. This Lease is intended to be a "triple net" lease in favor of Landlord and shall be liberally construed to give effect to such intention. All expenses borne by Tenant for partial years at the commencement and end of this Lease shall be appropriately prorated. 7. Tenant's Use and Operation: The Leased Premises shall be used and occupied by Tenant solely as an office, warehouse and light manufacturing facility and for no other use without Landlord's prior written consent. Tenant shall comply with all rules, regulations and laws of any governmental authority or Landlord with respect to use and occupancy of the Leased Premises. 8. Utilities: Tenant shall pay promptly as in when the same shall become due its Pro Rata Share of all water rents, electricity, gas, sewer, heat, sprinkling systems and all other utilities and all taxes or charges on such utility services which are used on or attributable to the Leased Premises. To the extent Landlord provides air conditioning to the Leased Premises, the Landlord may increase the Tenant's Pro Rata Share of the costs of the utilities to reflect the providing of such additional utilities based upon Landlord's good faith estimate of such additional costs. 9. Landlord's Duty to Repair: Landlord shall keep and maintain in good repair the foundation, exterior walls, HVAC and roof of the Warehouse and the structural portions of the Warehouse exclusive of doors, door frames, door checks, windows, and window frames located in exterior building walls. 10. Tenant's Duty to Repair; Alterations: Except for the repairs to be performed by Landlord, Tenant shall keep and maintain in good order, condition and repair the Leased Premises. 11. Hazardous Substances: Tenant shall not generate, store, treat, dispose of, install or otherwise permit any Hazardous Substances on, in, or under or in any way related to the Leased Premises, or any other portion of the Project or cause or permit any such generation, storage, treatment, disposal, installation or other use with respect thereto except in accordance with all laws, rules and regulations. Tenant shall fully indemnify and hold Landlord harmless from any liability, damage, cost or expense that Landlord might otherwise suffer from Tenant's failure to fully comply with this provision. This indemnity shall survive expiration or other termination of this Lease. As used herein, "Hazardous Substances" means and inlcudes any substances, materials, elements or compounds that are listed as Hazardous Substances on any list adopted or maintained by any federal, state or local governmental authority or agency. 12. Surrender of Leased Premises: At the termination of the Base Term or any Option Term, if applicable, the Tenant does agree to deliver the Leased Premises in the same condition as received by it on the Commencement Date (subject to the removals hereinafter required), reasonable wear and tear excepted, and shall surrender all keys for the Leased Premises to Landlord at the place then fixed for the payment of rent and shall inform Landlord of all combination locks, safes and vaults, if any, in the Leased Premises. Any items remaining in the Leased Premises on the termination date of this Lease shall be deemed abandoned for all purposes and shall become the property of the Landlord and the latter may dispose of the same without liability of any type or nature. 13. Property of Tenant: Tenant's property on the Leased Premises shall be at the sole risk and hazard of Tenant. Landlord shall not be liable or responsible for any loss of or damage to Tenant or Tenant's property. 14. Waiver of Subrogation: If any property owned by Tenant and located on the Leased Premises is damaged or destroyed by an insured peril, Landlord shall not have any liability to Tenant, nor to any insurer of Tenant, for such damage or destruction. Tenant shall require all policies of risk insurance carried by it on its property on the Leased Premises to contain a provision in and by which the insurer shall waive its rights of subrogation against Landlord. 15. Partial Destruction: If the Leased Premises are partially destroyed by fire or any other casualty (as determined by Landlord), and if two or more years remain on the Base Term or any Option Term, Landlord shall restore or repair the Leased Premises with reasonable diligence. In the event of such restoration or repair, Landlord shall expend such sums as required to repair or restore the Leased Premises to the condition it was in immediately prior to the date of the destruction; provided, Landlord shall not be obligated to expend any sums for repair or replacement of Tenant's property nor shall Landlord be obligated to expend sums in excess of the insurance proceeds received by Landlord as a result of such damage or destruction. A just and proportionate part of the rent payable by Tneant, tot eh extent that such damage or destruction renders the Leased Premises untenantable, shall abate from the date of such damage or destruction until the Leased Premises are repaired. In the event of a loss from fire or other casualty where the terms of this Lease do not require the Landlord to restore or repair the Warehouse, Landlord shall have an election not to rebuild or recondition the Leased Premises, which election shall be exercised by written notice thereof to Tenant, given within sixty (60) days from date of said loss. If Landlord exercises such election, this Lease shall cease and terminate, effective on the date of such loss, and Tenant shall pay the accrued rent up to the date of such loss, or Landlord, if the rent has been paid beyond such date, will refund to Tenant the proportionate part of any such rent prepaid, and thereupon this lease shall become null and void, with no further obligation on the part of either party hereto, even though the building may at a later date be rebuilt, restored or reconditioned. No damage or destruction shall allow Tenant to surrender possession of the Leased Premises, nor affect Tenant's liability for the payment of rent, except as speciaically provided in this Lease. If Landlord is required or elects to repair or rebuild the Leased Premises as herein provided, Landlord's obligation hereunder shall be limited to that work specifically designated herein as being Landlord's responsibility. Tenant shall repair or replace its merchandise, trade fixtures, furnishings, and equipment. 16. Substantial Destruction: If the Leased Premises are substantially destroyed by fire or other casualty (as determined by Landlord), then Landlord shall have the option to terminate this Lease by giving Tenant written notice within sixty (60) days after such destruction, and any unearned rent shall be apportioned and returned to Tenant. If Landlord does not elect to cancel this Lease, then the same shall remain in full force and effect and Landlord shall proceed with all reasonable diligence to repair the Leased Premises. In the event of such restoration or repair, Landlord shall expend such sums as required to repair or restore the building to the condition it was in immediately prior to the date of destruction; provided, Landlord shall not be obligated to expend any sums in excess of the inusrance proceeds received by Landlord as a result of such damage or destruciton. A just and proportionate part of the rent payable by Tenant, to the extent that such damage or destruction renders the Leased Premises untenantable, shall abate from the date of such damage or destruction until the Leased Premises are repaired. 17. Right of Termination: Notwithstanding anything else to the contrary contained in this Lease, Landlord, at its option, may terminate this Lease on thirty (30) days' notice to Tenant given within sixty (60) days after the occurrence of any one of the following: (i) the Leased Premises or the Warehouse shall be damaged or destroyed as a result of an occurrence that is not covered by Landlord's insurance; (ii) the Leased Premises or the Warehouse shall be damaged or destroyed and the cost to repair the same shall amount to more than twenty-five percent (25%) of the cost of replacement thereof; (iii) the Leased Premises shall be damaged or destroyed during the last two (2) years of the Base Term or Option Term, if applicable, or (iv) any or all of the buildings or Common Areaas of the Project are damaged (whether or not the Leased Premises are damaged) to such an extent that, in the sole judment of Landlord, the Warehouse cannot be operated as an economically viable unit. 18. Eminent Domain. If a portion of the Leased Premises shall be taken for public improvements or otherwise under the exercise of the right of eminent domain, and the Leased Premises shall continue to be reasonably suitable for the use which is herein authorized then the rental herein provided shall be reduced from the date of such taking in direct proportion to the reduction in usefulness of the Leased Premises. If the Leased Premises, or a part thereof, sufficient to render the Leased Premises wholly unfit for the use herein authorized shall be condemned or acquired in the exercise of the right of eminent domain, Tenant shall have the right, at Tenant's option, to terminate and cancel this Lease on thirty (30) days' prior written notice to Landlord and Landlord's lender, such notice to be given within sixty (60) days of the date of the taking, and Tenant shall be liable only for rents and other charges accrued and earned to the date of surrender of possession of the Leased Premises to Landlord and for the performance of other obkigations maturing prior to said date. Tenant shall not be entitled to participate in or receive any part of the damages or award which may be paid to or awarded Landlord by reason of a taking except where said award shall provide for moving or other reimbursable expenses for Tenant under applicable statute. 19. Rights of Landlord's Lender: Notwithstanding anything contained herein to the contrary, the obligation of Landlord with respect to repairing or rebuilding the Leased Premises is subject to the prior right of Landlord's lender to receive insurance proceeds as a result of a fire or other casualty, with any obligation of Landlord to be limited to the extent insurance proceeds are received by Landlord for such repair or rebuilding. 20. Quiet Enjoyment: Landlord agrees that, if the Minimum Rent and other expenses required to be paid by Tenant pursuant to the terms of this Lease are being paid in the manner and at the time prescribed and the covenants and obligations of the Tenant are being all and singularly kept, fulfilled and performed, Tenant shall lawfully and peaceably have, hold, possess, use and occupy and enjoy the Leased Premises so long as this Lease remains in force, without hindrance, disturbance or molestation from Landlord, subject to the specific provisions of this Lease. 21. Subordination. Subject to the Tenant's rights of quiet enjoyment as heretofore provided, Tenant hereby subordinates all of its interest under this Lease to the lien of any deed of trust or mortgage now or hereafter in force against the real estate or buildings of which the Leased Premises are a part. 22. Indemnity: Tenant shall indemnify and hold Landlord harmless from and against all and any liability and expense of any kind, including reasonable attorneys' fees, arising from injuries or damages to persons or property in, on or about the Leased Premises arising out of or resulting in any way from any act or omission of Tenant, its agents, invitees, servants and employees, in the use of the Leased Premises. Tenant's property on the Premises shall be at the sole risk and hazard of Tenant. Landlord shall not be liable or responsible for any loss of or damage to Tenant or Tenant's property. Landlord shall indemnify and hold Tenant harmless from and against all and any liability and expense of any kind, including reasonable attorneys' fees, arising from injuries or damages to persons or property in, on or about the Leased Premises arising out of or resulting in any way from any act or omission of Landlord, its agents, invitees, servants and employees, in connection with its ownership of the Leased Premises. 23. Attorneys' Fees and Expenses. If Landlord or Tenant engages legal counsel for the enforcement of any of the terms of this Lease as a result of a default by the other party, whether for suit or other legal services required to secure compliance on the part of Landlord or Tenant, the defaulting party shall pay to the non-defaulting party upon demand said reasonable attorneys' fees and any other reasonable expenses incurred by such non-defaulting party. 24. Tenant Assignment and Subletting: Neither Tenant, any court officer thereof nor any receiver or trustee in bankruptcy shall assign or transfer this lease or any part thereof, or interest therein, or sublet the Leased Premises or any part thereof without Landlord's prior written consent. Tenant shall always remain liable for any default of any assignee, transferee or subtenant. 25. Events of Default and Remedies. The occurrence of any of the following shall be an Event of Default: a. Failure by Tenant to pay in full any rent payment or other sum payable hereunder within ten (10) days of the date such payment is due; b. Failure by Tenant to perform of any of the terms or conditions of this Lease, other than the payment of money, of for a period of thirty (30) days after notice thereof to Tenant by Landlord; c. The abandonment of the Leased Premises as a going business by Tenant for any period exceeding thirty (30) consecutive days, regardless of whether Tenant continues to pay all rent. Upon the occurrence of an Event of Default and exercise of such remedies, Landlord may immediately or at any time thereafter re-enter the Leased Premises and remove all persons and all or any property therefrom by any suitable action or proceedings at law or in equity, or by force or otherwise, without being liable for any prosecution therefor or damages therefrom, and repossess and enjoy the Leased Premises, together with all additions, alterations and improvements. Such re-entry shall not relieve Tenant from the obligation to make the rental payments required by this Lease at any time and in the manner provided herein. Upon such re-entry Landlord may, but shall not be required to, repair, remodel and/or change the character of the Leased Premises as Landlord may see fit, and/or at any time relet the Leased Premises in whole or in part, as the agent of Tenant, or otherwise, in the name of Landlord or of Tenant, as Landlord shall see fit, and Landlord may receive the rents therefor, applying the same first to the payment of such reasonable expenses hereinabove specified in addition to the payment of the rent required hereunder, and fulfillment of the covenants of Tenant herein, Tenant shall pay to Landlord such difference at the end of the each month during the remainder of the term. In attempting to relet the Leased Premises, Landlord shall be the sole judge as to whether or not a proposed tenant is suitable and acceptable. Landlord shall not, by receiving partial payments of rent in arrears, be deemed to have waived any rights herein for non-pyament of rent, or for any other default on the part of Tenant. In addition to all of the remedies grnated Landlord in this respect, Landlord shall also have the right to invoke any remedy allowed at law or equity to enforce Landlord's rights hereunder or any of them, as if re-entry and other remedies were nfot herein provided for. No remedy herein conferred upon or reserved to Landlord is intended to be exclusive of any other available remedy or remedies, but each and every such remedy shall be cumulative, and shall be in addition to every other remedy given under this agreement or now or hereafter existing at law or in equity or by statute. No delay or omission by Landlord to exercise any right or power accruing upon any default of Tenant shall impair any such right or power or shall be construed to be a waiver thereof, but any such right and power may be exercised by Landlord at any time, from time to time and as often as may be deemed expedient. In order to entitle Landlord to exercise any rememdy reserved to it hereunder, it shall not be necessary to give any notice, other than such notice as is expressly required by this agreement. 26. Notices: All notices required or permitted by the terms of this Lease must be given by hand-delivery, by telecopier (confirmed by U.S. Mail delivery) or United States registered or certified mail addressed to Tenant at the Leased Premises or as listed below and addressed to Landlord at: Landlord: FURROW-HOLROB DEVELOPMENT, LLC c/o Holrob Leasing and Management Company 2607 Kingston Pike, Suite 3 Knoxville, Tennessee 37919 Telephone: (423) 637-3770 Telecopier: (423) 637-8217 Tenant: Telephone: (___) Telecopier: (___) The date when such notice shall be deemed to have been given shall be the date when it is deposited in the United States Mail, postage prepaid, in accordance with the provisions of this paragraph. Any address herein specified may be changed from time to time by either party by written notice given to the other party as above provided. 27. Successors: The provisions, covenants and conditions of this Lease shall bind and inure to the benefit of the legal representatives, successors and assigns of each of the parties, except that no assignment or subletting by Tenant without the written consent of Landlord shall vest any right in the assignee or sublessee of Tenant. 28. Governing Law: The Lease shall be governed by, and construed in accordance with, the laws of Tennessee 29. Landlord's Exculpatory Clause: In the event of a breach or default by Landlord of any of its obligations under this Lease, Tenant shall look solely to any right of offset allowed by law against any amounts due hereunder or to the equity of the Landlord in the Leased Premises for the satisfaction of Tenant's remedies, it being understood and agreed that the exculpation of Landlord (and its successors and assigns) shall be absolute. In the event of any sale of such land or interest, or assignment of Landlord's rights under this Lease, Landlord shall be and hereby is released of all obligations of Landlord hereunder. It shall be deemed, without further agreement between the parties or their successors in interest, that the successor to landlord's interest has assumed all obligations of Landlord hereunder. It is specifically understood and agreed that there shall be no personal liability of Landlord in respect to any of the covenants, conditions, or provisions of this Lease. 30. Entire and Binding Agreement: This Lease contains all of the agreements between the parties hereto, and it may not be modified in any manner other than by agreement signed by all parties hereto or their successors in interest. The Tenant hereby covenants and agrees not to disclose or discuss with any third party the provisions, covenants, and conditions of this Lease without the prior written consent of the Landlord. In the event Tenant violates this covenant, Landlord reserves the right to either (i) terminate this Lease, or (ii) revoke any rental or other concessions granted hereunder. 31. Addenda: All addenda and exhibits attached hereto are made a part of this Lease for all purposes. IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the day and date first above written. LANDLORD: FURROW-HOLROB DEVELOPMENT II, LLC By: Name: Robert S. Talbott Title: President TENANT: INNOVO GROUP, INC. By: Name: Title: EXHIBIT 10.58 SALES AND MARKETING AGREEMENT THIS SALES AND MARKETING AGREEMENT (the "Agreement") has been entered into as of the 14th day of January, 1999 (the "Effective Date"), by and between INNOVO GROUP INC. ("Innovo"), a Delaware corporation with principle offices in Knoxville, Tennessee and The Coulver Marketing Group ("Coulver"), a Michigan Limited Liability Company. RECITALS WHEREAS, Innovo desires to enter into the Agreement to obtain the services of Coulver in selling and marketing Innovo's products as specified hereafter; WHEREAS, the financial relationship between Coulver and Innovo is based completely on performance; WHEREAS, this Agreement constitutes the entire agreement between the parties in regards to all subject matter and supersedes all prior written and oral agreements and understandings between Innovo and Coulver including but not limited to an agreement dated July 15, 1998 and titled "Sales Representative Agreement." NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein, the parties agree as follows: 1. Payment. Innovo will pay Coulver $25,000.00 (twenty-five thousand dollars) pursuant to the aforementioned sales representative agreement dated July 15, 1998. This payment shall represent the final payment owed to Coulver under the July 15, 1998 agreement. Furthermore, it is agreed that Innovo has previously made two payments in the amount of $16,666.66 to Coulver. When combined with the final payment of $25,000.00 the total payments towards the draw per the agreement totals $58,333,32. The final payment of $25,000.00 shall be made within 5 (five) business days of the mutual signing of this Agreement. 2. Commission Rate for Future Earned Commissions. The commission rate for future earned commissions shall be five-percent (5%) of written special account pricing for those accounts listed in "Exhibit A." The commission rate for future earned commissions shall be ten-percent (10%) of written regular wholesale pricing for these accounts listed in "Exhibit B." 3. Commission Due Date. The commissions owed to Coulver under the Agreement shall be paid to Coulver upon receipt of payment to Innovo. 4. Coulver's Right to Accounts and Channels of Distribution. Coulver shall have the exclusive right to the accounts and channels of distribution described in "Exhibit C," the customers can be expanded but not reduced during the term of the Agreement or during any extension period without Coulver's written consent. 5. Term of Agreement. The terms of this Agreement shall be for 12 months with the Agreement commencing on January 1, 1999 and ending on January 1, 2000. This Agreement can be renewed annually upon the mutual written agreement of Innovo and Coulver Marketing. Upon the termination of this Agreement, the period following such termination shall be referred to as the post- termination period (hereinafter "Post-Termination Period"). Any period prior to the Post- Termination period shall be referred to as the pre-termination period (hereinafter "Pre-Termination Period"). 6. Commissions upon Termination of the Agreement. Upon termination of this Agreement, Coulver shall have the right to the commissions associated with the Post-Termination Period sale of Innovo product to customers generated directly pursuant to Coulver's marketing efforts during the Pre-Termination Period so long as the Post-Termination Period sales are a direct product of Coulver's continuing marketing efforts during the Post-Termination Period. To receive Post-Termination Period commissions, Coulver must continue to service the Pre- Termination Period Coulver generated customers materially in the same manner as during the Pre-Termination Period of this Agreement. If after written notice from Innovo that Coulver is not properly servicing customers and after Coulver fails to cure its alleged failure within 60 days, then Coulver shall forfeit their right to commissions as defined under section 6 of this Agreement. The Post-Termination Period shall last for no longer than 5 (five) years. 7. Expenses. Coulver shall be responsible for all of Coulver's expenses that are associated with performing under this Agreement. 8. Confidential Information. (A) Definition. For purposes of this Agreement, the term "Confidential Information: shall mean information that Innovo owns or possesses, that it uses or is potentially useful in its business, that it treats as proprietary, private, or confidential, and that is not generally known to the public, including, but not limited to, information relating to Innovo's existing and contemplated businesses, sales, company financial information, products, technology, manufacturing techniques, engineering processes, chemical formulae, marketing, sales methods, techincal service expertise, employees, list of actual or potential customers, actual and potential customer usage and requirements, new and existing programs or services, prices and terms, pricing strategy, sources of supplies and materials, iperating and other cost data, trade secrets, inventions, patent applications, and other proprietary information as may exist or be developed from time to time by Innovo or its affiliates. (B) Information Access and Disclosure. Coulver, its employees, sub- contractors, associates and affiliates acknowledge that they shall occupy a position of trust and confidence with Innovo and will potentially have access to and may develop Confidential Information of actual or potential value to or otherwise useful to Innovo. Coulver, its employees, sub- contractors, associates and affiliates shall hold in strictest confidence and not disclose, without express written authorization from the Officers or the Board of Directors of Innovo, to any persons or entity, other than Innovo, Innovo's affiliates and their officers and agents, or use in whole or in part any Confidential Information that Coulver, its employees, sub- contractors, associates and affiliates may acquire while this Agreement exists between Coulver and Innovo. (C) Innovo Property Return. At the termination of this Agreement, or at any other time that Innovo may request, Coulver or any one associated with Coulver shall promptly deliver to Innovo all memoranda, notes, records, reports, documents, sketches, plans, models, compositions, formulations, computer data, and other tangible items made or compiled by Coulver or in Coulver's possession concerning or relating to Innovo or its affiliates and their businesses, operations or affairs and any Confidential Information that Coulver may posses or have under their control (Company Property). 9. Governing Law. This Agreement and all performance hereunder shall be construed and governed by the laws of the State of Tennessee, without regard for the conflicts of laws principles. 10. Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to subject matter of this Agreement and supersedes all prior written and oral agreements and understandings between Innovo and Coulver with respect to the subject matter of this Agreement. This Agreement may not be amended except by a written agreement executed by the party to be charged with the amendment. IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first above written. INNOVO GROUP INC. By: __________________________ Pat Anderson Title: President, V.P. of Sales COULVER MARKETING GROUP By: __________________________ Herschel S. Wright Title: President EXHIBIT 10.59 6TH August 1998 Pat Anderson-Lasko Nasco Products Int Inc 27 North Main Street Springfield Tennessee 37172 USA Dear Pat This letter constitutes an amendment to your existing NFL Agreement numbers NFL172C and GB371. The original term of these agreements are hereby extended Until 31st March 2001 with no additional guarantee payments. Special terms: Outstanding invoice number 97/009 for $25,000 will be paid in full by 1st August 1999. All terms and conditions of these license agreements, except Where specifically amended herein, shall remain in full force And effect. Please acknowledge your understanding and acceptance of the Above by signing all three copies of this letter and returning Two copies to this office for our records. Yours sincerely, Buckley Sara Buckley NFL Properties (UK)Ltd Signed and agreed on behalf of Nasco Products International Inc: /s/ Pat Anderson, President Dated: 9/02/98 EXHIBIT 10.60 8th June 1998 INNOVO GROUP INC. trading as NASCO INTERNATIONAL LIMITED 27 North Main Street Springfield Tennessee 37172 USA Dear Sirs RE: LOONEY TUNES TRADEMARK LICENSE NO. 50541-WBLT Reference is made to the above Trademark License date 25th June 1996 ("the Agreement") between WARNER BROS. A DIVISION OF TIME WARNER ENTERTAINMENT COMPANY L.P. c/o WARNER BROS. CONSUMER PRODUCTS, A TIME WARNER ENTERAINMENT COMPANY ("Licensor") and INNOVO GROUP INC. trading as NASCO INTERNATIONAL LIMITED ("Licensee"). It is agreed between Licensor and Licensee that the Agreement is amended as set forth below: Paragraph 8, shall have the following deleted: "28th February 1998" which shall be replaced by: "28th February 1999" In all other respects the Agreement shall remain in full force and effect between us. Please confirm acceptance of the foregoing by countersigning where indicated below. This Side Letter shall be of no force and effect unless and until signed by all parties hereto as specified below. Your faithfully Accepted and agreed for and on behalf of WARNER BROS. A DIVISION OF TIME INNOVO GROUP INC. trading as WARNER ENTERTAINMENT COMPANY, L.P. NASCO INTERNATIONAL LIMITED By its agent WARNER BROS. CONSUMER PRODUCTS, A TIME WARNER ENTERTAINMENT COMPANY EXHIBIT 10.61 FORM: NBAP U.S./Non-Apparel NPIR LICENSEE: INNOVO INC. RETAIL PRODUCT LICENSE AGREEMENT ADDRESS: 27 North Main Street Springfield, TN 37172 THIS RETAIL PRODUCT LICENSE AGREEMENT is entered into by NBA Properties, Inc. ("NBAP"), with its principal office at 645 Fifth Avenue, New York, New York 10022, and the licensee listed above ("LICENSEE") with regard to the commercial use of certain names, logos, symbols, emblems, designs and uniforms and all identifications, labels, insignia or indicia thereof (the "Marks") of the National Basketball Association (the "NBA") and its Member Teams (collectively, the "NBA Marks"). Subject to the terms of this Agreement and the terms of the attached NBAP Standard Terms and Conditions, NBAP hereby grants to LICENSEE, and LICENSEE hereby accepts, the non-exclusive (except as otherwise expressly provided in this Agreement) right and license to use the Marks of the Member Teams, the silhouetted dribbler logo (the "NBA Logo") and Marks of the NBA, NBA All-Star Weekend and NBA Playoffs and Finals (collectively, the "Licensed Marks") solely in connection with the manufacture, distribution, advertisement, promotion and sale of the products described in Paragraph A below including one or more of the Licensed Marks ("Licensed Products"). No license or right is granted for the use of the Licensed Marks for any purpose other than on the Licensed Products and in the manufacture, distribution, advertisement, promotion and sale of the Licensed Products in accordance with this Agreement. A. LICENSED PRODUCTS: Insulated and non-insulated vinyl lunch bags and soft-sided coolers Cotton canvas tote bags Nylon, vinyl and/or cotton laundry bags Shoe bags Garment bags Seat cushion totes B. TERM: August 1, 1998 to July 31, 1999 (the "Term"). C. TERRITORY: Licensed Products may only be distributed in the 50 United States and the District of Columbia, except that product may be shipped to the in-arena concessionaires of the Toronto Raptors and Vancouver Grizzlies (the "Territory"). D. ROYALTY RATES: LICENSEE shall pay monthly to NBAP a combined royalty and advertising and promotion payment (hereinafter referred to as "royalty") equal to twelve percent (12%) of "Net Sales" (as defined in Paragraph 1 of the attached NBAP Standard Terms and Conditions). E. MINIMUM GUARANTEES: LICENSEE guarantees that its aggregate royalty payments to NBAP for the Term under this Agreement shall not be less than twenty thousand dollars ($20,000). F. ADVANCES: Upon execution of this Agreement, LICENSEE shall pay to NBAP the sum of twelve thousand five hundred dollars ($12,500) as an advance to be credited against LICENSEE's Minimum Guarantee as set forth above. G. ADVERTISING AND PROMOTION: (i) Consistent with NBAP's past practice of creating, undertaking or supporting advertising and promotion activities with respect to NBAP-licensed products sold at retail, NBAP shall devote up to two percent (2%) of Net Sales (from the royalties received from LICENSEE pursuant to this Agreement) to cover the expenses incurred by NBAP in connection with such advertising and promotion activities. (ii)LICENSEE shall exhibit, at its sole cost and expense, a fair and representative selection of Licensed Products at the Super Show and every other trade show where LICENSEE exhibits licensed products. H. SELLING PRACTICES: LICENSEE acknowledges NBAP's legitimate and reasonable interest in protecting the value of the NBA Marks and maximizing the effectiveness of its advertising, promotion and distribution efforts by segmenting the classes of trade into which its licensees sell NBAP-licensed products. Therefore, LICENSEE shall only sell Licensed Products to a buyer that, to its best knowledge, (i) purchases Licensed Products from LICENSEE solely for sale directly to the consumer and operates a retail establishment that supports the high quality and image of NBA officially licensed products with appropriate merchandising displays, promotion and/or customer service, or (ii) sells to retailers that support the high quality and image of NBA officially licensed products with appropriate merchandising displays, promotion and/or customer service. LICENSEE acknowledges that a failure to comply with the selling practices set forth in this Paragraph shall cause significant harm to NBAP's efforts to effectively and efficiently distribute NBAP-licensed products. AGREED TO AND ACCEPTED, subject AGREED TO AND ACCEPTED: to and incorporating the attached NBAP NBA PROPERTIES, INC. Standard Terms and Conditions which the undersigned has read: INNOVO INC, By: Pat Anderson Harvey E. Benjamin President Senior Vice President, Business Affairs Dated: 8/12/98 NBAP STANDARD TERMS AND CONDITIONS ADDITIONAL DEFINITIONS For the purposes of this Agreement: (a) "Contract Year" shall mean a twelve (12) month accounting period commencing August 1 and concluding July 31. (b) "Counterfeit Goods" shall mean and include: (i) goods that bear any NBA Mark that has been reproduced and/or affixed without authorization from NBAP; (ii) goods that bear any NBA Mark produced by any source in excess of an amount ordered by an NBAP licensee; and (iii) goods that bear any NBA Mark that have been rejected by NBAP or an NBAP licensee and nevertheless enter the stream of commerce. (c) "Diverted Goods" shall mean and include any goods produced by someone acting on behalf of an NBAP licensee, which goods are not delivered by the producer to such licensee or to a person designated by such licensee to receive such goods. (d) "Net Sales" shall mean the total amount of the gross sales of a Licensed Product by LICENSEE, after deducting any bona-fide credit or adjustment for returns actually made and volume discounts actually and customarily given to the trade (such discounts may not exceed two percent (2%) of the gross sales for the applicable accounting period). In computing Net Sales, no direct or indirect expenses or costs incurred in connection with paying royalties due under this Agreement (including transferring funds for royalties or converting currency into U.S. dollars) or manufacturing, selling, distributing, importing or advertising (including cooperative and other advertising and promotion allowances) the Licensed Products shall be deducted, nor shall any deduction be made for uncollectible accounts, cash discounts, early payment discounts, discounts relating to advertising, mark-down allowances or other allowances. Net Sales resulting from sales to any party directly or indirectly related to or affiliated with LICENSEE (a "Related Transaction") shall be computed based on regular selling prices to the trade. If such related party or affiliate is a reseller to the trade of the Licensed Products, the sales price for purposes of determining Net Sales of a Related Transaction shall be the higher of the sales price to the related or affiliated party or the sales price charged to the trade by such related or affiliated party. If a purchaser from LICENSEE purchases FOB the manufacturing source or participates in other arrangements which result in such purchaser paying less for the Licensed Products than LICENSEE's regular selling prices to the trade, Net Sales with respect to any such transaction shall be computed based on the regular selling prices to the trade. (e) "Parallel Goods" shall mean and include Licensed Products transferred outside of the Territory or brought into the Territory in violation of this Agreement. (f) "Premium" shall mean anything given free or sold at substantially less than its usual selling price (but does not include sales made pursuant to periodic price reductions resulting from "specials," "sales," or volume pricing discounts) for the purpose of increasing the sale of, or publicizing, any product or service, or other giveaway or promotional purpose. Other giveaway or promotional purposes include, but are not limited to, self-liquidating offers, uses of Licensed Products as sales force or trade incentives and sales of Licensed Products through distribution schemes involving earned discounts or "bonus" points based on the consumer's use of the offeror's product or service. 2. TEAM REPRESENTATION; LIMITATIONS ON LICENSE (a) Unless otherwise approved in writing by NBAP, each Licensed Product must be manufactured and offered for sale on LICENSEE's standard terms in a version for each Member Team. LICENSEE acknowledges that, unless the NBA Logo is specifically contained in the definition of Licensed Marks above, no license is granted for the use of the NBA Logo except insofar as the NBA Logo is embodied in the NBA "Official Licensed Product" logo. Unless otherwise approved in writing by NBAP, the NBA Logo may only be used in combination with the Marks of one (1) or more Member Teams (i.e., the NBA Logo may not be used by itself), which must be shown with equal or greater prominence than the NBA Logo. (b) All designs of the Licensed Products, including any packages, containers or tags, shall be subject to NBAP's prior written approval and shall be used solely in furtherance of this Agreement, and such designs will not be used in any other respect by LICENSEE nor will LICENSEE authorize any third party to use such designs except as may be required by NBAP. Notwithstanding the foregoing, NBAP acknowledges that LICENSEE may hold other licenses pursuant to which LICENSEE manufactures, distributes or sells products similar in design to the Licensed Products and nothing in this Agreement is intended to prohibit LICENSEE's manufacture, distribution or sale of such products not bearing or relating to the Licensed Marks. 3. STATEMENTS AND PAYMENTS; REPORTING (a) Statement and Payments: By the fifteenth (15th) day following the end of each month, LICENSEE shall furnish (on forms provided by or approved by NBAP) full and accurate statements (on a country-by-country and unit basis, if more than one country is contained within the definition of the Territory), certified by an officer of LICENSEE, showing all information relating to the calculation of Net Sales for the preceding month. Simultaneously with the submission of such statement, LICENSEE shall make all monthly royalty payments required under this Agreement for the preceding month. The minimum amount of royalties to be paid by LICENSEE by the end of each quarter with respect to each Licensed Product category shall be the amount which, when added to payments of royalties previously made for the Contract Year with respect to such Licensed Product category, shall be equal to one-fourth (25%) of the Minimum Guarantee for such Licensed Product category for such Contract Year required under Paragraph E above multiplied by the number of quarters then elapsed. Aggregate royalties paid each Contract Year may exceed the Minimum Guarantee for such Contract Year. Such monthly statements shall be furnished and the required payments made by LICENSEE whether or not there are any Net Sales for that month. All payments made by LICENSEE to NBAP under this Agreement shall be made free and clear of, and without deduction or withholding for or on account of, any income, stamp or other taxes, charges, fees, deductions or withholdings. If any such taxes, charges, fees, deductions or withholdings are required by law to be withheld from any amounts payable to NBAP hereunder, the amounts so payable shall be increased to the extent necessary to yield to NBAP the amounts specified in this Agreement. All payments shall be in U.S. dollars, from a U.S. source approved by NBAP. All computations and payments shall be in U.S. dollars, at the spot rate for the local currency as published in the Wall Street Journal for the last business day of the preceding month. If LICENSEE shall fail to timely pay any amount due under this Paragraph, LICENSEE shall pay interest on such amount at a rate equal to the lesser of (i) three percent (3%) per annum over the highest prime rate (announced by Chase Bank, New York branch) prevailing during the period between the date the payment first became due and the date such payment is actually paid or (ii) the highest rate permitted by law during the period between the date the payment first became due and the date such payment is actually paid. The receipt or acceptance by NBAP of any of the statements furnished or royalties paid by LICENSEE (including the cashing of any royalty checks) shall not preclude NBAP from questioning their accuracy at any time, auditing LICENSEE's books and records pursuant to Paragraph 12 or claiming any shortfall in royalty payments. In order to assist with NBAP's annual budget process, by April 15 of each Contract Year, LICENSEE shall deliver a statement detailing LICENSEE's projections for sales of each Licensed Product for the following Contract Year, broken down on a quarterly basis. If LICENSEE fails to comply with the reporting requirements contained in this Paragraph, NBAP may charge LICENSEE, and LICENSEE shall pay, two thousand U.S. dollars (USD 2,000) for each instance of non-compliance with this Paragraph. (b) No Cross Collateralization: Any royalty payment for a unit of Licensed Product sold shall only be applied against the Minimum Guarantee for such Licensed Product for the Contract Year in which the unit of such Licensed Product was sold (i.e., any shortfall in, or payment in excess of, the Minimum Guarantee for a Contract Year may not be offset or credited against the Minimum Guarantees for any other Contract Year, against any other Licensed Product or against any other NBA license (including premium license agreements entered into pursuant to Paragraph 5 hereof) held by LICENSEE). If Minimum Guarantees are stated separately for different categories of Licensed Products or for different territories, royalty payments resulting from Net Sales of a category of Licensed Product or in a particular territory shall be applied only against the Minimum Guarantee for such category of Licensed Product or territory. 4. NON-RESTRICTIVE GRANT; RIGHTS RESERVED Nothing in this Agreement shall prevent NBAP from granting any other licenses and rights. All rights not specifically granted in this Agreement are expressly reserved by NBAP. No right of renewal or option to extend is granted or implied and LICENSEE shall have no right to continue manufacturing or selling Licensed Products or to continue holding itself out as a licensee of NBAP after the expiration or termination of this Agreement except as provided in Paragraph 14. 5. PREMIUMS LICENSEE shall not use, nor allow any third party to use, any Licensed Product as a Premium without the prior written authorization of NBAP pursuant to a separate agreement with NBAP. In addition, no Premium shall be offered with the Licensed Products without the prior written approval of NBAP. Nothing in this Agreement shall prohibit LICENSEE from marketing Licensed Products using creative techniques consistent with industry practice, including, but not limited to, periodic "specials," "sales," or volume discount prices, so long as all receipts are accounted for in Net Sales and in accordance with this Agreement. 6. GOODWILL LICENSEE recognizes that (i) a portion of the value of the NBA Marks is attributable to goodwill, (ii) the goodwill attached to the NBA Marks belongs exclusively to NBAP, the NBA and its Member Teams and (iii) that such NBA Marks have secondary meanings in the minds of the public. LICENSEE shall not, during the Term or thereafter, challenge (y) the property rights of the Member Teams, whether severally owned or held in association as the NBA, or NBAP's property rights, in and to NBA Marks, or (z) the validity, legality or enforceability of this Agreement. 7. PROTECTION OF RIGHTS (a) Unauthorized Activities: LICENSEE shall promptly notify NBAP in writing of any infringements of the Licensed Marks or the Licensed Products or the sale of any Licensed Products outside the Territory (e.g., unauthorized importation/exportation of goods) which may come to LICENSEE's attention. NBAP shall have the sole right to determine whether or not any action shall be taken on account of any such infringement or unauthorized importation/exportation. LICENSEE agrees not to contact any third party, not to make any demands for claims and not to institute any suit or action on account of such infringement or unauthorized importation/exportation without obtaining the express prior written permission of NBAP in each instance. (b) Assistance in Protecting Marks: LICENSEE shall cooperate to the fullest extent necessary to assist NBAP in the protection of the rights of NBAP, the NBA and the Member Teams in and to the Licensed Marks. NBAP shall reimburse LICENSEE for any reasonable out-of-pocket costs actually incurred by LICENSEE in providing such cooperation and assistance. LICENSEE shall cooperate with NBAP in its enforcement efforts, including being named by NBAP as a complainant in any action against an infringer. LICENSEE shall pay to NBAP, and waives all claims to, ail damages or other monetary relief recovered in any such NBAP-initiated action by reason of a judgment or settlement (other than for reasonable attorneys' fees and expenses incurred at NBAP's request) whether or not such damages or any part of such damages represent or are intended to represent injury sustained by LICENSEE. (c) Ownership of Marks: LICENSEE acknowledges that NBAP and/or the Member Teams are the exclusive owners of the Licensed Marks. Any intellectual property rights in the Licensed Marks that may accrue to LICENSEE shall inure to the benefit of NBAP and shall be assigned to NBAP upon its request. Any copyright, trademark, service mark or other right used, created or procured by LICENSEE with respect to or involving the Licensed Marks, derivations or adaptations of the Licensed Marks, or any word, symbol or design which uses or is similar to the Licensed Marks so as to suggest association with or sponsorship by the NBA, one of its Member Teams or any of their affiliates, shall be procured for the benefit of and in NBAP's name, but at LICENSEE's expense, notwithstanding their creation by LICENSEE. LICENSEE shall take all necessary steps to secure an assignment to NBAP of the copyright from a creator of work that is not work-for-hire. Any copyright, trademark or service mark affecting or relating to the Licensed Marks already procured or applied for shall be assigned to NBAP. LICENSEE shall supply NBAP with any necessary supporting materials required to obtain copyright or trademark registrations of any copyrights or trademarks required to be assigned to NBAP under this Agreement. (d) Notices, Labeling and Records: NBAP may from time-to-time designate such copyright, trademark or service mark notices (including the form, location and content of such notices) that LICENSEE shall cause to appear on or within each Licensed Product sold, by means of a tag, label, imprint or other appropriate device, in every instance in which any Licensed mark is used. The following general notice (in the English language and the language of the country where the Licensed Products will be sold) must be included on a label, the packaging material or on a separate slip of paper packed with or attached to the Licensed Product: "The NBA and individual NBA member team identifications reproduced on this product are trademarks and copyrighted designs, and/or other forms of intellectual property, that are the exclusive property of NBA Properties, Inc. and the respective NBA member teams and may not be used, in whole or in part, without the written consent of NBA Properties, Inc." LICENSEE shall: (i) cause all Licensed Products to bear the NBA "Official Licensed Product' logo on either the article or its packaging in such place, and in such prominence, as NBAP may designate from time-to-time, (ii) faithfully comply with and adhere to NBAP's mandatory hologram "Official Licensed Product' identification system or such other shipment tracking, identification and anti-counterfeiting systems, tags and labels that NBAP may establish from time-to-time, (iii) unless approved in writing by NBAP, not cross-license or otherwise use other licensed properties or other Marks with the Licensed Products or Licensed Marks and (iv) keep appropriate records, and advise NBAP, of the date when each of the Licensed Products is first placed on sale or sold in each country of the Territory and the date of first use in each country of each different Licensed Mark on the Licensed Products and any promotional or packaging materials. (e) Recordation and Registered User Applications: With respect to those countries in which LICENSEE may distribute and which require applications to register LICENSEE as a permitted or registered user of the Licensed Marks, or which require the recordation of this Agreement, LICENSEE shall execute and deliver to NBAP such applications, agreements or other documents as may be necessary. In such event, this Agreement rather than such agreements will govern any disputes between LICENSEE and NBAP, and when this Agreement expires or is terminated, any such other agreement shall also be deemed expired or terminated. (f) LICENSEE Trade Names and Trademarks: LICENSEE shall permanently affix labeling on each Licensed Product or its packaging, indicating its name, trade name and address so that the public can identify the supplier of the Licensed Product. Prior to any distribution or sale of any Licensed Products, LICENSEE shall advise NBAP in writing of LICENSEE's trade names or trademarks used on Licensed Products and the proposed placement of such trade names and trademarks on the Licensed Products. LICENSEE shall only sell Licensed Products under mutually agreed upon trade names or trademarks and with approved copyrighted designs, shall not incorporate the Licensed Marks into LICENSEE's corporate or business name or trademark in any manner whatsoever and shall place its trade names and trademarks on Licensed Products only as approved by NBAP. As requested by NBAP, LICENSEE shall supply NBAP, in advance of shipping any Licensed Products, with at least twelve (12) copies of each type of its hang tags, labels and other markings of origin for use in identifying and authenticating Licensed Products in the marketplace. LICENSEE shall not use, whether during or after the Term, any Marks: (i) in connection with the Licensed Marks without NBAP's authorization, (ii) confusingly similar to the Licensed Marks, or (iii) intended to relate or refer to the Licensed Marks, the Member Teams or events involving the NBA or the Member Teams. 8. INDEMNIFICATIONS; INSURANCE (a) LICENSEE shall be solely responsible for, and shall defend, hold harmless and indemnify NBAP, NBA Entertainment, Inc. ("NBAE"), the NBA, its Member Teams and the National Basketball Players Association ("NBPA") and their respective affiliates, owners, directors, governors, officers, employees and agents (collectively "NBA Parties") against, any claims, demands, causes of action or damages, including attorneys' fees (collectively, "Claims"), arising out of: (i) any act or omission of LICENSEE, any Third Party Contributor (as defined in Paragraph 11 (b) below) or any other entity acting on LICENSEE's behalf (whether or not approved by NBAP pursuant to this Agreement), (ii) any breach of this Agreement by LICENSEE, any Third Party Contributor or any other entity acting on LICENSEE's behalf (whether or not approved by NBAP pursuant to this Agreement), (iii) the manufacture, distribution, advertisement, promotion, sale, possession or use of any Licensed Product (including, but not limited to, claims relating to (w) any defect (whether obvious or hidden and whether or not present in any sample approved by NBAP) in a Licensed Product or in any packaging or other materials (including advertising materials), (x) any alleged injuries to persons or property, (y) any infringement of any rights of any other person or entity or (z) the alleged failure by LICENSEE to comply with applicable laws, regulations, standards or the terms of the NBAP Code of Conduct, as amended from time to time by NBAP (the "Code of Conduct"), attached hereto as or (iv) any claim that any Licensed Product or element thereof (other than the Licensed Marks) violates or infringes upon the trademark, copyright or other intellectual property rights (including trade dress and rights of publicity and privacy) of a third party, provided LICENSEE is given prompt written notice of and shall have the option to undertake and conduct the defense of any such Claim. In any instance to which the foregoing indemnities pertain, NBAP shall cooperate fully with and assist LICENSEE in all respects in connection with any such defense. LICENSEE shall reimburse NBAP for all reasonable out-of-pocket costs actually incurred by NBAP in connection with such cooperation and assistance. In any instance to which such indemnities pertain, LICENSEE shall keep NBAP fully advised of all developments pertaining to such Claim and shall not enter into a settlement of such Claim or admit liability or fault without NBAP's prior written approval. LICENSEE shall obtain and maintain product liability insurance providing protection for the NBA Parties against any Claims arising out of any alleged defects in the Licensed Products or any use of the Licensed Products, in an amount and providing coverage satisfactory to NBAP (including the amount of the deductible). Such insurance shall be carried by an insurer with a rating by A.M. Best & Co. of A-7 or other rating satisfactory to NBAP. Such insurance policy shall also provide that NBAP receive written notice within thirty (30) days prior to the effective date of the cancellation, non-renewal or any material change in coverage. In the event that LICENSEE has failed to deliver to NBAP a certificate of such insurance evidencing satisfactory coverage prior to NBAP's execution of this Agreement (or fails to maintain such insurance in accordance with this Paragraph), NBAP shall have the right to withdraw its consent to use any or all of the Licensed Marks and/or terminate this Agreement at any time. Such insurance obligations shall not limit LICENSEE's indemnity obligations, except to the extent that LICENSEE's insurance company actually pays NBAP amounts which LICENSEE would otherwise be obligated to pay NBAP. (b) NBAP shall be solely responsible for, and shall defend, hold harmless and indemnify LICENSEE, its directors, officers, employees and agents against any Claims arising out of: (i) a claim that the use of the Licensed Marks as specifically approved by NBAP in accordance with the terms of this Agreement violates or infringes upon the trademark, copyright or other intellectual property rights (including trade dress) of a third party in or to the Licensed Marks or (ii) any breach of this Agreement by NBAP, provided NBAP is given prompt written notice of and shall have the option to undertake and conduct the defense of any such Claim. In any instance to which the foregoing indemnities pertain, LICENSEE shall cooperate fully with and assist NBAP in all respects in connection with any such defense. NBAP shall reimburse LICENSEE for all reasonable out-of-pocket expenses actually incurred by LICENSEE in connection with such cooperation and assistance. In any instance to which such indemnities pertain, NBAP shall not enter into a settlement of such Claim or admit liability or fault without LICENSEE's prior written approval. 9. QUALITY; APPROVALS; SAMPLES LICENSEE shall cause the Licensed Products to meet and conform to high standards of style, quality and appearance. In order to assure NBAP that it is meeting such standards and other provisions of this Agreement, LICENSEE shall comply with the following: (a) Pre-Production: Before commercial production and distribution of any product bearing a Licensed Mark, LICENSEE shall submit to NBAP all preliminary and proposed final artwork, three dimensional models (if any), prototypes, mock-ups and pre-production samples of each product, including all styles, colors and variations, together with its labels, tags, cartons and containers (including packaging and wrapping materials). All LICENSEE submissions under this Paragraph shall be accompanied by forms supplied by NBAP, using one (1) form for each submission and filling in all necessary information. NBAP shall approve or disapprove in writing all submissions, in its sole discretion, before LICENSEE shall be entitled to distribute, advertise, use, produce commercial quantities of or sell any item relating to any such submission. Any article actually submitted and not disapproved within sixty (60) days after receipt by NBAP shall be deemed approved. Approval of an article which uses particular artwork does not imply approval of such artwork with a different article or of such article with different artwork. LICENSEE acknowledges that NBAP's approval of an article does not imply approval of, or license to use, any non-NBA controlled elements contained in any article. After a sample of an article has been approved, LICENSEE shall not make any changes without resubmitting the modified article for NBAP's written approval. (b) Production Samples: Before selling or distributing any product bearing a Licensed Mark, LICENSEE shall furnish NBAP with, at no charge, for its permanent use, two (2) samples of the product from the first production run of each manufacturer of the Licensed Products, including all styles, colors and variations, together with its labels, tags, cartons and containers (including packaging and wrapping materials). If such samples do not conform to all aspects of the Licensed Product as approved or if the quality of any such sample does not meet the requirements of this Paragraph 9, NBAP shall notify LICENSEE and such article shall be deemed disapproved and all such articles shall be promptly destroyed. LICENSEE shall also furnish NBAP, free of charge, with any additional pieces of Licensed Product as may reasonably be requested by NBAP to promote the sale of Official Licensed Products (e.g., for NBAP's display room, advertisements, catalogs, mailers, product placement and trade shows) or for comparison with earlier samples. In addition, LICENSEE shall provide NBAP with any additional pieces of Licensed Product as may be required for the permanent use of the Member Teams, not to exceed one (1) piece per Member Team. If NBAP wishes to purchase Licensed Products for give-away purposes and not for resale, LICENSEE shall sell the Licensed Products to NBAP at LICENSEE's direct manufacturing cost for such Licensed Products and LICENSEE shall not be required to pay royalties on such sales to NBAP. (c) Rejections and Non-Compliance: The rights granted under this Agreement do not permit the sale of "seconds" or "irregulars." All submissions or samples not approved by NBAP shall promptly be destroyed by LICENSEE. LICENSEE shall advise NBAP regarding the time and place of such destruction (in sufficient time to arrange for an NBAP representative to witness such destruction, if NBAP so desires) and such destruction shall be attested to in a certificate signed by one of LICENSEE's officers and submitted to NBAP within fifteen (15) days of the date on which the sample was not approved. In the event of LICENSEE's unapproved or unauthorized manufacture, distribution, use or sale of any products or materials bearing the Licensed Marks, including promotional and advertising materials, or the failure of LICENSEE to comply with Paragraphs 7(d), 7(f), 9, 11(c) or 11(e), NBAP shall have the right to: (i) immediately revoke LICENSEE's rights with respect to any Licensed Product licensed under this Agreement, (ii) charge LICENSEE two thousand U.S. dollars (USID 2,000) for each instance (e.g., per unit) of non-compliance with this Paragraph with respect to any article, product or materials and/or (iii) at LICENSEE's expense, confiscate or order the destruction of such unapproved, unauthorized or non-complying products. Such right(s) shall be without prejudice to any other rights NBAP may have under this Agreement or otherwise. (d) Testing: Both before and after Licensed Products are put on the market, LICENSEE shall follow reasonable and proper procedures for testing the Licensed Products for compliance with laws, regulations, standards and procedures, and shall permit NBAP (upon reasonable notice) to inspect its and its authorized manufacturers testing, manufacturing and quality control records, procedures and facilities and to test or sample Licensed Products for compliance with this Paragraph and the other terms and conditions of this Agreement. Licensed Products found by NBAP at any time not to comply with applicable laws, regulations, standards and procedures shall be deemed disapproved, even if previously approved by NBAP, and shall not be shipped unless and until LICENSEE can demonstrate to NBAP's satisfaction that such Licensed Products have been brought into full compliance. (e) Revocation of Approval: In the event that: (i) the quality, appearance or style of any Licensed Product ceases to be acceptable to NBAP, (ii) LICENSEE uses the Licensed Marks improperly or violates any term of this Paragraph 9 or (iii) NBAP becomes aware of something relating to any such Licensed Product or LICENSEE which, in the opinion of NBAP, reflects unfavorably upon the professional, business or personal reputation of NBAP, the NBA or any of its Member Teams, then, in any such event, NBAP shall have the right, in its sole discretion, to withdraw its approval of such Licensed Product. In the event of such withdrawal, NBAP shall provide immediate written notice to LICENSEE and LICENSEE shall cease the use of the Licensed Marks in connection with the manufacture, sale, distribution, advertisement or use of such Licensed Product and such Licensed Product shall immediately be withdrawn from the market and destroyed; provided, however, that in the event of a revocation of approval pursuant to (i) above, NBAP and LICENSEE shall negotiate in good faith to provide for a reasonable sell-off period for such Licensed Product. Within ten (10) days after LICENSEE's receipt of such notice, LICENSEE shall pay all royalties and Minimum Guarantees due NBAP with respect to the Licensed Product for which approval has been revoked. If there are other Licensed Products for which approval has not been withdrawn under this subparagraph, then this Agreement shall remain in full force and effect as to such other Licensed Products. LICENSEE shall notify NBAP in writing of any Licensed Products deleted from its product lines. 10. PROMOTIONAL MATERIAL LICENSEE shall not use the Licensed Marks or any reproduction of the Licensed Marks in any advertising, promotion or display material in connection with any product or in any other manner whatsoever without prior written approval from NBAP. Under no circumstance will "lotteries," "games of chance" or any other type of promotion which NBAP believes reflects unfavorably upon the NBA or its Member Teams be approved. All advertising or promotional copy and material depicting or using the Licensed Marks (including display material, catalogs and press releases) shall be submitted for approval well in advance of production (but in no event less than ten (10) business days prior to the start of commercial production) to allow adequate time for NBAP, in its sole discretion, to approve, disapprove or comment upon such materials and for any required changes to be made. By way of example, no television or cinema advertising containing any Licensed Mark may be used unless it has been approved in all stages (i.e., storyboard, production "rough-cut" and final version). Unless otherwise approved by NBAP, any NBA game action photographs or footage that LICENSEE uses in connection with the Licensed Products must be obtained from NBAE and shall be subject to NBAE's search and edit charges and any applicable use fee. Any promotional material submitted that is not approved or disapproved by NBAP within thirty (30) days of its receipt by NBAP shall be deemed approved by NBAP. 11. DISTRIBUTION; COMPLIANCE (a) Distribution: LICENSEE shall use its best efforts to distribute and sell, within and throughout the Territory, the Licensed Products in such manner as may be required to meet competition by reputable manufacturers of similar articles. In any ninety (90) day period in which LICENSEE fails to sell or distribute Licensed Products in reasonable commercial quantities, LICENSEE shall be deemed not to have used its best efforts. LICENSEE shall make and maintain adequate arrangements for the distribution and timely delivery of Licensed Products to retailers within and throughout the Territory. In the event NBAP advises LICENSEE that a special promotional effort is to take place in an individual store or chain, LICENSEE shall use its best efforts to sell the Licensed Products to said store or chain. In addition, LICENSEE shall give the Licensed Products wide distribution and shall not, subject to the provisions set forth in this Agreement, refrain for any reason from selling Licensed Products to any retail outlet within the Territory that may desire to purchase Licensed Products and whose credit rating and marketing image warrants such sale. (b) Third Party Contributors: If LICENSEE desires to use a third party manufacturer or distributor (if permitted under this Agreement) (each, a "Third Party Contributor") in connection with the manufacturing of all or any part of, or the distribution (if permitted by this Agreement) of, any Licensed Product, LICENSEE must first notify NBAP of the name and address of such proposed Third Party Contributor and of the Licensed Product LICENSEE desires such proposed Third Party Contributor to manufacture or distribute. NBAP shall have the right, in its sole discretion, to withhold or withdraw approval of any proposed Third Party Contributor and may predicate its approval on any terms or conditions as NBAP shall determine in its sole discretion. LICENSEE may not use a Third Party Contributor in connection with the manufacture of all or any part of, or the distribution (if permitted by this Agreement) of, any Licensed Product prior to receiving such approval from NBAP. If any of LICENSEE's Third Party Contributors uses the Licensed Marks or Licensed Attributes for any unauthorized purpose, LICENSEE shall be responsible for, and shall cooperate fully and use its best efforts to stop such unauthorized use. Attached as Schedule A is a true and complete list of all Third Party Contributors authorized by NBAP as of the date of execution of this Agreement. (c) Counterfeit, Diverted and Parallel Goods: LICENSEE understands and acknowledges the meanings of "Counterfeit Goods , Diverted Goods" and "Parallel Goods" as set forth in Paragraph 1 above and LICENSEE shall use all commercially reasonable means to prevent the creation of any such goods by its employees, agents, representatives or any others operating under its direction, supervision or control and involving the NBA Marks. LICENSEE shall stamp on all invoices, and shall require any third party distributors (to whom LICENSEE is authorized to sell under this Agreement) and any authorized sublicensees and distributors to stamp on their invoices, a prominent legend that states that the Licensed Products are allowed to be sold only within the Territory and only to an end user. LICENSEE shall periodically, and at the request of NBAP, inquire of its authorized distributors, agents and customers as to whether they are observing territorial limits and shall periodically report in writing to NBAP the results of such inquiries. LICENSEE shall notify NBAP of all orders from, or on behalf of, a customer who LICENSEE knows (or has reason to know after having made reasonable inquiry) is located outside the Territory or intends to resell the Licensed Products outside the Territory. If LICENSEE knows or has reason to know that any Licensed Product sold by LICENSEE is resold outside the Territory, LICENSEE shall compensate NBAP for the injury to its licensing and distribution program and shall pay all costs and expenses, including attorney's fees, required to remove such goods from the marketplace. Any such monetary damages shall be in addition to, and not in lieu of, such other rights and relief (including injunctive relief) as may be available to NBAP. LICENSEE shall incorporate within its contracts of sale or sales orders a provision similar in substance to this subparagraph and which provides that the obligations set forth in this subparagraph shall be a continuing obligation on the re-sale of the Licensed Products to subsequent authorized wholesale purchasers and which makes NBAP a third party beneficiary of such provision. (d) Selling, Distributing and Reporting: In the event LICENSEE sells or distributes other licensed merchandise of a similar grade or quality as the Licensed Products, but which do not bear any of the Licensed Marks, LICENSEE will not discriminate, in a manner which adversely impacts the Licensed Products, in the granting of commissions or discounts to salespeople, dealers and distributors between the Licensed Products and the licensed products of any third party. LICENSEE may not package the Licensed Products in combination with other products, whether similar or different, without the prior written approval of NBAP. In the event that NBAP believes in good faith that LICENSEE has employed selling or reporting methods which circumvent or reduce the royalty or other payment or reporting obligations contained in this Agreement, NBAP may, in addition to any other rights and remedies it may have, at its option and upon fifteen (15) days' prior written notice, adjust the minimum royalty per unit. (e) Shipping and Anti-Counterfeiting Compliance: LICENSEE shall at all times conduct all aspects of its business in a fair and reasonable manner and in compliance with all shipment tracking, identification and anti-counterfeiting systems and labels that NBAP may establish from time-to-time and all applicable laws, government rules and regulations, court and administrative decrees and the highest standard of business ethics then prevailing in the industry. LICENSEE shall faithfully comply with and adhere to NBAP's shipping and distribution policies established from time-to-time. LICENSEE shall use its commercially reasonable efforts to ensure that all retailers and authorized distributors purchasing Licensed Products comply with NBAP's anticounterfeiting systems, labels and shipping and distribution policies established from time to time. (f) Conduct Requirements: LICENSEE represents and warrants to NBAP that LICENSEE shall faithfully comply with and adhere to, and LICENSEE shall take all steps necessary to ensure that all Third Party Contributors shall faithfully comply with and adhere to, all of the terms, provisions and policies contained in this Agreement, the Code of Conduct and all applicable United States and foreign laws, government rules and regulations, court and administrative decrees and the highest standard of business ethics then prevailing in the industry with regard to the conduct of all aspects of LICENSEE's (or any Third Party Contributor's) business and the manufacture, distribution, sale, testing and use of all Licensed Products (collectively, "Conduct Requirements"). NBAP and its authorized representatives shall have the right, upon reasonable prior notice, to examine and audit LICENSEE to ensure compliance with the Conduct Requirements. LICENSEE shall allow NBAP access to any of its premises and personnel at all reasonable times for the purposes of such auditing. LICENSEE shall take all necessary steps in negotiating contracts with Third Party Contributors to provide NBAP and its authorized representatives with a contractual right to audit such Third Party Contributors to ensure compliance with the Conduct Requirements, including the right of NBAP to have access to the premises and personnel of any Third Party Contributor at all reasonable times for the purposes of such auditing. (g) Governmental Approvals: It shall be LICENSEE's sole responsibility, at its sole expense, to obtain all approvals (including, but not limited to, approvals of advertising materials) of all governmental authorities which may be necessary in connection with LICENSEE's performance under this Agreement. (h) NBA Store: LICENSEE acknowledges that NBAP intends to offer various NBA and/or Member Team-identified products for sale in an NBAP-owned "showcase" retail store ("NBA Store"). LICENSEE further acknowledges that it will receive a variety of tangible and intangible benefits as a result of having merchandise manufactured by LICENSEE displayed, sold and promoted at the NBA Store. Therefore, LICENSEE shall, in addition to and in consideration for the license granted under this Agreement and in consideration of the benefits it will receive from having merchandise displayed, sold and promoted at the NBA Store, (i) upon the request of NBAP, perform contract manufacturing services for NBAP in connection with the manufacture of products for sale in the NBA Store on terms as mutually agreed upon by NBAP and LICENSEE and (ii) offer Licensed Products to the NBA Store on terms at least as favorable as those offered to LICENSEE's most preferred high-volume customers, including price, priority of delivery, discounts, cooperative or other advertising and promotional allowances and other benefits (regardless of volume). 12. RECORDS; AUDITS LICENSEE shall keep accurate books of account and records covering all transactions relating to the license granted in this Agreement (including, but not limited to, sales of Licensed Products, purchases and uses of NBA hologram hang tags and compliance with shipment tracking, identification and anti-counterfeiting systems and labels that NBAP may establish from time to time). NBAP and its authorized representatives shall have the right, at all reasonable hours of the day and upon reasonable prior notice, to examine and audit such books of account and records and all other documents and materials in LICENSEE's possession or under its control (including records of LICENSEE's parents, subsidiaries, affiliates and third parties, if they are involved in activities which relate to this Agreement) relating to this Agreement. NBAP shall have free and full access for such purposes and for the purpose of making extracts and copies. Should an audit by NBAP establish a deficiency between the amount found to be due NBAP and the amount LICENSEE actually paid or reported, the LICENSEE shall pay the amount of such deficiency, plus interest at the then current prime rate (as announced by Chase Bank, New York branch) from the date such amount should have been paid until the date of payment. Should such audit establish a deficiency of more than five percent (5%), LICENSEE shall also pay for the cost of the audit. LICENSEE shall pay such amount within thirty (30) days. All such books of account and records shall be kept available for at least two (2) years after the expiration or termination of this Agreement, or three (3) years after the end of the Contract Year to which they relate, whichever is earlier. In order to facilitate inspection of its books and records, LICENSEE shall designate a symbol or number which will be used exclusively in connection with the Licensed Products on which royalty payments are payable and shall maintain for inspection as provided in this Agreement duplicates of all billings to customers with respect to Licensed Products. LICENSEE shall, within ten (10) business days of NBAP's request (which shall not be made more than four (4) times per Contract Year), furnish NBAP with a list of LICENSEE's top twenty-five (25) retail accounts for Licensed Products (on a country by country basis) and their monthly purchases of Licensed Products (broken down by unit sales and in dollar volume by retailer). LICENSEE shall supply NBAP with true and complete copies of any agreement it has entered into, or in the future enters into, with any Member Team or any NBA player. In addition, LICENSEE shall, on a quarterly basis during the Term, provide NBAP with copies of either (i) financial information furnished to the United States Securities and Exchange Commission or (ii) with all financial statements and other financial information prepared by LICENSEE for distribution to its banks or other financial lending institutions to whom it reports regularly. LICENSEE shall cooperate with NBAP in developing an electronic data interchange through which NBAP may access LICENSEE's electronic database relating to the manufacture, distribution and sale of Licensed Products (such as work-in-process, finished goods on hand, orders received, deliveries made and any other on-line information relating to the Licensed Products) or developing such other system as will enable NBAP to obtain such information or facilitate NBAP's review of LICENSEE's graphic designs for Licensed Products. 13. EARLY TERMINATION Without prejudice to any other rights NBAP may have pursuant to this Agreement or otherwise, NBAP shall have the right to terminate this Agreement at any time if: (a) Within three (3) months from the date that this Agreement is executed on behalf of NBAP, LICENSEE shall not have begun the bona-fide distribution and sale of each Licensed Product within and throughout the Territory in accordance with this Agreement. (b) LICENSEE shall fail to timely remit any payment of any nature due to NBAP or any of its affiliates when due and shall fail to cure such non-payment within thirty (30) days (ten (10) days for a payment default other than a royalty payment default) of its receipt of written notice from NBAP; provided, however, that LICENSEE shall not have the right to cure any subsequent payment default. (c) LICENSEE or any guarantor under this Agreement shall be unable to pay its liabilities when due, or shall make any assignment for the benefit of creditors, or under any applicable law admits in writing its inability to meet its obligations when due or commit any other act of bankruptcy, institute voluntary proceedings in bankruptcy or insolvency or permit institution of such proceedings against it. (d) LICENSEE shall exhibit a pattern of frequent failure to make timely delivery of sufficient quantities of the Licensed Products to its retail accounts. (e) LICENSEE (or any entity that controls LICENSEE or is controlled by LICENSEE) now or in the future holds a license from NBAP and such license is terminated by NBAP during the Term. (f) LICENSEE (i) delivers Licensed Products outside the Territory; (ii) sells Licensed Products to a third party who LICENSEE knows, or has reason to know, intends to deliver the Licensed Products outside the Territory; or (iii) LICENSEE is in breach of Paragraph 11 (c) (g) LICENSEE sells to any third party that LICENSEE knows, or has reason to know, is altering or modifying the Licensed Products prior to sale to the ultimate consumer. (h) LICENSEE is in breach of Paragraphs 11 (b) or 11 (D. (i) LICENSEE shall fail to perform or shall be in breach of any other term or condition of this Agreement (other than a payment default). A termination pursuant to this subparagraph (i) shall take effect (i) thirty (30) days after written notice of such failure to perform or breach is sent by NBAP if such failure to perform or breach can be Completely Cured (as defined below) and such failure to perform or breach has not been Completely Cured during such thirty (30) day period, or (ii) immediately after written notice of such failure to perform or breach is sent by NBAP if such failure to perform or breach cannot be Completely Cured. For purposes of this subparagraph, "Completely Cured" means that such failure to perform or breach is cured so that, in the reasonable judgment of NBAP, such failure to perform or breach will have had no effect on, or caused no damage to, NBAP. In addition to NBAP's other rights and remedies, upon termination of this Agreement under this Paragraph, LICENSEE shall pay NBAP (within thirty (30) days of such termination) the Minimum Guarantees for each Licensed Product through the end of the Agreement, less the royalties paid to NBAP through the date of termination. 14. DISPOSAL OF STOCK; EFFECT OF TERMINATION Sixty (60) days before the expiration of this Agreement and ten (10) days after any termination under Paragraphs 9 or 13, LICENSEE will furnish to NBAP a certificate showing the number and description of Licensed Products on hand or in process of manufacture. After expiration or termination of this Agreement, LICENSEE shall have no right to, nor allow any third party to, manufacture, advertise, distribute, sell, promote or otherwise deal in any Licensed Products or use the Licensed Marks (and LICENSEE shall not engage in any such activity) except as provided below. For a period of ninety (90) days following the expiration (but not after the termination) of this Agreement, LICENSEE may sell-off and deliver Licensed Products which are on hand or in process at the time of such expiration (the "Sell- Off Period"); provided, however that (i) the total number of units of each Licensed Product sold during the Sell-Off Period may not be greater than one hundred ten percent (110%) of the total number of units of such Licensed Product on hand on the same date the preceding Contract Year, (ii) such Licensed Products may only be sold in accordance with this Agreement and in the normal course of business and at regular selling prices, (iii) all payments then due are first made to NBAP and (iv) statements and payments with respect to the Sell-Off Period are made in accordance with this Agreement. NBAP shall have the option to conduct physical inventories before the expiration of this Agreement until the end of the Sell-Off Period in order to verify such inventory and/or statements. If LICENSEE refuses to permit such physical inventory, LICENSEE shall forfeit its right to dispose of Licensed Products under this Paragraph. After such Sell-Off Period, all inventory on hand or in process (including all promotional and packaging materials) will be destroyed. LICENSEE shall have no sell- off rights in the event this Agreement is terminated. After such termination, all inventory on hand or in process (including all promotional and packaging materials) will be destroyed. Any destruction of Licensed Product required pursuant to this Agreement shall be attested to in a certificate signed by one of LICENSEE's officers. 15. EQUITABLE RELIEF LICENSEE acknowledges that NBAP is entering into this Agreement not only in consideration of the royalties or other financial consideration to be paid, but also for the promotional value and intrinsic benefit resulting from the manufacture, advertisement, distribution, sale and promotion of the Licensed Products by LICENSEE in the Territory. LICENSEE acknowledges that the Licensed Marks possess a special, unique and extraordinary character which makes difficult the assessment of the monetary damage which NBAP would sustain as a result of the unauthorized use of the Licensed Marks. LICENSEE further acknowledges that: (i) its failure to manufacture, advertise, distribute, sell and promote the Licensed Products in accordance with this Agreement and (ii) the unauthorized or unapproved use of the Licensed Marks, will, in either case, cause immediate and irreparable damage to NBAP for which NBAP would not have an adequate remedy at law. Therefore, LICENSEE agrees that, in the event of a breach of this Agreement by LICENSEE, in addition to such other legal and equitable rights and remedies as shall be available to NBAP, NBAP shall be entitled to injunctive and other equitable relief, without the necessity of proving damages or furnishing a bond or other security. 16. NOTICES All notices and statements to be given and all payments to be made under this Agreement shall be given or made at the respective address of the parties as set forth above, unless notification of a change of address is given in writing. Any notice of breach or default must be in writing and sent by facsimile, overnight express delivery, or registered or certified mail, return receipt requested, properly addressed and stamped. Any written notice shall be deemed to have been given at the time it is sent. 17. NO JOINT VENTURE Nothing in this Agreement shall be construed to place the parties in the relationship of partners or joint venturers. Neither party shall have the power to obligate or bind the other to a third party in any manner whatsoever. 18. ARBITRATION OF CERTAIN MATTERS Any dispute or disagreement between the parties relating solely to the amount of royalty payments owing under this Agreement shall be settled by arbitration in New York City under the rules then in effect of the American Arbitration Association. Judgment upon the award may be entered in any court having jurisdiction. No other dispute or disagreement between the parties (including any claim by NBAP that LICENSEE is using the Licensed Marks in a manner not authorized by this Agreement or is otherwise in breach of this Agreement) shall be settled by arbitration. All decisions by NBAP relating to disapproval of any Licensed Product or advertising, promotion or display material shall be final and binding on LICENSEE and shall not be subject to review in any proceeding. 19. NO USE OF PLAYERS LICENSEE acknowledges that this Agreement does not grant to LICENSEE any licenses or rights with respect to the use of the names, likenesses or other attributes of any NBA player (collectively, "Player Attributes"). The license granted under this Agreement does not include, and shall not be used to imply, a testimonial or endorsement of any Licensed Products by any NBA player. LICENSEE shall not use Player Attributes in any manner without first obtaining written authorization from the subject player(s). LICENSEE shall not enter into any agreement with any NBA player or any other person which would require that player or other person to wear or use any Licensed Product or other product at any NBA game (either courtside or in any locker room) or at practice. 20. WARRANTIES Each party represents and warrants that it has the right and authority to enter into and perform this Agreement and NBAP represents and warrants that it has the right to grant the rights to use the Licensed Marks in accordance with the terms and conditions of this Agreement. LICENSEE represents and warrants that the Licensed Products and all advertising and promotional materials shall comply with all applicable laws, regulations and standards. NBAP's approval of such materials will not imply a representation or belief that NBAP believes such materials are sufficient to meet applicable laws, regulations and standards, nor shall it imply that NBAP agrees with or supports any claims made by LICENSEE in any advertising materials relating to the Licensed Products. LICENSEE further represents and warrants that all advertising and promotional materials and all graphics used on Licensed Products will not violate the intellectual property rights of any third party. 21. SEVERABILITY In the event any provision of this Agreement is found to be void, invalid or unenforceable as a result of any judicial or administrative proceeding or decree, this Agreement shall be construed and enforced as if such provision were not contained in this Agreement. 22. MISCELLANEOUS (a) Assignment: This Agreement and any rights granted under this Agreement are personal to LICENSEE and shall not be assigned, sublicensed, subcontracted or encumbered, directly or indirectly, by law or by contract, without NBAP's prior written consent, which consent may, in NBAP's sole discretion, (i) be contingent upon a fee payable by LICENSEE or the transferee, the amount of which shall be determined by NBAP in its sole discretion, and/or (ii) impose other terms and conditions upon the assignment, sublicense or transfer. Any transfer of a controlling interest in LICENSEE or in any party which currently controls LICENSEE, directly or indirectly, shall be deemed an assignment prohibited by the preceding sentence. Any nonconsensual assignment, sublicense, subcontract or encumbrance of this Agreement by LICENSEE shall be invalid and of no force or effect. Upon any such nonconsensual assignment, sublicense or encumbrance, this Agreement shall terminate, all payment obligations of LICENSEE hereunder shall be accelerated and immediately due and payable, and all rights granted under this Agreement shall immediately revert to NBAP. (b) Waiver: None of the provisions of this Agreement can be waived or modified except expressly by a writing signed by both parties. There are no representations, promises, agreements, warranties, covenants or undertakings by either party other than those contained in this Agreement. No failure on the part of NBAP to exercise any right under this Agreement shall operate as a waiver of such right; nor shall any single or partial exercise of any right preclude any other or further exercise or the exercise of any other rights. (c) Survival: No expiration or termination of this Agreement shall relieve LICENSEE of its obligation to pay NBAP any amounts due to NBAP at the time of termination, regardless of whether these amounts are then or thereafter payable. The provisions of Paragraphs 12 and 22(f) shall survive the expiration or termination of this Agreement. (d) Adjustments: NBAP shall have the option to increase the Royalty Rates in the event that, at any time during the Term, LICENSEE agrees to pay or in fact pays royalty rates and/or advertising and promotion contributions with respect to any other licensed sports or entertainment property in excess of the Royalty Rate for any Licensed Product required under this Agreement. From time to time at NBAP's request, LICENSEE shall deliver a certificate to NBAP which sets forth the royalty rates and any advertising and promotion contributions LICENSEE pays to any other professional sports league or entertainment property. (e) Governing Law and Jurisdiction: This Agreement shall be construed in accordance with the laws of the State of New York, USA, without regard to its principles of conflicts of laws. Any claim arising under this Agreement (except as provided under Paragraph 18) shall be prosecuted in a federal or state court of competent jurisdiction located within the City of New York, USA and LICENSEE consents to the jurisdiction of such court and to the service of process by mail. (f) Confidentiality: LICENSEE shall not (nor shall it permit or cause its employees or agents to) divulge, disseminate or publicize information relating to this Agreement or the financial or other terms of this Agreement (including any information on the specifications or methods of reproduction of the Licensed Marks) to any third party (other than its attorneys or accountants), except as may be required by law or to fulfill the terms of this Agreement. In the event LICENSEE is required by law to publicly disclose any of the terms of this Agreement, LICENSEE must use best efforts to request confidential treatment from the applicable government agency or, if such confidential treatment cannot be obtained, LICENSEE must redact all sensitive information (e.g., royalty rates, minimum guarantees, etc.) from the information to be publicly disclosed. (g) Research: LICENSEE shall cooperate with NBAP's reasonable requests for information in connection with conducting marketing tests, surveys and other research ("Research"), provided that any proprietary information so furnished shall be kept strictly confidential by NBAP. If LICENSEE performs or causes to be performed any Research primarily dedicated to evaluating or otherwise assessing a Licensed Product (or any LICENSEE (non-NBA) product offering similar to a Licensed Product), then copies of such Research results shall be promptly provided to NBAP. As may be reasonably requested by NBAP, LICENSEE shall provide NBAP (or NBAP's designated third-party researcher) with any Research and information that LICENSEE has or obtains regarding its retail accounts. (h) Construction: This Agreement has been executed in a text using the English language, which text shall be controlling. This Agreement, together with any exhibits or attachments, when fully-executed, shall constitute the entire agreement and understanding between the parties and cancels, terminates and supersedes any prior agreement or understanding relating to the subject matter of this Agreement between LICENSEE and the NBA, any Member Team, NBAP or NBAE. The headings in this Agreement are for reference purposes only and shall not affect the interpretation of this Agreement. This Agreement shall not be binding on NBAP until signed on its behalf by its President or Senior Vice President, Business Affairs or such other executive designated by the President to sign. Schedule A Third Party Contributors: Sunwaki Industrial Co. Ltd. Room 1501 & 1503-4 15-F Mong Kok Comm Ctr. 16 Argyle Mong Kog Kowloon Hong Kong Tel: 852-2395-5161 Fax: 852-2789-4977 Hi-Performance 3/F, Kaiser Estate Phase 3, Flat 0 11 Hok Yuen Street, Hunghom Kowloon Hong Kong Tel: 852-2774-0324 Fax: 852-2365-6238 EXHIBIT A NBA PROPERTIES, INC. LICENSEE AND SUPPLIER CODE OF CONDUCT The NBA's mission is to be the most respected and successful sports league and sports marketing organization in the world. In keeping with this mission, NBA Properties, Inc. ("NBAP") is committed to conducting its business in a socially responsible and ethical manner. We expect all NBAP licensees, including their contractors, engaged in the manufacture and sourcing of products bearing NBA, WNBA, USA Basketball and NBC trademarks (collectively "Product Suppliers") to share this commitment. At a minimum, all Product Suppliers must adhere to the following Licensee and Supplier Code of Conduct: 1 . ETHICAL STANDARDS Product Suppliers shall conduct their businesses in accordance with the highest standards of ethical behavior. 2. COMPLIANCE WITH APPLICABLE LAWS Product Suppliers shall comply with all applicable laws and regulations of the countries, states and localities in which they operate. 3. EMPLOYMENT PRACTICES NBAP will only do business with Product Suppliers whose employees are appropriately compensated, present at work voluntarily, not at undue risk of physical harm and not exploited in any way. In addition, Product Suppliers must comply with the following specific standards: Wages and Benefits: Product Suppliers shall provide wages, overtime compensation and benefits at not less than the minimum levels required by applicable laws and regulations or the prevailing local industry levels, if higher. Working Hours: Product Suppliers shall, at a minimum, comply with all applicable working hours laws and regulations. Except in unusual business circumstances, employees shall not be required to work more than the lesser of (a) 48 hours per week and 12 hours of overtime or (b) the limits on regular and overtime hours allowed by local law or, where local law does not limit the hours of work, the regular work week in such locality plus 12 hours of overtime. In addition, except in unusual business circumstances, employees shall be entitled to at least one day off in every seven-day period. Child Labor. Product Suppliers shall not employ any person under the age of 15 (or 14 where allowed by local law) or under the local age for completing compulsory education, if higher. Forced Labor. Product Suppliers shall not use any forced labor, whether in the form of prison labor, indentured labor, bonded labor or otherwise. Harassment or Abuse: Product Suppliers shall treat each employee with dignity and respect, and shall not use corporal punishment, threats of violence or other forms of physical, sexual, psychological or verbal harassment or abuse. Nondiscrimination: Product Suppliers shall not discriminate in employment practices on the basis of race, religion, age, nationality, social or ethnic origin, gender, sexual orientation, political opinion or disability. Freedom of Association: Product Suppliers shall recognize and respect the right of employees to join organizations of their own choosing and shall neither threaten nor penalize employees for their efforts to organize or bargain collectively. Health and Safety., Product Suppliers shall provide employees with a safe and healthy working environment. Manufacturing facilities shall, at a minimum, contain clean restrooms, potable water, adequate lighting, adequate ventilation and fire exits. Residential facilities, if provided, shall also be kept sanitary and safe. 4. ENVIRONMENTAL REQUIREMENTS Product Suppliers shall comply with all applicable environmental laws and regulations. 5. COMMUNICATION Product Suppliers shall take appropriate steps to ensure that the provisions of this Code are communicated to employees, including the prominent posting of the Code (in the local language) in their manufacturing facilities. 6. MONITORING AND COMPLIANCE Product Suppliers shall conduct periodic audits of manufacturing facilities, on the basis of which they shall certify to NBAP on request either that (a) all products bearing NBA, WNBA, USA Basketball and NBC trademarks have been manufactured in compliance with this Code, or (b) identified facilities have been found not to be in compliance with this Code, in which event the Product Supplier shall specify appropriate and effective steps to remedy the non-compliance. NBAP or its representatives are authorized to engage in monitoring activities to confirm compliance with this Code, including on-site inspections of manufacturing facilities and residential facilities, audits of records relating to employment matters and private interviews with employees at all levels. Product Suppliers shall retain and make available to NBAP or its representatives, either on site or at agreed upon locations, all documentation that may be required to assess whether or not the Product Supplier is in compliance with this Code. 7. FAILURE TO COMPLY NBAP reserves the right, in addition to all other legal and contractual rights, to terminate its relationship with any Product Supplier found to be in violation of this Code. FORM: NBA Europe Int'l./E/Non-Fr NPR Non-Apparel EXHIBIT 10.62 RETAIL PRODUCT LICENSE AGREEMENT LICENSEE: NASCO PRODUCTS INTERNATIONAL, INC. ADDRESS: 1808 N. Cherry Street Knoxville, TN 37917 United States THIS RETAIL PRODUCT LICENSE AGREEMENT is entered into by NBA Europe S.A. ("NBA Europe"), a French Societe Anonyme with capital of FF 250,000, with its principal office at 40, rue La Boetie, 75008 Paris, France, and registered with the Registry of Commerce and Companies of Paris under Number B 411 908 528, pursuant to the rights and obligations granted to it under a license from NBA Properties, Inc. ("NBAP") a New York corporation, and the licensee listed above ("LICENSEE") with regard to the commercial use of certain names, logos, symbols, emblems, designs and uniforms and identifications, labels, insignia or indicia thereof (the "Marks") of the National Basketball Association (the "NBA) and its Member Teams. On the terms of this Agreement and subject to the attached NSA Europe Standard Terms and Conditions, NBA Europe hereby grants to LICENSEE, and LICENSEE hereby accepts, the nonexclusive (except as otherwise expressly provided in this Agreement) right and license to use the Marks of the Member Teams, the silhouetted dribbler logo (the "NBA Logo") and Marks of the NBA, NBA AII-Star Weekend and NBA Playoffs and Finals (collectively, the "Licensed Marks") solely in connection with the manufacture, distribution, advertisement, promotion and sale of the products listed in Paragraph A below including one or more of the Licensed Marks ("Licensed Products"). No license or right is granted for the use of the Licensed Marks for any purpose other than on the Licensed Products and in the distribution, advertisement, promotion and sale of the Licensed Products in accordance with this Agreement. A. LICENSED PRODUCTS: Sports bags, backpacks and waist packs. All Licensed Products shall be produced and marketed under the "NASCO" label. B. TERM: August 1, 1998 through July 31, 2000 (the 'Term"). C. TERRITORY: Austria, Belgium, Denmark, Finland, Germany, Greece, Iceland, Ireland, Italy, Liechtenstein, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden. Switzerland and the United Kingdom (the 'Territory"). D. ROYALTY RATES: LICENSEE shall pay monthly to NBA Europe a royalty equal to thirteen percent (13%) of "Net Sales" (as defined in Paragraph 1 of the attached NBA Europe Standard Terms and conditions). E. MINIMUM GUARANTEES: LICENSEE guarantees that its aggregate annual royalty payments to NBA Europe for each Contract Year under this Agreement shall not be less than the amount set forth opposite such Contract Year: 1st Contract Year: US$32,000 2nd Contract Year: US$40,000 F. ADVANCES: At the commencement of each Contract Year, LICENSEE shall pay to NBA Europe the below indicated sum set forth opposite each Contract Year as an advance to be credited against LICENSEE's annual Minimum Guarantee as set forth above: 1st Contract Year: US$7,000 2nd Contract Year: US$8,000 G. ADVERTISING AND PROMOTION: (i) Consistent with NBA Europe's past practice of creating, undertaking or supporting advertising and promotion activities with respect to NBA Europe-licensed products sold at retail, NBA Europe shall devote an amount up to two percent (2%) of LICENSEE's Net Sales (from the royalties received from LICENSEE pursuant to Paragraph D above) to cover the expenses incurred by NBA Europe in connection with such advertising and promotion activities. (ii) LICENSEE shall exhibit, at its sole cost and expense, a fair and representative selection of Licensed Products at every trade show where LICENSEE exhibits its products. (iii) LICENSEE shall also provide NBA Europe with at least three thousand US dollars (US $3,000) worth (wholesale cost) of Licensed Products at no cost. H.ADDITIONAL PAYMENT: (i) With respect to LICENSEE's shortfall of thirty five thousand US dollars (US$35,000) in Minimum Guarantee payments pursuant to the Retail Product License Agreement between NBAP and LICENSEE dated August 1, 1997, LICENSEE shall pay to NBAP seventeen thousand five hundred US dollars (US$ 17,500) prior to execution of this Agreement and seventeen thousand five hundred US dollars (US$ 17,500) by no later than March 31, 1999 (collectively, the "Additional Payment"). (ii) If LICENSEE shall fail to timely remit the Additional Payment NBA Europe shall have the right to terminate this Agreement at any time pursuant to the terms of Paragraph 13 of the NBA Europe Standard Terms and Conditions attached hereto. I.SELLING PRACTICES: LICENSEE acknowledges NBA Europe's legitimate and reasonable interest in protecting the value of the Licensed Marks and maximizing the effectiveness of its advertising, promotion and distribution efforts by segmenting the classes of trade into which its licensees sell NBA Europe-licensed products. Therefore, LICENSEE shall sell Licensed Products to a buyer that, to its best knowledge, (i) purchases Licensed Products from LICENSEE solely for sale directly to the consumer and operates a retail establishment that supports the high quality and image of NBA officially licensed products with appropriate service or (ii) sells to retailers that merchandising displays, promotion and/or customer support the high quality and image of NBA officially licensed products with appropriate merchandising displays, promotion and/or customer service. LICENSEE acknowledges that a failure to comply with the selling practices set forth in this Paragraph shall cause significant harm to NBA Europe's efforts to effectively and efficiently distribute NBA Europe licensed products. AGREED TO AND ACCEPTED, subject AGREED TO AND ACCEPTED: to and incorporating the attached NBA EUROPE S.A. NBA Europe Standard Terms and conditions which the undersigned has read and fully approved By:/s/ NBA Europe Title: By:/s/ Pat Anderson Title:President NBA EUROPE STANDARD TERMS AND CONDITIONS 1.ADDITIONAL DEFINITIONS For the purposes of this Agreement: (a) "Contract Year' shall mean a twelve (12) month accounting period commencing August 1 and concluding July 31. (b) "Counterfeit Goods" shall mean and include: (i) goods that bear any Licensed Mark that has been reproduced and/or affixed without authorization from NBA Europe; (ii) goods that bear any Licensed Mark produced by any source in excess of an amount ordered by an NBA Europe licensee; and (iii) goods that bear any Licensed Mark that have been rejected by NBA Europe or an NBA Europe licensee and nevertheless enter the stream of commerce. (c) "Diverted Goods" shall mean and include any goods produced by someone acting on behalf of an NBA Europe licensee, which goods are not delivered by the producer to such licensee or to a person designated by such licensee to receive such goods. (d)"Net Sales" shall mean the total amount of the gross sales of a Licensed Product by LICENSEE, after deducting any bona-fide credit or adjustment for returns actually made and volume discounts actually and customarily given to the trade (such discounts may not exceed two percent (2%) of the gross sales for the applicable accounting period). In computing Net Sales, no direct or indirect expenses or costs incurred in connection with paying royalties due under this Agreement (including transferring funds or royalties or converting currency into U.S. dollars) or manufacturing, selling, distributing, importing or advertising (including cooperative and other advertising and promotion allowances) the Licensed Products shall be deducted, nor shall any deduction be made for uncollectible accounts, cash discounts, early payment discounts, discounts relating to advertising, mark- down allowances or other allowances. Net Sales resulting from sales to any party directly or indirectly related to or affiliated with LICENSEE (a "Related Transaction") shall be computed based on regular selling prices to the trade. If such related party or affiliate is a reseller to the trade of the Licensed Products, the sales price for purposes of determining Net Sales of a Related Transaction shall be the higher of the sales price to the related or affiliated party or the sales price charged to the trade by such related or affiliated party. If a purchaser from LICENSEE purchases FOB the manufacturing source or participates in other arrangements which result in such purchaser paying less for the Licensed Products than LICENSEE's regular selling prices to the trade, Net Sales with respect to any such transaction shall be computed based on the regular selling prices to the trade. (e)"Premium" shall mean anything given free or sold at substantially less than its usual selling price (but does not include sales made pursuant to periodic price reductions resulting from "specials," "sales," or volume pricing discounts) for the purpose of increasing the sale of, or publicizing, any product or service, or other giveaway or promotional purpose. Other giveaway or promotional purposes include, but are not limited to, self-liquidating offers, uses of Licensed Products as sales force or trade incentives and sales of Licensed Products through distribution schemes involving earned discounts or "bonus" points based on the consumer's use of the offeror's product or service. product or service. 2.TEAM REPRESENTATION; LIMITATIONS ON LICENSE Unless otherwise approved in writing by NBA Europe, each Licensed Product must be manufactured and offered for sale on LICENSEE's Standard terms in a version for each Member Team. Unless otherwise approved in writing by NBA Europe, the NBA Logo (I) must be used in combination with the Marks of one (1) or more Member Teams (i.e., must be used on all Licensed Products), which must be shown with equal or greater prominence than the NBA Logo or (ii) may be used by itself. (b)The designs of the Licensed Products, including any packages, containers or tags, shall be subject to NBA Europe's prior written approval and shall be used solely in furtherance of this Agreement, and such designs will not be used in any other respect by LICENSEE nor will LICENSEE authorize any third party to use such designs except as may be required by NBA Europe. Notwithstanding the foregoing, NBA Europe acknowledges that LICENSEE may hold other licenses pursuant to which LICENSEE manufactures, distributes or sells products similar in design to the Licensed Products and nothing in this Agreement is intended to prohibit LICENSEE's manufacture, distribution or sale of such products not bearing or relating to the Licensed Marks. 3. STATEMENTS AND PAYMENTS; REPORTING (a)Statement and Payments: By the fifteenth (15th) day following the end of each month, LICENSEE shall furnish (on forms provided by or approved by NBA Europe) full and accurate statements (on a country-by-country and unit basis, if more than one country is contained within the definition of the Territory), certified by an officer of LICENSEE, showing all information relating to the calculation of Net Sales for the preceding statement, LICENSEE shall make all monthly royalty payments required under this Agreement for the preceeding month. Simultaneously with the submission of such statement, LICENSEE shall make all monthly royalty payments required under this Agreement for the preceding month. The minimum amount of each monthly royalty payment with respect to each Licensed Product category shall be the amount which, when added to payments of royalties previously made for the Contract Year with respect to such Licensed Product category, shall be equal to one-twelfth (8.34%) of the Minimum Guarantee for such Licensed Product category for such Contract Year required under Paragraph E above, multiplied by the number of calendar months then elapsed. Aggregate royalties paid each Contract Year may exceed the Minimum Guarantee for such Contract Year. Such monthly statements shall be furnished and the required payments made by LICENSEE whether or not there are any Net Sales for that month. All computations and payments shall be in U.S. dollars, at the spot rate for the local currency as published in the Wall Street Journal for the last business day of the proceeding month. If LICENSEE shall fail to timely pay any amount due under this Paragraph, LICENSEE shall pay interest on such amount at a rate equal to the lesser of (i) three percent (3%) per annum over the highest prime rate (announced by Chase Bank, New York branch) prevailing during the period between the date the payment first became due and the date such payment is actually paid or (ii) the highest rate permitted by law during the period between the date the payment first became due and the date such payment is, actually paid. The receipt or acceptance by NBA Europe of any of the statements furnished or royalties paid by LICENSEE (including the cashing of any royalty checks) shall not preclude NBA Europe from questioning their accuracy at any firm, auditing LICENSEE's books and records pursuant to Paragraph 12 or claiming any shortfall in royalty payments, or advertising and promotion payments. In order to assist with NBA Europe's annual budget process, by April 16 of each Contract Year, LICENSEE shall deliver a statement detailing LICENSEE's projections for sales of each Licensed Product for the following Contract Year. broken down on a quarterly basis. If LICENSEE fails to comply with the reporting requirements contained in this Paragraph, NBA Europe may charge LICENSEE two thousand U.S. dollars (U.S. $2,000) for each instance of non-compliance with this Paragraph. (b)No Cross Collateralization: Any royalty payment for a unit of Licensed Product sold shall only be applied against the Minimum Guarantee for such Licensed Product for the Contract Year in which the unit of such Licensed Product was sold (i.e., any shortfall in, or payment in excess of, the Minimum Guarantee for a Contract Year may not be offset or credited against the Minimum Guarantees for any other Contract Year, against any other Licensed Product or against any other NBA license (including premium license agreements entered into pursuant to Paragraph 5 hereof) held by LICENSEE). If Minimum Guarantees are stated separately for different categories of Licensed Products, royalty payments resulting from Net Sales of a category of Licensed Product shall be applied only against the Minimum Guarantee for such category of Licensed Product. (c) No Withholdings: All payments made by LICENSEE under this Agreement shall be made free and clear of, and without deduction or withholding for or on account of, any income, stamp or other taxes, bank charges, fees, deductions or withholdings. If any such taxes, charges, fees, deduction or withholdings are required to be withheld from any amounts payable to NBA Europe hereunder, the amounts so payable shall be increased to the extent necessary to yield to NBA Europe the amounts specified in this Agreement. 4.NON-RESTRICTIVE GRANT; RIGHTS RESERVED Nothing in this Agreement shall prevent NBA Europe from granting any other licenses and rights. All rights not specifically granted in this Agreement are expressly reserved by NBA Europe. No right of renewal or option to extend is granted or implied and LICENSEE shall have no right to continue manufacturing or selling Licensed Products or to continue holding itself out as a licensee of NBA Europe after the expiration or termination of this Agreement except as provided in Paragraph 14. 5.PREMIUMS LICENSEE shall not use, nor allow any third party to use, any Licensed Product as a Premium without NBA Europe's prior written authorization pursuant to a separate agreement with NBA Europe. In addition, LICENSEE shall not offer any Premium with the Licensed Products without the prior written consent of NBA Europe. Nothing in this Agreement shall prohibit LICENSEE from marketing Licensed Products using creative techniques consistent with industry practice, including, but not limited to, periodic "specials," "sales," or volume discount prices, so long as all receipts are accounted for in Net Sales and in accordance with this Agreement. 6.GOODWILL LICENSEE recognizes that (i) a portion of the value of the Licensed Marks is attributable to goodwill, (ii) the goodwill attached to the Licensed Marks belongs exclusively to NBA Europe and/or its affiliates, the NBA and its Member Teams and (iii) that such Licensed Marks have secondary meanings in the minds of the public. LICENSEE shall not, during the Term or thereafter, challenge the property rights of the Member Teams, whether severally owned or held in association as the NBA, or NBA Europe's and/or its affiliates' property rights, in and to Licensed Marks. 7.PROTECTION OF RIGHTS (a)Unauthorized Activities: LICENSEE shall promptly notify NBA Europe in writing of any infringements of the Licensed Marks or the Licensed Products or the sale of any Licensed Products outside the Territory which may come to LICENSEE's attention. NBA Europe shall have the sole right to determine whether or not any action shall be taken on account of any such infringement. LICENSEE agrees not to contact any third party, not to make any demands for claims and not to institute any suit or action on account of such infringement or unauthorized importation/exportation without obtaining the express prior written permission of NBA Europe in each instance. (b)Assistance in Protecting Marks: LICENSEE shall cooperate to the fullest extent necessary to assist NBA Europe in the protection of the rights of NBA Europe, the NBA and the Member Teams in and to the Licensed Marks. NBA Europe shall reimburse LICENSEE for any reasonable out-of-pocket costs actually incurred by LICENSEE in providing such cooperation and assistance. LICENSEE shall cooperate with NBA Europe in its enforcement efforts, including being named by NBA Europe as a complainant in any action against an infringer. LICENSEE shall pay to NBA Europe, and waives all claims to, all damages or other monetary relief recovered in any such NBA Europe-initiated action by reason of a judgment or settlement (other than for reasonable attoreys' fees and expenses incurred at NBA Europe's request) whether or not such damages or any part of such damages represent or are intended to represent injury sustained by LICENSEE. (c)Ownership of Marks: LICENSEE acknowledges that NBA Europe, its affiliates and/or the Member Teams are the exclusive owners of the Licensed Marks. Any intellectual property rights in the Licensed Marks that may accrue to LICENSEE shall inure to the benefit of NBA Europe and shall be assigned to NBA Europe and/or its affiliates upon its request. Any copyright, trademark or service mark used or procured by LICENSEE with respect to or involving the Licensed Marks, derivations or adaptations of the Licensed Marks, or any word, symbol or design which is similar to the Licensed Marks so as to suggest association with or sponsorship by the NBA, one of its Member Teams or any of their affiliates, shall be procured for the benefit of and in NBA Europe's name, but at LICENSEE's expense, notwithstanding their creation by LICENSEE. LICENSEE shall take all necessary steps to secure an assignment to NBA Europe of the copyright from a creator of work that is not work-for-hire. LICENSEE shall assign, and does hereby assign, to NBA Europe any copyright, trademark or service mark affecting or relating to the Licensed Marks already procured or applied for. LICENSEE shall supply NBA Europe with any necessary procured or applied for. LICENSEE shall supply NBA Europe with any necessary supporting materials required to obtain copyright or trademark registrations of any copyrights or trademarks required to be assigned to NBA Europe under this Agreement. Notwithstanding the above, LICENSEE shall also remain proprietor in conjunction with NBA Europe, during and after the termination of this Agreement, of any intellectual property right that LICENSEE acquired in relation to the licensed trademark. (d)Notices, Labeling and Records: NBA Europe may from time-to-time designate such copyright, trademark or service mark notices (including the form, location and content of such notices) that LICENSEE shall cause to appear on or within each Licensed Product sold, by means of a tag, label, imprint or other appropriate device, in every instance in which any Licensed Mark is used. The following general notice (in the English language and the language of the country where the Licensed Products will be sold) must be included on a label, the packaging material or on a separate slip of paper packed with or attached to the Licensed Product: The NBA and individual NBA member team identifications reproduced on this product are trademarks and copyrighted designs, and/or other forms of intellectual property, that are the exclusive property of NBA Properties, Inc. and the respective NBA member teams and may not be used, in whole or in part without the written consent of NBA Properties, Inc." LICENSEE shall: (I) cause all Licensed Products to bear the NBA "Official Licensed Product" logo on either the article or its packaging in such place, and in such prominence, as NBA Europe may designate from time-to- time, (ii) faithfully comply with and adhere to NBA Europe's mandatory hologram "Official Licensed Product" identification system, or such other shipment tracking, identification and anticounterfeiting systems, tags and labels that NBA Europe may establish from time-to-time, (iii) unless approved in writing by NBA Europe, not crosslicense or otherwise use other licensed properties or other Marks with the Licensed Products or Licensed Marks and (1v) keep appropriate records, and advise NBA Europe, of the date when each of the Licensed Products is first placed on sale or sold in each country of the Territory and the date of first use in each country of each different Licensed Mark on the Licensed Products and any promotional or packaging materials. (e)Recordation and Registered User Applications: which LICENSEE may distribute and which require applications to register LICENSEE as a permitted or registered user of the Licensed Marks, or which require the recordation of this Agreement, LICENSEE shall execute and deliver to NBA Europe such applications, agreements or other documents as may be necessary. In such event, this Agreement rather than such agreements will govern any disputes between LICENSEE and NBA Europe, and when this Agreement expires or is terminated, any such other agreement shall also be deemed expired or terminated. (f) LICENSEE Trade Names and Trademarks: LICENSEE shall permanently affix labeling on each Licensed Product or its packaging, indicating its name, trade name and address so that the public can identify the supplier of the Licensed Product. Prior to any distribution or sale of any Licensed Products, LICENSEE shall advise NBA Europe in writing of LICENSEE's trade names or trademarks used on Licensed Products and the proposed placement of such trade names and trademarks on the Licensed Products. LICENSEE shall only sell Licensed Products under mutually agreed upon trade names or trademarks and with approved copyrighted designs, shall not incorporate the Licensed Marks into LICENSEE's corporate or business name or trademark in any manner whatsoever and shall place its trade names and trademarks on Licensed Products only as approved in writing by NBA Europe prior to such use. As requested by NBA Europe, LICENSEE shall supply NBA Europe, in advance of shipping any Licensed Products, with at least twelve (12) copies of each type of its hang tags, labels and other markings of origin for use in identifying and authenticating Licensed Products in the marketplace. LICENSEE shall not use, whether during or after the Term, any Marks: (1) in connection with the Licensed Marks without NBA Europe's authorization, (ii) confusingly-similar to the Licensed Marks, or (iii) intended to relate or refer to the Licensed Marks, the Member Teams or events involving the NBA or the Member Teams. INDEMNIFICATIONS (a) LICENSEE shall be solely responsible for, and shall defend, hold harmless and indemnify NBA Europe, the NBA, its Member Teams and the National Basketball Players Association ("NBPA") and their respective affiliates, owners, directors, governors, officers, employees and agents (collectively "NBA Parties") against any claims, demands, causes of action or damages, including attorneys' fees (collectively, "Claims"), arising out of: (i) any act or omission of LICENSEE, (ii) any breach of this Agreement by LICENSEE, (iii) the manufacture, distribution, advertisement, promotion. sale, possession or use of any Licensed Product (including, but not limited to, Claims relating to (w) any defect (whether obvious or hidden and whether or not present in any sample approved by NBA Europe) in a Licensed Product or in any packaging or other materials (including advertising materials), (x) any alleged injuries to persons or property, (y) any infringement of any rights of any other person or entity or (z) the alleged failure by LICENSEE to comply with applicable laws, regulations, standards or the terms of the NBA Europe Code of Conduct, as amended from time to time by NBA Europe (the "Code of Conduct"), attached hereto as Exhibit or (iv) any claim that the use of any design or other graphic component of any Licensed Product (other than the Licensed Marks) violates or infringes upon the trademark, copyright or other intellectual property rights (including trade dress) of a third party, provided LICENSEE is given prompt written notice of and shall have the option to undertake and conduct the defense of any such Claim. In any instance to which the foregoing indemnities pertain, NBA Europe shall cooperate fully with and assist LICENSEE in all respects in connection with any such defense. LICENSEE shall reimburse NBA Europe for all reasonable out-of-pocket costs actually incurred by NBA Europe in connection with such cooperation and assistance. In any instance to which such indemnities pertain, LICENSEE shall keep NBA Europe fully advised of all developments pertaining to such Claim and shall not enter into a settlement of such Claim or admit liability or fault without NBA Europe's prior written approval. LICENSEE shall obtain and maintain product liability insurance providing protection for the NBA Parties against any Claims arising out of any alleged defects in the Licensed Products or any use of the Licensed Products, in an amount and providing coverage satisfactory to NBA Europe (including the amount of the deductible). Such insurance shall be carried by an insurer with a rating by A.M. Best & Co. of A-7 or other rating satisfactory to NBA Europe. Such insurance policy shall also provide that NBA Europe receive written notice within thirty (30) days prior to the effective date of the cancellation, non-renewal or any material change in coverage. In the event that LICENSEE has failed to deliver to NBA Europe a certificate of such insurance evidencing satisfactory coverage prior to NBA Europe's execution of this Agreement (or fails to maintain such insurance in accordance with this Paragraph), NBA Europe shall have the right to withdraw its consent to use any or all of the Licensed Marks and/or terminate this Agreement at any time. Such insurance obligations shall not limit LICENSEE's indemnity obligations, except to the extent that LICENSEE's insurance company actually pays NBA Europe amounts which LICENSEE would otherwise be obligated to pay NBA Europe. (b)NBA Europe shall be solely responsible for, and shall defend, hold harmless and indemnify LICENSEE, its directors, officers, employees and agents against any Claims arising out of: (i) a claim that the use of a Licensed Mark that has been registered in the Territory and which is used as authorized by this Agreement violates or infringes upon the trademark, copyright or other intellectual property rights (including trade dress) of a third party in or to the Licensed Marks or (ii) any breach of this Agreement by NBA Europe, provided NBA Europe is given prompt written notice of and shall have the option to undertake and conduct the defense of any such Claim. In any instance to which the foregoing indemnities pertain, LICENSEE shall cooperate fully with and assist NBA Europe in all respects in connection with any such defense. NBA Europe shall reimburse LICENSEE for all reasonable out-of-pocket expenses actually incurred by LICENSEE in connection with such cooperation and assistance. In any instance to which such indemnities pertain, NBA Europe shall not enter into a settlement of such Claim or admit liability or fault without LICENSEE's prior written approval. NBA Europe shall have the right within seventy (70) days of LICENSEE's commencement of production of Licensed Products bearing such Marks, to advise LICENSEE that one or more Marks of a Member Team (other than the team's name or primary logo) are not covered by this Paragraph 8(b), whereupon any continued use of such Mark by LICENSEE shall be at LICENSEE's sole risk. 9.QUALITY; APPROVALS; SAMPLES LICENSEE shall cause the Licensed Products to meet and conform to high standards of style, quality and appearance. In order to assure NBA Europe that it Is meeting such standards and other provisions of this Agreemtent, LICENSEE shall submit all materials for approval to either NBA Europe at the address listed above or NBA Properties, Inc. at 645 Fifth Avenue, New York, New York, as directed by NBA Europe and shall comply with the following: (a) Pre-Production: Before commercial production and distribution of any product bearing a Licensed Mark, LICENSEE shall submit to NBA Europe all preliminary and proposed final artwork, three dimensional models (if any), prototypes, mock-ups and pre-production samples of each product, including all styles, colors and variations, together with its labels, tags, cartons and containers (including packaging and wrapping materials). All LICENSEE submissions under this Paragraph shall be accompanied by forms supplied by NBA Europe, using one (1) form for each submission and filling in all necessary information. NBA Europe shall approve or disapprove in writing all submissions, in Its sole discretion, before LICENSEE shall be entitled to distribute, advertise, use, produce commercial quantities of or sell any item relating to any such submission. Any article actually submitted and not disapproved within sixty (60) days after receipt by NBA Europe shall be deemed approved. Approval of an article which uses particular artwork does not imply approval of such artwork with a different article or of such article with different artwork. LICENSEE acknowledges that NBA Europe's approval of an article does not imply approval of, or license to use, any non-NBA controlled elements contained in any article. After a sample of an article has been approved, LICENSEE shall not make any changes without resubmitting the modified article for NBA Europe's written approval. (b) Production Samples: Before selling or distributing any product bearing a Licensed Mark, LICENSEE shall furnish NBA Europe with, at no charge, for its permanent use, two (2) samples of the product from the first production run of each manufacturer of the Licensed Products, including all styles, colors and variations, together with its labels, tags, cartons and containers (including packaging and wrapping materials). If such samples do not conform to all aspects of the Licensed Product as approved or if the quality of any such sample does not meet the requirements of this Paragraph 9, NBA Europe shall notify LICENSEE and such article shall be deemed disapproved and all such articles shall be promptly destroyed. LICENSEE shall also furnish NBA Europe, free of charge, with any additional pieces of Licensed Product as may reasonably be requested by NBA Europe to promote the sale of Official Licensed Products (e.g., for NBA Europe's display room, advertisements, catalogs, mailers, product placement and trade shows) or for comparison with earlier samples. In addition, LICENSEE shall provide NBA Europe with any additional pieces of Licensed Product as may be required for the permanent use of the Member Teams, not to exceed one (1) piece per Member Team. If NBA Europe wishes to purchase Licensed Products for give- away purposes and not for resale, LICENSEE shall sell the Licensed Products to NBA Europe at LICENSEE's direct manufacturing cost for such Licensed Products and LICENSEE shall not be required to pay royalties on such sales to NBA Europe. (c) Rejections and Non-Compliance: The rights granted under this Agreement do not permit the sale of "seconds" or "irregulars." All submissions or samples not approved by NBA Europe shall promptly be destroyed by LICENSEE. LICENSEE shall advise NBA Europe regarding the time and place of such destruction (in sufficient time to arrange for an NBA Europe representative to witness such destruction, if NBA Europe so desires) and such destruction shall be attested to in a certificate signed by one of LICENSEE's officers and submitted to NBA Europe within fifteen (15) days of the date on which the sample was not approved. In the event of LICENSEEs unapproved or unauthorized manufacture, distribution, use or sale of any products or materials bearing the Licensed Marks, including promotional materials, or the failure of LICENSEE to comply with Paragraphs 7(d), 7(f) 9, 11 (c) or 11 (e), NBA Europe shall have the right to: (1) immediately revoke LICENSEE's rights with respect to any Licensed Product licensed under this Agreement, (ii) charge LICENSEE two thousand U.S. dollars (U.S. $2,000) for each instance (e.g., per unit) of non-compliance with respect to any article, product or material and/or (iii) at LICENSEE's expense, confiscate or order the destruction of such unapproved, unauthorized or noncomplying products. Such right(s) shall be without prejudice to any other rights NBA Europe may have under this Agreement or otherwise. (d) Testing: Both before and after Licensed Products are put on the market, LICENSEE shall follow reasonable and proper procedures for testing the Licensed Products for compliance with laws, regulations, standards and procedures, and shall permit NBA Europe (upon reasonable notice) to inspect its and its authorized manufacturer's testing, manufacturing and quality control records, procedures and facilities and to test or sample Licensed Products for compliance with this Paragraph and the other terms and conditions of this Agreement. Licensed Products found by NBA Europe at any time not to comply with applicable laws, regulations, standards and procedures shall be deemed disapproved, even if previously approved by NBA Europe, and shall not be shipped unless and until LICENSEE can demonstrate to NBA Europe's satisfaction full compliance. (e) Revocation of Approval: In the event that: (i) the quality, appearance or style of any Licensed Product ceases to be acceptable to NBA Europe, (ii) LICENSEE uses the Licensed Marks improperly or violates any term of this Paragraph 9 or (iii) NBA Europe becomes aware of something relating to any such Licensed Product or LICENSEE which. in the opinion of NBA Europe. reflects unfavorably upon the professional, business or personal reputation of NBA Europe, the NBA or any of its Member Teams, then, in any such event, NBA Europe shall have the right, in its sole discretion, to withdraw its approval of such Licensed Product. In the event of such withdrawal, NBA Europe shall provide immediate written notice to LICENSEE and LICENSEE shall cease the use of the Licensed Marks in connection with the manufacture, sale, distribution, advertisement or use of such Licensed Product and such Licensed Product shall immediately be withdrawn from the market and destroyed; provided, however, that in the event of a revocation of approval pursuant to (i) above, NBA Europe and LICENSEE shall negotiate in good faith to provide for a reasonable sell-off period for such Licensed Product. Within ten (10) days after LICENSEE's receipt of such notice, LICENSEE shall pay all royalties, Monthly Payments, Minimum Guarantees and advertising and promotion amounts due NBA Europe with respect to the Licensed Product for which approval has been revoked. If there are other Licensed Products for which approval has not been withdrawn under this subparagraph, then this Agreement shall remain in full force and effect as to such other Licensed Products. LICENSEE shall notify NBA Europe in writing of any Licensed Products deleted from its product lines. (f) All decisions by NBA Europe relating to disapproval of any Licensed Product shall be final and binding on LICENSEE and shall not be subject to review in any proceeding. 10. PROMOTIONAL MATERIAL LICENSEE shall not use the Licensed Marks or Player Attributes (as defined in Paragraph 19) or any reproduction of the Licensed Marks or Player Attributes in any advertising, promotion or display material in connection with any product or in any other manner whatsoever without prior written approval from NBA Europe. Under no circumstance will "lotteries," "games of chance" or any other type of promotion which NBA Europe believes reflects unfavorably upon the NBA or Its Member Teams be approved. AJI advertising or promotional copy and material depicting or using the Licensed Marks (including display material, catalogs and press releases) shall be submitted for approval well in advance of production (but in no event less than ten (10) business days prior to the start of commercial production) to allow adequate time for NBA Europe, in its sole discretion, to approve, disapprove or comment upon such materials and for any required changes to be made. By way of example, no television or cinema advertising containing any Licensed Mark may be used unless it has been approved in all stages (i.e., storyboard, production rough-cut and final version). Unless otherwise approved by NBA Europe, any NBA game action photographs or footage that LICENSEE uses in connection with the Licensed Products must be obtained from NBA Entertainment, Inc. (NBAE") and shall be subject to NBAE's search and edit charges and any additional NBAE licensing fees. Any promotional material submitted that is not approved or disapproved by NBA Europe within thirty (30) days of its receipt by NBA Europe shall be deemed approved by NBA Europe. LICENSEE shall be solely responsible and liable for any advertising and promotional activities conducted and shall ensure that all such activities comply with all applicable laws, regulations and standards in the Territory. AJI decisions by NBA Europe relating to disapproval of any advertising, promotion or display material shall be final and binding on LICENSEE and shall not be subject to review in any proceeding. 11. DISTRIBUTION; COMPLIANCE d sell, within and throughout the (a) LICENSEE shall use its best efforts to distribute an Territory, the Licensed Products in such manner as may be required to meet competition by reputable manufacturers of similar articles. In any ninety (90) day period in which LICENSEE fails to sell or distribute Licensed Products in reasonable commercial quantities, LICENSEE shall be deemed not to have used its best efforts. LICENSEE shall make and maintain adequate arrangements for the distribution and timely delivery of Licensed Products to retailers within and throughout the Territory. In the event NBA Europe advises LICENSEE that a special promotional effort is to take place in an individual store or chain, LICENSEE shall use its best efforts to sell the Licensed Products to said store or chain. In addition, LICENSEE shall give the Licensed Products wide distribution in the Territory and shall not, subject to the provisions set forth in this Agreement, refrain for any reason from selling Licensed Products to any retail outlet within the Territory that may desire to purchase Licensed Products and whose credit rating and marketing image warrants such sale. (b)If LICENSEE desires to have a third party manufacture or distribute (if permitted under this Agreement) any Licensed Product, LICENSEE must first notify NBA Europe of the name and address of such third party and of the Licensed Product LICENSEE desires such third party to manufacture or distribute. Attached as Schedule A is a true and complete list of all third party manufacturers and distributors (if permitted under this Agreement) currently authorized by NBA Europe. NBA Europe shall have the right, in its sole discretion, to withhold approval for such third party manufacture or distribution. If NBA Europe grants approval for such third party manufacture or distribution, it may grant such approval pursuant to an agreement (on a form supplied by NBA Europe) to be entered into prior to such manufacture or distribution among NBA Europe, LICENSEE and such manufacturer or distributor which will, among other things, require that the third party manufacturer or distributor be subject to all of the terms and conditions of this Agreement. If NBA Europe does not require the third party to enter into a separate agreement, LICENSEE must provide NBA Europe with a copy of its agreement with the third party, which agreement must provide that it is subject to this Agreement. If any of LICENSEE's authorized manufacturers or distributors uses the Licensed Marks for any unauthorized purpose, LICENSEE shall be responsible for, and shall cooperate fully and use its best efforts in stopping, such unauthorized use. Any change by LICENSEE from a third party manufacturer or distributor previously approved by NBA Europe shall require approval in accordance with this Paragraph. (c)LICENSEE understands and acknowledges the meanings of "Counterfeit Goods" and "Diverted Goods" as set forth in Paragraph 1 above and LICENSEE shall use all commercially reasonable means to prevent the creation of any such goods by its employees, agents, representatives or any others operating under its direction, supervision or control and involving the Licensed Marks. Nothing in this Agreement, however, shall be deemed to restrict LICENSEE with respect to its obligation to fulfill orders from customers in accordance with applicable laws. (d)In the event grade or quality as the Licensed Products, but which do not bear any of the Licensed Marks, LICENSEE will not discriminate, in a manner which adversely impacts the Licensed Products, in the granting of commissions and discounts to salesmen, dealers and distributors between the Licensed Products and the licensed products of any third party. LICENSEE may not package the Licensed Products in combination with other products, whether similar or different, without the prior written approval of NBA Europe. In the event that NBA Europe believes in good faith that LICENSEE has employed selling or reporting methods which circumvent or reduce the royalty or other payment or reporting obligations contained in this Agreement, NBA Europe may, in addition to any other rights and remedies it may have, at its option and upon fifteen (15) days' prior written notice, adjust or establish minimum royalties per unit. (e)LICENSEE shall at all times conduct all aspects of its business in a fair and reasonable manner and in compliance with all shipment tracking, identification and anti-counterfeiting systems and labels that NBA Europe may establish from time to time and all applicable laws, government rules and regulations, court and administrative decrees and the highest standard of business ethics then prevailing in the industry. LICENSEE shall faithfully comply with and adhere to NBA Europe's shipping and distribution policies established from time-to-time. LICENSEE shall use reasonable efforts to ensure that all retailers and authorized its commercially distributors purchasing Licensed Products comply with NBA Europe's anti- counterfeiting systems, labels and shipping and distribution policies established from time-to-time. It shall be LICENSEE's sole responsibility, at its sole expense, to obtain all approvals (including, but not limited to, approvals of advertising materials) of all governmental authorities which may be necessary in connection with LICENSEE's performance under this Agreement. (g) LICENSEE acknowledges that one or more of NBA Europe's affiliates intend to offer various NBA and/or Member Team-identified products for sale in an NBA Europe owned "showcase" retail store ("NBA Store"). LICENSEE further acknowledges that it will receive a variety of tangible and intangible benefits as a result of having merchandise manufactured by LICENSEE displayed, sold and promoted at the NBA Store. Therefore, LICENSEE shall, in addition to and in consideration for the license granted under this Agreement and in consideration of the benefits it will receive from having merchandise displayed, sold and promoted at the NBA Store, (i) upon the request of NBA Europe, perform contract manufacturing services for NBA Europe in connection with the manufacture of products for sale in the NBA Store on terms as mutually agreed upon by NBA Europe and LICENSEE and (ii) offer Licensed Products to the NBA Store on terms at least as favorable as those offered to LICENSEE's most preferred high-volume customers, including price, priority of delivery, discounts, cooperative or other advertising and promotional allowances and other benefits (regardless of volume). 12. RECORDS; AUDITS LICENSEE shall keep accurate books of account and records covering all transactions relating to the license granted in this Agreement (including, but not limited to, sales of Licensed Products, purchases and uses of NBA hologram hang tags and compliance with shipment tracking, identification and anti-counterfeiting systems and labels that NBA Europe may establish from time to time). NBA Europe and its authorized representatives shall have the right, at all reasonable hours of the day and upon reasonable prior notice, to examine and audit such books of account and records and all other documents and materials in LICENSEE's possession or under its control (including records of LICENSEE's parents, subsidiaries, affiliates and third parties, if they are involved in activities which relate to this Agreement) relating to this Agreement. NBA Europe shall have free and full access for such purposes and for the purpose of making extracts and copies. Should an audit by NBA Europe establish a deficiency between the amount found to be due NBA Europe and the amount LICENSEE actually paid or reported, the LICENSEE shall pay the amount of such deficiency, plus interest at the then current prime rate (as announced by Chase Bank, New York branch) from the date such amount should have been paid until the date of payment. Should such audit establish a deficiency of more than five percent (5%), LICENSEE shall also pay for the cost of the audit. LICENSEE shall pay such amount within thirty (30) days. All such books of account and records shall be kept available for at least two (2) years after the expiration or termination of this Agreement, or three (3) years after the end of the Contact Year to which they relate, whichever is earlier. in order to facilitate inspection of Its books and records, LICENSEE shall designate a symbol or number which will be used exclusively in connection with the Licensed Products on which royalty payments are payable and shall maintain for inspection as provided in this Agreement duplicates of all billings to customers with respect to Licensed Products. LICENSEE shall, within ten (10) business days of NBA Europe's request (which shall not be made more than four (4) times per Contract Year), furnish NBA Europe with a list of LICENSEE's top twenty-five (25) retail accounts for Licensed Products (on a country by country basis) and their monthly purchases of Licensed Products (broken down by unit sales and in dollar volume by retailer). LICENSEE shall supply NBA Europe with true and complete copies of any agreement it has entered into, or in the future enters into, with any Member Team or any NBA player. In addition, LICENSEE shall, on a quarterly basis during the Term, provide NBA Europe with copies of all financial statements and other financial information prepared by LICENSEE for distribution to its banks or other financial lending institutions to whom it reports regularly. LICENSEE shall cooperate with NBA Europe in developing an electronic data interchange through which NBA Europe may access LICENSEE's electronic database relating to the manufacture, distribution and sale of Licensed Products (such as work-in-process, finished goods on hand, orders received, deliveries made and any other online information relating to the Licensed Products) or developing such other system as Will enable NBA Europe to obtain such information or facilitate NBA Europe's review of LICENSEE's graphic designs for Licensed Products. 13.EARLY TERMINATION Without prejudice to any other rights NBA Europe may have pursuant to this Agreement or otherwise, NBA Europe shall have the right to terminate this Agreement at any time if: (a) Within three (3) months from the d NBA Europe, LICENSEE shall not have begun the bona-fide distribution and sale of each Licensed Product within and throughout the Territory in accordance with this Agreement. (b)LICENSEE shall fail to timely remit a payment when due and shall fail to cure such non-payment within thirty (30) days (ten (10) days for a payment default other than a royalty payment default) of its receipt of written notice from NBA Europe; provided, however, that the LICENSEE shall not have the right to cure any subsequent payment default. (c) LICENSEE or any guarantor under this Agreement shall be unable to pay its liabilities when due, or shall make any assignment for the benefit of creditors, or under any applicable law admits in writing its inability to meet its obligations when due or commit any other act of bankruptcy, institute voluntary proceedings in bankruptcy or insolvency or permit institution of such proceedings against it. (d)LICENSEE shall exhibit a pattern of frequent failure to make timely delivery of sufficient quantities of the Licensed Products to its retail accounts. (e)LICENSEE (or any entity that controls LICENSEE or is controlled by LICENSEE) now or in the future holds another license from NBA Europe or from any of its affiliates and such license is terminated during the Term, LICENSEE is in breach of Paragraph 6 or Paragraph 111 (c). (g)LICENSEE sells to any third party that LICENSEE knows, or has reason to know, is altering or modifying the Licensed Products prior to sale to the ultimate consumer. (h)LICENSEE shall fail to perform or shall be in breach of any other term or condition of this Agreement (other than a payment default). A termination pursuant to this subparagraph (h) shall take effect (i) thirty (30) days after written notice of such failure to perform or breach is sent by NBA Europe If such failure to perform or breach can be Completely Cured (as defined below) and such failure to perform or breach has not been Completely Cured during such thirty (30) day period, or (ii) immediately after written notice of such failure to perform or breach is sent by NBA Europe if such failure to perform or breach cannot be Completely Cured. For purposes of this subparagraph, 'Completely Cured" means that such failure to perform or breach is cured so that, in the reasonable judgment of NBA Europe, such failure to perform or breach will have had no effect on, or caused no damage to, NBA Europe. In addition to NBA Europe's other rights and remedies, upon termination of this Agreement under this Paragraph, LICENSEE shall pay NBA Europe (within thirty (30) days of such termination) the Minimum Guarantees for each Licensed Product through the end of the Agreement, less the royalties paid to NBA Europe through the date of termination. 14. DISPOSAL OF STOCK Sixty (60) days before the expiration of this Agreement and ten (10) days after any termination under Paragraphs 9 or 13, LICENSEE will furnish to NBA Europe a certificate showing the number and description of Licensed Products on hand or in process of manufacture. After expiration or termination of this Agreement, LICENSEE shall have no right to, nor allow any third party to, Manufacture, advertise, distribute, sell, promote or otherwise deal in any Licensed Products or use the Licensed Marks (and LICENSEE shall not engage in any such activity) except as provided below. For a period of ninety (90) days following the expiration (but not after the termination) of this Agreement, LICENSEE may sell-off and deliver Licensed Products which are on hand or in process at the time of such expiration (the "Sell-Off Period"); provided, however that (i) the total number of units of each Licensed Product sold during the Sell-Off Period may not be greater than one hundred ten percent (110%) of the total number of units of such Licensed Product on hand on the same date the preceding Contract Year, (ii) such Licensed Products may only be sold in accordance with this Agreement and in the normal course of business and at regular selling prices, (iii) all payments then due are first made to NBA Europe and (iv) statements and payments with respect to the Sell-Off Period are made in accordance with this Agreement. NBA Europe shall have the option to conduct physical inventories before the expiration of this Agreement until the end of the Sell-Off Period in order to verify such inventory and/or statements. If LICENSEE refuses to permit such physical inventory, LICENSEE shall forfeit its right to dispose of Licensed Products under this Paragraph. After such Sell-Off Period, all inventory on hand or in process (including all promotional and packaging materials) will be destroyed. LICENSEE shall have no sell-off rights in the event this Agreement is terminated. After such termination, all inventory on hand or in process (including all promotional and packaging materials) will be destroyed. Any destruction of Licensed Product required pursuant to this Agreement shall be attested to in a certificate signed by one of LICENSEE's officers. 15. EQUITABLE RELIEF LICENSEE acknowledges that NBA Europe-is entering into this Agreement not only in consideration of the royalties or other financial consideration to be paid, but also for the promotional value and intrinsic benefit resulting from the manufacture, advertisement, distribution, sale and promotion of the Licensed Products by LICENSEE in the Territory. LICENSEE acknowledges that the Licensed Marks possess a special, unique and extraordinary character which makes difficult the assessment of the monetary damage which NBA Europe would sustain as a result of the unauthorized use of the Licensed Marks. LICENSEE further acknowledges that: (I) its failure to manufacture, advertise, distribute, sell and promote the Licensed Products in accordance with this Agreement and (ii) the unauthorized or unapproved use of the Licensed Marks, will. in either case, cause immediate and irreparable damage to NBA Europe for which NBA Europe would not have an adequate remedy at law. Therefore, LICENSEE agrees that, in the event of a breach of this Agreement by LICENSEE, in addition to such other legal and equitable rights and remedies as shall be available to NBA Europe, NBA Europe shall be entitled to injunctive and other equitable relief, without the necessity of proving damages or furnishing a bond or other security. 16. NOTICES All notices and statements to be given and all payments to be made under this Agreement shall be given or made at the respective address of the parties as set forth above, unless notification of a change of address is given in writing. Any notice of breach or default must be in writing and sent by facsimile, overnight express delivery, or registered or certified mail, return receipt requested, property addressed and stamped. Any written notice shall be deemed to have been given at the time it is sent. 17. NO JOINT VENTURE Nothing in this Agreement shall be construed to place the parties in the relationship of partners or joint venturers. Neither party shall have the power to obligate or bind the other to a third party in any mannerwhatsoever 18. ARBITRATION OF CERTAIN MATTERS Any dispute or disagreement between the parties relating solely to the amount of royalty payments owing under this Agreement shall be settled by arbitration in New York City under the rules then in effect of the American Arbitration Association. Judgment upon the award may be entered in any court having jurisdiction. No other dispute or disagreement between the parties (including any claim by NBA Europe that LICENSEE is using the Licensed Marks in a manner not authorized by this Agreement or is otherwise in breach of this Agreement) shall be settled by arbitration. 19. NO USE OF PLAYERS LICENSEE acknowledges that this Agreement does not grant to LICENSEE any licenses or rights with respect to the use of the names, likenesses or other attributes of any NBA player (collectively, "Player Attributes") except in advertising and promotional materials specifically approved by NBA Europe. The license granted under this Agreement does not include, and shall not be used to imply, a testimonial or endorsement of any Licensed Products by any NBA player. LICENSEE shall not use Player Attributes without first obtaining written authorization from the subject player(s). LICENSEE shall not enter into any agreement with any NBA player or any other person which would require that player or other person or other person to wear or use any Licensed Product at any NBA game (either courtside or in any locker room) or at practice. 20. WARRANTIES Each party represents and warrants that it has the right and authority to enter into and perform this Agreement and NBA Europe represents and warrants that ft has the right to grant the rights to use the Licensed Marks in accordance with the terms and conditions of this Agreement. LICENSEE represents and warrants that the Licensed Products and all advertising and promotional materials shall comply with all applicable laws, regulations and standards. NBA Europe's approval of such materials will not imply a representation or belief that NBA Europe believes such materials are sufficient to meet applicable laws, regulations and standards, nor shall it imply that NBA Europe agrees with or supports any claims made by LICENSEE in any advertising materials relating to the Licensed Products. LICENSEE further represents and warrants that all advertising and promotional materials and all graphics used on Licensed Products will not violate the intellectual property rights of any third party. 21. SEVERABILITY In the event any provision of this Agreement is found to be void, invalid or unenforceable as a result of any judicial or administrative proceeding or decree, this Agreement shall be construed and enforced as if such provision were not contained in this Agreement. 22. GOVERNING LAW AND JURISDICTION Pursuant to the obligations of NBA Europe under a license from NBAP, NBA Europe is required to cause each license agreement authorizing the use of the Licensed Marks to provide that ft shall be governed by the laws of the State of New York and that the courts of the State of New York in New York County and the United States District Court for the Southern District of New York shall have exclusive jurisdiction over any dispute or controversy arising under. Accordingly, this Agreement shall be construed in accordance with the laws of the State of New York, USA, without regard to its principles of conflicts of laws. Any claim arising under this Agreement (except as provided under Paragraph 18) shall be prosecuted in a federal or state court of competent jurisdiction located within the City of New York, USA and LICENSEE consents to the jurisdiction of such court and to the service of process by mail. 23. MISCELLANEOUS (a) Assignment: This Agreement and any rights granted under this Agreement are personal to LICENSEE and shall not be assigned, sublicensed, subcontracted or encumbered, directly or indirectly, by law or by contract, without N6A Europe's prior written consent, which consent may, in NBA Europe's sole discretion, (i) be contingent upon a fee payable by LICENSEE or the transferee, the amount of which shall be determined by NBA Europe in its sole discretion, and/or (ii) impose other terms and conditions upon the assignment, sublicense or transfer. Any transfer of a controlling interest in LICENSEE or in any party which currently controls LICENSEE, directly or indirectly, shall be deemed an assignment prohibited by the preceding sentence. Any nonconsensual assignment, sublicense, subcontract or encumbrance of this Agreement by LICENSEE shall be invalid and of no force or effect. Upon any such nonconsensual assignment, sublicense or encumbrance, this Agreement shall terminate, all payment obligations of LICENSEE hereunder shall be accelerated and immediately due and payable, and all rights granted under this Agreement shall immediately revert to NBA Europe. (b) Waiver: None of the provisions of this Agreement can be waived or modified except expressly by a writing signed by both parties. There are no representations, promises, agreements, warranties, covenants or undertakings by either party other than those contained in this Agreement. No failure on the part of NBA Europe to exercise any right under this Agreement shall operate as a waiver of such right; nor shall any single or partial exercise of any right preclude any other or further exercise or the exercise of any other rights. (c)Survival: No expiration or termination of this Agreement shall relieve LICENSEE of its obligation to pay NBA Europe any amounts due to NBA Europe at the time of termination, regardless of whether these amounts are then or thereafter payable. The provisions of Paragraphs 12 and 23(e) shall survive the expiration or termination of this Agreement. (d) Adjustments: NBA Europe shall have the option to increase the Royalty Rates and any advertising and promotion commitment in the event that, at any time during the Term, LICENSEE agrees to pay or in fact pays royalty rates and/or advertising and promotion contributions with respect to any other licensed sports or entertainment property in excess of the Royalty Rate for any Licensed Product. From time to time at NBA Europe's request, LICENSEE shall- deliver a certificate to NBA Europe which sets forth the royalty rates and advertising and promotion contributions LICENSEE pays to any other professional sports league or entertainment property. (e) Confidentiality: Neither party shall (nor shall they permit or cause their employees or agents to) divulge, disseminate or publicize the financial terms of this Agreement or, in the case of LICENSEE, any information on the specifications or methods of reproduction of the Licensed Marks to any third party (other than their respective attorneys or accountants or in the case of NBA Europe, the NBA Board of Governors and the NBPA), except as may be required by law or to fulfill the terms of this Agreement. (f)Research: LICENSEE shall cooperate with NBA Europe's reasonable requests for information in connection with conducting marketing tests, surveys and other research ("Research"), provided that any proprietary information so furnished shall be kept strictly confidential by NBA Europe. If LICENSEE performs or causes to be performed any Research primarily dedicated to evaluating or otherwise assessing a Licensed Product (or any LICENSEE (non-NBA) product offering similar to a Licensed Product), then copies of such Research results shall be promptly provided to NBA Europe. As may be reasonably requested by NBA Europe, LICENSEE shall provide NBA Europe (or NBA Europe's designated third-party researcher) with any Research and information that LICENSEE has or obtains regarding its retail accounts. (g)Construction: This Agreement has been executed in a text using the English language, which text shall be controlling. This Agreement, together with any exhibits or attachments, when fully executed, shall constitute the entire agreement and understanding between the parties and cancels, terminates and supersedes any prior agreement or understanding relating to the subject matter of this Agreement between LICENSEE and the NBA, any Member Team or NBA Europe. The headings in this Agreement are for reference purposes only and shall not affect the interpretation of this Agreement. This Agreement shall not be binding on NBA Europe until signed on its behalf by its President or such other executive designated by the President to sign. Schedule A [Third party manufacturers and distributors] EXHIBIT A NBA EUROPE, S.A. LICENSEE AND SUPPLIER CODE OF CONDUCT The NBA!s mission is to be the most respected and successful sports league and sports marketing organization in the world. In keeping with this mission, NBA Europe, S.A. ("NBA Europe") is committed to conducting its business in a socially responsible and ethical manner. We expect all NBA EUROPE licensees, including their contractors, engaged in the manufacture and sourcing of products bearing NBA, WNBA, USA Basketball and NBC trademarks (collectively "Product Suppliers") to share this commitment. At a minimum, all Product Suppliers must adhere to the following Licensee and Supplier Code of Conduct: 1 . ETHICAL STANDARDS Product Suppliers shall conduct their businesses in accordance with the highest standards of ethical behavior. 2. COMPLIANCE VVITH APPLICABLE LAWS Product Suppliers shall comply with all applicable laws and regulations of the countries, states and localities in which they operate. 3. EMPLOYMENT PRACTICES NBA EUROPE will only do business with Product Suppliers whose employees are appropriately compensated, present at work voluntarily, not at undue risk of physical harm and not exploited in any way. In addition, Product Suppliers must comply with the following specific standards: Wages and Benefits: Product Suppliers shall provide wages, overtime compensation and benefits at not less than the minimum levels required by applicable laws and regulations or the prevailing local industry levels, if higher. Working Hours: Product Suppliers shall, at a minimum, comply with all applicable working hours laws and regulations. Except in unusual business circumstances, employees shall not be required to work more than the lesser of (a) 48 hours per week 12 hours of overtime or (b) the limits on regular and overtime hours allowed by local law or, where local law does not limit the hours of work, the regular work week in such locality plus 12 hours of overtime. In addition, except in unusual business circumstances, employees shall be entitled to at least one day off in every seven-day period. Child Labor. Product Suppliers shall not employ any person under the age of 15 (or 14 where allowed by local law) or under the local age for completing compulsory education, if higher. Forced Labor.- Product Suppliers shall not use any forced labor, whether in the form of prison labor, indentured labor, bonded labor or otherwise. Harassment or Abuse: Product Suppliers shall treat each employee with dignity and respect, and shall not use corporal punishment, threats of violence or other forms of physical, sexual, psychological or verbal harassment or abuse. 19 I i Nondiscrimination: Product Suppliers shall not discriminate in employment practices on the basis of race, religion, age, nationality, social or ethnic origin, gender, sexual orientation, political opinion or disability. Freedom of Association: Product Suppliers shall recognize and respect the right of employees to join organizations of their own choosing and shall neither threaten nor penalize employees for their efforts to organize or bargain collectively. Health and Safety. Product Suppliers shall provide employees with a safe and healthy working environment. Manufacturing facilities shall, at a minimum, contain clean restrooms, potable water, adequate lighting, adequate ventilation and fire exits. Residential facilities, if provided, shall also be kept sanitary and safe. 4. ENVIRONMENTAL REQUIREMENTS Product Suppliers shall comply with all applicable environmental laws and regulations. 5. COMMUNICATION Product Suppliers shall take appropriate steps to ensure that the provisions of this Code are communicated to employees, including the prominent posting of the Code (in the local language) in their manufacturing facilities. 6. MONITORING AND COMPLIANCE Product Suppliers shall conduct periodic audits of manufacturing facilities, on the basis of which they shall certify to NBA EUROPE on request either that (a) all products bearing NBA, WNBA, USA Basketball and NBC trademarks have been manufactured in compliance with this Code, or (b) identified facilities have been found not to be in compliance with this Code, in which event the Product Supplier shall specify appropriate and effective steps to remedy the non-compliance. NBA EUROPE or its representatives are authorized to engage in monitoring activities to confirm compliance with this Code, including on-site inspections of manufacturing facilities and residential facilities, audits of records relating to employment matters and private interviews with employees at all levels. Product Suppliers shall retain and make available to NBA EUROPE or its representatives, either on site or at agreed upon locations, all documentation that may be required to assess whether or not the Product Supplier is in compliance with this Code. 7. FAILURE TO COMPLY NBA EUROPE reserves the right, in addition to all other legal and contractual rights, to terminate its relationship with any Product Supplier found to be in violation of this Code. EXHIBIT 10.63 Contract No: MLI-4024C MAJOR LEAGUE BASEBALL LICENSE AGREEMENT THIS LICENSE AGREEMENT, made and entered into as of this 18th day of Jauary, 1999, by and among MAJOR LEAGUE BASEBALL PROPERTIES, INC. of 145 Park Avenue, New York, New York 10167 (hereinafter referred to as "Licensor"), and Nasco Products International, Inc. of 1808 North Charry St., Knoxville, TN 37917, (hereinafter referred to as "Company"); WITNESSETH WHEREAS, Licensor is the exclusive licensing agent of trademarks and other proprietary rights (the "Trademarks" defined below) which identify or are used by Licensor, the Office of the Commissioner of Baseball, the American and National Leagues of Professional Baseball Clubs (the "Leagues") and their member Clubs (as listed in Paragraph l(g) below, the "Clubs"); WHEREAS, Company desires to obtain the night to use the Trademarks within the "Licensed Territory" (defined below), on and in connection with the manufacture, advertisement, promotion, distribution and sale of the "Licensed Products" (defined below); and NOW, THEREFORE, in consideration of the mutual agreements contained herein, the parties agree as follows: 1. Definitions. For purposes of this Agreement the following definitions shall apply: (a) "Licensed Products" shall mean the following products which are manufactured, advertised, promoted, distributed or sold by Company: (i) Backpacks, referred to by Company as style number PRO 114, made of 600D nylon fabric measuring 16T x I OW x 6D cm in size and featuring a zippered main compartment with zipper pull, front zippered storage compartments, bottom rubber skid, padded adjustable shoulder straps, 2 inch hang loop and embroidered Club Trademarks; (ii) Rucksacks, referred to by Company as style number PRO 115, made of 600D nylon fabric measuring 30T x 38W x 18D cm in size and featuring padded back and shoulder straps, padded top handles with key ring, raincover zippered side pockets, front pocket, flap buckled pocket, and embroidered Club Trademarks; (iii) Sport bags (other than authentic), referred to by Company as style number TBP23, made of 600D nylon fabric measuring 30T x 38W x 18D cm in size and featuring padded back and shoulder straps, padded top handles with key ring, raincover zippered side pockets, front pocket, flap buckled pocket, and embroidered Club Trademarks; (iv) Sport carryall bags (other than authentic), referred to by Company as style number PRO 116, made of 600D nylon fabric featuring a 20" padded/adjustable shoulder strap, double zippered opening on the main compartment, a flap buckled pocket, and embroidered Club Trademarks; (v) Backpacks,, referred to by Company as style number PRO 101, made of 600D polyester fabric, measuring 40T x 35W x 12D cm in size, featuring black with trimmed Club colour gusset, half-zippered main compartment, gusseted front zipper pocket, padded/adjustable shoulderings, and embroidered Club Trademarks; (vi) School satchels, referred to by Company as style number PRO 117, made of 600D polyester fabric, measuring 30T x 12W x 24D cm in size, featuring padded shoulder strap, divided compartment with inside double pockets, and embroidered Club Trademarks; (vii) Carry school organisers, referred to by Company as style number PRO 119, made of 600D polyester fabric, featuring top handles, padded back and shoulder straps, inside organising pencil pouch, card and pen holder, key ring and calculator slot, 3 major compartments for notebooks and text books, and embroidered Club Trademarks; (viii) Equipment bags (other than authentic), referred to by Company as style number PRO 107, made of 600D polyester fabric, measuring 27T x 14.5W x 14D cm in size, featuring a double zippered main compartment, two gusset zipper end pockets, mesh and slash pocket with zipper closure, adjustable/detachable should strap, Velcro handlock, sturdy rubber bottom, and embroidered Club Trademarks; (ix) Backpacks, referred to by Company as style number PRO 113, made of 600D polyester fabric, measuring 40T x 35W x 12D cm in size, featuring a halfzippered main compartment, gusseted front zipper pocket, padded/adjustable shoulder straps, molded back pad, enlargement extender zipper on both sides, and embroidered Club Trademarks. (x) Waistpacks, refer-red to by Company as style number FPN14SI, made of 600D polyester fabric, measuring 37T x 11.5W x 8D cm in size, featuring large compartment with zipper and zipper pull, adjustable waist strap, and embroidered Club Trademarks; (xi) Backpacks, referred to by Company as style number PRO 118, made of 600D polyester fabric, featuring heavy padded back and shoulder straps, zip-up front hidden organiser with 6 different sections, and embroidered Club Trademarks; (xii) Backpacks, referred to by Company as style number HH01BI, made of 70D nylon fabric with PVC backing, measuring 37.5T x 29.9W x 12.7D cm in size, featuring a top zipper closure, padded/adjustable shoulder straps, gusseted front pocket with zipper closure, and embroidered Club Trademarks; (xiii) Backpacks, referred to by Company as style number FFPI, made of 70D nylon fabric with PVC backing, measuring 37T x 11.5W x 8D cm in size, featuring large compartment with zipper closure, padded/adjustable shoulder straps, and embroidered Club Trademarks; (xiv) Waistpacks, referred to by Company as style number FFPI, made of 70D nylon fabric with PVC backing, measuring 37T x 11.5W x 8D cm in size, featuring large compartment with zipper closure, adjustable waist strap, and embroidered Club Trademarks; (xv) Sport bags, referred to by Company as style number HH571, made of 70D nylon fabric with PVC backing, measuring 44.5T x 26.7W x 25AD cm in size, featuring double-pull top zipper closure, adjustable/detachable zipper closure, and embroidered Club Trademarks; (xvi) Backpacks, referred to by Company as style number TBP600, made of 600D polyester fabric with PVC backing, measuring 40.6T x 33W x 153D cm in size, featuring padded shoulder straps, retractable pull handle, zippered main compartment, zippered front gusset pocket, plastic identification holder, trolley wheels and comers, and embroidered Club Trademarks; (xvii) Lunch totes, referred to by Company as style number LNBIZ, made of 70D nylon fabric, measuring 7.5T x 8.5W x 6D inches in size, featuring adjustable shoulder strap, League identified zipper pull, and embroidered Club Trademarks; (xviii) Lunch totes, referred to by Company as style number LNBIV, made of 70D nylon fabric, measuring 9.75T x 7W x 3.5D inches in size, featuring side hook attachment and screen printed Club Trademarks on front panel; (xix) Lunch totes/6 pack coolers, referred to by Company as style number SPKC, made of 70D nylon fabric, measuring 6.5T x 8.5W x 6D inches in size, featuring polyweb shoulder strap, League identified zipper pull, and front panel screen printed Club Trademarks; (xx) Lunch totes, referred to by Company as style number LNIBIE, made of 600D polyester fabric, measuring 7.5T x 9.5W x 3.513 inches in size, featuring adjustable shoulder strap, League identified zipper pull, and embroidered Club Trademarks; (xxi) Lunch totes, referred to by Company as style number LNBIZE, made of 600D polyester fabric, measuring 7.5T x 9.5W x 3.5D inches in size, featuring adjustable shoulder strap, League identified zipper pull, and embroidered Club Trademarks; (xxii) Lunch totes/6 pack coolers, referred to by Company as style number SPKCM, made of 600D polyester fabric, measuring 6.5T x 8.5W x 6D inches in size, featuring adjustable shoulder strap, zippered front mesh pocket, League identified zipper pull, and screen printed Club Trademarks. For the purposes of this Agreement, "authentic" bags shall mean: bags that are used in the Clubhouse by the players, coaches or managers of the Club whose Trademark is featured. (b) "Licensed Territory" shall mean Austria, Belgium, Czech Republic, Denmark, Eire, Finland, France, Germany, Hungary, Iceland, Italy, Luxembourg, The Netherlands, Norway, Poland, Portugal, Spain, Sweden, Switzerland, United Kingdom, excluding U.S. military bases and post exchanges. (c) "Contract Period" shall mean that period of time commencing with effect from June 1, 1998 and concluding on May 31, 2000 unless sooner terminated pursuant to the provisions hereinafter set forth. (d) "Contract Year" shall mean a period of twelve successive months commencing on any first day of June during the Contract Period. (e) "Trademarks" shall mean and be limited to those MLB Logos for which Licensor owns or controls the trademark registrations and applications in the Licensed Territory in those trademark classes which relate to Licensed Products. "MLB Logos" shall mean those names, symbols and logos which identify or are used by Licensor, the Office of the Commissioner of Baseball, the Leagues, and each of the Clubs. (g) "Clubs" shall mean the following Major League Baseball Clubs: American League Anaheim Angels Minnesota Twins Baltimore Orioles New York Yankees Boston Red Sox Oakland Athletics Chicago White Sox Seattle Mariners Cleveland Indians Tampa Bay Devil Rays Detroit Tigers Texas Rangers National League Arizona Diamondbacks Milwaukee Brewers Atlanta Braves New York Mets Chicago Bulls Montreal Expos Cincinnati Reds Philadelphia Phillies Colorado Rockies Pittsburgh Pirates Florida Marlins St. Louis Cardinals Houston Astros San Diego Padres Los Angeles Dodgers San Francisco Giants 2. Grant of Rights. (a) Licensor hereby grants to Company, during the Contract Period hereof, subject to all of the terms and conditions set forth in this Agreement, the "Non-Exclusive Rights" described in subparagraph (b) immediately below. (b) As used herein, the "Non-Exclusive Rights" shall mean the non-exclusive night and license to use the Trademarks, in the Licensed Territory only, solely in connection with the manufacture, advertisement, promotion, distribution and sale of the Licensed Products described in Paragraph I(a). Licensor shall have the continuing right, throughout the Contract Period, to use and to grant to others the right to use the Trademarks throughout the Licensed Territory on and in connection with the manufacture, advertisement, promotion, distribution and sale of the Licensed Products (and all other items of merchandise). 3. Guaranteed Compensation. As compensation to Licensor for the grant to Company of the rights granted herein, Company shall pay to Licensor, in the manner described in Paragraph 5 below, with respect to each separate Contract Year during the Contract Period, guaranteed minimum compensation (the "Guaranteed Compensation") as follows: Contract Year Guaranteed Compensation Amount Due Date First On Execution US$ 10,000.00 Second June 1, 1999 US$ 10,000.00 Guaranteed Compensation as described in this paragraph shall be paid except to the extent that cumulative payments of Percentage Compensation (defined below) with respect to such Contract Year shall theretofore have offset all or a portion of the total of the Guaranteed Compensation payable with respect to that Contract Year. Notwithstanding the foregoing, no part of Percentage Compensation which may be attributable to Premium Sales (defined below) of the Licensed Products shall serve to offset any part of the Guaranteed Compensation described in this paragraph. No part of any Guaranteed Compensation shall be repayable to Company for any reason. No part of any Guaranteed Compensation shall be carried forward (or back) as a credit from one Contract Year to another. 4. Percentage Compensation. As additional compensation to Licensor for the grant to Company of the rights granted herein, Company shall pay to Licensor, in the manner described in Paragraph 5 below, Percentage Compensation at the rate of ten percent (10%) of all "Net Sales" (as defined in Section F of the attached Standard Terms and Conditions) by Company (or any of its affiliated, associated or subsidiary entities) of Licensed Products covered by this Agreement. Such percentage of Net Sales is herein called "Percentage Compensation." Percentage Compensation shall be reported within thirty (30) days after the initial shipment of the Licensed Products, and promptly on the fifteenth day of every month thereafter. Percentage Compensation shall be payable within thirty (30) days following the conclusion of each calendar month with regard to Licensed Products sold during such month, except to the extent offset by any portion of the Guaranteed Compensation for that Contract Year theretofore paid. 5. Payments. (a) Unless and until Licensor advises Company to the contrary, all payments pursuant to this Agreement shall be paid either by way of cheque in United States Dollars made payable to Licensor which shall be delivered to the address of the Licensor's authorized agent, International Management Group (UK) Inc ("IMG-UK") as follows: International Management Group (UK) Inc Pier House Strand on the Green Chiswick London W4 3NN England Attn: Sarah McNaughton or, if Company so desires, by bank transfer to the account of Major League Baseball Properties Inc. at Barclays Bank, 54 Lombard Street, London EC3V 9EX. (b) Company shall pay all bank charges, remittance fees, and all other fees, charges or deductions of whatever nature (other than withholding tax) so that Licensor receives in its account the entire amount payable by Company. Company shall be authorized to withhold from any payment withholding tax at the appropriate rate provided that Company promptly pays such withholding tax to the taxing authority and further provided that Company delivers to IMG-UK within thirty (30) days after payment the original receipt issued by the taxing authority evidencing payment of withholding tax to the taxing authority. (c) Past due payments shall bear interest from the due date at the rate of (i) one and one-half percent (1.5%) per month, or (ii) the maximum interest rate permissible under law, whichever is less. 6. Market Date. Company agrees that Licensed Products will be available for shipment to customers and distributors of Company in commercially substantial numbers by no later than June 1, 1998, and that Company will commence actual shipment of Licensed Products to its customers and distributors within thirty (30) days following the foregoing date. 7. Marketing Support. In addition to the consideration payable by Company as set forth above, Company agrees that it will budget and spend, each Contract Year, for the advertising and promotion of Licensed Products within the Licensed Territory, an amount which is no less than five percent (5%) of Company's "Net Sales" (as defined in the attached Standard Terms and Conditions) of Licensed Products during the relevant Contract Year. Within forty- five (45) days following the conclusion of the relevant Contract Year, Company shall deliver to IMG-UK a report on the foregoing marketing expenditures (including invoices and other receipts) evidencing the required level of expenditure. 8. Product Credit. In connection with Section I of the attached Standard Terms and Conditions, the aggregate value of the merchandise to be supplied by Company to Licensor (the "Product Credit") shall be US$ 1,000 wholesale value per contract year. 9. Liability Insurance. In connection with Section L of the attached Standard Terms and Conditions, the required amount of liability insurance shall be US$ 1,000,000.00. 10. List of Manufacturers. In connection with Section Q of the attached Standard Terms and Conditions, the following is a list of each party that Company desires to have produce one or more of the Licensed Products, as follows: (A) Name Sunwaki Industrial Company Ltd Address 16 Argyle Street, Monkok, Kowloon Hong Kong Telephone Number 2395 5161 Principal Contact 11. List of Distributors. In connection with Section S of the attached Standard Terms and Conditions, the following is a list of each party that Company desires to have distribute one or more of the Licensed Products, as follows: (A) Name Sportco S.A. Address 84 Rue de Calevoet, 1180 Brussels, Belgium Telephone Number 3223320018 Principal Contact Norman Snoeck (B) Name Michalis Vasilopoulos & Co Address 7740 Tochni, Larnaca, Cyprus Telephone Number 3574332531 Principal Contact Harris Vasilopoulos (C) Name Trend Fashion Line AP Address Metalvej 7D, DK-4000 Roskilde, Denmark Telephone Number 4546753880 Principal Contact Stig Sorenson (D) Name BA Sportprodukter AB Address Torvingegatan 3, 58273 Linkoping Sweden Telephone Number 4613 102427 Principal Contact Mats Hagsten (E) Name U.S. Sports by Pelcor Address RN 10 Couhe Sud BP 7, 86700 Couhe, France Telephone Number 33 549 592 424 Principal Contact Nathalie Liege (F) Name AMCO Sports Address 77 Rue de Columbus BP, 55-32404 Courevoie, France Telephone Number 33 1433 43055 Principal Contact Ms Anika Michel (G) Name Hartstone Deutschland Gmbh Address Gertigstrasse 48, D-22303 Hamburg Germany Telephone Number 49 4027 15110 Principal Contact Mr Gunther Garvs/Mr Udi Ronen (H) Name Frank Terry SRL Address Via Monzart 16, 20052 Monza, Milan, Italy Telephone Number 39 39 2326258 Principal Contact Mr Gianfranco Terruzzi Ms Silvana Fontana (1) Name Cedesmon Trade S.A. Address C/ Torrent de L'olla 12 - atico 08012 Barcelona, Spain Telephone Number 34 93 476 1330 Principal Contact Mr Alberto Savalls/Mr Javier Melero (J) Name Descul Address Parque Industrial Barrerior (Quimiparque) Rua Berthelot I - Caixa Postal 5172-2830 Barreiro, Portugal Telephone Number 351 12071579 Principal Contact Mr Antonio Liborio (K) Name Hartstone Leathergoods Ltd Address 90-92 Great Portland Street London WIN 5PB, U.K. Telephone Number 44 1712914900 Principal Contact Ms Judy Kahn 12. Sell-Off Period. In connection with Section U of the attached Standard Terms and Conditions, the period following the last day of the Contract Period during which Company may distribute its remaining inventory (the "Sell-Off Period") shall be a period of sixty (60) days. 13. Standard Terms and Conditions. This Agreement is subject to all of the provisions of the Standard Terms and Conditions which are attached to and made a part of this Agreement. 14. Execution and Delivery Required. This instrument shall not be considered to be an agreement or contract nor shall it create any obligation whatsoever on the part of Licensor or Company, or either of them, unless and until it has been signed by representatives of Licensor and Company, respectively, and delivery has been made of a fully signed original. IN WITNESS WHEREOF, the parties have caused their duly authorized officers to execute this Agreement as of the day and year first above Written. MAJOR LEAGUE BASEBALL NASCO PRODUCTS PROPERTIES, INC. INTERNATIONAL, INC. By By STANDARD TERMS AND CONDITIONS FOR MAJOR LEAGUE BASEBALL LICENSE AGREEMENT WITH NASCO PRODUCTS INTERNATIONAL, INC. SECTION A. LIMITATIONS OF LICENSE: This license does not constitute and may not be used so as to imply the endorsement by Licensor, the Office of the Commissioner of Baseball, the Leagues or the Clubs of the Licensed Products or any other product of Company. While the Trademarks licensed herein may be used as trademarks subject to the terms of this Agreement, the Trademarks are not licensed herein for use as certification marks or indications of a particular standard of quality. SECTION B. PREMIUM SALES BY LICENSOR/COMPANY. (1) "Premium" Defined. For the purposes of this Agreement, a "premium" use of Licensed Products shall be defined as including, but not necessarily limited to, free or self-liquidating items offered to the public in conjunction with the sale or promotion of a product or service, including traffic building or continuity visits by the consumer/customer, or any similar scheme or device, the prime intent of which is to use the Licensed Products in such a way as to promote, publicize and/or sell the products, services or business image of the offeror or manufacturer. "Premium" use shall also specifically include distribution of Licensed Products for retail sale through distribution channels (including, without limitation, catalogues) offering earned discounts or "bonus" points based upon the extent of usage of the offeror's product or service. (2) Premium Uses by Company. Company agrees it will not use, or knowingly permit the use of, the Licensed Products as a Premium, except with the prior written consent of Licensor and the specific negotiation of separate compensation to be payable by Company in connection therewith. Notwithstanding the foregoing, if Company desires to make any premium use of Licensed Products, Company may submit such a request in writing to Licensor, it being understood that Licensor shall have the right to approve or disapprove any such proposed premium use in Licensor's sole and absolute discretion. SECTION C. NO PLAYER ENDORSEMENTS. Company acknowledges and agrees that the rights hereinbefore granted to Company do not include any right to make any use of the name, image, likeness, photograph or other identification (the "Player Endorsement") of any baseball player, or any other person, living or dead, and Company acknowledges and agrees that if Company desires to use the Player Endorsement of any baseball player (or other individual), it shall be the sole and exclusive responsibility of Company to obtain such right and license from such individual, at Company's sole cost and expense. Company agrees that it will not make any use of any Player Endorsement of any person on any Licensed Product unless and until Company shall first obtain authorization from such individual. Company agrees that Company will not make any such use of any Player Endorsement unless and until Company shall first submit to IMGUK a photocopy of written authorization obtained by Company from such individual. SECTION D. QUALITY CONTROL. (1) Company acknowledges and agrees that Licensor shall have the right of absolute approval of the Licensed Product(s) and of all packaging, advertising and promotional materials at all stages of their development. For purposes of facilitating this approval by Licensor, Licensor has retained IMG-UK to act on Licensor's behalf in these matters. Accordingly, Company shall deliver to IMG-UK (and, if IMG-UK or Licensor shall so request, to Licensor at its address in the United States), in a timely manner, free of charge, and at no cost or expense, for IMG-Ws written approval as to quality and style, designs of each of the Licensed Products covered by this Agreement and samples of each of the Licensed Products before their manufacture, sale or distribution, whichever first occurs, and samples of all advertising, point-of-sale displays, catalogues, sales sheets and other items that display or picture the Trademarks, and no such Licensed Product or other such materials shall be manufactured, sold or distributed by Company without such prior written approval. From time to time subsequent to final approval, a reasonable number of production samples shall periodically be sent to IMG-UK (and, if IMG-UK or Licensor shall so request, to Licensor at its address in the United States), free of charge, and at no cost or expense. Such samples shall also be provided, in the same manner, upon any change in design, style or quality, which shall necessitate subsequent review and approval by IMG-UK. IMG-UK shall also have the right to inspect Company's plant or plants or warehouse or storage facilities at any reasonable time without notice. (2) Subject, in each instance, to the prior written approval of IMG-UK, Company or its agents may use textual and/or pictorial matter pertaining to the Trademarks on such promotional display and advertising material as may, in Company's judgment, promote the sale of the Licensed Products. All promotional display and advertising material must contain and prominently display the official logo of Licensor. (3) Company shall, at the advance written request of Licensor given from time-to-time, deliver to Licensor, at its address in the United States, free of charge, and at no cost or expense, samples of each Licensed Product then distributed and sold by Company. Company shall, in addition, at the advance written request of Licensor given from time-to-time, deliver to each Club, at the address of such Club in the United States, free of charge and at no cost or expense, additional samples of each Licensed Product bearing the trademark of that Club. (4) In the event that any item or matter submitted to IMG-UK under this Agreement for approval or consent shall not have been approved or consented to, disapproved or denied, or commented upon within twenty (20) IMG-UK business days after receipt thereof and IMG-UK shall have received notice from Company that comment is overdue by facsimile or other written communication, and IMG-UK shall not have commented within five (5) additional IMG-UK business days of receipt of such notice, any items or matters so submitted shall be deemed approved and consented to. (5) Company agrees that no irregulars, seconds, or other Licensed Products which do not conform in all material respects to the approved samples will be distributed or sold without the express written advance approval of IMG-UK. All such sales, if made, shall bear Percentage Compensation as set forth in this Agreement. (6) Company acknowledges that no use of any Trademarks shall be made on stationery of Company (specifically, without limitation, letterheads, envelopes, business cards, shopping bags, invoices, statements, packing slips, etc.) without IMG-UK's express written approval in advance of any such use. (7) In any instance where any matter is required to be submitted to IMG-UK for IMG-UK's approval, that approval shall be granted or withheld at IMG-UK's sole discretion. SECTION E. NOTICES AND SUBMISSIONS. Unless and until Licensor or IMG-UK shall notify Company to the contrary, all advertising materials which incorporate the Trademarks and which are submitted hereunder for approval, and all sample Licensed Products submitted hereunder for approval, shall be delivered to IMG-UK as follows: International Management Group (UK) Inc Pier House Strand on the Green Chiswick London W4 3NN England Attn: Sarah McNaughton Unless and until Licensor or IMG-UK shall notify Company to the contrary, all notices and a copy of each payment, sales report or other notification of payment delivered to IMG-UK at the address set forth in Paragraph 5 of this Agreement, shall be delivered to IMG-UK at the address set forth above, with a copy thereof to be delivered at the same time to Licensor at the following address: Major League Baseball Properties, Inc. 245 Park Avenue New York, New York 10167 Attention: Vice President, International Licensing All materials shall be delivered to the intended recipient with all charges (such as, for example, shipping charges and customs duties) prepaid. SECTION F. PERCENTAGE COMPENSATION. For purposes of computing the Percentage Compensation described in Paragraph 4 of this Agreement, the parties agree that the term "Net Sales" shall mean gross sales of Licensed Products based on the wholesale price to the retail trade less quantity discounts and actual returns, but no deduction shall be made for uncollectible accounts, commissions, taxes, discounts other than quantity discounts (such as cash discounts and discounts attributable to the issuance of a letter of credit), or any other amount. No costs incurred in the manufacture, sale, distribution, promotion or advertisement of the Licensed Products shall be deducted from Net Sales in computing Percentage Compensation payable by Company. Said Percentage Compensation shall also be paid by Company to Licensor on all Licensed Products (including, without limitation, any irregulars, seconds, etc. distributed pursuant to the provisions of Section D of these Standard Terms and Conditions)) distributed by Company or any of its affiliated, associated or subsidiary companies even if not billed or billed at less than usual net sales price for such Licensed Products, and shall be based upon the usual net sales price for such Licensed Products sold to the trade by Company. Company shall be responsible to pay all taxes in connection with Net Sales. SECTION G. PERIODIC STATEMENTS: (1) Company shall deliver to IMG-UK, at those periodic intervals described in Paragraph 4 of this Agreement, complete and accurate statements, certified to be accurate by Company, or if Company is a corporation, by an officer of Company, showing the sales volume of each Licensed Product (itemized by Club, for each applicable Licensed Product and for each territory), gross sales price per unit, itemized deductions from gross sales price, and the "Net Sales" of the Licensed Products distributed and/or sold by Company during the relevant reporting period, together with any returns made during such reporting period. Such statements shall be furnished to IMG-UK whether or not any of the Licensed Products have been sold during the reporting period to which such statements refer. (2) Company shall furnish to Licensor sufficient background information so as to make such statements intelligible to Licensor, and on an annual basis, a complete list of Company's customers to whom Licensed Products have been sold. Licensor agrees that it will not divulge said customer list to any other Company, to any other competitor licensing organization, or to any competitor of Company. Receipt or acceptance by Licensor of any of the statements furnished pursuant to this Agreement or of any sums paid hereunder shall not preclude Licensor from questioning the correctness thereof at any time, and in the event that any inconsistencies or mistakes are discovered in such statements or payments, they shall immediately be rectified and the appropriate payments made by Company. Late payment penalties, if any, shall be made pursuant to Paragraph 5 of this Agreement. Upon demand of IMG- UK or Licensor, Company shall at its own expense, but not more often than once in any twelve (12) month period, furnish to IMG-UK a detailed statement certified by any independent certified public accounting firm approved by Licensor showing the sales volume of each Licensed Product (itemized by Club, for each applicable Licensed Product), gross sales price, itemized deductions from gross sales price and Net Sales of the Licensed Products covered by this Agreement distributed and/or sold by Company to the date of the IMG-UK's demand. SECTION H. BOOKS AND RECORDS. (1) Company shall keep, maintain and preserve (in Company's place of business) for at least two (2) years following termination or expiration of the license period or any renewal thereof, complete and accurate records and accounts including, without limitation, invoices, correspondence, banking and financial and other records pertaining to the various items required to be shown on the statements to be submitted by Company. Such records and accounts shall be available for inspection, audit and copying (at Licensor's expense) at any time or times during or after the term or terms of the license period during reasonable business hours and upon reasonable notice by Licensor or its representatives. (2) Company agrees not to cause or permit any interference with Licensor or representatives of Licensor in the performance of their duties of inspection and audit. (3) The exercise by Licensor, in whole or in part or at any time or times, of the right to audit records and accounts or of any other right herein granted, the acceptance by Licensor of any statement or statements or the receipt and deposit by Licensor of any payment tendered by or on behalf of Company shall be without prejudice to any rights or remedies of Licensor and shall not stop or prevent Licensor from thereafter disputing the accuracy of any such statement or payment. (4) If pursuant to its rights hereunder to audit and inspect Licensor caused an audit and inspection to be instituted which thereafter discloses a deficiency of more than 3% between the amount found to be due to Licensor and the amount actually received or credited to Licensor, then Company shall be responsible for payment of the entire deficiency, together with interest (at the rate set forth in the last sentence of Paragraph 5 of this Agreement) from the date such amount became due until the date of payment, and the reasonable costs and expenses of such audit and inspection. SECTION 1. PRODUCT CREDIT. Company agrees to ship to Licensor and/or IMG-UK, at the address(es) designated thereby, at Company's sole cost and expense, merchandise valued at the amount of the "Product Credit" set forth in Paragraph 8 of this Agreement, based upon the best wholesale price, during the First Contract Year and annually thereafter during the Contract Period of this Agreement and/or any renewal or extension hereof. The parties contemplate that from time to time, approximately monthly, Licensor will request that specific merchandise be shipped at Company's sole expense and at Licensor's direction, and that Company shall be under no obligation to provide said merchandise unless and until Licensor places an order. Company agrees that such merchandise may consist of any part of Company's then current range and may be customized to Licensor's specific requirements. SECTION J. INDEMNIFICATION BY LICENSOR . (1) Licensor hereby agrees to indemnify, defend and hold Company and its owners, shareholders, directors, officers, employees, agents, representatives, successors and assigns harmless from any claims, suits, damages or costs (including reasonable attorneys' fees and expenses) arising from (i) challenges to Licensor's authority as agent for and pursuant to authority granted by the Clubs to license the Trademarks in connection with the manufacture, distribution, promotion, advertisement and sale of the Licensed Product(s) or (ii) assertions to any claim of night or interest in or to the Trademarks as authorized and used on the Licensed Products, provided in each case that Company shall give prompt written notice, cooperation and assistance to Licensor relative to any such claim or suit, and provided further in each case that Licensor shall have the option to undertake and conduct the defense of any suit so brought and to engage in settlement thereof at its sole discretion. (2) Company shall assist Licensor, to the extent necessary, in the procurement of any protection or to protect any of Licensor's rights to the Trademarks, and Licensor, if it so desires and in its sole discretion, may commence or prosecute any claims of suits in its own name or in the name of Company or join Company as party thereto. Company shall notify Licensor in writing of any infringements or imitations by others of the Trademarks of which it is aware. Licensor shall have the sole right to determine whether or not any action shall be taken on account of such infringements or imitations. Company shall not institute any suit or take any action on account of any such infringements or imitations without first obtaining the written consent of Licensor to do so. Company agrees that it is not entitled to share in any proceeds received by Licensor (by settlement or otherwise) in connection with any formal or informal action brought by Licensor hereunder. SECTION K. INDEMNIFICATION BY COMPANY. Company hereby agrees to indemnify, defend and hold Licensor, IMG- LJK, the Office of the Commissioner of Baseball, the Leagues, and the Clubs, and their respective owners, shareholders, directors, officers, employees, agents, representatives, successors and assigns harmless from any claims, suits, damages an costs (including reasonable attorneys' fees and expenses) arising out of (i) any unauthorized use of or infringement of any trademark, service mark, copyright, patent, process, method of device by Company in connection with the Licensed Product(s) covered by this Agreement, (ii) alleged defects or deficiencies in said Licensed Product(s) or the use thereof, or false advertising, fraud, misrepresentation or other claims related to the Licensed Product(s) not involving a claim of right to the Trademarks, (iii) the unauthorized use of the Trademarks or any breach by Company of this Agreement, (iv) libel or slander against, or invasion of the right of privacy, publicity or property of, or violation or misappropriation of any other right of any third party, and/or (v) agreements or alleged agreements made or entered into by Company to effectuate the terms of this Agreement. Licensor or IMG-UK shall give Company notice of the making of any claim or the institution of any action hereunder and Licensor may at its option participate in any action. The indemnifications hereunder shall survive the expiration or termination of this Agreement. SECTION L. LIABILITY INSURANCE: Company agrees to obtain, at its own cost and expense, comprehensive general liability insurance including product liability insurance from an insurance company acceptable to Licensor, providing adequate protection for Licensor, IMG-LTK, the Clubs, the Leagues, the Office of the Commissioner of Baseball and Company against any claims or suits arising out of any of the circumstances described in Section K above, in an amount no less than the amount set forth in Paragraph 9 of this Agreement, per incident or occurrence, or Company's standard insurance policy limits, whichever is greater, and with a reasonable deductible in relation hereto. Such insurance shall remain in force at all times during the Contract Period and for a period of five years thereafter. Within thirty (30) days from the date hereof, Company will submit to Licensor a fully paid policy or certificate of insurance naming Licensor, the Leagues, the Office of the Commissioner of Baseball and IMG-LTK as additional insured parties and requiring that the insurer shall not terminate or materially modify such policy or certificate of insurance without written notice to Licensor at least thirty (30) days in advance thereof SECTION M. COPYRIGHTS AND TRADEMARKS. (1) Company agrees that in any instance wherein the Trademarks are used, the following general notice shall be included (i.e., on the product, on a label, on the packaging material or on a separate slip of paper attached to the product): "The Major League Club insignias depicted on this product are trademarks which are the exclusive property of the respective Major League Clubs and may not be reproduced without their written consent." Further, all products containing the Trademarks shall contain a hangtag and label with Company's name stating "Genuine Merchandise" and containing the Major League Baseball silhouetted batter logo and, where appropriate, the Major League Baseball Cooperstown Collection logo or Major League Baseball Authentic Diamond Collection logo. (2) All Licensed Product(s) shall contain a permanently affixed label that displays Company's name. All Licensed Product(s) components which bear any of the Trademarks (embroidered emblems, cloth or paper labels, hangtags, etc.) shall be manufactured in-house by Company or shall be obtained only from one or more suppliers officially authorized by Licensor to produce those components. All Company advertisements displaying the Trademarks, all retailer advertisements featuring Licensed Product(s) and of which Company has knowledge or any Licensed Product(s) shall contain the words "Genuine Merchandise" and the silhouetted batter logo. (3) Company shall require those to whom it sells Licensed Product(s) directly or indirectly to display the words "Genuine Merchandise" (or such other appropriate notice as directed by Licensor) and the silhouetted batter logo in all advertisements. All uses of the Trademarks shall also include any designations legally required or useful for enforcement of copyright, trademark or service mark rights (e.g., "C", "R" or "TM"). Company shall submit a copy of its specifications for all of the above notices (including copies of its artwork, layouts or mold blueprints) to Licensor for its review. (4) Licensor shall have the right to revise the above notice requirements and to require such other notices as shall be reasonably necessary to protect the interest of Licensor, the Clubs and/or the Leagues in the respective Trademarks. Company agrees to advise IMG-UK of the initial date of the marketing of each Licensed Product, and upon request, to deliver to IMG-UK the required number and type of specimen samples of the Licensed Product, labels, or the like upon which the Trademarks are used for use in procuring copyright, trademark and/or service mark registrations in the name of and at the expense of the person, firm, corporation or other legal entity owing the Trademarks, in compliance with any laws relating to copyright, trademark and service mark registrations. (5) Except to the extent set forth in any schedules attached to this Agreement, Licensor, the Clubs and/or the Leagues shall be solely responsible for taking such action as it or they deem appropriate to obtain such copyright, trademark or service mark registrations for its or their Trademarks. If it shall be necessary for Company to be the applicant to effect any such registrations, Company shall and hereby does assign all of its rights in each such application and any resulting registration to Licensor or any other appropriate owner thereof, and further agrees to execute all papers necessary to effectuate and/or confirm such assignments. Company shall perform all acts necessary and execute all documents necessary to effectuate its registration as a user of the Trademarks where such registration is needed. (6) Company also agrees that, in any case where it employs the services of photographers or artists in connection with the production, promotion, marketing or distribution of the Licensed Product(s), it will require each such photographer or artist to agree that the photographic or artistic works he or she produces for Company shall be "works made for hire" for the purposes of copyright laws, and that to the extent such photographic or artistic works may not qualify as "works made for hire" or such definition is not known to the laws of the territory to which such photographic or artistic works are subject, the copyright in each such work is assigned to Company. SECTION N. ACKNOWLEDGMENT OF RIGHTS: Company hereby acknowledges the proprietary nature of all the Trademarks, and acknowledges that all rights, title and interest to the Trademarks belong to Licensor. the Office of the Commissioner of Baseball, the Leagues or the Clubs. Company represents that Company has not made any unauthorized use of the Trademarks and agrees that it will make no use of any such Trademarks, other than as provided in this Agreement, without the prior written consent of Licensor, the Office of the Commissioner of Baseball, the Leagues or the Clubs, as the case may be. Any use Company has made or will make of the Trademarks has not conferred or will not confer, as the case may be, any rights or benefits upon Company whatsoever, and any rights created by such use shall inure to the benefit of the individual Clubs, the Leagues, the Office of the Commissioner of Baseball and/or Licensor, as the case may be. SECTION 0. GOODWILL: Company recognizes the great value of the publicity and good will associated with the Trademarks and, in such connection, acknowledges that such good will belongs exclusively to Licensor, the Office of the Commissioner of Baseball, the Leagues and/or the Clubs, and that the Trademarks have acquired a secondary meaning in the minds of the purchasing public. SECTION P. SPECIFIC QUALITY CONTROL OBLIGATIONS: During the Contract Period, and thereafter, Company agrees that: (1) Company will not acquire any rights in the Trademarks as a result of Company's use thereof pursuant to this Agreement, and all use of the Trademarks shall inure to Licensor's benefit; (2) Company agrees it will not, directly or indirectly, attack the title of Licensor, the Office of the Commissioner of Baseball, the Leagues and/or the Clubs in and to the Trademarks or any copyright, trademark or service mark pertaining thereto, nor will it attack the validity of the license granted hereunder, nor will it use the Trademarks in any manner other than as licensed hereunder; (3) Company agrees it will not harm, misuse or bring into disrepute the Trademarks; (4) Company agrees it will manufacture, sell, promote, advertise and distribute the Licensed Products in a legal and ethical manner and in accordance with the terms and intent of this Agreement; (5) Company agrees it will not create any expenses chargeable to Licensor without the prior written approval of Licensor; (6) Company agrees it will protect to the best of its ability the right to manufacture, sell and distribute the Licensed Products hereunder; (7) Company will not use the Licensed Products for combination sales or make any premium use of Licensed Products (as described in Section B of these Standard Terms and Conditions) except with the prior express written consent of IMG-UK and will exercise due care that its customers likewise refrain from making such use of the Licensed Products; (8) Company agrees it will not, without prior written consent of the Licensor, enter into any sublicense or agency agreement for the manufacture, sale or distribution of the Licensed Products; (9) Company agrees it will not engage in tying practices, illegal restraints of trade, or selling practices that exclude any member of the retail trade for any reasons other than poor credit history, known lack of integrity or disregard for the rights of Licensor or Major League Baseball. Nothing in the preceding sentence shall be deemed to require Company to violate any other term of this Agreement; (10) Company agrees it will comply with all laws, regulations and standards relating or pertaining to the manufacture, sale, advertising or use of the Licensed Products and shall maintain the highest quality and standards, and shall comply with the requirements of any regulatory agencies which shall have jurisdiction over the Licensed Products. It will also comply with such guidelines and/or requirements as Licensor may announce from time to time; (11) Company agrees it will furnish to Licensor, upon request of IMG-LTK (which shall be made only for reasonable cause and no more often than once per year), a list of all distributors, sales representatives and jobbers for the Licensed Products, as well as a list of all its "trade names", said list to include the company name, address, telephone number, territorial representation and key contact name. Licensor agrees that Licensor and IMG-UK will not divulge any information provided to it under this paragraph to any competitor; (12) Company agrees that it will use its diligent efforts to actively and aggressively promote the sale of Licensed Products throughout the Licensed Territory, and Company further agrees it will continue to manufacture, advertise, promote and distribute commercially substantial quantities of Licensed Products continuously throughout the entire duration of the Contract Period; (13) Company agrees it will not manufacture or allow the manufacture of, or accumulate inventory of Licensed Products at a rate greater than its average rate during the license period as the end of the Contract Period approaches; (14) Company agrees it will not at any time apply for any registration of any copyright, trademark, service mark or other designation which would affect the ownership of the Trademarks, or file any document with any governmental authority or take any action which would affect the ownership of the Trademarks or aid or abet anyone in doing so; (15) Company will not sell the Licensed Products to parties who it knows or reasonably should know will resell or distribute such products outside the Licensed Territory; (16) Company will not disclose any confidential, private, restricted or otherwise nonpublic information concerning Major League Baseball which, it acknowledges, it may become privy to during the Contract Period of this Agreement; (17) Company will not grant to any third person or entity a security interest in the Licensed Products without Licensor's prior written approval; (18) With respect to any Licensed Products manufactured outside the Licensed Territory, Company agrees: (i) Company will take receipt of goods only at ports of entry located in the Licensed Territory, (ii) Company will not allow any entity in the Licensed Territory, including but not limited to distributors, wholesalers and retailers, to accept shipment of the Licensed Products from any manufacturer of such products located outside the Licensed Territory, and (iii) Company will distribute such Licensed Products to third parties, including but not limited to distributors, wholesalers and retailers, from Company's principal place of business only; and (19) Company has not had and does not have an investment or interest in casinos, any other form of legalized gambling enterprise, or any activity that Licensor has previously notified Company to have been made unauthorized or contrary to official policy of Major League Baseball. SECTIQN Q. SUBCONTRACT MANUFACTURERS. Set forth in Paragraph 10 of this Agreement is a list of the names, addresses, telephone numbers and names of principal contacts of each party (hereinafter referred to as a "Manufacturer"), that Company desires or intends to have produce one or more of the Licensed Product(s) (in the event Company desires not to be the manufacturer of such Licensed Product(s)). In this list set forth in Paragraph 10, Company shall specify in writing the Licensed Product(s) which each Manufacturer will produce. In the event Company later wishes to substitute a Manufacturer for one of those listed in the list, or wishes to add an additional party to this list of Manufacturers, Company shall first provide IMG-UK, with the information set forth in that list regarding the proposed new Manufacturer for Licensor's written approval of such proposed Manufacturer. Company's failure to do so may result in termination of this Agreement and/or confiscation and seizure of the Licensed Product(s). Company shall ensure that: (a) Manufacturer produces no merchandise bearing the Trademarks other than the Licensed Product(s) described in this Agreement, unless authorized by Licensor; (b) Manufacturer produces the Licensed Product(s) only as and when directed by Company and in accordance with the terms herein and in compliance with all laws, regulations and governmental rules applicable to the Licensed Product(s) and/or their manufacture; (c) Manufacturer does not supply the Licensed Product(s) to any person, firm, corporation or business entity other than Company or to such entities as may be authorized by Company and Licensor jointly; and (d) Manufacturer does not delegate in any manner whatsoever its obligations with respect to the Licensed Product(s). Prior to the delivery of the Licensed Product(s) from Manufacturers to Company, Company shall submit to IMG-UK, free of cost, for written approval as to quality and style, at least two samples of the Licensed Product(s) produced by Manufacturer. SECTION R. APPROVAL OF MANUFACTURER: Nothing contained herein may be construed so as to imply endorsement of Manufacturer by Licensor, the Office of the Commissioner of Baseball, the Leagues or the Clubs. Company shall submit to IMG-UK, for written approval or disapproval thereof by Licensor, a request for written approval of Manufacturer prior to Company's engagement of Manufacturer. Any approval of Manufacturer granted by Licensor relates solely to the manufacturing of the Licensed Product(s) and shall not constitute a grant of any right, title or interest in or to the Trademarks, in or to any copyrights, service marks, trademarks or other property rights associated therewith. Licensor hereby reserves the right to terminate in its discretion the engagement of Manufacturer at any time. Additionally, Licensor may confiscate goods or samples imported by Company or shipped by Manufacturer that bear any of the Trademarks and that have not -been approved by Licensor as to quality. SECTION S. DISTRIBUTION: Set forth in Paragraph I I of this Agreement is a list of the names, addresses, telephone numbers and names of principle contacts of each party (hereinafter referred to as a "Distributor"), that Company desires or intends to have distribute one or more of the Licensed Products in the event Company desires not to be the sole distributor of such Licensed Products. For these purposes, a "Distributor" shall mean any individual or entity, other than consumers or entities that sell directly to consumers, to whom Company sells or otherwise provides the Licensed Products for subsequent sale or distribution. Company shall specify in writing the Licensed Products which each Distributor will distribute. In the event Company later wishes to substitute a Distributor for one of those listed in the list, or wishes to add an additional party to this list of Distributors, Company shall first provide IMG-UK with the information set forth in that list regarding the proposed new Distributor for Licensor's written approval of such proposed Distributor. Company's failure to do so may result in termination of this Agreement and/or confiscation and seizure of the Licensed Product(s). Company shall ensure that: (a) Distributor distributes no merchandise bearing the Trademarks other than the Licensed Product(s) described in this Agreement, unless authorized by Licensor; (b) Distributor distributes the Licensed Products only as and when directed by Company and in accordance with the terms herein and in compliance with all laws, regulations and government rules applicable to the Licensed Products and/or their distribution; (c) Distributor does not alter or modify, or add any labels, hangtags or other items featuring Distributor's corporate identification or other Distributor identification unless authorized in advance in writing by Licensor; (d) Distributor does not delegate in any manner its obligations with respect to the Licensed Products; and (e) Distributor does not advertise or promote its distribution of the Licensed Products or its relationship to Major League Baseball, without Licensor's prior written authorization. Company shall sell Licensed Products to jobbers, wholesalers, distributors or retailers for sale or resale and distribution to retail stores and merchants for their resale and distribution or directly to the public. In the event Company sells or distributes a Licensed Product at a special price directly or indirectly to itself including, without limitation, any subsidiary of Company, or to any other person, firm or corporation related in any manner to Company or its officers, directors or major stockholders, Company shall pay compensation with respect to such sales or distribution based upon the price generally charged the trade by Company. SECTION T. TERMINATION: Licensor shall have the right to terminate this Agreement without prejudice to any other rights which it may have whether under the provisions of this Agreement, in law or in equity or otherwise, upon the occurrence of any one or more of the following events (herein called "defaults") and Company's failure to cure such default(s) completely within ten (10) Licensor business days from receipt of notice from Licensor: (a) If Company falls to deliver to IMG-UK or to maintain in full force and effect the insurance referred to in Section L hereof, or (b) If Company fails to make any payment due hereunder on the date due, at which time all monies which are owed during the current term or renewal referred to in this Agreement shall become due and payable to Licensor; or (c) If the Company fails to deliver any of the statements referred to in this Agreement or to give access to the premises and/or license records pursuant to the provisions hereof to Licensor's authorized representatives for the purposes permitted hereunder; or (d) If any governmental agency or court of competent jurisdiction finds that the Licensed Product(s) is defective in any way, manner or form; or (e) If Company is unable to pay its debts when due, or makes any assignment for the benefit of creditors or any arrangement pursuant to any bankruptcy law, or files or has filed against it any petition under the bankruptcy or insolvency laws of any jurisdiction, country or place, or shall have or suffer a receiver or trustee to be appointed for its business or property, or to be adjudicated a bankrupt or an insolvent. In the event the license granted hereunder is terminated pursuant to this Section T, neither Company nor its receivers, representatives, trustees, agents, administrators, successors and/or assigns shall have any right to sell, exploit or otherwise deal with or in the Licensed Product(s) without the prior written consent of Licensor; or (f) If Company is in default of its obligations pursuant to Paragraph 6 of this Agreement; or; or (g) If Company shall discontinue its business as it is now conducted; or (h) If Company shall breach any of the undertakings set forth in Section P hereof, or (i) If Company shall breach any of the terms of this Agreement; or If, in the periodic statements furnished pursuant to Section G of this Agreement, the amounts owed to Licensor are significantly or consistently understated; or (k) If Company shall undergo a change in majority or controlling ownership. In the event any of these defaults occurs and Licensor desires to exercise its rights of termination under the terms of this Section T, Licensor shall give notice of termination in writing to Company. Any and all payments then or later due from Company hereunder (including guaranteed minimum annual royalty) shall then become promptly due and payable in full to Licensor and without set off of any kind; i.e. no portion of any prior payments made to Licensor shall be repayable to Company. Until payment to Licensor of the monies due it, Licensor shall have a lien on any units of the Licensed Product(s) not then disposed of by Company and on any monies due Company from any jobber, wholesaler, distributor, sublicensee or other third parties with respect to sales of the Licensed Product(s). Upon termination or expiration of the Contract Period hereof, all rights, licenses and privileges granted to Company hereunder shall automatically revert to Licensor and Company shall execute any and all documents evidencing such automatic reversion. SECTION U. FINAL STATEMENT UPON TERMINATION OR EXPIRATION: Company shall deliver, as soon as practicable, to IMG-LTK, following expiration or termination of this Agreement, a statement indicating the number and description of the Licensed Products on hand. Following expiration or termination Company may manufacture no more Licensed Products, but may continue to distribute its remaining inventory for that period of time designated in Paragraph 12 of this Agreement (the "Sell-Off Period), subject to the terms of Section P(4) and payment of applicable royalties relative thereto; provided, however, that such royalties shall not be applicable against Guaranteed Compensation. Notwithstanding the foregoing, Company shall not manufacture, sell or distribute any Licensed Products after the expiration or termination of this Agreement because of (a) the failure of Company to cause the appropriate statutory notice of copyright, trademark, service mark or user registration to appear wherever the Trademarks are used; (b) the departure of Company from the quality and style approved by Licensor under the terms of Section D hereof-, (c) the failure of Company to obtain the approval of Licensor under the terms of Section D hereof, or (d) the occurrence of an event of default under the terms of Section T hereof. Licensor or its representatives shall have the option to conduct physical inventories before termination and continuing until the end of the Sell-Off Period in order to ascertain or verify such inventories and/or statements. Immediately upon expiration of the Sell-Off Period, Company shall furnish IMG-UK with a detailed statement showing the number and description of Licensed Products on hand in its inventory, and Company shall dispose of such inventory at Licensor's direction and at Company's expense. In the event Company refuses to permit Licensor or its representatives to conduct such physical inventory, Company shall forfeit its rights hereunder to dispose of such inventory. In addition to such forfeiture, Licensor shall have recourse to all other remedies available to it. SECTION V. INJUNCTION: Company acknowledges that its failure to perform any of the terms or conditions of this Agreement, or its failure upon the expiration or termination of this Agreement to cease the manufacture of the Licensed Product(s) and limit their distribution and sale as provided in Section U hereof, shall result in immediate and irreparable damage to Licensor. Company also acknowledges that there may be no adequate remedy at law for such failures and that in the event thereof Licensor shall be entitled to equitable relief in the nature of an injunction and to all other available relief, at law and/or in equity. SECTION W. NON-ASSIGNABILITY: (1) Company acknowledges and recognizes: (i) that Company has been granted the license hereinbefore described because of Company's particular expertise, knowledge, judgment, skill and ability; (ii) that Company has substantial and direct responsibilities to perform this Agreement in accordance with all of the terms contained herein; (iii) that Licensor is relying upon Company's unique knowledge, experience and capabilities to perform this Agreement in a specific manner consistent with the high standards of integrity and quality associated with Major League Baseball as a national sport and with Major League Baseball licensed merchandise; and (iv) that the granting of the license under this Agreement creates a relationship of confidence and trust between Licensor and Company. (2) This Agreement is personal to Company, and Company shall not sublicense or franchise any of its rights hereunder, and neither this Agreement nor any of the rights of Company hereunder shall be sold, transferred or assigned by Company without Licensor's prior written approval and no rights hereunder shall devolve by operation of law or otherwise upon any assignee, receiver, liquidator, trustee or other party. Subject to the foregoing, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto, their successors and assigns. SECTION X. MISCELLANEOUS PROVISIONS. (1) Reservation Of Rights: Licensor retains all rights not expressly and exclusively conveyed herein, and Licensor may license firms, individuals or partnerships or corporations to use the Trademarks, artwork and textual matter in connection with other products, including other products identical to the Licensed Products contemplated herein. Licensor reserves the right to use, or license others to use and/or manufacture, identical items as premiums. (2) Waiver, Modification, Etc. No waiver, modification or cancellation of any term or condition of this Agreement shall be effective unless executed in writing by the party charged therewith. No written waiver shall excuse the performance of any act other than those specifically referred to therein. No waiver by either party hereto of any breach of this Agreement shall be deemed to be a waiver of any preceding or succeeding breach of the same or any other provision hereof. The exercise of any right granted to either party hereunder shall not operate as a waiver. The normal expiration of the Contract Period of this Agreement shall not relieve either party of its respective obligations accruing prior thereto, nor impair or prejudice the respective rights of either party against the other, which rights by their nature survive such expiration. Licensor makes no warranties or representations to Company except those specifically expressed herein. (3) No Partnership, Etc.: This Agreement does not constitute and shall not be construed as constituting an agency, partnership or joint venture relationship between Company and Licensor, IMG-UK, the Office of the Commissioner of Baseball, the Leagues and/or the Clubs. Company shall have no right to obligate or bind Licensor in any manner whatsoever, and nothing herein contained shall give or is intended to give any rights of any kind to any third persons. (4) Paragraph Headings. Paragraph headings contained in this Agreement are for convenience only and shall not be considered for any purpose in governing, limiting, modifying, construing or affecting the provisions of this Agreement and shall not otherwise be given any legal effect. (5) Construction: This Agreement shall be construed in accordance with the laws of the State of New York. (6) Severability The determination that any provision of this Agreement is invalid or unenforceable shall not invalidate this Agreement, and the remainder of this Agreement shall be valid and enforceable to the fullest extent permitted by law. (7) Time Of The Essence: Time is of the essence for all parts of this Agreement. (8) Miscellaneous: By executing this Agreement, Company acknowledges that this Agreement is for the Contract Period specified in Paragraph I of this Agreement only and that neither the existence of this Agreement or anything contained herein shall impose on Licensor any obligation to renew or otherwise extend this Agreement after expiration of the Contract Period. (9) Integration : This Agreement, when fully executed, shall represent the entire understanding between the parties hereto with respect to the subject matter hereof and supersedes all previous representations, understandings or agreements, oral or written, between the parties with respect to the subject matter hereof. (10) Acceptance By Licensor: This instrument, when signed by a representative of Company, shall be deemed an application for a license and not a binding agreement unless and until signed by Licensor. The receipt and/or deposit by Licensor of any, check or other consideration given by Company and/or delivery of any material by Licensor to Company shall not be deemed an acceptance by Licensor of this application. The foregoing shall also apply to any documents relating to renewals or modifications hereof. - ----- END ---- EXHIBIT 10.64 Contract No. ML-2474C MAJOR LEAGUE BASEBALL PROPERTIES, INC. LICENSE AGREEMENT THIS LICENSE AGREEMENT by and between Major League Baseball Properties, Inc., 350 Park Avenue. New York, NY 10022 (hereinafter referred to as "Licensor"), as agent for the Major League Baseball Clubs (the "Clubs"), and Innovo Group, Inc., 27 North Main Street, Springfield,/,TN 37172 (hereinafter referred to as "Licensee"). This Agreement is not effective until signed by the parties hereto. THIS WILL CONFIRM OUR AGREEMENT AS FOLLOWS: 1. GRANT OF LICENSE: Licensor grants to Licensee for the term of this Agreement, subject to the terms and conditions hereinafter contained, the non-exclusive license to utilize the names, characters, symbols, designs, likenesses and visual representations described in Schedule A attached hereto (herein such names. characters, symbols, designs, likenesses and visual representations are collectively called "Logos"), to be used solely in connection with the manufacture, distribution, promotion, advertisement and sale of the article or articles specified in Schedule B attached hereto (herein such article or articles are called "Licensed Product(s)"). This license does not constitute and may not be used so as to imply the endorsement of the Licensed Product(s) or any other product of Licensee by Licensor, the Office of the Commissioner of Baseball, the American or National League of Professional Baseball Clubs (hereinafter referred to as the "Leagues") or the Clubs. While the Logos licensed herein may be used as trademarks subject to the terms of this License Agreement, the Logos are not licensed herein for use as certification marks or indications of a particular standard of quality. Any exclusivity granted hereunder shall be subject to presently outstanding agreements granted by the Clubs. Further, any exclusivity granted hereunder shall pertain only to the extent of the items described and, if given, at the price set forth in Schedule E. Licensor warrants and represents that as the agent for the Clubs, pursuant to authority granted by the Clubs, it has the full authority to license the Logos in connection with the manufacture, distribution, promotion, advertisement and sale of the Licensed Product(s). 1 2. TERRITORY: Licensee shall b e entitled to use the license granted hereunder only in the territory described in Schedule C attached hereto (herein such territory is called "Licensed Territory"). Licensee will not make use of or authorize any use of this license or the Licensed Product(s) outside the Licensed Territory or distribute or sell the Licensed Product(s) directly or through others to retailers outside the Licensed Territory. 3. LICENSE PERIOD: The license granted hereunder shall be effective and terminate as of the dates specified in Schedule D attached hereto, unless sooner terminated or renewed in accordance with the terms and conditions hereof. 4. PAYMENT: A. Advance and Guaranteed Compensation: Licensee agrees to pay Licensor the sums specified in Schedule E attached hereto, as advance minimum compensation (herein called "Advance Compensation") and as guaranteed minimum compensation (herein called "Guaranteed Compensation"). The Advance Compensation shall be paid as set forth in Schedule E. and shall apply against Percentage Compensation as defined below. The Guaranteed Compensation shall be paid as provided in Schedule E except to the extent that paid Advance Compensation and annual cumulative payments of Percentage Compensation shall theretofore have offset all or a portion of the total of such Guaranteed Compensation. Notwithstanding the foregoing, no part of Percentage Compensation which may be attributable to premium sales (as defined hereunder) of the Licensed Product(s) shall serve to offset any part of the Total Guaranteed Compensation specified in Schedule E. No part of such Advance Compensation and no part of such Guaranteed Compensation shall be repayable to Licensee in any event, except as is expressly provided for herein. B. Percentage Compensation: Licensee agrees to pay Licensor a sum equal to the percentage specified in Schedule E (or Licensor's prevailing rate, if greater) of all net sales (as defined below) by Licensee or any of its affiliated, associated or subsidiary entities of the Licensed Product(s) covered by this Agreement. (Such percentage of net sales is herein called "Percentage Compensation.") Percentage Compensation shall be payable concurrently with the periodic statements required in the following paragraph, except to the extent offset by Guaranteed Compensation theretofore remitted. The term "net sales" shall mean gross sales based on the wholesale price to the retail trade less quantity discounts and actual returns, but no deduction shall be made for uncollectible accounts, commissions, taxes, discounts other than quantity discounts, such as cash discounts and discounts attributable to the issuance of a letter of credit, or any other amount. No costs incurred in the manufacture, sale, distribution, promotion or advertisement of the Licensed Product(s) shall be deducted from any Percentage Compensation payable by Licensee. Said Percentage Compensation shall also be paid by Licensee to Licensor on all Licensed Product(s) (including, without limitation, any irregulars, seconds, etc. distributed pursuant to the provisions of Paragraph 10 of this Agreement) distributed by Licensee or any of its affiliates. associated or subsidiary entities even if not billed or billed at less than usual net sales price for such Licensed Products and shall be based upon the usual net sales price for such Licensed Product(s) sold to the trade by Licensee. Any late payments of Advance Compensation, Guaranteed Compensation or Percentage Compensation shall require Licensee to pay Licensor, in addition to the amounts due, interest at one percent(1%) per month or the highest prime lending rate of Chemical Bank during the period such amounts are delinquent, whichever is greater, on the amounts delinquent for he period of the delinquency, without prejudice to any other rights of Licensor in connection therewith. C. Catalog Contribution: Licensee agrees that licensor shall have the right in its sole discretion and in a style and manner in which it chooses, to print catalogs, sales sheets or brochures (hereinafter "catalogs") Wherein representative merchandise from licensees of Licensor shall be displayed. S. PERIODIC STATEMENTS: Within thirty (30) days after the first day of the license period. and 1romptly on the I 5th day of every calendar month thereafter, Licensee shall furnish to Licensor complete and accurate statements, certified to be accurate by Licensee, or if a corporation. by an officer of Licensee. showing the sales volume of each Licensed Product (itemized by Club, for each applicable Licensed Product), gross sales price, itemized deductions from gross sales price, and net sales price of the licensed Product(s) distributed and/or sold by Licensee during the preceding calendar month, together with any returns made during the preceding calendar month. Such statements shall be furnished to Licensor whether or not any of the Licensed Product(s) have been sold. or any payment to Licensor whether or not any Licensed Product(s) have been sold, or any payment is shown to be due Licensor, during the calendar months in which such statements we due. Licensee shall furnish to Licensor sufficient background information so as to make such statements intelligible to Licensor, and on an annual basis, a complete list of Licensee's customers to whom Licensed Product(s) have been sold. Licensor agrees that it will not divulge said customer list to any other licensee, to any other competitor licensing organization, or to any competitor of Licensee. Receipt or acceptance by Licensor of any of the statements furnished pursuant to the Agreement or of any sums paid hereunder shall not preclude licensor from questioning the correctness thereof at any time. and in the event that any inconsistencies or mistakes are discovered in such statements or payments, they shall immediately be rectified and the appropriate payments made by Licensee. Late payment penalties. if any, shall be made pursuant to Paragraph 4b. Upon demand of Licensor, Licensee "I at its own expense, but not more than once in any twelve (12) month will furnish to licensor a detailed statement certified by an independent certified public accounting firm approved by Licensor showing the sales volume of each Licensed Product (itemized by Club, for each applicable Licensed Product), gross sales price, itemized deductions from gross sales price and net sales price of the Licensed Product(s) covered by this Agreement distributed and/or sold by licensee to the date of the Licensor's demand. All amounts payable pursuant to this Agreement shall be in U.S. dollars only. 6. BOOKS AND RECORDS: Licensee shall keep, maintain and preserve in its principal place of business for at least two (2) years following termination or expiration of this Agreement or any renewal thereof, complete and accurate records and accounts covering all transactions relating to this Agreement and pertaining to the various items required to be shown on the statements to be submitted by Licensee, including, without limitation, invoices, correspondence and banking, financial and other records in Licensee's possession or under its control. Such records and accounts shall be available for inspection and audit (and copying at Licensees, expense) at any time or times during or after the term or terms of this Agreement during reasonable business hours and upon reasonable notice by Licensor or its representatives. Licensee agrees not to cause or permit any interference with Licensor or representatives of licensor in the performance of their duties of inspection and audit. The exercise by Licensor, in whole or in part or at any time or times, of the right to audit records and accounts or of any other right herein granted, the acceptance by Licensor of any statement or statements or the receipt and deposit by Licensor of any payment tendered by or on behalf of Licensee shall be without prejudice to any rights or remedies of Licensor and shall not stop or prevent Licensor from thereafter disputing the accuracy of any such statement or payment. If pursuant to its right hereunder to audit and inspect Licensor causes an audit and inspection to be instituted which thereafter discloses a deficiency of three percent (3%) or more between the amount found to be due to Licensor and the amount actually paid or credited to Licensor, then Licensee shall be responsible for payment of the entire deficiency, together with interest thereon at the then current prime rate of Chemical Bank or its successor from the date such amount became due until the date of payment, and die costs and expenses of such audit and inspection. If the audit discloses a deficiency of less than three percent (3%) between the amount found to be due to Licensor and the amount actually paid or credited to Licensor, and if the amount actually paid or credited to licensor plus the deficiency exceeds the Guaranteed Compensation for the period covered by the deficiency. then Licensee shall pay Licensor the amount of the deficiency plus interest as calculated above. 7. INDEMNINCATIONS AND PROTECTIONS: A. licensor hereby agrees to indemnify, defend and hold Licensee and its owners, shareholders, directors, officers, employees, agents, representatives, successors and assigns harmless from any claims. suits, damages or costs (including reasonable attorneys' fees and expenses) arising from (I) challenges to Licensor's authority as agent for and pursuant to authority granted by the Clubs to license the Logos in connection with the manufacture, distribution, promotion, advertisement and sale of the Licensed Product(s) or (ii) assertions to any claim of right or interest in or to the Logos as authorized and used on the Licensed Products, provided in each case that Licensee shall give prompt written notice, cooperation and assistance to Licensor relative to any such claim or suit, and provided further in each case that Licensor shall have the option to undertake and conduct the defense of any suit so brought and to engage in settlement thereof at its sole discretion. B. Licensee shall assist Licensor, to the extent necessary, in the procurement of any protection or to protect any of Licensor's rights to the Logos, and Licensor, if it so desires and in its sole discretion, may commence or prosecute any claims or suits in its own name or in the name of Licensee or join Licensee as a party thereto. Licensee shall notify Licensor in writing of any infringements or imitations by others of the Logos of which it is aware. Licensor shall have the sole right to determine whether or not any action shall be taken on account of such infringements or imitations. Licensee shall not institute any suit or take any action on account of any such infringements or imitations without first obtaining the written consent of Licensor to do so. Licensee agrees that it is not entitled to share in any proceeds received by Licensor (by settlement or otherwise) in connection with any formal or informal action brought by Licensor hereunder. C. Licensee hereby agrees to indemnify, defend and hold Licensor, the Clubs, the Leagues and the Office of the Commissioner of Baseball and their respective owners, shareholders, directors, officers, employees, agents, representatives, successors and assigns harmless from any claims, suits, damages and costs (including reasonable attorneys' fees and expenses) arising out of (i) any unauthorized use of or infringement of any trademark, service mark, copyright, patent, process, method or device by Licensee in connection with the Licensed Product(s) covered by this Agreement, (ii) alleged defects or deficiencies in said Licensed Product(s) or the use thereof, or false advertising, fraud, misrepresentation or other claims related to the Licensed Product(s) not involving a claim of right to the Logos, (iii) the unauthorized use of the Logos or any breach by Licensee of this Agreement, (iv) libel or slander against, or invasion of the right of privacy, publicity or property of, or violation or misappropriation of any other fight of any third party, and/or (v) agreements or alleged agreements made or entered into by Licensee to effectuate the terms of this Agreement. Licensor shall give Licensee notice of the making of any claim or the institution of any action hereunder and Licensor may at its option participate in any action. The indemnifications hereunder shall survive the expiration or termination of this Agreement. 8. INSURANCE: Licensee agrees to obtain, at its own cost and expense, comprehensive general liability insurance including product liability insurance from an insurance company acceptable to Licensor, providing adequate protection for Licensor, the Clubs, the Leagues, the Office of the Commissioner of Baseball and Licensee against any claims or suits arising out of any of the circumstances described in Paragraph 7C above for which insurer is able to provide insurance, in an amount no less than $3,000,000.00 (three million dollars) per incident or occurrence, or Licensee's standard insurance policy limits, whichever is greater, and with a reasonable deductible in relation thereto. Such insurance shall remain in force at all times during the license period and for a period of five years thereafter. Within thirty (30) days from the date hereof, Licensee will submit to Licensor a fully paid policy or certificate of insurance naming Licensor, the Leagues and the Office of the Commissioner of Baseball as additional insured parties and requiring that the insurer shall not terminate or materially modify such policy or certificate of insurance without written notice to Licensor at least thirty (30) days in advance thereof. 9. COPYRIGHT AND TRADEMARK NOTICES AND REGISTRATIONS: Licensee further agrees that in any instance wherein the Logos of the Clubs and/or the Leagues are used, the following general notice shall be included (i.e., on the product, on a label, on the packaging material or on a separate slip of paper attached to the product): "The Major League Club insignias depicted on this product are trademarks which are the exclusive property of the respective Major League Clubs and may not be reproduced without their written consent." Further, all products containing the Logos shall contain a hangtag and label with Licensee's name stating "Genuine Merchandise" and containing the Major League Baseball silhouetted batter logo and, where appropriate, the Major League Baseball Cooperstown Collection logo or Major League Baseball Authentic Diamond Collection logo. All Licensed Product(s) shall contain a permanently affixed label that displays Licensee's name. All Licensed Product(s) components which bear any of the Logos (embroidered emblems, cloth or paper labels, hangtags, etc.) shall be manufactured in-house by Licensee or shall be obtained only from one or more suppliers officially authorized by Licensor to produce those components. All Licensee advertisements displaying the Logos, all retailer advertisements featuring Licensed Product(s) and of which Licensee has knowledge or any Licensed Product(s), shall contain the words "Genuine Merchandise" and the silhouetted batter logo. Licensee shall require those to whom it sells Licensed Product(s) directly or indirectly to display the words "Genuine Merchandise" (or such other appropriate notice as directed by Licensor) and the silhouetted batter logo in all advertisements. All uses of the Logos shall also include any designations legally required or useful for enforcement of copyright, trademark or service mark rights (e.g., "(c)," "(R)" or "TM"). Licensee shall submit a copy of its specifications for all of the above notices (including copies of its artwork, layouts or mold blueprints) to Licensor for its review. Licensor shall have the fight to revise the above notice requirements and to require such other notices as shall be reasonably necessary to protect the interests of Licensor, the Clubs and/or the Leagues in the respective Logos. Licensee agrees to advise Licensor of the initial date of the marketing of each Licensed Product, and upon request, to deliver to Licensor the required number and type of specimen samples of the Licensed Product, labels or the like upon which the Logos are used for use in procuring copyright, trademark and/or service mark registrations in the name of and at the expense of the person, firm, corporation or other legal entity owning the Logos, in compliance with any laws relating to copyright, trademark and service mark registrations. Except to the extent set forth in any schedules attached to this Agreement, Licensor, the Clubs and/or the Leagues shall be solely responsible for taking such action as it or they deem appropriate to obtain such copyright, trademark or service mark registrations for its or their Logos. If it shall be necessary for Licensee to be the applicant to effect any such registrations, Licensee shall and hereby does assign all of its fights in each such application and any resulting registration to Licensor or any other appropriate owner thereof, and further agrees to execute all papers necessary to effectuate and/or confirm such assignments. Licensee shall perform all acts necessary and execute all documents necessary to effectuate its registration as a user of the Logos where such registration is needed. Licensee also agrees that, in any case where it employs the services of photographers or artists in connection with the production, promotion, marketing or distribution of the Licensed Product(s), it will require each such photographer or artist to agree that the photographic or artistic works he or she produces for Licensee shall be "works made for hire" for the purposes of the copyright laws, and that to the extent such photographic or artistic works may not qualify as "works made for hire," the copyright in each such work is assigned to Licensee. 10. APPROVALS: Licensor shall have absolute approval of the Licensed Product(s) and of all packaging, advertising and promotional material at all stages of the development thereof. Licensee agrees to furnish in a timely manner to Licensor, free of cost, for its written approval as to quality and style, designs of each Licensed Product and samples of each Licensed Product before its manufacture, sale, promotion, advertisement, order distribution, which ever first occurs, and samples of all advertising, point-of- sale displays, catalogs, sales sheets and other items that display or picture the Logos, and no such Licensed Product or other such materials shall be manufactured, sold, promoted, advertised or distributed by Licensee without such prior written approval. In particular, no use of any Logo or Logos shall be made on stationery of Licensee (specifically including, without limitation, letterhead, envelopes, business cards, shopping bags, invoices, statements, packing slips, etc.) without Licensor's express written approval in advance of any such use. In addition, no irregulars, seconds or other Licensed Products which do not conform in all material respects to the approved samples may be distributed or sold without the express written advance consent of Licensor. All such sales, if made, shall bear Percentage Compensation as set forth in Paragraph 4.B. Subject, in each instance, to the prior written approval of Licensor, Licensee or its agents may use textual and/or pictorial matter pertaining to the Logos on such promotional display and advertising material as may, in its judgment, promote the sale of the Licensed Product(s). All promotional display and advertising material must contain and prominently display the official logo of Licensor. Ten samples of each Licensed Product shall be supplied free of cost to Licensor, and one to each Club whose Logos are used on such Licensed Product(s). From time to time subsequent to final approval, a reasonable number of production samples shall periodically be sent to Licensor free of cost. Such samples shall also be sent upon any change in design, style or quality, which shall necessitate subsequent approvals by Licensor. Additional samples shall be supplied to Licensor upon request at no more than cost. Licensor shall also have the right to inspect Licensee's plants, warehouses or store facilities at any reasonable time without notice. In the event that any item or matter submitted to Licensor under this Agreement for approval or consent shall not have been approved or consented to, disapproved or denied, or commented upon within twenty (20) Licensor business days after receipt thereof by Licensor (both Licensing Director and Licensed Product Compliance), and Licensor (both Licensing Director and Licensed Product Compliance) shall have received notice from Licensee that comment is overdue by telegram or other written com-munica6on, and Licensor shall not have commented within five (5) additional Licensor business days of receipt of such notice, any items or matters so submitted shall be deemed approved and consented to. In any instance where any matter is required to be submitted to Licensor for Licensor's approval, that approval shall be granted or withheld in Licensor's sole discretion. 11. DISTRIBUTION: Licensee shall sell the Licensed Product(s) to jobbers, wholesalers, distributors or retailers for sale or resale and distribution to retail stores and merchants for their resale and distribution or directly to the public. In the event Licensee sells or distributes a Licensed Product at a special price directly or indirectly to itself, including, without limitation, any subsidiary of Licensee, or to any other person, firm or corporation related in any manner to Licensee or its officers, directors or major stockholders, Licensee shall pay compensation with respect to such sales or distribution based upon the price generally charged the trade by Licensee. 12. GOODWILL: Licensee recognizes the great value of the publicity and good will associated with the Logos and, in such connection, acknowledges that such good will belongs exclusively to Licensor, the Clubs, the Office of the Commissioner of Baseball and/or the Leagues and, that the Logos have acquired a secondary meaning in the minds of the purchasing public. 13. SPECIFIC UNDERTAKINGS OF LICENSEE: During the license period, each additional license period if any and thereafter, Licensee agrees that: A. It will not acquire any rights in the Logos as a result of its use thereof and all use of the Logos shall inure to Licensor's benefit; B. It will not, directly or indirectly, attack the title of Licensor, the Clubs, the Office of the Commissioner of Baseball and/or the Leagues in and to the Logos or any copyright, trademark or service mark pertaining thereto, nor will it attack the validity of the license granted hereunder, nor will it use the Logos in any manner other than as licensed hereunder; C. It will not at any time apply for any registrarion of any copyright, trademark, service mark or other designation which would affect the ownership of the Logos, or file any document with any governmental authority or take any action which would affect the ownership of the Logos or aid or abet anyone in doing so; D. It will not harm, misuse or bring into disrepute the Logos; E. It will manufacture, sell, promote, advertise and distribute the Licensed Product(s) in a legal and ethical manner and in accordance with the terms and intent of this Agreement; F. It will not create any expenses chargeable to Licensor without the prior written approval of Licensor: G. It will protect to the best of its ability the fight to manufacture, sell and distribute the Licensed Product(s) hereunder; H. It will not use the Licensed Product(s) for combination sales, as self-liquidating or free giveaways or for any similar method of merchandising without the prior written consent of Licensor and will exercise due care that its customers likewise will refrain from making such use of the Licensed Product(s); I. It will not, without the prior written consent of Licensor, enter into any sublicense or agency agreement for the manufacture, sale, promotion, advertisement or distribution of the Licensed Product(s); J. It will not engage in tying practices, illegal restraints of trade, or selling practices that exclude any members of the retail trade for any reason other than poor credit history, known lack of integrity or disregard for the rights of Licensor or Major League Baseball. Nothing in the preceding sentence shall be deemed to require Licensee to violate any other term of this Agreement; K. It will not use, or knowingly permit the use of, the Licensed Product(s) as a premium, except with the prior written consent of Licensor and the specific negotiation of a higher royalty payment therefor. For purposes of this subparagraph and Paragraph 19 below, the term "premium" shall be defined as including, but not necessarily limited to, free or self-liquidating items offered to the public in conjunction with the sale or promotion of a product or service, including traffic building or continuity visits by the consumer/customer, or any similar scheme or device. the prime intent of which is to use the Licensed Product(s) in such a way as to promote, publicize and/or sell the products, services or business image of the third party company or manufacturer. "Premium" use shall also specifically include distribution of the Licensed Product(s) for retail sale through distribution channels (including, without limitation. catalogs) offering earned discounts or "bonus" points based upon the extent of usage of the offeror's product or service; L. It will comply with such guidelines and/or requirements as Licensor may announce from time to time. It will comply with all laws, regulations and standards relating or pertaining to the manufacture, sale, advertising or use of the Licensed Product(s) and shall maintain the highest quality and standards, and shall comply with the requirements of any regulatory agencies (including, without limitation, the United States Consumer Safety Commission) which shall have jurisdiction over the Licensed Product(s); M. It guarantees that Licensor, Clubs, official Club and/or Licensor retail stores, Club in-stadium concessionaires and the Clubs belonging to The National Association of Professional Baseball Leagues ("NAPBL Clubs") will obtain the Licensed Product(s) for retail sale at lowest possible wholesale prices and shall receive prompt shipments and/ or deliveries of the Licensed Product(s), without regard to the relatively small volume their orders may represent. Licensor, Clubs and NAPBL Clubs may obtain the Licensed Product(s) for their use, but not resale, at the manufacturer's lowest possible price, which shall in no event be greater than its lowest wholesale price; N. It will furnish to Licensor, upon request of Licensor (which shall be made only for reasonable cause and no more often than once per year), a list of all its distributors, sales representatives and jobbers for the Licensed Product(s), as well as a list of all its "trade names," said list to include the company name, address, telephone number, territorial representation and key contact name. Licensor agrees that it will not divulge any information provided to it under this paragraph to any other competitor licensing organization; 0. Concurrently with its execution of this Agreement, it will provide Licensor with the names, addresses, telephone numbers and names of principal contacts of each party (hereinafter referred to as "Manufacturer"), both domestic and foreign, that Licensee desires or intends to have produce one or more of the Licensed Products in the event Licensee desires not to be the manufacturer of such Licensed Product(s). This information shall be set out in Schedule of this Agreement and Licensee shall specify the Licensed Product(s) Manufacturer will produce. In the event Licensee wishes to substitute a Manufacturer for those listed in Schedule F or wishes to add to the number of Manufacturers, Licensee shall first provide Licensor with the information set out in Schedule F regarding the proposed new Manufacturers for Licensor's written approval of such Manufacturers. Licensee's failure to do so may result in termination of this Agreement and/or confiscation and seizure of the Licensed Product(s). Licensee shall ensure that: (a) Manufacturer produces no merchandise bearing the Logos other than the Licensed Product(s) described in Schedule F of this Agreement unless authorized by Licensor; (b) Manufacturer produces the Licensed Product(s) only as and when directed by Licensee and in accordance with the terms herein and in compliance with all laws, regulations and governmental rules applicable to the Licensed Product(s) and/or their manufacture; (c) Manufacturer does not supply the Licensed Product(s) to any person, firm. corporation or business entity other than Licensee or to such entities as may be authorized by Licensee and Licensor jointly, and (d) Manufacturer does not delegate in any manner whatsoever its obligations with respect to the Licensed Product(s). Prior to the delivery of the Licensed Product(s) from Manufacturer to Licensee, Licensee shall submit to Licensor, free of cost, for its written approval as to quality and style, at least two samples of the Licensed Product(s) produced by Manufacturer; P. It will not manufacture or allow the manufacture, or accumulate inventory, of the Licensed Product(s), at a rate greater than its average rate during the license period as the end of the license period approaches; Q. It will not sell the Licensed Product(s) to parties whom it knows or reasonably should know will resell or distribute such Product(s) outside the Licensed Territory; R. It will not disclose any confidential, private, restricted or otherwise nonpublic information concerning Major League Baseball which, it acknowledges, it may become privy to during the term of this Agreement; S. It will not grant to any third person or entity a security interest in the Licensed Product(s) without Licensor's prior written approval; T. It has not had and does not have an investment or interest in casinos, any other form of legalized gambling enterprise, or any activity that Licensor or any other Major League Baseball related entity has made unauthorized or which is contrary to official policy of Major League Baseball; and U. With respect to any Licensed Products manufactured outside the United States, (i) it will take receipt of goods at U.S. ports of entry, (ii) it will not allow any entity in the United States. including but not limited to distributors, wholesalers and retailers, to accept shipment of the Licensed Products from any non U.S. manufacturer of such Products. and (iii) it will distribute such Products to third parties, including but not limited to distributors, wholesalers and retailers, from Licensee's principal place of business only. 14. APPROVAL OF MANUFACTURER, ETC.: Nothing contained herein may be construed so as to imply endorsement of Manufacturer by Licensor, the Office of the Commissioner of Baseball, the Leagues or the Clubs. Licensee shall seek Licensor's written approval of Manufacturer prior to Licensee's engagement of Manufacturer. Any approval of Manufacturer granted by Licensor relates solely to the manufacturing of the Licensed Product(s) and shall not constitute a grant of any fight, title or interest in or to the Logos, nor to any copyrights, service marks, trademarks or other property rights associated therewith. Licensor hereby reserves the right to terminate in its discretion the engagement of Manufacturer at any time. Additionally, Licensor may confiscate goods or samples imported by Licensee or shipped by Manufacturer that bear any of the Logos and that have not been approved by Licensor as to quality. 15. ACKNOWLEDGEMENT OF RIGHTS: Licensee hereby acknowledges the proprietary nature of all names and logos of the Major League Baseball Clubs, the Leagues, the Office of the Commissioner of Baseball or Licensor and acknowledges that all tights, title and interest to such names or logos belong to the individual Clubs, the Leagues, the Office of the Commissioner of Baseball and/or Licensor, as the case may be. Licensee represents that it has not made any unauthorized use of names or logos of the Major League Baseball Clubs, the Leagues, the Office of the Commissioner of Baseball or Licensor and agrees that it will make no use of any such names or logos, other than as provided in this Agreement, without the prior written consent of Licensor, the Office of the Commissioner of Baseball or the appropriate individual League or Club. Any use Licensee has made or will make of such names and logos has not conferred or will not confer, as the case may be, any rights or benefits upon it whatsoever, and any rights created by such use shall inure to the benefit of the individual Clubs, the Leagues, the Office of the Commissioner of Baseball and/or Licensor, as the case may be. 16. TERMINATION: A. Immediate Termination: Licensor shall have the right to terminate this A2reement immediately upon the occurrence of any one or more of the following events (herein called "defaults"): (i) If Licensee fails to deliver to Licensor or to maintain in full force and effect the insurance referred to in Paragraph 8 hereof; or (ii) If any governmental agency or court of competent jurisdiction finds that the Licensed Product(s) are defective in any way, manner or form; or (iii) If Licensee shall breach any one of the following undertakings set forth in Paragraph 13 hereof: 13A through F H through J, Q, R or T; or (iv) If Licensee shall undergo a change in majority or controlling ownership. B. Termination With Cure Period: Licensor shall have the right to terminate this Agreement upon the occurrence of any one or more of the following defaults, and Licensee's failure to cure such default(s) completely within ten (10) business days from Licensee's receipt of notice from Licensor: (i) If Licensee fails to make any payment due hereunder on the date due, at which time all monies which are owed during the current term or renewal referred to in Schedule E of this Agreement shall become due and payable to Licensor; or (ii) If Licensee fails to deliver any of the statements hereinabove referred to or to give access to the premises and/or license records pursuant to the provisions hereof to Licensor's authorized representatives for the purposes permitted hereunder or (iii) If Licensee is unable to pay its debts when due, or makes any assignment for the benefit of creditors or an arrangement pursuant to any bankruptcy law, or files or has filed against it any petition under the bankruptcy or insolvency laws of any jurisdiction, county or place, or shall have or suffer a receiver or trustee to be appointed for its business or property, or be adjudicated a bankrupt or an insolvent. In the event the license granted hereunder is terminated pursuant to this Paragraph 16(B)(iii), neither Licensee nor its receivers, representatives. trustees, agents, administrators, successors and/or assigns shall have any right to sell, exploit or otherwise deal with or in the Licensed Product(s) without the prior written consent of Licensor; or (iv) If Licensee does not commence in good faith to manufacture, distribute and sell each Licensed Product throughout the Licensed Territory within any twelve (12) month period, but such default and Licensor's resultant right of termination shall apply only to the specific Licensed Product(s) and/or the specific territory(ies) which or wherein Licensee fails to meet said requirements; or (v) If Licensee shall discontinue its business as it is now conducted; or (vi) If Licensee shall breach any of the undertakings set forth in Paragraph 13 hereof, except as otherwise provided in Paragraph 16(A)(iii) above; or (vii) If Licensee shall breach any of the terms of this Agreement; or (viii) If, in the periodic statements furnished pursuant to Paragraph 5 hereof, the amounts owed to Licensor are significantly or consistently understated. Licensor's fight to terminate this Agreement shall be without prejudice to any other rights which it may have, whether under the provisions of this Agreement, in law or in equity or otherwise. In the event any of these defaults occurs and Licensor desires to exercise its fight of termination under the terms of this Paragraph 16, Licensor shall give notice of termination in writing to Licensee. Any and all payments then or later due from Licensee hereunder (including Advance Compensation) shall then become promptly due and payable in full to Licensor and without set off of any kind; i.e., no portion of any prior payments made to Licensor shall be repayable to Licensee. Until payment to Licensor of any monies due it, Licensor shall have a lien on any units of the Licensed Product(s) not then disposed of by Licensee and on any monies due Licensee from any jobber, wholesaler, distributor, sublicensee or other third parties with respect to sales of the Licensed Product(s). Upon termination or expiration of the term hereof, all rights, licenses and privileges granted to Licensee hereunder shall automatically revert to Licensor and Licensee shall execute any and all documents evidencing such automatic reversion. 17. FINAL STATENMNT UPON TERMNATION OR EXPIRATION: Licensee shall deliver to Licensor, as soon as practicable, following expiration or termination of this Agreement, a statement indicating the number and description of the Licensed Product(s) on hand. Following expiration or termination Licensee may manufacture no more Licensed Product(s), but may continue to distribute its remaining inventory for a period not to exceed sixty (60) days, subject to the terms of Paragraph 13(P) hereof and payment of applicable royalties relative thereto; provided, however, that such royalties shall not be applicable against Advance Compensation or Guaranteed Compensation. Notwithstanding the foregoing, Licensee shall not manufacture, sell or distribute any Licensed Product(s) after the expiration or termination of this Agreement because of (a) the failure of Licensee to cause the appropriate statutory notice of copyright, trademark, service mark or user registration to appear wherever the Logos are used; (b) the departure of Licensee from the quality and style approved by Licensor under the terms of Paragraph 10 hereof, (c) the failure of Licensee to obtain the approval of Licensor under the terms of Paragraph 10 hereof; or (d) the occurrence of an event of default under the terms of Paragraph 16 hereof. Licensor shall have the option to conduct physical inventories before termination and continuing until the end of the 60-day sell-off period in order to ascertain or verify such inventories and/or statement. Immediately upon expiration of the sell-off period, Licensee shall furnish Licensor a detailed statement certified by an officer of Licensee showing the number and description of Licensed Products on hand in its inventory and shall dispose of such inventory at Licensor's direction and at Licensee's expense. In the event Licensee refuses to permit Licensor to conduct such physical inventory, Licensee shall forfeit its right hereunder to dispose of such inventory. In addition to such forfeiture, Licensor shall have recourse to all other remedies available to it. 18. INJUNCTION: Licensee acknowledges that its failure to perform any of the terms or conditions of this Agreement, or its failure upon the expiration or termination of this Agreement to cease the manufacture of the Licensed Product(s) and limit their distribution and sale as provided in Paragraph 17 hereof, shall result in immediate and irreparable damage to Licensor. Licensee also acknowledges that there may be no adequate remedy at law for such failures and that in the event thereof Licensor shall be entitled to equitable relief in the nature of an injunction and to all other available relief, at law and/or in equity. 19. RESERVATION OF RIGHTS: Licensor retains all rights not expressly and exclusively conveyed herein, and Licensor may license firms, individuals, partnerships or corporations to use the Logos. artwork and textual matter in connection with other products, including other products identical to the Licensed Product(s) contemplated herein. Licensor reserves the right to use, or license others to use and/or manufacture, identical items as premiums. 20. PAYMENTS AND NOTICES: All notices and statements provided for herein shall be in writing. and all notices hereunder are to be sent to Major League Baseball Properties, Inc., 350 Park Avenue, New York, New York 10022, Attention: President. All statements and payments shall be made to Major League Baseball Properties and sent to an address designated by Licensor. 21. WAIVER, MODIFICATION, ETC.: No waiver, modification or cancellation of any term or condition of this Agreement shall be effective unless executed in writing by the party charged therewith. No written waiver shall excuse the performance of any act other than those specifically referred to therein. No waiver by either party hereto of any breach of this Agreement shall be deemed to be a waiver of any preceding or succeeding breach of the same or any other provision hereof. The exercise of any right granted to either party hereunder shall not operate as a waiver. The normal expiration of the term of this Agreement shall not relieve either party of its respective obligations accruing prior thereto, nor impair or prejudice the respective rights of either party against the other, which rights by their nature survive such expiration. Licensor makes no warranties or representations to Licensee except those specifically expressed herein. 22. NO PARTNERSHIP, ETC.: This Agreement does not constitute and shall not be construed as constituting an agency, partnership or joint venture relationship between Licensee and Licensor arid/or the Clubs. Licensee shall have no right to obligate or bind Licensor in any manner whatsoever, and nothing herein contained shall give or is intended to give any rights of any kind to any third persons. 23. NON-ASSIGNABILITY: Licensee acknowledges and recognizes: (a) that it has been granted the license described in Paragraph I because of its particular expertise, knowledge, judgement, skill and ability; (b) that 'it has substantial and direct responsibilities to perform this Agreement in accordance with all of the terms contained herein; (c) that Licensor is relying on Licensee's unique knowledge, experience and capabilities to perform this Agreement in a specific manner consistent with the high standards of integrity and quality associated with Major League Baseball as a national sport and with Major League Baseball licensed merchandise; and (d) that the granting of the license under this Agreement creates a relationship of confidence and trust between Licensee and Licensor. This Agreement is personal to Licensee, and Licensee shall not sublicense or franchise any of its rights hereunder, and neither this Agreement nor any of the rights of Licensee hereunder shall be sold, transferred or assigned by Licensee without Licensor's prior written approval and no fights hereunder shall devolve by operation of law or otherwise upon any assignee, receiver, liquidator, trustee or other party. Subject to the foregoing, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto, their successors and assigns. 24. PARAGRAPH HEADINGS: Paragraph headings contained in this Agreement are for convenience only and shall not be considered for any purpose in governing, limiting, modifying, construing or affecting the provisions of this Agreement and shall not otherwise be given any legal effect. 25. CONSTRUCTION: This Agreement shall be construed in accordance with the laws of the State of New York, which shall be the sole jurisdiction for any disputes. 26. SEVERABILITY: The determination that any provision of this Agreement is invalid or unenforceable shall not invalidate this Agreement, and the remainder of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 27. TIME OF THE ESSENCE: Time is of the essence of all parts of this Agreement. 28. ACCEPTANCE BY LICENSOR: This instrument, when signed by Licensee or a duly authorized officer of Licensee if Licensee is a corporation, shall be deemed an application for a license and not a binding agreement unless and until signed by a duly authorized officer of Licensor. The receipt and/or deposit by Licensor of any check, or other consideration given by Licensee and/or the delivery of any material by Licensor to Licensee shall not be deemed an acceptance by Licensor of this application. The foregoing shall also apply to any documents relating to renewals or modifications hereof. 29. INTEGRATION: This Agreement, when fully executed, shall represent the entire understanding between the parties hereto with respect to the subject matter hereof and supersedes all previous representations, understandings or agreements, oral or written. between the parties with respect to the subject matter hereof. 30. SURVIVAL OF PROVISIONS: Paragraphs 2,6,7C, 8,12, 3 A, B, C, D, F, H, I, K, Q and R, 15, 17, 18, 19, 21, 22, 24. 25, 26, 30 and 31 shall survive any termination or expiration of this Agreement. 31. NUSCELLANEOUS: By signing below, Licensee acknowledges that this Agreement is for the term specified in Schedule D only and that neither the existence of this Agreement nor anything contained herein shall impose on Licensor any obligation to renew or otherwise extend this Agreement after expiration of the license period. _ SCHEDULE A LOGOS The names, word marks, logos, uniform designs, characters, symbols, designs, likenesses, visual representations and such other similar or related identifications (hut such similar or related identifications must be approved in writing by Licensor in advance of use) of the following noted organizations, events, programs and product lines in connection with the marketing, promotion and sale of that described in Schedule B hereof: (1) Major League Baseball Properties, Inc., (2) the American League, (3) the National League and (4) the following Clubs: Anaheim Angels, Baltimore Orioles, Boston Red Sox, Chicago White Sox, Cleveland Indians, Detroit Tigers, Kansas City Royals, Milwaukee Brewers, Minnesota Twins, New York Yankees, Oakland Athletics, Seattle Mariners, Tampa Bay Devil Rays, Texas Rangers, Toronto Blue Jays, Arizona Diamondbacks, Atlanta Braves, Chicago Cubs, Cincinnati Reds, Colorado Rockies, Florida Marlins, Houston Astros, Los Angeles Dodgers, Montreal Expos, New York Mets, Philadelphia Phillies. Pittsburgh Pirates, St. Louis Cardinals, San Diego Padres and San Francisco Giants. SCHEDULE B LICENSED PRODUCT(S) ALL LICENSED PRODUCTS SHALL CONFORM TO LICENSOR'S THEN-CURRENT LABELING REQUIREMENTS. 1. Laundry bags measuring 27" x 19" in size, made of durable nylon fabric, and featuring a drawstring closure and screen printed individual Club Logos. 2. Stadium cushion/tote bags measuring 17" x 19" x 6" in size, and featuring a wrap-around zipper, handles that open to form two separate stadium cushions. and screen printed individual Club Logos. 3. Shoe bags measuring 15" x 5" x 13" in size, made of 100% cotton fabric, and featuring a drawstring closure and screen printed individual Club Logos on one side. 4. Garment bags measuring 22" x 40" x 2" in size, made of nylon fabric, and featuring PBC backing, a zippered opening and screen printed individual Club Logos. 5. Over-the-door organizers designed for children, measuring 24" x 58" in size, and featuring imprinted individual Club Logos on one side and including, but not limited to, two shoe compartments, two specially designed pockets with velcro extension straps for baseball bats and two quick-use clips for hanging baseball. caps. 6. Under-bed storage organizers, measuring 35" x 2C" x 4-3/4" in size, made of colored canvas fabric, and featuring a zipper closure and individual Club Logos on the top flap and such Club's name on the front gusset. 7. Vertical insulated lunch bags measuring 9-3/4" x 7" x 3-1/2" in size, and featuring polyurethane insulation, a polyweb handle, velcro closure and individual Club Logos. 8. Vertical insulated lunch bags measuring 9-3/4" x 7" x 3-1/5" in size, and featuring a ball flap, polyurethane insulation, a polyweb handle, velcro closure and individual Club Logos. 9. Adult insulated lunch totes measuring 6-1/2" x 8-1/2" x 6" in size, and featuring 3/8" closed cell foam insulation, top zipper opening, a polyweb shoulder strap and individual Club Logos. 10. Kids specialty tote bags measuring 13" x 12" in size, made of colored canvas fabric, and featuring polyweb handles and imprinted individual Club Logos on one side. 11. Vertical tote bags measuring 12" x 17" x 4" in size, made of colored canvas fabric, and featuring 28" polyweb handles and screen printed individual Club Logco on one side. 12. Wide tote bags measuring 16" x 14" x 4" in size, made of colored canvas fabric, and featuring 26" polyweb handles and imprinted individual Club Logos on one side. 13. Two-toned fashion tote bags measuring 14" x 16" x 4" in size, made of colored canvas fabric, and featuring body and bottom of tote bag in contrasting Club colors, 28" polyweb handles and imprinted individual Club Logos on one side. 14. Two-toned fashion tote bags measuring 12" x 16" x 4" in size, made of colored canvas fabric, and featuring body and bottom of the tote bag in contrasting Club colors, matching two-toned 28" polyweb handles and imprinted individual Club Logos on one side. 15. Soft-touch portfolios measuring 16" x 12" in size, made of colored polyester fabric, and featuring contrasting polyweb handles, a fashion strip, a top zipper closure and imprinted individual Club Logos on one side. 16. Fashion tote bags measuring 10" x 15" x 5" in size, made of denim fabric, and featuring 1/8" closed cell foam insulation, an inside zipper pocket, velcro closure and embroidered individual Club Logos in lower right corner. 17. Fully-lined fashion tote bags measuring 6-3/4" ~' 10" x 4" in size, made of denim fabric, and featuring a front slash pocket, zipper closure and imprint: individual Club Logos on the front pocket. 18. Boat tote bags made of heavyweight bull denim fabric, and featuring body and bottom of tote bag in contrasting Club colors, matching two-toned 28" handles, a front slash pocket and individual Club Logos on the front pocket. 19. Boat tote bags made of heavyweight bull denim fabric. and featuring body and bottom of tote bag in contrasting Club colors, matching two-toned 28" handles, a recessed top zipper closure. a front slash pocket and individual Club Logos on the front pocket. SCHEDULE C LICENSED TERRITORY The fifty United States of America, the District of Columbia, Puerto Rico and U.S. territories and possessions, including U.S. military bases worldwide. SCHEDULE D LICENSE PERIOD January 1. 1997 - December 31, 1998 SCEDULE 8 COMPENSATION TOTAL GUOMEM COMPENSATION: M.000.00 PAYABLE AS: Q) NON-RETURNABLE ADVANCE COMPENSATION due upon signing: S10,000.00 (ii) REMAINDER OF GUARANTEED COMPENSATION due as follows: November 1, 1997 $5,000.00 Total 1997 Guarantee $15,000.00 January 1, 1998 $4,000.00 July 1, 1998 $4,000.00 November 1, 1998 $7,000.00 Total 1998 Guarantee . $15,000.00 PERCENTAGE COMPENSATION: Nine percent (9%) of net sales as defined in Paragraph 4B. Percentage Compensation shall be applied against Guaranteed Compensation payable in the same calendar year only, without carryover. Percentage Compensation attributable to premium sales of the Licensed Products shall not be applied against Total Guaranteed Compensation. SCHEDULE F MANUFACTURER: Licensee agrees that at no time during the license or sell-off periods shall it sell, directly or indirectly. to any of the Manufacturers listed below. or to any individual or entity affiliated in any manner with any of such Manufacturers. any Licensed Products for subsequent sale or distribution. without prior written approval of Licensor. 1) Licensed Product(s):all lunch totes Name of Manufacturer: Hi-Performance Address: 3/F Kaiser Estate Phase 3, Flat 0, 11 Hok Yuen St, Hong Kong Telephone: 011 852 2 774 0324 Principal Contact: Ron Sonneberg Approved by Major League Baseball Properties, Inc.: Corporate Secretary Initials/Title 8-6-98 Date 2) Licensed Product(s): Name of Manufacturer: Address: Telephone: Principal Contact: Approved by Major League Baseball Properties, Inc.: Initials/Title Date 3) Licensed Product(s): Name of Manufacturer: Address: Telephone: Principal Contact: Approved by Major League Baseball Properties, Inc.: Initials/Title Date SCHEDULE G Product Credit: Licensee shall provide to Licensor merchandise credit in the amount of $2,500.00 (wholesale value) during each year of the license period. Licensee shall ship at Licensor's direction such merchandise as Licensor shall request from time to time under this merchandise credit. Advertising. Marketing & Promotion Licensee acknowledges that it is required to promote the Licensed Products under this Agreement. Accordingly, to satisfy part of that obligation, by March I of each year of the license period, Licensee shall pay Licensor the sum of two thousand, five hundred dollars ($2.500.00) for Licensor's use in connection with Licensor-driven programs and/or initiatives designed to promote Major League Baseball and Licensor's licensed merchandise. Brand Names: Concurrently with its execution of this Agreement, Licensee will list below the brand names that Licensee desires or intends to use on the Licensed Products. 1) Licensed Product(s) Nos.: All Products Brand Name(s): Innovo Approved by Major League Baseball Properties, Inc.: Initials/Title Date 2) Licensed Product(s) Nos.: Coolers/Lunch Totes only Brand Name (s): Nasco Approved by Major League Baseball Properties, 11c.: Initials/Title Date 3) Licensed Product(s) Nos.: Brand Name(s): Approved by Major League Baseball Properties, Inc.: Initials/Title Date In the event Licensee wishes to substitute a brand name for those listed above or wishes to add to the number of brand names, Licensee shall first obtain Licensor's written approval of such brand names. IN WITNESS WHEREOF, the parties hereto have signed this Agreement: MAJOR LEAGUE BASEBALL PROPERTIES, INC., as agent for the Clubs CORPORATE SECRETARY BY: Title DATE. 8-6-98 LICENSEE: INNOVO,GROUP, INC. BY: /s/ Pat Anderson President I Title EXHIBIT 10.65 Date: 12/05/97 7/01/98 AGREEMENT made on April 17, 1998 between Licensor The Walt Disney Company (Germany) GmbH, with its principal office located at Kolner Strasse 10, 65760 Eschborn, - -hereinafter referred to as "we", "us, "our", etc. -and Licensee Nasco Products International, Inc., with its principal office located at Springfield, TN 37172, U.S.A., 27 North Main Street, - - hereinafter referred to as "you", "your", etc. - Preamble WHEREAS, we have heretofore entered into an agreement with Disney Enterprises, Inc., a corporation organized and existing under the laws of the State of Delaware, United States of America (hereinafter referred to as "Disney"), pursuant to which, in the Territory hereinafter identified, we have been granted the right to license third parties to use certain materials and trademarks which are owned by Disney in a number of merchandising activities and endeavors; and WHEREAS, you desire to obtain a license to use some of those materials and trademarks on and/or in connection with the Article or Articles of merchandise specified below and we are willing to grant said license under the conditions, provisions and limitations hereinafter set forth. NOW, THEREFORE, it is mutually agreed between you and us as follows: Section I MEANING OF TERMS As used in this Agreement: (a) Licensed Material means the representations of the characters listed on the Schedule and designated still scenes from the motion pictures and/or television series identified in Subparagraph l(b) hereafter. (b) "Trademarks" means "Walt Disney", "Disney", the representations of Licensed Material included in Subparagraph l(a) above, and the logo(s) of the motion pictures, television series and/or branded programs specified on the Schedule in which Licensed Material appears. (c) "Articles" means the items listed on the Schedule on or in connection with which the Licensed Material and/or the Trademarks are reproduced or used. (d)Minimum Per Article Royalty" means-the sum(s) for each Article sold specified on the Schedule. (i) "Minimum Per Article Royalty Per Invoice" means the sum per article sold specified on the Schedule, being the minimum Royalty payable for each Stock Keeping Unit ("SKU") of each Article sold during each Royalty Payment Period, effective from January 1, 1998. (ii)Average Minimum Per Article Royalty means the sum per article specified on the Schedule, being the average minimum Royalty payable for all quantities of each article sold in the Territory or, if the Territory includes a country within the European Economic Area, the European Economic Area during each Royalty Payment Period or such longer period as we may mutually agree upon, effective from January 1, 1998. (iii)Any conversion from the Ecu into another currency to ensure compliance with (d) (i) and (d) (h) shall he done at the exchange rate reported on the first working day which precedes the relevant Royalty Payment Period, as published in the International Herald Tribune. 2 (e)"Term" means the period specified on the Schedule. (f) "Territory" means the area specified on the Schedule. If the Territory includes a country within the European Economic Area you may export Articles to other countries within the European Economic Area which are not included in the Territory. You may not export Articles outside the European Economic Area unless such Articles are destined for ultimate delivery in the Territory or in the European Economic Area and may not sell or otherwise distribute any of the Articles to any party if you know, or in the exercise of prudent business judgment should know, that such sale(s) ultimately with result in the exporting of Articles outside of the European Economic Area. Except as specifically provided herein, you shall not export Articles outside the Territory without our prior written consent. (g)"Royalties" means a copyright royalty in an amount equal to the greater of: (i) The percentage specified on the Schedule Of Your Net Invoiced Billings for Articles sold C.I.F. a location in the Territory or in the European Economic Area ("In Sales") or, if Articles are sold to a customer in the Territory or in the European Economic Area F.O.B. a shipping point outside the Territory or the European Economic Area for importation by the customer into the Territory ("Out Sales'), the percentage specified oil the Schedule of your Net Invoiced Billings for such Articles. All sales of Articles shipped to a customer outside the Territory and outside the European Economic Area pursuant to a distribution permission shall hear a Royalty at the rate for Out Sales; or (ii) the Minimum Per Article Royalty, if any has been specified in Subparagraph I(d) above. (h) "Net Invoiced Billings" shall mean actual invoiced billings (i.e. sales quantity multiplied by the selling price) for Articles sold less volume discounts and other customary discounts separately identified by Article on the sales invoice, Customary discounts shall not include cash discounts granted as terms of payments, early payment discounts, year end rebates and allowances or discounts relating to advertising. Royalties are not due on invoiced charges for transportation of Articles within the Territory, value added taxes and takes on the sale of Articles which are separately identified on the sales invoices and have actually been paid. No costs incurred in manufacturing, importing, selling or advertising the Articles shall be deductible from the actual invoiced billings for Articles sold, nor shall any deduction be taken for freight costs included in the selling price or for uncollectible accounts. No royalties are payable for the mere manufacture of Articles. You agree that you will advise us, in writing, prior to selling Articles to any person or entity which is a parent, affiliate, subsidiary, joint venturer or partner of yours or to any entity which is directly or indirectly controlled by you or under common control with you (collectively referred to as "affiliated entities"). For purposes of this Agreement, an entity shall be deemed to be controlled by you if you are the actual or beneficial owner of 20% or more of the voting corporate or partnership shares. If you are a corporation with fewer than 20 shareholders, all entity will also be deemed to be controlled by you if, in the aggregate, 20% or more of the voting corporate or partnership shares of such entity are owned or controlled by relatives, attorneys or other agents of yours or any of your shareholders. Royalties paid to us on sales of Articles to your affiliated entities shall not be less than the Royalties paid to us on sales of such Articles to non-affiliated entities, regardless of the Net Invoiced Billing amount charged by you to such affiliated entities. Further, if such affiliated entity is a reseller of the Articles, the sale such affiliated entity shall not be counted as a sale for Royalty calculation purposes but rather, the relevant sale for Royalty calculation purposes shall be that of such affiliated entity to its customers. (i)"Royalty Payment Period" means each calendar quarter period during the Term and during the sell-off period (referenced in Paragraph 31), if granted. (j)"Advance" means the sum(s) payable as an advance on Royalties to accrue, in such amounts, at such times and for the periods specified on the Schedule. Royalties generated by sales outside the Territory but within the European Economic Area, Outside the European Economic Area, or made pursuant to a distribution permission may not be applied against the Advance. (k)"Guarantee" means the sum(s) which you guarantee to pay as minimum Royalties on your cumulative sales in the Territory in the period(s) specified on the Schedule. (l)"Samples" means the number of free copies from the first production run of each supplier of each Article as specified on the Schedule. (m) "Promotion Commitment" means the amount specified on the Schedule, which amount you agree to spend during each Royalty Payment Period on consumer advertising and promotion activities as detailed in Paragraph 17 hereof. (n)"Common Marketing Fund Payment" (the "CMF Payment") means an amount equal to such percentage of your III Sales and Out Sales, respectively) , as specified on the Schedule, for Articles sold to customers, which amount 3 you agree to pay us concurrently with Royalties (but by separate payment to such account as we may specify) due each Royalty Payment Period as detailed in Subparagraph 22(a) hereof. (o) "CMF Guarantee" means the sum(s), which you guarantee to pay us as a minimum amount of the CMF Payment on your cumulative sales within the Territory and in the periods as specified on the Schedule. (p) "CMF Advance" means the non-refundable installments of the CMF Guarantee, due and payable on the dates specified on the Schedule. (q) "Marketing Date" means the date(s) by which the Article(s) shall lie available for purchase and immediate delivery, as specified on the Schedule. (r) "Laws' means any and all applicable laws, rules, and regulations, including but not limited to local and national laws, rules and regulations, treaties, voluntary industry standards, association laws, codes or other obligations pertaining to any of your activities under this Agreement, including but not limited to those applicable to the manufacture, pricing, sale and/or distribution of the Articles. (s) "Manufacturer" means any of your third party manufacturers and suppliers (and their submanufacturers and suppliers) which reproduce or use the Licensed Material and/or Trademarks on Articles or components thereof and/or which assemble such Articles. (t) "Schedule" means the attachment appended hereto immediately following the signature page of this Agreement entitled "Schedule to License Agreement" the terms of which are incorporated herein by reference and made a part hereof as though fully set forth herein. Section 2 RIGHTS GRANTED (a) In consideration for your promise to pay and actual payment to us of all Royalties, Advances, Guarantees, CMF Payments, CMF Guarantees and CMF Advances specified herein and your performance of all of your other obligations hereunder, during the Term , we grant you the nonexclusive right under Disney's various copyrights and Trademarks in the Territory, to reproduce the Licensed Material only on or in connection with the Articles, to use the Trademarks, but only such Trademarks and uses thereof as may be approved when the Articles are approved and only on or in connection with the Articles, and to manufacture, distribute for sale and sell (other than by direct marketing methods, including but not limited to, computer on-line selling, catalog sales, direct mail and door-to-door solicitation) the Articles. You will sell the Articles only to retailers for resale to the public in the Territory or to wholesalers for resale to such retailers; provided however, that you may not sell the Articles to retailers that sell the Articles on a duty-free basis nor may you sell the Articles to wholesalers for resale to such retailers, unless such retailer or wholesaler has a then-current license agreement with us or an affiliate of ours permitting it to make duty-free sales of the Articles. (b) Unless we consent in writing, you shall not sell or otherwise provide Articles for use as premiums (including those in purchase-with-purchase promotions), promotions, give-aways, fund-raisers or entries in sweepstakes or to customers for resale by direct mail or other direct marketing methods, including but not limited to, home shopping television programs, or to customers for inclusion in another product. However, you may solicit orders by mail from wholesalers or retailer., and you may sell to retailers which sell predominantly at retail, but which include the Articles in their mail order catalogs or otherwise sell Articles by direct marketing methods as well as at retail. If you wish to sell the Articles to other customers for resale through mail order catalogs, you must obtain written consent in each instance. (c) The prohibition of computer on-line selling referenced in Subparagraph 2(a) includes, but is not limited to, the display, promotion or offering of Articles in or on any on-line venues, including but not limited to any catalog company,, web sites", "home pages" or any similar venues, except as specifically permitted in the next two sentences. Articles approved by us may be displayed and promoted on Disney-controlled Internet services, only within the Territory. In addition, Articles approved by us may be displayed, promoted and sold on retailers web sites, home pages and any similar venues; however, you must obtain our prior written approval of all creative and editorial elements of such uses, in accordance with the provisions of Paragraph 8 of this Agreement. (d) Unless we consent in writing, you shall not give away or donate Articles to your accounts, employees or other persons for the purpose of promoting sales of Articles. except for minor quantities or samples which are not for onward distribution. (e) Nothing contained herein shall preclude you from selling Articles to us, Disney or to any subsidiary of ours or Disney's subject to the payment to us of Royalties on such sales. 4 (f) We further grant you the non-exclusive right to reproduce the Licensed Material and to use the Trademarks, only within the Territory, during the Term, and, if the Territory includes a country in the European Economic Area, the European Economic Area, on containers, packaging, display material and in advertising for the Articles. (g) Nothing contained in this Agreement shall be deemed to imply any restriction on your freedom and that of your customers to sell the Articles at such prices as you or they shall determine. (h) You recognize and acknowledge the vital importance to us of the characters and other proprietary material we own and create and the association of the Disney name with them. In order to prevent the denigration of products bearing the Licensed Material and/or the Trademarks and the value of their association with the Disney name, and in order to ensure the dedication of your best efforts to preserve and maintain that value, you agree that during the Term . you will not manufacture or distribute any merchandise embodying or bearing any artwork or other representation which we determine, in our reasonable discretion, is confusingly similar to the Disney characters or other proprietary material. Section 3 ADVANCE (a) You agree to pay us within fifteen (15) days of our sending an invoice to you, the nonrefundable Advance plus value-added taxes or other applicable taxes thereon, if any, which shall be on account of Royalties earned and payable only during the Term and only with respect to sales in the Territory; provided, however, that if any part of the Advance is specified hereinabove as applying to any period less than the Term, such part shall be on account of Royalties to accrue during such lesser period only. If Royalties earned during any period are less than the Advance, no part of the Advance shall be refunded to you. (b) Royalties accruing during any sell-off period or extension of the Term shall not be offset against the Advance unless otherwise agreed in writing. Royalties accruing during any other period shall be offset only against an advance paid with respect to such other term. (c) In no event shall Royalties accruing by reason of any sales to us or a subsidiary of ours or by reason of sales outside the Territory pursuant to a distribution permission be offset against the Advance or any subsequent advance. (d) Notwithstanding anything hereinabove to the contrary, upon your breach of this Agreement (which breach is not cured in the period specified in Subparagraph 30(a) hereof) You agree that any and all Advances due hereunder shall become immediately due and payable, regardless of whether we also exercise our right hereunder to terminate this Agreement because of such breach. Section 4 GUARANTEE (a) With your statement for each Royalty Payment Period ending on a date indicated in Subparagraph I(k) hereof defining "Guarantee," you shall pay us the amount, if any, by which cumulative Royalties paid with respect to sales in the Territory during any period or periods covered by the Guarantee provision or any Guarantee provision contained in any agreement extending the term hereof, fall short of the amount of the Guarantee for such period. (b) Advances applicable to Royalties due oil sales in the period to which the Guarantee relates apply towards meeting the Guarantee. (c) In no event shall Royalties paid with respect to sales to us or to any subsidiary or affiliate of ours or with respect to sales outside the Territory or outside the European Economic Area pursuant to a distribution permission apply towards meeting the Guarantee or any subsequent guarantee. (d) Notwithstanding anything hereinabove to the contrary, upon your breach of this Agreement (which breach is not cured in the period specified in Subparagraph 30(a) hereof) you agree that any and all Guarantees due hereunder shall become immediately due and payable, regardless of whether we also exercise our rights hereunder to terminate this Agreement because of such breach. Section 5 CMF ADVANCE AND CMF GUARANTEE (a) You agree to pay in hill the CMF Advances plus value added taxes or other applicable taxes thereon, if any, oil account of the CMF Guarantee to accrue during the Term, at such times and in such amounts as specified in Subparagraph I (p) above. In addition, with your statement for each Royalty Payment Period ending on a date indicated hereinabove with respect to the CMF Guarantee, you shall pay us, the amount if any, by which cumulative CMF payments made with respect to sales in the Territory during any period or periods covered by such provision fall short of the amount of the CMF Guarantee specified for that period. (b) In no event shall CMF Payments accruing or paid with respect to sales to us or to any subsidiary or affiliate of ours or with respect to sales outside the Territory or outside the European Economic Area pursuant to a distribution permission be offset against the CMF Advances or apply towards meeting the CMF Guarantee. (c) Notwithstanding anything hereinabove to the contrary, upon your breach of this Agreement (which breach is not cured within 15 days of our written notice thereof to you), you agree that any and all CMF Advances and CMF Guarantees due hereunder shall become immediately due and payable, regardless of whether we also exercise our right hereunder to terminate this Agreement because of such breach. Section 6 PRE-PRODUCTION APPROVALS (a) As early as possible and in any case before commercial production of any Article you shall submit to us for our review and written approval (to utilize such materials in preparing a pre-production sample) all concepts, all preliminary and proposed final artwork and all three-dimensional models which are to appear on or in the Article. Thereafter, you shall submit to us for our written approval a pre-production sample of each Article. We shall endeavor to respond to such requests within a reasonable time, but such approvals should be sought as early as possible in case, of delays. In addition to the foregoing, as early as possible, and in any case no later than sixty (60) days following written conceptual approval, you shall supply to us for our use for internal purposes, a mock-up, prototype or pre-production sample of each style of each Article on or in connection with which the Licensed Material is used. You acknowledge that we may not approve concepts or artwork near the end of the Principal Term. Any pre-production approval we may give will not constitute or imply a representation or belief by its that such materials comply with any applicable Laws. (b) Articles must lie in compliance with all applicable Laws and the minimum quality standards set-forth in Exhibit A hereto. Approval or disapproval of Articles shall lie solely in our discretion, and any Article not so approved in writing shall be deemed unlicensed and shall not lie manufactured or sold. If any unapproved Article is sold, or any Article that is not in compliance with Laws or the minimum quality standards, we may, together with other remedies available to us (including, but not limited to immediate termination of this Agreement), by written notice require such Article to be immediately withdrawn from the market. Any modification of an Article, including, but not limited to, change of materials, color, design or size of the representation of Licensed Material must be submitted in advance for our written approval as if it were a new Article. Approval of an Article which uses particular artwork does not imply approval of such artwork for use with a different Article. The fact that artwork has been taken from a Disney publication or a previously approved Article does not mean that its use will necessarily be approved in connection with an Article licensed hereunder. (c) If you submit for approval artwork from ail article or book manufactured or published by another licensee of ours or Disney's of any subsidiary of ours or Disney's, you must advise us in writing of the source of such artwork. If you fail to do so, any approval which we may give for use by you of such artwork may be withdrawn by giving you written notice thereof, and you may be required by us not to sell Articles using such artwork. (d) If we have supplied you with forms for use in applying for approval of artwork, models, pre-production and production samples of Articles, you hall use such forms when submitting anything for our approval. SECTION 7 APPROVAL OF PRODUCTION SAMPLES (a) Before shipping an Article to any customer, you agree to furnish to us, for our approval of all aspects of the Article in question, from the first production run of each supplier of each of the Articles the number of Samples, with packaging, set forth in Subparagraph 1 (1) which shall conform to the approved artwork, threedimensional models, pre-production sample, applicable Laws and minimum quality standards. Approval or disapproval of the artwork as it appears, oil the Article as well as of the quality of the Article shall lie in our sole discretion and may inter alia be based on unacceptable quality of the artwork or of the Article as manufactured. Any Article not so approved shall be -deemed unlicensed, shall not be sold and unless otherwise agreed by us in writing, shall be destroyed. Such destruction shall be attested to in a certificate signed by an officer of yours. Production samples of Articles for which we have approved a pre-production sample shall be deemed approved, unless within 20 days of our receipt of such production sample we notify you to the contrary, Any approval of a production sample attributable to us will not constitute or imply a representation or belief by us that such production sample complies with any applicable Laws. (b) You agree to make available at to charge such additional samples of each Article as we may from time to time reasonably request for the purpose of comparison with earlier samples, or to test for compliance with applicable Laws, and you agree to maintain consistent quality and to permit us upon reasonable request to inspect your inspect your manufacturing operations and testing records those of your third party manufacturers) for the Articles. (c) It is specifically understood that we may disapprove an Article or a production run of an Article because the quality is unacceptable to us, and, accordingly, we recommend that you submit production samples to us for approval before committing to a large original production run or to purchase a large shipment from a new supplier. (d) No modification of an approved production sample shall be made without our further prior written approval. Articles being sold must conform in all respects to the approved production sample. It is understood that if in our reasonable judgment the quality of an Article originally approved has deteriorated in later production runs, or if the Article has otherwise been altered, we may, in addition to other remedies available to us. by written notice require such Article to be immediately withdrawn from the market. (e) The rights granted hereunder do not permit the sale of "seconds' or "irregulars". All Articles not meeting the standard of approved samples shall be destroyed or all Licensed Material and Trademarks shall be removed or obliterated therefrom. (f) You are responsible for the consistent quality and safety of the Articles and their compliance with applicable Laws and the minimum quality standards set forth on Exhibit A. We will not unreasonably object to any change in the design of an Article or in the materials used in the manufacture of the Article or in the process of manufacturing the Articles which you advise us in writing is intended to make the Article safer or more durable. (g) We shall have the right, by written notice to you, to require modification of any Article approved by us under any previous agreement between us pertaining to the Licensed Material. Likewise, if the Principal Term of this Agreement is extended by mutual agreement, we shall have the right, by written notice to you, to require modification of any Article approved by us under this Agreement. It is understood that there is no obligation upon either party to extend the Agreement. (h) If we notify you of required modification., under Subparagraph 7(g) with respect to a particular Article, such notification shall advise you (if the nature of the changes required and you shall not accept any order for any such Article until the Article has been resubmitted to us with such changes and you have received our written approval of the Article as modified. However, you may continue to distribute your inventory of the previously approved Articles until such inventory is exhausted (unless such Articles are dangerously defective, as determined by us). (i)Upon our request, you agree to give us written notice of the first ship date for each Article. (j)If we have inadvertently approved a concept, pre-production sample, or production sample of a product which is not included in the Articles under this Agreement, or if we have inadvertently approved an Article using artwork and/or trademarks not included in this Agreement, such approval may be revoked at any time without any obligation whatsoever on our part to you. Any Such product as to which our approval is revoked shall be deemed unauthorized and shall not be distributed or sold by or for you. Section 8 APPROVAL OF PACKAGING, PROMOTIONAL MATERIAL AND ADVERTISING (a) All containers, packaging, display material, promotional material, catalogs and all advertising, including but not limited to television advertising and press releases, for Articles must be submitted to us for our written approval before use. To avoid unnecessary expense if changes are required, our approval thereof should be procured when such is still in rough or storyboard format. We shall endeavor to respond to requests for approval within a reasonable time. Approval or disapproval shall lie in our sole discretion, and the use of unapproved containers, packaging, display material, promotional material, catalogs or advertising is prohibited. Our approval of any containers, packaging, display material, promotional material, catalogs or advertising under this A2reement will not constitute or imply a representation or belief by us that such materials comply with any applicable Laws. Whenever you shall prepare catalog sheets or other printed matter containing illustrations of Articles, You will furnish to us Five (5) copies thereof when they are published. (b) If we have supplied you with forms for use in applying for approval of materials referenced in this Paragraph 8, you shall use such forms when submitting anything for our approval. (c) We have designed character artwork and/or a brand name logo(s) as set forth in subparagraph l(b) to be used by all licensees in connection with the packaging of all merchandise using the Licensed Material and, if applicable, on hang tags and garment labels for such merchandise. We will supply you with reproduction artwork thereof, and you agree to use such artwork and/or logo(s) on the packaging of the Articles, and, if applicable, on hang tags and garment labels which you will have printed and attached to each Article at your cost. We recommend that You source the hang tags and garment labels from our authorized manufacturer (if any) of pre-approved hang tags and garment labels. the mime of which we will provide you on request. However, you may use another manufacturer for the required hang tags and garment labels if the hang tags and garment labels manufactured are of equivalent quality and are approved by us in accordance with our usual approval process. Section 9 ARTWORK On or before the due date for payment of our invoice, you shall pay us for artwork done at your request by us or Disney or third parties under contract to us or Disney in the development and creation of Articles, display, packaging or promotional material (including any artwork which in our opinion is necessary to modify necessary artwork initially prepared by you and submitted to us for approval) at our or Disney's then prevailing commercial art rates. Estimates of artwork charges are available upon request, While you are not obligated to use our or Disney's inhouse creative services, you are encouraged to do so in order to minimize delays which may occur if outside artists prepare renditions of Licensed Material which we cannot approve and to maximize the attractiveness of the Articles. Section 10 PRINT, RADIO OR TV ADVERTISING You shall submit to us for our authorization and approval in advance all plans and materials relating to print, radio, television and cinema advertising and promotional activities relating to the Articles. We may approve or reject any such advertising or promotional activity in our sole discretion, including without limitation, for reasons of overexposure of the Licensed Material and. further, have the right to prohibit you from advertising the Articles by means of television and/or billboards. You shall obtain all third party consents and approvals necessary in connection with advertising and promotional activities which we do authorize. You represent and warrant that all advertising and promotional materials shall comply with all applicable Laws. Our approval of copy or storyboards for such advertising will not constitute or imply a representation or belief by us that such copy or storyboards comply with any applicable Laws. This Agreement does not grant you any rights to use the Licensed Material in animation. Section 11 LICENSEE NAME AND ADDRESS ON ARTICLES (a) Your name, trade name (or a trademark of yours which you have advised us in writing that you are using) your address (at least city and country) and the country, of manufacture (if different from your address) will appear on permanently affixed labeling on each Article or, if the Article is sold to the public in packaging or container, printed on such packaging or container so that the public can identify the supplier of the Article. On soft goods "permanently affixed" shall mean sewn on. (b) You shall advise us in writing of all trade names or trademarks you are using on Articles if such names or marks differ from your corporate name, its indicated herein. Section 12 COMPLIANCE WITH APPROVED SAMPLES AND APPLICABLE LAWS AND STANDARDS (a) You covenant that each Article and component thereof distributed hereundershall be of good quality and free of defects in design, materials and workmanship, and shall comply with all applicable Laws, and such specifications, if any, as may have been specified in connection with this Agreement, and shall conform to the sample thereof approved by us. You covenant that you will comply with all applicable Laws in performing this Agreement, including but not limited to, those pertaining to the manufacture, pricing, sale and distribution of the Articles. (b) Without limiting the foregoing, you covenant on behalf of your own manufacturing facilities, and agree to require all Manufacturers to covenant by signing the Consent/Manufactures Agreement (referenced in paragraph 26), as follows: (i) You and the Manufacturers agree not to use child labor in the manufacturing, packaging or distribution of Disney merchandise. The term "child" refers to a person younger than the local legal minimum age for employment or the age for completing compulsory education, but in no case shall any child younger than fifteen (15) years of age (or fourteen (14) years of age where local law allows) be employed in the manufacturing, packaging or distribution of Disney merchandise. Licensee and the Manufacturers employing young persons who do not fall within the definition of "children" agree also to comply with any Laws applicable to such persons. (ii)You and the Manufacturers agree only to employ persons whose presence is voluntary. You and the Manufacturers agree not to use any forced or involuntary labor, whether prison, bonded, indentured or otherwise. 8 (iii)You and the Manufacturers agree to treat each employee with dignity and respect, and not to use corporal punishment, threats of violence, or other forms of physical, sexual, psychological or verbal harassment or abuse. (iv)You and the Manufacturers agree not to discriminate in hiring and employment practices, including salary, benefits, advancement, discipline, termination, or retirement, on the basis of race, religion, age, nationality, social or ethnic origin, sexual orientation, gender, political opinion or disability. (v) You and the Manufacturers recognize that wages are essential to meeting employees' basic needs. You and the Manufacturers agree to comply, at a minimum, with all applicable wage and hour Laws, including minimum wage, overtime, maximum hours, piece rates and other elements of compensation, and to provide legally mandated benefits. If local Laws do not provide for overtime pay, you and Manufacturers agree to pay at least regular wages for overtime work. Except in extraordinary business circumstances, you and the Manufacturers will not require employees to work more than the lesser of (a) 48 hours per week and 12 hours overtime or (b) the limits on regular and overtime hours allowed by local law, or, where local law does not limit the hours of work, the regular work week in such country plus 12 hours overtime. In addition, except in extraordinary business circumstances, employees will be entitled to at least one day off in every seven-day period. You and the Manufacturers agree that, where local industry standards are higher than applicable legal requirements, they will meet the higher standards. (vi)You and the Manufacturers agree to provide employees with a safe and healthy workplace in compliance with all applicable Laws, ensuring, at a minimum, reasonable access to potable water and sanitary facilities, fire safety, and adequate lighting and ventilation. You and the Manufacturers also agree to ensure that the same standards of health and safety are applied in any housing they provide for employees. You and the Manufacturers agree to provide us with all information we may request about manufacturing, packaging and distribution facilities for the Articles. (vii)You and the Manufacturers agree to respect the rights of employees to associate, organize and bargain collectively in a lawful and peaceful manner, without penalty or interference, in accordance with applicable Laws. (viii) You and the Manufacturers agree to comply with all applicable environmental Laws. (ix)You and the Manufacturers agree to comply with all applicable Laws, including those pertaining to consumer protection and the manufacture, pricing, sale and distribution of the Articles. (x) You and the Manufacturers agree that we and our designated agents (including third parties) may engage in monitoring activities to confirm compliance with this Paragraph 12, including unannounced on-site inspections of manufacturing, packaging and distribution facilities. and employer-provided housing, such inspections to include reviews of books and records relating to employment matters and private interviews with employees. You and the Manufacturers agree to maintain on site all documentation necessary to demonstrate compliance with this Paragraph 12. You agree to promptly reimburse us for the actual costs of inspections performed pursuant to this Paragraph 12 when any of your manufacturing facilities or those of any Manufacturer do not pass the inspection(s). (xi)You and the Manufacturers agree to take appropriate steps to ensure that the provisions of the Code of Conduct are communicated to employees, including the prominent posting of a copy of the Code of Conduct for Manufacturers (copy attached) in the local language and in a place readily accessible to employees at all times. (c) You agree to take appropriate steps, in consultation with its, to develop, implement and maintain procedures to evaluate and monitor the Manufacturers you use to manufacture the Articles or components thereof, and to ensure compliance with Subparagraph 12 (b), including but not limited to, unannounced on-site inspections of manufacturing, packaging and distribution facilities and employer-provided housing, reviews of books and records relating to employment matters and private interviews with employees. (d) Both before and after You put Articles on the market, you shall follow reasonable and proper procedures for testing that Articles comply with all applicable product safety Laws and the minimum quality standards set forth on Exhibit A, and shall permit our designees to inspect testing, manufacturing and quality control records and procedures and to test the Articles for compliance with product safety and other applicable Laws. You agree to promptly reimburse us for the reasonable costs of such testing when any Article so tested fails to comply with such Laws. You shall also give due consideration to any recommendations by us that Articles exceed the requirements of applicable Laws. Articles not manufactured, packaged or distributed in accordance with applicable Laws shall be deemed unapproved, even if previously approved by us, and shall not be shipped unless and until they have been brought into full compliance therewith. Section 13 DISNEY OWNERSHIP OF ALL PIGHTS IN LICENSED MATERIAL (a) You acknowledge that the copyrights and all other proprietary rights in and to Licensed Material are exclusively owned by and reserved to Disney. You shall neither acquire nor assert copyright ownership or any other proprietary rights in Licensed Material or in any derivation, adaptation, variation or name thereof. Without limiting the foregoing, you hereby assign to Disney all your worldwide right, title and interest in the Licensed Material and in any material objects consisting of or incorporating drawings, paintings, animation cels, or sculptures of the Licensed Material, or other derivations, adaptations, compilations, collective works, variations or names of Licensed Material heretofore or hereafter created by or for you or any parent, subsidiary, affiliate, joint venturer or partner of yours. All such new materials shall be included in the definition of "Licensed Material" under this Agreement. (b) In the case of the creation of such new materials by or for you or any parent, subsidiary, affiliate, joint venturer or partner of yours or if any third party makes or has made any contributions to the creation of new materials, you shall ensure that the owner of such copyright grants you the worldwide exclusive license thereto which you in turn shall grant to Disney. Disney shall grant you a non-exclusive right to such licenses to the extent expressed in this Agreement. (c) You acknowledge the right on Disney's part to license such materials outside the Territory during the term of this Agreement and anywhere thereafter and to demand delivery of such materials (delivery costs to be borne by us) when they are no longer needed by you for the manufacture, sale or promotion of the Articles. (d) The obtaining of the exclusive licenses described in subparagraph (b) herein forthwith upon the creation of the new materials is an essential term of this Agreement. The foregoing shall not include that portion of your displays, catalogs or promotional (material not containing Licensed Material or the physical items constituting the Articles, unless such items are in the shape of the Licensed Material; provided however, such assignment shall include any and all design elements incorporated into the Articles which convey the spirit and theme of the Licensed Material, and which were developed for the first time by or for you for use with the Articles. Section 14 COPYRIGHT NOTICE As a condition to the grant of rights hereunder, each Article and any other matter containing Licensed Material shall bear a properly located permanently affixed copyright notice in our name (e.g. "Disney") or such other notice as we may notify to you in writing. You will comply with such instructions as to form, location and content of the notice as we or Disney may give from time to time. You will not, without our prior written consent, affix to any Article or any other matter containing Licensed Material a copyright notice in any other name. If through inadvertence or otherwise a copyright notice on any Article or other such matter should appear in your name or the name of a third party, you hereby agree to assign to Disney the copyright represented by any such copyright notice in your name and, upon request, cause the execution and delivery to us of whatever documents are necessary to convey to Disney that copyright represented by any such copyright notice in another party's name. If by inadvertence a proper copyright notice in Disney's name is omitted front any Article or other matter containing Licensed Material, you agree at your expense to use all reasonable efforts to correct the omission on all such Articles or other matter in process of manufacture or in distribution. You agree to advise us promptly and in writing of the steps being taken to correct any such omission and to make the corrections on existing Articles which can be located. Section 15 NON-ASSOCIATION OF OTHER FANCIFUL CHARACTERS WITH LICENSED MATERIAL To preserve Disney's identification with its characters and to avoid confusion of the public, you agree not to associate other characters or licensed properties with the Licensed Material or the Trademarks either on the Articles or in their packaging or, without our written permission, on advertising, promotional or display materials. Any use by you of a character which constitutes your trademark on the Articles or their packaging, or otherwise in connection with the Articles shall lie subject to our prior written permission in our sole discretion. Section 16 ACTIVE MARKETING OF ARTICLES You agree to manufacture (or have manufactured for you) and offer for sale all the Articles and to exercise the rights granted herein. You agree that not later than by the Marketing Date applicable to a particular Article or, in the absence of such a date being specified in Subparagraph I(q), by six (6) months from the commencement of the Principal Term, shipments to customers of Articles will have taken place and that Articles shall be available for purchase and prompt delivery to customers. In any case in which such sales have not taken place or when the Article is not then and thereafter available for purchase by the public, we may either invoke our remedies under Paragraph 30, or withdraw such Article from the list of Articles licensed in this Agreement without obligation to You other than to give you written notice thereof. Section 17 PROMOTION COMMITMENT (a) You shall carry out the Promotion Commitment as defined in Subparagraph I (m). The advertising and promotion activities required thereunder to promote the sale of the Articles shall include one or more of the following activities: - -point of purchase displays (not including packaging or other individual product costs) - -media advertising - -measurable public relations programs - -sampling - -contests and games approved in advance in writing by Disney - -trade shows, catalogue trade activities, fashion shows - -participation in group promotions organized by Disney - -other activities as agreed in advance in writing with Disney All promotional material is subject to the approval provisions of Paragraph 7 hereof. (b) For purposes of determining your satisfaction of the Promotion Commitment, all consumer advertising and merchandising costs associated with the above-listed activities for the Articles, but not including packaging or other individual product costs, will be counted toward the requirement; provided, however, that any advertising discounts given in connection with cooperative advertising may not be included in the calculation. (c) Concurrently with your submitting to its a statement following each Royalty Payment Period as specified herein (or in the case where the Royalty Payment Period is monthly. then every third Royalty Payment Period), you also shall provide us with a statement describing the funds theretofore spent and consumer exposure provided as required in this paragraph, together with a description of the manner in which such funds were spent, all in such detail as we may specify from time to time. Amounts spent in excess of the Promotion Commitment during any Royalty Payment Period may be credited against the Promotion Commitment for any other Royalty Payment Period occurring in the same annual twelve month period during the term. If in any Royalty Payment Period you have not satisfied the Promotion Commitment, you (1) may carry forward such shortfall into the next succeeding Royalty Payment Period (other than in the case of a shortfall in the final Royalty Payment Period hereunder, in which case no carryforwards shall be permitted) or (2) shall pay us the amount of such shortfall as liquidated damages; provided, however, no shortfall (or fraction thereof) may be carried forward more than twelve months. You acknowledge that your expenditure of the Promotion Commitment as provided for herein increases the value of the business from which we benefit as licensor. You and we agree that it is impracticable and extremely difficult to fix the actual damages which may proximately result from your failure to fulfill your obligation as provided for herein, and your liability for failure to do so shall, for each Royalty Payment Period, be limited to and fixed at the sum of an amount equal to the shortfall between the amount you actually spend on the Promotion Commitment during such Royalty Payment Period as theretofore reported to us and the amount required to he expended hereunder. Such cumulative amount shall be considered liquidated damages and not a penalty. Section 18 COMMON MARKETING FUND The Common Marketing Fund Payment as defined in Subparagraph l(n) shall be placed in a general fund for use in promoting the Disney Characters, Disney's copyrights and trademarks (which may include the Licensed Material and the Trademarks) and licensee activities generally, all as we deem appropriate in our discretion. Such funds shall be expended by us and our designees (but not paid to our own employees for services they render) in the amounts and in the manner we deem most appropriate in order to provide national, territorial, regional or local advertising, marketing and promotion, and marketing research related thereto, of the Licensed Material and the Trademarks licensed hereunder or other Disney properties in the same property classification. However, we do not ensure that you or any other particular licensee will benefit directly or pro-rata from the operation of the Common Marketing Fund. We will apprise you of the operations and proposed expenditures of the Common Marketing Fund from time to time and seek your advice on how best the Common Marketing Fund monies relating to the Licensed Material and Trademarks can be spent. The Common Marketing Fund Payment is payable to us simultaneously with quarterly Royalties as provided in Subparagraph 22(a) hereof. You shall not be entitled to any audit rights with regard to the Common Marketing Fund. Section 19 TRADEMARK RIGHTS AND OBLIGATIONS (a) All uses of the Trademarks by you hereunder shall inure to Disney's benefit. You acknowledge that Disney is the exclusive owner of all the Trademarks and of any trademark incorporating all or any part of a Trademark or any Licensed Material and the trademark rights created by such uses. Without limiting the foregoing, you hereby assign to Disney all the Trademarks and any trademark incorporating all or any part of a Trademark or any Licensed Material and the trademark rights created by such uses together with the goodwill attaching to that part of the business in connection with which such Trademarks or trademarks are used. You agree to execute and deliver to Disney such documents as Disney may require to register you as a registered user or permitted user of the Trademarks or such trademarks and to follow Disney's or our instructions for proper use thereof in order that protection and/or registrations for the Trademarks and such trademarks may be obtained or maintained. We acknowledge that you retain all rights of ownership in and to your trademarks, trade names, trade dress and all other indicia used on or in association with the Articles that do not incorporate Disney related elements. (b) You agree not to use any Licensed Material or Trademarks or any trademark incorporating all or any part of a Trademark or any Licensed Material on any business sign, business cards, stationery or forms (except as licensed herein) or to use any Licensed Material or Trademark as the name of your business or any division thereof, unless otherwise agreed by Disney in writing. (c) Nothing contained herein shall prohibit you from using your own trademarks on the Articles or your copyright notice on the Articles when the Articles contain independent material which is your property. Further, nothing contained herein is intended to give us any rights to, and we shall not use, any trademark, copyright or patent used by you in connection with the Articles which is not derived or adapted from Licensed Material, Trademarks or other materials owned by us or by Disney. Section 20 REGISTRATIONS Except with Disney's written consent, neither you, your parent or any subsidiary, affiliate, joint venturer or partner of yours will register or attempt in any country to register copyrights in, or register as a trademark, service mark, design patent or industrial design, or business designation, any of the Licensed Material, Trademarks or derivations or adaptations thereof, or any word, symbol or design which is so similar thereto as to suggest association with or sponsorship by us or Disney or any subsidiary of ours or Disney's. In the event of breach of the foregoing, you agree, at your expense and at out request. immediately to terminate the unauthorized registration activity and promptly to execute and deliver, or cause to be delivered, to Disney such assignments and other documents as Disney may require to transfer to Disney all rights to the registrations, Patents or applications involved. Section 21 UNLICENSED USE OF LICENSED MATERIALS (a) You agree that you will not use the Licensed Material or the Trademarks or any other material the copyright to which is owned by Disney in any way other than as herein authorized (or as is authorized in such other written contract signed by both of us as may be in effect between us). In addition to any other remedy we may have, you agree that the net revenues (that is, gross revenues less only the cost of manufacture and distribution of such products) from any use thereof on products other than the Articles (unless authorized by us in writing), and all net revenues from the use of any other copyrighted material of Disney's without written authorization, shall be immediately payable to us as damages. (b) You agree to give us prompt written notice of any unlicensed use by third parties of Licensed Material or Trademarks and that you will not, without our written consent, bring or cause to be brought any criminal prosecution, lawsuit or administrative action for infringement, interference with or violation of any rights to Licensed Material or Trademarks. You agree to cooperate with us, and, if necessary, to be named by us as a sole complainant or co-complainant in any action against an infringer of the Licensed Material or Trademarks and you agree to pay to us all or any part of damages or other monetary relief recovered in such action other than for reasonable expenses incurred at our request. Section 22 STATEMENTS AND PAYMENTS OF ROYALTIES (a) (i)You agree to furnish to us by the 15th day after each Royalty Payment Period a full and accurate statement showing by Article, with stock number and name, any corresponding Disney assigned product number, product approval number and retail destination reference number, invoice quantities and prices, the Royalties payable, quantities, country of sale, Net Invoiced Billings and applicable Royalty rate(s) of Articles invoiced during the preceding Royalty- Payment Period reported in the currency invoiced to customer., and the quantities and invoice value of defective Articles returned for credit or refund in such period. A statement is due even if no sales occurred during the period covered by the statement. We then shall submit to you an invoice for all Royalties due on billings shown by such statement, plus value added taxes, if any, and other applicable taxes due thereon ("Royalty invoice"). You agree to pay us all amounts indicated on such Royalty invoices on or by the earlier of thirty (30) days after the end of the Royalty Payment Period, or the fifteenth (15th) day after we send such invoice to you. You shall bear any costs associated with the transfer of such payments to us. To the extent that any Royalties or CMF Payments are not paid, you authorize us to offset Royalties due against any sums which we or any affiliate of ours may owe to you or any parent or subsidiary or affiliate of yours. No deduction or withholding from CMF Payments. CMF Guarantees or CMF Advances payable to us shall be made by reason of any tax and, except as provided in Subparagraph 22(b) hereof, no deduction or withholding from Royalties payable to us shall be made by reason of any tax. Any applicable tax on the manufacture, distribution and sale of the Articles shall be borne by you. (ii)If you fail to furnish to us a royalty statement in such detail and by such day as required hereunder, we may nevertheless submit a Royalty invoice to You, prepared based on the average amount invoiced during the immediately preceding three periods, together with interest thereon, the amount of which invoice shall be immediately payable. In the event that there are fewer than three preceding periods on which to calculate an average, then such calculation shall be based on such lesser period or, if the failure to furnish a royalty statement occurs with respect to the initial reporting period, then the Royalty invoice submitted to you shall reflect the difference between the amount theretofore invoiced, and the Guarantee. We will make any necessary adjustments to such invoice amount on the Royalty invoice next prepared after we receive accurate reporting information from you. Our submission of a Royalty invoice to you due to your failure to timely furnish the statement required hereunder, shall not constitute a waiver on our part of your breach of your reporting obligations. (b)In those countries of the Territory where a withholding tax is imposed on the payment of Royalties, you shall be permitted to deduct from Such payment the appropriate amount of withholding taxes so imposed, provided: (i) contemporaneously with any payment of Royalties, you shall provide to us all withholding tax receipts or other government certifications evidencing all taxes withheld from payments due under this Agreement; (ii)you cooperate with us and provide us with any other information or documentation reasonably requested by us from time to time to enable us to adequately support any foreign tax credit we claim which is attributable to taxes withheld by you front payments due to us; (iii)you agree that the Licensed Material constitutes "artistic works" as such term is used in the relevant income tax treaties; (iv)in addition to any and all legal and equitable rights and remedies available to us, you shall indemnify us for any disallowed foreign tax credits, including any interest and penalties associated with such disallowed foreign tax credits, attributable to your failure to timely provide the documentation required hereunder and otherwise comply with the provisions of this Subparagraph; and (v) your obligation, under the provisions of this Subparagraph shall survive termination, cancellation or expiration of this Agreement. Notwithstanding the foregoing, no deductions for withholding taxes or any other amounts shall be made from the advertising and marketing funds represented by the CMF Payments, CMF Guarantees and CMF Advances. (c) If we at any time so request, your statements shall be made on statement forms which we provide or in a form or delivery medium as we require (including for example, electronic transmission). Should any investment to implement electronic reporting he required, such investment shall be borne entirely by you. You will fully comply with the instructions supplied by us for completing such forms or adhering to any such format. Apparel Articles Shall he reported separately by size range (e.g. "boys", "girls'", "men's", etc.). Your statements shall identify for each Article the character or other Licensed Material used on each such Article. (d)Your statement shall with respect to all Articles report separately: (i)In Sales; (ii)Out Sales; (iii)sales of Articles outside the Territory pursuant to a distribution permission (indicating the country involved); (iv)your sale, of Article, to any of our licensees and the licensees of any of our affiliates that are licensed to sell the Articles and who are reselling such Articles and paying us or such Disney affiliate royalties on such resales; (v) sales of Articles to us, Disney or anny subsidiary (if ours or Disney's (identifying in each case the entity involved); and (vi)sales of Articles under any brand or program, motion picture or television series identified in Subparagraph l(b) and; (vii)sales of Articles to or for distribution through any mail order catalog approved hereunder or to a Disney licensed retail operator. (e) Sales of items licensed under contracts with us other than this Agreement shall not be reported on the same statement as sales of Articles under this Agreement. (f)Your statements and payments shall be delivered to us at the address indicated on page I of this Agreement. (g) You shall take all necessary steps to ensure that your information systems, including without limitation, all your proprietary and all third party hardware and software, process dates correctly prior to, during and after the calendar year 2000 ("Year 2000 Compliance"). Year 2000 Compliance shall include, without limitation, correct century recognition, calculations that property accommodate same century and multi-century formulas and date values, and interface values that reflect the appropriate century. Necessary steps to ensure Year 2000 Compliance shall include, without limitation, analysis Of all components of your information systems and, as necessary, development, installation and testing of software fixes, patches and/or updates. In a timely manner, but no later than by December 31, 1999, you shall certify to us in writing that your information systems are Year 2000 Compliant. Such certification is a material term of this Agreement. Upon a breach by you of your obligation under this paragraph, we shall be entitled to terminate this Agreement in accordance with the provisions for termination set forth herein. Section 23 ARTICLES RETURNED FOR CREDIT OR REFUND Royalties reported oil sales of defective Articles which have been returned to you for credit or refund and on which a refund has been made or credit memo issued may be credited against Royalties due at the same Royalty rate as applied in the original sales report submitted. The credit shall be taken in the Royalty Payment Period in which the refund is given or credit memo issued. Unused credits may be carried forward, but in no event shall you be entitled to a refund of Royalties. Section 24 INTEREST Royalties, Advances Guarantees, CMF Payments, CMF Guarantees or CMF Advances received after the date due shall bear interest at tile rate of three percent (3%) per annum above the rate for discounts of the Federal Bank from the date due plus value added tax. Section 25 AUDITS AND MAINTAINING RECORDS (a) You agree to keep accurate records of all transactions relating to this Agreement and any prior agreement with us regarding the Licensed Material including without limitation, records of shipments to you of Articles and components thereof, production/inventory records, records of sales and shipments by you and records of returns, and to preserve such records for the lesser of seven (7) years or three (3) years after the expiration or termination of this Agreement. (b) We, or our representatives, shall have the right from time to time, during normal business hours, but only for the purpose of confirming the accuracy of your statements and/or your performance hereunder, to audit and make copies of all such records, including the general ledger, books of account, all invoices (whether or not they relate to tile Articles) and any other records which we reasonably deem appropriate to verify the accuracy of your statements or your performance hereunder, including records of your parent, subsidiary and affiliate companies if they are involved in activities that are the subject of this Agreement. In particular your invoices shall identify the Articles separately from goods which are not licensed hereunder. Additionally, we shall have the right to confirm purchases from vendors and sales to customers and, in connection therewith, you agree to sign a letter in a form prescribed by us instructing your vendors and customers to furnish us with information relating to such purchases and sales. You acknowledge that we may furnish you with an audit questionnaire, and you agree to fully and accurately complete such questionnaire and return it to us within the designated time. Our use of an audit questionnaire shall not limit our ability to conduct any on-site audit(s) as provided herein. (c) If in all audit of your records it is determined that there is a shortfall in Royalties or CMF Payments reported for any Royalty Payment Period you shall, upon request by us, pay such shortfall and, if the shortfall is 5 % or more in Royalties or CMF Payments reported for such period, you also shall reimburse us for the full out-of-pocket costs of the audit, including the costs of employee auditors calculated at US$150 per hour per person for travel time during normal working hours and actual working time. The obligation to maintain records and to grant us and our representatives access to such records shall survive the expiration or earlier termination of this Agreement. (d) If you fail to keep adequate records for one (1) or more Royalty Payment Periods, we will assume that the Royalties owed to us for such Royalty Payment Period(s) are equal to a reasonable amount, determined in our absolute discretion based on the record you have kept, if any, and other reasonable assumptions we deem appropriate. Section 26 MANUFACTURE OF ARTICLES BY THIRD PARTY MANUFACTURERS (a) You agree to supply us with the names and addresses of all your own manufacturing facilities for the Articles. If you at any time desire to have Articles or components thereof containing Licensed Material and/or Trademarks manufactured by a third party, you must, as a condition to the continuation of this Agreement, notify us of the accurate name and complete address of such Manufacturer and the Articles or components involved and obtain our prior written permission to do so. If we are prepared to grant permission, we will do so if you and each of your Manufacturers sign a Consent/Manufacturer's Agreement in the form attached hereto and we receive such agreements properly signed. (b) It is not our policy to reveal the names of your Manufacturers to third parties or to any division of ours involved with buying products except as may he necessary to enforce our contract rights or protect our trademarks and copyrights. (c) If any such Manufacturer utilizes Licensed Material or Trademarks for any unauthorized purpose, you shall cooperate fully in bringing such utilization to all im mediate halt. If, by reason of your not having supplied the above mentioned agreements to us or not having given us the name of any Manufacturer, we make any representation or take any action and are thereby Subjected to any penalty, loss, damage or expense, you will fully compensate us for any cost or loss we Sustain (in addition to any other legal or equitable remedies available to us). (d) If any Manufacturer fails to pass a compliance inspection as referenced in Paragraph 12, and thereafter fails to remedy the cited failure(s) within the time designated by us, or if the Manufacturer otherwise breaches the Consent/Manufacturer's Agreement, the Consent/Manufacturer's Agreement for such Manufacturer may be terminated immediately by us and you %hall not thereafter use such Manufacturer to manufacture Articles or components thereof. Section 27 INDEMNITY (a) You shall indemnify its and Disney and our and their related companies during and after the term hereofagainst all claims, demands, suits, judgments, losses, liabilities (including settlements entered into in good faith with your consent, not to be unreasonably withheld) and expenses of any nature (including reasonable legal fees) arising out of your activities hereunder including but not limited to, any actual or alleged: (1) negligent acts or omissions on your part, (2) defect (whether obvious or hidden and whether or not present in any sample approved by us) in any Article, (3) personal injury, (4) infringement of any rights of any other person by the manufacture, sale, possession or use of Articles, (5) breach on your part of any covenant, representation or warranty contained in this Agreement. or (6) failure of the Articles or your failure to comply with applicable Laws. The parties indemnified hereunder shall include Disney Enterprises, Inc. and its parent, subsidiaries and their officers, directors, employees and agents. This agreement to indemnify shall survive the expiration or earlier termination of this Agreement. The indemnity shall not apply to any claim or liability relating to any infringement of the copyright of a third party caused by your utilization of the Licensed Material and the Trademarks in accordance with provisions hereof, unless such claim or liability arises out of your failure to obtain the full assignment of rights referenced in Paragraph 13. (b) We shall indemnify you during and after the term hereofagainst all claims, demands. suits, judgments, losses, liabilities (including settlements entered into in good faith with our consent, not to be unreasonably withheld) and expenses of any nature (including reasonable legal fees) arising out of any claim that your use of any representation of the Licensed Material or the Trademarks approved in accordance with the provisions of this agreement infringes the copyright of any third party or infringes any right granted by us or Disney to such third party, except for claims arising out of your failure to obtain the full assignment of rights referenced in Paragraph 13. You shall not, in any case, be entitled to recover for lost profits. (c) Additionally, if by reason of any claims referred to in Subparagraph 27(b) you are precluded from selling any stock of Articles or utilizing any materials in your possession or which come into your possession by reason of any required recall, we shall be obligated to purchase such Articles and materials from you at their out-of-pocket cost to you, excluding overhead, but we shall have no other responsibility or liability with respect to Such Articles or materials. (d) We give no warranty or indemnity with respect to any liability or expense arising from any claim that use of the Licensed Material or the Trademarks oil or in-connection with the Articles hereunder or any packaging, advertising or promotional material infringes on any trademark right of any third party or otherwise constitutes unfair competition by reason of any prior rights acquired by such third party other than rights acquired from Disney. It is expressly agreed that it is your responsibility to carry out such investigations as you may deem appropriate to establish that Articles, packaging, and promotional and advertising material which are manufactured or created hereunder. including any use made of the Licensed Material and the Trademarks therewith, do not infringe such right of any third party and neither we nor Disney shall be liable to you if such infringement occurs. (e) You and we agree to give each other prompt written notice of any claim or suit which may arise under the indemnity provisions set forth above. Without limiting the foregoing. you agree to give us written notice of any product liability claim made with respect to any Article, any investigations or directives regarding the Articles issued by any consumer safety agency and any notices sent by you to, or received by you from, any consumer safety agency regarding the Articles, within seven (7) days of your receipt or promulgation of the claim, suit, investigation, directive, or notice. Section 28 INSURANCE You shall maintain at your cost in full force and effect at all times while this Agreement is in effect and for three years thereafter commercial general liability insurance on a per occurrence form, including contractual and products liability coverage waiving subrogation with limits of no less than the equivalent of two million United States Dollars (US$ 2,000,000) per occurrence and naming as additional insured those indemnified in Paragraph 27 hereof. You shall deliver to us a certificate or certificates of insurance evidencing satisfactory coverage and indicating that we shall receive written notification of cancellation, non-renewal or of any material change in coverage at least 30 days prior to the effective date thereof. Compliance herewith in no way limits your indemnity obligations, except to the extent that your insurance company actually pays us amounts which you would otherwise be obligated to pay us. Section 29 WITHDRAWAL OF LICENSED MATERIAL You agree that we may, without obligation to you other than to give you written notice thereof, withdraw from the scope of this Agreement any Licensed Material which by the Marketing Date or, in the absence of such a date being specified in Subparagraph I (q), by six (6) months from the commencement of the Principal Term, is not being used on or in connection with Articles. We may also withdraw any Licensed Material or Articles the use or sale of which under this Agreement would infringe or reasonably be claimed to infringe the rights, other than rights granted by us, of a third party, in which case our obligations to you shall be limited to the purchase at cost of Articles and other materials utilizing such withdrawn Licensed Material which cannot be sold or used. Section 30 TERMINATION Without prejudice to any other right or remedy available to us: (a) We shall have the right at any time to terminate this Agreement as of right without any formality other than by giving you written notice thereof. if you fail to manufacture, sell and distribute the Articles in accordance with this Agreement, or fail to furnish statements or to pay Royalty invoices as herein provided, or fail to notify us of the accurate name and complete address of your own manufacturing facilities or of any Manufacturer of the Articles, or fail to have any such Manufacturer execute the Consent/Manufacturer's Agreement, or if you otherwise breach the terms of this Agreement, and if any such failure is not corrected within 15 days after we %end you written notice thereof(or, in the event of a breach which cannot be corrected within 15 days, if you fail to commence such correction within 15 days and thereafter diligently prosecute it to completion). (b) Notwithstanding the provisions Of Subparagraph 30(a) above, we shall have the right at any time to terminate this Agreement immediately as of right without any formality other than by giving you written notice thereof: (i) if YOU deliver to any customer without our written authorization merchandise containing representations of Licensed Material or other material the copyright or other proprietary rights to which are owned by Disney other than Articles listed herein and approved in accordance with the provisions hereof; or (ii)if you deliver Articles outside the European Economic Area or knowingly sell Articles to a third party for delivery Outside the European Economic Area (except when such Articles are destined for immediate re-importation into the European Economic Area), unless pursuant to a written distribution permission or separate written license agreement with us or any affiliate of ours; (iii)if a breach occurs which is of the same nature, and which violates the same provision of this Agreement, as a breach of which we have previously given you written notice; (iv)if you breach any material term of any other license agreement between you and us, or between you or any affiliate of yours and u., or any company affiliated with us, and such agreement is terminated for cause; (v) if you make any assignment for the benefit of creditors, or file a petition in bankruptcy, or are adjudged bankrupt, or become insolvent, or are placed in the hands of a receiver, or if the equivalent of any such proceedings or acts occurs though known by some other name or term; (vi)if you are not permitted or are unable to Operate your business in the usual manner, or are not permitted or are unable to provide us with assurance satisfactory to us that you will so operate your business, as debtor in possession or its equivalent, or are not permitted, or are unable to otherwise meet your obligations under this Agreement or to provide us with assurance satisfactory to us that you will meet such obligations; (vii) if you breach any covenant set forth in Paragraph 12 of this Agreement; and/or (viii)If more than three Consent/Manufacturer's Agreements are terminated in any twelve month period by us for the Manufacturers' failure to pay past compliance inspections as referenced in Paragraphs 12 and 26. (c) If we terminate this Agreement pursuant to this Paragraph 30, you shall not be permitted to seek injunctive relief to contest our determination that a termination event has occurred or to otherwise affect our full and absolute control of the Licensed Material and the Trademarks-, provided however, you may bring an action for damages but prior to and during any such action we shall have full and absolute control over the Licensed Material and the Trademarks. Section 31 RIGHTS AND OBLIGATIONS UPON EXPIRATION OR TERMINATION (a) Upon the expiration or termination of this Agreement all rights herein granted to you shall revert to us, any unpaid portion of the Guarantee shall be immediately due and payable, and we shall be entitled to retain as our property all Royalties and other things of value paid or delivered to us. You agree that from the expiration or termination of this Agreement you shall neither manufacture nor have manufactured for you any Articles, that you will deliver to us any and all artwork (including Style Guides, animation cels and drawings) which may have been provided to you or used or created by you in connection with this Agreement, that you will at our option either sell to us at a price to be negotiated in good faith between us (reflecting the residual economic value but at a rate not exceeding cost to you) or destroy or efface any molds, plates and other items used to reproduce Licensed Material or Trademarks and that. Subject as hereinafter provided, you will cease selling Articles. Any unauthorized distribution of Articles after the expiration or termination of this Agreement shall constitute copyright infringement. (b) If you have any unsold Articles in inventory on the expiration or termination of this Agreement, you shall provide us with a full statement similar to the statement required under Subparagraph 22(a) regarding such unsold Articles. If such statement has been provided to its and if you have fully complied with the terms of this Agreement including the payment of all Royalties due and the Guarantee, upon notice from us you shall have the right for a limited period of ninety (90) days from such expiration or earlier termination date to sell off and deliver such Articles as authorized under Paragraph 2. You shall furnish us statements covering such sales and pay us Royalties in respect of such sales. Such Royalties shall not be applied against the Advance or towards meeting the Guarantee. (c) In recognition of our interest in maintaining a stable and viable market for the Articles during and after the selloff period, you agree to refrain from "dumping" the Articles in the Territory or in the European Economic Area during the sell-off period. For purposes of this paragraph 31, "dumping" shall mean the distribution of product at volume levels significantly above your prior sales practices with respect to the Articles and at price levels significantly below your prior sales practices with respect to the Articles, provided that nothing contained herein shall be deemed to restrict your ability to set product prices at your discretion. (d) Except as otherwise agreed by us in writing, any inventory of Articles in your possession or control after the expiration or termination hereof and of any sell-off period granted hereunder shall be destroyed (and such destruction shall be attested to in a certificate signed by an officer of yours) or all Licensed Material and Trademarks removed or obliterated therefrom or, if we so elect at our option, shall be sold to us at cost. (e) If we supply you with forms regarding compliance with this paragraph, you agree to complete, execute and return such forms to its expeditiously. (f) Notwithstanding anything to the contrary in this Agreement, you expressly agree that you will not be entitled to any lost profits or business revenues or any other damages including, but not limited to, indirect, incidental, special or consequential damages arising from termination of this Agreement. Section 32 WAIVERS A waiver by either of us at any time of a breach of any provision of this Agreement shall not apply to any breach of any other provision of this Agreement or imply that a breach of the saint provision at any other time has been or will be waived or that this Agreement has been in any way amended, nor shall any failure by either party to object to conduct of the other be deemed to waive such party's right to claim that a repetition of such conduct is a breach hereof. Section 33 PURCHASE OF ARTICLES BY US OR DISNEY If we or Disney wish to purchase Articles, you agree to sell such Articles to us or Disney or any subsidiary of ours or theirs at as low a price as you charge for similar quantities sold to your regular customers and to pay us Royalties on any such sales. Section 34 NON-ASSIGNABILITY (a)You shall not voluntarily or by operation of law Transfer all or any part of your interest in this Agreement without our prior written consent, to be granted or withheld in our absolute discretion. Any attempted Transfer without such consent shall be void and shall constitute a material default and breach of this Agreement. "Transfer" within the meaning of this Paragraph 34 shall mean any assignment, sublicense, transfer, encumbrance or any disposition of all or any part of your interest in this Agreement (including but not limited to, any encumbrance of the Articles), or any reorganization, merger consolidation involving your company, its majority shareholder or its ultimate controlling entity, any sale or transfer of all or substantially all of your parent company's or your ultimate controlling entity's assets and any transaction or series of related transactions resulting in the transfer of thirty-three and one-third percent (33-1/3 %) or more of the voting stock of your company, its majority shareholder or its ultimate controlling entity or, if your company is a partnership, thirty-three and one-third percent (33-1/3%) or more of the profit and loss participation in your company or the occurrence. of any of the foregoing with respect to any general partner of your company. (b)You agree to provide us with at least two (2) months prior written notice of any desired Transfer of this Agreement as defined in Subparagraph 34(a). At the time you give us such notice, you shall provide us with the information and documentation necessary to evaluate the contemplated transaction. Under no circumstances shall our failure to respond or any delay in responding to such written notice constitute or be understood as or be deemed to be consent to such proposed Transfer. Our consent (if given) to any Transfer shall be subject to such terms and conditions as we deem Appropriate, including but not limited to payment of a transfer fee. The Amount of the transfer fee shall be determined by us based upon the circumstances of the particular transfer, taking into account such factors As the estimated value of the license involved in the Transfer; the risk of business interruption or loss of quality, production or control we may suffer as a result of the Transfer; the identity, reputation, creditworthiness, financial condition and business capabilities of the proposed transferee; and our internal costs related to the Transfer; provided however, in no event shall the transfer fee be less than all amount equal to the Actual Royalties earned hereunder in the twelve (12) month period immediately preceding the notice of proposed assignment or, if such figures are unavailable, then an amount equal to the Guarantee for the first year of this Agreement. The foregoing transfer fee shall not apply if this Agreement is assigned to one or more of your affiliates as part of a corporate reorganization exclusively among some or all of the entities existing in your corporate structure when this Agreement is signed; provided however, that you must give us at least two (2) weeks' prior written notice of such transfer and a description of the reorganization. If you have more than one merchandise license agreement with us for the Territory, and an event occurs which would trigger the transfer fee provisions of this Paragraph 34, you need only pay to us one transfer fee, determined by us as set forth above. The provisions of this Subparagraph 34 (b) shall supersede any conflicting provisions on this subject in any merchandise license agreement previously entered into between you and us for the Territory or any portion thereof, if comprised of more than one country. (c)Notwithstanding Subparagraphs 34(a) and (1)), you may, upon written notice to us, unless we have objected within thirty (30) days of receipt of such notice, sublicense your rights hereunder to your affiliates. You hereby irrevocably and unconditionally guarantee that they will observe and perform all of your obligations hereunder, including without limitation, the provisions governing approvals, and compliance with approved samples, Applicable Laws and all other provisions hereof, and that they will otherwise adhere strictly to all of the terms hereof, and act in accordance with your obligations hereunder. Any involvement of an affiliate in the activities which are the subject of this Agreement shall be deemed carried on pursuant to such a sublicense and thus covered by such guarantee; provided however, such involvement may be treated by us as a breach of this Agreement, unless you have notified us of your intent to sublicense an affiliate in each instance, and we have failed to object within thirty (30) days of receipt of such notice. Section 35 RELATIONSHIP This Agreement does not provide for a joint venture, Partnership, Agency or employment relationship between us or any relationship other than that of licensor and Licensee. Section 36 CHOICE OF LAW AND VENUE This Agreement shall be governed by And construed in accordance with the laws of Germany. Any legal actions pertaining to this Agreement shall be commenced within the court, of Frankfurt am Main, however, each party has the right to assert claims vis-a-vis the other at its general place of jurisdiction. Section 37 CONSTRUCTION The language of all parts of this Agreement shall in all cases be construed as a whole, according to its fair meaning and not strictly for or against either party. Notwithstanding the foregoing, the invalidity or unenforceability of any provision or portion of this Agreement shall not affect the validity or enforceability of any other provision or portion of this Agreement. Headings of paragraphs herein are for convenience of reference only and are without substantive significance. Section 38 MODIFICATIONS OR EXTENSIONS OF THIS AGREEMENT A modification or extension of this Agreement shall be valid and binding only if it is in writing and signed by both parties indicating their agreement to such modification or extensions, provided however, that modifications shall be effective if signed by the party to be charged and the same is communicated to the other party. A renewal of this Agreement may be effectuated only upon the entering into and execution of a new agreement between you and us. The execution of this Agreement or any other agreement between you and us shall not under any circumstances imply that this Agreement will be renewed or create an expectation that we or you will be obligated to enter into negotiations for a new agreement nor will any such expectation or obligation be implied by any representation or conduct of the parties. Section 39 NOTICES All notices which either party is required or may desire to serve upon the other party shall be in writing, addressed to the party to be served at the address set forth on page I of this Agreement, and may be served personally, sent by an internationally recognized courier service, by postage prepaid registered or certified mail, addressed as herein provided (unless and until otherwise notified) or by facsimile transmission confirmed by a transmission report. Such notice shall be deemed served upon personal delivery, on the date it is recorded as delivered by receipt of courier service or mailing receipt, or upon the date shown on the facsimile transmission report; provided, however, that service of a request for approval of materials under this Agreement will be effective only upon our actual receipt of the request and of any required accompanying materials. Section 40 MUSIC Music is not licensed hereunder. Any charges, fees or royalties payable for music rights or any other rights not covered by this Agreement shall be in addition to the Royalties and covered by separate agreement. Section 41 PREVIOUS AGREEMENTS This Agreement ,and any confidentiality agreement you may have signed pertaining to any of the Licensed Material, contains the entire agreement between us concerning the subject matter hereof, and supersedes any pre-existing agreement and any oral or written communications between us concerning the subject matter hereof. Further, if any pre-existing agreement(s) allow you to sell or distribute Articles outside the Territory or to manufacture any Articles outside the Territory, such agreement(s) shall be deemed to remain in effect to the extent that they relate to Licensed Material and Articles licensed hereunder. Section 42 CONFIDENTIALITY You represent and warrant that you did not disclose to any third party the prospect of a license from us, and that you did not trade on a prospect of a license from us prior to full execution of this Agreement. You agree to keep the terms and conditions of this Agreement confidential, and you shall not disclose any such terms and conditions to any third party without obtaining our prior written consent, provided, however, that this Agreement may be disclosed on a need-to-know basis to your attorneys and accountants who agree to be bound by this confidentiality provision. In addition, you may have access to information concerning our and/or our affiliates' business and operations and/or information concerning works in progress, artwork, plots, characters or other matters relating to our and/or our affiliates' artistic creations, which information may not be accessible or known to the general public. You agree not to use or disclose such information to any third party without obtaining our prior written consent. Section 43 GOODWILL You acknowledge that the right, and powers retained by us hereunder are necessary to protect our copyrights and property right, and, specifically, to conserve the goodwill and good name of our products and company, and the mime "Disney". and therefore You agree that you will not allow the same to become involved in matters which will or could, detract from or impungn the public acceptance and popularity thereof of impair their legal status. 1 9 Section 44 POWER TO SIGN The parties warrant and represent that their respective representatives signing this Agreement have full power and authority to sign this Agreement and to bind the parties. Section 45 SURVIVAL OF OBLIGATIONS The respective obligations of the parties to this Agreement, which by their nature would continue beyond the termination, cancellation or expiration hereof, including but not limited to indemnification, insurance, payment of Royalties and Guarantees, and Paragraph 3l, shall survive termination, cancellation or expiration of this Agreement. When signed by both parties this shall constitute an agreement between us. Eschborn, this April 17, 1998 . . .................... . The Walt Disney Company Nasco Products (Germany) GmbH International, Inc. SCHEDULE TO LICENSE AGREEMENT No. 3746 dated April 17, 1998 between The Walt Disney Company (Germany) GmbH and Nasco Products International, Inc. Section I (a) Licensed Material Mickey for Kids (2-12 years, according to MFK-Gui delines): Mickey Mouse, Minnie Mouse, Donald Duck, Daisy Duck, Goofy, Pluto, Scrooge McDuck, Huey, Dewey, Louie. Mickey Unlimited (up from 12 years, according to MU Guidelines): Mickey Mouse, Minnie Mouse, Donald Duck, Daisy Duck, Goofy, Pluto, Scrooge McDuck, Huey, Dewey, Louie. Section I (b) Trademarks "Trademarks' means 'Walt Disney", "Disney", the representations of Licensed Material included in Subparagraph I (a) above and the logo(s) of the motion picture, television series and/or branded program in which Licensed Material appears: Mickey for Kids, Mickey Unlimited. Section I (c) Articles Fashion Accessories Children: Travel Bags: Hard Luggage Art.-No. 5 3050 1001 Soft Luggage Art.-No. 5 3050 1002 Leisure Bags: Beach Bags Art.-No. 530502001 Shopping Bags: Art.-No. 530502002 Totebags Art. -No. 5 3050 2003 Schoolbags: Backpacks Art.-No. 530505001 Wallets: Wallets/coin purses Art.-No. 5 306022001 Teen/Adult: Travel Bags: Hard Luggage Art.-No. 531602001 Soft Luggage Art.-No. 5 31602002 Leisure Bags: Beach Bags Art.-No. 531603001 Shopping Bags Art.-No. 531603002 Totebags Art.-No. 531603003 Fashion Bags: Fashion Backpacks Art.-No. 531604002 Wallets: Wallets/coin purses Art.-No. 531702001 Sport Toys: Sport Bag Art.-No. 5 11203001 Section I (e) Term : 01/Sept/1998 - 30/June/1999 Section I (f) Territory : Germany, Austria, Switzerland Section I (d) Minimum Per Article Royalty: N/A Section I (g) Royalties 12 %, FOB 17 %, based on wholesale price in Germany Section I (i) Royalty Payment Period Each calendar quarter Secion I (j) Advance DM 50.000,00: DM 25.000,00 on 15/June/1998 DM 25.000,00 on 15/September/1998 Section I (k) Guarantee DM 10O.W0,100 Section I (1) Samples 3 per article and motif Section I (m) Promotion Commitment 2 % of Net Invoiced Billings for articles sold to customers Section I (n) CMF Payment I %, FOB 1,4 % Section I (o) CMF Guarantee DM 8.400,00 Section I (p) CMF Advance DM 4.200,00: DM 2. 100 00 payable on 15/June/1998 DM 2.100:00 payable on 15/September/1999 Section I (q) Marketing Date N/A Section 31 (b) Sell-Off Period 30/September/1999 CONSENT/MANUFACTURER'S AGREEMENT DISNEY CHARACTER MERCHANDISE Licensee: XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX Reference is made to the License Agreement dated______ between __________("Disney') and ____________________("Licensee"), expiring on_________________Disney hereby consents to the manufacture of the "Authorized Articles" referenced below, for the account of Licensee. upon the condition that the Manufacturer shall sign and fully comply in all respects with this Manufacturer's Agreement ("Agreement'). Failure of said condition shall entitle Disney to terminate the Agreement forthwith and require that that portion of all copies and molds or other devices used to manufacture the "Authorized Articles" in possession of the Licensee or the Manufacturer be immediately delivered to Disney or be destroyed to Disney's satisfaction. NAME AND ADDRESS OF MANUFACTURER: XXXXXXXXXXXX XXXXXXXXXXXX XXXXXXXXXXXX TERRITORY OF MANUFACTURE: XXXXXXXXXXXX EXPIRATION OF THIS AGREEMENT: (Unless sooner termninored or extended) AUTHORIZED ARTICLES: (or components thereof) XXXXXXXXXXXX XXXXXXXXXXXX DISNEY PROPERTIES: XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX The Manufacturer signing below covenants and agrees that (except as may be authorized under a separate Disney Manufacturer's Agreement or license): 1. The Manufacturer will not manufacture the Authorized Articles to the order of any one but the Licensee, will invoice only the Licensee, will not ship to anyone other than the Licensee or Licensee's designees and will not ship after the expiration date of the License. 2. The Manufacturer will not subcontract production of the Authorized Articles or components which contain the Disney Properties without Disney's, written consent. 3. The Manufacturer will not (without Disney's written consent) manufacture merchandise utilizing any of the Disney Properties listed above or any other properties the copyright or trademark to which is owned by Disney, other than the Authorized Articles in accordance with this Agreement. 4. From time to time. the Manufacturer will permit Disney's authorized representative to inspect its activities and premises, accounting books and invoices relevant to its manufacture and Supply of Authorized Articles. 5. The Manufacturer will not publish or cause the publication of pictures of the Authorized Articles in any publication or promotional material nor advertise the fact that it is permitted to manufacture Authorized Articles, nor use the name "Disney" or any variant thereof without Disney's prior written consent. 6. In manufacturing the Authorized Articles, the Manufacturer will comply with all applicable local and national laws and regulations, treaties, voluntary industry standards, codes or other obligations (collectively, "Laws"), including but not limited to, applicable health and safety standards and labor laws for manufacturing operations. Specifically, the Manufacturer covenant, that: (a) The Manufacturer will not use child labor in the manufacturing, packaging or distribution of Disney merchandise. The term "child" refers to a person younger than the local legal minimum age for employment or the age for completing compulsory education, but in no case shall any child younger than fifteen (15) years Of age (or fourteen (14) years of age where local law allows) be employed in the manufacturing, packaging or merchandise. The Manufacturer employing young persons who do not fall within the definition of "children" agrees also to comply with any Laws applicable to such persons. (b) The Manufacturer agrees only to employ persons whose presence is voluntary. The Manufacturer agrees not to use any forced or involuntary labor, whether prison, bonded, indentured or otherwise. (c) The Manufacturer agrees to treat each employee with dignity and respect, and not to use corporal punishment, threats of violence, or other forms of physical, sexual, psychological or verbal harassment or abuse. (d) The Manufacturer agrees not to discriminate in hiring and employment practices, including salary, benefits, advancement, discipline, termination, or retirement, on the basis of race, religion, age, nationality, social or ethnic origin, sexual orientation, gender, political opinion or disability. (e) The Manufacturer recognizes that wages are essential to meeting employees' basic needs. The Manufacturer agrees to comply, at a minimum, with all applicable wage and hour Laws, including minimum wage, overtime, maximum hours, piece rates and other elements of compensation, and to provide legally mandated benefits. If local Laws do not provide for overtime pay, the Manufacturer agrees to pay at least regular wages for overtime work. Except in extraordinary business circumstances, the Manufacturer will not require employees to work more than the lesser of (1) 49 hours per week and 12 hours overtime or (2) the limits on regular and overtime hours allowed by local law, or, where local law does not limit the hours of work, the regular work week in such country plus 12 hours overtime. In addition, except in extraordinary business circumstances, employees will be entitled to at least one day off in every seven-day period. The Manufacturer agrees that, where local industry standards are higher than applicable legal requirements, it will meet the higher standards. (f) The Manufacturer agrees to provide employees with a safe and healthy workplace in compliance with all applicable Laws, ensuring, at a minimum, reasonable access to potable water and sanitary facilities, fire safety, and adequate lighting and ventilation. The Manufacturer also agrees to ensure that the same standards of health and safety are applied in any housing it provides for employees. The Manufacturer agrees to provide Disney with all information Disney may request about manufacturing, packaging and distribution facilities for the Articles. (g) The Manufacturer agrees, to respect the rights of employees to associate, organize and bargain collectively in a lawful and peaceful manner, without penalty or interference, in accordance with applicable Laws. (h) The Manufacturer agrees to comply with all applicable Laws, including those pertaining to the manufacture, pricing, sale and distribL16011 of the Articles. (i) The Manufacturer agrees to comply with all applicable environmental Laws. (j) The Manufacturer agrees that Disney and its designated agents (including third parties) may engage in monitoring activities to confirm compliance with this Agreement, including unannounced on-site inspections of manufacturing, packaging and distribution facilities, and employer-provided housing, such inspections to include reviews of books and records relating to employment matters and private interviews with employees. The Manufacturer agrees to maintain on site all documentation necessary to demonstrate compliance with this Agreement. (k) The Manufacturer agrees to take appropriate steps to ensure that the provisions of this Paragraph 6 are communicated to employees, including the prominent posting of a copy of Disney's Code of Conduct for Manufacturers in the local language and in a place readily accessible to employees at all times. 7. Upon expiration or termination of the License Agreement, or upon notification by Disney or Licensee, the Manufacturer will (a) immediately cease manufacturing the Authorized Articles and deliver to Disney or its authorized representative that portion of any and all molds, plates, engravings or other devices used to reproduce the Disney Properties, or (b) provide Disney with satisfactory evidence that the Disney Properties have been erased or eradicated and are no longer reproducible. LICENSOR: THE, WALT DISNEY COMPANY (GERMANY) GmbH By:XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX Title: Vice President & Managing Director LICENSEE: MANUFACTURER: By:XXXXXXXXXXXXXXXXXXXX By:XXXXXXXXXXXXXXXXXXXX Title: Title: Code of Conduct for Licensees At The Walt Disney Company, we are committed to: a standard of excellence in every aspect of our business and in every comer of the world; ethical and responsible conduct in all of our operations; respect for the rights of all individuals; and respect for the environment. We expect these same commitments to be shared by all Disney Licensees and the manufacturers with which they work in the production of Disney merchandise. At a minimum, we require that all Disney licensees meet the following standards: Conduct of Manufacturing Licensees that engage directly in the manufacturing of Disney merchandise will comply with all of the standards set forth in Disney's Code of Conduct for Manufacturers, a copy of which is attached. Licensees will ensure that each manufacturer other than the licensee also enters into a written commitment with Disney to comply with the standards set forth in Disney's Code of Conduct for Manufacturers. Licensees will prohibit manufacturers from subcontracting the manufacture of Disney merchandise or components thereof without Disney's express written consent, and only after the subcontractor has entered into a written commitment with Disney to comply with Disney's Code of Conduct for Manufacturers. Monitoring and Compliance Licensees will take appropriate steps, in consultation with Disney, to develop, implement and maintain procedures to evaluate and monitor manufacturers of Disney merchandise and ensure compliance with Disney's Code of Conduct for Manufacturers, including unannounced on site inspections of manufacturing facilities and employer-provided housing; review of books and records relating-to employment matters; and private interviews with employees. Licensees will authorize Disney and its designated agents (including third parties) to engage in similar monitoring activities to confirm Licensees compliance with this Code of Conduct. Licensee will maintain on site all documentation that may be needed to demonstrate such compliance. Attached: Code of Conduct for Manufacturers At The Walt Disney Company, we are committed to: a standard of excellence in every aspect of our business and in every comer of the world; ethical and responsible conduct in all of our operations; respect for the rights of all individuals; and respect for the environment We expect these same commitments to be shared by all manufacturers of Disney merchandise. At a minimum, we require that all manufacturers of Disney merchandise meet the following standards: Child Labor Manufacturers will not use child labor The term "child" refers to a person younger than 15 (or 14 where local law allows) or, if higher, the local legal minimum age for employment or age for completing compulsory education. Manufacturers employing young persons who do not fall within the definition of "children" will also comply with any laws and regulations applicable to such persons. Involuntary Labor Manufacturers will not use any forced or involuntary labor. whether prison, bonded, indentured or otherwise. Coercion and Harassment Manufacturers will treat each employee with dignity and respect, and will not use corporal punishment, threats of violence or other forms of physical, sexual, psychological or verbal harassment or abuse. Nondiscrimination Manufacturers will not discriminate in hiring and employment practices, including salary, benefits, advancement, discipline, termination or retirement, on the basis of race, religion, age nationality, social or ethnic origin, sexual orientation, gender, political opinion or disability. Association Manufacturers will respect the rights of employees to associate, organize and bargain collectively in a lawful and peaceful manner, without penalty or interference. Health and Safety Manufacturers will provide employees with a safe and healthy workplace in compliance with all applicable laws and regulations, ensuring at a minimum, reasonable access to potable water and sanitary facilities, fire safety, and adequate lighting and ventilation. Manufacturers will also ensure that the same standards of health and safety are applied in any housing that they provide for employees. Compensation We expect manufacturer, to recognize that wages are essential to meeting employees' basic needs. Manufacturers will, at a minimum, comply with all applicable wage and hour laws and regulations, including, those relating to minimum wages, overtime, maximum hours, piece rates and other elements of compensation, and provide legally mandated benefits. If local laws do not provide for overtime pay, manufacturers will pay at least regular wages for overtime work. Except in extraordinary business circumstances, manufacturers will not require employees to work more than the lesser of (a) 48 hours per week and 12 hours overtime or (b) the limit,, on regular and overtime hours allowed by local law or, where local law does not limit the hours, of work, the regular work week, in such country plus 12 hours overtime. In addition, except in extraordinary business circumstances, employees will be entitled to at least one day off in every seven-day period. Where local industry standards are higher than applicable legal requirements. we expect manufacturers to meet the higher standards. Protection of the Environment Manufacturers will comply with all applicable environmental laws and regulations. Other Laws Manufacturers will comply with all applicable laws and regulations, including those pertaining to the manufacture, pricing, sale and distribution of merchandise. All references to "applicable laws and regulations" in this Code of Conduct include local and national codes, rules and regulations as well as applicable treaties and voluntary industry standards. Subcontracting Manufacturers will not use subcontractors for the manufacture of Disney merchandise or components thereof without Disney's express written consent, and only after the subcontractor has entered into a written commitment with Disney to comply with this Code of Conduct. Monitoring and Compliance Manufacturer, will authorize Disney and its designated agents (including third parties) to engage in monitoring activities to confirm compliance with this Code of Conduct, including unannounced on-site inspections of manufacturing facilities and employer-provided housing; reviews of book,; and records relating to employment matters; and private interviews with employees. Manufacturers will maintain on site all documentation that may be needed to demonstrate compliance with this Code of Conduct. Publication Manufacturers will take appropriate steps to ensure that the provisions of this Code of Conduct are communicated to employees, including the prominent posting of a copy of this Code of Conduct, in the local language and in a place readily accessible to employees, at all times. EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS INNOVO GROUP INC. Knoxville, Tennessee We hereby consent to the incorporation by reference of our report dated February 10, 1999 relating to the consolidated financial statements of Innovo Group Inc. included in the Company's Annual report on Form 10-K as of November 30, 1998 and 1997, and for each of the three years in the period ended November 30, 1998, in the Registration Statement on Form S-8 pertaining to the Sims Moss Kline & Davis LLP Consulting Agreement and the Zummo & Perry, LLP Consulting Agreement. BDO Seidman, LLP Atlanta, Georgia March 15, 1999 [PERIOD-TYPE] 12-MOS 12-MOS [FISCAL-YEAR-END] NOV-30-1998 NOV-30-1998 NOV-30-1998 NOV-30-1998 [CASH] 1078 469 [SECURITIES] 0 0 [RECEIVABLES] 775 1018 [ALLOWANCES] (67) (123) [INVENTORY] 1101 1582 [CURRENT-ASSETS] 3154 3344 [PP&E] 6119 6843 [DEPRECIATION] (2082) (1772) [TOTAL-ASSETS] 7232 9168 3229 3523 [BONDS] 2234 1854 [PREFERRED-MANDATORY] 0 0 [PREFERRED] 0 0 [COMMON] 538 446 [OTHER-SE] 1184 3345 [TOTAL-LIABILITY-AND-EQUITY] 7232 9168 [SALES] 6790 7901 [TOTAL-REVENUES] 6790 7901 [CGS] 4493 5303 [TOTAL-COSTS] 8696 9310 [OTHER-EXPENSES] (142) (337) [LOSS-PROVISION] 58 26 [INTEREST-EXPENSE] 503 657 [INCOME-PRETAX] (2267) (1729) [INCOME-TAX] 0 0 [INCOME-CONTINUING] (267) (1729) [DISCONTINUED] (1747) (110) [EXTRAORDINARY] 0 0 [CHANGES] 0 0 -----END PRIVACY-ENHANCED MESSAGE-----