Product Development Agreement

PRODUCT DEVELOPMENT AND LICENSING AGREEMENT


THIS AGREEMENT, is made and entered into as of this 1st day of January, 1997, by and between GOLDEN BEAR GOLF, INC., a Florida corporation, whose address is 11780 U.S. Highway One, Suite 300, North Palm Beach, Florida 33408 ("GB Golf") and GARGOYLES, INC., a Washington corporation, whose mailing address is 5866 South 194th Street, Kent, Washington 98032 ("Gargoyles").


W I T N E S S E T H:


WHEREAS, Gargoyles currently designs, manufactures, markets and distributes various lines of high performance eyewear, including specialty eyewear for sports enthusiasts;


WHEREAS, GB Golf, through its business activities and the professional activities of its principal, Jack Nicklaus ("Nicklaus"), has developed unique expertise with respect to the requirements of professional and serious amateur golfers for equipment and accessories;


WHEREAS, Gargoyles and GB Golf are desirous of developing a new line of specialty eyewear for golfers as identified in Schedule "1" annexed hereto (the "Licensed Products"), which Licensed Products will be designed to Nicklaus' standards by Gargoyles in consultation with GB Golf and will be manufactured and distributed by Gargoyles using certain brands developed by GB Golf and the endorsement of Nicklaus.


NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants and conditions set forth herein, the parties hereto agree as follows:


1. DESIGN CONSULTATION


Promptly after the execution and delivery of this Agreement, GB Golf and Gargoyles will begin a joint and cooperative effort to create and develop the Products. Such collaboration will include, but not be limited to, consultation between Nicklaus and other designated representatives of GB Golf and Gargoyles's staff and outside design consultants regarding technical design ideas, performance characteristics, materials, styles and colors, in order to develop a complete line of Licensed Products. It is anticipated by the parties that the efforts of Gargoyles and its independent design consultants will be undertaken at Gargoyles' design and manufacturing facilities 2 where necessary to make use of Gargoyles' testing and manufacturing equipment, and that any consulting services to be rendered personally by Nicklaus, including review of designs and prototypes, may be rendered whenever appropriate from such locations as may be convenient to him. All costs incurred in connection with the design of the Licensed Products, including prototype development, product testing and regulatory approvals, shall be solely borne by Gargoyles. Gargoyles acknowledges that GB Golf's consultation in the design process for the Products shall not relieve Gargoyles from its legal obligations to provide those engineering and design services required to develop merchantable products, fit for their intended purposes, in conformity to all applicable laws and regulations governing the design and manufacture of eyewear. The parties agree that neither GB Golf nor Nicklaus, by virtue of consulting services rendered by them under this Agreement or otherwise, will assume any professional responsibility or products liability with respect to the Licensed Products or any other products manufactured or distributed by Gargoyles.


2. GRANT OF TRADEMARK AND ENDORSEMENT RIGHTS


GB Golf represents and warrants to Gargoyles that it is the exclusive licensee of Golden Bear International, Inc. ("GBI"), and that GBI is the owner of trademark and service mark rights in those trademarks identified in Schedule "2" annexed hereto and made a part hereof (the "Trademarks"), and has developed substantial goodwill in connection with its use of such Trademarks for a variety of goods and services worldwide. GB Golf has full right and authority to sub-license the Trademarks to Gargoyles for use by Gargoyles in accordance with the terms of this Agreement. Subject to the terms and conditions of this Agreement, GB Golf hereby grants to Gargoyles the right during the term of this Agreement: (i) to affix the Trademarks to Licensed Products to be marketed in and sold in the "Territory" (as defined in Section 6, below), and (ii) to utilize the Trademarks and the name, likeness and signature of Nicklaus and other information, artwork and materials approved in writing by GB Golf (collectively, the "Nicklaus Endorsement") to indicate Nicklaus' endorsement of the Licensed Products marketed within the Territory.


3. PRODUCT DESIGN AND APPROVALS


GB Golf shall have the right to approve all Licensed Products prior to sale by Gargoyles under this Agreement, which approval shall be in writing in accordance with the procedures set forth herein. As set forth in Section 1, above, GB Golf shall assist Gargoyles in the conceptual development of the Licensed Products and Gargoyles shall consult with GB Golf on an ongoing basis during all phases of the design and development of the Licensed Products. Without limiting the generality of


-2- 3 the foregoing, GB Golf and Gargoyles shall agree upon conceptual design and performance criteria for each new or materially changed model of the Licensed Products in advance of the commencement of the design process. Gargoyles shall be responsible for integrating reasonable comments and suggestions made by GB Golf into the design of each model of this Licensed Products, including providing the design and engineering services reasonably required to implement such matters with existing know-how and research of Gargoyles. Unless otherwise agreed by GB Golf, Gargoyles shall furnish to GB Golf, free of charge, working prototypes of each new or materially changed model of the Licensed Products for review, testing and approval prior to Gargoyles' commitment to manufacture such model on other than a prototype basis. Gargoyles shall also furnish to GB Golf for its approval a final production sample of each model of the Licensed Products before production in commercial quantities. GB Golf shall have ten (10) working days from receipt of any working prototype to approve or disapprove of such prototype, and shall have ten (10) working days from receipt of any production sample to approve or disapprove such sample. If no written disapproval of a prototype is received by Gargoyles within the required time period, Gargoyles shall be authorized to prepare the corresponding model for final production. Gargoyles shall not prepare production samples of Licensed Products until corresponding prototypes have been approved by GB Golf, and Gargoyles shall not manufacture, distribute or sell any Licensed Products in commercial quantities until corresponding production samples have been approved by GB Golf. Approvals under this section shall in no event be unreasonably withheld or delayed, and if withheld, the reasons therefor shall be clearly explained to Gargoyles. Gargoyles agrees that all Licensed Products to be distributed, sold, promoted, or manufactured under this Agreement shall substantially conform to the latest production samples approved, or deemed to be approved, by GB Golf, and to those additional quality standards and controls applied by Licensee in general to similar products manufactured and marketed by Licensee.


4. ADVERTISING/PROMOTIONAL DEVELOPMENT AND APPROVALS


Gargoyles acknowledges that it is essential for the protection of the interests of GB Golf in the Nicklaus Endorsement that GB Golf have a continuing control over the design and content of all labelling, packaging, advertising, and promotional materials (collectively, "Promotional Material") used in connection with marketing of the Licensed Products, including, without limitation, any brand name, trademark or trade name used by Gargoyles in connection therewith to promote itself as a source of the Licensed Products. Accordingly, Gargoyles agrees that: (i) GB Golf shall have a continuing right to approve or disapprove of any Promotional Material used in connection with the Licensed Products, whether used by Gargoyles or provided by


-3- 4 Gargoyles to any distributor, retailer, or other party selling the Licensed Products; and (ii) Gargoyles will not use and will not extend to others the right to use any Promotional Material of any type whatsoever without the prior approval thereof by GB Golf as provided in this Section. In the event that GB Golf in good faith requests Gargoyles to terminate further use of Promotional Material which had been approved prior to the time of such request, the parties will use their best efforts to negotiate a mutual agreement for phasing out further use of such Promotional Material in a manner which minimizes the negative impact of such material on GB Golf and recognizes the financial and marketing interests of Gargoyles in use of such materials for a reasonable period. Prior to the creation of any Promotional Material, Gargoyles shall consult with GB Golf regarding the appropriate uses of the Nicklaus Endorsement and marketing ideas for the Licensed Products. Gargoyles shall submit conceptual descriptions for proposed Promotional Material for approval by GB Golf as soon as reasonably practicable. After approval of such concepts, Gargoyles shall prepare samples of each item of Promotional Material so approved, which shall reflect the artwork, photography, and text to be used for labelling, packaging and print media and scripts and storyboards for broadcasting media. GB Golf shall have ten (10) working days from receipt of such samples to approve or disapprove of such samples. Approvals under this section shall in no event be unreasonably withheld or delayed, and if withheld, the reasons therefor shall be clearly explained to Gargoyles. Gargoyles shall not commit to production or media run any Promotional Material without the prior approval of such Promotional Material GB Golf, and it is understood that all Promotional Material shall conform to the samples approved by GB Golf or to revised samples submitted to and approved by GB Golf as provided herein. Gargoyles shall use reasonable efforts to inform GB Golf of any unauthorized use of Promotional Material by its customers, and upon request of GB Golf, to assist GB Golf in its efforts to eliminate any unauthorized use of any part of the Nicklaus Endorsement in connection with the Licensed Products.


5. STANDARDS OF QUALITY


Gargoyles acknowledges that it shall not be authorized to use any part of the Nicklaus Endorsement or any of the Product Marks (as defined in Section 11, below) except to identify and promote those Licensed Products meeting the standards of quality adopted by GB Golf in connection with the product approval process set forth in this Agreement. GB Golf and/or its representatives shall have reasonable access to any manufacturing or distribution facility used by Gargoyles in connection with the Licensed Products for the purpose of verifying Gargoyles' ongoing adherence to the standards of quality imposed by this Agreement.


-4- 5 6. TERRITORY


The Territory shall initially consist of the United States domestic market and those countries identified in Schedule "3" annexed hereto, which Gargoyles represents and warrants to be its primary territories for distribution of its current product lines. GB Golf agrees that Gargoyles shall have the exclusive right to expand the initial Territory by giving GBI reasonable prior notice of any proposed sales activities which Licensee intends to conduct in any jurisdiction outside of those countries expressly identified in Schedule "3", and provided that GB Golf shall have the right to determine, in its discretion, whether or not to request GBI to proceed with the registration of the Trademarks in such jurisdiction based upon the projected costs of such registration and the amount of compensation which Gargoyles reasonably expects to generate from its proposed activities. GBI shall not be responsible for any loss or liability incurred for trademark infringement incurred by Gargoyles as a result of its distribution of Licensed Products into any new jurisdiction prior to confirmation by GB Golf that no conflict exists in such jurisdiction with respect to the proposed use of a Trademark. In the event that any person not authorized by GBI asserts any interest in a Trademark or in any similar or conflicting trademark under the trademark laws or regulations of such a jurisdiction, GB Golf may withdraw such jurisdiction from the Territory granted to Licensee hereunder unless the parties reach a mutual determination as to their common business interest in defending GBI's ownership rights in the Trademark or resolving any conflict with the other trademark based upon the proposed activities to be conducted in such jurisdiction under this Agreement or by GBI under any related Agreement. If the parties determine to proceed with the distribution of Licensed Products into such jurisdiction, GB Golf shall cause GBI to use its best efforts to secure the trademark rights required for the proposed activities in such jurisdiction, provided that GB Golf and Gargoyles will each be required to contribute one-half (1/2) of the reasonable expenses and attorneys' fees required by GBI to secure such rights. Notwithstanding the foregoing, it is understood that GBI, as the sole owner of the Trademarks, and GB Golf, as its master licensee, reserve the right to take such action at their sole cost and expense as each of them may deem prudent in order to protect its trademark rights in any jurisdiction, whether included in the Territory or not.


7. DISTRIBUTION CHANNELS


The Licensed Products will initially be sold for distribution to sunglass specialty stores and dispensing optical retailers in Gargoyles existing distribution channels, to on course golf pro shops and off course specialty golf retailers, and to such other channels as may be mutually agreed upon in writing by the parties.


-5- 6 Gargoyles agrees to work with GB Golf and the existing licensees of the Nicklaus Endorsement for golf equipment and apparel with respect to golf retail channels in order to avoid conflicts with existing distribution activities in such channels, provided that the agreement of Gargoyles to enter into any distribution arrangements for the Licensed Products with other licensees shall be subject to its reasonable satisfaction with such licensees and the terms of such arrangements, and provided further, that the delegation of distribution duties to such licensees or common sales representatives shall not relieve Gargoyles of its obligations to meet its distribution requirements under this Agreement. GB Golf agrees that it will not unreasonably refuse to agree to any new channels proposed by Gargoyles, provided that the proposed distribution does not conflict with Nicklaus' professional image or reputation for quality or the brand image of GB Golf. Gargoyles shall use its best efforts to assure the integrity of the distribution channels selected, and to prevent transshipment and gray market sales by its customers and distributors through unauthorized distribution channels. Distribution of the Licensed Products, including but not limited to the cost thereof, shall be the exclusive responsibility of Gargoyles.


8. COMPENSATION AND EXPENSES


The parties agree that, in consideration for the performance of this Agreement by GB Golf, Gargoyles will provide compensation and expense reimbursements as provided in this Section. As an independent contractor, GB Golf agrees to be responsible for all other overhead and expenses incurred in connection with the performance of this Agreement, and GB Golf will be responsible for payment of all taxes due with respect to the payments received under this Agreement and for making all employer's withholding deposits in connection with payments made to its staff, including Nicklaus, for services rendered in support of this Agreement.


(a) As compensation for the design consulting and marketing services to be performed by GB Golf under this Agreement, Gargoyles agrees to pay GB Golf annual consulting fees (the "Consulting Fees") in the amounts set forth on Schedule "4" annexed hereto for each calendar year during the term. In addition to the Consulting Fees, Gargoyles hereby agrees to pay GB Golf guaranteed royalties (the "Minimum Royalties") for each calendar year in the amounts set forth on Schedule "4" for the intangible rights licensed to Gargoyles under this Agreement. The Consulting Fee and Minimum Royalty for each year (collectively, the "Annual Retainer") shall be paid to GB Golf in equal quarterly installments due and payable in advance, with the first installment of the Annual Retainer for 1997 due upon execution of this Agreement, and subsequent installment payments due on or before the first (1st) day of each calendar quarter thereafter. All Annual Retainer payments made to GB Golf


-6- 7 hereunder shall be guaranteed and non-refundable, provided that Annual Retainer payments will be credited against Percentage Compensation due from Gargoyles as provided in subsection (b) hereof. In the event that this Agreement is terminated due to a breach by GB Golf, in which case that portion of the aggregate Annual Retainer attributable to periods of time subsequent to such termination shall be repaid to Licensee if in excess of actual Percentage Compensation earned under subsection (b) hereof.


(b) Within thirty (30) days following the end of each calendar quarter, commencing with the first quarter in which shipments of Licensed Products are actually made, Gargoyles shall deliver to GB Golf a statement setting forth the total amount of shipments of Licensed Products by Gargoyles during such quarter and for the applicable calendar year on a cumulative basis and also setting forth the amount of discounts, allowances and returns given and received with respect to Licensed Prod ...