Umbro's Canadian soccer wear distributor Galaxy says it is unlikely it "will be able to continue as a going concern" after Umbro Holdings Limited reneged on a financing deal in May 2002, and is now trying to restructure its business amid discussions with potential strategic investors and bankers. Planned initiatives to reduce the size and scope of its operations in Canada and the US will reduce staffing levels by 80-90 per cent.

In a filing with the Alberta and British Columbia Securities Commissions on 21 August 2002, Galaxy said the dispute began in 2001 when Umbro Holdings Ltd (UHL) agreed to extend Galaxy's US distribution rights (under the "Big Box License") to outlets previously covered by the "Team Channel License."

In October 2001, Galaxy and UHL signed a non-binding letter of intent, which agreed Galaxy would pay UHL for the inventory purchased from the former Team Channel licensee over a six-month period. The deal was, however, subject to Galaxy securing adequate financing to buy this inventory and finance future expansion.

Although the letter of intent formally expired on 30 November 2001, both parties decided its terms would govern their future actions and, in December 2001, UHL shipped former Team Channel inventory worth $2.6 million to Galaxy's warehouse in Washington State.

Early in 2002, UHL offered to acquire Galaxy's outstanding shares for $1.10 per share and finance its US expansion. Galaxy says it continued this expansion on the strength of UHL's financing commitment - but in May 2002 UHL decided not complete the transaction.

In a statement, Galaxy president Steve Dewar said: "The failure of UHL to complete the above-noted financings, and on the strength of which Galaxy had in good faith assumed various obligations, has left Galaxy undercapitalised, unable to purchase inventory to meet fall orders for both the United States and Canadian markets and unable to pay for product that it previously ordered. Galaxy is in arrears in paying royalties to UHL in the amount of $1.24 million and UHL has demanded payment for the inventory purchased from the former Team Channel licensee which has been sold by Galaxy, aggregating approximately US$1.02 million.

"On 19 August 2002, Umbro Worldwide Limited gave notice of termination of the Big Box License and the license under which Galaxy distributes Umbro products in Canada. In addition, some suppliers have begun making demands for payment for goods that have been shipped. Galaxy's working capital as at 31 July 2002 was approximately $6000."

He added that Galaxy has initiated steps to preserve its cash while it continues to hold discussions with potential strategic investors and other parties, including its bankers, and to allow itself time to evaluate its legal options.

"Galaxy has today terminated all further business operations related to the Team Channel License in the United States and laid off all employees involved in those operations, in both the United States and Canada."

Galaxy expects that it will seek some form of statutory protection from creditors, and is currently consulting with legal counsel.