<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 14, 1997.
REGISTRATION NO. 333-29295
- ------------------------------------------------------------
- ------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------------
RETROSPETTIVA, INC.
(Exact Name of Small Business Issuer As Specified In Its Charter)
<TABLE>
<S> <C> <C>
CALIFORNIA 2337 95-4298051
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code No.) I.D. Number)
incorporation or organization)
</TABLE>
8825 WEST OLYMPIC BLVD.
BEVERLY HILLS, CA 90211
(310) 657-4488
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
MICHAEL D. SILBERMAN, CHIEF FINANCIAL OFFICER
RETROSPETTIVA, INC.
8825 WEST OLYMPIC BLVD.
BEVERLY HILLS, CA 90211
(310) 657-1745
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES OF ALL COMMUNICATIONS TO:
GARY A. AGRON, ESQ. DONALD C. REINKE, ESQ.
Law Office of Gary A. Agron BRUCE P. JOHNSON, ESQ.
5445 DTC Parkway, Suite 520 Pezzola & Reinke, A Professional
Englewood, CO 80111 Corporation
(303) 770-7254 1999 Harrison Street, Suite 1300
(303) 770-7257 (Fax) Oakland, CA 94612
(510) 273-8750
(510) 834-7440 (Fax)
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective and the
Underwriting Agreement is executed.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
check the following box:
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER SECURITY OFFERING PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Units, consisting of two shares of Common Stock, 575,000
no par value and one Warrant(1)................. Units $12.00 $6,900,000 $2,091
575,000
Common Stock, no par value, underlying Warrants... Shares $7.50 $4,312,500 $1,307
50,000
Representatives' Warrants(2)...................... Warrants $ .002 $ 100 $ --0--
Units underlying Representatives' Warrants
consisting of two shares of Common Stock and one 50,000
Warrant......................................... Units $14.40 $720,000 $219
Common Stock, no par value, underlying Warrants 50,000
included in Representatives' Warrants(2)........ Shares $7.50 $375,000 $114
Common Stock, no par value offered by Selling 75,000
Shareholders.................................... Shares $6.00 $450,000 $136
Totals............................................ $12,757,600 $3,776
</TABLE>
(1) Includes the overallotment option granted to the Underwriters of 75,000
Units.
(2) Pursuant to Rule 416 of the Securities Act of 1933, as amended, the number
of shares issuable upon exercise of the Representatives' Warrants is subject
to adjustment in accordance with anti-dilution provisions of such warrants.
------------------------------
THE REGISTRANT HEREBY AMENDS THE REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
(EXHIBIT INDEX LOCATED ON PAGE OF THIS FILING)
- ------------------------------------------------------------
- ------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED AUGUST 14, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
RETROSPETTIVA, INC.
500,000 UNITS
------------------
Retrospettiva, Inc. (the "Company") is offering (the "Offering") through
Kensington Securities, Inc. and Gunn Allen Financial, Inc., as the
representatives (the "Representatives") of the underwriters herein named (the
"Underwriters") 500,000 Units of the Company's securities ("Units"), each Unit
consisting of two shares of no par value common stock ("Common Stock") and one
redeemable common stock purchase warrant ("Warrant") at a price of $12.00 per
Unit. The Common Stock and Warrants are separately tradeable immediately upon
issuance. Each Warrant is exercisable to purchase one share of Common Stock at
an exercise price of $7.50 per share for a period of five years from the date
hereof and may be redeemed by the Company after six months from the date hereof
for $.01 per Warrant on 30 days' written notice to the Warrantholders if the
closing price of the Common Stock on the Nasdaq National Market System (the
"National Market") is at least $8.50 per share for 20 consecutive trading days,
ending not earlier than five days before the Warrants are called for redemption.
The Unit price and Warrant exercise price have been determined by negotiations
between the Company and the Representatives and such prices are not necessarily
related to the Company's financial condition, net worth or other established
criteria of value. See "Risk Factors" and "Underwriting."
There is no trading market for the Units, Common Stock and Warrants and
there can be no assurance that a trading market will develop in these securities
upon completion of the Offering. The Company has applied to have the Common
Stock and Warrants (but not the Units) listed on the National Market under the
symbols "RTRO" and "RTROW," respectively.
This Prospectus also covers the sale of 75,000 shares of Common Stock which
may be sold from time to time in open market transactions at prevailing prices
by two shareholders (the "Selling Shareholders"). All registration expenses
associated with the sale of the Selling Shareholders' shares (excluding sales
commissions) will be paid by the Company. See "Selling Shareholders."
--------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("COMMISSION") NOR HAS THE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL
DILUTION AND SHOULD BE CONSIDERED ONLY BY PERSONS ABLE TO SUSTAIN A TOTAL
LOSS OF THEIR INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE 6.
The Units are offered by the Underwriters on a firm commitment basis,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters and subject to certain conditions, including the right of the
Underwriters to reject orders in whole or in part. It is expected that delivery
of certificates representing the securities will be made against payment
therefor in Scottsdale, Arizona on or about three business days from the date of
this Prospectus.
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
Per Unit................................... $12.00 $1.20 $10.80
<S> <C> <C> <C>
Total(3)................................... $6,000,000 $600,000 $5,400,000
</TABLE>
(1) Excludes a nonaccountable expense allowance payable to the Representatives
of $180,000 ($207,000 if the Overallotment Option is exercised) and the
issuance of warrants to the Representatives (the "Representatives'
Warrants") to purchase up to 50,000 Units at a price of $14.40 per Unit. The
Company has granted certain registration rights with respect to the Units
underlying the Representatives' Warrants and has agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933 (the "1933 Act"). See "Underwriting."
(2) Before deducting costs of the Offering estimated to be $455,000, including
the Representatives' nonaccountable expense allowance. See "Underwriting."
(3) Assumes no exercise of the Underwriters' option (the "Overallotment
Option"), exercisable within 30 days from the date of this Prospectus, to
purchase from the Company up to 75,000 additional Units on the same terms as
the Units offered hereby solely to cover overallotments, if any. If the
Overallotment Option is exercised in full, the total Price to Public,
Underwriting Discounts and Proceeds to Company will be $6,900,000, $690,000
and $6,210,000, respectively. See "Underwriting."
KENSINGTON SECURITIES, INC. GUNN ALLEN FINANCIAL, INC.
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK AND
WARRANTS INCLUDING OVERALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN
SUCH SECURITIES AND THE IMPOSITION OF A PENALTY BID IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
The Company will furnish annual reports to its shareholders which will
include year end audited financial statements. The Company may also furnish to
its shareholders quarterly financial statements and such other reports as may be
authorized by its Board of Directors. See "Available Information."
[Woman wearing blazer]
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED IN THIS
PROSPECTUS AND IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION AND
FINANCIAL STATEMENTS THAT APPEAR ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE
INDICATED, ALL SHARE AND OTHER INFORMATION IN THIS PROSPECTUS REFLECTS AN
APPROXIMATELY 2.3825731 SHARES FOR ONE SHARE FORWARD STOCK SPLIT EFFECTED BY THE
COMPANY ON JUNE 20, 1997 AND ASSUMES THAT THE WARRANTS, THE OVERALLOTMENT OPTION
AND THE REPRESENTATIVES' WARRANTS HAVE NOT BEEN EXERCISED.
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS SET
FORTH IN THIS PROSPECTUS INCLUDE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO
RISKS AND UNCERTAINTIES THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY.
THESE RISKS AND UNCERTAINTIES ARE DETAILED UNDER THE CAPTION "RISK FACTORS" AND
ELSEWHERE THROUGHOUT THE PROSPECTUS AND WILL BE FURTHER DISCUSSED FROM TIME TO
TIME IN THE COMPANY'S PERIODIC REPORTS FILED WITH THE COMMISSION. THE
FORWARD-LOOKING STATEMENTS INCLUDED IN THE PROSPECTUS SPEAK ONLY AS OF THE DATE
HEREOF.
THE COMPANY
The Company contracts for the manufacture of a variety of garments,
primarily basic women's activewear, sportswear and businesswear which include
skirts, blouses, blazers, pants, shorts, vests and dresses, using assorted
fabrics including rayons, linens, cotton and wool. The Company offers such
garments to customers under its own labels, "Magellan" and "Retrospettiva" and
under private labels selected by its customers and markets its products
exclusively in the United States to (i) large wholesalers such as Giorgio Sant'
Angelo, Jeans Collectibles, V.S. Sport, Positive Influence, David N., Synari and
Wild Life, (ii) national retailers including department stores such as Dayton
Hudson, J.C. Penney, Casual Corner and Newton's, and (iii) women's chain
clothing stores such as Marshalls, TJ Maxx, Chadwicks, Hit or Miss, Fred Mayer
and Cato.
Substantially all of the Company's garments are sold on a "package" basis
pursuant to which the Company markets at fixed prices finished garments to the
customer's specifications and quantity requirements, arranges for production of
the garments and delivers the garments directly to the customer at the port of
entry. In its marketing, the Company emphasizes these package arrangements and
what it believes to be the better quality and lower prices of garments produced
by skilled Macedonian workers as compared to lower paid workers in certain other
regions. See "Business--Marketing."
As a package provider, the Company sources and purchases fabrics and trims,
arranges for cutting and sewing, and coordinates any other services required to
provide a completed garment. Since the Company manufactures its finished
products only upon receipt of purchase orders from its wholesale and retail
customers, and therefore does not maintain an inventory of finished products,
the Company believes that it minimizes the marketing and fashion risk generally
associated with the apparel industry. Fabrics and trims are purchased from
suppliers in China, India, Russia, Romania, Italy and the United States. After
dying the fabric, if necessary, the fabric and trim are shipped to factories
selected by the Company (located in Macedonia) where they are manufactured into
completed garments under the Company's management and quality control guidance.
The apparel industry is highly competitive and consists of numerous
manufacturers, importers and distributors. Many of the Company's competitors are
significantly larger, more diversified and have significantly greater financial,
distribution, marketing, name recognition and other resources than the Company.
The Company believes it has certain competitive advantages resulting from its
relationships with Macedonian manufacturers including (i) the availability in
Macedonian factories of highly skilled workers
3
<PAGE>
at relatively lower costs than in more economically developed regions, (ii) a
lack of quotas and lower tariffs in the importation into the United States of
finished goods from Macedonia, and (iii) lower shipping costs and faster garment
delivery as a result of the closer geographical proximity to the United States
of the Company's Macedonian contract manufacturers compared to manufacturers in
the Pacific Rim nations. See "Business--Competition."
The Company was organized in November 1990 initially to manufacture and
import textile products from Italy including finished garments and fabrics. By
1993, the Company was purchasing fabrics from firms and factories around the
world and contracting for the manufacture of finished garments in Macedonia for
importation into the United States.
The Company's executive offices are located at 8825 West Olympic Blvd.,
Beverly Hills, California 90211, and its telephone number is (310) 657-1745.
THE OFFERING
<TABLE>
<S> <C>
Securities Offered............ 500,000 Units, each Unit consisting of two shares of Common
Stock and one Warrant
Offering Price................ $12.00 per Unit
Common Stock Outstanding Prior
to the Offering(1).......... 1,750,000 shares
Securities Outstanding After
the Offering(1)............. 2,750,000 shares and 500,000 Warrants
Use of Proceeds............... The net proceeds of the Offering will be used to purchase
fabric, purchase apparel manufacturing equipment, repay debt
and for working capital. See "Use of Proceeds."
Nasdaq National Market RTRO--Common Stock
Symbols..................... RTROW--Warrants
Transfer and Warrant Agent.... Corporate Stock Transfer, Inc.
</TABLE>
- ------------------------
(1) Excludes exercise of: (i) the Warrants; (ii) the Overallotment Option; (iii)
the Representatives' Warrants; and (iv) outstanding stock options to
purchase up to 1,761,633 shares of Common Stock issued under the Company's
1996 Stock Option Plan. See "Dilution," "Capitalization," "Management--1996
Stock Option Plan," "Description of Securities" and "Underwriting."
4
<PAGE>
SUMMARY FINANCIAL INFORMATION
The financial information of the Company set forth below for the two years
ended December 31, 1995 and 1996 has been derived from the Company's audited
financial statements included herein. Interim information for the six months
ended June 30, 1996 and 1997 has been derived from unaudited financial
statements which are also included herein. The results of operations for the six
months ended June 30, 1997 are not necessarily indicative of the results to be
expected for the year ending December 31, 1997. The financial information should
be read in conjunction with the financial statements, related notes and other
financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995
------------ ------------ SIX MONTHS ENDED JUNE
30,
------------------------
1997 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales.................................................. 12,902,195 11,379,826 7,921,299 5,680,696
Gross profit............................................... 1,896,142 1,402,893 1,162,968 762,355
Operating income........................................... 1,363,342 891,776 887,283 444,586
Interest expense........................................... 61,457 21,241 23,784 18,024
Net income................................................. 772,802 680,495 519,976 254,562
Weighted average shares outstanding........................ 1,750,000 1,750,000 1,750,000 1,750,000
Net income per share....................................... .44 .39 .30 .15
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, AS
1997 ADJUSTED(1)
----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital........................................................................ 1,555,579 5,917,579
Total assets........................................................................... 5,846,644 10,928,644
Long-term debt......................................................................... -- --
Total liabilities...................................................................... 4,148,125 3,668,125
Shareholders' equity................................................................... 1,698,519 6,643,519
</TABLE>
- ------------------------
(1) As adjusted to give effect to the receipt and application of the estimated
net proceeds of the Offering without giving effect to exercise of the
Warrants, the Overallotment Option, the Representatives' Warrants or
outstanding stock options. See "Use of Proceeds" and "Description of
Securities."
5
<PAGE>
RISK FACTORS
Prospective purchasers of the Units should carefully consider the following
risk factors and the other information contained in this Prospectus before
making an investment in the securities. Information contained in this Prospectus
includes "forward-looking statements" which can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "should" or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy. See, e.g., "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and
"Business--Strategy." No assurance can be given that the future results
addressed by the forward-looking statements will be achieved. The following
matters constitute cautionary statements identifying important factors with
respect to such forward-looking statements, including certain risks and
uncertainties, that could cause actual results to vary materially from the
future results addressed in such forward-looking statements. Other factors could
also cause actual results to vary materially from the future results addressed
in such forward-looking statements.
LIMITED OPERATING HISTORY. The Company began operations in November 1990,
and has a limited operating history upon which potential investors may evaluate
its performance. Although the Company reported net income for the years ended
December 31, 1995 and 1996, and the six months ended June 30, 1997, there can be
no assurance that future operations will be profitable. The likelihood of the
Company's success must be considered relative to the problems, difficulties,
complications and delays frequently encountered in connection with the
development and operation of a relatively new business and the intensely
competitive environment in which the Company operates. The business risks to
which the Company are subject include, but are not limited to, inability to
develop products, competition, unforeseen marketing and promotional expenses,
unforeseen negative publicity, unforeseen difficulties in obtaining appropriate
supply of raw materials, cutting and sewing services and warehouse and shipping
services, lack of operating experience and limitations on its ability to raise
capital or finance operations. Many of the risks may be unforeseeable or beyond
the control of management, including the introduction of superior products to
the market by competitors. See "Business" and "Financial Statements."
DEPENDENCE ON THE COMPANY'S PRESIDENT AND OTHER KEY PERSONNEL. The success
of the Company is largely dependent on the personal efforts, relationships and
abilities of the executive officers of the Company, especially Mr. Vukadinovic,
who is the Chief Executive Officer and President of the Company. In May 1996,
Mr. Vukadinovic entered into a three-year employment agreement with the Company
which includes a non-competition provision effective through the term of the
agreement and for two additional years thereafter. The Company intends to apply
for life insurance upon Mr. Vukadinovic's life in the face amount of $1,000,000
but does not maintain key man life insurance on the lives of any other executive
officers. The loss of the services of Mr. Vukadinovic would have a material
adverse effect on the Company. See "Management."
DEPENDENCE UPON UNAFFILIATED MANUFACTURERS AND FABRIC SUPPLIERS; DEPENDENCE
UPON EXTENSION OF CREDIT TERMS. The Company does not own or operate any fabric
making or manufacturing facilities and is therefore dependent upon independent
fabric suppliers and manufacturers to manufacture products to the Company's
specifications. The inability of a fabric supplier to deliver fabric to the
manufacturers, or of a manufacturer to produce or ship the Company's products at
agreed upon times, or to meet the Company's quality standards, could adversely
affect the Company's ability to deliver products to its customers in a timely
manner. Delays in delivery could also result in missing certain retailing
seasons with respect to products ordered by customers or could otherwise have an
adverse effect on the Company's financial condition and results of operations.
The Company is dependent upon two fabric suppliers (Newbel, Inc. and Farnet
Trading Co.) which provided approximately 37% and 11%, respectively, of the
Company's fabric purchases for the year ended December 31, 1996 and three fabric
suppliers (Newbel, Inc., Elvana Trading Limited and One Four Four accounted for
41%, 15% and 31% respectively of the Company's fabric purchases for the six
months ended June 30, 1997. The loss of any of these suppliers could have a
6
<PAGE>
material adverse affect on the Company's operations. Additionally, the Company
is dependent upon one manufacturing agent which selects factories in Macedonia
to manufacture the Company's products and oversees such production. The Company
does not have any written contracts with any of its contractors or suppliers.
One of these suppliers has extended credit terms to the Company for fabric
purchased of up to $1,200,000. The loss of credit terms from this or any other
supplier would have a material adverse effect on the Company's operations. There
can be no assurance that this or other suppliers will provide credit terms to
the Company in the future. See "Business--Manufacturing and Suppliers."
DEPENDENCE ON CERTAIN CUSTOMERS. Three of the Company's customers each
accounted for 10% or more of sales (and 87% of sales in the aggregate) for the
year ended December 31, 1996, and two customers each accounted for 10% or more
of sales (and 91% of sales in the aggregate) for the six months ended June 30,
1997. A loss of any of these customers would have a material adverse effect on
the Company's operations. See "Business--Marketing."
FOREIGN OPERATIONS. During 1996, substantially all of the Company's fabric
purchases were made outside the United States, and all of the apparel sold by
the Company was manufactured in Macedonia. The Company's operations would be
adversely affected by political instability resulting in disruption of trade
with foreign countries in which the Company's contractors and suppliers are
located, the imposition of additional regulations related to imports or duties,
taxes and other charges on imports, significant fluctuations in the value of the
United States' dollar against foreign currencies and restrictions on the
international transfer of funds. The Company's import operations may be subject
to constraints imposed by bilateral textile agreements between the United States
and a number of foreign countries (not currently including Macedonia). These
agreements impose quotas on the amount and type of goods which can be imported
into the United States from these countries and can limit or prohibit
importation of products on very short notice. The Company's imported products
are also subject to United States customs duties which may be a material portion
of the Company's cost of imported goods. A substantial increase in customs
duties or the imposition of quota limits applicable to the Company's imports
(especially from Macedonia) could have a material adverse effect on the
Company's financial condition and results of operations. Because the Company's
foreign manufacturers are located at greater geographic distances from the
Company's customers than domestic manufacturers, the Company is generally
required to allow greater lead time for its orders. See "Business."
COMPETITION. The apparel industry is highly competitive and consists of
numerous manufacturers, importers and retailers. The Company's strategy relies
on its ability to deliver high-quality products to its wholesale and retail
customers in a timely fashion and at competitive prices. Many of the Company's
competitors are significantly larger and more diversified and have significantly
greater financial, distribution, marketing, name recognition and other resources
than the Company. The Company also encounters competition from department stores
and mass merchandisers, including some of the Company's own retail customers,
who sell apparel under their own private labels. Recently, department stores and
mass merchandisers have increased the amount of sportswear and activewear
manufactured specifically by them or their contract manufacturers and sold under
their own labels. See "Business--Competition."
RISKS ASSOCIATED WITH SIGNIFICANT GROWTH. The Company has experienced rapid
growth which has placed, and could continue to place, a significant strain on
its employees and operations. The Company remains vulnerable to a variety of
business risks generally associated with rapidly growing companies as well as
risks related to the broadening of its product offerings and the expansion of
its distribution channels. No assurance can be given that the Company will be
able to continue to deliver products in a timely manner at competitive prices.
To manage growth effectively, the Company will be required to continue to
implement changes in certain aspects of its business, expand its information
systems and operations to respond to current demand and develop, train and
manage employees. In addition, failure to enhance operating control systems or
unexpected difficulties encountered during expansion could adversely affect the
Company's financial condition and results of operations. See "Financial
Statements."
7
<PAGE>
UNCERTAINTIES IN APPAREL INDUSTRY; GENERAL ECONOMIC CONDITIONS;
SEASONALITY. The apparel industry has historically been subject to substantial
cyclical variations. During recessionary periods, when disposable income is low,
purchases of apparel and related goods tend to decline. Accordingly, a recession
in the general economy or uncertainties regarding future economic prospects that
affect consumer spending habits could have a material adverse effect on the
Company's results of operations. Additionally, the retail apparel industry has
experienced significant changes and difficulties over the past several years,
including consolidation of ownership, increased centralization of buying
decisions, restructurings, bankruptcies and liquidations. Various retailers,
including some of the Company's customers, experienced financial difficulties in
the past few years which increased the risk of extending credit to such
retailers. Financial problems of a retailer could cause the Company to curtail
business with such retailer, require the Company to assume more credit risk
relating to the retailer's receivables or even write off the retailer's
receivables. The Company cannot predict what effect, if any, continued changes
within the retail industry will have on the Company's business. In addition,
apparel manufacturers face the risks of delays in delivery of products,
imperfections in the manufacture of products and returns from customers, all of
which could have an adverse effect on the Company. The Company's business is
somewhat seasonal, with historically greater sales in the first and fourth
quarters, but management believes that it is less so than many other apparel
companies, primarily because of the Company's focus on basic sportswear, which
tends to be less seasonal than fashion sportswear. The Company does not believe
this seasonality has had a material adverse impact on its cash flow or
operations, although there can be no assurance that this will not be the case in
the future. See "Business."
POLITICAL INSTABILITY. All of the apparel sold by the Company is
manufactured in Macedonia, which was formerly a part of Yugoslavia. Some regions
of the former Yugoslavia, most notably Bosnia, Croatia and Serbia, have
experienced significant political instability, including warfare and rebellion.
Although Macedonia has not experienced such instability, there can be no
assurance that future unrest will not occur in Macedonia. Any unrest,
instability, warfare, or rebellion in Macedonia would have a material adverse
effect on the Company's operations.
CONCENTRATION OF ACCOUNTS RECEIVABLE. At December 31, 1996 and June 30,
1997, two customers accounted in the aggregate for 93% and 73%, respectively, of
the Company's accounts receivable. All payments on these accounts are current;
however, if either customer defaulted on its account receivable obligation to
the Company, the Company's financial condition would be adversely affected. See
"Financial Statements."
POSSIBLE FLUCTUATIONS IN OPERATING RESULTS. The Company's operating results
could vary from period to period as a result of the purchasing patterns of
customers, the timing of new product introductions by the Company and its
competitors, variations in sales and competitive pricing. Seasonal variations in
sales and unanticipated events, including delays in manufacturing new garments,
could also have a material adverse effect on the Company's operating results.
These factors could result in significant fluctuations in operating results in
future periods. See "Financial Statements."
LIMITATION ON LIABILITY. The Company's Articles of Incorporation provide
that liability of directors to the Company for monetary damages is eliminated to
the full extent provided by California law. Under California law, a director is
not personally liable to the Company or its shareholders for monetary damages
for breach of fiduciary duty as a director except for liability (i) for any
breach of the director's duty of loyalty to the Company or its shareholders;
(ii) for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law; (iii) for authorizing the unlawful
payment of a dividend or other distribution on the Company's capital stock or
the unlawful purchases of its capital stock; or (iv) for any transaction from
which the director derived any improper personal benefit.
The effect of this provision in the Articles of Incorporation is to
eliminate the rights of the Company and its shareholders (through shareholders'
derivative suits on behalf of the Company) to recover monetary damages from a
director for breach of the fiduciary duty of care as a director (including
breaches
8
<PAGE>
resulting from negligent or grossly negligent behavior) except in the situations
described in clauses (i) through (iv) above. This provision does not limit or
eliminate the rights of the Company or any shareholder to seek non-monetary
relief such as an injunction or rescission in the event of a breach of a
director's duty of care or any liability for violation of the federal securities
laws. See "Description of Securities--Limitation on Liability."
LACK OF PUBLIC MARKET; DETERMINATION OF OFFERING PRICE. Prior to the
Offering, there has been no public trading market for the Common Stock or
Warrants underlying the Units. The initial public offering price of the Units
and the exercise price of the Warrants were determined by negotiations between
the Company and the Representatives and do not necessarily bear any relationship
to recognized criteria for the valuation of such securities. Factors considered
in such negotiations included the Company's current level of revenues and
earnings, its prospects for future growth based upon proceeds of the Offering,
the nature of the Company's products, the apparel industry in general and the
level of competition within the industry. There can be no assurance that a
regular trading market for the Common Stock or Warrants will develop or continue
after the Offering or, if such a market develops, that the market price of the
component securities will equal or exceed the Offering price. See
"Underwriting."
IMMEDIATE SUBSTANTIAL DILUTION. The Offering involves an immediate and
substantial dilution of $3.59 per share of Common Stock, a 60% difference
between the public offering price of $6.00 per share of Common Stock (ascribing
no value to the Warrants included in the Units) and the net tangible book value
of $2.41 per share of Common Stock upon completion of the Offering, assuming no
exercise of the Warrants, the Overallotment Option, the Representatives'
Warrants or other outstanding stock options of the Company. See "Dilution."
SIGNIFICANT NUMBER OF STOCK OPTIONS OUTSTANDING. The Company's officers,
directors, employees and consultants hold stock options to purchase an aggregate
of 1,761,633 shares of the Company's Common Stock at prices ranging from $.63 to
$6.75 per share. Exercise of these stock options would significantly increase
the number of shares of Common Stock outstanding, dilute the ownership of the
investors in the Offering and reduce any per share earnings otherwise realized
by the Company.
NO DIVIDENDS. The Company has not paid any dividends on its Common Stock
and does not intend to pay dividends in the foreseeable future. See "Description
of Securities--Dividends."
POSSIBLE VOLATILITY OF SECURITIES PRICES. The market price of the Company's
Common Stock and Warrants following the Offering may be highly volatile, as has
been the case with the securities of other companies completing initial public
offerings. Factors such as the Company's operating results or announcements by
the Company or its competitors may have a significant effect on the market price
of the Company's securities. In addition, market prices for securities of many
emerging and small capitalization companies have experienced wide fluctuations
in response to variations in quarterly operating results and general economic
indicators and conditions, as well as other factors beyond the control of the
Company.
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of Common
Stock in the open market or the availability of such shares for sale following
the Offering could adversely affect the market price for the Common Stock.
Following the Offering, the 1,000,000 shares of Common Stock and the 500,000
Warrants included in the Units, together with the 500,000 shares of Common Stock
underlying the Warrants and the 75,000 shares registered hereby on behalf of the
Selling Shareholders may all be sold in the open market. An additional 1,340,241
shares of the Company's Common Stock are currently eligible for sale in the open
market under Rule 144 ("Rule 144") promulgated under the 1933 Act, and the
remaining 334,759 shares will be eligible for sale in March 1998.
Notwithstanding the above, the Company's officers, directors and 5% or greater
shareholders (holding an aggregate of 1,101,991 shares after deducting the
75,000 shares to be registered hereby which are excluded from the following
restriction on resale) have agreed with the Representatives not to sell or
otherwise dispose of their shares of Common Stock without the prior written
consent of the Representatives for a period of two years from the date of this
Prospectus provided,
9
<PAGE>
however, that 50% of such shares (550,996 shares) may be sold after one year
from the date of this Prospectus if the Company reports at least $1,000,000 of
after tax net income for the year ending December 31, 1997. In addition, the
holders of an additional 573,009 shares have agreed not to sell or otherwise
dispose of their shares without the prior written consent of the Representatives
for a period of one year from the date of this Prospectus. See "Description of
Securities--Common Stock Eligible for Future Sale" and "Underwriting."
UNDERWRITERS' INFLUENCE ON THE MARKET. A significant amount of the Common
Stock and Warrants offered hereby may be sold to customers of the
Representatives and the Underwriters. Such customers subsequently may engage in
transactions for the sale or purchase of such securities through or with the
Underwriters. Although it has no obligation to do so, the Representatives intend
to make a market in the Company's Common Stock and Warrants and may otherwise
effect transactions in the Common Stock and Warrants. This market-making
activity may terminate at any time. If it participates in the market, the
Representatives may exert a dominating influence on the market, if one develops,
for the Common Stock and Warrants. The price and liquidity of the Common Stock
and Warrants may be significantly affected by the degree, if any, of the
Underwriters' participation in such market.
POSSIBLE RESTRICTIONS ON MARKET-MAKING ACTIVITIES IN THE COMPANY'S
SECURITIES. Although they have no obligation to do so, the Representatives
intend to engage in market-making activities or soliciting brokerage activities
with respect to the purchase or sale of the Common Stock and Warrants in the
National Market where such securities will trade. However, no assurance can be
given that the Representatives will continue to participate as market makers for
the Common Stock and Warrants or that other broker/dealers will make a market in
such securities. In connection with the Offering, the Company has granted the
Representatives the right to act as the Company's agent in connection with any
future solicitation of holders of the Warrants to exercise their Warrants.
Unless granted an exemption by the Commission from Regulation M under the 1934
Act, the Representatives will be prohibited from engaging in any market-making
activities or solicited brokerage activities with regard to the Company's
securities during a period prescribed by Regulation M before the solicitation of
the exercise of any Warrants until the latter of the termination of such
solicitation activities or the termination by waiver or otherwise of any right
the Representatives may have to receive a fee for the exercise of the Warrants
following such solicitation. As a result, the Representatives and soliciting
broker/dealers may be unable to continue to make a market for the Company's
securities during certain periods while the Warrants are exercisable. Such a
limitation, while in effect, could impair the liquidity and market prices of the
Company's securities.
CONTROL BY MANAGEMENT; AUTHORIZATION AND ISSUANCE OF PREFERRED STOCK;
PREVENTION OF CHANGES IN CONTROL. Upon completion of the Offering, the
Company's officers and directors will own approximately 40.1% of the then issued
and outstanding shares of Common Stock (assuming no exercise of the Warrants,
the Overallotment Option, the Representatives' Warrants or other outstanding
stock options) and will continue to be able to elect substantially all of the
Company's directors and control the affairs of the Company. The Company's
Articles of Incorporation authorize the issuance of up to 1,000,000 shares of
Preferred Stock with such rights and preferences as may be determined from time
to time by the Board of Directors. Accordingly, under the Articles of
Incorporation, the Board of Directors may, without shareholder approval, issue
Preferred Stock with dividend, liquidation, conversion, voting, redemption or
other rights which could adversely affect the voting power or other rights of
the holders of the Common Stock. The issuance of any shares of Preferred Stock
having rights superior to those of the Common Stock may result in a decrease of
the value or market price of the Common Stock and could further be used by the
Board of Directors as a device to prevent a change in control of the Company.
The Company has no other anti-takeover provisions in its Articles of
Incorporation or Bylaws. Holders of Preferred Stock may have the right to
receive dividends, certain preferences in liquidation, and conversion rights.
See "Description of Securities."
10
<PAGE>
REPRESENTATIVES' LACK OF UNDERWRITING EXPERIENCE. Kensington Securities,
Inc., one of the Representatives, was organized in July 1989 under the name
Chadwick Securities, Incorporated, was registered as a broker-dealer in October
1989 and changed its name to Kensington Securities, Inc. in September 1994.
Kensington Securities, Inc. acted as a representative of the underwriters in
only one prior public offering and Gunn Allen Financial, Inc. has never acted as
a representative of the underwriters, although both firms have participated as
dealers in offerings underwritten by others. This lack of underwriting
experience may (i) adversely affect the development or continuation of a trading
market for the Common Stock and Warrants, (ii) have limited the effectiveness of
the Representatives in negotiating the offering price of the Units and the
exercise price of the Warrants, and (iii) negatively influence the market price
of the Common Stock and Warrants following the Offering. The Representatives had
no material relationship with the Company or its promoters prior to this
Offering.
NON-REGISTRATION IN CERTAIN JURISDICTIONS OF SHARES OF COMMON STOCK
UNDERLYING THE WARRANTS. The Warrants are not convertible or exercisable
unless, at the time of exercise, the Company has a current prospectus covering
the shares of Common Stock issuable upon exercise of the Warrants and such
shares of Common Stock have been registered, qualified or deemed to be exempt
under the securities laws of the states of residence of the holders of such
Warrants. There can be no assurance that the Company will have or maintain a
current prospectus or that the securities will be qualified or registered under
any state laws. Although the Company has undertaken and intends to use its best
efforts to maintain a current prospectus covering the Common Stock issuable upon
exercise of the Warrants following completion of the Offering to the extent
required by federal securities laws, there can be no assurance that the Company
will be able to do so. The value of the Warrants may be greatly reduced if a
prospectus covering the Common Stock issuable upon exercise of the Warrants is
not kept current or if the Common Stock issuable upon exercise of the Warrants
is not qualified, or exempt from qualification, in the states in which the
holders of Warrants reside. Persons holding Warrants who reside in jurisdictions
in which such securities are not qualified and in which there is no exemption
will be unable to exercise their Warrants and would either have to sell their
Warrants in the open market or allow them to expire unexercised. If and when the
Warrants become redeemable by the terms thereof, the Company may exercise its
redemption right even if it is unable to qualify the Common Stock issuable upon
exercise of the Warrants for sale under all applicable state securities laws.
See "Description of Securities--Warrants."
REDEMPTION OF WARRANTS. The Warrants may be redeemed by the Company under
certain circumstances (if there is a current prospectus covering exercise of the
Warrants) upon 30 days' written notice to the Warrantholders at $.01 per
Warrant. In such event, the Warrants will be exercisable until the close of
business on the date fixed for redemption in such notice. Any Warrants not
exercised by such time will cease to be exercisable, and the holders will be
entitled only to the redemption price, which is likely to be substantially less
than the market value of the Warrants. Accordingly, such redemption could force
the Warrantholders to exercise the Warrants and pay the exercise price at a time
when it might be disadvantageous for them to do so or to sell the Warrants at
the then market price when they might otherwise prefer to hold the Warrants. See
"Description of Securities--Warrants."
The Common Stock and the Warrants, which comprise the Units offered hereby,
are detachable and separately transferable immediately upon issuance. Purchasers
may buy Warrants in the aftermarket or may move to jurisdictions in which the
shares of Common Stock underlying the Warrants are not registered or qualified
during the period that the Warrants are exercisable. In this event, the Company
would be unable to issue Common Stock to those persons desiring to exercise
their Warrants unless and until such shares could be qualified for sale in
jurisdictions in which the purchasers reside, or an exemption from qualification
exists in such jurisdiction. In this event, Warrantholders would have no choice
but to attempt to sell the Warrants in a jurisdiction where such sale is
permissible or allow them to expire unexercised. See "Description of
Securities--Warrants."
11
<PAGE>
LISTING AND MAINTENANCE CRITERIA FOR NASDAQ SECURITIES. The Company has
applied for listing on the Nasdaq National Market and believes it meets the
current and recently proposed standards for such listing. The current listing
criteria for the National Market require (i) $4,000,000 of net tangible assets
(ii) pre-tax and net income in the most recently completed fiscal year or in two
of the last three most recently completed years of $750,000 and $400,000,
respectively (iii) a public float of 500,000 shares, (iv) a market value of the
public float of at least $3,000,000, (v) a $5.00 minimum bid price per share for
the securities, (vi) two market makers and (vii) at least 400 shareholders. The
proposed listing criteria, which have not yet been adopted, increase (i) the net
tangible assets to $6,000,000 (ii) the pre-tax earnings to $1,000,000 (the net
income requirement is eliminated), (iii) the public float to 1,100,000 shares,
(iv) the market value of the public float to $8,000,000, and (v) the number of
market makers to three.
The National Association of Securities Dealers, Inc. (the "NASD"), which
administers Nasdaq (which includes the National Market) recently has adopted
certain criteria for continued Nasdaq eligibility. In order to continue to be
included on at least the Nasdaq Small Cap Market, (thereby exempting a company
from the "penny stock" regulations described below) a company must maintain $2
million in total assets, a $200,000 market value of its public float and $1
million in total capital and surplus. In addition, continued inclusion requires
at least two market makers, 300 holders of the Common Stock and a minimum bid
price of $1 per share; provided, however, that if a company falls below such
minimum bid price, it will remain eligible for continued inclusion if the market
value of the public float is at least $1 million and the Company has $2 million
in capital and surplus. Proposed maintenance requirements on the Nasdaq SmallCap
Market would increase net tangible assets to $2 million unless the Company had
net income of $500,000 in two of the last three years or a market capitalization
of $35 million. In addition, shares in the public float would be increased to
500,000 from 100,000 and the net value of the float would be increased to $1
million. The Company's failure to meet these maintenance criteria in the future
may result in the discontinuance of the inclusion of its securities on at least
the Nasdaq SmallCap Market. In such event, trading, if any, in the securities
may then continue to be conducted in the non-Nasdaq over-the-counter market in
what are commonly referred to as the electronic bulletin board and the "pink
sheets." As a result, an investor may find it more difficult to dispose of or to
obtain accurate quotations as to the market value of the securities.
DISCLOSURE RELATED TO PENNY STOCKS. The Commission has adopted rules that
define a "penny stock" as equity securities priced at under $5.00 per share
which are not listed for trading on Nasdaq (unless (i) the issuer has a net
worth of $2,000,000 if in business for more than three years or $5,000,000 if in
business for less than three years or (ii) the issuer has had average annual
revenues of $6,000,000 or more for the prior three years). In the event that any
of the Company's securities are characterized in the future as penny stock,
broker-dealers dealing in the securities will be subject to the disclosure rules
for transactions involving penny stocks which require the broker-dealer among
other things to (i) determine the suitability of purchasers of the securities,
and obtain the written consent of purchasers to purchase such securities and
(ii) disclose the best (inside) bid and offer prices for such securities and the
price at which the broker-dealer last purchased or sold the securities. The
additional burdens imposed upon broker-dealers may discourage them from
affecting transactions in penny stocks, which could reduce the liquidity of the
securities offered hereby.
12
<PAGE>
DILUTION
At June 30, 1997, the net tangible book value of the Company was $1,565,190,
or $.89 per share of Common Stock. "Net tangible book value" per share
represents the total amount of tangible assets of the Company, less the total
amount of liabilities of the Company, divided by the number of shares of Common
Stock outstanding. Without taking into account any changes in net tangible book
value after June 30, 1997, other than to give effect to the sale by the Company
of the 1,000,000 shares of Common Stock included in the Units and offered
hereby, less underwriting discounts and commissions and estimated costs of the
Offering not recorded as deferred costs as of June 30, 1997, the net tangible
book value of the Company at June 30, 1997 would have been $6,627,519 or
approximately $2.41 per share. This represents an immediate increase in net
tangible book value of $1.52 per share of Common Stock to existing shareholders
and an immediate dilution of $3.59 per share to new shareholders. "Dilution" per
share represents the difference between the $6.00 per share price to be paid by
the new shareholders (without ascribing any value to the Warrants included in
the Units) and the net tangible book value per share of Common Stock immediately
after this Offering.
The foregoing is illustrated in the following table:
<TABLE>
<S> <C>
Public offering price per share of Common Stock included in the Units...... $ 6.00
Net tangible book value per share of Common Stock before Offering........ $ .89
Increase in net tangible book value per share of Common Stock
attributable to new investors purchasing in the Offering............... $ 1.52
Net tangible book value per share of Common Stock after the Offering....... $ 2.41
Dilution of net tangible book value per share of Common Stock to new
investors................................................................ $ 3.59
Percent reduction of net tangible book value per share to new investors.... 60%
</TABLE>
The following table sets forth the number of shares of Common Stock
purchased as a part of the Units, the total consideration paid and the average
price per share paid by existing shareholders as of June 30, 1997 and new
investors purchasing Common Stock in the Offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------- --------------------------- PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
---------- ------------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
New investors............................ 1,000,000 36.4% $ 6,000,000 95.7% $ 6.00
Existing shareholders.................... 1,750,000 63.6% $ 272,054 4.3% $ .16
---------- ----- ------------ -----
Totals................................... 2,750,000 100.0% $ 6,272,054 100.0%
---------- ----- ------------ -----
---------- ----- ------------ -----
</TABLE>
The preceding discussion and the accompanying tables assume no exercise of
(i) the Warrants; (ii) the Overallotment Option; (iii) the Representatives'
Warrants; or (iv) outstanding stock options to purchase up to 1,761,633 shares
of Common Stock issued under the Company's 1996 Stock Option Plan. See
"Capitalization," "Management--1996 Stock Option Plan," "Description of
Securities" and "Underwriting."
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at June 30,
1997 and as adjusted to give effect to the sale by the Company of 500,000 Units
offered hereby, without giving effect to the exercise of the Warrants, the
Overallotment Option, the Representatives' Warrants or other outstanding stock
options.
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED(1)
------------ --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Current Liabilities $ 4,148,125 $ 3,668,125
Long-term liabilities............................................................... -- --
Shareholders' equity................................................................
Preferred Stock, 1,000,000 no par value shares authorized, none issued............ -- --
Common Stock, 15,000,000 no par value shares authorized, 1,750,000 shares
outstanding, and 2,750,000 shares outstanding, as adjusted...................... 272,054 5,217,054
Additional paid-in capital........................................................ 230,000 230,000
Retained earnings................................................................. 1,196,465 1,196,465
------------ --------------
Total shareholders' equity...................................................... 1,698,519 6,643,519
------------ --------------
Total capitalization.......................................................... $ 5,846,644 $ 10,311,614
------------ --------------
------------ --------------
</TABLE>
- ------------------------
(1) As adjusted to give effect to the receipt and application of the estimated
net proceeds of the Offering. See "Use of Proceeds."
14
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the Offering are
estimated to be $4,945,000 ($5,728,000 if the Overallotment Option is
exercised). The Company intends to use the net proceeds of the Offering to
purchase fabric ($3,365,000 or 68.0% of the net proceeds), to purchase apparel
manufacturing equipment ($700,000 or 14.2% of the net proceeds), for repayment
of debt ($480,000 or 9.7% of the net proceeds) and for working capital ($400,000
or 8.1% of the net proceeds). Debt repayment consists of repayment of (i)
principal and interest due on bridge loans advanced in June 1996 aggregating
approximately $280,000 evidenced by promissory notes bearing interest at 8% per
annum through June 30, 1997 and 18% per annum until paid, and due the earlier of
September 30, 1997 or the closing date of the Offering, and (ii) a commercial
bank line of credit, of which $200,000 will be repaid, bearing interest at 3.15%
over the thirty day commercial paper rate per annum due August 31, 1998. The
bridge loans and bank line of credit were used for working capital.
The Company estimates, but cannot assure, that the net proceeds of the
Offering, together with anticipated operating revenues, will be sufficient to
fund the Company's estimated cash requirements for at least 12 months following
this Offering. Any additional funds received by the Company from exercise of the
Warrants, the Overallotment Option and the Representatives' Warrants will be
added to working capital.
While the above use of proceeds indicates the Company's current plans, there
may be changes due to the availability of other business opportunities and/or
changes in the Company's plan of operation. Management is not currently aware of
any such business opportunities or planned changes in operations. Pending
application, the net proceeds may be invested in short-term interest bearing
obligations.
15
<PAGE>
SELECTED FINANCIAL DATA
The financial information of the Company set forth below for the two years
ended December 31, 1995 and 1996 has been derived from the Company's audited
financial statements included herein. Interim information for the six months
ended June 30, 1996 and 1997 has been derived from unaudited financial
statements which are also included herein. The results of operations for the six
months ended June 30, 1997 are not necessarily indicative of the results to be
expected for the year ending December 31, 1997. The financial information should
be read in conjunction with the financial statements, related notes and other
financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED JUNE
DECEMBER 31, 30,
-------------------------- ------------------------
<S> <C> <C> <C> <C>
1996 1995 1997 1996
------------ ------------ ---------- ------------
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales.................................................. 12,902,195 11,379,826 7,921,299 5,680,696
Gross profit............................................... 1,896,142 1,402,893 1,162,968 762,355
Operating income........................................... 1,363,342 891,776 887,283 444,586
Interest expense........................................... 61,457 21,241 23,784 18,024
Net income................................................. 772,802 680,495 519,976 254,562
Weighted average shares outstanding........................ 1,750,000 1,750,000 1,750,000 1,750,000
Net income per share....................................... .44 .39 .30 .15
<CAPTION>
AT JUNE 30, 1997 AS ADJUSTED(1)
-------------------------- ------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................................ 1,555,579 5,917,579
Total assets............................................... 5,846,644 10,428,644
Long-term debt............................................. -- --
Total liabilities.......................................... 4,148,125 3,668,125
Shareholders' equity....................................... 1,698,519 6,643,519
</TABLE>
- ------------------------
(1) As adjusted to give effect to the receipt and application of the estimated
net proceeds of the Offering without giving effect to exercise of the
Warrants, the Overallotment Option, the Representatives' Warrants or
outstanding stock options. See "Use of Proceeds" and "Description of
Securities."
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of the Company for the years ended December 31, 1995 and 1996 and the
six months ended June 30, 1996 and 1997. This discussion should be read in
conjunction with the Company's financial statements, the notes related thereto,
and the other financial data included elsewhere in this Prospectus. All
information with respect to the six month period ended June 30, 1996 and June
30, 1997 is unaudited. The matters discussed in this section that are not
historical or current facts deal with potential future circumstances and
developments. Such forward-looking statements include, but are not limited to,
the development and market acceptance for products, trends in the results of the
Company's operations and the Company's anticipated capital requirements and
capital resources. The Company's actual results could differ materially from the
results discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include those discussed below as well as those
discussed under the caption "Risk Factors" and elsewhere in this Prospectus.
OVERVIEW
The Company contracts for the manufacture of a variety of garments,
primarily basic women's activewear, sportswear and businesswear which include
skirts, blouses, blazers, pants, shorts, vests and dresses, using assorted
fabrics including rayons, linens, cotton and wool. Substantially all of the
Company's garments are sold on a "package" basis pursuant to which the Company
markets at fixed prices finished garments to the customer's specifications and
quantity requirements, arranges for production of the garments and delivers the
garments directly to the customer at the port of entry. Since the Company
manufactures its finished products only upon receipt of purchase orders from its
retail customers, and therefore does not maintain an inventory of finished
products, the Company believes that it minimizes the market and fashion risk
generally associated with the apparel industry.
The Company purchases fabrics and trim (such as buttons, zippers, shoulder
pads and the like) on behalf of its customers from suppliers in a number of
countries, including Australia, China, India, Russia, Romania, Italy and the
United States. After dying the fabric, if necessary, the fabric and trim are
shipped by the suppliers directly to factories under contract to the Company in
Macedonia where they are manufactured into finished garments for delivery to the
Company's customers in the United States.
In its marketing, the Company emphasizes its package arrangements and what
it believes to be the better quality and lower prices of garments produced by
skilled Macedonian workers as compared to lower paid workers in certain other
regions. The Company offers garments for customers under its own labels, "Easy
Concepts," "Magellan" and "Retrospettiva" and under private labels selected by
its customers and markets its products exclusively in the United States to (i)
large wholesalers such as Giorgio Sant' Angelo, Jeans Collectibles, V.S. Sports,
Positive Influence, David N., Synari and Wild Life, (ii) national retailers
including department stores such as Dayton Hudson, J.C. Penney, Casual Corner,
and Newton's and (iii) women's chain clothing stores such as Marshalls, TJ Maxx,
Chadwicks, Hit or Miss, Fred Mayer and Cato. See "Business--Marketing."
17
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to net revenues of certain items in the Company's statements of
operations data:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------------------
1994 1995 1996
----------- ----------- ----------- SIX MONTHS ENDED
JUNE 30,
----------------------------
1996 1997
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Revenues......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold................................... 87.4 87.7 85.3 86.6 85.3
Gross profit......................................... 12.6 12.3 14.7 13.4 14.7
Selling, general and administrative expenses......... 10.9 4.5 4.1 5.6 3.5
Interest expense..................................... .04 .2 .5 .3 .3
Operating income..................................... 1.7% 7.8% 10.6% 7.8% 11.2%
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
SALES
Sales for the six months ended June 30, 1997 (the "1997 Six Month Period")
were $7,921,299 which represented an increase of $2,240,603 or 39.4% over the
six months ended June 30, 1996 (the "1996 Six Month Period") net sales of
$5,680,696. The growth in sales was primarily attributable to increased
purchases by existing customers. Generally, the Company receives relatively
small initial orders from new customers. As the relationship with the customer
continues, the purchase orders often increase substantially. Net sales increases
during the period reflected these increased customer orders. Sales of the
Company's own labeled products and private label products were $399,700 and
$7,521,599, respectively, in the 1997 Six Month Period compared to $1,615,804
and $4,064,892, respectively, in the 1996 Six Month Period. The reduction in
sales of the Company's own labeled products reflects the Company's current
market emphasis upon sale of private label products.
COST OF GOODS SOLD
Cost of goods sold in the 1997 Six Month Period was $6,758,331 or 85.3% of
sales, an increase of $1,839,990 from $4,918,341 or 86.6% of sales for the 1996
Six Month Period. The increase in cost of goods sold was attributable primarily
to an increase in sales, while the decrease in percentage of cost of goods sold
reflected the Company's continuing efforts to more efficiently use raw materials
used in the production of garments.
GROSS PROFIT
Gross profit was $1,162,968 for the 1997 Six Month Period, an increase of
$400,613. The gross profit percentage was 14.7% for the 1997 Six Month Period
and 13.4% for the 1996 Six Month Period. Reduced consumption of raw materials
reduced the cost of goods sold and increased the gross profit.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses were $275,685 or 3.5%
of net revenues for the 1997 Six Month Period, a decrease of $(42,084) from
$317,769 or 5.6% of sales for the 1996 Six Month Period. The decrease in SG&A
expense levels was primarily the result of decreases in commissions paid.
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INTEREST EXPENSE
Interest expense for the 1997 Six Month Period was $23,784 as compared to
$18,024 for the 1996 Six Month Period. The increase in interest expense was
primarily attributable to the accrual of interest on bridge loan debt.
PROVISION (BENEFIT) FOR INCOME TAXES
The provision for income taxes was $348,000 and $172,000 for the 1997 Six
Month Period and the 1996 Six Month Period, respectively. The increase in the
provision for income taxes was due to the increase in income before income taxes
which was $867,976 for the 1997 Six Month Period, an increase of $441,414 or
103.5% from $426,562 from the 1996 Six Month Period.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
SALES
Sales for the year ended December 31, 1996 ("1996") were $12,902,195, which
represented an increase of $1,522,369 or 13.4% over 1995 ("1995") sales of
$11,379,826. The growth in sales was primarily attributable to increased
purchases by existing customers. Generally the Company receives relatively small
initial orders from new customers. As the relationship with the customer
continues, the purchase orders often increase substantially. Net sales increases
during the period reflected these increased customer orders. Sales of the
Company's own labeled products and private label products were $3,381,524 and
$9,520,671, respectively in 1996 compared to $2,214,378 and $9,165,448,
respectively, in 1995. Increased sales of the Company's own labeled products
were attributable to promotion of the Company's Easy Concepts brand during the
period.
COST OF GOODS SOLD
Cost of goods sold was $11,006,053 or 85.3% of sales in 1996, an increase of
$1,029,120 from $9,976,933 or 87.7% of sales in 1995. The decrease in the
percentage of cost of goods sold was a result of increased sales and
implementation of a system to more tightly control consumption of raw materials
used in production of finished goods.
GROSS PROFIT
Gross profit was $1,896,142 for 1996, an increase of $493,249. The gross
profit percentage was 14.7% in 1996, an increase from 12.3% in 1995. Tighter
control of consumption of raw materials used in the production of finished goods
enabled the Company to produce more units using less raw materials.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses were $532,800 or 4.1%
of sales in 1996, an increase of $21,683 from $511,117 or 4.5% of sales in 1995.
The increase in SG&A expense levels was primarily the result of increased costs
of insurance to cover the exposure associated with increased production and
import volume. The increase in SG&A expense also reflects the growth in the
Company's management and the expense associated with building the infrastructure
necessary to support the growth strategies of the Company. Such infrastructure
expenses included costs associated with upgrading computer hardware and software
systems, furniture and fixture purchases and adding accounting personnel.
Marketing expenses were $170,179 or 1.3% of sales in 1996, a decrease of $60,122
from $230,301 or 2.0% of sales in 1995. The decrease was primarily due to the
reduction of sales commissions as the Company's executive officers called
directly on more customers.
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<PAGE>
INTEREST EXPENSE
Interest expense in 1996 was $61,457 as compared to $21,241 in 1995. The
increase in interest expense was the result of financing obtained through bridge
loans and the increased utilization of the Company's line of credit.
PROVISION (BENEFIT) FOR INCOME TAXES
The provision for income taxes was $540,285 and $195,000 in 1996 and 1995,
respectively. The increase in the provision for income taxes in 1996 was
primarily attributable to increased earnings. The level of increase was also due
to the tax benefits employed by the Company in 1995. The Company's effective tax
rate increased to 41.2% in 1996 from 22.3% in 1995, principally due to the loss
carry forwards used in 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
SALES
Sales for the year ended December 31, 1995 ("1995") were $11,379,826, which
represented an increase of $5,858,024 or 106% over 1994 ("1994") sales of
$5,521,802. The growth in sales was primarily attributable to increased
purchases by existing customers. Generally, the Company receives relatively
small initial orders from new customers. As the relationship with the customer
continues, the purchase orders often increase substantially. Net sales increases
during the period reflected these increased customer orders. Sales of the
Company's own labeled products and private label products were $2,214,378 and
$9,165,448, respectively, in 1995 compared to $0 and $5,521,802, respectively,
in 1994. The Company did not begin marketing and production of its own labeled
products until 1995.
COST OF GOODS SOLD
Cost of goods sold was $9,976,933 or 87.7% of sales in 1995, an increase of
$5,152,222 from $4,824,711 or 87.4% of net sales in 1994. The increase in cost
of goods sold was attributable primarily to increased sales.
GROSS PROFIT
Gross profit was $1,402,893 for 1995, an increase of $705,802. The gross
profit percentage was 12.3% in 1995, a decrease from 12.6% in 1994. The slight
decrease in gross profit was due primarily to an increase in air freight expense
versus transporting goods by ship.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses were $511,117 or 4.5%
of sales in 1995, a decrease of $92,374 from $603,491 or 10.9% of net revenues
in 1994. The decrease in SG&A expense levels was primarily the result of the
decrease in sales commissions resulting from payment of a salary in lieu of
payment of sales commissions to the Company's Chief Executive Officer. The
salary payments were less than the previously paid commissions.
INTEREST EXPENSE
Interest expense in 1995 was $21,241 as compared to $2,430 in 1994. The
increase in interest expense was the result of increase utilization of the
Company's line of credit.
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<PAGE>
PROVISION (BENEFIT) FOR INCOME TAXES
The provision (benefit) for income taxes was $195,000 and ($179,500) in 1995
and 1994, respectively. The increase in the provision for income taxes in 1995
was primarily attributable to increased earnings and reduced tax benefits
available from prior years. The Company's effective tax rate increased to 22.3%
in 1995 from (200.3%) in 1994, principally due to the loss carry forwards used
in 1994.
LIQUIDITY AND CAPITAL RESOURCES
Since its formation, the Company has financed its operations and met its
capital requirements primarily through cash flows from operations, customer
advances, from principals, credit facilities and two private placements. The
Company received gross proceeds of $812,000 from two private placements in 1996.
The proceeds of the private placements were used to pay expenses related to the
Offering, for working capital and for other corporate purposes. The Company's
capital requirements primarily result from working capital needs.
YEAR ENDED DECEMBER 31, 1996
CASH FLOWS FROM (TO) OPERATING ACTIVITIES
Operating activities used net cash of $367,339 in 1995 compared to providing
net cash of $263,280 in 1996. The principal use of operating cash is to purchase
fabric, manufacture the Company's products and import finished goods. Cash
increased as a result of increased sales, profits, favorable turnover in
accounts receivable and customer advances.
CASH FLOWS PROVIDED (USED) FOR INVESTING ACTIVITIES
The Company's cash flow used by investing activities totalled $16,172 and
$6,825 in 1995 and 1996. The Company's capital expenditures related to the
purchase of fixed assets totalled $16,172 and $6,825 in 1995 and 1996. These
capital expenditures were for office equipment, computer and improvements to
leased premises. Certain budgeted capital expenditures over the next year are
described in the "Use of Proceeds."
CASH FLOWS FROM (TO) FINANCING ACTIVITIES
Cash flows from financing activities totalled $353,651 in 1995 and cash
flows to financing activities totalled $183,975 in 1996. The majority of the
financing costs incurred in 1996 arose primarily from deferred costs associated
with the Offering in the amount of $230,930 and payments to the Company's Chief
Executive Officer of $354,176 to pay down the Company's loan payable to him.
Cash flows from financing activities in 1995 came primarily from the utilization
of a bank line of credit of $247,403 and loans from the Company's Chief
Executive Officer.
The Company's ability to fund its working capital and capital expenditure
requirements, make interest payments and meet its other cash requirements
depends, among other things, on internally generated funds and proceeds from the
Offering. Thereafter, if cash generated from operations is insufficient to
satisfy the Company's capital requirements, the Company may have to sell
additional equity or debt securities or obtain credit facilities. In the event
such financing is needed in the future, there is no assurance that it will be
available to the Company in an amount and on terms acceptable to the Company.
SIX MONTHS ENDED JUNE 30, 1997
CASH FLOWS FROM (TO) OPERATING ACTIVITIES. Operating activities provided
net cash of $100,955 for the 1997 Six Month Period compared to providing net
cash of $74,808 for the 1996 Six Month Period. The principal use of operating
cash is to purchase fabric, manufacture the Company's products and import
finished goods. The increase in cash flows from operating activities was
primarily attributable to an
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<PAGE>
increase in net income, turnover of accounts receivable and utilization of
existing inventories net of reductions in accounts payable and customer
advances.
CASH FLOWS PROVIDED (USED) FOR INVESTING ACTIVITIES. The Company's
investing activities provided $42,192 of cash for the 1997 Six Month Period and
used $(4,837) for the 1996 Six Month Period. The increase in cash flows provided
by investing activities is primarily attributable to reductions in notes
receivable.
CASH FLOWS FROM (TO) FINANCING ACTIVITIES. Cash flows from financing
activities totalled $35,981 and $102,142 for the 1997 Six Month Period and the
1996 Six Month Period, respectively. The decrease in cash flows from financing
activities was primarily attributable to deferred offering costs and an increase
in loans to the Company's Chief Executive Officer. See "Certain Transactions."
SEASONALITY
The Company's revenues and operating results have exhibited some degree of
seasonality in past periods. Typically, the Company experiences its highest
sales in the first and fourth quarters and its lowest sales in the second and
third quarters. The Company expects this trend to continue in the future.
The Company believes that the net proceeds of the Offering, together with
its sales, existing cash resources and available credit facilities, will be
sufficient to meet the Company's anticipated working capital needs for the next
12 months. The Company, however, may raise capital through the issuance of
long-term or short-term debt, or the issuance of securities in private or public
transactions to fund future expansion of its business, either before or after
the end of the 12 month period. There can be no assurance that acceptable
financing for future transactions can be obtained.
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BUSINESS
INTRODUCTION
The Company contracts for the manufacture of a variety of garments,
primarily basic women's activewear, sportswear and businesswear which include
skirts, blouses, blazers, pants, shorts, vests and dresses, using assorted
fabrics including rayons, linens, cotton and wool. The Company offers such
garments to customers under its own labels, "Magellan" and "Retrospettiva" and
under private labels selected by its customers and markets its products
exclusively in the United States to (i) large wholesalers such as Giorgio Sant'
Angelo, Jeans Collectibles, V.S. Sports, Positive Influence, David N., Synari
and Wild Life, (ii) national retailers including department stores such as
Dayton Hudson, J.C. Penney, Casual Corner, and Newton's, and (iii) women's chain
clothing stores such as Marshalls, TJ Maxx, Chadwicks, Hit or Miss, Fred Mayer
and Cato.
Substantially all of the Company's garments are sold on a "package" basis
pursuant to which the Company markets at fixed prices finished garments to the
customer's specifications and quantity requirements, arranges for production of
the garments and delivers the garments directly to the customer at the port of
entry. In its marketing, the Company emphasizes these package arrangements and
what it believes to be the better quality and lower prices of garments produced
by skilled Macedonian workers as compared to lower paid workers in certain other
regions. See "Business--Marketing."
As a package provider, the Company sources and purchases fabrics and trims,
arranges for cutting and sewing, and coordinates any other services required to
provide a completed garment. Since the Company manufactures its finished
products only upon receipt of purchase orders from its wholesale and retail
customers, and therefore does not maintain an inventory of finished products,
the Company believes that it minimizes the marketing and fashion risk generally
associated with the apparel industry. Fabrics and trims are purchased from
suppliers in China, India, Russia, Romania, Italy and the United States. After
dying the fabric, if necessary, the fabric and trim are shipped to factories
selected by the Company (located in Macedonia) where they are manufactured into
completed garments under the Company's management and quality control guidance.
The finished products are then shipped directly to New York City where the goods
are claimed by the Company's customers either at the port in New York City or at
a consolidating warehouse in Astoria, New York.
The Company was organized in November 1990 initially to manufacture and
import textile products from Italy including finished garments and fabrics. By
1993, the Company was purchasing fabrics from firms and factories around the
world and contracting for the manufacture of finished garments in Macedonia for
importation into the United States.
STRATEGY
The Company intends to continue to offer better quality, popular priced
women's apparel in a wide variety of styles, patterns, colors and fabrics. The
Company's business strategy emphasizes the following elements:
MAINTAIN FOCUS ON THE COMPANY'S CORE BUSINESS. The Company intends to
continue to contract for the manufacture and market basic women's activewear,
sportswear and businesswear on a package basis while avoiding the production of
trendier fashion apparel which, if not purchased by the customer who ordered
such goods, might contribute to inventory write-offs for out of style garments.
Consistent with this strategy, the Company will continue to deemphasize sale of
its own labeled products and focus on the sale of its private label products.
INCREASE PENETRATION OF CURRENT MARKETS. The Company seeks to further
penetrate its current markets by offering lower product prices while maintaining
a high degree of quality control. The Company's relationships with its
Macedonian manufacturers, lower transportation costs compared to other parts of
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the world (such as the Pacific Rim) and current quota-free United States
importation rules for garments imported from Macedonia contribute to its ability
to offer competitive prices.
VERTICAL INTEGRATION. The Company intends to invest in wool manufacturing
equipment which will be placed in one nonaffiliated manufacturing facility in
Macedonia with which the Company currently maintains a manufacturing
relationship. The equipment is expected to provide the Company with improved
quality control, reduced costs and increased production. The equipment will be
operated and maintained by the manufacturer who is expected to lease the
equipment on a minimum five year lease. Lease payments will be in the form of a
per unit reduction in the garment manufacturing costs charged to the Company,
although the Company has not yet acquired the equipment or entered into a lease
agreement covering such equipment. See "Use of Proceeds."
EXPAND DISTRIBUTION CHANNELS AND PRODUCT LINES. The Company will continue
to explore new geographic markets within the United States for its existing
products while expanding its existing product lines within the basic women's
activewear, sportswear and businesswear market.
PRODUCTS
The Company offers to its customers a variety of women's activewear,
sportswear and businesswear including 26 women's garment styles manufactured in
rayon, 33 styles manufactured in rayon and linen mixes, 30 styles manufactured
in linen and cotton mixes, 25 styles manufactured in all cotton, 23 styles
manufactured in wool and two styles manufactured in rayon faille. The Company's
garments are moderately priced ranging at retail from $12.99 to $49.99 and are
marketed by the Company's customers primarily to college students and working
women.
MARKETING
The apparel industry in general and the women's apparel industry in
particular are mature markets. According to the United States Department of
Commerce, United States apparel sales increased from approximately $75 billion
in 1986 to approximately $113 million in 1996, however, sales increased only
approximately $3 billion between 1995 and 1996. Similarly, women's apparel sales
increased from approximately $28 billion in 1986 to approximately $33 billion in
1996 but decreased approximately $2 billion from 1995 to 1996. Accordingly, a
substantial portion of any growth by individual apparel companies such as the
Company must come at the expense of competitors.
The Company arranges for the manufacture of garments for customers under its
own labels, "Magellan" and "Retrospettiva" and under private labels selected by
its customers, and markets its products exclusively in the United States to (i)
large wholesalers such as Giorgio Sant' Angelo, Jeans Collectibles, V.S. Sport,
Positive Influence, David N., Synari and Wild Life, (ii) national retailers
including department stores such as Dayton Hudson, J.C. Penney, Casual Corner,
and Newton's and (iii) women's chain clothing stores such as Marshalls, TJ Maxx,
Chadwicks, Hit or Miss, Fred Mayer and Cato. Sales of the Company's own labeled
products and private label products were $3,381,524 and $9,520,671,
respectively, for the year ended December 31, 1996 and -0- and $7,921,299,
respectively, for the six months ended June 30, 1997. The Company elected not to
market its own labeled products in the first half of 1997 in order to focus upon
the marketing and sale of its private label products. See "Strategy."
Marketing is conducted through three in-house salespersons who call directly
upon customers, through customer referrals and through the efforts of the
Company's executive officers. The Company maintains a buying office in New York,
attends trade shows and advertises by direct mail in trade journals.
The Company's customers include large United States retailers and
wholesalers as described above. Three of the Company's customers (Jeans
Collectibles, David N. and Easy Concepts) each accounted for 10% or more of
sales (and 87% of sales in the aggregate) for the year ended December 31, 1996
and two customers (David N. and V.S. Sports) each accounted for 10% or more of
sales (and 91% of sales in the
24
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aggregate) for the six months ended June 30, 1997. A loss of any of these
customers would have a material adverse affect on the Company's results of
operations.
MANUFACTURING AND SUPPLIERS
The Company arranges for the manufacture of garments based on the fabric,
design, styling and quality specifications of individual customer orders. The
Company does not own or operate any manufacturing facilities and obtains its
products from manufacturers in Macedonia who contract with the Company to
manufacture specific items of apparel in predetermined amounts and for agreed
upon unit prices. The Company contracts for the purchase of fabric and the
manufacture and sewing of its products with approximately 15 overseas factories.
The Company believes that outsourcing allows it to enhance production
flexibility and capacity while reducing capital expenditures and avoiding the
costs of managing a large production work force. In addition, the Company
believes that outsourcing allows the Company to utilize the expertise of its
suppliers and manufacturers in fabric selection and manufacturing processes.
The Company arranges for the production of its products based on orders
received. The Company obtains substantially all of its customers' orders prior
to placement of its contract manufacturing orders. The Company's customer orders
may change with respect to colors, sizes, allotments or assortments prior to
commencement of production of the garments, and any costs associated with such a
change will be borne by the Company. Accordingly, there is some risk associated
with the Company's practice of allowing change orders after fabric is purchased.
However, costs associated with change orders have not been material in the past
and are not expected to be material in the future.
The Company purchases fabric and trim from the manufacturers of these
garment components who ship their products directly to the Company's contract
manufacturer or to fabric dyers (currently in Slovenia) who in turn ship the
fabric to the contract manufacturer. The Company does not have written contracts
with any of its fabric or trim suppliers or contractors; however, the Company
believes that its relationships with its suppliers and contractors are good.
For the year ended December 31, 1996 Newbel, Inc. and Farnet Trading Co.
accounted for 37% and 11%, respectively of the Company's total fabric purchases
and Newbel, Inc., Elvana Trading Limited and One Four Four accounted for 41%,
15% and 31%, respectively of the Company's fabric purchases for the six months
ended June 30, 1997.
The Company has retained Yucan Trade International ("Yucan") as its
manufacturing agent in Macedonia. Yucan is responsible to select the factories
which will manufacture all of the Company's finished goods, to oversee this
production and to warehouse and arrange for shipping the finished goods to the
Company in the United States. Yucan is paid a fee which ranges from $.15 to $.50
per garment manufactured. Although Yucan is currently responsible for the
manufacture, warehousing and shipping of all of the Company's finished goods,
the Company believes that there are other manufacturing agents in Macedonia
which the Company could retain for the same purpose on substantially similar
terms. The Company does not have written contracts with Yucan or any of its
suppliers or contractors. Although the loss of certain suppliers or contractors
(including Yucan) could have a significant adverse effect on the Company's
operating results, the Company believes it would be able to replace such
suppliers and contractors within a reasonable amount of time if required to do
so.
The Company delivers finished goods directly from its contract manufacturers
to its customers at the port of entry in New York City or at the Company's
consolidating warehouse in Astoria, New York. Since the Company assumes the risk
of loss when the finished goods leave its manufacturer, the goods are insured
until delivery is made to the customer.
25
<PAGE>
QUALITY CONTROL
The Company's quality control program is designed to provide that all of the
Company's products meet the Company's and its customers' standards. The Company
maintains a staff of four quality control employees in the United States and
seven such employees in Macedonia. The Company develops and inspects prototypes
of each product prior to production, establishes fittings based on the prototype
and inspects sample fabric prior to cutting and several times during the
production process. The Company, Yucan and (in the case of private label
products) representatives of the Company's customers inspect final products
prior to shipment.
COMPETITION
The apparel industry is highly competitive and consists of numerous
manufacturers, importers and distributors. Many of the Company's competitors are
significantly larger, more diversified and have significantly greater financial,
distribution, marketing, name recognition and other resources than the Company.
The Company believes it has certain competitive advantages resulting from its
contractual relationships with Macedonian manufacturers including (i) the
availability in Macedonian factories of highly skilled workers at relatively
lower costs than in more economically developed regions, (ii) a lack of quotas
and lower tariffs in the importation into the United States of finished goods
from Macedonia, and (iii) lower shipping costs as a result of the closer
geographical proximity to the United States of the Company's Macedonian contract
manufacturers compared to manufacturers in the Pacific Rim nations.
The Company also encounters competition from department stores and mass
merchandisers, including some of the Company's own retail customers who sell
apparel under their own private labels. Recently, department stores and mass
merchandisers have increased the amount of sportswear and activewear
manufactured specifically by them or their contract manufacturers (including the
Company), and sold under their own labels.
TRADENAMES
The Company has developed two apparel tradenames, "Magellan" and
"Retrospettiva" in connection with the marketing of its apparel. The Company
regards its tradenames as assets although no tradename registrations have been
filed in the United States or in foreign countries. While the use of a tradename
may provide certain common law rights of further usage, there can be no
assurance the Company could prohibit the use of its tradenames by others.
CREDIT POLICY AND CREDIT CONTROL
Prior to accepting a purchase order and purchasing fabric and components,
the Company investigates the customer's credit history through traditional
credit reporting services, through asset-based lenders of the customer and
through other contract partners of the customer. The Company also generally
obtains a deposit or advance payment equal to approximately 10% of the total
amount of the order before purchasing fabric or commencing garment production
for the customer.
The Company manages its own credit and collection functions. The Company
does not factor its accounts receivables or maintain credit insurance to manage
the risks of bad debts. The Company's bad debt write-offs were less than 1% of
sales for the year ended December 31, 1996 and the six months ended June 30,
1997.
GOVERNMENT REGULATION
The Company's import operations are subject to constraints imposed by
bilateral textile agreements between the United States and a number of foreign
countries. These agreements, which have been negotiated bilaterally either under
the framework established by the Arrangement Regarding International
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Trade in Textiles, known as the Multifiber Agreement, or other applicable
statutes, impose quotas on the amounts and types of merchandise which may be
imported into the United States from these countries. However, apparel imported
from Macedonia is not subject to such quotas. These agreements also allow the
signatories to adjust the quantity of imports for categories of merchandise
that, under the terms of the agreements, are not currently subject to specific
limits. The Company's imported products are also subject to United States
customs' duties which may comprise a material portion of the cost of the
merchandise.
Apparel products are subject to regulation by the Federal Trade Commission
in the United States. Regulations relate principally to the labelling of the
Company's products. The Company believes that it is in substantial compliance
with such regulations, as well as applicable federal, state, local, and foreign
rules and regulations governing the discharge of materials hazardous to the
environment. There are no significant capital expenditures for environmental
control matters either estimated in the current year or expected in the near
future.
PROPERTIES
The Company leases approximately 2,200 square feet for its executive and
administrative offices at 8825 West Olympic Boulevard, Beverly Hills, California
90211, pursuant to a lease expiring January 31, 2000 for $2,300 per month
subject to annual cost of living increases.
The Company subleases 2,000 square feet of office and showroom facilities at
1359 Broadway, Suite 2102, New York, New York 10018, through October 1, 1998 for
$2,600 per month which includes maintenance expenses. The Company maintains two
small New York apartments for use by its employees traveling from Los Angeles,
California and Macedonia to New York City. Both apartments are subleased to the
Company on a monthly basis with monthly rent aggregating approximately $3,500.
The Company also uses a portion of a consolidating warehouse in Astoria, New
York for short term storage and for consolidating services in connection with
finished goods imported from Macedonia pending pick up by the Company's
customers. Positive Influences, Inc ("PII") the owner of the warehouse and the
provider of the consolidating services, is a non-affiliated former customer of
the Company which was indebted to the Company in the amount of $130,496 at June
30, 1997 for goods previously purchased from the Company. The Company is charged
an average of approximately $10,000 per month for use of the warehouse and for
consolidating services provided by PII which amount is deducted from the amount
owed by PII to the Company. PII also provides Easy Concepts, Inc. ("ECI"), a
former affiliate of the Company, with warehouse space and consolidating
services. Charges due from ECI to PII are also deducted from the amount owed by
PII to the Company and ECI pays such amounts directly to the Company.
Consolidating services involve accepting finished goods shipments, combining the
goods into larger quantities for pickup by, or delivery to, customers and
storage of the goods prior to customer acceptance.
EMPLOYEES
As of June 30, 1997, the Company employed 15 individuals in Los Angeles,
California, New York, New York and Macedonia including its two executive
officers, three inventory management and order control personnel, three
administrative personnel and four quality control workers.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The name, age, position and term of office of each of the Company's
executive officers and directors are set forth below:
<TABLE>
<CAPTION>
OFFICER OR
NAME AGE POSITION DIRECTOR SINCE
- ------------------------------------------ --- ------------------------------------------------ ---------------
<S> <C> <C> <C>
Borivoje Vukadinovic...................... 38 Chief Executive Officer, President and Director 1991
Michael D. Silberman...................... 41 Chief Financial Officer, Secretary and Director 1996
Ivan Zogovic.............................. 37 Manager--Export/Import and Director 1996
Mojgan Keywanfar.......................... 34 Accounting Manager and Director 1996
S. William Yost........................... 68 Director 1996
Donald E. Tormey.......................... 65 Director 1996
Philip E. Graham.......................... 41 Director 1996
</TABLE>
The name, age and position of each of the Company's key employees are set
forth below:
<TABLE>
<S> <C> <C> <C>
Natasha Vukadinovic............... 33 General Manager--Foreign
Operations--Macedonia
Jovica Kecman..................... 32 General Manager--International
Quality Control
Millisav Vicanovic................ 48 General Manager--Quality
Control--Macedonia
</TABLE>
Directors hold office for a period of one year from their election at the
annual meeting of shareholders or until their successors are duly elected and
qualified. Officers of the Company are elected by, and serve at the discretion
of, the Board of Directors. Upon completion of the Offering, the Company intends
to establish an audit and compensation committee, each of which will be composed
of a majority of individuals not employed by the Company.
BACKGROUND
The following is a summary of the business experience, for at least the last
five years, of the individuals named below:
DIRECTORS AND EXECUTIVE OFFICERS
BORIVOJE VUKADINOVIC has been a director and executive officer of the
Company since January 1991, and its Chief Executive Officer since January 1993.
From June 1990 to August 1993, he was Vice President and a principal stockholder
of Celtex ENT, a Los Angeles, California based company which established and
administered production of yarns and raw textiles in Yugoslavia, Turkey and
Macedonia. From May 1988 to June 1990, he was the founder, owner and President
of DUTY OFF, Inc., a Los Angeles, California based company which produced young
men's apparel. He earned a Bachelor of Arts degree in Business from the
University of Banja Luka in Yugoslavia and a Bachelor of Arts degree in Art from
Bern University in Switzerland.
MICHAEL D. SILBERMAN has served as Chief Financial Officer and as a Director
of the Company since April 1996. From May 1994 until he joined the Company in
April 1996, Mr. Silberman was a financial advisor with Prudential Securities
Inc. From April 1992 to February 1994, he was a portfolio manager for
28
<PAGE>
Private Investment Fund, a privately-held and managed investment fund, and from
September 1991 to April 1992, Mr. Silberman was president of UMB Commercial
Capital, a division of United Mercantile Bank of Pasadena, California where he
administered the division's accounts' receivable finance department. From 1983
to 1991, Mr. Silberman served as the Executive Vice President of Allied Business
Capital, a privately-held Los Angeles, California based commercial finance
company. Mr. Silberman received his Bachelor of Arts degree from the University
of California, Los Angeles ("UCLA") and his MBA degree from the Anderson
Graduate School of Management at UCLA.
IVAN B. ZOGOVIC has been employed by the Company as its
Manager-Export/Import since January 1994 and was appointed a director in May
1996. Mr. Zogovic is responsible for the export and import of raw materials and
finished goods including customs clearing, scheduling and freight forwarding,
between the United States and the Company's contract manufacturers in Eastern
Europe. He earned a law degree from the University of Belgrade Law School and
practiced law in Yugoslavia from 1984 until 1992.
MOJGAN KEYWANFAR has been employed by the Company as its accounting manager
since February 1991 and was appointed a director in December 1996. Ms. Keywanfar
manages the Company's bookkeeping and management information systems. She holds
a B.A. degree in Economics from California State University, Northridge.
S. WILLIAM YOST became a director of the Company in May 1996. He has been an
adjunct professor of Operations and Technology Management at the Anderson
Graduate School of Management of the University of California, Los Angeles,
since 1986. During his tenure at Anderson, Dr. Yost has developed two new
graduate courses, Managing Service and Managing Entrepreneurial Operations. In
addition, he has over 20 years experience in industrial positions together with
four years as a presidential appointee in the executive branch of the federal
government and three years in Management Consulting. Dr. Yost holds a doctorate
in Business Administration (DBA) from the Harvard Business School, an MBA from
the Anderson Graduate School of Management at the University of California, Los
Angeles, and a B.A. from the University of California, Berkeley. He serves on
the Board of Directors of a number of small privately-held companies and is a
consultant to a variety of public and private clients.
DONALD E. TORMEY became a director of the Company in May 1996. From 1958
until he retired in 1995, he was employed by Chevron Corporation in a number of
positions culminating as the Refinery General Manager in El Segundo, California
from 1994 until his retirement. He holds a BSCE degree in engineering from the
University of Wisconsin School of Engineering.
PHILIP E. GRAHAM became a director of the Company in May 1996. Since
February 1997, he has been the Information Technology Executive at the Avionics
and Communications Finance and Information Technology department of Rockwell
Avionics and Communications, Inc. From 1989 until February 1997, he was employed
by AirTouch Cellular in a number of positions, culminating as its director of
Information Technology from July 1989 to February 1997. Mr. Graham holds an MBA
degree from the Anderson Graduate School of Management at the University of
California, Los Angeles, an M.S. degree from California State University at
Fullerton and a B.S. degree from the University of California at Irvine.
KEY EMPLOYEES
NATASHA VUKADINOVIC has been employed by the Company since 1990 initially as
a designer and subsequently as a manager responsible for quality control and
organization of the Company's offshore production. In 1986, Ms. Vukadinovic, who
is Borivoje Vukadinovic's sister, earned an advanced degree in textile design
from the Textile Design School in Prague, Czechoslovakia.
JOVICA KECMAN has been employed by the Company as general manager of
international quality control since 1990. Mr. Kecman earned a degree in
economics from the University of Banja Luka. He is Mr. Vukadinovic's
brother-in-law.
29
<PAGE>
MILISAV VICANOVIC joined the Company in 1993 and is responsible for quality
control of all of the Company's lightweight garments, such as dresses and
two-piece women's suits. From 1975 to 1993, he was Director of Textile
Manufacturing, Chief Executive Officer and General Manager for Macedonia Sport,
a Yugoslavian company involved in the manufacture of garments in factories
employing in the aggregate more than 3,500 workers. He earned an advanced degree
in textile manufacturing from the University of Belgrade in 1971.
EXECUTIVE COMPENSATION
The following table discloses all compensation awarded to, received by, and
paid to the Chief Executive Officer of the Company for the year ended December
31, 1996. No other executive officer's annual compensation exceeded $100,000 in
1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------------------------------- ------------------------------ -----------
(E)
OTHER ANNUAL (F) (G) (H)
(A) (B) (C) (D) COMPENSA- RESTRICTED STOCK OPTIONS/ LTIP
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) TION($) AWARD(S)($) SARS(#) PAYOUTS($)
- --------------------------- --------- ----------- ------------- ------------- ----------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Borivoje Vukadinovic
Chief Exec. Officer...... 1996 $ 40,928 -0- -0- -0- 1,358,067(1) -0-
<CAPTION>
(I)
ALL OTHER
(A) COMPENSA-
NAME AND PRINCIPAL POSITION TION($)
- --------------------------- -------------
<S> <C>
Borivoje Vukadinovic
Chief Exec. Officer...... -0-
</TABLE>
- ------------------------
(1) See "1996 Stock Option Plan" for description of the options and certain
repricing information.
EMPLOYMENT AGREEMENTS
In April 1996, the Company entered into a three-year employment agreement
with Mr. Vukadinovic to serve as the Company's Chief Executive Officer and
President. Mr. Vukadinovic's employment agreement provides for an annual salary
of $95,000 per year for the term of the agreement, subject to increase at the
discretion of the Board of Directors, such salary to become effective following
the earlier of the closing of the Offering or the merger of the Company with a
public company. Mr. Vukadinovic is not permitted to vote on proposals to
increase his own salary. Pursuant to his employment agreement, Mr. Vukadinovic
also received stock options to purchase up to 1,191,300 shares of the Company's
Common Stock at an exercise price of $6.75 per share through April 2006 and
agreed not to compete with the Company for a period of two years following the
termination of his employment agreement.
In April 1996, the Company entered into an employment agreement with Mr.
Silberman to serve as the Company's Chief Financial Officer. Mr. Silberman's
agreement provides for an annual salary of $60,000 per year for the term of the
agreement, subject to increase at the discretion of the Board of Directors, such
salary to become effective following the earlier of the closing of the Offering
or the merger of the Company with a public company. In 1996, pursuant to the
agreement, Mr. Silberman's was issued 81,007 shares of the Company's Common
Stock, valued at $.0042 per share as of the date of grant, of which 25,000
shares have been registered by the Prospectus. In addition, Mr. Silberman also
received stock options pursuant to the agreement to purchase up to 119,128
shares of the Company's Common Stock at an exercise price of $6.75 per share
through April 2006.
DIRECTOR COMPENSATION
The Company's directors do not receive any cash compensation for their
services as directors, although they are reimbursed for out-of-pocket expenses
in attending Board of Directors' meetings. In addition, in 1996, non-employee
directors were granted stock options to purchase an aggregate of 71,478
30
<PAGE>
shares of the Company's Common Stock at prices ranging from $1.68 per share to
$2.94 per share under the Company's 1996 Stock Option Plan.
1996 STOCK OPTION PLAN
In May 1996, the Company adopted a stock option plan for officers,
directors, employees and consultants (the "Plan") which provides for the grant
of options intended to qualify as "incentive stock options" and "nonqualified
stock options" within the meaning of Section 422 of the United States Internal
Revenue Code of 1986 (the "Code"). Incentive stock options are issuable only to
eligible officers and key employees of the Company, and nonqualified options may
be granted to officers, employees, directors and consultants.
The Plan is administered by at least three members of the Board, at least
two of whom are not executive officers or salaried employees of the Company. As
of May 1996, the Company had reserved 1,786,930 shares of Common Stock for
issuance under the Plan. Under the Plan, the Board of Directors determines which
individuals shall receive options, the time period during which the options may
be partially or fully exercised, the number of shares of Common Stock that may
be purchased under each option and the option price. Each option granted under
the Plan shall be evidenced by a stock option agreement.
The per share exercise price of options granted under the Plan may not be
less than the fair market value of the Common Stock on the date the options are
granted. No person who owns, directly or indirectly, at the time of the granting
of an incentive stock option, more than 10% of the total combined voting power
of all classes of stock of the Company is eligible to receive incentive stock
options under the Plan unless the option price is at least 110% of the fair
market value of the Common Stock subject to the option on the date of grant.
No options may be transferred by an optionee other than by will or the laws
of descent and distribution, and during the lifetime of an optionee, the option
may only be exercisable by the optionee. Options under the Plan must be granted
within 10 years from the effective date of the Plan and the exercise date of an
option cannot be later than 10 years from the date of grant. Any options that
expire unexercised or that terminate upon an optionee's ceasing to be employed
by the Company become available once again for issuance. Shares issued upon
exercise of an option will rank equally with other shares then outstanding.
As of the date of this Prospectus, 1,761,633 options have been granted under
the Plan to officers, directors, employees and consultants including 1,477,198
options granted to Messrs. Vukadinovic and Silberman, an aggregate of 71,478
options granted to the Company's three non-employee directors and 212,961
options granted to other employees and consultants. The per share exercise
prices range from $0.63 to $6.75, which prices represent at least the fair
market value of Company's Common Stock on the respective dates the options were
granted, based on prior sales of the Company's Common Stock. The table below
sets forth the total number of options issued to each executive officer and
director of the Company and the exercise price. Messrs. Vukadinovic's and
Silberman's options are exercisable until April 2006. The remaining options
expire at various times in 2006. All options were granted in 1996 and no options
were exercised in 1996.
In May 1996, the Board granted Mr. Silberman (i) a stock option to purchase
238,440 shares of Common Stock at an exercise price of $3.04 per share, (ii) a
stock option to puchase 59,610 shares of Common Stock at an exercise price of
$2.91 per share, and (iii) a stock option to purchase 59,610 shares of Common
Stock at an exercise price of $3.88 per share.
In November 1996, the Board amended Mr. Silberman's option grant to reduce
the number of stock options granted to Mr. Silberman from 357,657 to 119,128
options. 59,564 of these options were re-priced to the exercise price of $3.15
per share. The remaining 59,564 options were repriced to the exercise price of
31
<PAGE>
$3.78 per share. In December 1996, the Company amended Mr. Silberman's stock
option grants to provide for an adjustment of the exercise price of both of his
stock option grants in the event of an initial public offering of the Company's
securities ("IPO"), a merger or acquisition. In June 1997, the Board re-priced
all 119,128 of Mr. Silberman's options to the current exercise price of $6.75
per share.
In June 1997, the exercise price of 1,191,290 of Mr. Vukadinovic's options
were re-priced from $2.83 per share to $6.75 per share.
OPTION GRANTS IN 1996
<TABLE>
<CAPTION>
PERCENT OF
TOTAL OPTIONS
GRANTED TO
TOTAL NUMBER OF EMPLOYEES IN EXERCISE EXPIRATION
NAME OF EXECUTIVE OFFICER OR DIRECTOR OPTIONS ISSUED FISCAL YEAR PRICE DATE
- ------------------------------------------------------- ---------------- --------------- ----------- -------------
<S> <C> <C> <C> <C>
Borivoje Vukadinovic................................... 1,358,070(1) 77.1 (1)(2) 2006
Michael D. Silberman................................... 119,128 6.8 $ 6.75 2006
Ivan Zogovic........................................... 66,712 3.8 (3) 2006
Mojgan Keywanfar....................................... 66,712 3.8 (3) 2006
S. William Yost........................................ 23,826 1.4 $ 2.94 2006
Donald E. Tormey....................................... 23,826 1.4 $ 2.94 2006
Philip E. Graham....................................... 23,826 1.4 $ 2.94 2006
---------------- ---
TOTALS................................................. 1,682,100 95.7
</TABLE>
- ------------------------
(1) Consists of 166,777 options exercisable at $.63 per share and the remaining
1,191,290 options exercisable at $6.75 per share. A total of 595,643 of the
options will be cancelled by the Company if the Company's after tax net
income for the year ended December 31, 1997 does not exceed $750,000.
(2) In the event the per share price of the Company's Common Stock in an initial
public offering or other public offering of such Common Stock is less than
$6.50 per share, the per share exercise price of any unexercised options
granted to Mr. Vukadinovic with a current exercise price of $6.75 per share
will be readjusted one time to the per share price of the Common Stock in
the public offering.
(3) Consists of 35,739 options exercisable at $2.94 per share and 30,973 options
exercisable at $1.68 per share as to each individual.
32
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
ownership of the Company's Common Stock as of June 30, 1997, by (i) each person
who is known by the Company to own of record or beneficially more than 5% of the
Company's Common Stock, (ii) the Company's Chief Executive Officer and each of
the Company's directors and (iii) all directors and officers of the Company as a
group. The persons listed in the table have sole voting and investment powers
with respect to the shares of Common Stock and the address of each person is in
care of the Company at 8825 West Olympic Blvd., Beverly Hills, California 90211.
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF
AMOUNT OF CLASS PRIOR CLASS AFTER
NAME OWNERSHIP TO OFFERING OFFERING
- --------------------------------------------------------------------------- ----------- ------------- -------------
<S> <C> <C> <C>
Borivoje Vukadinovic(1).................................................... 2,454,051 79.0% 59.7%
Michael D. Silberman(2).................................................... 200,136 10.7 7.0
Ivan Zogovic(3)............................................................ 66,712 3.7 2.4
Mojgan Keywanfar(5)........................................................ 66,712 3.7 2.4
S. William Yost(4)......................................................... 23,826 1.3 *
Donald E. Tormey(4)........................................................ 23,826 1.3 *
Philip E. Graham(4)........................................................ 23,826 1.3 *
All officers and directors as a group (7 persons).......................... 2,859,089 83.3% 64.5%
</TABLE>
- ------------------------
* Less than 1%.
(1) Includes stock options to purchase up to 1,191,300 shares of Common Stock at
$6.75 per share and 166,777 shares at $.63 per share exercisable until April
2006. See "Management--1996 Stock Option Plan."
(2) Includes stock options to purchase up to 119,128 shares of Common Stock at
$6.75 per share exercisable until April 2006. See "Management--1996 Stock
Option Plan."
(3) Represents stock options to purchase up to 30,973 shares at $1.68 per share
exercisable until April 2001, 11,913 shares at $2.94 per share exercisable
until May 2001, and 23,826 shares at $2.94 per share exercisable until April
2006. See "Management--1996 Stock Option Plan."
(4) Represents stock options to purchase up to 23,826 shares of Common Stock at
$2.94 per share exercisable until May 2001. See "Management--1996 Stock
Option Plan."
(5) Represents stock options to purchase up to 11,913 shares at $2.94 per share
exercisable until May 2001, 30,973 shares at $1.68 per share exercisable
until April 2006, and 23,826 shares at $2.94 per share exercisable until
April 2006. See "Management--1996 Stock Option Plan."
33
<PAGE>
SELLING SHAREHOLDERS
The Company is registering by this Prospectus and at its expense 50,000
shares of Common Stock held by Mr. Vukadinovic and 25,000 shares of Common Stock
held by Mr. Silberman, the Company's Chief Executive Officer and Chief Financial
Officer, respectively. The Common Stock may be sold from time to time after the
date hereof in public or private open market transactions directly to purchasers
or through brokerage firms at prevailing market prices less customary
commissions. The Underwriters and Selling Shareholders have no plans, proposals,
arrangements or understandings with respect to any transactions involving the
Selling Shareholders' securities. If there are changes to the stated plan of
distribution, including any plans, proposals, arrangements or understandings
involving the Underwriters or the distribution of the Common Stock, a
post-effective amendment with current information will first be filed with and
declared effective by the Commission. Information concerning the Selling
Shareholders is set forth below. The Selling Shareholders may be deemed to be
"underwriters" within the meaning of the 1933 Act. All registration expenses
associated with the sale of the Selling Shareholders' shares (excluding sales
commissions) will be paid by the Company.
<TABLE>
<CAPTION>
PERCENT OF CLASS TO
BE OWNED AFTER
OFFERING AND SALE
PERCENT OF CLASS NUMBER OF OF SELLING
NUMBER OF OWNED PRIOR TO SHARES OFFERED SHAREHOLDERS'
NAME OF SELLING SHAREHOLDER SHARES OWNED OFFERING FOR SALE SHARES
- ------------------------------------------- ------------- ----------------- --------------- -------------------
<S> <C> <C> <C> <C>
Borivoje Vukadinovic....................... 2,454,051(1) 79.0% 50,000 59.7%
Michael D. Silberman....................... 200,136(2) 10.7% 25,000 7.0%
</TABLE>
- ------------------------
(1) Includes stock options to purchase up to 1,191,300 shares of Common Stock at
$6.75 per share and 166,777 shares at $.63 per share exercisable until April
2006. Also includes the 50,000 shares of Common Stock registered for sale
hereby.
(2) Includes stock options to purchase up to 119,128 shares of Common Stock at
$6.75 per share exercisable until April 2006. Also includes the 25,000
shares of Common Stock registered for sale hereby.
CERTAIN TRANSACTIONS
In April 1996, the Company executed three-year employment agreements with
Mr. Vukadinovic, its Chief Executive Officer, and Mr. Silberman, its Chief
Financial Officer, providing for annual salaries of $95,000 and $60,000
respectively, upon an IPO or merger of the Company with a publicly-traded
company. In connection with their employment, Messrs. Vukadinovic and Silberman
received options under the Plan to purchase 1,191,300 shares and 119,128 shares,
respectively, of the Company's Common Stock. Mr. Silberman also received 81,007
shares of Common Stock for services rendered valued at $.0042 per share on the
date of grant, or an aggregate value on such date of $34,023. See
"Management--Executive Compensation--Employment Agreements."
At June 30, 1997, Mr. Vukadinovic was indebted to the Company in the amount
of $203,094. The indebtedness is evidenced by an unsecured promissory note
bearing interest at 10% per annum and is due on demand.
Until December 31, 1996, Mr. Vukadinovic was a 22.5% stockholder in Easy
Concepts, Inc. ("ECI"), an apparel customer of the Company. At December 31, 1996
and June 30, 1997, ECI was indebted to the Company for apparel purchases on open
account in the amounts of $1,182,202 and $232,704, respectively. ECI is current
in its payments on the account. On January 1, 1997 Mr. Vukadinovic returned all
of his ECI stock to ECI for no consideration. He was never an officer or
director of ECI and ECI is no longer a customer of the Company. The Company and
ECI both contract for space and consolidating services from a non-affiliate in
the same consolidating warehouse in Astoria, New York. See
"Business--Properties."
34
<PAGE>
The Company believes that the transactions described above were fair,
reasonable and consistent with the terms of transactions which the Company could
have entered into with non-affiliated third parties. All future transactions
with affiliates will be approved by a majority of the Company's disinterested
directors.
DESCRIPTION OF SECURITIES
UNITS
Each Unit being offered hereby consists of two shares of Common Stock and
one Warrant to purchase one share of Common Stock. The Common Stock and Warrants
have been approved for listing on the National Market and are each separately
transferable immediately upon issuance.
COMMON STOCK
The Company is authorized to issue 15,000,000 shares of no par value Common
Stock. Upon issuance, the shares of Common Stock are not subject to further
assessment or call. The holders of Common Stock are entitled to one vote for
each share held of record on each matter submitted to a vote of shareholders.
Cumulative voting for election of directors is permitted; provided, however,
that the By-laws provide cumulative voting will no longer be permitted following
this Offering, when the Common Stock will be listed on the National Market.
Subject to the prior rights of any series of Preferred Stock which may be issued
by the Company in the future, holders of Common Stock are entitled to receive
ratably such dividends as may be declared by the Board of Directors out of funds
legally available therefor, and, in the event of the liquidation, dissolution or
winding up of the Company, are entitled to share ratably in all assets remaining
after payment of liabilities. Holders of Common Stock have no preemptive rights
and have no rights to convert their Common Stock into any other securities. The
outstanding Common Stock is, and the Common Stock to be outstanding upon
completion of the Offering will be, validly issued, fully paid and
nonassessable.
PREFERRED STOCK
The Company is authorized to issue 1,000,000 shares of no par value
preferred stock (the "Preferred Stock"). The Preferred Stock may, without action
by the shareholders of the Company, be issued by the Board of Directors
("Board") from time to time in one or more series for such consideration and
with such relative rights, privileges and preferences as the Board may
determine. Accordingly, the Board has the power to fix the dividend rate and to
establish the provisions, if any, relating to voting rights, redemption rates,
sinking funds, liquidation preferences and conversion rights for any series of
Preferred Stock issued in the future.
It is not possible to state the actual effect of authorization of any series
of Preferred Stock upon the rights of holders of Common Stock until the Board
determines the specific rights of the holders of such series of Preferred Stock.
The Board's authority to issue Preferred Stock also provides a convenient
vehicle in connection with possible acquisitions and other corporate purposes,
but could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock. Accordingly, the issuance of
Preferred Stock may be used as an "anti-takeover" device without further action
on the part of the shareholders of the Company, and may adversely affect the
holders of the Common Stock. See "Risk Factors--Control by Management;
Authorization and Issuance of Preferred Stock; Prevention of Changes in
Control."
WARRANTS
Each Warrant represents the right to purchase one share of Common Stock at
an initial exercise price of $7.50 per share for a period of five years from the
date hereof. The exercise price and the number of shares issuable upon exercise
of the Warrants will be adjusted upon the occurrence of certain events,
including the issuance of Common Stock as a dividend on shares of Common Stock,
subdivisions,
35
<PAGE>
reclassifications or combinations of the Common Stock or similar events. The
Warrants do not contain provisions protecting against dilution resulting from
the sale of additional shares of Common Stock for less than the exercise price
of the Warrants or the current market price of the Company's securities and do
not entitle Warrant holders to any voting or other rights as a shareholder until
such Warrants are exercised and Common Stock issued.
Warrants may be redeemed in whole or in part, at the option of the Company
after six months from the date hereof, upon 30 days' notice, at a redemption
price equal to $.01 per Warrant if the closing price of the Company's Common
Stock on the National Market is at least $8.50 per share for 20 consecutive
trading days, ending not earlier than five days before the Warrants are called
for redemption.
Holders of Warrants may exercise their Warrants for the purchase of shares
of Common Stock only if a current prospectus relating to such shares is then in
effect and only if such shares are qualified for sale, or deemed to be exempt
from qualification under applicable state securities laws. The Company is
required to use its best efforts to maintain a current prospectus relating to
such shares of Common Stock at all times when the market price of the Common
Stock exceeds the exercise price of the Warrants until the expiration date of
the Warrants, although there can be no assurance that the Company will be able
to do so.
The shares of Common Stock issuable on exercise of the Warrants will be,
when issued in accordance with the Warrants, duly and validly issued, fully paid
and non-assessable. At all times that the Warrants are outstanding, the Company
will authorize and reserve at least that number of shares of Common Stock equal
to the number of shares of Common Stock issuable upon exercise of all
outstanding Warrants.
For the term of the Warrants, the holders thereof are given the opportunity
to profit from an increase in the per share market price of the Company's Common
Stock, with a resulting dilution in the interest of all other shareholders. So
long as the Warrants are outstanding, the terms on which the Company could
obtain additional capital may be adversely affected. The holders of the Warrants
might be expected to exercise them at a time when the Company would, in all
likelihood, be able to obtain additional capital by a new offering of securities
on terms more favorable than those provided by the Warrants.
COMMON STOCK ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, there will be 2,750,000 shares of Common
Stock outstanding, of which 1,000,000 shares included in the Units have been
registered in the Offering on behalf of the Company, 75,000 shares have been
registered on behalf of the Selling Shareholders, and the remaining 1,675,000
shares have not been registered in the Offering and are "restricted securities"
under Rule 144 of the 1933 Act.
RULE 144
In general, under Rule 144, a person (or persons whose shares are
aggregated) who has held securities acquired in a non-public offering for at
least one year may, under certain circumstances, sell, within any three-month
period, that number of shares which does not exceed the greater of one percent
of the then outstanding shares of Common Stock (approximately 27,500 shares
immediately after the Offering, assuming no exercise of the Warrants, the
Representatives' Warrants, the Overallotment Option, or other outstanding stock
options), or the average weekly trading volume during the four calendar weeks
prior to such sale. Rule 144 also permits, under certain circumstances, the sale
of shares by a person without any quantity limitation after the securities have
been held for two years. Of the 1,675,000 shares of Common Stock that are
restricted securities, 1,340,241 are currently eligible for immediate sale under
Rule 144 and the remaining 334,759 shares may be sold in March 1998 without
further restriction. The Company is unable to predict what effect, if any, such
sale of shares of Common Stock, under Rule 144 or otherwise, may have on the
then prevailing per share market price of the Common Stock. The Company's
officers, directors and 5% or greater shareholders (holding an aggregate of
1,101,991 shares after deducting the
36
<PAGE>
75,000 shares to be registered hereby which are excluded from the following
restriction on resale) have agreed not to sell, transfer, or otherwise dispose
of any of their shares of Common Stock for a period of two years from the date
of this Prospectus, without the prior written consent of the Representatives,
provided however, that 50% of such shares (550,996 shares) may be sold after one
year from the date of this Prospectus if the Company reports at least $1,000,000
of after-tax net income for the year ending December 31, 1997. In addition, the
holders of the remaining 573,009 shares described above have agreed not to sell
or otherwise dispose of their shares without the prior written consent of the
Representatives for a period of one year from the date of this Prospectus. The
Company has granted certain demand and piggy-back registration rights to the
Representatives with respect to the Representatives' Warrants, as well as the
50,000 shares of Common Stock issuable upon exercise of the Representatives'
Warrants.
TRANSFER AGENT AND WARRANT AGENT
The Company has appointed Corporate Stock Transfer, Inc., 370 17th Street,
Suite 2350, Denver, Colorado 80202, as its transfer agent and warrant agent.
DIVIDENDS
The Company has not paid any dividends on its Common Stock since inception
and does not plan to pay dividends in the foreseeable future. The Company
anticipates that any future earnings will be retained to finance growth.
LIMITATION ON LIABILITIES
The Company's Articles of Incorporation provide that liability of directors
to the Company for monetary damages is eliminated to the full extent provided by
California law. Under California law, a director is not personally liable to the
Company or its shareholders for monetary damages for breach of fiduciary duty as
a director except for liability (i) for any breach of the director's duty of
loyalty to the Company or its shareholders; (ii) for acts or omissions not in
good faith or that involve intentional misconduct or a knowing violation of law;
(iii) for authorizing the unlawful payment of a dividend or other distribution
on the Company's capital stock or the unlawful purchases of its capital stock;
or (iv) for any transaction from which the director derived any improper
personal benefit.
The effect of this provision in the Articles of Incorporation is to
eliminate the rights of the Company and its shareholders (through shareholders'
derivative suits on behalf of the Company) to recover monetary damages from a
director for breach of the fiduciary duty of care as a director (including any
breach resulting from negligent or grossly negligent behavior) except in the
situations described in clauses (i) through (iv) above. This provision does not
limit or eliminate the rights of the Company or any securityholder to seek
non-monetary relief, such as an injunction or rescission, in the event of a
breach of a director's duty of care or any liability for violation of the
federal securities laws.
Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised that in
the opinion of the Commission such indemnification is against public policy as
expressed in the 1933 Act and is, therefore, unenforceable.
37
<PAGE>
UNDERWRITING
The Underwriters named below have severally agreed, subject to the terms and
conditions of the Underwriting Agreement, to purchase from the Company the
number of Units set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS UNITS
- ------------------------------------------------------------------------------------------------------ -----------
<S> <C>
Kensington Securities, Inc.
Gunn Allen Financial, Inc.
-----------
Total................................................................................................. 500,000
-----------
-----------
</TABLE>
The Company has been advised by Kensington Securities, Inc. and Gunn Allen
Financial, Inc. as the Representatives of the Underwriters that the Underwriters
propose to offer the Units purchased by them directly to the public at the
public offering price set forth on the cover page of this Prospectus and to
certain dealers at a price that represents a concession of $ per Unit. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ within the discretion of the Representatives. The Underwriters are
committed to purchase and pay for all of the Units if any Units are taken. After
the initial public offering of the Units, the offering price and the selling
terms may be changed in the sole discretion of the Underwriters.
The Company has also granted the Underwriters an Overallotment Option,
exercisable within 30 days from the date of this Prospectus, to purchase from
the Company up to 75,000 Units solely to cover overallotments. The Underwriters
are under no obligation to exercise their Overallotment Option or purchase any
Units subject to the Overallotment Option.
The Underwriters will purchase the Units (including Units subject to the
Overallotment Option) from the Company at a price of $10.80 per Unit. In
addition, the Company has agreed to pay to Kensington Securities, Inc. a 3%
nonaccountable expense allowance on the aggregate initial public offering price
of the Units, including Units subject to the Overallotment Option, of which
$30,000 has already been paid. Kensington Securities, Inc. also received a sales
commission of $8,000 in connection with the March 1997 private placement of the
Company's Common Stock. The Representatives have agreed to pay a finder's fee of
up to $45,000 to a person not affiliated with the Company or the Representatives
for introducing the Company to the Representatives.
The Company has agreed to issue the Representatives' Warrants to the
Representatives for a consideration of $100. The Representatives' Warrants are
exercisable at any time in the four-year period commencing one year from the
date of this Prospectus to purchase up to an aggregate of 50,000 Units for
$14.40 per Unit. The Representatives' Warrants are not transferable for one year
from the date of this Prospectus except (i) to an Underwriter or a partner or
officer of an Underwriter or (ii) by will or operation of law. During the term
of the Representatives' Warrants, the holder thereof is given the opportunity to
profit from an increase in the per share market price of the Company's
securities. As long as the Representatives' Warrants are outstanding, the
Company may find it more difficult to raise additional equity capital. At any
time at which the Representatives' Warrants are likely to be exercised, the
Company would probably be able to obtain additional equity capital on more
favorable terms. If the Company files a registration statement relating to an
equity offering under the provisions of the 1933 Act at any time during the
five-year period following the date of this Prospectus, the holders of the
Representatives' Warrants or underlying Units will have the right, subject to
certain conditions, to include
38
<PAGE>
in such registration statement, at the Company's expense, all or part of the
underlying Units at the request of the holders. Additionally, the Company has
agreed, for a period of five years commencing on the date of this Prospectus, on
demand of the holders of a majority of the Representatives' Warrants or the
Units issued or issuable thereunder, to register the Units underlying the
Representatives' Warrants one time at the Company's expense. The registration of
securities pursuant to the Representatives' Warrants may result in substantial
expense to the Company at a time when it may not be able to afford such expense
and may impede future financing. The number of Units covered by the
Representatives' Warrants and the exercise price are subject to adjustment under
certain events to prevent dilution. In the event of any demand registration, the
Company has the right to redeem the Representatives' Warrants by committing to
pay, within ten days of the date of such demand registration, the difference
between the exercise price of the Representatives' Warrants and the average bid
price of the Units (or the component securities) over the prior ten business
days.
The Company has agreed, in connection with exercise of the Warrants pursuant
to solicitation by the Representatives, or any other broker-dealer, to pay to
the Representatives, or any broker-dealer, a fee of 5% of the exercise price of
any Warrants exercised after six months from the date hereof. The
Representatives, or broker-dealer, will not be entitled to receive such
compensation in Warrant exercise transactions except with respect to the
exercise of Warrants solicited and procured by such broker-dealer and confirmed
in writing by the Warrantholder that the broker-dealer solicited such Warrants
and provided that (i) the market price of the shares of Common Stock at the time
of exercise is higher than the exercise price of the Warrants, (ii) disclosure
of compensation arrangements is made, in addition to the disclosure provided in
the Registration Statement, in documents provided to holders of Warrants at the
time of exercise, (iii) the exercise of the Warrants is solicited, (iv) the
Warrants are not exercised by discretionary accounts, and (v) the solicitation
of exercise of the Warrants is not in violation of Rule 10b-6 promulgated under
the 1934 Act.
In connection with the Offering, the Representatives and selling group
members (if any) and their respective affiliates may engage in transactions that
stabilze, maintain or otherwise affect the market price of the Common Stock and
Warrants. Such transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M, pursuant to which such persons may bid
for or purchase Common Stock or Warrants for the purpose of stabilizing their
market prices. The Representatives may also create a short position for the
account of the Representatives by selling more securities in connection with the
Offering than they are committed to purchase from the Company and in such case
may purchase securities in the open market following completion of the Offering
to cover all or a portion of such short position. The Representatives may also
cover all or a portion of such short position by exercising the Overallotment
Option. Any of the transactions described in this paragraph may result in the
maintenance of the securities at a level above that which might otherwise
prevail in the open market. None of the transactions described in this paragraph
is required, and, if they are undertaken, they may be discontinued at any time.
The Company's officers, directors and 5% or greater shareholders (holding an
aggregate of 1,101,991 shares) have entered into a lock-up agreement with the
Representatives pursuant to which they have agreed not to sell or otherwise
dispose of any of their shares of Common Stock (including shares issuable upon
exercise of stock options) for a period of two years from the date of this
Prospectus without the prior written consent of the Representatives; provided,
however, that 50% of such shares (550,996 shares) may be sold after one year
from the date of the Prospectus if the Company reports at least $1,000,000 of
after tax net income for the year ending December 31, 1997. This lock-up
agreement does not apply to the 75,000 Selling Shareholders' shares. In
addition, the holders of an additional 573,009 shares have agreed not to sell or
otherwise dispose of their shares without the prior written consent of the
Representatives for a period of one year from the date of this Prospectus. The
Company has also granted certain demand and piggy-back registration rights to
the Representatives with respect to the Representatives' Warrants as well as the
50,000 shares of Common Stock issuable upon exercise of the Representatives'
Warrants.
39
<PAGE>
The Company has agreed with the Representatives that, for a period of 36
months from the effective date of the Offering, the Company will allow an
observer designated by the Representatives and acceptable to the Company to
attend all meetings of the Board of Directors. The observer will have no voting
rights, will be reimbursed for out-of-pocket expenses incurred in attending
meetings and will be indemnified against any claims arising out of participation
at the meetings, including claims based on liabilities arising under the
securities laws.
In connection with the Offering, the Underwriters may purchase and sell the
Common Stock and Warrants in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover syndicate
short positions created in connection with the Offering. Stabilizing
transactions consist of certain bids or purchases for the purposes of preventing
or retarding a decline in the market price of the Common Stock and Warrants; and
syndicate short positions involve the sale by the Underwriters of a greater
number of shares of Common Stock or of Warrants than they are required to
purchase from the Company in the Offering. The Underwriters also may impose a
penalty bid, whereby selling concessions allowed to syndicate members or other
broker-dealers in respect of the Common Stock and Warrants sold in the Offering
for their account may be reclaimed by the syndicate if such securities are
repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Common Stock and Warrants, which may be higher than the price that might
otherwise prevail in the open market; and these activities, if commenced, may be
discontinued at any time. These transactions may be effected on the National
Market in the over-the-counter market or otherwise.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the 1933 Act, or to contribute to
payments that any Underwriter may be required to make in respect thereof.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Gary A. Agron Esq., Englewood, Colorado. Certain legal
matters in connection with the Offering will be passed upon for the
Representatives by Pezzola & Reinke, a Professional Corporation, Oakland,
California.
EXPERTS
The financial statements of the Company for the years ended December 31,
1995 and 1996, appearing in this Prospectus, have been audited by AJ. Robbins,
P.C., independent certified public accountants. The financial statements, as
stated in their report and appearing herein, have been included herein in
reliance upon the authority of that firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 (the "Registration
Statement") under the 1933 Act with respect to the securities offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement, certain items of which are omitted in accordance with
the rules and regulations of the Commission. For further information with
respect to the Company and the securities offered by this Prospectus, reference
is made to such Registration Statement and the exhibits thereto which may be
inspected without charge at the public reference facilities of the Commission at
Judiciary Plaza, 450 Fifth Street N.W., Washington, DC 20549; Northwest Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, IL 60661; 7 World Trade
Center, New York, NY 10048; and 5670 Wilshire Boulevard, Los Angeles, CA 90036.
40
<PAGE>
The Company will be subject to the informational requirements of the
Securities Exchange Act of 1934 (the "1934 Act") and, in accordance therewith,
will file reports, proxy and information statements and other information with
the Commission. Such reports, proxy statements and other information may be
inspected at public reference facilities of the Commission at Judiciary Plaza,
450 Fifth Street N.W., Washington, DC 20549; Northwest Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, IL 60661; 7 World Trade Center, New York,
NY 10048; and 5670 Wilshire Boulevard, Los Angeles, CA 90036. Copies of such
material can be obtained from the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street N.W., Washington, DC 20549 at prescribed
rates. The Commission maintains a Web site that will contain such reports, proxy
and information statements and other information regarding the Company at
http://www.sec.gov.
41
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report............................................................................... F-2
Balance Sheets............................................................................................. F-3
Statements of Income....................................................................................... F-4
Statement of Changes in Stockholders' Equity............................................................... F-5
Statements of Cash Flows................................................................................... F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Retrospettiva, Inc.
Beverly Hills, California
We have audited the accompanying balance sheet of Retrospettiva, Inc. as of
December 31, 1996 and the related statements of income, changes in stockholders'
equity and cash flows for the two years ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Retrospettiva, Inc. as of
December 31, 1996 and the results of its operations and its cash flows for the
two years ended December 31, 1996 in conformity with generally accepted
accounting principles.
AJ. ROBBINS, P.C.
CERTIFIED PUBLIC ACCOUNTANTS AND
CONSULTANTS
Denver, Colorado
March 15, 1997
Except for Note 14 as to which
the date is July 18, 1997
F-2
<PAGE>
RETROSPETTIVA, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
1997
DECEMBER 31, ------------
1996
------------ (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash............................................................................... $ 110,777 $ 289,905
Accounts receivable, net, pledged.................................................. 760,495 1,192,553
Accounts receivable, related party, pledged........................................ 1,182,202 --
Note receivable, current portion................................................... 140,000 130,496
Note receivable, stockholder....................................................... -- 203,094
Inventories, pledged............................................................... 3,112,678 3,725,044
Deferred tax assets, current portion............................................... 11,000 11,000
Deferred offering costs............................................................ 330,930 117,329
Other.............................................................................. 14,825 34,283
------------ ------------
Total Current Assets........................................................... 5,662,907 5,703,704
PROPERTY AND EQUIPMENT, at cost, net................................................. 61,386 57,164
NOTE RECEIVABLE, net of current portion.............................................. 47,583 --
DEFERRED TAX ASSETS, net of current portion.......................................... 5,000 5,000
OTHER ASSETS......................................................................... 80,666 80,776
------------ ------------
$5,857,542 $ 5,846,644
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade............................................................ $2,806,812 $ 2,356,572
Note payable....................................................................... 237,580 145,000
Notes payable, bridge loans........................................................ 250,000 250,000
Accrued expenses................................................................... 51,070 25,496
Accrued income taxes............................................................... 541,910 853,804
Customer advances.................................................................. 909,681 517,253
------------ ------------
Total Current Liabilities...................................................... 4,797,053 4,148,125
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock--authorized 1,000,000 shares--none issued or outstanding............. -- --
Common stock--authorized 15,000,000 shares, no par value; issued and outstanding
1,415,241 and 1,750,000 shares, respectively....................................... 154,000 272,054
Additional paid-in capital........................................................... 230,000 230,000
Retained earnings.................................................................... 676,489 1,196,465
------------ ------------
Total Stockholders' Equity..................................................... 1,060,489 1,698,519
------------ ------------
$5,857,542 $ 5,846,644
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE>
RETROSPETTIVA, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------- --------------------------
1995 1996 1996 1997
------------- ------------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
SALES.................................................. $ 9,165,448 $ 9,520,671 $ 4,128,978 $ 7,921,299
SALES, related party................................... 2,214,378 3,381,524 1,551,718 --
------------- ------------- ------------ ------------
Total Sales.......................................... 11,379,826 12,902,195 5,680,696 7,921,299
COST OF SALES.......................................... 9,976,933 11,006,053 4,918,341 6,758,331
------------- ------------- ------------ ------------
GROSS PROFIT........................................... 1,402,893 1,896,142 762,355 1,162,968
------------- ------------- ------------ ------------
OPERATING EXPENSES:
Selling expenses..................................... 230,301 170,179 146,261 94,568
General and administrative........................... 280,816 362,621 171,508 181,117
------------- ------------- ------------ ------------
Total Operating Expenses............................. 511,117 532,800 317,769 275,685
------------- ------------- ------------ ------------
INCOME FROM OPERATIONS................................. 891,776 1,363,342 444,586 887,283
OTHER INCOME (EXPENSES):
Other income......................................... 4,960 11,202 -- 4,477
Interest expense..................................... (21,241) (61,457) (18,024) (23,784)
------------- ------------- ------------ ------------
Net Other Income (Expenses)............................ (16,281) (50,255) (18,024) (19,307)
------------- ------------- ------------ ------------
INCOME BEFORE INCOME TAXES............................. 875,495 1,313,087 426,562 867,976
PROVISION FOR INCOME TAXES............................. 195,000 540,285 172,000 348,000
------------- ------------- ------------ ------------
NET INCOME............................................. $ 680,495 $ 772,802 $ 254,562 $ 519,976
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
NET INCOME PER COMMON SHARE............................ $ .39 $ .44 $ .15 $ .30
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
WEIGHTED AVERAGE NUMBERS OF SHARES OUTSTANDING......... 1,750,000 1,750,000 1,750,000 1,750,000
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
RETROSPETTIVA, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
AND THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
---------------------- PAID IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1994..................... 1,095,984 $ 20,000 $ 230,000 $ (776,808) $ (526,808)
Net income for the year......................... -- -- -- 680,495 680,495
---------- ---------- ---------- ------------ ------------
Balances, December 31, 1995..................... 1,095,984 20,000 230,000 (96,313) 153,687
Stock issued for compensation................... 81,007 34,000 -- -- 34,000
Stock issued for bridge loans................... 238,250 100,000 -- -- 100,000
Net income for the year......................... -- -- -- 772,802 772,802
---------- ---------- ---------- ------------ ------------
Balances, December 31, 1996..................... 1,415,241 154,000 230,000 676,489 1,060,489
Stock issued in private offering net of offering
costs (unaudited)............................. 334,759 118,054 -- -- 118,054
Net income for the period (unaudited)........... -- -- -- 519,976 519,976
---------- ---------- ---------- ------------ ------------
Balances, June 30, 1997 (unaudited)............. 1,750,000 $ 272,054 $ 230,000 $ 1,196,465 $ 1,698,519
---------- ---------- ---------- ------------ ------------
---------- ---------- ---------- ------------ ------------
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE>
RETROSPETTIVA, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------- --------------------------
1995 1996 1996 1997
------------- ----------- ------------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM (TO) OPERATING ACTIVITIES:
Net income............................................... $ 680,495 $ 772,802 $ 254,562 $ 519,976
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization........................ 17,792 17,491 8,580 8,831
Stock issued for compensation........................ -- 34,000 -- --
Deferred income taxes................................ 160,000 7,000 -- --
Services provided to reduce note receivable.......... -- 8,417 -- 10,286
Changes in:
Accounts receivable................................ 274,471 (572,917) (22,191) 750,144
Accounts receivable, related party................. (441,830) (740,372) (215,566) --
Accounts receivable, others........................ (76,166) -- -- --
Inventories........................................ (1,257,515) (592,610) 921,443 (612,366)
Other.............................................. (3,600) (11,225) -- (19,568)
Accounts payable and accrued expenses.............. 265,682 (103,765) (1,242,358) (475,814)
Accrued income taxes............................... 13,332 534,778 170,338 311,894
Customer advances.................................. -- 909,681 200,000 (392,428)
------------- ----------- ------------- -----------
Cash flows provided (used) by operating
activities..................................... (367,339) 263,280 74,808 100,955
------------- ----------- ------------- -----------
CASH FLOWS FROM (TO) INVESTING ACTIVITIES:
Purchase of property and equipment..................... (16,172) (6,825) (4,837) (4,609)
Payments on notes receivable........................... -- -- -- 46,801
------------- ----------- ------------- -----------
Cash flows provided (used) by investing
activities..................................... (16,172) (6,825) (4,837) 42,192
------------- ----------- ------------- -----------
CASH FLOWS FROM (TO) FINANCING ACTIVITIES:
Loans to stockholder................................... -- -- -- (230,500)
Collections on note receivable, stockholder............ -- -- -- 27,406
Proceeds from note payable, stockholder................ 351,263 170,856 2,199 --
Payments on note payable, stockholder.................. (245,015) (354,176) (36,973) --
Proceeds from notes payable, bridge loans.............. -- 250,000 250,000 --
Proceeds from note payable............................. 247,403 -- -- --
Payments on note payable............................... -- (19,725) (594) (92,580)
Payments for deferred offering costs................... -- (330,930) (212,490) (229,384)
Utilization of deferred offering costs................. -- -- -- 442,985
Proceeds from issuance of common stock................. -- 100,000 100,000 118,054
------------- ----------- ------------- -----------
Cash flows provided (used) by financing
activities..................................... 353,651 (183,975) 102,142 35,981
------------- ----------- ------------- -----------
NET INCREASE (DECREASE) IN CASH.......................... (29,860) 72,480 172,113 179,128
CASH IN BANK, beginning of period........................ 68,157 38,297 38,297 110,777
------------- ----------- ------------- -----------
CASH IN BANK, end of period.............................. $ 38,297 $ 110,777 $ 210,410 $ 289,905
------------- ----------- ------------- -----------
------------- ----------- ------------- -----------
</TABLE>
See Note 13
See accompanying notes to financial statements
F-6
<PAGE>
RETROSPETTIVA, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACTIVITY
Retrospettiva, Inc. (the Company) located in Beverly Hills, California was
organized in November 1990 to manufacture and import textile products from Italy
including finished garments and fabrics. By 1993, the Company was purchasing
fabrics from firms and factories around the world and contracting for the
manufacture of the fabrics in Eastern Europe (primarily Macedonia) for
importation into the United States.
The Company designs, contracts to manufacture and markets a variety of
garments. Fabrics are purchased from suppliers worldwide including firms in
China, India, Russia, Romania, Italy and the United States. The fabrics are
shipped to contractor factories primarily in Macedonia to be manufactured into
finished garments for shipment to the Company's customers in the United States.
UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of management, the unaudited interim financial statements for
the six month periods ending June 30, 1996 and 1997 are presented on a basis
consistent with the audited annual financial statements and reflect all
adjustments, consisting only of normal recurring accruals, necessary for fair
presentation of the results of such periods. The results of operations for the
interim period ending June 30, 1997 are not necessarily indicative of the
results to be expected for the year ended December 31, 1997.
STOCK SPLITS
In May 1996, the Company's Board of Directors authorized a 46 for one stock
split. In May 1997, the Company's Board of Directors authorized a 2.3826 for one
stock split to be approved by the Company's stockholders in June 1997. The
financial statements have been presented as if the splits had occurred at the
beginning of each period presented.
CASH AND CASH EQUIVALENT
Cash and cash equivalents include cash on hand and investments with original
maturities of three months or less.
ACCOUNTS RECEIVABLE
The Company provides an allowance for doubtful accounts, as needed, for
accounts deemed uncollectible. Allowance for uncollectible accounts was recorded
at $17,196 for December 31, 1996 and June 30, 1997 (unaudited), respectively.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
expense is generally provided on a straight-line basis using estimated useful
lives of 5-10 years for equipment. Leasehold improvements are amortized over the
lesser of the estimated useful life of the asset or the term of the lease.
Depreciation and amortization expense of property and equipment was $17,792,
$17,491, $8,580, and
F-7
<PAGE>
RETROSPETTIVA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
$8,831 for the years ended December 31, 1995, 1996 and for the six months ended
June 30, 1996 (unaudited) and 1997 (unaudited), respectively.
DEFERRED OFFERING COSTS
Costs incurred in connection with the Company's current anticipated public
offering are deferred and will be charged against stockholders equity upon the
successful completion of the offering or charged to expense if the offering is
not consummated.
REVENUE RECOGNITION
Revenue is recognized when sold merchandise has cleared customs in the
United States and is available to be shipped to customers from a port of entry.
INCOME TAXES
The Company adopted Statement of Financial Accounting Standards No. 109
(SFAS 109), Accounting for Income Taxes. Under this method, deferred income
taxes are recorded to reflect the tax consequences in future years of temporary
differences between the tax basis of the assets and liabilities and their
financial statement amounts at the end of each reporting period. Valuation
allowances will be established when necessary to reduce deferred tax assets to
the amount expected to be realized. Income tax expense is the tax payable for
the current period and the change during the period in deferred tax assets and
liabilities. The deferred tax assets and liabilities have been netted to reflect
the tax impact of temporary differences. The adoption of SFAS 109 did not have a
material effect on the Company's financial statements.
EARNINGS PER COMMON SHARE
Earnings per common share is computed based upon the weighted average number
of common and dilutive common equivalent shares outstanding during the period.
Fully diluted and primary earnings per common share are the same amounts for
each of the periods presented.
Common shares issued by the Company in the twelve months immediately
preceding a proposed public offering plus the number of common equivalent shares
which became issuable during the same period pursuant to the grant of warrants
and stock options (using the treasury stock method) at prices substantially less
than the initial public offering price have been included in the calculation of
common stock and common stock equivalent shares as if they were outstanding for
all periods presented.
Dilutive common equivalent shares consist of stock options and warrants
(calculated using the treasury stock method). In loss periods, dilutive common
equivalent shares are excluded as the effect would be anti-dilutive.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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
disclosure of contingent assets and liabilities at the date of the financial
statements and
F-8
<PAGE>
RETROSPETTIVA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
revenues and expenses during the reporting periods. Actual results could differ
from those estimates and assumptions.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial instruments, which
principally include cash, trade receivables, note receivable, accounts payable
and accrued expenses, approximates fair value due to the relatively short
maturity of such instruments.
The fair value of the Company's debt instruments are based on the amount of
future cash flows associated with each instrument discounted using the Company's
borrowing rate. At December 31, 1996 and June 30, 1997 (unaudited), the carrying
value of all financial instruments was not materially different from fair value.
CREDIT RISK
The Company sells its merchandise principally to customers throughout the
United States. Management performs regular evaluations concerning the ability of
its customers to satisfy their obligations and records a provision for doubtful
accounts based upon these evaluations. The Company's credit losses for the
periods presented have not exceeded management's estimates.
There are two customers that make up 93% and 73% of the accounts receivable
balance at December 31, 1996 and June 30, 1997 (unaudited), respectively.
The Company maintains all cash in bank deposit accounts, which at times may
exceed federally insured limits. The Company has not experienced a loss in such
accounts.
SIGNIFICANT CUSTOMERS
Individual customers aggregating in excess of 10% of net sales are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------------
1995 1996
------------ ------------ SIX MONTHS ENDED
JUNE 30,
--------------------------
1996 1997
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
SALES
Customer A........................... $ 5,413,771 $ 4,102,545 $ 3,214,633 $ --
Customer B........................... $ 2,325,851 $ 3,745,836 $ 880,089 $ 4,791,915
Customer C, related party............ $ 2,214,378 $ 3,381,524 $ 1,551,718 $ 306,774
Customer D........................... $ -- $ -- $ 95,354 $ 2,429,139
</TABLE>
RELATED PARTY TRANSACTIONS
The Company has sales to a related party customer. The Company's
officer/stockholder was part owner of Customer C. Effective January 1, 1997, the
Company's officer/stockholder relinquished his
F-9
<PAGE>
RETROSPETTIVA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ownership in Customer C. Accounts receivable at December 31, 1996 for Customer C
was $1,182,202 as follows:
<TABLE>
<CAPTION>
GREATER THAN
30 DAYS PAST 60 DAYS PAST
CURRENT DUE DUE TOTAL
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
December 31, 1996.......................................... $ 534,816 $ 381,164 $ 266,222 $ 1,182,202
June 30, 1997 (Unaudited).................................. $ -- $ -- $ 232,704 $ 232,704
</TABLE>
Principal ownership and control of the Company rests with the Chief
Executive Officer.
ADOPTION OF NEW STANDARDS
Statement of Financial Accounting Standards No. 128, Earnings Per Share
(SFAS 128), was issued in February 1997 (effective for financial statements
ending after December 15, 1997). This Statement simplifies the standards for
computing earnings per share (EPS) previously found in APB Opinion No. 15,
Earnings Per Share, and makes them more comparable to international EPS
standards. SFAS 128 replaces the presentation of primary EPS with a presentation
of basic EPS. In addition, the Statement requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. The Company has not yet assessed the impact of SFAS 128
on its financial statements.
NOTE 2--INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
1997
DECEMBER 31, ------------
1996
------------ (UNAUDITED)
<S> <C> <C>
Finished goods................................................... $ 923,373 $ 780,596
Work-in-process.................................................. 908,752 1,289,669
Raw materials.................................................... 1,280,553 1,654,779
------------ ------------
$3,112,678 $ 3,725,044
------------ ------------
------------ ------------
</TABLE>
The Company's import operations are subject to constraints imposed by
bilateral textile agreements between the United States and a number of foreign
countries. These agreements impose quotas on the amount and type of goods which
can be imported into the United States from these countries and can limit or
prohibit importation of products on very short notice. The Company's imported
products are also subject to United States customs duties which are a material
portion of the Company's cost of imported goods. A substantial increase in
customs duties or a substantial reduction in quota limits applicable to the
Company's imports could have a material adverse effect on the Company's
financial condition and results of operations.
F-10
<PAGE>
RETROSPETTIVA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------ JUNE 30,
1997
-----------
(UNAUDITED)
<S> <C> <C>
Insurance claim, receivable....................................... $ 76,166 $ 76,166
Deposits.......................................................... 4,500 4,610
------------ -----------
$ 80,666 $ 80,776
------------ -----------
------------ -----------
</TABLE>
The insurance claim receivable is due to inventory lost in a fire in a
consolidating warehouse.
NOTE 4--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------ JUNE 30,
1997
-----------
(UNAUDITED)
<S> <C> <C>
Automobile........................................................ $ 20,568 $ 20,568
Furniture and fixtures............................................ 35,494 40,103
Leasehold improvements............................................ 50,514 50,514
------------ -----------
Total....................................................... 106,576 111,185
Less accumulated depreciation and amortization.................... (45,190) (54,021)
------------ -----------
$ 61,386 $ 57,164
------------ -----------
------------ -----------
</TABLE>
NOTE 5--NOTE RECEIVABLE
During 1994, the Company was owed an outstanding trade receivable of
$266,000. Approximately $70,000 was written off as uncollectible in 1994 and
$196,000 was converted to a note receivable, bearing interest at 10%, and
requiring 24 monthly payments of $10,000 in consolidation services. Services are
valued at the market value of comparative consolidation services in the area.
The Company realized $8,416 in services during 1996 and $10,286 (unaudited)
during the six months ended June 30, 1997.
The Company negotiated with a customer (former related party) to use the
warehouse services. The customer will reimburse the Company for the services and
the note receivable is reduced accordingly. During the six months June 30, 1997
the note receivable was reduced by $57,087 (unaudited).
NOTE 6--NOTE RECEIVABLE FROM STOCKHOLDER (UNAUDITED)
The Company's note receivable ($250,000 maximum) due from an
officer/stockholder is unsecured, due on demand and bears interest at 10% per
annum.
NOTE 7--NOTE PAYABLE
On September 27, 1995, the Company obtained a line of credit of $250,000
with a bank due October 10, 1996. The loan was collateralized by accounts
receivable inventory and personal guarantee of an officer/stockholder. Interest
was payable monthly at 3% over the financial institutions variable prime
F-11
<PAGE>
RETROSPETTIVA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--NOTE PAYABLE (CONTINUED)
rate. During March 1997 the line of credit was refinanced with a variable rate
(4% over prime rate, initial rate of 12.25%). Payments were due in four monthly
installments of $20,000 principal plus interest beginning April 15, 1997, with
one final principal and interest payment due August 15, 1997. (See Note 14)
NOTE 8--NOTES PAYABLE, BRIDGE LOANS
During June 1996 the Company completed an offering of 25 units in a Private
Placement. Each unit consisted of one $10,000 promissory note (totaling
$250,000) bearing interest at 8% per annum and 9,530 shares of the Company's
Common Stock. The notes were payable the earlier of June 30, 1997 or on the
closing date of an initial public offering of the Company's stock. The
underwriter was paid a commission of $50,000.
Effective July 1, 1997, (unaudited) notes were amended to be payable
September 30, 1997 and bear interest at 18% per annum.
NOTE 9--STOCK OPTION PLAN
STOCK OPTION PLAN
On May 1, 1996 the Company adopted the Stock Option Plan (the Plan) which
provides for the granting of options to officers, directors, employees and
consultants. 1,786,930 shares of common stock have been reserved under the plan
for the granting of options. The Plan will be in effect until April 30, 2006,
unless extended by the Company's shareholders. The options are exercisable to
purchase stock for a period of ten years from the date of grant.
Incentive Stock Options granted pursuant to this Plan may not have an option
price that is less than the fair market value of the stock on the date the
option is granted. Incentive stock options granted to significant stockholders
shall have an option price of not less than 110% of the fair market value of the
stock on the date of the grant.
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-----------------------
RESERVED PRICE PER
SHARES SHARES SHARES
---------- ---------- -----------
<S> <C> <C> <C>
Initial reserved shares................................ 1,786,930 -- $ --
Granted................................................ 1,701,635 1,701,635 $ .63-.675
---------- ---------- -----------
Balance, December 31, 1996............................. 85,295 1,701,635 $ .63-6.75
Granted (unaudited).................................... 60,000 60,000 $ 6.75
---------- ---------- -----------
Balance, June 30, 1997 (unaudited)..................... 25,295 1,761,635 $ .63-6.75
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
Under an employment agreement a total of 595,645 options will be cancelled
if net income for the year ended December 31, 1997 does not exceed $750,000.
At December 31, 1996, 1,105,990 options granted under the plan were
exercisable.
F-12
<PAGE>
RETROSPETTIVA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company signed a 61 month lease agreement for its offices commencing
December 1, 1995. The monthly lease payment is $2,300.
The Company signed a ten-month sublease agreement in New York commencing
December 1, 1996. The terms of the sublease agreement require monthly payments
of $1,250 plus 50% of the maintenance costs.
The Company has another sublease in New York, with a two year term through
April 1, 1998. The terms require monthly payments of $2,175 through January 31,
1997 and monthly payments of $2,285 for the remainder of the agreement.
Future minimum rental payments under non-cancelable operating leases are as
follows:
<TABLE>
<CAPTION>
JUNE 30,
1997
DECEMBER 31, -----------
1996
------------ (UNAUDITED)
<S> <C> <C>
1997.............................................................. $ 66,160 $ 36,600
1998.............................................................. 34,455 34,455
1999.............................................................. 27,600 27,600
2000.............................................................. 2,300 2,300
------------ -----------
Total........................................................... $ 130,515 $ 100,955
------------ -----------
------------ -----------
</TABLE>
The Company rents office and showroom space from a major supplier in New
York on a month to month basis.
Rent expense for the years ended December 31, 1995 and 1996 was $37,900 and
$62,920, and for the six months ended June 30, 1996 and 1997 was $24,883
(unaudited) and $41,680 (unaudited), respectively.
EMPLOYMENT AGREEMENTS
In May 1996 the Company entered into a three year employment agreement with
an officer/ stockholder which provides for annual salary of $95,000, commencing
the first month subsequent to the earlier of the closing of an initial public
offering or the closing of a merger or acquisition by a public company, a
non-competition clause for two years following termination of the employment
agreement and stock options to purchase up to 1,191,300 shares of Common Stock
at $6.75 per share exercisable for a period of 10 years.
In April 1996, the Company entered into a three year employment agreement
with the chief financial officer which provides for annual salary of $60,000
commencing the first month after the completion of its planned initial public
offering. As signing compensation he received 81,007 shares of Common Stock and
stock options to purchase up to 119,128 shares of Common Stock at $6.75 per
share exercisable for a period of 10 years.
LITIGATION
The Company is a party to various claims, complaints, and other legal
actions that have arisen in the ordinary course of business. The Company
believes that the outcome of all pending legal proceedings, in
F-13
<PAGE>
RETROSPETTIVA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED)
the aggregate, will not have a material adverse effect on the Company's
financial condition or the results of its operations.
NOTE 11--INCOME TAXES
The components of deferred tax assets and (liabilities) are as follows:
<TABLE>
<CAPTION>
JUNE 30,
1997
DECEMBER 31, -----------
1996
------------ (UNAUDITED)
<S> <C> <C>
Total deferred tax assets......................................... $ 16,000 $ 16,000
Total deferred tax (liabilities).................................. -- --
------------ -----------
Net deferred tax assets........................................... $ 16,000 $ 16,000
------------ -----------
------------ -----------
</TABLE>
There are no significant differences between financial statement and taxable
income.
The tax effects of temporary differences that give rise to deferred tax
assets and (liabilities) are as follows:
<TABLE>
<CAPTION>
JUNE 30,
1997
DECEMBER 31, -----------
1996
------------ (UNAUDITED)
<S> <C> <C>
Temporary differences:
Allowance for bad debts......................................... $ 7,000 $ 7,000
Property and equipment.......................................... 5,000 5,000
Other........................................................... 4,000 4,000
------------ -----------
$ 16,000 $ 16,000
------------ -----------
------------ -----------
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
----------------------
1995 1996
---------- ---------- SIX MONTHS ENDED JUNE
30,
------------------------
1996 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Current................................... $ 35,000 $ 533,285 $ 172,000 $ 348,000
Deferred.................................. 160,000 7,000 -- --
---------- ---------- ----------- -----------
Provision................................. $ 195,000 $ 540,285 $ 172,000 $ 348,000
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
F-14
<PAGE>
RETROSPETTIVA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--INCOME TAXES (CONTINUED)
Following is a reconciliation of the amount of income tax (benefit) expense
that would result from
applying the statutory federal income tax rates to pre-tax income and the
reported amount of income tax expense for the periods:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------
1995 1996
---------- ---------- SIX MONTHS ENDED
JUNE 30,
------------------------
1996 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Tax expense at federal statutory rates.... $ 298,000 $ 450,000 $ 132,000 $ 268,000
State tax, net of federal benefit......... 25,000 101,000 40,000 80,000
Alternative minimum tax (credit).......... 10,000 (10,000) -- --
Depreciation.............................. -- 3,000 -- --
Other..................................... -- 3,285 -- --
(Benefit) of net operating loss
carryforward............................ (298,000) (14,000) -- --
---------- ---------- ----------- -----------
$ 35,000 $ 533,285 $ 172,000 $ 348,000
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
The components of deferred income tax (benefit) expense are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
----------------------
1995 1996
----------- --------- SIX MONTHS ENDED JUNE
30,
------------------------
1996 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Bad debts.................................. $ 7,000 $ -- $ -- $ --
Depreciation............................... 2,000 (3,000) -- --
Other...................................... 4,000 (4,000) -- --
Net operating loss carryover............... 364,000 14,000 -- --
Valuation allowance........................ (217,000) -- -- --
----------- --------- ----------- -----------
$ 160,000 $ 7,000 $ -- $ --
----------- --------- ----------- -----------
----------- --------- ----------- -----------
</TABLE>
NOTE 12--STOCK-BASED COMPENSATION
During 1996 the Company adopted Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation (SFAS 123). The new standard
requires the Company to adopt the fair value method with respect to stock-based
compensation of consultants and other non-employees.
The Company did not change its method of accounting with respect to employee
stock options; the Company continues to account for these under the intrinsic
value method. Had the Company adopted the fair value method with respect to
options issued to employees as well, an additional charge to income of $52,300
would have been required in 1996; proforma net income would have been $319,000
and earnings per share would have been $.18 on both a primary and fully diluted
basis.
In June 1997, the Company has granted stock options to purchase 60,000 share
of common stock at $6.75 per share to a consultant. The amount of compensation
to be recognized under SFAS 123 is approximately $120,000, commencing subsequent
to the closing of an initial public offering of the Company's common stock.
F-15
<PAGE>
RETROSPETTIVA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--STOCK-BASED COMPENSATION (CONTINUED)
In estimating the above expense, the Company used the Modified Black-Scholes
European pricing model. The average risk-free interest rate used was 6.2%,
volatility was estimated at 31%; the expected life was less than three years.
NOTE 13--SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS FOR NONCASH
INVESTING AND FINANCING ACTIVITIES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
---------------------
1995 1996
--------- ---------- SIX MONTHS ENDED JUNE
30,
------------------------
1996 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash paid for interest...................... $ 8,180 $ 26,820 $ 17,414 $ 16,271
--------- ---------- ----------- -----------
--------- ---------- ----------- -----------
Cash paid for income taxes.................. 26,113 $ 2,196 $ -- $ --
--------- ---------- ----------- -----------
--------- ---------- ----------- -----------
Stock issued for bridge loans............... $ -- $ 100,000 $ 100,000 $ --
--------- ---------- ----------- -----------
--------- ---------- ----------- -----------
</TABLE>
NOTE 14--SUBSEQUENT EVENTS
PROPOSED PUBLIC OFFERING
The Company has entered into a letter of intent with an underwriter to sell
Company securities in a public offering. Upon a registration statement being
declared effective, 500,000 units (each unit consisting of two shares of common
stock and one warrant) are anticipated to be sold and 75,000 shares to be agreed
upon by certain security holders.
NOTE PAYABLE
On July 18, 1997 the Company refinanced its existing line of credit (see
Note 7) by obtaining a new line of credit with Merrill Lynch Business Financial
Services, Inc. for $500,000 due August 31, 1998. The new debt is collateralized
by accounts receivable, inventory, property and equipment, notes receivable and
the personal guarantee of an officer/stockholder. Interest is payable at 3.15%
over the 30 day commercial paper rate (8.75% at July 18, 1997).
F-16
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING DESCRIBED HEREIN, AND IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL,
OR THE SOLICITATION OF AN OFFER TO BUY, THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY STATE OR OTHER JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Dilution.................................................................. 13
Capitalization............................................................ 14
Use of Proceeds........................................................... 15
Selected Financial Data................................................... 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 17
Business.................................................................. 23
Management................................................................ 28
Principal Shareholders.................................................... 33
Selling Shareholders...................................................... 34
Certain Transactions...................................................... 34
Description of Securities................................................. 35
Underwriting.............................................................. 38
Legal Matters............................................................. 40
Experts................................................................... 40
Available Information..................................................... 40
Index to Financial Statements............................................. F-1
</TABLE>
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
500,000 UNITS
RETROSPETTIVA, INC.
------------------
PROSPECTUS
------------------
KENSINGTON SECURITIES, INC.
GUNN ALLEN FINANCIAL, INC.
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 317 of the California Corporations Code authorizes a court to award,
or a corporation's Board of Directors to grant, indemnity to directors and
officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended. Article V of the
Registrant's Restated Articles of Incorporation (Exhibit 3.01 hereto) provides
for indemnification of its directors, officers, employees and other agents
through the Corporation's bylaws, agreements with agents, vote of shareholders
or disinterested directors or otherwise, in excess of the indemnification
otherwise permitted by Section 317 of the California Corporations Code, subject
only to the applicable limits set forth in Section 204 of the California
Corporations Code with respect to actions for breach of duty to the corporation
and its shareholders.
In addition, Article VI of the Registrant's Bylaws provides as follows:
ARTICLE VI
INDEMNIFICATION OF CERTAIN PERSONS
Section 1. INDEMNIFICATION. For purposes of Article VI, a "Proper Person"
means any person (including the estate or personal representative of a director)
who was or is a party or is threatened to be made a party to any threatened,
pending, or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, and whether formal or informal, by reason of
the fact that he is or was a director, officer, employee, fiduciary or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, partner, trustee, employee, fiduciary or agent of any foreign
or domestic profit or nonprofit corporation or of any partnership, joint
venture, trust, profit or nonprofit unincorporated association, limited
liability company, or other enterprise or employee benefit plan. The corporation
shall indemnify any Proper Person against reasonably incurred expenses
(including attorneys' fees), judgments, penalties, fines (including any excise
tax assessed with respect to an employee benefit plan) and amounts paid in
settlement reasonably incurred by him in connection with such action, suit or
proceeding if it is determined by the groups set forth in Section 4 of this
Article that he conducted himself in good faith and that he reasonably believed
(i) in the case of conduct in his official capacity with the corporation, that
his conduct was in the corporation's best interests, or (ii) in all other cases
(except criminal cases), that his conduct was at least not opposed to the
corporation's best interests, or (iii) in the case of any criminal proceeding,
that he had no reasonable cause to believe his conduct was unlawful. Official
capacity means, when used with respect to a director, the office of director
and, when used with respect to any other Proper Person, the office in a
corporation held by the officer or the employment, fiduciary or agency
relationship undertaken by the employee, fiduciary, or agent on behalf of the
corporation. Official capacity does not include service for any other domestic
or foreign corporation or other person or employee benefit plan.
A director's conduct with respect to an employee benefit plan for a purpose
the director reasonably believed to be in the interests of the participants in
or beneficiaries of the plan is conduct that satisfies the requirement in (ii)
of this Section 1. A director's conduct with respect to an employee benefit plan
for a purpose that the director did not reasonably believe to be in the
interests of the participants in or beneficiaries of the plan shall be deemed
not to satisfy the requirement of this section that he conduct himself in good
faith.
No indemnification shall be made under this Article VI to a Proper Person
with respect to any claim, issue or matter in connection with a proceeding by or
in the right of a corporation in which the Proper Person was adjudged liable to
the corporation or in connection with any proceeding charging that the
II-1
<PAGE>
Proper Person derived an improper personal benefit, whether or not involving
action in an official capacity, in which he was adjudged liable on the basis
that he derived an improper personal benefit. Further, indemnification under
this section in connection with a proceeding brought by or in the right of the
corporation shall be limited to reasonable expenses, including attorneys' fees,
incurred in connection with the proceeding.
Section 2. RIGHT TO INDEMNIFICATION. The corporation shall indemnify any
Proper Person who was wholly successful, on the merits or otherwise, in defense
of any action, suit, or proceeding as to which he was entitled to
indemnification under Section 1 of this Article VI against expenses (including
attorneys' fees) reasonably incurred by him in connection with the proceeding
without the necessity of any action by the corporation other than the
determination in good faith that the defense has been wholly successful.
Section 3. EFFECT OF TERMINATION OF ACTION. The termination of any action,
suit or proceeding by judgment, order, settlement or conviction, or upon a plea
of nolo contendere or its equivalent shall not of itself create a presumption
that the person seeking indemnification did not meet the standards of conduct
described in Section 1 of this Article VI. Entry of a judgment by consent as
part of a settlement shall not be deemed an adjudication of liability, as
described in Section 2 of this Article VI.
Section 4. GROUPS AUTHORIZED TO MAKE INDEMNIFICATION DETERMINATION. Except
where there is a right to indemnification as set forth in Sections 1 or 2 of
this Article or where indemnification is ordered by a court in Section 5, any
indemnification shall be made by the corporation only as determined in the
specific case by a proper group that indemnification of the Proper Person is
permissible under the circumstances because he has met the applicable standards
of conduct set forth in Section 1 of this Article. This determination shall be
made by the board of directors by a majority vote of those present at a meeting
at which a quorum is present, which quorum shall consist of directors not
parties to the proceeding ("Quorum"). If a Quorum cannot be obtained, the
determination shall be made by a majority vote of a committee of the board of
directors designated by the board, which committee shall consist of two or more
directors not parties to the proceeding, except that directors who are parties
to the proceeding may participate in the designation of directors for the
committee. If a Quorum of the board of directors cannot be obtained and the
committee cannot be established, or even if a Quorum is obtained or the
committee is designated and a majority of the directors constituting such Quorum
or committee so directs, the determination shall be made by (i) independent
legal counsel selected by a vote of the board of directors or the committee in
the manner specified in this Section 4 or, if a Quorum of the full board of
directors cannot be obtained and a committee cannot be established, by
independent legal counsel selected by a majority vote of the full board
(including directors who are parties to the action) or (ii) a vote of the
shareholders.
Authorization of indemnification and advance of expenses shall be made in
the same manner as the determination that indemnification or advance of expenses
is permissible except that, if the determination that indemnification or advance
of expenses is permissible is made by independent legal counsel, authorization
of indemnification and advance of expenses shall be made by the body that
selected such counsel.
Section 5. COURT-ORDERED INDEMNIFICATION. Any Proper Person may apply for
indemnification to the court conducting the proceeding or to another court of
competent jurisdiction for mandatory indemnification under Section 2 of this
Article, including indemnification for reasonable expenses incurred to obtain
court-ordered indemnification. If a court determines that the Proper Person is
entitled to indemnification under Section 2 of this Article, the court shall
order indemnification, including the Proper Person's reasonable expenses
incurred to obtain court-ordered indemnification. If the court determines that
such Proper Person is fairly and reasonably entitled to indemnification in view
of all the relevant circumstances, whether or not he met the standards of
conduct set forth in Section 1 of this Article or was adjudged liable in the
proceeding, the court may order such indemnification as the court deems proper
except that if the Proper Person has been adjudged liable, indemnification shall
be limited to reasonable expenses incurred
II-2
<PAGE>
in connection with the proceeding and reasonable expenses incurred to obtain
court-ordered indemnification.
Section 6. ADVANCE OF EXPENSES. Reasonable expenses (including attorneys'
fees) incurred in defending an action, suit or proceeding as described in
Section 1 may be paid by the corporation to any Proper Person in advance of the
final disposition of such action, suit or proceeding upon receipt of (i) a
written affirmation of such Proper Person's good faith belief that he has met
the standards of conduct prescribed by Section 1 of this Article VI, (ii) a
written undertaking, executed personally or on the Proper Person's behalf, to
repay such advances if it is ultimately determined that he did not meet the
prescribed standards of conduct (the undertaking shall be an unlimited general
obligation of the Proper Person but need not be secured and may be accepted
without reference to financial ability to make repayment), and (iii) a
determination is made by the proper group (as described in Section 4 of this
Article VI) that the facts as then known to the group would not preclude
indemnification. Determination and authorization of payments shall be made in
the same manner specified in Section 4 of this Article VI.
Section 7. ADDITIONAL INDEMNIFICATION TO CERTAIN PERSONS OTHER THAN
DIRECTORS. In addition to the indemnification provided to officers, employees,
fiduciaries or agents because of their status as Proper Persons under this
Article, the corporation may also indemnify and advance expenses to them if they
are not directors of the corporation to a greater extent than is provided in
these bylaws, if not inconsistent with public policy, and if provided for by
general or specific action of its board of directors or shareholders or by
contract.
Section 8. WITNESS EXPENSES. The sections of this Article VI do not limit
the corporation's authority to pay or reimburse expenses incurred by a director
in connection with an appearance as a witness in a proceeding at a time when he
has not been made or named as a defendant or respondent in the proceeding.
Section 9. REPORT TO SHAREHOLDERS. Any indemnification of or advance of
expenses to a director in accordance with this Article VI, if arising out of a
proceeding by or on behalf of the corporation, shall be reported in writing to
the shareholders with or before the notice of the next shareholders' meeting. If
the next shareholder action is taken without a meeting at the instigation of the
board of directors, such notice shall be given to the shareholders at or before
the time the first shareholder signs a writing consenting to such action.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "1933 Act"), may be permitted to officers, directors or
persons controlling the Company, the Company has been advised that, in the
opinion of the Securities and Exchange Commission, Washington, D.C. 20549, such
indemnification is against public policy as expressed in such Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the officer, director or controlling person of the
Company in the successful defense of any action, suit or proceeding) is asserted
by such officer, director or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in such Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.(1)(2)(3)
<TABLE>
<S> <C>
SEC Registration Fee...................................................... $ 3,776
NASD Filing Fee........................................................... 1,776
Blue Sky Filing Fees...................................................... 1,000
Blue Sky Legal Fee........................................................ 2,000
Printing Expense.......................................................... 50,000
Legal Fees and Expense.................................................... 80,000
Accounting Fee............................................................ 65,000
Transfer Agent............................................................ 3,000
Nasdaq NMS Application Fee................................................ 25,000
Miscellaneous Expenses.................................................... 43,448
---------
Total................................................................. $ 275,000(1)
---------
---------
</TABLE>
- ------------------------
(1) Does not include the Representatives' commission and expenses of $780,000
($897,000 if the Overallotment Option is exercised).
(2) All expenses, except the SEC registration fee and NASD filing fee, are
estimated.
(3) The Registrant will pay all registration expenses associated with the sale
of the Selling Shareholders' shares excluding sales commissions.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
During the last three years, the Registrant sold the following shares of its
Common Stock which were not registered under the Securities Act of 1933, as
amended (the "1933 Act"):
(i) In April 1996, the Registrant sold 81,007 shares of its Common Stock
to Michael D. Silberman for services rendered valued at $.0042 per share.
(ii) In June 1996, the Registrant sold 25 Units of its securities, each
Unit consisting of a $10,000 promissory note and 9,530 shares of Common
Stock for $10,000 per Unit to the following persons:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK UNDERLYING
NAME THE UNITS
- ------------------------------------------------------------------------------ -------------------------
<S> <C>
Daniel Nordstrom.............................................................. 19,060
Michael Nordstrom............................................................. 9,530
Michael N. Poli............................................................... 9,530
Larry Heimann................................................................. 9,530
Richard Yanez................................................................. 9,530
John Wrobel................................................................... 9,530
Kendall Oltrogge.............................................................. 9,530
Duane Eisenbeiss.............................................................. 9,530
Billie Jolson................................................................. 9,530
Howard K. O'Neil.............................................................. 9,530
Richard J. Weiler and Mary Jo Weiler.......................................... 19,060
Donald L. Moen and Barbara A. Moen............................................ 9,530
James W. O'Neil............................................................... 9,530
Startrust Co. as trustee for Patricia Bandawat................................ 38,120
John Jensen................................................................... 9,530
Jeffrey B. Rosenfeld.......................................................... 9,530
Steven Bandawat............................................................... 9,530
Patricia Bandawat............................................................. 28,590
</TABLE>
II-4
<PAGE>
(iii) In March 1997, the Registrant sold 334,759 shares of its Common
Stock at $1.68 per share to the following individuals.
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
- ------------------------------------------------------------------------------------- -----------------
<S> <C>
Gary Dendo and Masako Dendo.......................................................... 5,957
James. W. O'Neil..................................................................... 11,912
Rae Saltzman and Marjorie M. Saltzman................................................ 5,957
David H. Welch....................................................................... 17,870
Gary Oswald.......................................................................... 8,936
Josephine C.H. Tinimbang............................................................. 5,957
William A. Traxel and Ruth A. Miller................................................. 14,891
Robert L. Mapes and Peggy G. Mapes................................................... 595
James Mapes.......................................................................... 3,872
John Mapes........................................................................... 2,383
Kurt Kobel........................................................................... 3,574
John C. Gudgel, Jr................................................................... 23,826
Milton Lamansky...................................................................... 2,979
Scott Huddleston and Judith Huddleston............................................... 5,957
Shung Sen Choong and Tu C. Choong.................................................... 5,957
Marta Joan Butler and David T. Butler................................................ 23,826
Joanie L. Militich................................................................... 3,872
Samuel Wong and Linda Wong........................................................... 11,912
Russell J. Mello and Maxine F. Fuller................................................ 2,979
Clemence Tokarz...................................................................... 5,957
Jasvir S. Mattu...................................................................... 5,957
Eliot G. Ellefson.................................................................... 2,979
Frances M. Ellefson.................................................................. 5,957
Frank Hlvaka......................................................................... 2,979
Jeffery Silverman.................................................................... 5,957
William B. Silverman................................................................. 11,912
Steve Singer......................................................................... 9,530
Alan C. Andalman..................................................................... 9,530
Francene A. Kaefer................................................................... 5,957
Frederick S. Kaefer.................................................................. 11,912
James W.T. Hu and Grace T.Y. Hu...................................................... 11,912
Catherine Chen....................................................................... 5,957
Felicia Choi......................................................................... 11,912
Chuck Brown and Yvonne Brown......................................................... 5,957
Jesse Roggens........................................................................ 5,957
Gary L. Boster....................................................................... 9,530
Rabbi Yaakov Bender.................................................................. 35,738
Kevin S. McGovern.................................................................... 5,957
</TABLE>
(iv) In June 1997 the Registrant issued stock options to purchase up to
60,000 shares at $6.75 per share to Kevin Dieball for consulting services.
(v) From time to time, the Registrant has issued stock options
(currently aggregating 1,761,633 stock options) to employees, officers and
directors under its 1996 Stock Option Plan.
With respect to the sales made, the Registrant relied on Section 4(2) of the
1933 Act, and/or Regulation D promulgated under the 1933 Act. No advertising or
general solicitation was employed in offering the securities. The securities
were offered to a limited number of individuals all of whom were
II-5
<PAGE>
experienced and sophisticated investors capable of analyzing the merits and
risks of their investment. All such investors acknowledged in writing that they
were acquiring the securities for investment and not with a view toward
distribution or resale and that they understood the speculative nature of their
investment. The transfer of the securities was appropriately restricted from
sale by the Registrant.
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE
- ------------- ------------------------------------------------------------------------------------------------
<C> <S>
1.01 Form of Underwriting Agreement(1)
1.02 Form of Agreement Among Underwriters(1)
1.03 Form of Selected Dealer Agreement(1)
1.04 Form of Representatives' Warrant(1)
1.05 Form of Amended Underwriting Agreement
3.01 Restated Articles of Incorporation of the Registrant(1)
3.02 Bylaws of the Registrant(1)
4.01 Form of Warrant
4.02 Form of Common Stock Certificate
5.01 Opinion of Gary A. Agron, regarding legality of the Units (includes Consent)(1)
10.01 1996 Employee Stock Option Plan(1)
10.02 Office Lease and Amendments thereto (Beverly Hills, California)(1)
10.03 Employment Agreement with Mr. Vukadinovic, as amended(1)
10.04 Employment Agreement with Mr. Silberman, as amended(1)
10.05 Promissory Note issued by Mr. Vukadinovic
11.01 Computation of Earnings Per Share(1)
11.02 Computation of Earnings Per Share
23.01 Consent of A.J. Robbins, P.C.(1)
23.02 Consent of Gary A. Agron (See 5.01, above)(1)
23.03 Consent of A.J. Robbins, P.C.
27.01 Financial Data Schedule(1)
27.02 Financial Date Schedule
</TABLE>
- ------------------------
(1) Previously filed
ITEM 28. UNDERTAKINGS.
The Registrant hereby undertakes:
(a) That insofar as indemnification for liabilities arising under the 1933
Act may be permitted to directors, officers and controlling persons of the
Registrant, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
II-6
<PAGE>
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(b) That subject to the terms and conditions of Section 13(a) of the
Securities Exchange Act of 1934, it will file with the Securities and Exchange
Commission such supplementary and periodic information, documents and reports as
may be prescribed by any rule or regulation of the Commission heretofore or
hereafter duly adopted pursuant to authority conferred in that section.
(c) That any post-effective amendment filed will comply with the applicable
forms, rules and regulations of the Commission in effect at the time such
post-effective amendment is filed.
(d) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the 1933
Act;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(e) That, for the purpose of determining any liability under the 1933 Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(f) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
Offering.
(g) To provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in such
names as required by the Underwriters to permit prompt delivery to each
purchaser.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the 1933 Act, as amended, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements of filing on Form SB-2 and has caused this Amendment No. 1
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Beverly Hills, California, on August 12, 1997.
<TABLE>
<S> <C> <C>
RETROSPETTIVA, INC.
By: /s/ BORIVOJE VUKADINOVIC
-----------------------------------------
Borivoje Vukadinovic
CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the 1933 Act, as amended, this Registration
Statement has been signed below by the following persons on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ BORIVOJE
VUKADINOVIC Chief Executive Officer,
- ------------------------------ President and Director August 12, 1997
Borivoje Vukadinovic
/s/ MICHAEL D. Chief Financial Officer,
SILBERMAN Principal Accounting
- ------------------------------ Officer, Secretary and August 12, 1997
Michael D. Silberman Director
/s/ IVAN ZOGOVIC
- ------------------------------ Manager - Export/Import August 12, 1997
Ivan Zogovic
/s/ MOJGAN KEYWANFAR
- ------------------------------ Accounting Manager and August 12, 1997
Mojgan Keywanfar Director
/s/ S. WILLIAM YOST
- ------------------------------ Director August 12, 1997
S. William Yost
/s/ DONALD E. TORMEY
- ------------------------------ Director August 12, 1997
Donald E. Tormey
/s/ PHILIP E. GRAHAM
- ------------------------------ Director August 12, 1997
Philip E. Graham
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE
- --------- ---------------------------------------------------------------------------------------------------------
<C> <S>
1.05 Form of Amended Underwriting Agreement
4.01 Form of Warrant
4.02 Form of Common Stock Certificate
10.05 Promissory Note issued by Mr. Vukadinovic
11.02 Computation of Earnings Per Share
23.03 Consent of AJ. Robbins, P.C.
27.02 Financial Data Schedule
</TABLE>
<PAGE>
EXHIBIT 1.05
RETROSPETTIVA, INC.
500,000 UNITS
UNDERWRITING AGREEMENT
Kensington Securities, Inc. September ___, 1997
Gunn Allen Financial, Inc.
c/o Kensington Securities, Inc.
4110 North Scottsdale Road, Suite 355
Scottsdale, AZ 85251
On behalf of the Several
Underwriters named in
Schedule I attached hereto
Ladies and Gentlemen:
Retrospettiva, Inc., a California corporation (the "Company"), proposes to
issue and sell to you and the other underwriters named in Schedule I to this
Agreement (the "Underwriters"), for whom you are acting as Representatives, an
aggregate of 500,000 units (the "Firm Units"), each unit ("Unit") consisting of
two (2) shares of the Company's no par value Common Stock (the "Common Stock"),
and one Redeemable Common Stock Warrant entitling the holder thereof to purchase
for $7.50, one share of Common Stock for a term of five (5) years from the
effective date of the Registration Statement described below in Section 1(a).
The terms of the Units and the components of the Units shall be as described in
the Registration Statement. In addition, for the sole purpose of covering over-
allotments in connection with the sale of the Firm Units, the Company proposes
to grant to the Underwriters an option to purchase up to an additional 75,000
Units (the "Option Units"). The Company further agrees to sell and issue (i) to
Kensington Securities, Inc., as Representative, a five-year warrant to purchase
for $14.40 per Unit an aggregate of 25,000 Units, and (ii) to Gunn Allen
Financial, Inc., as Representative, a five year warrant to purchase for $14.40
per Unit an aggregate of 25,000 Units. The warrants to be issued to the
Representatives shall be hereinafter referred to as the "Representatives'
Warrants" and the Units underlying the Representatives' Warrants shall be
hereinafter referred to as the "Representatives' Warrants Units." Each
Representatives' Warrants Unit consists of two (2) shares of Common Stock and
one Redeemable Warrant ("Underlying Warrant"). The terms and conditions of the
Representatives' Warrants, Representatives' Warrants Units and Underlying
Warrants, including the purchase price thereof, shall be as set forth in the
form of Representatives' Warrants filed as an exhibit to the Registration
Statement.
The Firm Units, any Option Units purchased pursuant to this Agreement and
the Representatives' Warrants Units are collectively called herein the "Units"
and the Warrants
<PAGE>
included in the Units and the Representatives' Warrants are collectively
called herein the "Warrants." The shares of Common Stock issuable upon
exercise of the Warrants are collectively called the "Warrant Shares" and the
Warrant Shares, together with the shares of Common Stock included in the
Units, are collectively called the "Shares."
You have advised the Company that you intend to purchase the Firm Units,
and that you have been authorized to execute this Agreement. The Company
confirms the agreements made by it with respect to the purchase of the Firm
Units by the Underwriters, as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to, and agrees with, the Underwriters
that:
(a) A registration statement (File No. 333-29295) on Form SB-2 relating to
the public offering of the Units, Warrants and Shares, including a preliminary
form of prospectus, copies of which have heretofore been delivered to you, has
been prepared by the Company in conformity with the requirements of the
Securities Act of 1933, as amended (the "Act"), and the rules and regulations
(the "Rules and Regulations") of the Securities and Exchange Commission (the
"Commission") thereunder, and has been filed with the Commission under the Act.
"Preliminary Prospectus" shall mean each prospectus filed pursuant to Rule 430
of the Rules and Regulations. The registration statement (including all
financial schedules and exhibits) as amended at the time it becomes effective
and the final prospectus included therein are respectively referred to as the
"Registration Statement" and the "Prospectus", except that (i) if the prospectus
first filed by the Company pursuant to Rule 424(b) or Rule 430A of the Rules and
Regulations or otherwise utilized and not required to be so filed shall differ
from said prospectus as then amended, the term "Prospectus" shall mean the
prospectus first filed pursuant to Rule 424(b) or Rule 430A, or so utilized from
and after the date on which it shall have been filed or utilized and (ii) if
such registration statement or prospectus is amended or such prospectus is
supplemented, after the effective date (the "Effective Date") of such
registration statement and prior to the Option Closing Date (as defined in
Section 2(b)), the term "Registration Statement" shall include such
registration statement as so amended, and the term "Prospectus" shall include
the prospectus as so amended or supplemented, or both, as the case may be.
(b) At the time the Registration Statement becomes effective and at all
times subsequent thereto up to the Option Closing Date (defined above), (i) the
Registration Statement and Prospectus will in all respects conform to the
requirements of the Act and the Rules and Regulations, (ii) there will be no
stop order of the Commission, any court of competent jurisdiction or the
securities administrator of any state in which the Units, Warrants and Shares
have been, or are to be, registered or qualified, in effect, pending or
threatened with respect to the effectiveness of the Registration Statement or
the distribution of the Prospectus and (iii) neither the Registration Statement
nor the Prospectus will include any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
statements therein not misleading; provided, however, that the Company makes no
2
<PAGE>
representations, warranties or agreements as to information contained in or
omitted from the Registration Statement or Prospectus in reliance upon, and in
conformity with, written information furnished to the Company by or on behalf of
the Underwriters specifically for use in the preparation thereof. It is
understood that the statements set forth in the Prospectus with respect to
stabilization, the material set forth under the heading "Underwriting", and the
identity of counsel to the Underwriters under the heading "Legal Matters"
constitute the only information furnished in writing by or on behalf of the
Underwriters for inclusion in the Registration Statement and Prospectus, as the
case may be.
(c) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, with full power and corporate authority to own its properties and
conduct its business as described in the Prospectus and is duly qualified to do
business as a foreign corporation and is in good standing in all other
jurisdictions in which the nature of its business or the character or location
of its properties requires such qualification, except where failure to so
qualify will not materially affect the Company's business, properties or
financial condition.
(d) The authorized capital stock of the Company as of the date of the
Prospectus, as set forth under "Description of Securities" in the Prospectus,
was 15,000,000 shares of Common Stock, no par value per share, of which not more
than 2,000,000 shares will be issued and outstanding or subject to outstanding
options or warrants as of the Effective Date and 1,000,000 shares of Preferred
Stock, no par value per share, of which no shares will be issued and
outstanding. The shares of issued and outstanding capital stock of the Company
set forth thereunder have been duly authorized, validly issued and are fully
paid and non-assessable; except as set forth in the Prospectus, no options,
warrants or other rights to purchase, agreements or other obligations to issue,
or agreements or other rights to convert any obligation into, any shares of
capital stock of the Company have been granted or entered into by the Company.
The Preferred Stock conforms to all statements relating thereto contained in the
Registration Statement and Prospectus.
(e) The Units and the Representatives' Warrants and their respective
components upon issuance and delivery and payment therefor in the manner
contemplated by this Agreement will be duly authorized, validly issued, fully
paid and nonassessable. The shares of Common Stock are not subject to
preemptive rights of any security holder of the Company. Neither the filing of
the Registration Statement nor the offering or sale of the Units, Warrants or
Shares, as contemplated in this Agreement and the Representatives' Warrants,
gives rise to any rights, other than those which have been waived or satisfied,
for or relating to the registration of any shares of Common Stock or other
securities of the Company, except as described in the Registration Statement.
(f) All offers and sales of the Company's capital stock prior to the date
hereof, other than pursuant to effective registration statements under the Act,
were at all relevant times exempt from the registration requirements of the Act
and were duly registered or the subject of an available exemption from the
registration requirements of the applicable state securities or Blue
3
<PAGE>
Sky laws, or the relevant statutes of limitations have expired, or civil
liability therefor has been eliminated by an offer to rescind.
(g) This Agreement, including the Representatives' Warrants, the agreement
between the Company and the warrant agent (the "Warrant Agreement") and the
other agreements of the Company provided for herein, have been duly authorized,
executed and delivered by the Company and constitute valid and binding
agreements of the Company enforceable against the Company in accordance with
their respective terms, except insofar as rights to indemnity and/or
contribution may be limited by federal or state securities laws or the public
policy underlying such laws and except as enforcement may be limited by
bankruptcy, insolvency, reorganization or other similar laws affecting
creditors' rights generally, and be subject to general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law). The Units, Warrants and Shares have been duly authorized for
issuance and sale, and, when issued pursuant to this Agreement and the
Representatives' Warrants against payment of the consideration therefor, will be
validly issued, fully paid and nonassessable and not subject to preemptive
rights. The Warrant Shares issuable upon exercise of the Warrants have been
duly authorized and reserved for issuance upon exercise of the Warrants and when
issued upon payment of the exercise price therefor will be validly issued, fully
paid and nonassessable shares of Common Stock and not subject to preemptive
rights.
(h) Except as described in the Prospectus, the Company is not in
violation, breach or default of or under, and consummation of the transactions
herein contemplated and the fulfillment of the terms of this Agreement will not
conflict with, or result in a breach of, any of the terms or provisions of, or
constitute a default under, or result in the creation or imposition of any lien,
charge or encumbrance pursuant to the terms of, any indenture, mortgage, deed of
trust, loan agreement or other material agreement or instrument to which the
Company is a party or by which the Company may be bound or to which any of the
property or assets of the Company are subject, nor will such action result in
any violation of the provisions of the articles of incorporation or the
by-laws of the Company, as amended, or any statute or any order, rule or
regulation applicable to the Company of any court or of any regulatory authority
or other governmental body having jurisdiction over the Company.
(i) Subject to the qualifications stated in the Prospectus, the Company
has good and marketable title to all properties and assets described in the
Prospectus as owned by it, free and clear of all liens, charges, encumbrances or
restrictions, except such as are not materially significant or important in
relation to its business; all of the material leases and subleases under which
the Company is the lessor or sublessor of properties or assets or under which
the Company holds properties or assets as lessee or sublessee as described in
the Prospectus are in full force and effect, and, except as described in the
Prospectus, the Company is not in default in any material respect with respect
to any of the terms or provisions of any of such leases or subleases, and no
claim has been asserted by anyone adverse to rights of the Company as lessor,
sublessor, lessee or sublessee under any of the leases or subleases mentioned
above, or affecting or questioning the right of the Company to continued
possession of the leased or subleased premises or assets under any such lease or
sublease except as described or referred to in the
4
<PAGE>
Prospectus; and the Company owns or leases all such properties described in
the prospectus as are necessary to its operations as now conducted and,
except as otherwise stated in the Prospectus, as proposed to be conducted as
set forth in the Prospectus.
(j) A.J. Robbins, P.C., who have given their reports on certain financial
statements filed and to be filed with the Commission as a part of the
Registration Statement, which are incorporated in the Prospectus, are with
respect to the Company independent public accountants as required by the Act and
the Rules and Regulations.
(k) The financial statements and schedules, together with related notes,
set forth in the Prospectus or the Registration Statement present fairly the
financial position and results of operations and changes in financial position
of the Company on the basis stated in the Registration Statement, at the
respective dates and for the respective periods to which they apply. Said
statements and schedules and related notes have been prepared in accordance with
generally accepted accounting principles applied on a basis which is consistent
during the periods involved.
(l) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, except as may otherwise be stated or
contemplated therein: (i) there has not been any material adverse change in the
condition of the Company and its subsidiaries, taken as a whole, financial and
otherwise, or in the earnings, business prospects or current operations of the
Company and its subsidiaries, taken as a whole, whether or not arising in the
ordinary course of business, (ii) there have not been any material transactions
entered into by the Company or any of its subsidiaries which are required to be
disclosed in the Registration Statement, (iii) there has been no dividend or
distribution of any kind declared, paid or made by the Company on any class of
its capital stock or any material change in the capital stock or material
increase in the long-term indebtedness of the Company; (iv) no action, suit or
proceeding at law or in equity and no governmental or regulatory proceeding has
occurred or is pending or, to the knowledge of the Company, threatened against
or affecting the Company or any of its subsidiaries wherein an unfavorable
decision, ruling or finding would have a material adverse effect on the
consummation of this Agreement or the business, operations, financial condition,
income or business prospects of the Company and its subsidiaries, taken as a
whole and (v) neither the Company nor any of its subsidiaries has sustained a
loss of, or damage to, its properties (whether or not insured) which would have
a material adverse effect on the business, operations, financial condition,
income or business prospects of the Company and its subsidiaries, taken as a
whole.
(m) Except as set forth in the Prospectus, there is not now pending nor,
to the knowledge of the Company, threatened, any action, suit or proceeding
(including those related to environmental matters or discrimination on the basis
of age, sex, religion or race) to which the Company is a party before or by any
court or governmental agency or body, which might result in any material adverse
change in the condition (financial or other), business prospects, net worth or
properties of the Company; and no labor disputes involving the employees of the
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Company exist which might be expected to materially adversely affect the
conduct of the business, property or operations or the financial condition or
earnings of the Company.
(n) Except as disclosed in the Prospectus, the Company has filed all
necessary federal, state and foreign income and franchise tax returns and has
paid all taxes shown as due thereon; and there is no tax deficiency which has
been or to the knowledge of the Company might be asserted against the Company.
(o) The Company has sufficient licenses, permits and other governmental
authorizations currently required for the conduct of its business or the
ownership of its property as described in the Prospectus and is in all material
respects complying therewith and, except as disclosed in the Prospectus, owns or
possesses adequate rights to use all material patents, patent applications,
trademarks, mark registrations, copyrights and licenses necessary for the
conduct of such business and has not received any notice of conflict with the
asserted rights of others in respect thereof. To the best knowledge of the
Company, none of the activities or business of the Company is in violation of,
or cause the Company to violate, any law, rule, regulation or order of any
foreign governmental authority or of the United States, any state, county or
locality, or of any agency or locality, the violation of which would have a
material adverse impact upon the condition (financial or otherwise), business,
property, prospective results of operations or net worth of the Company.
(p) The Company has not, directly or indirectly, at any time (i) made any
contributions to any candidate for political office, or failed to disclose fully
any such contribution in violation of law, or (ii) made any payment to any
state, federal or foreign governmental officer or official, or other person
charged with similar public or quasi-public duties, other than payments or
contributions required or allowed by applicable law. The Company's internal
accounting controls and procedures are sufficient to cause the Company to comply
in all material respects with the Foreign Corrupt Practices Act of 1977, as
amended.
(q) On the Closing Dates (as defined in Section 2(c)), all transfer or
other taxes (including franchise, capital stock or other tax, other than income
taxes imposed by any jurisdiction), if any, which are required to be paid in
connection with the sale and transfer of the Units, Warrants and Shares to the
Underwriters hereunder will have been fully paid or provided for by the Company
and all laws imposing such taxes will have been fully complied with.
(r) All contracts and other documents of the Company which are, under the
Rules and Regulations, required to be filed as exhibits to the Registration
Statement have been so filed.
(s) The Company has not taken and will not take, directly or indirectly,
any action designed to cause or result in, or which has constituted or which
might reasonably be expected to constitute, the stabilization or manipulation of
the price of the Units, Warrants and Shares to facilitate the sale or resale of
the Units, Warrants and Shares hereunder.
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(t) Except as set forth in the Prospectus, the Company has no
subsidiaries.
(u) The Company has not entered into any agreement pursuant to which any
person is entitled either directly or indirectly to compensation from the
Company for services as a finder in connection with the proposed public
offering.
(v) As of the effective date of the Registration Statement, the Common
Stock has been duly registered under Section 12(g) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and the Common Stock and the
Warrants have been approved for quotation on the National Association of
Securities Dealers Automated Quotation National Market System (the "Nasdaq
National Market") upon official notice of issuance.
Any certificate signed by any officer of the Company and delivered to you
or to counsel for the Underwriters in connection with the Closing shall be
deemed a representation and warranty by the Company to the Underwriters as to
the matters covered thereby.
2. PURCHASE, DELIVERY AND SALE OF THE SHARES.
(a) Subject to the terms and conditions of this Agreement, and upon the
basis of the representations, warranties and agreements herein contained, the
Company agrees to issue and sell to the Underwriters, and the Underwriters agree
to buy from the Company at $10.80 per Unit at the place and time hereinafter
specified, 500,000 Units.
Delivery of the Firm Units as well as the Representatives' Warrants against
payment therefor shall take place at the offices of Kensington Securities, Inc.,
4110 North Scottsdale Road, Suite 355, Scottsdale, Arizona 85251 (or at such
other place as may be designated by agreement between you and the Company) at
9:00 a.m. local time on September ___, 1997 or at such later time and date as
you may designate within ten business days of the effective date of the
Registration Statement or the date which you receive the Prospectus in
sufficient quantity to send confirmations of sale, such time and date of
delivery for the Firm Units being herein called the "First Closing Date." Time
shall be of the essence and delivery at the time and place specified in this
subsection (a) is a further condition to the obligations of the Underwriters
hereunder. Payment shall be made to the order of the Company on the First
Closing Date.
(b) In addition, subject to the terms and conditions of this Agreement,
and upon the basis of the representations, warranties and agreements herein
contained, the Company hereby grants an option to you to purchase all or any
part of an aggregate of an additional 75,000 Units at the same price per Unit as
you shall pay for the Firm Units being sold pursuant to the provision of
subsection (a) of this Section 2. This option may be exercised within thirty
(30) days after the First Closing Date upon notice by you to the Company
advising it as to the amount of Option Units as to which the option is being
exercised, the names and denominations in which the certificates for such Option
Units are to be registered and the time and date when such certificates are to
be delivered. Such time and date shall be determined by you but shall not be
earlier than four and not later than ten full business days after the exercise
of said option, nor in any event prior to the First Closing Date, and such time
and date is referred to herein as the
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"Option Closing Date." Delivery of the Option Units against payment therefor
shall take place at the offices of the Underwriters. Time shall be of the
essence and delivery at the time and place specified in this subsection (b)
is a further condition to your obligations hereunder. The Option granted
hereunder may be exercised only to cover over-allotments in the sale by the
Underwriters of Firm Units referred to in subsection (a) above.
(c) On the basis of the representations, warranties, covenants and
agreements herein contained, and subject to the terms and conditions herein set
forth, the Company shall sell to each of Kensington Securities, Inc. and Gunn
Allen Financial, Inc., individually, and/or your respective designated officers,
at the First Closing Date, as defined below, for $50 each, a Representatives'
Warrant to purchase up to 25,000 Representatives' Warrants Units. The price,
terms and provisions of the Representatives' Warrants Units and the respective
rights and obligations of the Company and the holders of the Representatives'
Warrants and/or Representatives' Warrants Units and the components thereof are
set forth in the Representatives' Warrants between the Company and the
Representatives.
(d) The Company will make the certificates for the securities comprising
the Units to be purchased by the Underwriters hereunder available to you for
examination at least two full business days prior to the First Closing Date or
the Option Closing Date (which are collectively referred to herein as the
"Closing Dates" and individually as a "Closing Date"), as the case may be. The
certificates shall be in such names and denominations as you may request, at
least two full business days prior to the relevant Closing Dates. Time shall be
of the essence and the availability of the certificates at the time and place
specified in this Agreement is a further condition to the obligations of the
Underwriters.
Definitive engraved certificates in negotiable form for the Firm Units and
the Option Units to be purchased by the Underwriters hereunder will be delivered
by the Company to you for your account against payment of the purchase price by
you by certified or bank cashier's checks in certified funds, payable to the
order of the Company.
In addition, in the event you exercise the option to purchase from the
Company all or any portion of the Option Units pursuant to the provisions of
subsection (b) above, payment for such Option Units shall be made to or upon the
order of the Company not later than ten (10) business days after the Option
Closing Date by certified checks at the time and date of delivery of such Option
Units as required by the provisions of subsection (b) above, against receipt of
the certificates for such Option Units by you for your account, registered in
such names and in such denominations as you may request.
It is understood that the Underwriters propose to offer the Units to be
purchased hereunder to the public upon the terms and conditions set forth in the
Registration Statement, after the Registration Statement becomes effective.
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<PAGE>
3. COVENANTS OF THE COMPANY.
The Company covenants and agrees with the Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement to become effective and, upon notification from the Commission that
the Registration Statement has become effective, will so advise you and will not
at any time, whether before or after the effective date, file any amendment to
the Registration Statement or supplement to the Prospectus of which you shall
not previously have been advised and furnished with a copy or to which you or
your counsel shall have objected in writing or which is not in compliance with
the Act and the Rules and Regulations. At any time prior to the later of (i)
the completion by the Underwriters of the distribution of the Shares
contemplated hereby (but in no event more than nine months after the date on
which the Registration Statement shall have become or been declared effective)
and (ii) 25 days after the Effective Date, the Company will prepare and file
with the Commission, promptly upon your request, any amendments or supplements
to the Registration Statement or Prospectus which, in your reasonable opinion,
may be necessary or advisable in connection with the distribution of the Shares.
(i) Promptly after you or the Company is advised thereof, you
will advise the Company or the Company will advise you, as the case
may be, and confirm the advice in writing, of the receipt of any
comments of the Commission, of the effectiveness of any post-effective
amendment to the Registration Statement, of the filing of any
supplement to the Prospectus or any amended Prospectus, of any request
made by the Commission for amendment of the Registration Statement or
for supplementing of the Prospectus or for additional information with
respect thereto, of the issuance by the Commission or any state or
regulatory body of any stop orders or other order suspending the
effectiveness of the Registration Statement or any order preventing or
suspending the use of any Preliminary Prospectus, or of the suspension
of the qualification of the Shares for offering in any jurisdiction,
or the institution of any proceedings for any of such purposes, and
the Company will use its reasonable efforts to prevent the issuance of
any such order and, if issued, to obtain as soon as possible the
lifting thereof.
(ii) The Company has caused to be delivered to you copies of each
Preliminary Prospectus, and the Company has consented and hereby
consents to the use of such copies for the purposes permitted by the
Act. The Company authorizes the Underwriters and selected dealers to
use the Prospectus in connection with the sale of the Units for such
period as in the opinion of counsel of the Underwriters (whether
general, special, patent or otherwise) the use thereof is required to
comply with the applicable provisions of the Act and the Rules and
Regulations. In case of the happening, at any time within such period
as a Prospectus is required under the Act to be delivered in
connection with sales by an underwriter or dealer, of any event of
which the Company has knowledge and
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<PAGE>
which materially affects the Company or the Securities, or which, in the
opinion of counsel for the Company or counsel for the Underwriters,
should be set forth in an amendment to the Registration Statement or a
supplement to the Prospectus in order to make the statements therein not
then misleading, in light of the circumstances existing at the time the
Prospectus is required to be delivered to a purchaser of the Units, or
in case it shall be necessary to amend or supplement the Prospectus to
comply with the Act or with the Rules and Regulations, the Company will
notify you promptly and forthwith prepare and furnish to you copies of
such amended Prospectus or of such supplement to be attached to the
Prospectus, in such quantities as you may reasonably request, in order
that the Prospectus, as so amended or supplemented, will not contain any
untrue statement of a material fact or omit to state any material facts
necessary in order to make the statements in the Prospectus, in the
light of the circumstances under which they are made, not misleading.
The preparation and furnishing of any such amendment or supplement to
the Registration Statement or amended Prospectus or supplement to be
attached to the Prospectus shall be without expense to the Underwriters,
except that in case the Underwriters are required, in connection with
the sale of the Shares, to deliver a Prospectus nine months or more
after the effective date of the Registration Statement, the Company will
upon your request and at your expense, amend or supplement the
Registration Statement and Prospectus or file a new registration
statement on Form SB-2, S-1 or S-3, if necessary, and furnish the
Underwriters with reasonable quantities of prospectuses complying with
Section 10(a)(3) of the Act.
(iii) The Company will comply with the Act, the Rules and
Regulations and the Exchange Act and the rules and regulations
thereunder in connection with the offering and issuance of the Shares.
(b) The Company will use its best efforts and shall pay all costs and
expenses to qualify or register ("Blue Sky") the Firm Units and Option Units for
sale under the securities or "blue sky" laws of such jurisdictions as you may
designate and will make such applications and furnish such information to
counsel for the Underwriters as may be required for that purpose and to comply
with such laws, provided that the Company shall not be required to qualify as a
foreign corporation or a dealer in securities or to execute a general consent of
service of process in any jurisdiction in any action other than one arising out
of the offering or sale of the Firm Units and Option Units. Blue Sky
applications shall be prepared by the Underwriters' counsel at the Company's
expense. On the Effective Date of this Agreement as defined in Section 9 below,
counsel for the Underwriters shall deliver to the Underwriters a Blue Sky
Memorandum describing, among other things, all states wherein the Offering has
been qualified or registered for sale, the number of Units registered in each
such state and the period of effectiveness of such qualification or
registration. The Company will, from time to time, prepare and file such
statements and reports as are or may be required to continue such qualification
in effect for so long a period as you may reasonably request.
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(c) If the sale of the Units provided for herein is not consummated for
any reason caused by the Company, the Company shall pay all costs and expenses
incident to the performance of the Company's obligations hereunder, including
but not limited to, all of the expenses itemized in Section 8, including your
accountable expenses, as provided in Section (b).
(d) The Company will use its best efforts to cause a Registration
Statement under the Exchange Act to be declared effective concurrently with the
completion of the offering of the Shares or promptly thereafter, but in no event
later than three days after the date of the Prospectus.
(e) For so long as the Company is a reporting company under either Section
12(g) or 15(d) of the Exchange Act, the Company, at its expense, will furnish to
the holders of its Common Stock, Units and Warrants an annual report (including
financial statements audited by independent public accountants), in reasonable
detail and at its expense, will furnish to you during the period ending five
years from the date hereof, (i) within 90 days of the end of each fiscal year, a
balance sheet of the Company and any subsidiaries as at the end of such fiscal
year, together with statements of income, stockholders' equity and cash flows of
the Company and any subsidiaries as at the end of such fiscal year, all in
reasonable detail and accompanied by a copy of the certificate or report thereon
of independent auditors; (ii) as soon as they are available, a copy of all
reports (financial or other) mailed to security holders; (iii) as soon as they
are available, a copy of all non-confidential reports and financial statements
furnished to or filed with the Commission; and (iv) such other information as
you may from time to time reasonably request.
(f) In addition to the information and reports set forth in Section 3(e)
above, for a period of two years from the Effective Date, the Company, at its
expense, shall furnish to you (i) unaudited quarterly financial statements on a
timely basis, and (ii) monthly shareholder lists prepared by the Company's
transfer agent.
(g) In the event the Company has an active subsidiary or subsidiaries,
such financial statements referred to in subsection (e) above will be on a
consolidated basis to the extent the accounts of the Company and its subsidiary
or subsidiaries are consolidated in reports furnished to its stockholders
generally.
(h) The Company will deliver to you at or before the First Closing Date
two signed copies of the Registration Statement including all financial
statements and exhibits filed therewith, and of all amendments thereto. The
Company will deliver to or upon order of the Underwriters, from time to time
until the Effective Date, as many copies of any Preliminary Prospectus filed
with the Commission prior to the Effective Date as the Underwriters may
reasonably request. The Company will deliver to the Underwriters on the
Effective Date and thereafter for so long as a Prospectus is required to be
delivered under the Act, from time to time, as many copies of the Prospectus, in
final form, or as thereafter amended or supplemented, as the Underwriters may
from time to time reasonably request.
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(i) The Company will make generally available to its security holders and
deliver to you as soon as it is practicable to do so, but in no event later than
90 days after the end of 12 months after its current fiscal quarter, an earnings
statement (which need not be audited) covering a period of at least 12
consecutive months beginning after the Effective Date, which shall satisfy the
requirements of Section ll(a) of the Act.
(j) The Company will apply the net proceeds from the sale of the Firm
Units substantially for the purposes set forth under "Use of Proceeds" in the
Prospectus, and will file such reports with the Commission with respect to the
sale of the Units and the application of the proceeds therefrom as may be
required pursuant to Rule 463 of the Rules and Regulations.
(k) The Company will, promptly upon your request, prepare and file with
the Commission any amendments or supplements to the Registration Statement,
preliminary Prospectus or Prospectus and take any other action, which in the
reasonable opinion of Pezzola & Reinke, A Professional Corporation, counsel to
the Underwriters, may be reasonably necessary or advisable in connection with
the distribution of the Shares and will use its reasonable efforts to cause the
same to become effective as promptly as possible.
(l) Except as stated below, each of the existing stockholders of the
Company at the date hereof who is not an officer or director of the Company (the
"Existing Stockholders"), will have executed agreements ("Lock Up Agreements")
to the effect that for a period of 12 months from the date of the Prospectus,
they will not sell, assign, hypothecate, pledge or otherwise dispose of,
directly or indirectly, any shares of Common Stock of the Company owned prior to
the date hereof without your prior written consent, and will agree to permit all
certificates evidencing their shares to be endorsed with the appropriate
restrictive legends, and consent to the placement of appropriate stop transfer
orders with the transfer agent for the Company. In addition, each officer and
director of the Company shall execute a Lock Up Agreement, in the form
previously delivered, to the effect that for a period of 24 months from the date
of the Prospectus, they will not sell, assign, hypothecate, pledge or otherwise
dispose of, directly or indirectly, any shares of Common Stock of the Company
owned prior to the date hereof without your prior written consent, and will
agree to permit all certificates evidencing their shares to be endorsed with the
appropriate restrictive legends, and consent to the placement of appropriate
stop transfer orders with the transfer agent of the Company; provided, however
that fifty percent (50%) of such shares held by officers and directors may be
sold after one year from the date of the Prospectus if the Company reports at
least $1,000,000 of after-tax net income for the year ending December 31, 1997.
Excluded from the Lock-Up Agreements shall be those shares of Common Stock that
certain officers are registering for sale as part of the Registration Statement.
The Company further agrees that for a period of 12 months from the date hereof,
it will not register any shares of Common Stock underlying any existing stock
purchase warrants.
(m) The Company shall immediately make all filings required to seek
approval for the quotation of the Common Stock and the Warrants on the Nasdaq
National Market and will use its reasonable efforts to effect and maintain the
aforesaid approval for at least five years from the date of this Agreement.
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(n) The Company and its officers and directors and the Existing
Stockholders represent that it or they have not taken, and agree that it or they
will not take, directly or indirectly, any action designed to or which has
constituted or which might reasonably be expected to cause or result in the
stabilization or manipulation of the price of the Units to facilitate the sale
or resale of the Units.
(o) For a period of thirty-six months from the Closing, the Company shall,
at your option, appoint a non-voting advisor to the Company's Board of
Directors, designated by you and such advisor shall receive notice of and be
entitled to attend all meetings of the Board of Directors. The Company agrees
it shall fully indemnify, defend and hold harmless such advisor to the fullest
extent permitted by law with respect to all acts and omissions as an advisor to
the Company's Board of Directors.
(p) The Company will reserve and keep available that maximum number of its
authorized but unissued Shares which are issuable upon exercise of the Warrants
and the Representatives' Warrants (as defined in Section 11).
(q) For a period of thirty-six (36) months from the Effective Date, you
shall have the right to provide a competitive 401k program to management and all
employees of the Company.
(r) The Company shall select Common Stock and Warrant certificates and
utilize a stock transfer agent satisfactory to you.
(s) So long as any Warrants are outstanding, the Company shall use its
best efforts to cause post-effective amendments to the Registration Statement to
become effective in compliance with the Act and without any lapse of time
between the effectiveness of any such post-effective amendments and cause a copy
of each Prospectus, as then amended, to be delivered to each holder of record of
a Warrant and to furnish to the Underwriters and each dealer as many copies of
each such Prospectus as the Underwriters or dealer may reasonably request.
4. CONDITIONS OF UNDERWRITERS' OBLIGATIONS.
The obligations of the Underwriters to purchase and pay for the Units which
they have agreed to purchase hereunder are subject to the accuracy (as of the
date hereof, and as of the Closing Dates) of and compliance with the
representations and warranties of the Company herein, to the performance by the
Company of its obligations hereunder, and to the following conditions:
(a) The Registration Statement shall have become effective and you shall
have received notice thereof not later than 4:00 p.m., Eastern time, on the date
of this Agreement, or at such later time or on such later date as to which you
may agree in writing; on the Closing Dates, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that or any similar purpose shall have been instituted or shall
be
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pending or, to your knowledge or to the knowledge of the Company, shall be
contemplated by the Commission; any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of Pezzola & Reinke, counsel to the Underwriters; and no stop order
shall be in effect denying or suspending effectiveness of the Registration
Statement nor shall any stop order proceedings with respect thereto be
instituted or pending or threatened under the Act.
(b) At the First Closing Date, you shall have received the opinion, dated
as of the First Closing Date, of Gary A. Agron, counsel for the Company, in form
and substance satisfactory to counsel for the Underwriters, to the effect that:
(i) the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of California and is duly qualified or licensed to do business as a
foreign corporation in good standing in each other jurisdiction in
which the ownership or leasing of its properties or the conduct of its
business requires such qualification, except where failure to so
qualify would not result in a material adverse effect on the Company;
(ii) to the best knowledge of such counsel, (a) the Company has
obtained, or is in the process of obtaining, all licenses, permits and
other governmental authorizations necessary to the conduct of its
business as described in the Prospectus, (b) such obtained licenses,
permits and other governmental authorizations are in full force and
effect, and (c) the Company is in all material respects complying
therewith;
(iii) the authorized capitalization of the Company as of the
date of the Prospectus was as set forth under "Description of
Securities" in the Prospectus; all of the shares of the Company's
outstanding stock requiring authorization for issuance by the
Company's Board of Directors have been duly authorized and validly
issued, are fully paid and non-assessable and conform to the
description thereof contained in the Prospectus; the outstanding
shares of Common Stock of the Company have not been issued in
violation of the preemptive rights of any stockholder, and the
stockholders of the Company do not have any preemptive rights or other
rights to subscribe for or to purchase, and there are no restrictions
upon the voting or transfer of, any of the Common Stock; the Units,
Common Stock, Warrants and the Representatives' Warrants conform to
the respective descriptions thereof contained in the Prospectus; the
Units and each Unit component to be issued as contemplated in the
Registration Statement have been duly authorized and, when paid, will
be non-assessable and free of preemptive rights, and no personal
liability will attach to the ownership thereof; all prior sales of the
Company's securities have been made in compliance with, or under an
exemption from, the Act and applicable state securities laws; a
sufficient number of shares of Common Stock have been reserved for
issuance upon exercise of the Warrants and the Representatives'
Warrants; and to the best of
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such counsel's knowledge, neither the filing of the Registration
Statement nor the offering or sale of the Units as contemplated by this
Agreement gives rise to any registration rights or other rights, other
than those which have been waived or satisfied, for or relating to the
registration of the Units;
(iv) each of this Agreement, the Representatives' Warrants, the
Warrant Agreement and the Warrants has been duly and validly
authorized, executed and delivered by the Company, and assuming due
authorization, execution and delivery of this Agreement by the
Underwriters and of such other agreements by the other parties
thereto, all of such agreements are, or when duly executed will be,
the valid and legally binding obligations of the Company (except as to
bankruptcy and related matters described in paragraph 1(f), above);
provided that no opinion need be expressed as to the enforceability of
the indemnity provisions contained in Section 6 or the contribution
provisions contained in Section 7 of this Agreement;
(v) the Warrant Shares (including those issuable upon exercise
of the Representatives' Warrants) and Representatives' Warrants Units
have been duly authorized and reserved for issuance and, when issued
and delivered in accordance with the terms of this Agreement and the
Representatives' Warrants, respectively, will be duly and validly
issued, fully paid and nonassessable.
(vi) the certificate evidencing the Unit components and the
Representatives' Warrants are in valid and proper legal form; the
Warrants and the Representatives' Warrants will be exercisable for
shares of Common Stock of the Company in accordance with the terms of
the Warrant Agreement and the Representatives' Warrants, respectively;
and at the respective prices therein provided for; the shares of
Common Stock of the Company issuable upon exercise of the Warrants and
the Representatives' Warrants have been duly authorized and reserved
for issuance upon such exercise or conversion, and such shares, when
issued upon such exercise in accordance with the terms of the Warrants
and the Representatives' Warrants and at the price paid, or upon such
conversion, shall be fully paid and non-assessable;
(vii) such counsel knows of no pending or threatened legal or
governmental proceedings to which the Company is a party which could
materially and adversely affect the business, property, financial
condition or operations of the Company or which question the validity
of the Units or the components thereof, this Agreement, the Warrant
Agreement or the Representatives' Warrants or of any action taken or
to be taken by the Company pursuant to this Agreement, the Warrant
Agreement or the Representatives' Warrants; no such proceedings are
known to such counsel to be contemplated against the Company; and
there are no governmental proceedings or regulations
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<PAGE>
known to such counsel required to be described or referred to in the
Registration Statement which are not so described or referred to;
(viii) to the best knowledge of such counsel, the Company is
not in violation of or default under this Agreement, the Warrant
Agreement or the Representatives' Warrants, and the execution and
delivery hereof and thereof and the incurrence of the obligations
herein and therein set forth and the consummation of the transactions
herein or therein contemplated will not result in a violation of, or
constitute a default under, the certificate or articles of
incorporation or by-laws of the Company, or in the performance or
observation of any material obligation, agreement, covenant or
condition contained in any bond, debenture, note or other evidence of
indebtedness or in any contract, indenture, mortgage, loan agreement,
lease, joint venture or other agreement or instrument to which the
Company is a party or in a violation of any material order, rule,
regulation, writ, injunction or decree or any government, governmental
instrumentality or court, domestic or foreign;
(ix) the Registration Statement has become effective under the
Act, and to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement is in
effect, no proceedings for that purpose have been instituted or are
pending before, or threatened by, the Commission and the Registration
Statement and the Prospectus (except for the financial statements and
other financial data contained therein, or omitted therefrom, as to
which such counsel need express no opinion) comply as to form in all
material respects with the applicable requirements of the Act and the
Rules and Regulations;
(x) such counsel has participated in the preparation of the
Registration Statement and the Prospectus and nothing has come to the
attention of such counsel to cause such counsel to have reason to
believe that the Registration Statement or any amendment thereto at
the time it became effective contained any untrue statement of a
material fact or omitted to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading or that the Prospectus or any supplement thereto contains
any untrue statement of a material fact or omits to state a material
fact necessary in order to make statements therein in light of the
circumstances under which they were made not misleading (except, in
the case of both the Registration Statement and any amendment thereto
and the Prospectus and any supplement thereto, for the financial
statements, notes thereto and other financial information and
statistical data contained therein, as to which such counsel need
express no opinion);
(xi) all descriptions in the Registration Statement and the
Prospectus, and any amendment or supplement thereto, of contracts and
other documents filed as exhibits to the Registration Statement are
accurate and fairly present the
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information required to be shown, and such counsel is familiar with
all contracts and other documents filed as exhibits to the
Registration Statement and the Prospectus and any such amendment or
supplement, or filed as exhibits to the Registration Statement, and
such counsel does not know of any contracts or documents of a
character required to be summarized or described therein or to be
filed as exhibits thereto which are not so summarized, described or
filed;
(xii) no authorization, approval, consent or license of any
governmental or regulatory authority or agency is necessary in
connection with the authorization, issuance, transfer, sale or
delivery of the Units or Unit components by the Company, in connection
with the execution, delivery and performance of this Agreement by the
Company or in connection with the taking of any action contemplated
herein, or the issuance of the Warrants, Representatives' Warrants or
the securities underlying the Warrants and the Representatives'
Warrants, other than registration or qualification of the Units and
Representatives' Warrants under applicable state or foreign securities
or blue sky laws and registration under the Act;
(xiii) the statements in the Registration Statement under the
captions "Business," "Use of Proceeds,"Management" and "Description of
Securities" have been reviewed by such counsel and, insofar as they
refer to descriptions of agreements, statements of law, descriptions
of statutes, licenses, rules or regulations or legal conclusions, are
correct in all material respects; and
Such opinion shall also cover such matters including to the
transactions contemplated hereby as you or counsel for the
Underwriters shall reasonably request. In rendering such opinion, such
counsel may rely upon certificates of any officer of the Company or
public officials as to matters of fact; and may rely as to all matters
of law other than the law of the United States or the corporate law of
the State of California upon opinions of counsel satisfactory to you,
which may also be addressed to you, in which case the opinion shall
state that they have no reason to believe that you and they are not
entitled to so rely.
(c) All corporate proceedings and other legal matters relating to this
Agreement, the Registration Statement, the Prospectus, and other related matters
shall be reasonably satisfactory to or approved by Pezzola & Reinke, counsel to
the Underwriters, and you shall have received from such counsel a signed
opinion, dated as of the First Closing Date, with respect to the validity of the
issuance of the Units, the form of the Registration Statement and Prospectus
(other than the financial statements and other financial data contained
therein), the execution of this Agreement and other related matters as you may
reasonably require. The Company shall have furnished to counsel for the
Underwriters such documents as they may reasonably request for the purpose of
enabling them to render such opinion.
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(d) At both the time of the execution of this Agreement by the Company and
at the Closing Date, you shall have received letters in form and substance
satisfactory to you, from A.J. Robbins, P.C. (collectively the "Auditors"),
dated respectively as of the date of this Agreement and as of the Closing Date,
to the effect that they are independent certified public accountants with
respect to the Company within the meaning of the Act and published Rules and
Regulations, and that the Registration Statement is correct insofar as it
relates to them and stating in effect that:
(i) In their opinion the audited financial statements and notes
of the Company in the Registration Statement and the Prospectus
examined by them comply as to form in all material respects with the
applicable accounting requirements of the Act and the published Rules
and Regulation with respect to registration statements on Form SB-2.
(ii) On the basis of inquiries and procedures conducted by them
(not constituting an examination in accordance with generally accepted
auditing standards), including a reading of the financial information
and other data included in the Registration Statement and the
Prospectus in response to Item 310 of Regulation S-B; that on the
basis of inquiries of officials of the Company who have responsibility
for financial accounting matters, especially as to whether there was
any adverse change in revenues, net income, or any change in the
capital stock of the Company or any change in the long-term debt or
any increase in bank borrowings or any decreases in total assets, net
current assets or shareholders' equity of the Company; reviewing
minutes of all meetings of shareholders and boards of directors (and
various committees thereof) of the Company since inception and other
specified inquiries and procedures, nothing has come to their
attention as a result of the foregoing inquiries and procedures that
caused them to believe that:
(A) the audited financial statements for the years ended
December 31, 1995 and December 31, 1996, as to the Company, included
in the Prospectus do not comply as to form in all material respects
with the applicable accounting requirements of the Act and the
published Rules and Regulations with respect to registration
statements on Form SB-2; or said financial statements are fairly
presented in conformity with generally accepted accounting principles;
or the amounts included in the Registration Statement and the
Prospectus in response to Item 310 of Regulation S-B are not
consistent with the corresponding amounts in the audited or unaudited
financial statements from which such amounts were derived; or
(B) during the period from December 31, 1996 to a specified date
not more than five (5) days prior to the date of such letter, there
has been any change in the Common Stock or long-term debt of the
Company or any increase in bank borrowings of the Company or any
decrease in the shareholders' equity or
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working capital of the Company or change in any other item
appearing on the Company's financial statements as to which the
Underwriters may request advice, in each case as compared with
amounts shown in the financial statements included in the
Prospectus, except in each case for increases or deficiencies which
the Prospectus discloses have occurred or may occur, or as
specified in such letter, in which case the letter shall be
accompanied by an explanation by the Company of the significance
thereof.
(iii) On the basis of certain procedure agreed to by the
Underwriters and the Auditors and described in their letter or
letters, certain numerical data and information included in the
Registration Statement and Prospectus and referred to in their letter
were in agreement with specifically designated records of the Company
which were not included in the Registration Statement and Prospectus
but from which information in the Registration Statement or the
Prospectus was derived.
(e) At each of the Closing Dates, (i) the representations and warranties
of the Company contained in this Agreement shall be true and correct with the
same effect as if made on and as of such Closing Date, and the Company shall
have performed all of its obligations hereunder and satisfied all the conditions
on its part to be satisfied at or prior to such Closing Date; (ii) the
Registration Statement and the Prospectus and any amendments or supplements
thereto shall contain all statements which are required to be stated therein in
accordance with the Act and the Rules and Regulations, and shall in all material
respects conform to the requirements thereof, and neither the Registration
Statement nor the Prospectus nor any amendment or supplement thereto shall
contain any untrue statements of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading; (iii) there shall have been, since the respective dates as of
which information is given, no material adverse change in the business,
properties, condition (financial or otherwise), results of operations, capital
stock, long-term or short-term debt or general affairs of the Company from that
set forth in the Registration Statement and the Prospectus, except changes which
the Registration Statement and Prospectus indicate might occur after the
effective date of the Registration Statement, and the Company shall not have
incurred any material liabilities nor entered into any agreement not in the
ordinary course of business other than as referred to in the Registration
Statement and Prospectus; and (iv) except as set forth in the Prospectus, no
action, suit or proceeding at law shall be pending or threatened against the
Company which would be required to be disclosed in the Registration Statement,
and no proceedings shall be pending or threatened against the Company before or
by any commission, board or administrative agency in the United States or
elsewhere, wherein an unfavorable decision, ruling or finding would materially
and adversely affect the business, property, condition (financial or otherwise),
results of operations or general affairs of the Company. In addition, you shall
have received, at the First Closing Date, a certificate signed by the Chairman
of the Board and the principal financial or accounting officer of the Company,
dated as of the First Closing Date, evidencing compliance with the provisions of
this subsection (e).
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(f) Upon exercise of the option provided for in Section 2(b) hereof, your
obligations to purchase and pay for the Option Units referred to therein will be
subject (as of the date hereof and as of the Option Closing Date) to the
following additional conditions:
(i) The Registration Statement shall remain effective at the
Option Closing Date, no stop order suspending the effectiveness
thereof shall have been issued, and no proceedings for that purpose
shall have been instituted or shall be pending, or, to your knowledge
or the knowledge of the Company, shall be contemplated by the
Commission, and any reasonable request on the part of the Commission
for additional information shall have been complied with to the
satisfaction of Pezzola & Reinke, counsel to the Underwriters.
(ii) At the Option Closing Date there shall have been delivered
to you the signed opinion of Gary A. Agron, counsel for the Company,
dated as of the Option Closing Date, in form and substance
satisfactory to Pezzola & Reinke, counsel to the Underwriters, which
opinion shall be substantially the same in scope and substance as the
opinion furnished to you at the First Closing Date pursuant to Section
4(b) hereof, except that such opinion, where appropriate, shall cover
the Option Shares rather than the Firm Shares. If the First Closing
Date is the same as the Option Closing Date, such opinions may be
combined.
(iii) At the Option Closing Date, there shall have been delivered
to you a certificate of the Chairman of the Board and the principal
financial or accounting officer of the Company dated the Option Closing
Date, in form and substance satisfactory to Pezzola & Reinke, counsel to
the Underwriters, substantially the same in scope and substance as the
certificate furnished to you at the First Closing Date pursuant to Section
4(e) hereof.
(iv) At the Option Closing Date, there shall have been delivered
to you letters in form and substance satisfactory to you from the
Auditors, dated the Option Closing Date and addressed to you,
confirming the information in their letter referred to in Section 4(d)
hereof as of the date thereof and stating that, without any additional
investigation required, nothing has come to their attention during the
period from the ending date of their review referred to in said letter
to a date not more than five (5) business days prior to the Option
Closing Date which would require any change in said letter if it were
required to be dated the Option Closing Date.
(v) All proceedings taken at or prior to the Option Closing Date
in connection with the sale and issuance of the Option Units shall be
satisfactory in form and substance to you, and you and Pezzola &
Reinke, counsel to the Underwriters, shall have been furnished with
all such documents, certificates and opinions as you may request in
connection with this transaction in order to evidence the accuracy and
completeness of any of the representations, warranties
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or statements of the Company or its compliance with any of the
covenants or conditions contained therein.
(g) If any of the conditions herein provided for in this Section shall not
have been completely fulfilled as of the date indicated, this Agreement and all
obligations of the Underwriters under this Agreement may be cancelled at, or at
any time prior to, each Closing Date by your notifying the Company of such
cancellation in writing or by telegram at or prior to the applicable Closing
Date. Any such cancellation shall be without liability of the Underwriters to
the Company, except as otherwise provided herein.
5. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY.
The obligation of the Company to sell and deliver the Units is subject to
the following conditions:
(a) The Registration Statement shall have become effective not later than
4:00 P.M. Eastern time, on the date of this Agreement, or on such later date or
time as the Company and you may agree in writing.
(b) On the Closing Dates, no stop order suspending the effectiveness of
the Registration Statement shall have been issued under the Act or any
proceedings therefor initiated or threatened by the Commission.
If the conditions to the obligations of the Company provided for in this
Section have been fulfilled on the First Closing Date but are not fulfilled
after the First Closing Date and prior to the Option Closing Date, then only the
obligation of the Company to sell and deliver the Option Units on exercise of
the option provided for in Section 2(b) hereof shall be affected.
6. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless the Underwriters and
each person, if any, who controls the Underwriters, within the meaning of the
Act, from and against any losses, claims, damages or liabilities (which shall,
for all purposes of this Agreement, include, but not be limited to, all
reasonable costs of defense and investigation and all attorneys' fees), joint or
several, to which such Underwriters or such controlling person may become
subject, under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
(i) the Registration Statement, any Preliminary Prospectus, the Prospectus, or
any amendment thereof or supplement thereto, or (ii) any blue sky application or
other document executed by the Company specifically for that purpose or based
upon written information furnished by the Company filed in any state or other
jurisdiction in order to qualify any or all of the Units or other securities
under the securities laws thereof (any such application, document or information
being hereinafter called a "Blue Sky Application"), or arise out of or are based
upon the omission or alleged omission to state in the
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Registration Statement, any supplement thereto, or in any Blue Sky
Application, a material fact required to be stated therein or necessary to
make the statements therein not misleading; provided, however, that the
Company will not be liable in any such case to the extent, but only to the
extent, that any such loss, claim, damage or liability arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon and in conformity with written
information furnished to the Company by or on behalf of the Underwriters
specifically for use in the preparation of the Registration Statement or any
such amendment or supplement thereof or any such Blue Sky Application or any
such Preliminary Prospectus or the Prospectus or any such amendment or
supplement thereto. This indemnity will be in addition to any liability which
the Company may otherwise have.
(b) The Underwriters agree to indemnify and hold harmless the Company and
each person, if any, who controls the Company, within the meaning of the Act,
from and against any losses, claims, damages or liabilities (which shall, for
all purposes of this Agreement, include, but not be limited to, all reasonable
costs of defense and investigation and all attorneys' fees) to which the Company
or any such director, nominee, officer or controlling person may become subject
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the Registration Statement, any preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or the alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or omission or
alleged omission made in the Registration Statement, any Preliminary Prospectus,
the Prospectus, or any amendment or supplement thereto, in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
the Underwriters, specifically for use in preparation thereof. This indemnity
agreement will be in addition to any liability which the Underwriters may
otherwise have.
(c) Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section, notify in writing the indemnifying party of the commencement thereof,
but the omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party otherwise than under
this Section. In case any such action is brought against any indemnified party,
and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in and, to the extent that it
may wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, subject to the provisions herein stated, with
counsel reasonably satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation. The indemnified party
shall have the right to employ separate counsel in any such action and to
participate in the defense thereof, but the fees and
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expenses of such counsel shall not be at the expense of the indemnifying
party if the indemnifying party has assumed the defense of the action with
counsel reasonably satisfactory to the indemnified party; provided that if
the indemnified party is the Underwriters or a person who controls the
Underwriters within the meaning of the Act, the fees and expenses of such
counsel shall be at the expense of the indemnifying party if (i) the
employment of such counsel has been specifically authorized in writing by the
indemnifying party or (ii) the named parties to any such action (including
any impleaded parties) include both the Underwriters or such controlling
person and the indemnifying party, and in the reasonable judgment of the
Underwriters, it is advisable for the Underwriters or controlling persons to
be represented by separate counsel (in which case the indemnifying party
shall not have the right to assume the defense of such action on behalf of
the Underwriters or such controlling person, it being understood, however,
that the indemnifying party shall not, in connection with any one such action
or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of more than one separate firm of
attorneys). No settlement of any action against an indemnified party shall be
made without the consent of the indemnified party, which shall not be
unreasonably withheld in light of all factors of importance to such
indemnified party.
7. CONTRIBUTION.
In order to provide for just and equitable contribution under the Act in
any case in which (i) the Underwriters makes claims for indemnification pursuant
to Section 6 hereof but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case, notwithstanding the fact that
the express provisions of Section 6 provide for indemnification in such case, or
(ii) contribution under the Act may be required on the part of the Underwriters,
then the Company and each person who controls the Company, in the aggregate, and
the Underwriters shall contribute to the aggregate losses, claims, damages or
liabilities to which they may be subject (which shall, for all purposes of this
Agreement, include, but not be limited to, all reasonable costs of defense and
investigation and all reasonable attorneys' fees) in either such case (after
contribution from others) in such proportions that such Underwriters are
responsible in the aggregate for that portion of such losses, claims, damages or
liabilities represented by the percentage that the underwriting discount per
Unit appearing on the cover page of the Prospectus bears to the public offering
price per Unit appearing thereon, and the Company shall be responsible for the
remaining portion, provided, however, that (a) if such allocation is not
permitted by applicable law, then the relative fault of the Company and the
Underwriters and controlling persons, in the aggregate, in connection with the
statements or omissions which resulted in such damages and other relevant
equitable considerations shall also be considered. The relative fault shall be
determined by reference to, among other things, whether in the case of an untrue
statement of a material fact or the omission to state a material fact, such
statement or omission relates to information supplied by the Company or the
Underwriters, and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such untrue statement or omission. The
Company and the Underwriters agree (a) that it would not be just and
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equitable if the respective obligations of the Company and the Underwriters
to contribute pursuant to this Section 7 were to be determined by PRO RATA or
PER CAPITA allocation of the aggregate damages or by any other method of
allocation that does not take account of the equitable considerations
referred to in the first sentence of this Section 7 and (b) that the
contribution of the Underwriters shall not be in excess of its proportionate
share of the portion of such losses, claims, damages or liabilities for which
the Underwriters are responsible. No person guilty of a fraudulent
misrepresentation (within the meaning of Section ll(f) of the Act) shall be
entitled to contribution from any person who is not guilty of such fraudulent
misrepresentation. As used in this paragraph, the word "Company" includes
any officer, director, or person who controls the Company within the meaning
of Section 15 of the Act. If the full amount of the contribution specified
in this paragraph is not permitted by law, then the Underwriters and each
person who controls the Underwriters shall be entitled to contribution from
the Company to the full extent permitted by law. The foregoing contribution
agreement shall in no way affect the contribution liabilities of any persons
having liability under Section 11 of the Act other than the Company and the
Underwriters. No contribution shall be requested with regard to the
settlement of any matter from any party who did not consent to the
settlement; provided, however, that such consent shall not be unreasonably
withheld in light of all factors of importance to such party.
8. COSTS AND EXPENSES.
(a) Whether or not this Agreement becomes effective or the sale of the
Firm Units or Option Units to the Underwriters is consummated, the Company will
pay all costs and expenses incident to the performance of this Agreement by the
Company, including but not limited to the fees and expenses of counsel to the
Company and of the Company's accountants; the costs and expenses incident to the
preparation, printing, filing and distribution under the Act of the Registration
Statement (including the financial statements therein and all amendments and
exhibits thereto), each Preliminary Prospectus and the Prospectus, as amended or
supplemented, the fee of the NASD in connection with the filing required by the
NASD relating to the offering of the Units contemplated hereby; all expenses,
including reasonable fees (but not in excess of the amount set forth in Section
3(b)) and disbursements of counsel to the Underwriters, in connection with the
qualification of the Units and Unit components under the State Securities or
Blue Sky Laws which we shall mutually designate; the cost of printing and
furnishing to the Underwriters copies of the Registration Statement, each
Preliminary Prospectus, the Prospectus, this Agreement, the Selling Agreement
and the Blue Sky Memorandum; the cost of printing the certificates representing
the components comprising the Units, expenses of Company due diligence meetings
and presentations. The Company shall pay any and all taxes (including any
transfer, franchise, capital stock or other tax imposed by any jurisdiction) on
sales to the Underwriters hereunder. The Company will also pay all costs and
expenses incident to the furnishing of any amended Prospectus or of any
supplement to be attached to the Prospectus as called for in Section 3(a) of
this Agreement except as otherwise set forth in said Section.
(b) In addition to the foregoing expenses, the Company shall at the First
Closing Date pay to Kensington Securities, Inc. the balance of a non-accountable
expense allowance of
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$180,000, of which $___________ has been paid. In the event the over-
allotment option is exercised in full, the Company shall pay to Kensington
Securities, Inc. at the Option Closing Date an additional amount equal to
3% of the gross proceeds received upon exercise of the over-allotment
option. In the event the transactions contemplated hereby are not
consummated for any reason, the Underwriters will retain that portion of the
$_____________ non-accountable expense allowance deposit received from the
Company as is equal to its actual accountable expenses and will reimburse the
Company for the remainder, if any.
(c) No person is entitled either directly or indirectly to compensation
from the Company, from the Underwriters or from any other person for services as
a finder in connection with the proposed offering, and the Company agrees to
indemnify and hold harmless the Underwriters, and the Underwriters agree to
indemnify and hold harmless the Company from and against any losses, claims,
damages or liabilities, joint or several (which shall, for all purposes of this
Agreement, include, but not be limited to, all reasonable costs of defense and
investigation and all attorneys' fees), to which the indemnified party may
become subject insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon the claim of any
person (other than an employee of the party claiming indemnity) or entity that
he or it is entitled to a finder's fee in connection with the proposed offering
by reason of such person's or entity's influence or prior contact with the
indemnifying party.
9. EFFECTIVE DATE.
The Agreement shall become effective upon its execution, except that you
may, at your option, delay its effectiveness until 10:00 A.M., Eastern time,
on the first full business day following the Effective Date, or at such
earlier time after the Effective Date as you in your discretion shall first
commence the initial public offering of any of the Shares. The time of the
initial public offering shall mean the time of release by you of the first
newspaper advertisement with respect to the Shares, or the time when the
Shares are first generally offered by you to dealers by letter or telegram,
whichever shall first occur. This Agreement may be terminated by you at any
time before it becomes effective as provided above, except that Sections
3(c), 6, 7, 8, 12, 13, 14 and 15 shall remain in effect notwithstanding such
termination.
10. TERMINATION.
(a) This Agreement, except for Sections 3(c), 6, 7, 8, 12, 13, 14 and
15, may be terminated at any time prior to the First Closing Date, and the
option referred to in Section 2(b), if exercised, may be cancelled, at any
time prior to the Option Closing Date, by you if in your judgment it is
impracticable to offer for sale or to enforce contracts made by the
Underwriters for the resale of the Units agreed to be purchased hereunder, by
reason of (i) the Company having sustained a material loss, whether or not
insured, by reason of fire, earthquake, flood, accident or other calamity, or
from any labor dispute or court or government action, order or decree, (ii)
trading in securities on the New York Stock Exchange or the American Stock
Exchange having been suspended or limited, (iii) material governmental
restrictions having been imposed on trading in securities generally which are
not in force and effect on the date hereof,
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(iv) a banking moratorium having been declared by federal or New York State
authorities, (v) an outbreak of major international hostilities or other
national or international calamity having occurred, (vi) the passage by the
Congress of the United States or by any state legislative body of similar
impact, of any act or measure, or the adoption of any orders, rules or
regulations by any governmental body or any authoritative accounting
institute or board, or any governmental executive, which is reasonably
believed likely by you to have a material adverse impact on the business,
financial condition or financial statements of the Company, (vii) any adverse
change having occurred in the sole opinion of the Underwriters in the
financial or securities markets since the date of this Agreement, or (viii)
any adverse change having occurred in the sole opinion of the Underwriters
with respect to the earnings, business prospects or general condition of the
Company, financial or otherwise, other than normal fluctuations in sales,
whether or not arising in the ordinary course of business.
(b) If you elect to prevent this Agreement from becoming effective or
to terminate this Agreement as provided in this Section 10 or in Section 9,
the Company shall be promptly notified by you, by telephone or telegram,
confirmed by letter.
11. REPRESENTATIVES' WARRANTS.
On the First Closing Date, the Company will issue to each of Kensington
Securities, Inc. and Gunn Allen Financial, Inc., for a consideration of $50
each and upon the terms and conditions set forth in the form of the
Representatives' Warrants annexed as an exhibit to the Registration
Statement, a Representatives' Warrant to purchase up to 25,000 Units, at an
exercise price of $14.40 per Unit. In the event of conflict in the terms of
this Agreement and the Representatives' Warrants, the language of the
Representatives' Warrants shall control.
12. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY.
The respective indemnities, agreements, representations, warranties and
other statements of the Company, and the Underwriters, set forth in or made
pursuant to this Agreement will remain in full force and effect regardless of
any investigation made by or on behalf of the Underwriters, the Company or any
of its officers or directors or any controlling persons and will survive
delivery of and payment for the Units and the termination of this Agreement.
13. NOTICES.
All communications hereunder will be in writing and, except as otherwise
expressly provided herein, if sent to you, will be mailed, certified mail,
return receipt requested, delivered or telegraphed and confirmed at 4110 North
Scottsdale Road, Suite 355, Scottsdale, AZ, 85251, or if sent to the Company,
will be mailed, certified mail, return receipt requested, delivered, or
telegraphed and confirmed to it at 8825 West Olympic Boulevard, Beverly Hills,
California, 90211.
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14. PARTIES IN INTEREST.
The Agreement herein set forth is made solely for the benefit of the
Underwriters and the Company and any person controlling the Company, or the
Underwriters, and directors of the Company, nominees for directors of the
Company (if any) named in the Prospectus, the officers of the Company who
have signed the Registration Statement, and their respective executors,
administrators, successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. The term "successors
and assigns" shall not include any purchaser, as such purchaser, from the
Underwriters of the Units.
15. APPLICABLE LAW.
This Agreement will be governed by, and construed in accordance with,
the laws of the State of California applicable to agreements made and to be
entirely performed within California.
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return this agreement, whereupon it will become a
binding agreement between the Company and the Underwriters in accordance with
its terms.
Yours very truly,
RETROSPETTIVA, INC.
By:
----------------------------------
Borivoje Vukadinovic,
Chief Executive Officer
Dated: , 1997
------------------
The foregoing Underwriting Agreement is hereby confirmed and accepted as
of the date first above written. The undersigned hereby are acting on behalf
of themselves and as representatives of the several Underwriters named in
Schedule I to this Agreement.
KENSINGTON SECURITIES, INC.
GUNN ALLEN FINANCIAL, INC.
By: Kensington Securities, Inc.
By:
----------------------------------
Howard Davis, President
27
<PAGE>
SCHEDULE I
Name of Underwriter Number of Units to be Purchased
- ------------------- -------------------------------
Total
28
<PAGE>
RETROSPETTIVA, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA
Number Number
THIS CERTIFIES THAT
IS THE OWNER OF
fully paid and non-assessable shares of Common Stock, no par value, of
RETROSPETTIVA, INC.
transferable only on the books of the Company by the holder hereof in person
or by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate and the shares represented hereby are issued and
shall be subject to all the provisions of the Articles of Incorporation, to
all of which the holder by acceptance hereby assents.
IN WITNESS WHEREOF, the Company has caused this Certificate to be signed by
its duly authorized officers and the facsimile seal of the Company to be duly
affixed hereto.
This Certificate is not valid unless countersigned by the Transfer Agent and
Registrar.
Dated:
/s/ Michael D. Silberman [SEAL] /s/ Borivoje Vukadinovic
- ------------------------ RETROSPETTIVA, INC. ------------------------
Secretary CORPORATE President
SEAL
CALIFORNIA
COUNTERSIGNED:
CORPORATE STOCK TRANSFER, INC.
370-17th Street, Suite 2350, Denver, Colorado 80202
BY
------------------------------------------------
Transfer Agent Authorized Signature
<PAGE>
RETROSPETTIVA, INC.
CORPORATE STOCK TRANSFER, INC.
TRANSFER FEE: $15.00 PER CERTIFICATE
- ------------------------------------------------------------------------------
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C>
TEN COM - as tenants UNIF GIFT MIN. ACT - ..............Custodian for...........
(Cust.) (Minor)
TEN ENT - as tenants by the entireties under Uniform Gifts to Minors
JT TEN - as joint tenants with right of Act of ................................
survivorship and not as tenants (STATE)
in common
Additional abbreviations may also be used though not in the above list.
For value received.....................................hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY NUMBER OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
----------------------------------------------------
----------------------------------------------------
Please print or type name and address of assignee
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- Shares
of the Common Stock represented by the within Certificate and do hereby irrevocably
constitute and appoint
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Attorney to transfer the said stock on the books of the within named Corporation, with
full power of substitution in the premises.
Dated: 19
------------------- --
</TABLE>
SIGNATURE GUARANTEED: X
-------------------------------
X -------------------------------
THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THIS CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATSOEVER. THE SIGNATURE(S) MUST BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKHOLDERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS) WITH MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
<TABLE>
<S> <C>
CERTIFICATE NUMBER RETROSPETTIVA, INC. NUMBER OF WARRANTS
WARRANT CERTIFICATE TO ACQUIRE NO PAR VALUE CUSIP
COMMON STOCK, OF RETROSPETTIVA, INC.
VOID AFTER , 2002
THIS WARRANT IS REDEEMABLE AS PROVIDED HEREIN
THIS CERTIFIES THAT
or registered assigns, has the right to purchase at any time after __________ , 1997 (the "Exercise
Date") and on or before the close of business on __________ , 2002, (the "Expiration Date"), one
fully paid and non-assessable share of Common Stock, no par value (the "Common Stock"), of
RETROSPETTIVA, INC., a California corporation (hereinafter called the "Company"), for each Warrant
represented hereby, upon payment therefor in cash at the rate initially of $7.50 per share of such
Common Stock (the "Exercise Price"), subject to the adjustments, terms and conditions herein and in
the Warrant Agreement between the Company and Corporate Stock Transfer, Inc., as Warrant Agent (as
the same may from time to time be amended, the "Warrant Agreement"). If at any time no other Warrant
Agent is acting for the Company, the Company shall be deemed the Warrant Agent.
This Warrant Certificate is issued pursuant to the terms and provisions of the Warrant Agreement
and each holder of a Warrant is entitled to the benefits thereof. The Warrant Agreement provides,
among other things, for adjustment of the Exercise Price and the number of shares of Common Stock
issuable upon exercise of this Warrant Certificate in certain events, including the issuance of
Common Stock as a stock dividend; sub-divisions combinations and reclassifications of the Common Stock;
the distribution to all holders of Common Stock of evidences of indebtedness, assets (excluding cash
dividends or other distributions) or rights to subscribe other than those mentioned above; and certain
mergers, consolidations and sales of substantially all the assets of the Company. Upon each such
adjustment, notice thereof will be given by filing a statement thereof with the Warrant Agent and by
mailing a copy of such notice to all registered holders of Warrant Certificates.
No fractional shares of Common Stock will be issued upon the exercise of a Warrant; instead, the
Warrant holder will be entitled to receive cash for such fractional interest at current market value.
The Warrants are redeemable by the Company, in whole or in part, on not less than 30 days' prior
written notice at a redemption price of $.01 per Warrant (the "redemption price") at any time after
_____________ , 1998 (the "Redemption Date"); PROVIDED THAT, (i) the closing price of the Common
Stock for the 20 consecutive trading days ending not earlier than five days before the Warrant is
called for redemption is at least $8.50 per share. On and after the date fixed for redemption and
stated in such notice, each holder of the Warrants called for redemption shall surrender the Warrant
Certificate evidencing such Warrants to the Company at the place designated in such notice and shall
thereupon be entitled to receive payment of the redemption price. If such notice of redemption shall
have been duly given, and if on or before the date fixed for redemption, funds necessary for the
redemption shall be available therefor, then, notwithstanding that the Warrant Certificates
evidencing any Warrants so called for redemption shall not have been surrendered, all rights with
respect to the Warrants so called for redemption shall forthwith after such date cease and
determine, except only the right of the holders to receive the redemption price without interest upon
surrender of the Warrant Certificates therefor. Holders of the Warrant shall have the right to
exercise the Warrants for the purchase of Warrant Shares until the close of business on the date
fixed for redemption.
Each Warrant represented hereby may be exercised by presentation and surrender of this
Certificate at the office of the Warrant Agent, with the Form of Exercise on the reverse hereof duly
executed, accompanied by payment for the shares of Common Stock purchased and, if required, with the
Form of Assignment on the reverse hereof or a separate instrument of transfer duly executed with
signature guaranteed. In the event that the number of Warrants so exercised is less than the total
number of Warrants represented hereby, there will be issued to the person so exercising the Warrants,
or his registered assigns, a new Warrant Certificate representing the number of Warrants not
exercised.
In the event of the liquidation, dissolution or winding-up of the Company, in cases where the
property to be distributed to the holders of Common Stock of the Company consists principally of
other than securities of another entity which shall have purchased all or substantially all of the
Company's assets, the right to exercise Warrants shall terminate at the close of business on the
fourth full business day before the earliest date fixed for the payment of any amount distributable
on the Common Stock of the Company; PROVIDED THAT, at least 45 days prior thereto, notice of such
payment date shall have been given by the Warrant Agent in writing to all registered holders of
Warrant Certificates. Warrants shall terminate and shall be of no further force and effect at such
close of business on such date.
Holders of Warrant Certificates, as such holders, shall have no voting or any other rights of a
stockholder of the Company, shall have no right, other than the right evidenced thereby, to purchase
or receive Common Stock of the Company, shall not be entitled to subscribe to or purchase any
additional or increased stock of the Company of any class, whether now or hereafter authorized, or
obligations convertible into any class of classes of stock, or stock of any class convertible into
stock of any other class or classes, or obligations, stock or other securities carrying warrants or
rights to subscribe to stock of the Company of any class or classes, whether now or hereafter
authorized.
This Warrant Certificate is transferable by the registered holder in person or by his duly
authorized attorney on the books of the Company at the office of the Warrant Agent upon surrender of
this Certificate with the Form of Assignment on the reverse hereof duly endorsed or with other
appropriate instruments of transfer duly endorsed with signature guaranteed and payment of any
transfer taxes or other governmental charges in connection with such transfer.
This Warrant Certificate is exchangeable for Warrant Certificates of different denominations at
the office of the Warrant Agent upon surrender of this Certificate, duly endorsed or with appropriate
instruments of transfer. Warrant Certificates issued upon transfers and exchanges shall be issued
only for full Warrants or an integral multiple thereof. Warrant Certificates which are transferred
shall be canceled.
This Warrant is not valid unless countersigned by the Warrant Agent.
Unless sooner terminated as provided herein upon exercise or upon liquidation, dissolution or
winding-up of the Company, the purchase rights under the Warrants shall terminate on the Expiration
Date and thereafter the Warrants represented by this Certificate shall be of no further force and
effect.
WITNESS the facsimile signature of the proper officer of the Company and its facsimile seal.
Dated:
RETROSPETTIVA, INC.
Borivoje Vukadinovic
President
[SEAL]
RETROSPETTIVA, INC. Michael Silberman
CORPORATE Secretary
SEAL
CALIFORNIA
COUNTERSIGNED:
CORPORATE STOCK TRANSFER, INC.
370-17TH STREET, SUITE 2350, DENVER, COLORADO 80202
BY
---------------------------------------------------
WARRANT AGENT AUTHORIZED SIGNATURE
<PAGE>
RETROSPETTIVA, INC.
FORM OF EXERCISE
The undersigned hereby irrevocably exercises _______________ Warrants to subscribe for the
purchase of shares of the Common Stock of the within named Company evidenced by this Warrant
Certificate and herewith makes payment of the purchase price in full. Kindly issue certificates for
shares of Common Stock in accordance with the instructions given below. The certificate for the
unexercised balance of the Warrants evidenced by the within Warrant Certificate, if any, will be
registered in the name of the undersigned.
Dated:
---------------------------------
-------------------------------------------
(Name, please print or type)
-------------------------------------------
Social Security or Other Identifying Number
-------------------------------------------
Address:
-------------------------------------------
Street
-------------------------------------------
City, State and Zip Code
FORM OF ASSIGNMENT
(To be executed by the Registered Holder if such Holder desires to transfer the Warrant Certificate)
FOR VALUE RECEIVED, ________________________________________ hereby sells, assigns and
transfers unto
____________________________________________________________________________________________________
____________________________________________________________________________________________________
(Please print or type name and address, including postal zip code of transferee)
____________________________________________________________________________________________________
(Social Security or Tax Identification Number)
this Warrant Certificate, together with all right, title and interest therein, and does hereby
irrevocably constitute and appoint ____________________________________________________ Attorney to
transfer the Warrant Certificate on the books of the within Company, with full power of substitution
in the premises.
Dated: , 19
------------------------- ----
Signed:
-------------------------------------------
-------------------------------------------
(Signature must conform in all respect to
name of the holder as specified on the face
of the Warrant Certificate).
Signature Guaranteed:
-------------------------------------------
-------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION, (Banks,
Stockbrokers, Savings and Loan Associations
and Credit Unions) WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM PURSUANT TO S.E.C. RULE 17Ad-15.
</TABLE>
<PAGE>
EXHIBIT 10.05
PROMISSORY NOTE
$100,000* June 30, 1997
As hereinafter provided, for value received, the undersigned, Borivoje
Vukadinovic, ("Boro") promises to pay to the order of Retrospettiva, Inc., a
California corporation at 8825 Olympic Boulevard, Beverly Hills, California
90211, or at such other place as the holder or holders hereof may direct One
Hundred Thousand Dollars* with interest at the rate of ten percent (10%) per
annum. This note is payable on demand by the holder hereof.
IT IS AGREED by the makers and endorsers hereof that if this note is not
paid when due or declared due hereunder, the principal and accrued interest
therein shall draw interest at the rate of 18 percent per annum, and that
failure to make any payment of principal or interest when due or any default
under any encumbrance or agreement securing this note shall cause the whole
note to become due at once, or the interest to be counted as principal, at
the option of the holder of the note. The makers and endorsers hereof
severally waive presentment for payment, protest, notice of nonpayment and of
protest, and agree to any extensions of time of payment and partial payments
before, at or after maturity, and if this note or interest thereon is not
paid when due, agree to pay all reasonable costs of collection, including
reasonable attorney's fees, and also waive all exemptions in case of suit on
this note.
* This note evidences an arrangement providing for optional future
advances which in the aggregate amount outstanding shall at no time exceed
the face amount of this note.
/s/ Borivoje Vukadinovic
------------------------
Borivoje Vukadinovic
This note is unsecured.
<PAGE>
PROMISSORY NOTE
$150,000* January 1, 1997
As hereinafter provided, for value received, the undersigned, Borivoje
Vukadinovic, ("Boro") promises to pay to the order of Retrospettiva, Inc., a
California corporation at 8825 Olympic Boulevard, Beverly Hills, California
90211, or at such other place as the holder or holders hereof may direct One
Hundred Fifty Thousand Dollars* with interest at the rate of ten percent
(10%) per annum. This note is payable on demand by the holder hereof.
IT IS AGREED by the makers and endorsers hereof that if this note is not
paid when due or declared due hereunder, the principal and accrued interest
therein shall draw interest at the rate of 18 percent per annum, and that
failure to make any payment of principal or interest when due or any default
under any encumbrance or agreement securing this note shall cause the whole
note to become due at once, or the interest to be counted as principal, at
the option of the holder of the note. The makers and endorsers hereof
severally waive presentment for payment, protest, notice of nonpayment and of
protest, and agree to any extensions of time of payment and partial payments
before, at or after maturity, and if this note or interest thereon is not
paid when due, agree to pay all reasonable costs of collection, including
reasonable attorney's fees, and also waive all exemptions in case of suit on
this note.
* This note evidences an arrangement providing for optional future
advances which in the aggregate amount outstanding shall at no time exceed
the face amount of this note.
/s/ Borivoje Vukadinovic
-------------------------
Borivoje Vukadinovic
This note is unsecured.
<PAGE>
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------ --------------------------
1995 1996 1996 1997
--------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
PRIMARY EARNINGS
Net income 680,495 772,802 254,562 519,976
Shares
Weighted average number of
common shares outstanding 1,750,000 1,750,000 1,750,000 1,750,000
Primary earnings per common share:
Net income 0.39 0.44 0.15 0.30
--------- --------- --------- ---------
--------- --------- --------- ---------
FULLY DILUTED EARNINGS
Net income 680,495 772,802 254,562 519,976
Shares
Weighted average number of
common shares outstanding 1,750,000 1,750,000 1,750,000 1,750,000
Fully diluted earnings per common share:
Net income 0.39 0.44 0.15 0.30
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public acountants, we hereby consent to the use of
our report dated March 15, 1997 on the financial statements of
Retrospettiva, Inc., and to the reference made to our firm under the caption
"Experts" included in or made part of this Registration Statement.
AJ. ROBBINS, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
AND CONSULTANTS
DENVER, COLORADO
AUGUST 12, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1997
<PERIOD-END> DEC-31-1995 DEC-31-1996 JUN-30-1996 JUN-30-1997
<CASH> 0 110,777 0 289,905
<SECURITIES> 0 0 0 0
<RECEIVABLES> 0 2,099,893 0 1,543,339
<ALLOWANCES> 0 17,196 0 17,196
<INVENTORY> 0 3,112,678 0 3,725,044
<CURRENT-ASSETS> 0 5,662,907 0 5,703,704
<PP&E> 0 106,576 0 111,185
<DEPRECIATION> 0 45,190 0 54,021
<TOTAL-ASSETS> 0 5,857,542 0 5,846,644
<CURRENT-LIABILITIES> 0 4,797,053 0 4,148,125
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 0 154,000 0 272,054
<OTHER-SE> 0 906,489 0 1,426,465
<TOTAL-LIABILITY-AND-EQUITY> 0 5,857,542 0 5,846,644
<SALES> 11,379,826 12,902,195 5,680,696 7,921,299
<TOTAL-REVENUES> 11,379,826 12,902,195 5,680,696 7,921,299
<CGS> 9,979,933 11,006,053 4,918,341 6,758,331
<TOTAL-COSTS> 230,301 170,179 146,261 94,568
<OTHER-EXPENSES> 280,815 362,621 171,508 181,117
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 21,241 61,457 18,024 23,784
<INCOME-PRETAX> 875,495 1,313,087 426,562 867,976
<INCOME-TAX> 195,000 540,285 172,000 348,000
<INCOME-CONTINUING> 680,495 772,802 254,562 519,976
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 680,495 772,802 254,562 519,976
<EPS-PRIMARY> 0.39 0.44 0.15 0.30
<EPS-DILUTED> 0.39 0.44 0.15 0.30
</TABLE>
