<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
---------------
AMENDMENT NO. 1
TO
FORM 10-SB12(g)
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
UNDER SECTION 12(b) or 12(g) of the SECURITIES
and EXCHANGE ACT OF 1934
PRO ELITE, INC.
[Name of small business issuer in its charter]
New Jersey 22-3161866
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
100 DORIGO LANE
SECAUCUS, NEW JERSEY 07094
(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number: (201) 601-0400
---------------
Securities to be registered under Section 12(b) of the Act:
None
Title of each class to be so registered: n/a
Name of exchange on which each class is to be registered: n/a
Securities to be registered under Section 12(g) of the Act:
Common Stock
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I
Item l. Description of Business 3
Item 2. Management's Discussion and Analysis or Plan of Operation 5
Item 3. Description of Property 7
Item 4. Security Ownership of Certain Beneficial Owners and Management 8
Item 5. Directors, Executive Officers, Promoters and Control Persons 8
Item 6. Executive Compensation 9
Item 7. Certain Relationships and Related Transactions 9
Item 8. Description of Securities 9
Part II
Item 1. Market for Common Equity and Related Stockholder Matters 10
Item 2. Legal Proceedings 10
Item 3. Changes In and Disagreements with Accountants 10
Item 4. Recent Sales of Unregistered Securities 10
Item 5. Indemnification of Directors and Officers 11
Part F/S
Index to Financial Statements F-1
Part III
Item 1. Index to Exhibits 12
</TABLE>
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ITEM 1. DESCRIPTION OF BUSINESS
Introduction
Pro Elite, Inc. was founded in 1992 by Bob and Michael Polsky. Both had
experience in the apparel business and in the "branded apparel" business
(described below) and sought to develop their own business. Pro Elite, Inc.
(hereinafter "Pro Elite" or "the Company") is a New Jersey corporation with its
offices located at 100 Dorigo Lane, Secaucus, New Jersey 07094. The Company may
be reached by telephone at (201) 601 0400. The Company has never been a party to
any bankruptcy, receivership or similar proceeding; and has not been involved in
any material reclassification, merger, consolidation, or purchase or sale of a
significant amount of assets not in the ordinary course of business.
The Company is in the business of marketing premium "branded apparel"
which in this context means apparel, such as shirts, hats, and sweaters, that
have had a sports or corporate logo, name and/or slogan applied by means of
embroidering to the apparel. The Company deals only in premium quality apparel
and embroidering as opposed to mass merchandised apparel exhibiting printed
sports logos and names. The Company engages various contractors for the supply
of apparel and then contracts with other companies to apply specified
embroidered logos, names and/or slogans to the apparel. Once the finished goods
are delivered, the Company then distributes the finished product through a
variety of means further discussed below.
The Company has two primary markets that it operates in for branded
apparel. The first market consists of the sale and distribution of apparel
exhibiting licensed sports logos, names and/or slogans. The second market is the
sale and distribution of apparel exhibiting corporate logos, names and/or
slogans to specific corporate customers at their request.
Licensed Products
In the licensed sports logos market, the Company works with two
licensing authorities. The National Football League Properties, Inc.
(hereinafter "NFLP") has granted Pro Elite a license to market apparel
exhibiting the logos and names of teams belonging to the National Football
League (hereinafter "NFL"). The Company also works with the Collegiate Licensing
Company (hereinafter "CLC") to market apparel exhibiting the logos and names of
collegiate teams associated with the CLC. As discussed further below in the
Trademarks and Licensing section, the Company contracts with CLC on a periodic
basis for the production of collegiate branded apparel. The apparel exhibiting
NFL and collegiate logos and names is directed at fans of those sports teams
interested in premium quality branded apparel. Given the specialty market for
this type of quality branded apparel, the Company concentrates on distribution
through stadium shops, department stores, specialty shops, and other retailers
such as the QVC television-shopping channel.
The NFLP license is a significant source of revenue for the Company.
However, the Company proposes to increase business through the acquisition of
additional sports franchise licenses. Pro Elite is actively seeking licenses
with the National Basketball Association, the XFL Football League, and the World
Wrestling Federation. However, there can be no assurance that the Company can
obtain licenses with these organizations, or that licenses with these entities
will result in significant revenues to the Company.
Corporate Products
While the corporate logos market employs the same product development,
that is, the contracting for quality pieces of apparel that is then provided to
a different contractor for the application of embroidered logos, names, and
slogans; the marketing and distribution of corporate branded apparel is
distinctly different from the Company's licensed products market. The Company's
strategy in the corporate branded apparel market is not directed to retail
distribution for the general public. The Company's strategy is directed at
corporations seeking to provide employees with appropriate corporate casual
apparel and/or promotional branded apparel for the corporation to either sell or
give away to the public. Consequently, licenses for the marketing of corporate
apparel are not needed.
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The Company believes that the corporate branded apparel market is
underserved and growing due to the advent of casual Fridays and the overall move
towards causal dress in the workplace. As companies struggle to define
appropriate dress codes for both the back office and those offices dealing with
the public, many businesses are finding that making corporate branded apparel
available to employees is the answer. Additionally, companies are discovering
that branded apparel is an effective way to engage in self-promotion and
advertising through Company sponsored catalogs, made available to employees and
customers, and giveaways connected with sponsored media events such as golf
tournaments and concerts. Regardless of the client's corporate purpose, Pro
Elite seeks to be the preferred provider of premium quality corporate branded
apparel. Pro Elite's current corporate customer base includes AT&T, UPS, Boeing,
Sprint, Direct TV, Coca Cola, Gatorade, Marriott Hotels and Miller Brewing
Company among others.
Other Markets
Pro Elite has entered two additional markets related to its core
business of branded apparel. Pro Elite has recently developed a new embroidered
apparel line trademarked as "Just Hafta". The line consists of embroidered
shirts featuring activities such as golf, fishing, and tennis. The Company plans
to market and distribute Just Hafta apparel through department stores and
specialty shops, in addition to licensing other apparel marketers to produce and
sell apparel using the Just Hafta trademark and stylized logos. The Company has
also licensed its corporate name and logo to a Japanese sportswear company to be
exhibited on golf related sportswear sold in Japan. The Just Hafta and Japanese
license markets do not constitute significant markets at present for the
Company.
Distribution
Distribution of the Company's products as discussed above varies by
market. The distribution of licensed branded apparel is accomplished through
manufacture's representatives, direct marketing to NFL and collegiate stadium
shops, college bookstores, and marketers such as the QVC shopping channel, Boise
Marketing, SFX Entertainment, and Host Marriott. Marketing of corporate branded
apparel is accomplished through manufacture's representatives, trade shows and
direct marketing. Just Hafta is presently marketed in the same manner as
licensed products. The Company also belongs to and markets through the
"Specialty Advertising Trade Information Center".
Competition
The marketing of logo embroidered apparel is keenly competitive in the
United States. There are several companies that compete directly with us in
several of our marketing venues from professional sports team logo apparel to
corporate logo apparel. The barriers to entry in the logo embroidered apparel
market are low given the various contractors available for the production of
embroidered apparel and the non-exclusive nature of Pro Elite's licenses. This
along with the rapid changes in consumer preferences in leisure apparel
constitutes significant risk factors in our operations.
Suppliers and Customers
Pro Elite has established relationships with its contractors for the
supply of apparel and contract embroidering. The Company's major suppliers are:
Gold Seven, Inc., Amrav, Inc., Ready Made Garment Corporation, and Y & Z, LLC.
In terms of significant customers, the Company's four main distributors, QVC,
Boise Marketing, SFX Entertainment, and Host Marriott, are its most significant
customers.
Trademarks and Licenses
The Company has registered its name and logo as a trademark with the
United States Office of Patents and Trademarks. The mark consists of Pro Elite's
logo and the Company's name in stylized text. The Company obtained the
registration on May 27, 1997. As was discussed above, the Company has entered
into a licensing agreement regarding this trademark with a Japanese company. The
licensee has the
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right to use the Pro Elite trademark on athletic sportswear sold in Japan
through March 15, 2005 with an option to renew.
The Company's license with the NFLP grants the Company the non-exclusive
right to market hats, jackets, shirts and sweaters in the United States
consistent with NFLP guidelines. All NFLP licensed products produced for sale by
the Company are submitted annually to the NFLP for prior approval. The Company
remits to the NFLP a royalty for the net sales of NFL branded apparel.
In February 1999, the Company was a party plaintiff in an action against
the NFLP. The action was filed to prevent the NFLP from terminating the
Company's license. On September 9, 1999, the parties settled the action with a
new license agreement that runs through March 31, 2001. The Company has had a
long-standing relationship with the NFLP for over 10 years and does not expect
this litigation to affect the renewal of the license in March of 2001.
However, NFLP is a business entity comprised of members representing
each of the teams from the NFL. NFLP was established to allow for a centralized
approach for negotiations and licensing agreements with Companies such as Pro
Elite for logos and trade names of the NFL member teams. In 2004, licensing of
the individual trade names and logos will revert back to each team. Negotiations
between the NFLP and the individual teams are now underway to continue the
present collective representation of NFL teams by the NFLP. However, the Company
cannot predict how these negotiations will conclude. It is possible that no
agreement will be reached between the team members and the NFLP. In this event,
the Company would be faced with having to negotiate and agree to terms with each
team separately. The Company expects, but cannot guarantee, that the NFL member
teams will agree to continue the centralized licensing of team logos through the
NFLP. In the event that the NFL teams do not reach an agreement with the NFLP,
then the Company will seek licenses with individual NFL teams.
CLC is licensed by various colleges and universities for the purpose of
sub-licensing the production of branded apparel. Pro Elite contracts with CLC on
an as needed basis at pre-published prices from CLC for the production of
collegiate branded apparel for those colleges and universities represented by
CLC. CLC has over 100 colleges and universities that it represents for licensing
purposes, many of which are the premier college sports teams of the country.
Other Information
The Company's research and development activities are limited to
investigations of consumer preferences to identify appropriate apparel to brand
and identify markets that may exist for sports franchise branded apparel. The
company also engages in limited research and development to target businesses
that would be interested in corporate branded apparel. To date, the Company has
not invested a significant amount of funds in research and development. The
Company is unaware of any governmental regulations, environmental or otherwise,
that would have a material effect or cost on the Company. The Company currently
employs seven people on a fulltime basis.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
When used in this Form 10 and in future filings by the Company with the
Securities and Exchange Commission, the words or phrases "will likely result,"
"management expects," or "The Company expects," "will continue," "is
anticipated," "estimated" or other similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance
on any such forward-looking statements, each of which speak only as of the date
made. These statements are subject to risks and uncertainties, some of which are
described herein. Actual results may differ materially from historical earnings
and those presently anticipated or projected. The Company has no obligation to
publicly release the result of any revisions, which may be made to any
forward-looking statements to reflect anticipated events or circumstances
occurring after the date of such statements.
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TRENDS AND OTHER RECENT EVENTS
As discussed in Item 1, Description of Business, the Company's business
is the marketing of branded apparel. The two primary market niches Pro Elite has
developed are (1) the sale of sports branded apparel through licenses with the
NFL and Collegiate Licensing, and (2) the sale of corporate branded apparel
through contacts with individual companies. In keeping with Pro Elite's
corporate strategy discussed in Item 1, the Company is looking forward to
improved operating results in fiscal year 2001, which began on March 1, 2000,
with the settlement of the NFLP litigation (discussed further below), the
development of new sports licenses and the implementation of new product
presentations for corporate branded apparel.
The Company is investigating branding licenses with additional sports
organizations such as the National Basketball Association, the XFL Football
League, and the World Wresting Federation and will seek licenses with other
sports associations where research indicates that a market for branded apparel
exists. Due to poor sales performance the Company recently terminated a license
that it had with Major League Baseball for the marketing of minor league branded
apparel. As specific markets for sports branded apparel are identified as having
potential, the Company will seek out new licenses. For those licenses that do
not perform the Company will either terminate the licenses or allow them to
expire. The Company's new marketing strategies for corporate apparel will
continue to focus on providing our corporate clients with appropriate casual
wear suitable for today's corporate casual look, in addition to casual wear that
will carry the client's name into corporate sponsored extracurricular activities
such as golf tournaments. The Company will also continue to pursue its "Just
Hafta" apparel line. However, there can be no assurance that the Company's
corporate strategies can be successfully executed or that increased revenues
will result from these strategies. Consumer tastes and preferences may not be
attracted to the Company's licensed brands, such as NFL branded apparel, and our
corporate branding strategy may not result in improved sales.
RESULTS OF OPERATIONS
The Company experienced a net loss for the year ended February 29, 2000
("Fiscal Year 2000") of $96,051 as compared to a loss of $540,316 for the year
ended February 28, 1999 ("Fiscal Year 1999"). The decline in the Company's loss
for Fiscal Year 2000 was significantly affected by the settlement reached with
the NFLP that concluded litigation over the licensing of NFL brands. The
settlement resulted in an extraordinary gain in the income statement of
$534,210. Excluding the extraordinary gain, the Company's net operating loss
increased to $582,932 in Fiscal Year 2000 from the net operating loss of
$490,728 in Fiscal Year 1999.
The increased operating loss in Fiscal Year 2000 is the result of a
decline in sales. This decline stemmed from the inability of the Company to
market NFL branded apparel during the NFLP litigation. Sales declined to $1.8
million in Fiscal Year 2000 from $3.6 in fiscal Year 1999. This 50% decrease in
sales was also reflected in a similar reduction in the cost of goods sold which
declined to $1.3 million in Fiscal Year 2000 from $2.6 million in Fiscal Year
1999. This decline in sales in Fiscal Year 2000 is a direct result of the NFLP
litigation. An additional factor resulting in reduced sales for both Fiscal Year
2000 and 1999, was a shift in consumer taste from sports branded apparel to
designer or equipment branded apparel such as "Nike", "No Fear" and "Tommy
Hilfiger".
In response to the sales decline the Company's strategy is to increase
sales by focusing on making up for lost marketing opportunities with NFL branded
apparel, bringing in new licensed brands and expanding the Company's branded
corporate apparel market. This strategy is contingent on a number of factors
that may not occur and no assurance can be made that sales in the next fiscal
year will improve. Factors that could adversely affect sales would be a lack of
customer acceptance of the Company's branded apparel and a lack of working
capital to secure the necessary finished product to make sales.
Overall operating expenses, including general and administrative
expenses, declined to $1.1 million in Fiscal Year 2000 from $1.4 million in
Fiscal Year 1999. The decline in operating expenses was
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directly related to the decrease in sales generally, with the primary reductions
being in sales commissions and advertising. General corporate expenses stayed
consistent between the two fiscal years.
LIQUIDITY AND CAPITAL RESOURCES
The Company has positive working capital of $256,297 for the period
ended February 29, 2000. Its operating activities for Fiscal Year 2000 resulted
in net cash provided in the amount of $307,204, however, this is primarily due
to the $562,210 settlement with the NFLP. Equipment purchases and loan payments
in Fiscal Year 2000 resulted in net cash used of $29,021 and $295,277
respectively. The Company's line of credit at February 29, 2000 is almost
exhausted. The line of credit is limited to $600,000 and the draw at February
29, 2000 was $522,734. However, this draw is secured by inventory of
approximately $600,000 and the Company's receivables.
In order for the Company to capitalize on its corporate strategy, it
will need additional working capital to fund inventory necessary to support its
sales initiatives. The Company is pursuing a private placement of common stock
and warrants to meet its liquidity needs. No assurance can be given that the
Company will obtain funds necessary to support its corporate strategy or that if
funded, that strategy will succeed. In the event funds are not available the
Company will focus on increasing sales for self-funding and implementing its
strategic plan on a reduced scale. No assurance can be given that the Company
will be able to achieve profitability through increased sales and self-funding
its strategy.
YEAR 2000
The Company has not experienced any Year 2000 related operating interruptions
and does not expect to.
ITEM 3. DESCRIPTION OF PROPERTY.
The Company's principal place of business and warehouse is leased. The
Company has no significant ownership interest in any real or personal property
beyond normal office and warehouse equipment and furniture.
The Company has no investments in real estate, interests in real estate,
real estate mortgages, or securities of or interests in persons primarily
engaged in real estate activities. Further, the Company has no policy respecting
investments in real estate, interests in real estate, real estate mortgages, or
securities of or interests in persons primarily engaged in real estate
activities.
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ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of August 1, 2000 certain information
as to the Company's Common Stock beneficially owned by (i) each person known to
the Company to beneficially own more than 5% of the Company's Common Stock, (ii)
each of the Company's directors, (iii) named executive officers and (iv) all
executive officers and directors as a group:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
COMMON STOCK
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED PERCENTAGE OF CLASS
--------------------------------------------------------------------------
<S> <C> <C>
Michael Polsky 943,180 (1) 26.81
2 Horizon Rd.
Ft. Lee, NJ 07024
Nicole Polsky 943,180 (1) 26.81
2 Horizon Rd.
Ft. Lee, NJ 07024
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</TABLE>
(1) Michael Polsky and Nicole Polsky are brother and sister.
The Company is not aware of any arrangement, including any pledge by any
person of securities in the Company, the operation of which may at a subsequent
date result in a change in control of the Company.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS
The following table sets forth information regarding the Company's
executive officers and directors:
<TABLE>
<CAPTION>
OFFICER OR DIRECTOR
NAME AGE OFFICE SINCE
---- --- ------ -----
<S> <C> <C> <C>
Robert Polsky 74 Chairman of the 1992
Board, Chief
Executive Officer,
Director
Michael Polsky 33 Director and 1992
President
</TABLE>
The following is a summary of the business experience of each executive
officer and director of the Company:
Robert Polsky is currently the Chief Executive Officer of Pro Elite,
Inc. He has held this position since establishing the Company in 1992. Before
starting Pro Elite with his son, Michael, Mr. Robert Polsky was the President
and founder of Cliff Engle, Ltd., a licensed product supplier to all major
sports. Prior to 1984, Mr. Polsky was President of Act III and Rosemary Reid
Swimwear, both were divisions of Jonathan Logan Co. In addition, Mr. Polsky also
worked with Puritan Fashions Calvin Klein Jeans Divisions and was President of
Dianne Von Furstenburg Sportswear Division.
Michael Polsky is currently the President of Pro Elite, Inc. Before
starting Pro Elite with his father, Michael Polsky was a Vice President of Sales
for Cliff Engle, Ltd. Mr. Polsky attended Blair Academy and North Eastern
University.
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The Chairman of the Board of Directors, Mr. Robert Polsky, and the
President of the Corporation, Mr. Michael Polsky, are father and son. None of
the directors, officers, or control persons have had, in the last five years:
i. Any voluntary or involuntary bankruptcy with any other company,
general partnership or executive officership within the past two
years.
ii. Any conviction in a criminal proceeding or being subjected to a
pending criminal proceedings.
iii. been the subject to any order, judgment or decree, not
subsequently reversed, suspended or vacated, of any court of
competent jurisdiction, permanently or temporarily enjoined,
barred, suspended or otherwise limited in their involvement in
any type of business, securities or banking activities.
iv. Been found by a court of competent jurisdiction (in a civil
action), the SEC or the Commodity Futures Trading Commission to
have violated a federal or state securities or commodities law,
and the judgment has not been reversed, suspended or vacated.
ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning
compensation earned by the Company's Chief Executive Officer and certain
executive officers of the Company as of February 29, 2000 for services rendered
in all capacities to the Company during the last three fiscal years:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
NAME AND PRINCIPAL FISCAL LONG-TERM
POSITION YEAR SALARY BONUS COMPENSATION
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert Polsky 1999 $60,000 $0.00 none
Chairman, Director and 1998 $31,730 $0.00 none
Chief Executive Officer 1997 $25,000 $0.00 none
Michael Polsky
Director, President 1999 $125,000 $0.00 none
1998 $125,000 $0.00 none
1997 $109,615 $0.00 none
--------------------------------------------------------------------------------
</TABLE>
At this time the Company does not have a long-term incentive plan. There
were no grants or exercises of options or SARs in the past fiscal year to any
officer or director. All compensation awarded to officers and directors was
through salary or bonuses and is reflected above.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There were no material interests, direct or indirect, of directors,
executive officers or senior officers of the Company or any known associate or
affiliate in any transaction since the commencement of the Company's last fiscal
year, or in any proposed transaction, which has materially affected or would
materially affect the Company or any of its subsidiaries and which is not
otherwise disclosed herein.
ITEM 8. DESCRIPTION OF SECURITIES
The Company is presently authorized to issue 20,000,000 shares of common
stock, $.0001 par value per share. The Company presently has 3,518,118 shares of
common stock outstanding. The shareholders of the Company do not have a
preemptive right to acquire the Company's un-issued shares. There are no
provisions, other than the articles and by-laws of the Company and the New
Jersey Statutes, that govern the voting of the Company's shares. The Company has
not to date paid any dividends on its
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common stock. There are no provisions, other than as may be set forth in the New
Jersey Statutes, that prohibit or limit the payment of dividends. There are no
provisions in the Company's Articles or by-laws that would delay, defer or
prevent a change in control of the Company.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
The Company is voluntarily filing this Registration Statement on Form
10-SB in order to re-establish its listing on the OTC Bulletin Board, which now
requires all listed companies to be registered with the SEC under Section 13 or
15(d) of the Securities Exchange Act of 1934 and to be current in its required
filings once so registered. Prior to being taken off the OTCBB, the Company
traded under the symbol PROE.
The table below sets forth the quarterly high and low closing sales
prices for the Company's Common Stock for the period from March 1, 1998 through
February 29, 2000. These prices are from the OTCBB for the period March 1, 1998
through March 9, 2000 there after the prices are as quoted in the Pink Sheets:
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 2000
---------------- ---------------
Quarter High Low High Low
------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
1st $1.125 $0.625 $ 0.50 $0.125
2nd $0.812 $0.625 $0.125 $0.125
3rd $0.593 $0.343 $0.125 $0.125
4th $0.500 $0.160 $0.187 $0.125
</TABLE>
There are no outstanding options, warrants to purchase, or securities
convertible into common equity of the Company outstanding. The Company has not
agreed to register any shares of its common stock for any shareholder. There are
presently 2,635,390 shares of restricted common stock which may be sold in
reliance upon Rule 144 of the Securities Act of 1933, now or at some time in the
future.
ITEM 2. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceeding, and none of
the Company's property is the subject of a pending legal proceeding.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
In April of 1998 the Company made a private sale of 215,040 shares of
Common Stock for a total aggregate consideration of $274,500, or $1.28 per
share. In April of 2000 the Company made a private sale of 250,000 shares of
Common Stock for a total aggregate consideration of $100,000, or $0.40 per
share. The Company had an additional private sale of 100,000 shares of Common
Stock for an aggregate consideration of $25,000, or $0.25 per share in July of
2000. Since April of 2000 to date the Company issued 183,990 shares of Common
Stock as compensation for services provided by various vendors, consultants, and
attorneys. All of the above issuances were performed under and in reliance on
Section 4(2) of the Securities and Exchange Act of 1933. The total amount of
outstanding shares at the date of this filing is 3,518,118.
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ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company is organized under the laws of the State of New
Jersey. Section 14A:3-5 of the New Jersey Revised Statutes, in general, empowers
a New Jersey corporation to indemnify any person who was or is a party or is
threatened to be made a party to any lawsuit or proceeding (other than an action
by or in the right of that corporation) due to the fact that such person is or
was a director, officer, employee or agent of that corporation, or is or was
serving at the request of that corporation as a director, officer, employee or
agent of another corporation or entity. A corporation is also allowed, in
advance of the final disposition of a lawsuit or proceeding, to pay the expenses
(including attorneys' fees) incurred by any officer, director, employee or agent
in defending the action, as long as the person undertakes to repay this amount
if it is ultimately determined that he or she is not entitled to be indemnified
by the corporation. In addition, New Jersey law allows a corporation to
indemnify these persons against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by any of
them in connection with the lawsuit or proceeding if (a) he or she acted in good
faith and in a manner he or she reasonably believed to be in or not opposed to
the best interests of the corporation, and (b) with respect to any criminal
action or proceeding, had no reasonable cause to believe his or her conduct was
unlawful.
A New Jersey corporation also can indemnify its officers and directors
in an action by or in the right of the corporation to procure a judgment in its
favor under the same conditions, except that judicial approval is needed to
indemnify any officer or director who is adjudged to be liable to the
corporation. Where an officer or director is successful on the merits or
otherwise in the defense of any such action, the corporation must indemnify him
or her against the expenses (including attorneys' fees) which he or she actually
and reasonably incurred in connection with this action. The indemnification
provided by New Jersey law is not deemed to be exclusive of any other rights to
which an officer or director may be entitled under any corporation's own
organizational documents, agreements or otherwise.
As permitted by Section 14A:3-5 of the Revised New Jersey Statutes,
Article Seven of our restated certificate of incorporation provides that we will
indemnify each person who is or was our director, officer, employee or agent
(including the heirs, executors, administrators or estate of these individuals)
or is or was serving at our request as a director, officer, employee or agent of
another entity, to the fullest extent that the law permits. This indemnification
is exclusive of any other rights to which any of these individuals otherwise may
be entitled. The indemnification also continues after a person ceases to be a
director, officer, employee or agent of our company and inures to the benefit of
the heirs, executors and administrators of these individuals. Expenses
(including attorneys' fees) incurred in defending any lawsuit or proceeding are
also paid by us in advance of the final disposition of these lawsuits or
proceedings after we receive an undertaking from the indemnified person to repay
this amount if it is ultimately determined that he or she is not entitled to be
indemnified by us. Article Seven further provides that a director or officer
shall not be personally liable, or shall be liable only to the extent therein
provided, to the corporation or its shareholders for damages for breach of any
duty owed to the corporation or its shareholders, except that such provision
shall not relieve a director or officer from liability for any breach of duty
based upon an act or omission (a) in breach of such person's duty of loyalty to
the corporation or its shareholders, (b) not in good faith or involving a
knowing violation of law or (c) resulting in receipt by such person of an
improper personal benefit. As used above, an act or omission in breach of a
person's duty of loyalty means an act or omission which that person knows or
believes to be contrary to the best interests of the corporation or its
shareholders in connection with a matter in which he has a material conflict of
interest. The Company's By-laws also provide that, to the fullest extent
permitted by law, we will indemnify any person who is a party or otherwise
involved in any proceeding because of the fact that he or she is or was a
director or officer of our company or was serving at our request.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to our directors, officers and controlling persons
pursuant to any of these foregoing provisions, or otherwise, we have been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
11
<PAGE> 12
PART F/S
PRO ELITE INC.
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report F-2
Balance Sheet for the year ended February 29, 2000 and February 28, F-3
1999
Statements of Income & Expenses & Accumulated Deficit for the
year ended February 29, 2000 and February 28, 1999 F-4
Statements of Cash Flows for the year ended February 29, 2000 and F-5
February 28, 1999
Notes to Financial Statements F-6
Independent Accountant's Letter F-10
Balance Sheet as of May 31, 2000 F-11
Statement of Income and Expenses and Accumulated (Deficit) as of
May 31, 2000 F-13
Notes to Financial Statements F-16
</TABLE>
F-1
<PAGE> 13
Feinberg & Company
Certified Public Accountants
Independent Auditors' Report
Board of Directors
Pro Elite, Inc.
Secaucus, New Jersey 07094
Ladies and Gentlemen:
We have audited the accompanying balance sheets of Pro Elite, Inc. as of
February 28, 1999 and February 29, 2000 and the related statements of income,
retained earnings and cash flow for the years then ended. 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 audit.
We conducted this audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that this audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above fairly
present, in all material respects, the financial position of Pro Elite, Inc. as
of February 28, 1999 and February 29, 2000 and the results of operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ Feinberg & Company
Certified Public Accountants
June 15, 2000
F-2
<PAGE> 14
PRO ELITE, INC.
BALANCE SHEET
FEBRUARY 29 AND FEBRUARY 28,
ASSETS
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Current Assets
Cash $ 2,464 $ 19,558
Accounts Receivable, less allowance for doubtful accounts of $28,080 and $26,709 210,144 713,040
Commissions and Royalties Receivable 11,616 31,870
Inventory 597,446 977,242
Federal Income Tax Receivable -- 36,379
Prepaid Expenses 54,014 13,009
-----------------------------
Total Current Assets 875,684 1,791,098
Property & Equipment, net 65,047 76,335
Other Assets
Loans Receivable 2,258 100
Trademarks and Computer Software, net 16,165 14,972
Deferred IPO Costs 100,849 99,462
-----------------------------
Total Other Assets 119,272 114,534
TOTAL ASSETS $ 1,060,003 $ 1,981,967
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable - Trade $ 83,881 $ 195,829
Interest Payable 667 --
Royalties Payable 9,321 416,664
Commission Payable 2,509 14,521
Corporate Income Taxes Payable 275 275
Loans Payable 522,734 818,011
-----------------------------
Total Current Liabilities 619,387 1,445,300
Stockholders' Equity
Common Stock, $0.0001 par value
20,000,000 Shares Authorized; 2,984,128 shares issued and outstanding 298 298
Additional Paid in Capital 1,044,702 1,044,702
Accumulated Deficit (604,384) (508,333)
-----------------------------
Total Stockholders' Equity 440,616 536,667
TOTAL LIABILITIES AND EQUITY $ 1,060,003 $ 1,981,967
=============================
</TABLE>
The accompanying notes are an integral part of this statement.
F-3
<PAGE> 15
PRO ELITE, INC.
STATEMENTS OF INCOME & EXPENSES & ACCUMULATED DEFICIT
FOR THE YEARS ENDED FEBRUARY 29 AND FEBRUARY 28,
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Revenue 1,842,340 3,576,695
Cost of Sales 1,337,838 2,618,606
---------------------------
Gross Profit 504,502 958,089
Operating Expenses
Payroll and Payroll Related 480,778 585,897
Trade Show Expenses 46,761 48,342
Building Lease 81,600 97,300
Freight Out & Delivery 58,441 98,904
Professional Fees 90,247 77,020
Other General & Administrative 329,607 540,904
---------------------------
Total Operating Expenses 1,087,434 1,448,367
Net Loss Before Income Taxes, Interest, and Depreciation & Amortization (582,932) (490,278)
Income Taxes 520 5,228
Depreciation & Amortization 46,809 44,810
---------------------------
Net Loss Before Extraordinary Item (630,261) (540,316)
Extraordinary Item
Income from Litigation Settlement 534,210 --
---------------------------
Net Loss (96,051) (540,316)
===========================
Basic and diluted net loss per common share (0.03) (0.17)
===========================
Weighted average shares outstanding 2,984,128 3,235,527
===========================
Accumulated Deficit Beginning (508,333) (4,396)
Federal Income Tax Refund -- 36,379
---------------------------
Accumulated Deficit Ending (604,384) (508,333)
===========================
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 16
PRO ELITE, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 29, AND FEBRUARY 28,
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (96,051) $(540,316)
Adjustments to reconcile net loss to cash used in operations:
Depreciation & Amortization 46,809 44,810
Changes in assets and liabilities:
Receivables 559,529 (18,534)
Inventory 379,796 (211,928)
Prepaid expenses (41,005) 36,852
Loans receivable (2,158) 95,471
Deferred IPO (1,387) 31,563
Trademarks -- (300)
Computer software (7,693) (2,600)
Accounts payable (111,948) (9,442)
Royalties payable (407,343) 346,465
Commissions payable (12,012) 14,174
Interest payable 667 --
-------------------------
Net cash provided from operating activities 403,255 326,531
Cash flows from investing activities:
Purchase of equipment and machines (27,443) (35,569)
Purchase of furniture and fixtures (1,578) (1,600)
-------------------------
Net cash used in investing activities (29,021) (37,169)
Cash flows from financing activities:
Decrease in Common stock -- (140,000)
Decrease in officer loan (26,586) (3,170)
Increase (decrease) in other loans (85,653) 140,000
Increase (decrease) in line of credit (183,038) 256,228
-------------------------
Net cash used in financing activities (295,277) 253,058
-------------------------
Net decrease in cash and cash equivalents (17,094) 2,104
Cash and cash equivalents, beginning of year 19,558 17,454
-------------------------
Cash and cash equivalents, end of year $ 2,464 $ 19,558
=========================
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 17
PRO ELITE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Nature of Business
The Company is in the business of marketing premium "branded
apparel" which in this context means apparel, such as shirts, hats and sweaters
that have had a sports or corporate logo, name and/or slogan applied by means of
embroidering to the apparel. The company deals only in premium quality apparel
and embroidering as opposed to mass merchandised apparel exhibiting printed
sports logos and names. The Company engages various contractors for the supply
of apparel and then contracts with other companies to apply specified
embroidered logos, names and/or slogans to the apparel. Once the finished goods
are delivered, the Company sells directly to retailers, e.g. sports stadium
shops, department stores and specialty shops. The Company also markets directly
to corporate customers.
(B) Inventories
Inventories consist principally of apparel finished goods and are
stated at the lower of cost or market.
(C) Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation is
provided generally by straight line method over the estimated useful lives of
the assets. Expenditures for maintenance and repairs are charged against income.
Estimated useful lives used in calculating depreciation are as follows:
<TABLE>
<S> <C>
Furniture and equipment 5 years
Leasehold improvements Life of lease
</TABLE>
(D) Intangible Assets and Amortization
Trademarks and computer software are stated at cost. Amortization
is provided generally by straight line method over the statutory life of the
assets.
(E) Income Taxes
The Company is a New Jersey "C" corporation and files under the
provisions of the applicable Internal Revenue Service and State of New Jersey
statutes. All prior filings were timely made. Deferred income taxes result from
the recognition of revenue and expense items in different periods for financial
reporting and tax purposes. For the current year, the Company has no deferred
income taxes, after accruing all sublicense revenues and sales to customers.
(F) Recognition of Income
The financial statements and tax filings are prepared on the
accrual basis of accounting. Sales are recorded in the period the merchandise is
shipped and sublicense fees are booked when earned.
F-6
<PAGE> 18
XIOtech
PRO ELITE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
NOTE 2: COMMITMENTS AND CONTINGENCIES
(A) Operating Leases
The Company occupies space for its sales, executive offices,
assembly and storage facilities under operating leases expiring August 31, 2002.
The lease provides for additional payments for insurance and other charges
related to the premises. Future minimum rental commitments under noncancellable
operating leases are as follows:
<TABLE>
<S> <C>
2000/01 $81,600
</TABLE>
Rent expense for the period ended February 29, 2000 was $81,600.
(B) Royalty Obligations
The Company has entered into various royalty, licensing and
commission agreements on products sold by the Company. The main agreement with
the NFLP, dated May 22, 1995, provides for minimum advance and guarantee
payments and ten percentage (10%) of specific product sales. Effective,
September 1, 1999 the royalty fees increase to fourteen percentage (14%) of
product sales.
The Company entered into a two year licensing agreement with
Major League Baseball Properties, Inc., effective January 1, 1999, for woven
shirts and knit sweaters. This agreement calls for annual, minimum advance and
guarantee payments of $25,000 and nine percent (9%) of specific product net
sales. On October 1, 1999, the Company and Major League Baseball Properties,
Inc. agreed to terminate the licensing agreement.
(C) Loans Payable
The Company has the following short term loan obligations:
<TABLE>
<S> <C>
Other Non-Related Party $ 71,500
Caterpillar Financial Services 7,847
MTB Bank 443,387
--------
Total $522,734
========
</TABLE>
On July 2, 1997, the Company entered into a $1.5 million credit
line with MTB Bank, New York, New York. The outstanding loan is secured by a
security interest in the Company's inventory, personal property, fixtures and
accounts receivable. In addition to the security interest, the president of the
Company has personally guaranteed the payment of any outstanding loans to the
extent that the collateral is less than the obligations. Further, in the event,
the president has any personal loans due and owing from the Company, he has
agreed to subordinate such loans to the MTB Bank obligations. The Company and
MTB Bank have agreed to reduce the credit line to $600,000.
F-7
<PAGE> 19
PRO ELITE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
NOTE 2 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
(D) Litigation
The Company was a plaintiff in a lawsuit with the National Football
League Properties, Inc. (NFLP). On February 11, 1999, Pro Elite filed a
complaint seeking to prevent NFLP from terminating its license to market and
sell apparel bearing the trademarks of the NFL and the teams that compromise the
NFL. As of September 9, 1999, the Company's outstanding liability with NFLP was
$610,544.
On September 9, 1999, the Company entered into a settlement agreement
with NFLP that provided relief of all its past due obligations, subject to the
full satisfaction of it obligations under the terms and conditions of the
license renewal. The settlement amount is reported as an extraordinary item.
NOTE 3: MAJOR CUSTOMERS
During the period ended February 29, 2000, sales to five major customers
were $437,608 which represents 27.7% of total sales revenues, exclusive of
sublicense commission fees, for the year. The Company sells a limited amount to
foreign customers.
F-8
<PAGE> 20
[FEINBERG & COMPANY LETTERHEAD]
INDEPENDENT ACCOUNTANT'S LETTER
Mr. Michael Polsky, President
PRO ELITE INC.
100 Dorigo Lane
Secaucus, New Jersey 07094
Dear Mr. Polksy:
We have compiled the accompanying balance sheet of Pro Elite Inc. as of
May 31, 2000, and the related statements of income and retained earnings for
the period then ended, in accordance with standards established by the American
Institute of Certified Public Accountants.
A compilation is limited to presenting in the form of financial statement
information that is the representation of management. We have not audited or
reviewed the accompanying financial statements, and accordingly, do not express
an opinion or any other form of assurance on them.
Management has elected to omit the statement of cash flows required by
generally accepted accounting principles. If the omitted statement of cash
flows were included in the financial statements, they might influence the
user's conclusions about the company's financial position, results of
operations and cash flows. Accordingly, these financial statements are not
designed for those who are not informed about such matters.
/s/ FEINBERG & COMPANY
Feinberg & Company
Certified Public Accountants
July 14, 2000
F-9
<PAGE> 21
PRO ELITE INC.
BALANCE SHEET
MAY 31, 2000
ASSETS
<TABLE>
<S> <C>
Current Assets:
Cash $ 2,937
Accounts Receivable (Less: Allowance For
Uncollectibles $24,202) 157,144
Commissions Receivable 10,783
Royalties Receivable 1,500
Prepaid Rent 6,800
Inventory 566,413
---------
Total Current Assets 745,547
---------
Property & Equipment:
Equipment 184,237
Leasehold Improvements 10,415
Furniture & Fixtures 55,531
---------
Subtotal 250,183
Less: Accumulated Depreciation (181,027)
---------
Net Property & Equipment 69,156)
---------
Other Assets:
Loans Receivable 10,598
---------
Intangible Assets:
Trademarks 12,798
Computer Software 35,693
---------
Subtotal 48,491
Less: Accumulated Amortization (42,928)
---------
Net Intangible Assets 5,563
Deferred Charges 47,214
Deferred IPO Costs 101,284
---------
Total Other Assets 164,659
---------
TOTAL ASSETS $ 979,362
=========
</TABLE>
The accompanying Independent Accountant's Letter and Notes To Financial
Statements are an integral part of this statement.
F-10
<PAGE> 22
PRO ELITE INC.
BALANCE SHEET
MAY 31, 2000
LIABILITIES & STOCKHOLDERS' EQUITY
<TABLE>
<C> <S>
Current Liabilities:
Accounts Payable - Trade $101,948
Royalties Payable 9,321
Corporate Taxes Payable 275
Commissions Payable 1,512
Loan Interest Payable 3,626
Loans Payable 440,461
----------
Total Current Liabilities 557,143
Stockholders' Equity:
Common Stock (Authorized 20,000,000 shares
par value $.0001, Issued and Outstanding
3,334,118 shares) 333
Additional Pain In Capital 1,144,667
Accumulated (Deficit) (722,781)
----------
Total Stockholders' Equity 422,219
----------
TOTAL LIABILITIES & EQUITY $ 979,362
==========
</TABLE>
The accompanying Independent Accountant's Letter and Notes to Financial
Statements are an integral part of this statement.
F-11
<PAGE> 23
PRO ELITE INC.
STATEMENT OF INCOME & EXPENSES & ACCUMULATED DEFICIT
MAY 31, 2000
<TABLE>
<S> <C>
INCOME:
Sales, net of returns $ 156,414
Commission Income 37,593
Royalty Income 6,069
Miscellaneous Income 9,344
---------
Total Income 209,420
---------
COST OF SALES:
Opening Inventory 597,446
Purchases 15,444
Freight In 0
Embroidery 12,696
Supplies 2,808
Design Costs 178
Royalties 17,461
----------
Total 646,033
Less: Ending Inventory (566,413)
----------
Total Cost of Sales 79,620
----------
GROSS PROFIT 129,800
----------
OPERATING EXPENSES:
Officer Salary 33,654
Office Salaries 23,154
Sales Salaries 16,154
Warehouse Salaries 14,541
Payroll Taxes 6,760
Employee Benefits 6,075
Pension & Profit Sharing Costs 0
Sales Commissions 2,158
Payroll Processing Costs 247
Sample Expenses 628
Advertising Expenses 20,056
Trade Show Expenses 8,940
Meals & Entertainment 3,190
Lodging 600
Transportation 2,342
Rent 20,400
Utilities 1,251
Telephonic Services 3,945
Alarm Expense 100
Insurance: Commercial 7,949
----------
Subtotal (Carried Forward) 172,144
</TABLE>
The accompanying Independent Accountant's Letter and Notes To Financial
Statements are an integral part of this statement.
F-12
<PAGE> 24
PRO ELITE INC.
STATEMENT OF INCOME & EXPENSES & ACCUMULATED DEFICIT
MAY 31, 2000
<TABLE>
<S> <C>
Subtotal (Carried Forward) $ 172,144
Interest Expense 15,263
Bank Service Charges 1,938
Bank Letter of Credit Fees 0
Bank Examination Fees 1,800
Postage 2,375
Office Supplies 2,596
Freight Out & Delivery 9,840
Professional Fees - Accounting 895
Professional Fees - Legal 9,761
Vehicle Expense 7,562
Public Relations 1,301
Dues & Subscriptions 981
Equipment Rentals 1,570
Repair & Maintenance 488
Warehouse Suppliers & Equipment 930
Cleaning Services 1,929
Outside Services 937
Computer Consulting Services 4,571
Miscellaneous Expenses 714
---------
Total Operating Costs 237,595
---------
NET (LOSS) BEFORE DEPRECIATION &
STATE INCOME TAXES (107,795)
Depreciation & Amortization 9,733
State Income Taxes 340
---------
Total 10,602
---------
NET (LOSS) (118,397)
ACCUMULATED (DEFICIT) BEGINNING: 3/1/00 (604,384)
---------
ACCUMULATED (DEFICIT) ENDING: 5/31/00 $(722,781)
=========
</TABLE>
The accompanying Independent Accountant's Letter and Notes to Financial
Statements are an integral part of this Statement.
F-13
<PAGE> 25
PRO ELITE, INC.
STATEMENT OF CASH FLOWS
MAY 31, 2000
<TABLE>
<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net Profit $ 260,475
Adjustments to Reconcile Net Profit
to Net Cash
Provided by Operating Activities:
Depreciation & Amortization 39,470
Changes in Assets & Liabilities:
(Increase) in Accounts Receivable (67,821)
Decrease in Commissions Receivable 8,619
Decrease in Royalties Receivable 41,142
(Increase) in Other Receivables (100,000)
(Increase) in Inventory (424,512)
(Increase) in Prepaid Expenses (47,751)
(Increase) in Loans Receivable (224)
(Increase) in Deferred IPO (39,690)
(Increase) in Trademarks (4,725)
(Increase) in Computer Software (7,428)
(Decrease) in Accounts Payable - Trade (155,987)
(Decrease) in Accounts Payable - Financing (159,788)
(Decrease) in Royalties Payable (17,335)
Increase in Commissions Payable 347
Increase in Accrued Corporation Taxes 125
---------
Total Adjustments (935,558)
---------
Net Cash Used for Operating Activities (675,083)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Equipment and Machines (15,767)
Purchase of Furniture and Fixtures (6,070)
---------
Total From Investing Activities (21,837)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) in Officer Loan (23,972)
Increase in Loans - Others 262,594
Increase in Common Stock 324,500
---------
Total 563,122
---------
(DECREASE) IN CASH & CASH EQUIVALENTS (133,798)
CASH & CASH EQUIVALENTS:
Beginning of Year 151,252
End of Year $ 17,454
=========
</TABLE>
The accompanying Independent Auditor's Report and Notes to the Financial
Statements are an Integral Part of this Statement.
F-14
<PAGE> 26
PRO ELITE INC.
NOTES TO FINANCIAL STATEMENT
MAY 31, 2000
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) NATURE OF BUSINESS
The principal business of the Company is to manufacture off-shore and
import apparel and accessories, and once received within the United States,
embroider on the apparel logos and/or trademarks of National Football League
(NFL) teams, and United States corporations. The goods are then distributed
principally within the United States. Also, the Company, in accordance with a
license agreement with the NFL, sublicenses hats. The Company sells directly to
retailers, catalogue showrooms and through premium/promotion incentives for
major corporations and colleges.
(B) INVENTORIES
Inventories consist principally of apparel finished goods and are
stated at the lower of cost or market.
(C) PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment are stated at cost. Depreciation is provided
generally by straight line method over the estimated useful lives of the
assets. Expenditures for maintenance and repairs are charged against income.
Estimated useful lives used in calculating depreciation are as follows:
Furniture and equipment 5 years
Leasehold improvements Life of lease
(D) INTANGIBLE ASSETS AND AMORTIZATION
Trademarks and computer software are stated at cost. Amortization is
provided generally by straight line method over the statutory life of the
assets.
(E) INCOME TAXES
The Company is a New Jersey "C" corporation and files under the
provisions of the applicable Internal Revenue Service and State of New Jersey
statutes. All prior filings were timely made. Deferred income taxes result from
the recognition of revenue and expense items in different periods for financial
reporting and tax purposes. For the current year, the Company has no deferred
income taxes, after accruing all sublicense revenues and sales to customers.
F-15
<PAGE> 27
PRO ELITE INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(F) Recognition of Income
The financial statements and tax filings are prepared on the accrual
basis of accounting. Sales are recorded in the period the merchandise is
shipped and sublicense fees are booked when earned.
NOTE 2: COMMITMENTS AND CONTINGENCIES
(A) Operating Leases
The Company occupies space for its sales, executive offices, assembly
and storage facilities under operating leases expiring August 31, 2002. The
lease provides for additional payments for insurance and other charges related
to the premises. Future minimum rental commitments under noncancellable
operating leases are as follows:
2000/01 $81,600
Rent expense for the period ended May 31, 2000 was $20,400.
(B) Royalty Obligations
The Company has entered into various royalty, licensing and
commission agreements on products sold by the Company. The main agreement with
the NFLP, dated May 22, 1995, provides for minimum advance and guarantee
payments and ten percentage (10%) of specific product sales. Effective,
September 1, 1999 the royalty fees increase to fourteen percentage (14%) of
product sales.
The Company entered into a two year licensing agreement with Major
League Baseball Properties, Inc., effective January 1, 1999, for woven shirts
and knit sweaters. This agreement calls for annual, minimum advance and
guarantee payments of $25,000 and nine percent (9%) of specific product net
sales. On October 1, 1999, the Company and Major League Baseball Properties,
Inc. agreed to terminate the licensing agreement.
F-16
<PAGE> 28
PRO ELITE INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000
COMMITMENTS AND CONTINGENCIES (Continued)
(C) Loans Payable
The Company has the following short term loan obligations:
<TABLE>
<S> <C>
Other Non-Related Party $ 68,500
Caterpillar Financial Services 7,847
MTB Bank 364,114
--------
Total $440,461
========
</TABLE>
On July 2, 1997, the Company entered into a $1.5 million credit line with
MTB Bank, New York, New York. The outstanding loan is secured by a security
interest in the Company's inventory, personal property, fixtures and accounts
receivable. In addition to the security interest, the president of the Company
has personally guaranteed the payment of any outstanding loans to the extent
that the collateral is less than the obligations. Further, in the event, the
president has any personal loans due and owing from the Company, he has agreed
to subordinate such loans to the MTB Bank obligations. The Company and MTB Bank
have agreed to reduce the credit line to $600,000.
(D) Litigation
The Company was a plaintiff in a lawsuit with the National Football League
Properties, Inc. (NFLP). On February 11, 1999, Pro Elite filed a complaint
seeking to prevent NFLP from terminating its license to market and sell apparel
bearing the trademarks of the NFL and the teams that compromise the NFL. As of
September 9, 1999, the Company's outstanding liability with NFLP was $610,544.
On September 9, 1999, the Company entered into a settlement agreement with
NFLP that provided relief of all its past due obligations, subject to the full
satisfaction of its obligations under the terms and conditions of the license
renewal. The settlement amount is reported as an extraordinary item.
NOTE 3: MAJOR CUSTOMERS
During the period ended May 31, 2000, sales to five major customers were
$46,532 which represents 29.7% of total sales revenues, exclusive of sublicense
commission fees, for the year. The Company sells a limited amount to foreign
customers.
*******************
F-17
<PAGE> 29
PART III
ITEM 1. INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
3.0* Articles of Incorporation
3.1* By-laws
27* Financial Data Schedule
</TABLE>
* Previously filed with this registration statement and incorporated herein by
reference.
12
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
PRO ELITE, INC.
(Registrant)
Date: October 6, 2000 By: /s/ Robert Polsky
-----------------------------
Robert Polsky
Chief Executive Officer
13
