-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EzwAh23hjAoCmmgNMSGFSEVUCAAJynQhhIdIqc0zLjeOu3HHlDsVR7t3MkYDQt/6 XBwBrhz+GNCoi331i7ptRQ== 0000912057-97-027741.txt : 19970815 0000912057-97-027741.hdr.sgml : 19970815 ACCESSION NUMBER: 0000912057-97-027741 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19970814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: RETROSPETTIVA INC CENTRAL INDEX KEY: 0001015383 STANDARD INDUSTRIAL CLASSIFICATION: WOMEN'S, MISSES', AND JUNIORS OUTERWEAR [2330] IRS NUMBER: 954298051 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-29295 FILM NUMBER: 97660208 BUSINESS ADDRESS: STREET 1: 8825 WEST OLYMPIC BLVD CITY: BEVERLY HILLS STATE: CA ZIP: 90211 SB-2/A 1 SB-2/A 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) 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)
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
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 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
(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) - ------------------------------------------------------------ - ------------------------------------------------------------ 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. 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.
UNDERWRITING DISCOUNTS AND PROCEEDS TO PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2) Per Unit................................... $12.00 $1.20 $10.80 Total(3)................................... $6,000,000 $600,000 $5,400,000
(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. 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 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 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 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.
- ------------------------ (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 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.
YEAR ENDED DECEMBER 31, -------------------------- 1996 1995 ------------ ------------ SIX MONTHS ENDED JUNE 30, ------------------------ 1997 1996 ----------- ----------- (UNAUDITED) (UNAUDITED) 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
AT JUNE 30, AS 1997 ADJUSTED(1) ----------- ------------ (UNAUDITED) (UNAUDITED) 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
- ------------------------ (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 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 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 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 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 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 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 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 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: 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%
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:
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ------------------------- --------------------------- PRICE NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE ---------- ------------- ------------ ------------- ----------- 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% ---------- ----- ------------ ----- ---------- ----- ------------ -----
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 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.
ACTUAL AS ADJUSTED(1) ------------ -------------- (UNAUDITED) (UNAUDITED) 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 ------------ -------------- ------------ --------------
- ------------------------ (1) As adjusted to give effect to the receipt and application of the estimated net proceeds of the Offering. See "Use of Proceeds." 14 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 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.
YEAR ENDED SIX MONTHS ENDED JUNE DECEMBER 31, 30, -------------------------- ------------------------ 1996 1995 1997 1996 ------------ ------------ ---------- ------------ (UNAUDITED) (UNAUDITED) 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 AT JUNE 30, 1997 AS ADJUSTED(1) -------------------------- ------------------------ (UNAUDITED) (UNAUDITED) 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
- ------------------------ (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 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 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:
YEARS ENDED DECEMBER 31, ------------------------------------- 1994 1995 1996 ----------- ----------- ----------- SIX MONTHS ENDED JUNE 30, ---------------------------- 1996 1997 ------------- ------------- (UNAUDITED) (UNAUDITED) 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%
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. 18 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. 19 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. 20 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 21 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. 22 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 23 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 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 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 26 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. 27 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:
OFFICER OR NAME AGE POSITION DIRECTOR SINCE - ------------------------------------------ --- ------------------------------------------------ --------------- 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
The name, age and position of each of the Company's key employees are set forth below: Natasha Vukadinovic............... 33 General Manager--Foreign Operations--Macedonia Jovica Kecman..................... 32 General Manager--International Quality Control Millisav Vicanovic................ 48 General Manager--Quality Control--Macedonia
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 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 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 $100,000 in 1996. SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ------------------------------------------- ANNUAL COMPENSATION AWARDS PAYOUTS ---------------------------------------------------- ------------------------------ ----------- (E) OTHER ANNUAL (F) (G) (H) (A) (B) (C) (D) COMPENSA- RESTRICTED STOCK OPTIONS/ LTIP NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) TION($) AWARD(S)($) SARS(#) PAYOUTS($) - --------------------------- --------- ----------- ------------- ------------- ----------------- ----------- ----------- Borivoje Vukadinovic Chief Exec. Officer...... 1996 $ 40,928 -0- -0- -0- 1,358,067(1) -0- (I) ALL OTHER (A) COMPENSA- NAME AND PRINCIPAL POSITION TION($) - --------------------------- ------------- Borivoje Vukadinovic Chief Exec. Officer...... -0-
- ------------------------ (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 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 $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
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 - ------------------------------------------------------- ---------------- --------------- ----------- ------------- 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
- ------------------------ (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 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.
PERCENT OF PERCENT OF AMOUNT OF CLASS PRIOR CLASS AFTER NAME OWNERSHIP TO OFFERING OFFERING - --------------------------------------------------------------------------- ----------- ------------- ------------- 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%
- ------------------------ * 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 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.
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 - ------------------------------------------- ------------- ----------------- --------------- ------------------- Borivoje Vukadinovic....................... 2,454,051(1) 79.0% 50,000 59.7% Michael D. Silberman....................... 200,136(2) 10.7% 25,000 7.0%
- ------------------------ (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 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 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 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 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:
NUMBER OF UNDERWRITERS UNITS - ------------------------------------------------------------------------------------------------------ ----------- Kensington Securities, Inc. Gunn Allen Financial, Inc. ----------- Total................................................................................................. 500,000 ----------- -----------
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 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 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 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 INDEX TO FINANCIAL STATEMENTS
PAGE ----- 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
F-1 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 RETROSPETTIVA, INC. BALANCE SHEETS ASSETS
JUNE 30, 1997 DECEMBER 31, ------------ 1996 ------------ (UNAUDITED) 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 ------------ ------------ ------------ ------------
See accompanying notes to financial statements F-3 RETROSPETTIVA, INC. STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ---------------------------- -------------------------- 1995 1996 1996 1997 ------------- ------------- ------------ ------------ (UNAUDITED) (UNAUDITED) 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 ------------- ------------- ------------ ------------ ------------- ------------- ------------ ------------
See accompanying notes to financial statements F-4 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)
COMMON STOCK ADDITIONAL RETAINED ---------------------- PAID IN EARNINGS SHARES AMOUNT CAPITAL (DEFICIT) TOTAL ---------- ---------- ---------- ------------ ------------ 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 ---------- ---------- ---------- ------------ ------------ ---------- ---------- ---------- ------------ ------------
See accompanying notes to financial statements F-5 RETROSPETTIVA, INC. STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, -------------------------- -------------------------- 1995 1996 1996 1997 ------------- ----------- ------------- ----------- (UNAUDITED) (UNAUDITED) 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 ------------- ----------- ------------- ----------- ------------- ----------- ------------- -----------
See Note 13 See accompanying notes to financial statements F-6 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 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 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:
YEARS ENDED DECEMBER 31, -------------------------- 1995 1996 ------------ ------------ SIX MONTHS ENDED JUNE 30, -------------------------- 1996 1997 ------------ ------------ (UNAUDITED) (UNAUDITED) 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
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 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:
GREATER THAN 30 DAYS PAST 60 DAYS PAST CURRENT DUE DUE TOTAL ---------- ------------ ------------ ------------ December 31, 1996.......................................... $ 534,816 $ 381,164 $ 266,222 $ 1,182,202 June 30, 1997 (Unaudited).................................. $ -- $ -- $ 232,704 $ 232,704
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:
JUNE 30, 1997 DECEMBER 31, ------------ 1996 ------------ (UNAUDITED) 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 ------------ ------------ ------------ ------------
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 RETROSPETTIVA, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 3--OTHER ASSETS Other assets consist of the following:
DECEMBER 31, 1996 ------------ JUNE 30, 1997 ----------- (UNAUDITED) Insurance claim, receivable....................................... $ 76,166 $ 76,166 Deposits.......................................................... 4,500 4,610 ------------ ----------- $ 80,666 $ 80,776 ------------ ----------- ------------ -----------
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:
DECEMBER 31, 1996 ------------ JUNE 30, 1997 ----------- (UNAUDITED) 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 ------------ ----------- ------------ -----------
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 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.
OUTSTANDING OPTIONS ----------------------- RESERVED PRICE PER SHARES SHARES SHARES ---------- ---------- ----------- 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 ---------- ---------- ----------- ---------- ---------- -----------
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 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:
JUNE 30, 1997 DECEMBER 31, ----------- 1996 ------------ (UNAUDITED) 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 ------------ ----------- ------------ -----------
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 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:
JUNE 30, 1997 DECEMBER 31, ----------- 1996 ------------ (UNAUDITED) Total deferred tax assets......................................... $ 16,000 $ 16,000 Total deferred tax (liabilities).................................. -- -- ------------ ----------- Net deferred tax assets........................................... $ 16,000 $ 16,000 ------------ ----------- ------------ -----------
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:
JUNE 30, 1997 DECEMBER 31, ----------- 1996 ------------ (UNAUDITED) 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 ------------ ----------- ------------ -----------
The provision for income taxes consists of the following:
YEARS ENDED DECEMBER 31, ---------------------- 1995 1996 ---------- ---------- SIX MONTHS ENDED JUNE 30, ------------------------ 1996 1997 ----------- ----------- (UNAUDITED) (UNAUDITED) Current................................... $ 35,000 $ 533,285 $ 172,000 $ 348,000 Deferred.................................. 160,000 7,000 -- -- ---------- ---------- ----------- ----------- Provision................................. $ 195,000 $ 540,285 $ 172,000 $ 348,000 ---------- ---------- ----------- ----------- ---------- ---------- ----------- -----------
F-14 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:
YEARS ENDED DECEMBER 31, ---------------------- 1995 1996 ---------- ---------- SIX MONTHS ENDED JUNE 30, ------------------------ 1996 1997 ----------- ----------- (UNAUDITED) (UNAUDITED) 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 ---------- ---------- ----------- ----------- ---------- ---------- ----------- -----------
The components of deferred income tax (benefit) expense are as follows:
YEARS ENDED DECEMBER 31, ---------------------- 1995 1996 ----------- --------- SIX MONTHS ENDED JUNE 30, ------------------------ 1996 1997 ----------- ----------- (UNAUDITED) (UNAUDITED) 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 $ -- $ -- ----------- --------- ----------- ----------- ----------- --------- ----------- -----------
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 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
YEARS ENDED DECEMBER 31, --------------------- 1995 1996 --------- ---------- SIX MONTHS ENDED JUNE 30, ------------------------ 1996 1997 ----------- ----------- (UNAUDITED) (UNAUDITED) 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 $ -- --------- ---------- ----------- ----------- --------- ---------- ----------- -----------
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 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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
PAGE ---- 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
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 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 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 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 ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.(1)(2)(3) 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) --------- ---------
- ------------------------ (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:
NUMBER OF SHARES OF COMMON STOCK UNDERLYING NAME THE UNITS - ------------------------------------------------------------------------------ ------------------------- 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
II-4 (iii) In March 1997, the Registrant sold 334,759 shares of its Common Stock at $1.68 per share to the following individuals.
NAME NUMBER OF SHARES - ------------------------------------------------------------------------------------- ----------------- 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
(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 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.
EXHIBIT NO. TITLE - ------------- ------------------------------------------------------------------------------------------------ 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
- ------------------------ (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 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 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. RETROSPETTIVA, INC. By: /s/ BORIVOJE VUKADINOVIC ----------------------------------------- Borivoje Vukadinovic CHIEF EXECUTIVE OFFICER
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 EXHIBIT INDEX
EXHIBIT NO. TITLE - --------- --------------------------------------------------------------------------------------------------------- 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
EX-1.05 2 EXHIBIT 1.05 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 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 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 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 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 5 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. 6 (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 7 "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. 8 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 9 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. 10 (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. 11 (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. 12 (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 13 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 14 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 15 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 16 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. 17 (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 18 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). 19 (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 20 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 21 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 22 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 23 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 24 $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, 25 (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. 26 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 SCHEDULE I Name of Underwriter Number of Units to be Purchased - ------------------- ------------------------------- Total 28 EX-4.01 3 EXHIBIT 4.01 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 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: 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 ------------------- --
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. EX-4.02 4 EXHIBIT 4.02 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 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.
EX-10.05 5 EX10.05 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. 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. EX-11.02 6 EXHIBIT 11.02 COMPUTATION OF EARNINGS PER COMMON SHARE SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ------------------------ -------------------------- 1995 1996 1996 1997 --------- --------- ----------- ----------- (UNAUDITED) (UNAUDITED) 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 --------- --------- --------- --------- --------- --------- --------- ---------
EX-23.03 7 EXHIBIT 23.03 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 EX-27.02 8 EXHIBIT 27.02
5 YEAR YEAR 6-MOS 6-MOS DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1997 DEC-31-1995 DEC-31-1996 JUN-30-1996 JUN-30-1997 0 110,777 0 289,905 0 0 0 0 0 2,099,893 0 1,543,339 0 17,196 0 17,196 0 3,112,678 0 3,725,044 0 5,662,907 0 5,703,704 0 106,576 0 111,185 0 45,190 0 54,021 0 5,857,542 0 5,846,644 0 4,797,053 0 4,148,125 0 0 0 0 0 0 0 0 0 0 0 0 0 154,000 0 272,054 0 906,489 0 1,426,465 0 5,857,542 0 5,846,644 11,379,826 12,902,195 5,680,696 7,921,299 11,379,826 12,902,195 5,680,696 7,921,299 9,979,933 11,006,053 4,918,341 6,758,331 230,301 170,179 146,261 94,568 280,815 362,621 171,508 181,117 0 0 0 0 21,241 61,457 18,024 23,784 875,495 1,313,087 426,562 867,976 195,000 540,285 172,000 348,000 680,495 772,802 254,562 519,976 0 0 0 0 0 0 0 0 0 0 0 0 680,495 772,802 254,562 519,976 0.39 0.44 0.15 0.30 0.39 0.44 0.15 0.30
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