-----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, KNnoi/SdJ9MsbvJEVERsGnQivJjkpF3qkwR9QE9LKHIiSPy6NU1S2QsObsNqNNbx rdE7ue2QskZnxLMZmwiuVg== 0000912057-97-020402.txt : 19970617 0000912057-97-020402.hdr.sgml : 19970617 ACCESSION NUMBER: 0000912057-97-020402 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 19970616 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: RETROSPETTIVA INC CENTRAL INDEX KEY: 0001015383 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 954298051 FILING VALUES: FORM TYPE: SB-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-29295 FILM NUMBER: 97624555 BUSINESS ADDRESS: STREET 1: 8825 WEST OLYMPIC BLVD CITY: BEVERLY HILLS STATE: CA ZIP: 90211 SB-2 1 SB-2 As filed with the Securities and Exchange Commission on June 13, 1997. Registration No. 333-__________ - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 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 of (Primary Standard Industrial (IRS Employer incorporation or organization) Classification Code No.) I.D. Number) 8825 WEST OLYMPIC BLVD. BEVERLY HILLS, CA 90211 (310) 657-4488 (Address, including zip code, and telephone number, in- cluding 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) 657-4488 (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 Pezzola & Reinke, A Professional 5445 DTC Parkway, Suite 520 Corporation Englewood, CO 80111 1999 Harrison Street, Suite 1300 (303) 770-7254 Oakland, CA 94612 (303) 770-7257 (Fax) (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 Title of Each Class Amount to Proposed Aggregate Amount of of Securities Be Maximum Price Offering Registration to be Registered Registered Per Security Price Fee - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Units, consisting of two shares of Common Stock, no par value 575,000 and one Warrant(1) Units $12.00 $ 6,900,000 $2,091 Common Stock, no par value, underlying 575,000 Warrants Shares $ 7.50 $ 4,312,500 $1,307 Representative's 50,000 Warrants(2) Warrants $ .002 $ 100 $ -0- Units underlying Representative's Warrants consisting of two shares of Common 50,000 Stock and one Warrant Units $14.40 $ 720,000 $ 219 Common Stock, no par value, underlying Warrants included in Representative's 50,000 Warrants(2) Shares $ 7.50 $ 375,000 $ 114 Common Stock, no par value offered by 75,000 Selling Shareholders Shares $ 6.00 $ 450,000 $ 136 ----------- ------ Totals . . . . . . . . . . . . . . . . . . . . . . $12,757,600 $3,776 (1) Includes the overallotment option granted to the Representative 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 Representative's 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) (ii) 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. SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED JUNE 13, 1997 RETROSPETTIVA, INC. 500,000 UNITS Retrospettiva, Inc. (the "Company") is offering (the "Offering") through Kensington Securities, Inc., as the representative (the "Representative") 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 as of the date of the Prospectus. 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 Representative 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 list the Common Stock and Warrants (but not the Units) 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"). 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." 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 Proceeds Price to Discounts and 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 Representative of $180,000 ($207,000 if the Overallotment Option is exercised) and the issuance of warrants to the Representative (the "Representative's 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 Representative's 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 Representative's nonaccountable expense allowance. See "Underwriting." (3) Assumes no exercise of the Representative's 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. The date of this Prospectus is __________, 1997. 2 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 PURCHASE AND SALE TRANSACTIONS OF THE COMMON STOCK AND WARRANTS ON THE NASDAQ NATIONAL MARKET. 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." 3 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 REFLECT AN APPROXIMATELY 2.3825731 SHARES FOR ONE SHARE FORWARD STOCK SPLIT APPROVED BY THE COMPANY'S SHAREHOLDERS ON JUNE 20, 1997 AND ASSUMES THAT THE WARRANTS, THE OVERALLOTMENT OPTION AND THE REPRESENTATIVE'S WARRANTS HAVE NOT BEEN EXERCISED. EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS SET FORTH IN THIS PROSPECTUS INCLUDE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE FORWARD-LOOKING STATEMENTS 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 produces internationally 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 produces garments for customers under its own labels, "Easy Concepts," "Magellan" and "Retrospettiva" and under private labels selected by its customers and markets its products to (i) large wholesalers such as Giorgio Sant' Angelo, Jeans Collectibles, Periwinkle, Positive Influence, David N., Rex Winston and Wild Life, (ii) national retailers including department stores such as Nordstrom, Dayton Hudson, Bloomingdales, J.C. Penney, Casual Corner, Neiman Marcus, May Co., Newton's, Macy's and Saks Fifth Avenue, and (iii) women's chain clothing stores such as Marshalls, TJ Maxx, Chadwicks, Hit or Miss, Fred Mayer, Burlington Coat Factory 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 Eastern European 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. Under this arrangement the Company does not assume the marketing and fashion risk generally associated with the apparel industry. Fabrics and trims are purchased from suppliers 4 in China, India, Russia, Romania, Italy and the United States. These items are shipped to factories selected by the Company (generally located in Eastern Europe) 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 Eastern European manufacturers including (i) the availability in Eastern European 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 of finished goods from certain Eastern European countries, 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 Eastern European 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 the fabrics in Eastern Europe (primarily Macedonia) for importation into the United States. Net sales increased from $821,345 for the year ended December 31, 1993 to $5,521,802 in 1994, $11,379,826 in 1995 and $12,902,195 in 1996. See "Financial Statements." The Company's executive offices are located at 8825 West Olympic Blvd., Beverly Hills, California 90211, and its telephone number is (310) 657-4488. 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." 5 Proposed Nasdaq National Market Symbols RTRO - Common Stock RTROW - Warrants Transfer and Warrant Agent Corporate Stock Transfer, Inc. - ---------- (1) Excludes exercise of: (i) the Warrants; (ii) the Overallotment Option; (iii) the Representative's Warrants; and (iv) outstanding stock options to purchase up to 1,761,635 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." 6 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 three months ended March 31, 1996 and 1997 has been derived from unaudited financial statements which are also included herein. The results of operations for the three months ended March 31, 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. THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------- --------- 1996 1995 1997 1996 ---- ---- ---- ---- INCOME STATEMENT DATA: (Unaudited) (Unaudited) Net sales 12,902,195 11,379,826 5,093,857 4,639,169 Gross profit 1,896,142 1,402,893 748,797 681,958 Operating income 1,363,342 891,776 598,569 552,015 Interest expense 61,457 21,241 13,264 12,342 Net income 772,802 680,495 350,305 296,673 Weighted average shares outstanding 1,750,000 1,750,000 1,750,000 1,750,000 Net income per share .44 .39 .20 .17 AT MARCH 31, AS 1997 ADJUSTED(1) ---- ----------- BALANCE SHEET DATA: (Unaudited) (Unaudited) Working capital 1,368,620 5,645,620 Total assets 4,667,902 9,164,902 Long-term debt -- -- Total liabilities 3,139,054 2,659,054 Shareholders' equity 1,528,848 6,473,848 - ---------- (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 Representative's Warrants or outstanding stock options. See "Use of Proceeds" and "Description of Securities." 7 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 three months ended March 31, 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 competitive environment in which the Company operates. 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 Mr. Vukadinovic, who is the Chief Executive Officer and President of the Company and other executive officers. In May 1996, Mr. Vukadinovic entered into a three-year employment agreement with the Company which included 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 $5,000,000 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" and "Principal Shareholders." DEPENDENCE UPON UNAFFILIATED MANUFACTURERS AND FABRIC SUPPLIERS. The Company does not own or operate any manufacturing facilities and is therefore dependent upon independent manufacturers, primarily in Macedonia, that manufacture products to the Company's specifications. The inability 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 8 results of operations. The Company is dependent upon one fabric supplier which provided approximately 37% and 38%, respectively, of the Company's fabric needs for the year ended December 31, 1996 and the three months ended March 31, 1997. The loss of this supplier could have an adverse affect on the Company's operations. The Company does not have any written contracts with any of its contractors or suppliers. See "Business - Manufacturing and Suppliers." DEPENDENCE ON CERTAIN CUSTOMERS. Three of the Company's customers each accounted for 10% or more of sales for the year ended December 31, 1996 and two customers each accounted for 10% or more of such sales for the three months ended March 31, 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, all of the apparel sold by the Company was manufactured outside the United States, primarily 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 than domestic manufacturers, the Company is generally required to allow greater lead time for its orders. See "Business." SUBSTANTIAL COMPETITION. The apparel industry is highly competitive and consists of numerous manufacturers, importers and retailers. 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 9 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. The Company's past growth cannot be assumed to be indicative of its future operating results. 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." UNCERTAINTIES IN APPAREL RETAILING; GENERAL ECONOMIC CONDITIONS. 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. DEPENDENCE ON EXTENSION OF CREDIT TERMS. Historically, the Company has borrowed significant amounts of working capital (up to $1,200,000) from one of its fabric suppliers through the extension of credit terms from this supplier on fabrics ordered by the Company. 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 the supplier will continue to provide credit terms to the Company. CONCENTRATION OF ACCOUNTS RECEIVABLE. At December 31, 1996 and March 31, 1997, two customers accounted in the aggregate for 93% and 80%, 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 Statement." NO TRADEMARK PROTECTION. The Company believes that its trademarks are valuable assets although no trademark registrations have been filed in the United States or in foreign countries, and accordingly, there can be no assurance that the Company can successfully defend its trademarks against infringement by others. See "Business - Trademarks." 10 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. Unanticipated events, including delays in manufacturing new garments, could have an 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 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 stockholder 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 Units, Common Stock or Warrants. The initial public offering price of the Units and the exercise price of the Warrants were determined by negotiations between the Company and the Representative and does 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 exceed the Offering price. See "Underwriting." IMMEDIATE SUBSTANTIAL DILUTION. The Offering involves an immediate and substantial dilution of $3.65 per share of Common Stock, a 61% 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 $2.35 per share of Common Stock upon completion of the Offering, assuming no exercise of the Warrants, the Overallotment Option, the Representative's Warrants or other outstanding stock options of the Company. See "Dilution." 11 SIGNIFICANT AMOUNTS OF STOCK OPTIONS OUTSTANDING. The Company's officers, directors, employees and consultants hold stock option to purchase an aggregate of 1,761,635 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 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) have agreed with the Representative not to sell or otherwise dispose of their shares of Common Stock without the prior written consent of the Representative for a period of two years from the date of this Prospectus provided, however, that one-half 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. 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 Representative 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 Representative intends 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 Representative may exert 12 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. CONTROL BY MANAGEMENT; AUTHORIZATION AND ISSUANCE OF PREFERRED STOCK; PREVENTION OF CHANGES IN CONTROL. Upon completion of the Offering, the Company's officer 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 Representative's Warrant 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." REPRESENTATIVE'S LACK OF UNDERWRITING EXPERIENCE. The Representative 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. The Representative has acted as a representative of the Underwriters in only one prior public offering although it has participated as a dealer 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) limit the effectiveness of the Representative 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 Representative 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. 13 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 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 as of the date hereof. 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." MAINTENANCE CRITERIA FOR NASDAQ NATIONAL MARKET SECURITIES. 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 the Nasdaq National Markets or the Nasdaq Small Cap Markets, 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 two market-makers, at least 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 in Nasdaq if the market value of the public float is at least $1 million and the Company has $2 million in capital and surplus. The Company's failure to meet these maintenance criteria in the future may result in the discontinuance of the inclusion of its securities in Nasdaq. 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 14 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. 15 DILUTION At March 31, 1997, the net tangible book value of the Company was $1,481,069, or $.85 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 March 31, 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 March 31, 1997, the net tangible book value of the Company at March 31, 1997 would have been $6,457,848, or approximately $2.35 per share. This represents an immediate increase in net tangible book value of $1.50 per share of Common Stock to existing shareholders and an immediate dilution of $3.65 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 $ .85 Increase in net tangible book value per share of Common Stock attributable to new investors purchasing in the Offering $1.50 Net tangible book value per share of Common Stock after the Offering $2.35 Dilution of net tangible book value per share of Common Stock to new investors $3.65 Percent reduction of net tangible book value per share to new investors 61% 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 March 31, 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% --------- ----- ---------- ----- --------- ----- ---------- ----- 16 The preceding discussion and the accompanying tables assume no exercise of (i) the Warrants; (ii) the Overallotment Option; (iii) the Representative's Warrants; or (iv) outstanding stock options to purchase up to 1,761,635 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." 17 CAPITALIZATION The following table sets forth the capitalization of the Company at March 31, 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 Representative's Warrants or other outstanding stock options. ACTUAL AS ADJUSTED(1) ---------- -------------- (Unaudited) (Unaudited) Current Liabilities $3,139,054 $2,659,054 Long-term liabilities -0- -0- Shareholders' equity Preferred Stock, 1,000,000 no par value shares authorized, none issued -0- -0- 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 1,026,794 1,026,794 ---------- ---------- Total shareholders' equity 1,528,848 6,473,848 ---------- ---------- Total capitalization 4,667,902 9,132,902 ---------- ---------- ---------- ---------- - ----------------- (1) As adjusted to give effect to the receipt and application of the estimated net proceeds of the Offering. See "Use of Proceeds." 18 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 due the earlier of June 30, 1997 or the closing date of the Offering, and (ii) a commercial bank loan in the amount of $220,000 bearing interest at 4% over the prime rate per annum due August 15, 1997. The bridge loans and bank loan 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. 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. Any funds received by the Company from exercise of the Warrants, the Overallotment Option and the Representative's Warrants will be added to working capital. 19 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 three months ended March 31, 1996 and 1997 has been derived from unaudited financial statements which are also included herein. The results of operations for the three months ended March 31, 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. THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------- --------- 1996 1995 1997 1996 ---- ---- ---- ---- INCOME STATEMENT DATA: (Unaudited) (Unaudited) Net sales 12,902,195 11,379,826 5,093,857 4,639,169 Gross profit 1,896,142 1,402,893 748,797 681,958 Operating income 1,363,342 891,776 598,569 552,015 Interest expense 61,457 21,241 13,264 12,342 Net income 772,802 680,495 350,305 296,673 Weighted average shares outstanding 1,750,000 1,750,000 1,750,000 1,750,000 Net income per share .44 .39 .20 .17 AT MARCH 31, AS 1997 ADJUSTED(1) ------------ ----------- BALANCE SHEET DATA: (Unaudited) (Unaudited) Working capital 1,368,620 5,645,620 Total assets 4,667,902 9,164,902 Long-term debt -- -- Total liabilities 3,139,054 2,659,054 Shareholders' equity 1,528,848 6,473,848 - ----------------- (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 Representative's Warrants or outstanding stock options. See "Use of Proceeds" and "Description of Securities." 20 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 three months ended March 31, 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 three month period ended March 31, 1996 and March 31, 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 produces to customer specifications, contracts to manufacture and ships 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. The Company believes that its package arrangements eliminate design and fashion risk and inventory write-offs and therefore allow the Company to offer lower product prices. 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. The fabrics 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 Eastern European workers as compared to lower paid workers in certain other regions. The Company produces garments for customers under its own labels, "Easy Concepts," "Magellan" and "Retrospettiva" and under private labels selected by its customers and markets its products to (i) large wholesalers such as Giorgio Sant' Angelo, Jeans Collectibles, Periwinkle, Positive Influence, David N., Rex Winston and Wild Life, (ii) national retailers including department stores such as Nordstrom, Dayton Hudson, Bloomingdales, J.C. Penney, Casual Corner, Neiman Marcus, 21 May Co., Newton's, Macy's and Saks Fifth Avenue, and (iii) women's chain clothing stores such as Marshalls, TJ Maxx, Chadwicks, Hit or Miss, Fred Mayer, Burlington Coat, Cato and Saks Fifth Avenue. See "Business - Marketing." 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 Three Months Ended December 31, March 31, -------------------- ----------------------- 1994 1995 1996 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 85.3 85.3 Gross profit . . . . 12.6 12.3 14.7 14.7 14.7 Selling, general and admini- strative expenses. 10.9 4.5 4.1 2.8 2.9 Interest expense . . .04 .2 .5 .3 .3 Operating income . . 1.7% 7.8% 10.6% 11.9% 11.8% THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996 SALES Sales for the first quarter ended March 31, 1997 (the "1997 Quarter") were $5,093,857 which represented an increase of $454,688 or 9.8% over the first quarter ended March 31, 1996 (the "1996 Quarter") net sales of $4,639,169. The growth in sales was primarily attributable to increased purchases by existing customers. Sales of the Company's own labeled products and private label products were $306,774 and $4,787,083, respectively, in the 1997 Quarter compared to $1,098,246 and $3,540,923, respectively, in the 1996 Quarter. COST OF GOODS SOLD Cost of goods sold in the 1997 Quarter was $4,345,060 or 85.3% of sales, an increase of $387,849 from $3,957,211 or 85.3% of sales for the 1996 Quarter. The increase in cost of goods sold was attributable primarily to an increase in sales. GROSS PROFIT Gross profit was $748,797 for the 1997 Quarter, an increase of $66,839. The gross profit percentage was 14.7% for the 1997 Quarter and 14.7% for the 1996 Quarter. 22 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative ("SG&A") expenses were $150,228 or 2.9% of net revenues for the 1997 Quarter, an increase of $20,285 from $129,943 or 2.8% of sales for the 1996 Quarter. The increase in SG&A expense levels was primarily the result of increases in rent. INTEREST EXPENSE Interest expense for the 1997 Quarter was $13,264 as compared to $12,342 for the 1996 Quarter. 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 $235,000 and $243,000 for the 1997 Quarter and the 1996 Quarter, respectively. The increase in the provision for income taxes was due to the increase in income before income taxes which was $585,305 for the 1997 Quarter, an increase of $45,632 or 8.5% from $539,673 from the 1996 Quarter. 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. 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. 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. 23 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. 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. 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. 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. 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. 24 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. 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. 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. 25 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. THREE MONTHS ENDED MARCH 31, 1997 CASH FLOWS FROM (TO) OPERATING ACTIVITIES. Operating activities provided net cash of $307,038 for the 1997 Quarter compared to providing net cash of $32,120 for the 1996 Quarter. 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 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 $44,593 of cash for the 1997 Quarter and used $1,900 for the 1996 Quarter. 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 $278,848 and $2,474 for the 1997 Quarter and the 1996 Quarter, respectively. The increase in cash flows from financing activities was primarily attributable to proceeds from the issuance of Common Stock. 26 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. 27 BUSINESS INTRODUCTION The Company produces internationally 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 produces garments for customers under its own labels, "Easy Concepts," "Magellan" and "Retrospettiva" and under private labels selected by its customers and markets its products to (i) large wholesalers such as Giorgio Sant' Angelo, Jeans Collectibles, Periwinkle, Positive Influence, David N., Rex Winston and Wild Life, (ii) national retailers including department stores such as Nordstrom, Dayton Hudson, Bloomingdales, J.C. Penney, Casual Corner, Neiman Marcus, May Co., Newton's, Macy's and Saks Fifth Avenue, and (iii) women's chain clothing stores such as Marshalls, TJ Maxx, Chadwicks, Hit or Miss, Fred Mayer, Burlington Coat Factory 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 Eastern European 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. Under this arrangement the Company does not assume 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. These items are shipped to factories selected by the Company (generally located in Eastern Europe) where they are manufactured into completed garments under the Company's management and quality control guidance. 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 the fabrics in Eastern Europe for importation into the United States. Net sales increased from $821,345 for the year ended December 31, 1993 to $5,521,802 in 1994, $11,379,826 in 1995 and $12,902,195 in 1996. See "Financial Statements." 28 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 will continue to produce, manufacture and market a wide variety of better quality, popular priced garments on a package basis while avoiding the trendier fashion apparel which contributes to inventory write-offs for out of style garments. 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 Eastern European manufacturers, lower transportation costs compared to other parts of the world (such as the Pacific Rim) and current quota free United States importation rules contribute to its ability to offer competitive prices. VERTICAL INTEGRATION. The Company intends to invest in wool manufacturing equipment which will be placed in certain manufacturing facilities in Macedonia with which the Company currently maintains manufacturing relationships. The equipment is expected to provide the Company with improved quality control, reduced costs and increased production. EXPAND DISTRIBUTION CHANNELS AND PRODUCT LINES. The Company will continue to explore new geographic markets for its existing products while expanding its existing product lines. 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 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. 29 The Company produces garments for customers under its own labels, "Easy Concepts," "Magellan" and "Retrospettiva" and under private labels selected by its customers, and markets its products to (i) large wholesalers such as Giorgio Sant' Angelo, Jeans Collectibles, Periwinkle, Positive Influence, David N., Rex Winston and Wild Life, (ii) national retailers including department stores such as Nordstroms, Dayton Hudson, Bloomingdales, J.C. Penney, Casual Corner, Neiman Marcus, May Co., Newton's and Macy's, and (iii) women's chain clothing stores such as Marshalls, TJ Maxx, Chadwicks, Hit or Miss, Fred Mayer, Burlington Coat, Cato and Saks Fifth Avenue. Sales of the Company's own labeled products and private label products were $3,381,524 and $9,520,671, respectively, from the year ended December 31, 1996 and $306,774 and $4,787,083, respectively, for the three months ended March 31, 1997. 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 each accounted for 10% or more of sales for the year ended December 31, 1996 and two customers each accounted for 10% or more of such sales for the three months ended March 31, 1997. A loss of any of these customers would have a material adverse affect on the Company's operations. MANUFACTURING AND SUPPLIERS The Company produces 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 generally from manufacturers in Eastern Europe (primarily 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, outsourcing provides the Company with expertise 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 the manufacturing delivery date. However, the Company utilizes initial orders and its experience to estimate fabric quantities and production requirements. 30 The Company purchases fabric and trim from the manufacturers of these garment components who ship their products directly to the Company's 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. Although the loss of certain suppliers or contractors 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. QUALITY CONTROL The Company's quality control program is designed to provide that all of the Company's products meet the Company's standards. The Company maintains a staff of four quality control employees in the United States and seven such employees in Eastern Europe. The Company develops and inspects prototypes of each product prior to production, establishes fittings based on the prototype, inspects sample fabric prior to cutting and several times during the production process. The Company and (in the case of private label products) representatives of the Company's customers inspect final products prior to shipment. BACKLOG As of March 31, 1997, the Company had unfilled orders of approximately $17,800,000 compared to approximately $11,700,000 at March 31, 1996. Backlog amounts include both firm and nonbinding orders, although the Company believes, based upon industry practice and prior experience, that substantially all of the nonbinding orders will be filled. 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 Eastern European manufacturers including (i) the availability in Eastern European 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 of finished goods from certain Eastern European countries, and (iii) lower shipping costs as a result of the closer geographical proximity to the United States of the Company's Eastern European 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 seek apparel under their own private labels. Recently, department stores and mass merchandisers have increased 31 the amount of sportswear and activewear manufactured specifically by them or their contract manufacturers (including the Company), and sold under their own labels. TRADEMARKS The Company has developed three apparel trademarks, "Easy Concepts," "Magellan" and "Retrospettiva" in connection with the marketing of its apparel. The Company regards its trademarks as valuable assets although no trademark registrations have been filed in the United States or in foreign countries and, accordingly, there can be no assurance the Company can successfully defend its trademarks against infringement 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 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 net sales for the year ended December 31, 1996. 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 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. 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. However, apparel imported from Macedonia is not subject to such quotas. 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. 32 PROPERTIES The Company leases 2,200 square feet for its executive and administrative offices at 8825 West Olympic Boulevard, Beverly Hills, California 90211, on a five-year lease expiring November 1, 1999 for $2,300 per month subject to 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 with monthly rent aggregating approximately $3,500. EMPLOYEES As of September 30, 1996, 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. 33 MANAGEMENT DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES The name, age, position and terms 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, 1991 President and Director Michael D. Silberman 41 Chief Financial Officer, 1996 Secretary and Director Ivan Zogovic 37 Manager - Export/Import 1996 and Director Mojgan Keywanfar 34 Accounting Manager 1996 and Director S. William Yost 67 Director 1996 Donald E. Tormey 63 Director 1996 Philip E. Graham 40 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 will establish an audit and compensation committee, each committee composed of a majority of individuals not employed by the Company. 34 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 Chief Executive Officer and President of the Company 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. Since February 1993, Mr. Vukadinovic has written music and recorded record albums which include his own instrument and vocal performances. 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 was Executive Vice President of Allied Business Capital, a privately-held Los Angeles, California based commercial finance company from 1983 to 1991. 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 April 1992 to February 1994, he was a portfolio manager for Private Investment Fund, a privately-held and managed investment fund. From May 1994 until he joined the Company in April 1996, Mr. Silberman was a financial advisor with Prudential Securities Inc. Mr. Silberman earned a Bachelor of Arts degree from the University of California, Los Angeles ("UCLA") and an 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. In this capacity, 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 35 Anderson, Dr. Yost developed two new graduate courses, Managing Service and Managing Entrepreneurial Operations. His career is diverse, with 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. His industrial experience includes nine years in energy-related production and exploration activities, six years in the manufacture of non-defense industrial products, three years in industrial services and supplies and four years in aerospace engineering and manufacturing. 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 to 1996, he was employed by Chevron Corporation in a number of positions culminating as the Refinery General Manager in El Segundo, California. He holds a BSCE degree in engineering from the University of Wisconsin engineering school. Mr. Tormey served in the U.S. Army Corps of Engineers from 1951 to 1953 and was mayor of the City of Pinole, California from 1970 to 1971. PHILIP E. GRAHAM became a director of the Company in May 1996. Since March 1997, he has been the Information Technology Executive at the Avionics and Communications Finance and Information Technology department of Rockwell managing a staff of over 400 individuals. From 1989 until March 1997 he was employed by AirTouch Cellular in a number of positions, culminating as its director of Information Technology where he is responsible for administering and providing technical direction for a staff of 48 persons. From May 1984 to July 1989, he was a business systems manager for Northrop's B-2 Division where he managed three departments and 25 individuals supporting the B-2 (Stealth Bomber) project. 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. 36 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 paid to the Chief Executive Officer of the Company for the year ended December 31, 1996. No other executive officer's annual compensation exceeded $100,000 in 1996. SUMMARY COMPENSATION TABLE LONG TERM COMPENSATION ANNUAL COMPENSATION AWARDS PAYOUTS ------------------------------------ --------------------------------- (a) (b) (c) (d) (e) (f) (g) (h) (i) Other All Annual Restricted Other Name and Compen- Stock Options/ LTIP Compen- Principal Position Year Salary($) Bonus($) sation($) Award(s)($) SARS(#) Payouts($) sation($) - ------------------ ---- --------- -------- --------- ----------- -------- ---------- --------- Borivoje Vukadinovic 1996 $40,928 -0- -0- -0- 500,000(1) -0- -0- Chief Exec. Officer
(1) See 1996 Stock Option Plan. In May 1996, the Company entered into three-year employment agreements with Mr. Vukadinovic, the Company's Chief Executive Officer, and Mr. Silberman, the Company's Chief Financial Officer, which provide for annual salaries commencing the first month following closing of the Offering of $95,000 and $60,000, respectively, together with a non-competition clause for two years following termination of Mr. Vukadinovic's employment agreement. As a part of their employment agreements, Mr. Vukadinovic and Mr. Silberman received stock options to purchase up to 1,191,290 and 119,129 shares, respectively, of Common Stock exercisable until April 2006 at $6.75 per share. Mr. Vukadinovic's stock options are cancelable under certain circumstances. See "1996 Stock Option Plan." 37 The Company's directors do not receive any cash compensation as directors, although they are reimbursed for out-of-pocket expenses in attending Board of Directors' meetings and have been granted stock options to purchase an aggregate of 204,902 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 (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, directors, key employees and consultants of the Company. The Plan is administered by the Compensation Committee of the Board of Directors which is comprised of nonemployee directors. 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. The per share exercise price of the Common Stock may not be less than the fair market value of the Common Stock on the date the option is 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 Memorandum, 1,761,635 options have been granted under the Plan to officers, directors, employees and consultants including 1,477,196 options granted to Messrs. Vukadinovic and Silberman, an aggregate of 204,902 options granted to the Company's five non-salaried directors and 79,537 options granted to employees and consultants. The per share exercise prices represented the fair market value of the Company's Common Stock at the date such 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 38 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 through 2006. All options were granted in 1996. Percent of Total Options Granted to Name of Executive Total Number Employees in Exercise Expiration Officer or Director of Options Issued Fiscal Year Price Date - ------------------- ----------------- ------------ -------- ---------- Borivoje Vukadinovic 1,358,067(1) 77.1 (1) 2006 Michael D. Silberman 119,129 6.8 6.75 2006 Ivan Zogovic 66,712 3.8 (2) 2006 Mojgan Keywanfar 66,712 3.8 (2) 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 1,682,098 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 595,645 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) 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. 39 PRINCIPAL SHAREHOLDERS The following table sets forth certain information with respect to the ownership of the Company's Common Stock as of March 31, 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 1,191,290 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 119,129 shares of Common Stock at $6.75 per share 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 at any time until April 2001, 11,913 shares at $2.94 per share exercisable at any time until May 2001, and 23,826 shares at $2.94 per share exercisable at any time 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 at any time 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 at any time until May 2001, 30,973 shares at $1.68 per share exercisable at any time until April 2006, and 23,826 shares at $2.94 per share exercisable at any time until April 2006. See "Management - 1996 Stock Option Plan." 40 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. Percent of Number of Percent of Class Name of Number of Class Owned Shares Offered To Be Owned Selling Stockholder Shares Owned Prior to Offering For Sale After Offering - ------------------- ------------ ----------------- -------------- ---------------- 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 1,191,290 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 119,129 shares of Common Stock at $6.75 per share until April 2006. Also includes the 25,000 shares of Common Stock registered for sale hereby. 41 CERTAIN TRANSACTIONS In May 1996, the Company executed employment agreements with Mr. Vukadinovic and Mr. Silberman, its Chief Financial Officer, providing for annual salaries of $95,000 and $60,000 respectively. In connection with their employment, Messrs. Vukadinovic and Silberman received options to purchase 1,191,290 shares and 119,129 shares, respectively of the Company's Common Stock, exercisable in perpetuity, at certain fixed prices and Mr. Silberman also received 81,007 shares of Common Stock for services rendered valued at $.42 per share. See "Management - Executive Compensation." At March 31, 1997, Mr. Vukadinovic was indebted to the Company in the amount of $105,777. 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 principal but minority stockholder in Easy Concepts, Inc. ("EC"), an apparel customer of the Company. At December 31, 1996 and March 31, 1997, EC was indebted to the Company for apparel purchases in the amounts of $1,182,202 and $552,902, respectively. EC is current in its payments on the account. 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. 42 DESCRIPTION OF SECURITIES UNITS Each Unit being offered hereby consists of two shares of Common Stock and one Warrant. The Common Stock and Warrants have been approved for listing on the National Market and are separately transferable as of the date of this Prospectus. 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. 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 any other authorization of Preferred Stock upon the rights of holders of Common Stock until the Board determines the specific rights of the holders of any other 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." 43 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 are subject to adjustment in certain events including the issuance of Common Stock as a dividend on shares of Common Stock, subdivisions 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. 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, fully paid and non-assessable. The holders of the Warrants have no rights as shareholders until they exercise their Warrants. For the life of the Warrants, the holders thereof are given the opportunity to profit from a rise in the market for 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 any needed 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. 44 In general, under Rule 144, a person (or persons whose shares are aggregated) who has satisfied a one-year holding period may, under certain circumstances, sell within any three-month period the 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 Representative's 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 sale under Rule 144 and the remaining 334,759 shares may be sold in March 1998. The Company is unable to predict the effect that any sales, under Rule 144 or otherwise, may have on the then prevailing 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 75,000 shares to be registered hereby) have agreed not to sell 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 Representative provided, however, that one-half 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. The Company has also granted certain demand and piggy-back registration rights to the Representative with respect to the Representative's Warrants as well as the securities issuable upon exercise of the Representative's 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 dividends on its Common Stock since inception and does not plan to pay dividends in the foreseeable future. Earnings, if any, 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. 45 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 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 stockholder 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. 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 UNDERWRITER UNITS ----------- ----- ------- Total 500,000 ------- The Company has been advised by the Representative 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 Representative. 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 by the Underwriters. The Company has 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 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 the Representative a 3% nonaccountable expense allowance on the aggregate initial public offering price of the Units, including Units subject to the Overallotment Option of which $15,000 has been paid. The Representative has agreed to pay a finder's fee of up to $45,000 to a person not affiliated with the Company or the Representative for introducing the Company to the Representative. 46 The Company has agreed to issue the Representative's Warrants to the Representative for a consideration of $100. The Representative's Warrants are exercisable at any time in the four-year period commencing one year from the date of this Prospectus to purchase up to 50,000 Units for $14.40 per Unit. The Representative's 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 Representative's Warrants, the holder thereof is given the opportunity to profit from a rise in the market price of the Company's securities. The Company may find it more difficult to raise additional equity capital while the Representative's Warrants are outstanding. At any time at which the Representative's 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 Representative's Warrants or underlying Units will have the right, subject to certain conditions, to include 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 Representative's Warrants or the Units issued or issuable thereunder, to register the Units underlying the Representative's Warrants one time at the Company's expense. The registration of securities pursuant to the Representative's 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 Company may find that the terms on which it could obtain additional capital may be adversely affected while the Representative's Warrants are outstanding. The number of Units covered by the Representative's 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 Representative's Warrants by committing to pay, within ten days of the date of such demand registration, the difference between the exercise price of the Representative's 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 Representative, or any other broker-dealer, to pay to the Representative, or any broker-dealer, a fee of 5% of the exercise price of any Warrants exercised after six months from the date hereof. The Representative, 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. 47 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 Representative 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 Representative; provided, however, that one-half 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. The Company has also granted certain demand and piggy-back registration rights to the Representative with respect to the Representative's Warrants as well as the securities issuable upon exercise of the Representative's Warrants. The Company has agreed with the Representative that, for a period of 36 months from the effective date of the Offering, the Company will allow an observer designated by the Representative 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. 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, Englewood, Colorado. Certain legal matters in connection with the Offering will be passed upon for the Representative 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, as stated in their report appearing herein, and have been so included herein in reliance upon such report given 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 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 48 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. 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 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. 49 INDEX TO FINANCIAL STATEMENTS PAGE ---- Independent Auditor's Report 2 Balance Sheets 3 Statements of Income 5 Statement of Changes in Stockholders' Equity 6 Statements of Cash Flows 7 Notes to Financial Statements 8 F-1 INDEPENDENT AUDITOR'S 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 June 1, 1997 F-2 RETROSPETTIVA, INC. BALANCE SHEETS ASSETS DECEMBER 31, MARCH 31, 1996 1997 ------------ ----------- (UNAUDITED) CURRENT ASSETS: Cash $ 110,777 $ 741,256 Accounts receivable, net, pledged 760,495 469,412 Accounts receivable, related party, pledged 1,182,202 597,495 Note receivable, current portion 140,000 115,121 Note receivable, stockholder - 105,777 Inventories, pledged 3,112,678 2,404,271 Deferred tax assets, current portion 11,000 11,000 Deferred offering costs 330,930 31,779 Other 14,825 31,563 ---------- ---------- Total Current Assets 5,662,907 4,507,674 PROPERTY AND EQUIPMENT, at cost, net 61,386 56,979 NOTE RECEIVABLE, net of current portion 47,583 17,583 DEFERRED TAX ASSETS, net of current portion 5,000 5,000 OTHER ASSETS 80,666 80,666 ---------- ---------- $5,857,542 $4,667,902 ========== ========== SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS F-3 RETROSPETTIVA, INC. BALANCE SHEETS (CONTINUED) LIABILITIES AND STOCKHOLDERS' EQUITY DECEMBER 31, MARCH 31, 1996 1997 ------------ ----------- (UNAUDITED) CURRENT LIABILITIES: Accounts payable, trade $2,806,812 $1,745,489 Note payable 237,580 205,000 Notes payable, related parties 250,000 250,000 Accrued expenses 51,070 57,624 Accrued income taxes 541,910 738,670 Customer advances 909,681 142,271 ---------- ---------- Total Current Liabilities 4,797,053 3,139,054 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 1,026,794 ---------- ---------- Total Stockholders' Equity 1,060,489 1,528,848 ---------- ---------- $5,857,542 $4,667,902 ========== ========== SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS F-4 RETROSPETTIVA, INC. STATEMENTS OF INCOME THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ------------------------- ------------------------- 1995 1996 1996 1997 ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) SALES $ 9,165,448 $ 9,520,671 $ 3,540,923 $ 4,787,083 SALES, related party 2,214,378 3,381,524 1,098,246 306,774 ----------- ----------- ----------- ----------- Total Sales 11,379,826 12,902,195 4,639,169 5,093,857 COST OF SALES 9,976,933 11,006,053 3,957,211 4,345,060 ----------- ----------- ----------- ----------- GROSS PROFIT 1,402,893 1,896,142 681,958 748,797 ----------- ----------- ----------- ----------- OPERATING EXPENSES: Selling expenses 230,301 170,179 51,371 47,788 General and administrative 280,816 362,621 78,572 102,440 ----------- ----------- ----------- ----------- Total Operating Expenses 511,117 532,800 129,943 150,228 ----------- ----------- ----------- ----------- INCOME FROM OPERATIONS 891,776 1,363,342 552,015 598,569 OTHER INCOME (EXPENSES) Other income 4,960 11,202 - - Interest expense (21,241) (61,457) (12,342) (13,264) ----------- ----------- ----------- ----------- Net Other Income (Expenses) (16,281) (50,255) (12,342) (13,264) ----------- ----------- ----------- ----------- INCOME BEFORE INCOME TAXES 875,495 1,313,087 539,673 585,305 PROVISION FOR INCOME TAXES 195,000 540,285 243,000 235,000 ----------- ----------- ----------- ----------- NET INCOME $ 680,495 $ 772,802 $ 296,673 $ 350,305 =========== =========== =========== =========== NET INCOME PER COMMON SHARE $ .39 $ .44 $ .17 $ .20 =========== =========== =========== =========== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 1,750,000 1,750,000 1,750,000 1,750,000 =========== =========== =========== ===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS F-5 RETROSPETTIVA, INC. STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996 AND THE THREE MONTHS ENDED MARCH 31, 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) - - - 350,305 350,305 --------- -------- -------- ---------- ---------- Balances, March 31, 1997 (unaudited) 1,750,000 $272,054 $230,000 $1,026,794 $1,528,848 ========= ======== ======== ========== ==========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS F-6 RETROSPETTIVA, INC. STATEMENTS OF CASH FLOWS THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ----------------------- ----------------------- 1995 1996 1996 1997 ----------- --------- --------- ----------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM (TO) OPERATING ACTIVITIES: Net income $ 680,495 $ 772,802 $ 296,673 $ 350,305 Adjustments to reconcile net income to net Cash provided (used) by operating activities: Depreciation and amortization 17,792 17,491 4,291 4,407 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) 2,048 291,083 Accounts receivable, related party (441,830) (740,372) (542,245) 584,707 Accounts receivable -- others (76,166) -- -- -- Inventories (1,257,515) (592,610) 572,017 708,407 Other (3,600) (11,225) (539) (16,738) Accounts payable and accrued expenses 265,682 (103,765) (743,125) (1,054,769) Accrued income taxes 13,332 534,778 243,000 196,760 Customer advances -- 909,681 200,000 (767,410) ----------- --------- --------- ----------- Cash flows provided (used) by operating activities (367,339) 263,280 32,120 307,038 ----------- --------- --------- ----------- CASH FLOWS FROM (TO) INVESTING ACTIVITIES: Purchase of fixed assets (16,172) (6,825) (1,900) -- Payments on notes receivable -- -- -- 44,593 ----------- --------- --------- ----------- Cash flows provided (used) by investing activities (16,172) (6,825) (1,900) 44,593 ----------- --------- --------- ----------- CASH FLOWS FROM (TO) FINANCING ACTIVITIES: Loans to stockholder -- -- -- (116,027) Collections on note receivable, stockholder -- -- -- 10,250 Proceeds from note payable, stockholder 351,263 170,856 2,199 -- Payments on note payable, stockholder (245,015) (354,176) -- -- Proceeds from notes payable, related parties -- 250,000 -- -- Proceeds from note payable 247,403 -- 275 -- Payments on note payable -- (19,725) -- (32,580) Deferred offering costs -- (230,930) -- 299,151 Proceeds from issuance of common stock -- -- -- 118,054 ----------- --------- --------- ----------- Cash flows provided (used) by financing activities 353,651 (183,975) 2,474 278,848 ----------- --------- --------- ----------- NET INCREASE (DECREASE) IN CASH (29,860) 72,480 32,694 630,479 CASH IN BANK, beginning of period 68,157 38,297 38,297 110,777 ----------- --------- --------- ----------- CASH IN BANK, end of period $ 38,297 $ 110,777 $ 70,991 $ 741,256 ----------- --------- --------- ----------- ----------- --------- --------- -----------
See Note 13 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS F-7 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, manufactures 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 three month periods ending March 31, 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 March 31, 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. The financial statements have been presented as if the split had occurred at the beginning of each period presented. 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 split 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 March 31, 1997 (unaudited), respectively. INVENTORIES Inventories are valued at the lower of cost (first-in, first-out) or market. F-8 RETROSPETTIVA, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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, $4,291, and $4,407 for the years ended December 31, 1995, 1996 and for the three months ended March 31, 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. F-9 RETROSPETTIVA, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 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 March 31, 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 81% of the accounts receivable balance at December 31, 1996 and March 31, 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. F-10 RETROSPETTIVA, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SIGNIFICANT CUSTOMERS Individual customers aggregating in excess of 10% of net sales are as follows: THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ----------------------- ------------------------ 1995 1996 1996 1997 ---------- ---------- ---------- ---------- (UNAUDITED) (UNAUDITED) SALES Customer A $5,413,771 $4,102,545 $2,149,939 $ - Customer B $2,325,851 $3,745,836 $ 891,529 $3,257,966 Customer C, related party $2,214,378 $3,381,524 $1,098,246 $ 306,774 Customer D $ - $ - $ - $1,074,696 RELATED PARTY TRANSACTIONS The Company has sales to a related party customer. The Company's officer/stockholder is part owner of Customer C. Accounts receivable at December 31, 1996 and March 31, 1997 for Customer C was $1,182,202 and $597,495 (unaudited), respectively. 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. F-11 RETROSPETTIVA, INC. NOTES TO FINANCIAL STATEMENTS NOTE 2 - INVENTORIES Inventories consist of the following: DECEMBER 31, MARCH 31, 1996 1997 ------------ ---------- (UNAUDITED) Finished goods $ 923,373 $ 409,200 Work-in-process 908,752 881,985 Raw materials 1,280,553 1,113,086 ---------- ---------- $3,112,678 $2,404,271 ---------- ---------- ---------- ---------- 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. NOTE 3 - OTHER ASSETS Other assets consist of the following: DECEMBER 31, MARCH 31, 1996 1997 ------------ ---------- (Unaudited) Insurance claim, receivable $76,166 $76,166 Deposits 4,500 4,500 ------- ------- $80,666 $80,666 ------- ------- ------- ------- The insurance claim receivable is due to inventory lost in a fire in a consolidating warehouse. F-12 RETROSPETTIVA, INC. NOTES TO FINANCIAL STATEMENTS NOTE 4 - PROPERTY AND EQUIPMENT Property and equipment consists of the following: DECEMBER 31, MARCH 31, 1996 1997 ----------- ----------- (UNAUDITED) Automobile $ 20,568 $ 20,568 Furniture and fixtures 35,494 35,494 Leasehold improvements 50,514 50,514 -------- -------- Total 106,576 106,576 Less accumulated depreciation and amortization (45,190) (49,597) -------- -------- $ 61,386 $ 56,979 -------- -------- -------- -------- 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 services. The Company realized $8,416 in services during 1996 and $10,286 (unaudited) during the three months ended March 31, 1997. The Company has negotiated with its related party customer to use the warehouse services. The note receivable will be reduced by services rendered. During the three months ended March 31, 1997 the notes receivable was reduced by $44,593 (unaudited). NOTE 6 - NOTE RECEIVABLE FROM STOCKHOLDER (UNAUDITED) The Company's note receivable from officer/stockholder is unsecured, due on demand and bears interest at 10% per annum. F-13 RETROSPETTIVA, INC. NOTES TO FINANCIAL STATEMENTS 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 rate. During March 1997 the line of credit was refinanced with a variable rate (4% over prime rate, initial rate of 12.25%). Payments are 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. NOTE 8 - NOTES PAYABLE, RELATED PARTIES During June 1996 the Company completed an offering of 25 units in a Private Placement for bridge loans. 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 are 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. 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 .63-6.75 --------- --------- --------- Balance, December 31, 1996 and March 31, 1997 (unaudited) 85,295 1,701,635 $ .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-14 RETROSPETTIVA, INC. NOTES TO FINANCIAL STATEMENTS 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: DECEMBER 31, MARCH 31, 1996 1997 ------------ ----------- (UNAUDITED) 1997 $ 66,160 $ 48,765 1998 34,455 34,455 1999 27,600 27,600 2000 2,300 2,300 -------- -------- Total $130,515 $113,120 -------- -------- -------- -------- 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 three months ended March 31, 1996 and 1997 was $9,900 (unaudited) and $22,310 (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 119,100 shares of Common Stock at $6.75 per share exercisable for a period of 10 years. F-15 RETROSPETTIVA, INC. NOTES TO FINANCIAL STATEMENTS NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED) 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 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: DECEMBER 31, MARCH 31, 1996 1997 ------------ ----------- (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: DECEMBER 31, MARCH 31, 1996 1997 ------------ ----------- (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 ------- ------- ------- ------- F-16 RETROSPETTIVA, INC. NOTES TO FINANCIAL STATEMENTS NOTE 11 - INCOME TAXES (CONTINUED) The provision for income taxes consists of the following: THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ------------------------ --------------------- 1995 1996 1996 1997 -------- -------- ---------- ---------- (UNAUDITED) (UNAUDITED) Current $ 35,000 $533,285 $243,000 $235,000 Deferred 160,000 7,000 -- -- -------- -------- -------- -------- Provision (Benefit) $195,000 $540,285 $243,000 $235,000 -------- -------- -------- -------- -------- -------- -------- -------- 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: THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ------------------------ --------------------- 1995 1996 1996 1997 -------- -------- ---------- ---------- (UNAUDITED) (UNAUDITED) Tax expense at federal statutory rates $ 298,000 $450,000 $185,000 $200,000 State tax, net of federal benefit 25,000 101,000 58,000 35,000 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 $243,000 $235,000 --------- -------- -------- -------- --------- -------- -------- -------- F-17 RETROSPETTIVA, INC. NOTES TO FINANCIAL STATEMENTS NOTE 11 - INCOME TAXES (CONTINUED) The components of deferred income tax (benefit) expense are as follows: THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ------------------------ --------------------- 1995 1996 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. No stock options were issued for the three months ended March 31, 1997. 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. F-18 RETROSPETTIVA, INC. NOTES TO FINANCIAL STATEMENTS NOTE 13 - SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS FOR NONCASH INVESTING AND FINANCING ACTIVITIES THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ------------------------ --------------------- 1995 1996 1996 1997 -------- -------- ---------- ---------- (UNAUDITED) (UNAUDITED) Cash paid for interest $ 8,180 $ 26,820 $7,722 $12,331 ------- -------- ------ ------- ------- -------- ------ ------- Cash paid for income taxes $26,113 $ 2,196 $ -- $59,295 ------- -------- ------ ------- ------- -------- ------ ------- Stock issued for bridge loans $ -- $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. STOCK OPTIONS ISSUED 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. In estimating the above expense, the Company used the Modified Black-Scholes European pricing model. The average risk-free interest rate used was 6.4%, volatility was estimated at 43%; the expected life was less than three years. F-19 - ------------------------------------------------------------------------------ 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . 20 Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . . . . . . . . . . . 21 Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Principal Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . 40 Selling Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Certain Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Description of Securities. . . . . . . . . . . . . . . . . . . . . . . . 43 Underwriting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Available Information. . . . . . . . . . . . . . . . . . . . . . . . . . 48 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. __________, 1997 - ------------------------------------------------------------------------------ PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS. 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 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. II-2 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 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 II-3 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. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.(1)(2) SEC Registration Fee. . . . . . . . . . . . . . . . $ 3,776 NASD Filing Fee . . . . . . . . . . . . . . . . . . 1,776 Blue Sky Filing Fees. . . . . . . . . . . . . . . . 1,000 Blue Sky Legal Fees . . . . . . . . . . . . . . . . 2,000 Printing Expenses . . . . . . . . . . . . . . . . . 50,000 Legal Fees and Expenses . . . . . . . . . . . . . . 80,000 Accounting Fees . . . . . . . . . . . . . . . . . . 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 Representative's 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. 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 $.42 per share. II-4 (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 (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 Jim Mapes 3,872 Mapes 2,383 Kurt Kobel 3,574 John C. Gudgel, Jr. 23,826 II-5 Name Number of Shares ---- ---------------- 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 Hiavka 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) From time to time, the Registrant has issued stock options (currently aggregating 1,761,635 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 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. II-6 ITEM 27. EXHIBITS. --------- Exhibit No. Title - ----------- ----- 1.01 Form of Underwriting Agreement 1.02 Form of Agreement Among Underwriters 1.03 Form of Selected Dealer Agreement 1.04 Form of Representative's Warrant 3.01 Restated Articles of Incorporation of the Registrant 3.02 Bylaws of the Registrant 4.01 Form of Warrant Agreement (To be filed by Amendment) 4.02 Common Stock Certificate (To be filed by Amendment) 5.01 Opinion of Gary A. Agron, regarding legality of the Units (includes Consent) 10.01 1996 Employee Stock Option Plan 10.02 Office Lease and Amendments thereto (Beverly Hills, California) 10.03 Employment Agreement with Mr. Vukadinovic, as amended 10.04 Employment Agreement with Mr. Silberman, as amended 11.01 Computation of Earnings Per Share 23.01 Consent of AJ. Robbins, P.C. 23.02 Consent of Gary A. Agron (See 5.01, above) 27.01 Financial Data Schedule II-7 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 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. II-8 (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 Underwriter at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriter to permit prompt delivery to each purchaser. II-9 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 Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Beverly Hills, California, on June 11, 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, June 11, 1997 Borivoje Vukadinovic President and Director /s/ MICHAEL D. SILBERMAN - ------------------------ Chief Financial Officer, June 11, 1997 Michael D. Silberman Principal Accounting Officer, Secretary and Director /s/ IVAN ZOGOVIC - ------------------------ Manager - Export/Import June 11, 1997 Ivan Zogovic and Director /s/ MOJGAN KEYWANFAR - ------------------------ Accounting Manager and June 11, 1997 Mojgan Keywanfar Director /s/ S. WILLIAM YOST - ------------------------ Director June 11, 1997 S. William Yost /s/ DONALD E. TORMEY - ------------------------ Director June 11, 1997 Donald E. Tormey /s/ PHILIP E. GRAHAM - ------------------------ Director June 11, 1997 Philip E. Graham EXHIBIT INDEX Exhibit No. Title - ----------- ----- 1.01 Form of Underwriting Agreement 1.02 Form of Agreement Among Underwriters 1.03 Form of Selected Dealer Agreement 1.04 Form of Representative's Warrant 3.01 Restated Articles of Incorporation of the Registrant 3.02 Bylaws of the Registrant 5.01 Opinion of Gary A. Agron, regarding legality of the Units (includes Consent) 10.01 1996 Employee Stock Option Plan 10.02 Office Lease and Amendments thereto (Beverly Hills, California) 10.03 Employment Agreement with Mr. Vukadinovic, as amended 10.04 Employment Agreement with Mr. Silberman, as amended 11.01 Computation of Earnings Per Share 23.01 Consent of AJ. Robbins, P.C. 23.02 Consent of Gary A. Agron (See 5.01, above) 27.01 Financial Data Schedule
EX-1.01 2 EXHIBIT 1.01 RETROSPETTIVA, INC. 500,000 UNITS UNDERWRITING AGREEMENT July ___, 1997 Kensington Securities, Inc. 162 Dockside Circle Ft. Lauderdale, FL 33326 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 Representative, 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 to you as Representative, a five-year warrant (the "Representative's Warrant") to purchase for $14.40 per Unit an aggregate of 50,000 Units (the "Representative's Warrant Units"). Each Representative's Warrant Unit consists of two (2) shares of Common Stock and one Redeemable Warrant ("Underlying Warrant"). The terms and conditions of the Representative's Warrant, Representative's Warrant Units and Underlying Warrants, including the purchase price thereof, shall be as set forth in the Representative's Warrant filed as an exhibit to the Registration Statement. The Firm Units, any Option Units purchased pursuant to this Agreement and the Representative's Warrant Units are collectively called herein the "Units" and the Warrants included in the Units and the Representative's Warrant 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-__________) 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 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 2 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 Representative's Warrant 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 Representative's Warrant, 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 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 Representative's Warrant, the agreement between the Company and the warrant agent (the "Warrant Agreement") and the other agreements of the 3 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 Representative's Warrant 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 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. 4 (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 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; 5 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. (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. 6 (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 Representative's Warrant against payment therefor shall take place at the offices of Kensington Securities, Inc., 7031 E. Camelback Road, Suite 494, 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 July ___, 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 "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. 7 (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 you individually, and/or your designated officers, at the First Closing Date, as defined below, for $100, the Representative's Warrant to purchase an aggregate of up to 50,000 Representative's Warrant Units. The price, terms and provisions of the Representative's Warrant Units and the respective rights and obligations of the Company and the holders of the Representative's Warrant and/or Representative's Warrant Units and the components thereof are set forth in the Representative's Warrant between the Company and the Representative. (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. 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 8 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 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 9 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 Company's counsel, Gary A. Agron, at the Company's expense. On the Effective Date of this Agreement as defined in Section 9 below, counsel for the Company shall deliver to Underwriters' counsel 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. (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 8(b). 10 (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. (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. 11 (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 (the "Existing Stockholders"), will execute agreements ("Lock Up Agreements"), 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 for the Company. Further, options of Company employees shall be excluded from the Lock-Up Agreement except for ______________ options of Borivoje Vukadinovic, the Company's Chief Executive Officer which will be subject to a Lock-Up Agreement for 12 months from the date hereof after which one-half of such options shall be released from the Lock-Up Agreement with all remaining options released from the Lock-Up Agreement on July 31, 1998. Excluded from the Lock-Up Agreement shall be those shares of Common Stock that certain Existing Stockholders 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. (n) The Company 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 12 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 Representative's Warrant (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' OBLIGATION. 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 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: 13 (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 Representative's Warrant 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 Representative's Warrant; and to the best of 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 Representative's Warrant, 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 14 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 Representative's Warrant) and Representative's Warrant Units have been duly authorized and reserved for issuance and, when issued and delivered in accordance with the terms of this Agreement and the Representative's Warrant, respectively, will be duly and validly issued, fully paid and nonassessable. (vi) the certificate evidencing the Unit components and the Representative's Warrant are in valid and proper legal form; the Warrants and the Representative's Warrant will be exercisable for shares of Common Stock of the Company in accordance with the terms of the Warrant Agreement and the Representative's Warrant, 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 Representative's Warrant 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 Representative's Warrant 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 Representative's Warrant or of any action taken or to be taken by the Company pursuant to this Agreement, the Warrant Agreement or the Representative's Warrant; no such proceedings are known to such counsel to be contemplated against the Company; and there are no governmental proceedings or regulations 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 Representative's Warrant, 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, 15 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 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 16 contemplated herein, or the issuance of the Warrants, Representative's Warrant or the securities underlying the Warrants and the Representative's Warrant, other than registration or qualification of the Units and Representative's Warrant 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. (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. 17 (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 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 18 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). (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. 19 (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 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. 20 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 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 21 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 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 22 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 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 23 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 you the balance of a non-accountable expense allowance of $__________, of which $___________ has been paid. In the event the over-allotment option is exercised in full, the Company shall pay to you 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. 24 (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, (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 25 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. REPRESENTATIVE'S WARRANT. On the First Closing Date, the Company will issue to you, for a consideration of $100 and upon the terms and conditions set forth in the form of the Representative's Warrant annexed as an exhibit to the Registration Statement, the Representative's Warrant to purchase up to 50,000 Units at an exercise price of $14.40 per Unit. In the event of conflict in the terms of this Agreement and the Representative's Warrant, the language of the Representative's Warrant 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. NOTICE. 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 162 Dockside Circle, Ft. Lauderdale, Florida, 33326, 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. 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. 26 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 is acting on behalf of itself and as representative of the several Underwriters named in Schedule I to this Agreement. KENSINGTON SECURITIES, INC. By ------------------------------------- Howard Davis, President 27 SCHEDULE I NAME OF UNDERWRITER NUMBER OF UNITS TO BE PURCHASED - ------------------- ------------------------------- Total 28 EX-1.02 3 EXHIBIT 1.02 RETROSPETTIVA, INC. 500,000 UNITS AGREEMENT AMONG UNDERWRITERS To each of the Underwriters named __________, 1997 in Schedule I to the attached Underwriting Agreement Dear Sirs: 1. UNDERWRITING AGREEMENT. Retrospettiva, Inc., a California corporation (the "Company") proposes to enter into an underwriting agreement in the form of the Underwriting Agreement attached hereto (the "Underwriting Agreement") with the underwriters named in Schedule I to the Underwriting Agreement (the "Underwriters") for whom we are acting as representative (the "Representative"), acting severally and not jointly, with respect to the purchase from the Company of 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 years from the effective date of the Registration Statement described below in Section 2. In addition, the Company proposes to sell to the Underwriters up to an additional 75,000 Units (the "Optional Units") for the purpose of covering over-allotments. Under the terms of the Underwriting Agreement, each of the Underwriters will agree, in accordance with the terms thereof, to purchase on a firm commitment basis the number of Units set forth opposite its name in said Schedule I, subject to adjustment pursuant to Section 12 hereof. 2. REGISTRATION STATEMENT AND PROSPECTUS. The Units are described in a registration statement on Form SB-2 (File No. 333-________) and related prospectus which have been filed by the Company with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Act") and the rules and regulations of the Commission thereunder. A copy of Amendment No. 1 to the registration statement has been delivered to you. An additional amendment to such registration statement has been or will be filed in which you have been or will be named as one of the Underwriters of the Units, and you hereby authorize us to approve on your behalf any further amendments or supplements which may be necessary or appropriate. The registration statement, as amended at the time it becomes effective, is called the "Registration Statement" and the final prospectus as filed by the Company with the Commission pursuant to Rule 424(b) under the Act, is referred to as the "Prospectus." 3. AUTHORITY OF REPRESENTATIVE. You authorize us as your Representative to execute the Underwriting Agreement with the Company in the form attached with such insertions, deletions or other changes as we may approve (but not as to price and number of the Units to be purchased by you except as provided herein and therein) and to take such actions as in our discretion we may deem advisable in respect of all matters pertaining to the Underwriting Agreement, this Agreement, and the transactions for the accounts of the several Underwriters contemplated thereby and hereby, determining whether and to what extent to purchase the Optional Units on behalf of the Underwriters, and the purchase, carrying, sale and distribution of the Units. 4. PUBLIC OFFERING. In connection with any public offering of the Units, you authorize us, in our discretion: (a) To determine the time and manner of the initial public offering (after the Registration Statement becomes effective), the initial public offering price, and the concessions and reallowances to dealers, to change the public offering price and such concessions and reallowances after the initial public offering, to furnish the Company with the information to be included in the Registration Statement and the Prospectus and any amendment or supplement thereto with respect to the terms of the offering, and to determine all matters relating to the public advertisement of the Units and any communications with dealers or others; (b) To reserve all or any part of your Units for sale to retail purchasers and to dealers selected by us ("Selected Dealers") among whom may be included any Underwriter (including ourselves) and each of whom shall be a member of the National Association of Securities Dealers, Inc., such reservations for sales to retail purchasers to be as nearly as practicable in proportion to the respective underwriting obligations of the Underwriters and such reservations for sales to Selected Dealers to be in such proportion as we determine, and from time to time to add to the reserved Units such aggregate number of Units retained by you remaining unsold and to release to you any of your Units reserved but not sold; (c) To sell reserved Units, as nearly as practicable in proportion to the respective reservations, to retail purchasers at the public offering price and to Selected Dealers at the public offering price less a concession (the "Selected Dealer's Concession") pursuant to the Selling Agreement in substantially the form attached; and (d) To buy Units for your account from Selected Dealers at the public offering price less such amount not in excess of the Selected Dealer's Concession as we may determine. After advice from us that the Units are released for public offering, you will offer to the public in conformity with the terms of the offering set forth in the Prospectus, or in any amendment or supplement thereto, such of your Units as we advise you are not reserved. You recognize the importance of a broad distribution of the Units among bona fide investors and you agree to use your best efforts to obtain such broad distribution, and to that end, to the extent you deem practicable, to give priority to small orders. In offering the Units to Selected Dealers we will take such action as we deem appropriate to effect a broad distribution. 5. REPURCHASE OF UNITS NOT EFFECTIVELY PLACED FOR INVESTMENT. You are requested to place for investment those of your Units which are not reserved as aforesaid. Any Units sold by you (otherwise than through us) which may be delivered to us against a purchase contract made by us for the account of any Underwriter prior to the termination of the provisions referred to in Section 11 of this Agreement, shall be repurchased by you on demand at the cost of such purchase plus brokerage commissions and transfer taxes on redelivery. Units delivered on such repurchase need not be the identical Units purchased by you. In lieu of demanding repurchase by you we may in our discretion (a) sell for your account the Units so purchased by us, at such price and upon such terms as we may determine, and debit or credit your account with the loss and expense or net profit resulting from such sale, or ((b) charge your account with an amount not in excess of the Selected Dealer's Concession with 2 respect to such Units plus brokerage commissions and transfer taxes paid in connection with such purchase. 6. PAYMENT AND DELIVERY. You agree to deliver to us at or before 8:00 a.m., Pacific Daylight Savings Time, on the Initial Closing Date referred to in the Underwriting Agreement, a certified check or bank cashier's check payable in Clearing House funds to the order of Kensington Securities, Inc., as Representative, for the full purchase price of the Units which you shall have agreed to purchase from the Company. The proceeds shall be delivered in the amounts required in each case for payment of the full purchase price by us to the Company against delivery of the Units to us for your account. You authorize us to accept that delivery and to give a receipt therefore. We may in our discretion make such payment on your behalf with our own funds, in which event you will reimburse us promptly upon request. You authorize us, as your custodian, to take delivery of your Units registered as we may direct, in order to facilitate deliveries. You also authorize us to hold for your account such of your Units as we have reserved for sale to retail purchasers and to Selected Dealers and to deliver your reserved Units against such sales. We will deliver your unreserved Units to you promptly and, after we receive payment for reserved Units sold by us for your account, we will remit to you an amount equal to the price paid by you for such Units. As soon as practicable after termination of Sections 4, 5 and 9 and the first sentence of Section 8 of this Agreement (pursuant to Section 11 hereof) we will deliver to you any of your Units reserved but not sold. All Units delivered to you pursuant to this Section will be evidenced by certificates in such denominations as you shall direct by written notice received by us not later than the third full business day preceding the Initial Closing Date. 7. AUTHORITY TO BORROW. In connection with the purchase or carrying of any Units purchased hereunder for your account, you authorize us, in our discretion, to advance funds for your account, charging current interest rates, or to arrange loans for your account, and in connection therewith to execute and deliver any notes or other instruments and hold or pledge as security any of your Units. Any lender may rely on our instructions in all matters relating to any such loans. Any of your Units held by us for your account may be delivered to you for carrying purposes only, and subject to our further direction. 8. STABILIZATION AND OVER-ALLOTMENT. To facilitate the distribution of the Units, you authorize us during the term of this Agreement, or for such longer period as may be necessary, in our discretion, and without obligating us to do so, to make purchases and sales of the Units for your account in the open market or otherwise, for long or short account, on such terms and at such prices as we deem advisable and, in arranging sales, to over-allot. You also authorize us to cover any short position incurred pursuant to this Section by purchase of any or all of the Optional Units from the Company pursuant to the option contained in the Underwriting Agreement or otherwise on such terms as we deem advisable. All such purchases and sales and over-allotments shall be made for the accounts of the several Underwriters as nearly as practicable in proportion to their respective underwriting obligations. You will on our demand take up at cost or deliver against payment any Units so purchased or sold or over-allotted for your account. You will be obligated in respect of purchases and sales made for your account hereunder whether or not the proposed purchase of the Units is consummated. Your net commitment shall not, at the end of any business day, exceed 15% of your maximum underwriting obligation. Notwithstanding the foregoing limitations, in the event of default by one or more Underwriters in respect of their obligations under this Section, you will assume your proportionate Unit of such obligation without relieving the defaulting Underwriter from liability. 3 In the event that we effect any stabilizing purchases pursuant to this Section, we will notify each Underwriter promptly of the date and time when the first stabilizing purchase is effected and the date and time when stabilizing is terminated. Each Underwriter agrees that if it effects any stabilizing purchases, it will, not later than three business days following the day on which any such stabilization purchase is effected, notify us of the price, date and time at which such stabilizing purchase was effected and will promptly notify us of the date and time when stabilizing was terminated by such Underwriter. Each Underwriter authorizes us to file with the Commission all notices and reports which may be required as a result of any transactions made pursuant to this Section. Upon request you will advise us of Units retained by you or purchased by you from other Underwriters and Selected Dealers and remaining unsold and will sell to us for the account of one or more of the Underwriters such of your unsold Units as we may designate, at the public offering price thereof less such amount as we may determine, but not in excess of the Selected Dealer's Concession with respect thereto. If, pursuant to the provisions of the first paragraph of this Section and prior to the termination of this Agreement (or such earlier date as we may have determined on notice to the Underwriters), we purchase or contract to purchase any Units which were retained by or released to you for direct sale, which Units were theretofore not effectively placed for investment by you, you authorize us in our discretion either to charge your account with an amount equal to the Selected Dealer's Concession with respect thereto or to require you to repurchase such Units at a price equal to the total cost of such purchase, including commissions, if any, and transfer tax on the redelivery. Units delivered on such repurchase need not be the identical Units originally purchased by and delivered to you. Upon the termination of this Agreement, we are authorized in our discretion, in lieu of delivering to the several Underwriters any Units then held for their respective accounts pursuant to this Section, to sell such Units for the accounts of each of the Underwriters at such price or prices as we may determine and debit or credit your account for the loss or profit resulting from such sale. 9. OPEN MARKET TRANSACTION. We and you agree not to bid for, purchase, attempt to induce others to purchase or sell, directly or indirectly, any Units except as brokers pursuant to unsolicited orders and as otherwise provided in this Agreement or in the Underwriting Agreement. You further agree not to offer the Units for sale until notified by us, as Representative, that they are released for that purpose. 10. EXPENSES AND SETTLEMENT. We may charge your account with Selected Dealer's Concessions and all transfer taxes on sales made by us for your account and with your proportionate share (based upon your underwriting obligation) of all other expenses incurred by us under the terms of this Agreement or the Underwriting Agreement or in connection with the purchase, carrying, sale or distribution of the Units. Our determination of the amount and allocation of the expenses shall be conclusive. As soon as practicable after termination of the provisions referred to in Section 11, the accounts hereunder will be settled, but we may reserve from distribution such amount as we deem advisable to cover possible additional expenses. We may at any time make partial distribution of credit balances or call for payment of debit balances. Any of your funds in our hands may be held with our general funds without accountability for interest. Notwithstanding any settlement, you will pay (a) your proportionate share (based upon your underwriting obligation) of any liability which may be incurred by the Underwriters, or any of them, based on the claim that the Underwriters constitute an association, 4 partnership, unincorporated business or other separate entity, and of any expenses incurred by us, or by any other Underwriter with our approval, in contesting any such liability, and (b) any transfer taxes which may be assessed and paid after such settlement on account of any sale or transfer for your account. 11. TERMINATION. The provisions of Sections 4, 5 and 9 and the first sentence of Section 8 of this Agreement shall terminate 30 days after the date of this Agreement unless extended by us. We may extend said provisions for periods not exceeding an additional 30 days in the aggregate, provided that the Selected Dealers Agreements, if any, are similarly extended. Whether extended or not, said provisions may be terminated in part or in whole by notice from us to the effect that the provisions referred to in this Section 11 have been so terminated. 12. DEFAULT BY UNDERWRITERS. Default by one or more Underwriters hereunder or under the Underwriting Agreement shall not release the other Underwriters from their obligations or affect the liability of any defaulting Underwriter to the other Underwriters for damages resulting from such default. In case of default under the Underwriting Agreement by one or more Underwriters, we may arrange for the purchase by others, including non-defaulting Underwriters, of Units not taken up by such defaulting Underwriters, and you will, at our request, increase pro rata with the other non-defaulting Underwriters the number of Units which you are to purchase. In the event any such arrangements are made, the respective number of Units to be purchased by non-defaulting Underwriters and by such others shall be taken as the basis for the Underwriters and by such others shall be taken as the basis for the underwriting obligations under this Agreement. In the event of default by one or more Underwriters in respect of their obligations under this Agreement, each non-defaulting Underwriter shall assume its proportionate share of the obligations under this Agreement of each such defaulting Underwriter (other than, to the extent stated in the first paragraph of this Section, the purchase obligation of such defaulting Underwriter). 13. POSITION OF REPRESENTATIVE. We shall be under no liability to you for any act or omission, except for obligations expressly assumed by us in this Agreement, but no obligation on our part shall be implied or inferred therefrom. Nothing shall constitute the Underwriters, or any of them, an association, partnership, unincorporated business or other separate entity and the rights and liability of ourselves and each of the other Underwriters are several and not joint. 14. INDEMNIFICATION. You will indemnify and hold harmless each other Underwriter and each person, if any, who controls such Underwriter within the meaning of Section 15 of the Securities Act of 1933, as amended, to the extent and upon the terms by which each Underwriter agrees to indemnify the Company in the Underwriting Agreement. Such indemnity agreement shall survive the termination of any of the provisions of this Agreement. In the event that at any time any claim shall be asserted against us, as, or a result of our having acted as, Representative, or otherwise involving the Underwriters generally, relating to the Registration Statement or any preliminary prospectus or the Prospectus, as from time to time amended or supplemented, the public offering of the Units or any of the transactions contemplated by this Agreement, you authorize us to make such investigation, to retain such counsel and to take such other action as we shall deem necessary or desirable under the circumstances, including settlement of any claim or claims if such course of action shall be recommended by counsel retained by us. You agree 5 to pay to us, on request, your proportionate share (based upon your underwriting obligation) of all expenses incurred by us (including, but not limited to, the disbursements and fees of counsel so retained) in investigating and defending against such claim or claims, and your proportionate share (based upon your underwriting obligation) of any liability incurred by us in respect of such claim or claims, whether such liability shall be the result of a judgment against us or as a result of any such settlement. 15. BLUE SKY MATTERS. You shall not have any responsibility with respect to the right of any Underwriter or other person to sell Units in any jurisdiction, notwithstanding any information we may furnish in that connection. You hereby authorize us to file or cause to be filed, on your behalf, a New York Further State Notice, if required, and to take such other action as may be necessary or advisable to qualify the Units for offering and sale in any jurisdiction. 16. TITLE TO SECURITIES. The Units purchased for the respective accounts of the several Underwriters shall remain the property of those Underwriters until sold; and no title to such securities shall in any event pass to us, as Representative, by virtue of any of the provisions of this Agreement. 17. CAPITAL REQUIREMENT. You confirm that your commitment hereunder will not result in any violation of Section 8(b) or 15(c) of the Securities Exchange Act of 1934 or the rules and regulations thereunder, including Rule 15c3-1, or any provision of any applicable rules of any securities exchange to which you are subject or of any restriction imposed upon you by such exchange. 6 18. NOTICES AND GOVERNING LAW. Any notice from you to us shall be delivered, mailed or telegraphed to us at Kensington Securities, Inc. Any notice from us to you shall be delivered, mailed or telegraphed to you at your address as set forth below. This Agreement shall be governed by and construed in accordance with the laws of the State of California. We represent that we are a member in good standing of the National Association of Securities Dealers, Inc. You represent that you are a member in good standing of said Association. Very truly yours, KENSINGTON SECURITIES, INC. By ------------------------------------- Howard Davis, President Confirmed and accepted as of the date first above written. By -------------------------------- Name of Underwriter -------------------------------- Authorized Signature -------------------------------- Address -------------------------------- Telephone Number -------------------------------- Number of Units Purchased 7 EX-1.03 4 EXHIBIT 1.03 KENSINGTON SECURITIES, INC. 500,000 Units Retrospettiva, Inc. SELLING AGREEMENT Dear Sirs: 1. We, as Underwriter, are offering for sale an aggregate of 500,000 Units (the "Firm Units") of Retrospettiva, Inc. (the "Company") which we have agreed to purchase from the Company. In addition, we have been granted an option to purchase from the Company up to an additional 75,000 Units (the "Option Units") to cover over-allotments in connection with the sale of the Firm Units. The Firm Units and the Option Units purchased are herein collectively called the "Units." The Units and the terms under which they are to be offered for sale by the Underwriter are more particularly described in the Prospectus. 2. The Units are to be offered to the public by the Underwriter at the price per Unit set forth on the cover page of the Prospectus (the "Public Offering Price"), in accordance with the terms of the offering thereof set forth in the Prospectus. 3. The Underwriter is offering, subject to the terms and conditions hereof, a portion of the Units for sale to certain dealers who are engaged in the investment banking or securities business and who are either (i) members in good standing of the National Association of Securities Dealers, Inc. (the "NASD") or (ii) dealers with their principal places of business located outside the United States, its territories and its possessions and not registered as brokers or dealers under the Securities Exchange Act of 1934, as amended (the "1934 Act") who have agreed not to make any sales within the United States, its territories or its possessions or to persons who are nationals thereof or residents therein (such dealers who shall agree to purchase Units hereunder being herein called "Selected Dealers"), at the Public Offering Price, less a selling concession (which may be changed) of not in excess of $.___ per Unit payable as hereinafter provided, out of which concession an amount not exceeding $.___ per Unit may be reallowable by Selected Dealers to members of the NASD or foreign dealers qualified as aforesaid. The Selected Dealers have agreed to comply with the provisions of Section 24 of Article III of the Rules of Fair Practice of the NASD, and if any such dealer is a foreign dealer and not a member of the NASD, such Selected Dealer also has agreed to comply with the NASD's interpretation with respect to free-riding and withholding, to comply, as though it were a member of the NASD, with the provisions of Section 8 and 36 of Article III of such Rules of Fair Practice, and to comply with Section 25 of Article III thereof as that Section applies to non-member foreign dealers. The Underwriter may be included among the Selected Dealers. 4. We shall have full authority to take such action as we may deem advisable in respect of all matters pertaining to the public offering of the Units. 5. If you desire to purchase any of the Units, your application should reach us promptly by telephone, telegraph or facsimile at our office at 162 Dockside Circle, Ft. Lauderdale, Florida, 33326, Attention: Syndicate Department, Telephone No. _____________, Fax No. ________________. We reserve the right to reject subscriptions in whole or in part, to make allotments and to close the subscription books at any time without notice. The Units allotted to you will be confirmed subject to the terms and conditions of this Agreement. 6. Any Units purchased by you under the terms of this Agreement may be immediately reoffered to the public in accordance with the terms of offering thereof set forth herein and in the Prospectus, subject to the securities or blue sky laws of the various states or other jurisdictions. You agree to pay us on demand an amount equal to the Selected Dealer concession as to any Units purchased by you hereunder which, prior to the termination of this Agreement, we may purchase or contract to purchase and, in addition, we may charge you with any broker's commission and transfer tax paid in connection with such purchase or contract to purchase. Certificates for Units delivered on such repurchases need not be the identical certificates originally purchased. No expenses shall be charged to Selected Dealers. A single transfer tax, if payable, upon the sale of the Units by the Underwriter to you will be paid when such Units are delivered to you. However, you shall pay any transfer tax on sales of Units by you and you shall pay your proportionate share of any transfer tax (other than the single transfer tax described above) in the event that any such tax shall from time to time be assessed against you and other Selected Dealers as a group or otherwise. Neither you nor any other person is or has been authorized to give any information or to make any representation in connection with the sale of the Units other than as contained in the Prospectus. 7. The first three paragraphs of Section 6 hereof will terminate when we shall have determined that the public offering of the Units has been completed and upon telegraphic notice to you of such termination, but, if not theretofore terminated, they will terminate at the close of business on the 30th full business day after the date hereof; provided however, that we shall have the right to extend such provisions for a further period or periods, not exceeding an additional 30 full business days in the aggregate upon telegraphic notice to you. 8. For the purpose of stabilizing the market in the Units, we have been authorized to make purchases and sales of the Units of the Company, in the open market or otherwise, for long or short account, and, in arranging for sales, to over-allot. 2 9. On becoming a Selected Dealer, and in offering and selling the Units, you agree to comply with all the applicable requirements of the Securities Act of 1933, as amended (the "1933 Act"), and the 1934 Act. You confirm that you are familiar with Rule 15c2-8 under the 1934 Act relating to the distribution of preliminary and final prospectuses for securities of an issuer (whether or not the issuer is subject to the reporting requirements of Section 13 or 15(d) of the 1934 Act) and confirm that you have complied and will comply therewith. We hereby confirm that we will make available to you such number of copies of the Prospectus (as amended or supplemented) as you may reasonably request for the purposes contemplated by the 1933 Act or the 1934 Act, or the rules and regulations thereunder. 10. Upon request, you will be informed as to the states and other jurisdictions in which we have been advised that the Units are qualified for sale under the respective securities or blue sky laws of such states and other jurisdictions, but we assume no obligation or responsibility as to the right of any Selected Dealer to sell the Units in any state or other jurisdiction or as to the eligibility of the Units for sale therein. 11. No Selected Dealer is authorized to act as our agent or otherwise to act on our behalf, in offering or selling the Units to the public or otherwise or to furnish any information or make any representation except as contained in the Prospectus. 12. Nothing will constitute the Selected Dealers an association or other separate entity or partners with the Underwriter or with each other, but you will be responsible or your share of any liability or expense based on any claim to the contrary. We shall not be under any liability for or in respect of value, validity or form of the Units or the delivery of the certificates for the Units, or the performance by anyone of any agreement on its part, or the qualification of the Units for sale under the laws of any jurisdiction, or for or in respect of any other matter relating to this Agreement, except for lack of good faith and for obligations expressly assumed by us or by the Underwriter in this Agreement and no obligation on our part shall be implied herefrom. The foregoing provisions shall not be deemed a waiver of any liability imposed under the 1933 Act. Payment for the Units sold to you hereunder is to be made at the Public Offering Price less the above-mentioned selling concession at such time and date as we may advise, at the office of Kensington Securities, Inc., at the address indicated above, by a certified or official bank check in Clearing House funds, payable to the order of Kensington Securities, Inc., against delivery of certificates for the Units. If such payment is not made at such time, you agree to pay us interest on such funds at the prevailing brokers' loan rate. 13. Notices should be addressed to us at our office address indicated above. Notices to you shall be deemed to have been duly given if telegraphed or mailed to you at the address to which this letter is addressed. 3 14. This Agreement shall be governed by and construed exclusively in accordance with the laws of the State of California without giving effect to the choice of law or conflicts of law principles thereof. 15. If you desire to purchase any Units, please confirm your application by signing and returning to us your confirmation on the duplicate copy of this letter enclosed herewith, even though you may have previously advised us thereof by telephone, telegraph or fax. Our signature hereon may be by facsimile. Very truly yours, KENSINGTON SECURITIES, INC. By: ------------------------------ Howard Davis Officer 4 Kensington Securities, Inc. 162 Dockside Circle Ft. Lauderdale, FL 33326 Gentlemen: We hereby irrevocably subscribe for _________ Units of Retrospettiva, Inc. in accordance with the terms and conditions stated in the foregoing letter. We hereby acknowledge receipt of the Prospectus referred to in the first paragraph thereof relating to said Units and we confirm that we have no right to return any Units to you. We further confirm that our commitment hereunder will not result in any violation by us of Section 8(b) or 15(c) of the Securities Exchange Act of 1934 or the rules and regulations thereunder, including Rule 15c3-1, or any provision of any applicable rules of any securities exchange to which we are subject or of any restriction imposed upon us by such exchange. We further state that in purchasing said Units we have relied upon said Prospectus and upon no other statement whatsoever, whether written or oral. We confirm that we are a dealer actually engaged in the investment banking or securities business and that we are either (i) a member in good standing of the National Association of Securities Dealers, Inc. (the "NASD") or (ii) a dealer with its principal place of business located outside the United States, its territories and its possessions and not registered as a broker or dealer under the Securities Exchange Act of 1934, as amended, who hereby agrees not to make any sales within the United States, its territories or its possessions or to persons who are nationals there or of residents therein. We hereby agree to comply with the provisions of Section 24 of Article III of the rules of Fair Practice of the NASD, and if we are a foreign dealer and not a member of the NASD, we also agree to comply with the NASD's interpretation with respect to free-riding and withholding, to comply, as though we were a member of the NASD, with provisions of Sections 8 and 36 of Article III of such Rules of Fair Practice, and to comply with Section 25 of Article III thereof as that Section applies to non-member foreign dealers. Name of Firm -------------------------- Authorized Signature ------------------- Title ---------------------------------- Date ----------------------------------- EX-1.04 5 EXHIBIT 1.04 WARRANT TO PURCHASE 50,000 Units RETROSPETTIVA, INC. REPRESENTATIVE'S WARRANT Dated: July ___, 1997 THIS CERTIFIES that Kensington Securities, Inc. (herein sometimes called the "Holder" and/or the "Representative") is entitled to purchase from Retrospettiva, Inc., a California corporation (the "Company"), at the price and during the period as hereinafter specified, up to 50,000 Units of the Company's securities with each Unit (the "Representative's Warrant Unit") consisting of two (2) shares of the Company's no par value per share Common Stock (the "Warrant Unit Shares") and one Redeemable Warrant (the "Underlying Warrant") entitling the holder thereof to purchase for $7.50 (the "Underlying Warrant Exercise Price"), one share of Common Stock (the "Underlying Warrant Shares") for a term of five (5) years from the effective date of the Registration Statement described below. The Warrant Unit Shares and the Underlying Warrant Shares are sometimes referred to herein collectively as the "Warrant Shares." This representative's Warrant (the "Representative's Warrant") is issued pursuant to an Underwriting Agreement between the Company and the Underwriters named in Schedule I to the Underwriting Agreement, for which the Holder is acting as Representative, in connection with a public offering, through the Underwriters, of 500,000 Units (the "Units") as more fully described in the Underwriting Agreement, (and up to 75,000 additional Units covered by an over-allotment option granted by the Company to the Underwriters) pursuant to a Registration Statement on Form SB-2 (the "Registration Statement") under the Securities Act of 1933, as amended (the "1933 Act"), and in consideration of $100 received by the Company for the Representative's Warrant. 1. The rights represented by the Representative's Warrant shall be exercised at the price, subject to adjustment in accordance with Sections 9 and 10 hereof (the "Exercise Price") and during the periods as follows: (a) The Representative's Warrant shall be numbered and shall be registered in a warrant register. The Company shall be entitled to treat the registered owner of any Representative's Warrant (the "Warrantholder") as the owner in fact thereof for all purposes and shall not be bound to recognize any equitable or other claim to or interest in such Representative's Warrant on the part of any other person, and shall not be liable for any registration or transfer of Representative's Warrants which are registered or to be registered in the name of a fiduciary or the nominee of a fiduciary unless made with the actual knowledge that a fiduciary or nominee is committing a breach of trust in requesting such registration or transfer, or with such knowledge of such facts that its participation therein amounts to gross negligence or bad faith. (b) During the 12 month period from the Effective Date of the Registration Statement (the "First Anniversary Date"), the Warrantholder shall have no right to purchase any Representative's Warrant Units hereunder, except that in the event of any merger, consolidation or sale of substantially all the assets of the Company as an entirety prior to the First Anniversary Date, the Warrantholder shall have the right to exercise the Representative's Warrant at such time and into the kind and amount of Representative's Warrant Units and other securities and property (including cash) receivable by a holder of the number of Representative's Warrant Units into which the Representative's Warrant would have been convertible or exercisable immediately prior thereto. (c) Between July ___, 1998 and 2002 (five years from the Effective Date, i.e. the "Expiration Date") inclusive, the Warrantholder shall have the option to purchase Representative's Warrant Units hereunder at a price ("Exercise Price") of $14.40 per Representative's Warrant Unit. (d) Between July ___, 1998 and 2002 (five years from the Effective Date) inclusive, the holders of the Underlying Warrants shall have the option to purchase the number of fully paid and nonassessable Underlying Warrant Shares which the holder of the Underlying Warrant may at that time be entitled to purchase on the same terms and conditions as the Redeemable Warrants offered and sold to the public. The Underlying Warrants are redeemable by the Company on the same terms and conditions as the Redeemable Warrants offered and sold to the public. Holders of the Representative's Warrants and the Underlying Warrants are sometimes herein referred to collectively as "Warrantholders." (e) After the Expiration Date, the Warrantholder shall have no right to purchase any Representative's Warrant Units hereunder. 2. The rights represented by the Representative's Warrant or Underlying Warrant may be exercised at any time within the periods above specified, in whole or in part, by (i) the surrender of the Representative's Warrant or Underlying Warrant (with the purchase form at the end hereof properly executed) at the principal executive office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the Warrantholder at the address of the Warrantholder appearing on the books of the Company); (ii) payment to the Company of the Exercise Price then in effect for the number of Representative's Warrant Units or Underlying Warrant Shares, as the case may be, specified in the above-mentioned purchase form together with applicable transfer taxes, if any; and (iii) delivery to the Company of a duly executed agreement signed by the person(s) designated in the purchase form to the effect that such person(s) agree(s) to be bound by the provisions of paragraph 7 and subparagraphs (b), (c) and (d) of paragraph 8 hereof. The Representative's Warrant or Underlying Warrant shall be deemed to have been exercised, in whole or in part to the extent specified, immediately prior to the close of business on the date the Representative's Warrant 2 or Underlying Warrant is surrendered and payment is made in accordance with the foregoing provisions of this paragraph 2. 3. Upon such surrender of an Representative's Warrant or Underlying Warrant and payment of the Exercise Price or Underlying Warrant Exercise Price, as applicable, the Company shall issue and cause to be delivered with all reasonable dispatch to or upon the written order of the Warrantholder exercising such Warrant or Underlying Warrant and in such name or names as such Warrantholder may designate, a certificate or certificates for the number of Warrant Units Shares or Underlying Warrant Shares or Underlying Warrants, as the case may be, so purchased upon the exercise of such Representative's Warrant or Underlying Warrant; and in the case of a fractional Warrant Share and/or Underlying Warrant, such fraction shall be rounded to the nearest whole Warrant Share and/or Underlying Warrant otherwise issuable upon such surrender. Such certificate, certificates or Underlying Warrants shall be deemed to have been issued and any person so designated to be named therein shall be deemed to have become a holder of record of such Warrant Unit Shares, Underlying Warrants and/or Underlying Warrant Shares, as the case may be, as of the date of receipt by the Company or the warrant agent, if any, of such Warrant or Underlying Warrant and payment of the applicable Exercise Price or Underlying Warrant Exercise Price; provided, however, that if, at the date of surrender of such Warrant or Underlying Warrant and payment of the applicable Exercise Price or Underlying Warrant Exercise Price therefor, the transfer books for the Common Stock or other class of stock purchasable upon the exercise of such Representative's Warrants or Underlying Warrants shall be closed, the certificates for the components of the Representative's Warrant Units or Underlying Warrant Shares, as the case may be, in respect of which such Representative's Warrant or Underlying Warrant is then exercised shall be issuable as of the date on which such books shall next be opened (whether before or after the date the Representative's Warrant or Underlying Warrants would otherwise terminate (the "Termination Date")) and until such date the Company shall be under no duty to deliver any Warrant Shares or Underlying Warrants. The rights of purchase represented by the Representative's Warrants and Underlying Warrants shall be exercisable, at the election of the Warrantholders thereof, either in full or from time to time in part and, in the event that an Representative's Warrant or Underlying Warrant is exercised in respect of less than all of the Representative's Warrant Units or Underlying Warrant Shares purchasable on such exercise at any time prior to the Termination Date, a new Warrant and/or Underlying Warrant evidencing the remaining Representative's Warrants and/or Underlying Warrants will be issued; and the Company shall deliver, or the warrant agent, if any, is hereby irrevocably authorized to countersign and to deliver the required new Warrant and/or Underlying Warrant pursuant to the provisions of this Section; and the Company whenever required by the warrant agent, if any, and will supply the warrant agent with Representative's Warrant or Underlying Warrant duly executed on behalf of the Company for such purpose. 4. The Representative's Warrant shall not be transferred, sold, assigned, or hypothecated for a period of one year commencing on the Effective Date except that it may be transferred to successors of the Warrantholder, and may be assigned in whole or in part to any person who is an officer of the Warrantholder or to any member of the selling group and/or the 3 officers or partners thereof during such period. Any such assignment shall be effected by the Warrantholder by (i) executing the form of assignment at the end hereof and (ii) surrendering the Representative's Warrant for cancellation at the office or agency of the Company referred to in paragraph 2 hereof, accompanied by a certificate (signed by an officer of the Warrantholder if the Warrantholder is a corporation), stating that each transferee is a permitted transferee under this paragraph 4; whereupon the Company shall issue, in the name or names specified by the Warrantholder (including the Warrantholder) a new Representative's Warrant or Warrants of like tenor and representing in the aggregate rights to purchase the same number of Representative's Warrant Units as are purchasable hereunder. Such transfers shall be made in compliance with the rules and regulations of the National Association of Securities Dealers ("NASD") as well as the 1933 Act, the Exchange Act of 1934, as amended, and the respective rules and regulations promulgated thereunder. 5. The Company covenants and agrees that all Warrant Unit Shares and Underlying Warrant Shares issued hereunder will, upon issuance, be duly and validly issued, fully paid and nonassessable, and no personal liability will attach to the holder thereof. The Company further covenants and agrees that, during the periods within which the Representative's Warrant and the Underlying Warrant may be exercised, the Company will at all times have authorized and reserved a sufficient number of Shares. 6. The Representative's Warrant and the Underlying Warrants shall not entitle the Warrantholder to any voting rights or other rights as a shareholder of the Company. 7. (a) If at any time for a period of four (4) years commencing one (1) year from the Effective Date, the Company files a registration statement under the 1933 Act which relates to a current offering of securities of the Company (except a Registration Statement on Form S-4, S-8 or any other inappropriate form), such registration statement and the prospectus included therein shall also, at the written request of the Company by any of the then owners of the Representative's Warrants, Warrant Units, Underlying Warrants or Warrant Shares (the "Owners"), include and relate to the Underlying Warrants and/or Warrant Shares issuable upon exercise of such Representative's Warrants and/or Underlying Warrants so as to permit the public sale thereof in compliance with the 1933 Act. The Company shall give written notice to the Owners of its intention to file a registration statement under the 1933 Act relating to a current offering of the securities of the Company, at least 30 days prior to the filing of such registration statement, and the written request provided for in the first sentence of this subsection shall be made by the Owners at least 10 days prior to the date specified in the notice as the date on which the Company intends to file such registration statement. Neither the delivery of such notice by the Company nor of such request by the Owners shall in any way obligate the Company to file such registration statement and, notwithstanding the filing of such registration statement, the Company may, at any time prior to the effective date thereof, determine not to offer those securities to which such registration statement relates, without liability to the Owners, except that the Company shall pay such expenses incurred in connection with the preparation and filing of such registration statement and as otherwise set forth in subsection (d) hereof. 4 (b) In addition, for a period of four (4) years commencing one (1) year from the Effective Date, upon written notice at any time from a Majority Holder (as such term is defined in subsection (f) of this Section 7) that he, she or it contemplates the transfer of all or any part of his, her or its Underlying Warrants or Warrant Shares under such circumstances that a public offering thereof would be involved within the meaning of the 1933 Act, the Company, as promptly as possible after the receipt of such notice, shall file, at its expense, a post-effective amendment or a new registration statement with respect to the offering, sale or other disposition of the Underlying Warrants and/or Warrant Shares as to which the Company shall have received such notice. Within 10 days after receiving any such notice, the Company shall give notice to the other Owners advising them that the Company is proceeding with such post-effective amendment or new registration statement and offering to include therein the Underlying Warrants and/or Warrant Shares of such Owners. The Company shall not be obligated to any such other Owner unless such other Owner shall accept such offer by written notice to the Company within 30 days of the Company's notice. The Owners will bear the expense of fees of counsel for the Owners and any sales commissions for the Underlying Warrants and/or Warrant Shares sold by the Owners. In no event shall the Company be required to file a post-effective amendment or a new registration statement pursuant to the requirements of this subsection (b) more than once. (c) In any exercise of the registration rights afforded pursuant to subsection (a) and (b) of this Section 7, the Company shall: (i) Supply to the Owner or its designee, as representative of the Owners intending to make a public distribution of their Underlying Warrants and/or Warrant Shares (the holder of the Representative's Warrant by his, her or its receipt of the Representative's Warrant and/or Underlying Warrant thereby acknowledging his, her or its appointment of the Owners' representative or its designee as his, her or its representative for purposes of this Agreement), four executed copies of each post-effective amendment or registration statement and as many copies of the preliminary and final prospectus which shall have been prepared in conformity with the requirements of the 1933 Act and the rules and regulations promulgated thereunder and such other documents as the representative of the Owners shall reasonably request; (ii) Cooperate in taking such action as may be necessary to register or qualify the Underlying Warrants and/or Warrant Shares under the securities acts or blue sky laws of such jurisdictions as the representative of the Owners shall reasonably request and the Company shall do any and all other acts and things which may be necessary or advisable to enable the Owners to consummate such proposed sale or other disposition of the Underlying Warrants and/or Warrant Shares in any such jurisdiction; provided, however, that in no event shall the Company be obligated, in connection therewith, to qualify to do business or to file a general consent to service of process in any jurisdiction where it shall not then be so qualified; and 5 (iii) Use its best efforts to cause any such post-effective amendment or new registration statement to become effective and remain effective for a period of not less than 12 months after the initial effectiveness thereof. The Company shall cooperate in taking such other action as may be necessary to permit the public sale or other disposition of the Underlying Warrants and/or Warrant Shares by the Owners. (d) The Company shall comply with the requirements of subsections (a) and (b) of this Section (including the related requirements of subsection (c) of this Section), at its own expense, including the costs to register/qualify the securities under the securities laws of those states as the Owners shall reasonably request; but excluding underwriting commissions, transfer taxes and Representative's expense allowance attributable to the securities being offered by the Owners. (e) The term "Majority Holder" as used in this Section shall include any owner or combination of owners of Representative's Warrants, Underlying Warrants and/or Warrant Shares, in any combination, if the aggregate amount of: A. the Warrant Unit Shares and/or Underlying Warrant Shares then held by him, her, it or among them, plus B. the Warrant Unit Shares and/or Underlying Warrant Shares then issuable upon exercise of the Representative's Warrants and/or Underlying Warrants then held by him, her, it or among them would constitute more than fifty percent of the Representative's Warrant Unit Shares and/or Underlying Warrant Shares originally issuable upon exercise of all of the Representative's Warrants and Underlying Warrants. (f) The provisions contained herein shall continue in effect regardless of the exercise or surrender of any of the Warrants. Notwithstanding anything in this Section 7 to the contrary, the Company shall not be obligated to register any Underlying Warrants or Underlying Warrant Shares if the Underlying Warrants shall have expired unexercised or if the Underlying Warrants shall have been redeemed by the Company; and the Underlying Warrant Shares shall not be used to calculate a Majority Holder if the Underlying Warrants shall have expired unexercised or shall have been redeemed by the Company. 8. (a) Whenever pursuant to paragraph 7 a registration statement relating to the Underlying Warrants and/or Warrant Shares is filed under the 1933 Act, amended or supplemented, the Company will indemnify and hold harmless each holder of the securities covered by such registration statement, amendment or supplement (such holder being hereinafter called the "Distributing Holder"), and each person, if any, who controls (within the meaning of the 1933 Act) the Distributing Holder, and each underwriter (within the meaning of the 1933 Act) of such securities and each person, if any, who controls (within the meaning of the 1933 Act) any such underwriter, against any losses, claims, damages or liabilities, joint or several, to which the Distributing Holder, any such controlling person or any such underwriter may become subject, under the 1933 Act or otherwise, insofar as such losses, claims, damages or 6 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 any such registration statement or any preliminary prospectus or final prospectus constituting a part thereof 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 and will reimburse the Distributing Holder or such controlling person or underwriter in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case 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 said registration statement, said preliminary prospectus, said final prospectus or said amendment or supplement in reliance upon and in conformity with written information furnished by such Distributing Holder or any other Distributing Holder for use in the preparation thereof. (b) The Distributing Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed said registration statement and such amendments and supplements thereto, and each person, if any, who controls the Company (within the meaning of the 1933 Act) against any losses, claims, damages or liabilities, joint or several, to which the Company or any such director, officer or controlling person may become subject, under the 1933 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 or alleged untrue statement of any material fact contained in said registration statement, said preliminary prospectus, said final prospectus, or said amendment or supplement, 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 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 said registration statement, said preliminary prospectus, said final prospectus or said amendment or supplement in reliance upon and in conformity with written information furnished by such Distributing Holder for use in the preparation thereof; and will reimburse the Company or any such director, officer or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action. (c) Promptly after receipt by an indemnified party under this paragraph 8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party, give the indemnifying party notice 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 paragraph 7. (d) In case any such action is brought against any indemnified party, and it notifies an 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 7 similarly notified, to assume the defense thereof, 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 paragraph 8 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. No settlement shall be made without the consent of the indemnifying party. 9. In case of any reclassification, capital reorganization or other change of outstanding Shares of Common Stock, or in case of any consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the continuing corporation and which does not result in any reclassification, capital, reorganization or other change of outstanding Shares of Common Stock), or in case of any sale or conveyance to another corporation of the property of the Company as, or substantially as, an entirety (other than a sale/leaseback, mortgage or other financing transaction), the Company shall cause effective provision to be made so that each holder of this Warrant shall have the right thereafter, by exercising such Warrant, to purchase the kind and number of Shares of stock or other securities or property (including cash) receivable upon such reclassification, capital reorganization or other change, consolidation, merger, sale or conveyance by a holder of the number of Shares of Common Stock that might have been purchased upon exercise of such Warrant, immediately prior to such reclassification, capital reorganization or other change, consolidation, merger, sale or conveyance. The foregoing provision shall similarly apply to successive reclassifications, capital reorganizations and other changes of outstanding Shares of Common Stock and to successive consolidations, mergers, sales or conveyances. 10. If, prior to the expiration of this Warrant by exercise or by its terms the Company shall issue any of its shares of Common Stock as a share dividend or subdivide the number of outstanding shares of Common Stock into a greater number of shares, then, in either such case, the Exercise Price per Representative's Warrant Unit shall be proportionately reduced, and the number of Representative's Warrant Units at the time purchasable pursuant to this Warrant shall be proportionately increased; and conversely, if the Company shall contract the number of outstanding shares of Common Stock by combining such shares into a smaller number of shares, then, in such case, the Exercise Price per Representative's Warrant Unit in effect at the time of such action shall be proportionately increased and the number of Representative's Warrant Units at that time purchasable pursuant to this Warrant shall be proportionately decreased. If the Company shall, at any time during the life of this Warrant declare a dividend payable in cash on its shares of Common Stock and shall at substantially the same time offer to its shareholders a right to purchase new shares of Common Stock from the proceeds of such dividend or for an amount substantially equal to the dividend, all shares of Common Stock so issued shall, for the purpose of this Warrant, be deemed to have been issued as a share dividend. Any dividend paid or distributed upon the shares of Common Stock in shares of any other class of securities convertible into shares of Common Stock shall be treated as a dividend paid in shares of Common Stock to the extent that shares of Common Stock are issuable upon the conversion thereof. 8 11. This Agreement shall be governed by and construed in accordance with the internal substantive laws of the State of California, without regard for the conflict of laws. IN WITNESS WHEREOF, Retrospettiva, Inc. has caused this Representative's Warrant to be signed by its duly authorized officers under its corporate seal and this Representative's Warrant to be dated ____________________, 1997. RETROSPETTIVA, INC. By ------------------------------------- President Attest: -------------------------------- Secretary 9 PURCHASE FORM (To be signed only upon exercise of Representative's Warrant) The undersigned, the holder of the foregoing Representative's Warrant, hereby irrevocably elects to exercise the purchase rights represented by such Representative's Warrant for, and to purchase thereunder, ____________ Units ("Unit") of Retrospettiva, Inc. with each Unit comprised of two (2) shares of Retrospettiva, Inc. no par value common stock and one (1) warrant to purchase an additional share of such common stock at $7.50 per share and herewith makes payment of $__________ therefor and requests that the certificates for Units be issued in the name(s) of, and delivered to ______________________________, whose address(es) is (are): ____________ ____________________. Dated: __________________, 19__ By: ------------------------------------ TRANSFER FORM (To be signed only upon transfer of Warrant) For value received, the undersigned hereby sells, assigns, and transfers unto _____________________ the right to purchase Shares represented by the foregoing Representative's Warrant to the extent of ___________ Units and appoints ____________________________________ attorney to transfer such rights on the books of Retrospettiva, Inc., with full power of substitution in the premises. Dated: _________________, 19__ By: ------------------------------------ 10 EX-3.01 6 EX3.01 ENDORSED FILED In the office of the Secretary of State of the State of California MAY 7 1996 /s/ Bill Jones BILL JONES, Secretary of State RESTATED ARTICLES OF INCORPORATION OF RETROSPETTIVA, INC. A CALIFORNIA CORPORATION Borivoje Vukadinovic and Michael D. Silberman certify that: A. They are the President and Secretary, respectively, of RETROSPETTIVA, INC., a California corporation. B. The Articles of Incorporation of this corporation are amended and restated to read as follows: "ARTICLES OF INCORPORATION OF RETROSPETTIVA, INC. ARTICLE I Name The name of the corporation is: RETROSPETTIVA, INC. ARTICLE II Purpose The purpose of the corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business, or the practice of a profession permitted to be incorporated by the California Corporation Code. ARTICLE III Capital Stock 1. AUTHORIZED SHARES OF COMMON STOCK. The aggregate number of common shares which the corporation shall have authority to issue is 15,000,000 shares of Common Stock. The shares of this class of Common Stock shall have unlimited voting rights and shall constitute the sole voting group of the corporation, except to the extent any additional voting group or groups may hereafter be established in accordance with the California Corporation Code. 2. DENIAL OF PREEMPTIVE RIGHTS. Preemptive rights to purchase additional shares of stock are denied. 3. AUTHORIZED SHARES OF PREFERRED STOCK. The corporation shall have the authority to issue 1,000,000 shares of Preferred Stock, which may be issued in one or more series at the discretion of the board of directors. In establishing a series, the board of directors shall give to it a distinctive designation so as to distinguish it from the shares of all other series and classes, shall fix the number of shares in such series, and the preferences, rights and restrictions thereof. All shares of any one series shall be alike in every particular except as otherwise provided by these Articles of Incorporation or the California Corporation Code. (1) DIVIDENDS. Dividends in cash, property or shares shall be paid upon the Preferred Stock for any year on a cumulative or noncumulative basis as determined by a resolution of the board of directors prior to the issuance of such Preferred Stock, to the extent earned surplus for each such year is available, in an amount as determined by a resolution of the board of directors. Such Preferred Stock dividends shall be paid pro rata to holders of Preferred Stock as determined by a resolution of the board of directors prior to the issuance of such Preferred Stock. No other dividend shall be paid on the Preferred Stock. Dividends in cash, property or shares of the corporation may be paid upon the Common Stock, as and when declared by the board of directors, out of funds of the corporation to the extent and in the manner permitted by law, except that no Common Stock dividend shall be paid for any year unless the holders of Preferred Stock, if any, shall receive the maximum allowable Preferred Stock dividend for such year. (2) DISTRIBUTION IN LIQUIDATION. Upon any liquidation, dissolution or winding up of the corporation, and after paying or adequately providing for the payment of all its obligations, the remainder of the assets of the corporation shall be distributed, either in cash or 2 in kind, first pro rata to the holders of the Preferred Stock until an amount to be determined by a resolution of the board of directors prior to issuance of such Preferred Stock has been distributed per share, and, then, the remainder pro rata to the holders of the Common Stock. (3) REDEMPTION. The Preferred Stock may be redeemed in whole or in part as determined by a resolution of the board of directors prior to the issuance of such Preferred Stock, upon prior notice to the holders of record of the Preferred Stock, published, mailed and given in such manner and form and on such other terms and conditions as may be prescribed by the Bylaws or by resolution of the board of directors, by payment in cash or Common Stock for each share of the Preferred Stock to be redeemed, as determined by a resolution of the board of directors prior to the issuance of such Preferred Stock. Common Stock used to redeem Preferred Stock shall be valued as determined by a resolution of the board of directors prior to the issuance of such Preferred Stock. Any rights to or arising from fractional shares shall be treated as rights to or arising from one share. No such purchase or retirement shall be made if the capital of the corporation would be impaired thereby. ARTICLE IV Limitation on Director Liability The liability of the directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. ARTICLE V Indemnification of Agents The corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) through bylaw provisions, 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. C. The foregoing amendment and restatement was approved by the required vote of the shareholders of the corporation in accordance with Section 902 of the California Corporations Code; the total number of outstanding shares of each class entitled to vote with respect to the foregoing amendment and restatement was ten thousand (10,000) shares; and the number of shares of each class voting in favor of the foregoing amendment and restatement equalled or exceeded the vote required, such required vote being a majority of the outstanding shares. 3 D. The foregoing amendment and restatement of Articles of Incorporation has been duly approved by the board of directors. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this Certificate are true and correct of our own knowledge. Dated: April 21, 1996 /s/ Borivoje Vukadinovic --------------------------------- Borivoje Vukadinovic, President /s/ Michael D. Silberman --------------------------------- Michael D. Silberman, Secretary 4 [SEAL] SECRETARY OF STATE CORPORATION DIVISION I, BILL JONES, Secretary of State of the State of California, hereby certify: That the annexed transcript has been compared with the corporate record on file in this office, of which it purports to be a copy, and that same is full, true and correct. IN WITNESS WHEREOF, I execute this certificate and affix the Great Seal of the State of California this MAY 10 1996 ----------------------------- /s/ Bill Jones [SEAL] Secretary of State EX-3.02 7 EX3.02 BYLAWS OF RETROSPETTIVA, INC., a California corporation BYLAWS TABLE OF CONTENTS ARTICLE.............................................................. PAGE I. Offices........................................................ 1 II. Shareholders................................................... 1 III. Board of Directors............................................. 8 IV. Officers and Agents............................................ 12 V. Stock.......................................................... 15 VI. Indemnification of Certain Persons............................. 17 VII. Provision of Insurance......................................... 20 VIII. Miscellaneous.................................................. 20 Effective: ---------------- BYLAWS OF RETROSPETTIVA, INC. ARTICLE I OFFICES The principal office of the corporation shall be designated from time to time by the corporation and may be within or outside of California. The corporation may have such other offices, either within or outside California, as the board of directors may designate or as the business of the corporation may require from time to time. The registered office of the corporation required by the California Corporations Code to be maintained in California may be, but need not be, identical with the principal office, and the address of the registered office may be changed from time to time by the board of directors. ARTICLE II SHAREHOLDERS Section 1. ANNUAL MEETING. The annual meeting of the shareholders shall be held during the month of April of each year on a date and at a time fixed by the board of directors of the corporation or by the president in the absence of action by the board of directors, for the purpose of electing directors and for the transaction of such other business as may come before the meeting. If the election of directors is not held on the day fixed as provided herein for any annual meeting of the shareholders, or any adjournment thereof, the board of directors shall cause the election to be held at a special meeting of the shareholders as soon thereafter as it may conveniently be held. A shareholder may apply to the district court in the county in California where the corporation's principal office is located or, if the corporation has no principal office in California, to the district court of the county in which the corporation's registered office is located to seek an order that a shareholder meeting be held (i) if an annual meeting was not held within six months after the close of the corporation's most recently ended fiscal year or fifteen months after its last annual meeting, whichever is earlier, or (ii) if the shareholder participated in a proper call of or proper demand for a special meeting and notice of the special meeting was not given within thirty days after the date of the call or the date the last of the demands necessary to require calling of the meeting was received by the corporation, or the special meeting was not held in accordance with the notice. Section 2. SPECIAL MEETINGS. Unless otherwise prescribed by statute, special meetings of the shareholders may be called for any purpose by the president or by the board of directors. The president shall call a special meeting of the shareholders if the corporation receives one or more written demands for the meeting, stating the purpose or purposes for which it is to be held, signed and dated by holders of shares representing at least ten percent of all the votes entitled to be cast on any issue proposed to be considered at the meeting. Section 3. PLACE OF MEETING. The board of directors may designate any place, either within or outside California, as the place for any annual meeting or any special meeting called by the board of directors. A waiver of notice signed by all shareholders entitled to vote at a meeting may designate any place, either within or outside California, as the place for such meeting. If no designation is made, or if a special meeting is called other than by the board, the place of meeting shall be the principal office of the corporation. Section 4. NOTICE OF MEETING. Written notice stating the place, date, and hour of the meeting shall be given not less than ten nor more than sixty days before the date of the meeting, except that (i) if the number of authorized shares is to be increased, at least thirty days' notice shall be given, or (ii) any other longer notice period that is required by the California Corporations Code. The secretary shall be required to give such notice only to shareholders entitled to vote at the meeting except as otherwise required by the California Corporations Code. Notice of a special meeting shall include a description of the purpose or purposes of the meeting. Notice of an annual meeting need not include a description of the purpose or purposes of the meeting except the purpose or purposes shall be stated with respect to (i) an amendment to the articles of incorporation of the corporation, (ii) a merger or share exchange in which the corporation is a party and, with respect to a share exchange, in which the corporation's shares will be acquired, (iii) a sale, lease, exchange or other disposition, other than in the usual and regular course of business, of all or substantially all of the property of the corporation or of another entity which this corporation controls, in each case with or without the goodwill, (iv) a dissolution of the corporation, (v) restatement of the articles of incorporation, or (vi) any other purpose for which a statement of purpose is required by the California Corporations Code. Notice shall be given personally or by mail, private carrier, telegraph, teletype, electronically transmitted facsimile or other form of wire or wireless communication by or at the direction of the president, the secretary, or the officer or persons calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed and if in a comprehensible form, such notice shall be deemed to be given and effective when deposited in the United States mail, properly addressed to the shareholder at his address as it appears in the corporation's current record of shareholders, with first class postage prepaid. If notice is given other than by mail, and provided that such notice is in a comprehensible form, the notice is given and effective on the date actually received by the shareholder. If requested by the person or persons lawfully calling such meeting, the secretary shall give notice thereof at corporate expense. No notice need be sent to any shareholder if three successive notices mailed to the last known address of such shareholder have been returned as undeliverable until such time as another address for such shareholder is made known to the corporation by such shareholder. In order to be entitled to receive notice of any meeting, a shareholder shall advise the corporation in writing of any change in such shareholder's mailing address as shown on the corporation's books and records. 2 When a meeting is adjourned to another date, time or place, notice need not be given of the new date, time or place if the new date, time or place of such meeting is announced before adjournment at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business which may have been transacted at the original meeting. If the adjournment is for more than 120 days, or if a new record date is fixed for the adjourned meeting, a new notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the meeting as of the new record date. A shareholder may waive notice of a meeting before or after the time and date of the meeting by a writing signed by such shareholder. Such waiver shall be delivered to the corporation for filing with the corporate records, but this delivery and filing shall not be conditions to the effectiveness of the waiver. Further, by attending a meeting either in person or by proxy, a shareholder waives objection to lack of notice or defective notice of the meeting unless the shareholder objects at the beginning of the meeting to the holding of the meeting or the transaction of business at the meeting because of lack of notice or defective notice. By attending the meeting, the shareholder also waives any objection to consideration at the meeting of a particular matter not within the purpose or purposes described in the meeting notice unless the shareholder objects to considering the matter when it is presented. Section 5. FIXING OF RECORD DATE. For the purpose of determining shareholders entitled to (i) notice of or vote at any meeting of shareholders or any adjournment thereof, (ii) receive distributions or share dividends, (iii) demand a special meeting, or (iv) make a determination of shareholders for any other proper purpose, the board of directors may fix a future date as the record date for any such determination of shareholders, such date in any case to be not more than seventy days, and, in case of a meeting of shareholders, not less than ten days, prior to the date on which the particular action requiring such determination of shareholders is to be taken. If no record date is fixed by the directors, the record date shall be the day before the notice of the meeting is given to shareholders, or the date on which the resolution of the board of directors providing for a distribution is adopted, as the case may be. When a determination of shareholders entitled to vote at any meeting of shareholders is made as provided in this section, such determination shall apply to any adjournment thereof unless the board of directors fixes a new record date, which it must do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting. Unless otherwise specified when the record date is fixed, the time of day for such determination shall be as of the corporation's close of business on the record date. Notwithstanding the above, the record date for determining the shareholders entitled to take action without a meeting or entitled to be given notice of action so taken shall be the date a writing upon which the action is taken is first received by the corporation. The record date for determining shareholders entitled to demand a special meeting shall be the date of the earliest of any of the demands pursuant to which the meeting is called. Section 6. VOTING LISTS. After a record date is fixed for a shareholders' meeting, the secretary shall make, at the earlier of ten days before such meeting or two business days after 3 notice of the meeting has been given, a complete list of the shareholders entitled to be given notice of such meeting or any adjournment thereof. The list shall be arranged by voting groups and within each voting group by class or series of shares, shall be in alphabetical order within each class or series, and shall show the address of and the number of shares of each class or series held by each shareholder. For the period beginning the earlier of ten days prior to the meeting or two business days after notice of the meeting is given and continuing through the meeting and any adjournment thereof, this list shall be kept on file at the principal office of the corporation, or at a place (which shall be identified in the notice) in the city where the meeting will be held. Such list shall be available for inspection on written demand by any shareholder (including for the purpose of this Section 6 any holder of voting trust certificates) or his agent or attorney during regular business hours and during the period available for inspection. The original stock transfer books shall be prima facie evidence as to who are the shareholders entitled to examine such list or transfer books or to vote at any meeting of shareholders. Any shareholder, his agent or attorney may copy the list during regular business hours and during the period it is available for inspection, provided (i) the shareholder has been a shareholder for at least three months immediately preceding the demand or holds at least five percent of all outstanding shares of any class of shares as of the date of the demand, (ii) the demand is made in good faith and for a purpose reasonably related to the demanding shareholder's interest as a shareholder, (iii) the shareholder describes with reasonable particularity the purpose and the records the shareholder desires to inspect, (iv) the records are directly connected with the described purpose, and (v) the shareholder pays a reasonable charge covering the costs of labor and material for such copies, not to exceed the estimated cost of production and reproduction. Section 7. RECOGNITION PROCEDURE FOR BENEFICIAL OWNERS. The board of directors may adopt by resolution a procedure whereby a shareholder of the corporation may certify in writing to the corporation that all or a portion of the shares registered in the name of such shareholder are held for the account of a specified person or persons. The resolution may set forth (i) the types of nominees to which it applies, (ii) the rights or privileges that the corporation will recognize in a beneficial owner, which may include rights and privileges other than voting, (iii) the form of certification and the information to be contained therein, (iv) if the certification is with respect to a record date, the time within which the certification must be received by the corporation, (v) the period for which the nominee's use of the procedure is effective, and (vi) such other provisions with respect to the procedure as the board deems necessary or desirable. Upon receipt by the corporation of a certificate complying with the procedure established by the board of directors, the persons specified in the certification shall be deemed, for the purpose or purposes set forth in the certification, to be the registered holders of the number of shares specified in place of the shareholder making the certification. Section 8. QUORUM AND MANNER OF ACTING. One-third of the votes entitled to be cast on a matter by a voting group represented in person or by proxy, shall constitute a quorum of that voting group for action on the matter. If less than one-third of such votes are represented at a meeting, a majority of the votes so represented may adjourn the meeting from time to time 4 without further notice, for a period not to exceed 120 days for any one adjournment. If a quorum is present at such adjourned meeting, any business may be transacted which might have been transacted at the meeting as originally noticed. The shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, unless the meeting is adjourned and a new record date is set for the adjourned meeting. If a quorum exists, action on a matter other than the election of directors by a voting group is approved if the votes cast within the voting group favoring the action exceed the votes cast within the voting group opposing the action, unless the vote of a greater number or voting by classes is required by law or the articles of incorporation. Section 9. PROXIES. At all meetings of shareholders, a shareholder may vote by proxy by signing an appointment form or similar writing, either personally or by his duly authorized attorney-in-fact. A shareholder may also appoint a proxy by transmitting or authorizing the transmission of a telegram, teletype, or other electronic transmission providing a written statement of the appointment to the proxy, a proxy solicitor, proxy support service organization, or other person duly authorized by the proxy to receive appointments as agent for the proxy, or to the corporation. The transmitted appointment shall set forth or be transmitted with written evidence from which it can be determined that the shareholder transmitted or authorized the transmission of the appointment. The proxy appointment form or similar writing shall be filed with the secretary of the corporation before or at the time of the meeting. The appointment of a proxy is effective when received by the corporation and is valid for eleven months unless a different period is expressly provided in the appointment form or similar writing. Any complete copy, including an electronically transmitted facsimile, of an appointment of a proxy may be substituted for or used in lieu of the original appointment for any purpose for which the original appointment could be used. Revocation of a proxy does not affect the right of the corporation to accept the proxy's authority unless (i) the corporation had notice that the appointment was coupled with an interest and notice that such interest is extinguished is received by the secretary or other officer or agent authorized to tabulate votes before the proxy exercises his authority under the appointment, or (ii) other notice of the revocation of the appointment is received by the secretary or other officer or agent authorized to tabulate votes before the proxy exercises his authority under the appointment. Other notice of revocation may, in the discretion of the corporation, be deemed to include the appearance at a shareholders' meeting of the shareholder who granted the proxy and his voting in person on any matter subject to a vote at such meeting. The death or incapacity of the shareholder appointing a proxy does not affect the right of the corporation to accept the proxy's authority unless notice of the death or incapacity is received by the secretary or other officer or agent authorized to tabulate votes before the proxy exercises his authority under the appointment. 5 The corporation shall not be required to recognize an appointment made irrevocable if it has received a writing revoking the appointment signed by the shareholder (including a shareholder who is a successor to the shareholder who granted the proxy) either personally or by his attorney-in-fact, notwithstanding that the revocation may be a breach of an obligation of the shareholder to another person not to revoke the appointment. Subject to Section 11 and any express limitation on the proxy's authority appearing on the appointment form, the corporation is entitled to accept the proxy's vote or other action as that of the shareholder making the appointment. Section 10. VOTING OF SHARES. Each outstanding share, regardless of class, shall be entitled to one vote, except in the election of directors, and each fractional share shall be entitled to a corresponding fractional vote on each matter submitted to a vote at a meeting of shareholders, except to the extent that the voting rights of the shares of any class or classes are limited or denied by the articles of incorporation as permitted by the California Corporations Code. Cumulative voting shall not be permitted in the election of directors or for any other purpose; however, this provision shall become effective only when the corporation becomes a listed corporation within the meaning of Section 301.5 of the California Corporations Code. Each record holder of stock shall be entitled to vote in the election of directors and shall have as many votes for each of the shares owned by him as there are directors to be elected and for whose election he has the right to vote. At each election of directors, that number of candidates equaling the number of directors to be elected, having the highest number of votes cast in favor of their election, shall be elected to the board of directors. Except as otherwise ordered by a court of competent jurisdiction upon a finding that the purpose of this Section would not be violated in the circumstances presented to the court, the shares of the corporation are not entitled to be voted if they are owned, directly or indirectly, by a second corporation, domestic or foreign, and the first corporation owns, directly or indirectly, a majority of the shares entitled to vote for directors of the second corporation except to the extent the second corporation holds the shares in a fiduciary capacity. Redeemable shares are not entitled to be voted after notice of redemption is mailed to the holders and a sum sufficient to redeem the shares has been deposited with a bank, trust company or other financial institution under an irrevocable obligation to pay the holders the redemption price on surrender of the shares. Section 11. CORPORATION'S ACCEPTANCE OF VOTES. If the name signed on a vote, consent, waiver, proxy appointment, or proxy appointment revocation corresponds to the name of a shareholder, the corporation, if acting in good faith, is entitled to accept the vote, consent, waiver, proxy appointment or proxy appointment revocation and give it effect as the act of the shareholder. If the name signed on a vote, consent, waiver, proxy appointment or proxy appointment revocation does not correspond to the name of a shareholder, the corporation, if 6 acting in good faith, is nevertheless entitled to accept the vote, consent, waiver, proxy appointment or proxy appointment revocation and to give it effect as the act of the shareholder if: (i) the shareholder is an entity and the name signed purports to be that of an officer or agent of the entity; (ii) the name signed purports to be that of an administrator, executor, guardian or conservator representing the shareholder and, if the corporation requests, evidence of fiduciary status acceptable to the corporation has been presented with respect to the vote, consent, waiver, proxy appointment or proxy appointment revocation; (iii) the name signed purports to be that of a receiver or trustee in bankruptcy of the shareholder and, if the corporation requests, evidence of this status acceptable to the corporation has been presented with respect to the vote, consent, waiver, proxy appointment or proxy appointment revocation; (iv) the name signed purports to be that of a pledgee, beneficial owner or attorney-in-fact of the shareholder and, if the corporation requests, evidence acceptable to the corporation of the signatory's authority to sign for the shareholder has been presented with respect to the vote, consent, waiver, proxy appointment or proxy appointment revocation; (v) two or more persons are the shareholder as co-tenants or fiduciaries and the name signed purports to be the name of at least one of the co- tenants or fiduciaries, and the person signing appears to be acting on behalf of all the co-tenants or fiduciaries; or (vi) the acceptance of the vote, consent, waiver, proxy appointment or proxy appointment revocation is otherwise proper under rules established by the corporation that are not inconsistent with this Section 11. The corporation is entitled to reject a vote, consent, waiver, proxy appointment or proxy appointment revocation if the secretary or other officer or agent authorized to tabulate votes, acting in good faith, has reasonable basis for doubt about the validity of the signature on it or about the signatory's authority to sign for the shareholder. Neither the corporation nor its officers nor any agent who accepts or rejects a vote, consent, waiver, proxy appointment or proxy appointment revocation in good faith and in accordance with the standards of this Section is liable in damages for the consequences of the acceptance or rejection. Section 12. INFORMAL ACTION BY SHAREHOLDERS. Any action required or permitted to be taken at a meeting of the shareholders may be taken without a meeting if a written consent (or 7 counterparts thereof) that sets forth the action so taken is signed by all of the shareholders entitled to vote with respect to the subject matter thereof and received by the corporation. Such consent shall have the same force and effect as a unanimous vote of the shareholders and may be stated as such in any document. Action taken under this Section 12 is effective as of the date the last writing necessary to effect the action is received by the corporation, unless all of the writings specify a different effective date, in which case such specified date shall be the effective date for such action. If any shareholder revokes his consent as provided for herein prior to what would otherwise be the effective date, the action proposed in the consent shall be invalid. The record date for determining shareholders entitled to take action without a meeting is the date the corporation first receives a writing upon which the action is taken. Any shareholder who has signed a writing describing and consenting to action taken pursuant to this Section 12 may revoke such consent by a writing signed by the shareholder describing the action and stating that the shareholder's prior consent thereto is revoked, if such writing is received by the corporation before the effectiveness of the action. Section 13. MEETINGS BY TELECOMMUNICATION. Any or all of the shareholders may participate in an annual or special shareholders' meeting by, or the meeting may be conducted through the use of, any means of communication by which all persons participating in the meeting may hear each other during the meeting. A shareholder participating in a meeting by this means is deemed to be present in person at the meeting. ARTICLE III BOARD OF DIRECTORS Section 1. GENERAL POWERS. All corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation shall be managed under the direction of, its board of directors, except as otherwise provided in the California Corporations Code or the articles of incorporation. Section 2. NUMBER, QUALIFICATIONS AND TENURE. The number of directors of the corporation shall be fixed from time to time by the board of directors, within a range of no less than two or more than nine, but no decrease in the number of directors shall have the effect of shortening the term of any incumbent director. A director shall be a natural person who is eighteen years of age or older. A director need not be a resident of California or a shareholder of the corporation. Directors shall be elected at each annual meeting of shareholders. Each director shall hold office until the next annual meeting of shareholders following his election and thereafter until his successor shall have been elected and qualified. Directors shall be removed in the manner provided by the California Corporations Code. Any director may be removed by the shareholders, with or without cause, at a meeting called for that purpose. The notice of the meeting shall state that the purpose or one of the purposes of the meeting is removal of the 8 director. A director may be removed only if the number of votes cast in favor of removal exceeds the number of votes cast against removal. Section 3. VACANCIES. Any director may resign at any time by giving written notice to the secretary. Such resignation shall take effect at the time the notice is received by the secretary unless the notice specifies a later effective date. Unless otherwise specified in the notice of resignation, the corporation's acceptance of such resignation shall not be necessary to make it effective. Any vacancy on the board of directors may be filled by the affirmative vote of a majority of the shareholders at a special meeting called for that purpose or by the board of directors. If the directors remaining in office constitute fewer than a quorum of the board, the directors may fill the vacancy by the affirmative vote of a majority of all the directors remaining in office. If elected by the directors, the director shall hold office until the next annual shareholders' meeting at which directors are elected. If elected by the shareholders, the director shall hold office for the unexpired term of his predecessor in office; except that, if the director's predecessor was elected by the directors to fill a vacancy, the director elected by the shareholders shall hold office for the unexpired term of the last predecessor elected by the shareholders. Section 4. REGULAR MEETINGS. A regular meeting of the board of directors shall be held without notice immediately after and at the same place as the annual meeting of shareholders. The board of directors may provide by resolution the time and place, either within or outside California, for the holding of additional regular meetings without other notice. Section 5. SPECIAL MEETINGS. Special meetings of the board of directors may be called by or at the request of the president or any two directors. The person or persons authorized to call special meetings of the board of directors may fix any place, either within or outside California, as the place for holding any special meeting of the board of directors called by them. Section 6. NOTICE. Notice of the date, time and place of any special meeting shall be given to each director at least two days prior to the meeting by written notice either personally delivered or mailed to each director at his business address, or by notice transmitted by private courier, telegraph, telex, electronically transmitted facsimile or other form of wire or wireless communication. If mailed, such notice shall be deemed to be given and to be effective on the earlier of (i) five days after such notice is deposited in the United States mail, properly addressed, with first class postage prepaid, or (ii) the date shown on the return receipt, if mailed by registered or certified mail return receipt requested, provided that the return receipt is signed by the director to whom the notice is addressed. If notice is given by telex, electronically transmitted facsimile or other similar form of wire or wireless communication, such notice shall be deemed to be given and to be effective when sent, and with respect to a telegram, such notice shall be deemed to be given and to be effective when the telegram is delivered to the telegraph company. If a director has designated in writing one or more reasonable addresses or facsimile numbers for delivery of notice to him, notice sent by mail, telegraph, telex, electronically transmitted facsimile or other form of wire or wireless communication shall not be deemed to 9 have been given or to be effective unless sent to such addresses or facsimile numbers, as the case may be. A director may waive notice of a meeting before or after the time and date of the meeting by a writing signed by such director. Such waiver shall be delivered to the secretary for filing with the corporate records, but such delivery and filing shall not be conditions to the effectiveness of the waiver. Further, a director's attendance at or participation in a meeting waives any required notice to him of the meeting unless at the beginning of the meeting, or promptly upon his later arrival, the director objects to holding the meeting or transacting business at the meeting because of lack of notice or defective notice and does not thereafter vote for or assent to action taken at the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the board of directors need be specified in the notice or waiver of notice of such meeting. Section 7. QUORUM. A majority of the number of directors fixed by the board of directors pursuant to Article III, Section 2 or, if no number is fixed, a majority of the number in office immediately before the meeting begins, shall constitute a quorum for the transaction of business at any meeting of the board of directors. Section 8. MANNER OF ACTING. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors. Section 9. COMPENSATION. By resolution of the board of directors, any director may be paid any one or more of the following: his expenses, if any, of attendance at meetings, a fixed sum for attendance at each meeting, a stated salary as director, or such other compensation as the corporation and the director may reasonably agree upon. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Section 10. PRESUMPTION OF ASSENT. A director of the corporation who is present at a meeting of the board of directors or committee of the board at which action on any corporate matter is taken shall be presumed to have assented to all action taken at the meeting unless (i) the director objects at the beginning of the meeting, or promptly upon his arrival, to the holding of the meeting or the transaction of business at the meeting and does not thereafter vote for or assent to any action taken at the meeting, (ii) the director contemporaneously requests that his dissent or abstention as to any specific action taken be entered in the minutes of the meeting, or (iii) the director causes written notice of his dissent or abstention as to any specific action to be received by the presiding officer of the meeting before its adjournment or by the secretary promptly after the adjournment of the meeting. A director may dissent to a specific action at a meeting, while assenting to others. The right to dissent to a specific action taken at a meeting of the board of directors or a committee of the board shall not be available to a director who voted in favor of such action. 10 Section 11. COMMITTEES. By resolution adopted by a majority of all the directors in office when the action is taken, the board of directors may designate from among its members an executive committee and one or more other committees, and appoint one or more members of the board of directors to serve on them. To the extent provided in the resolution, each committee shall have all the authority of the board of directors, except that no such committee shall have the authority to (i) authorize distributions, (ii) approve or propose to shareholders actions or proposals required by the California Corporations Code to be approved by shareholders, (iii) fill vacancies on the board of directors or any committee thereof, (iv) amend articles of incorporation, (v) adopt, amend or repeal the bylaws, (vi) approve a plan of merger not requiring shareholder approval, (vii) authorize or approve the reacquisition of shares unless pursuant to a formula or method prescribed by the board of directors, or (viii) authorize or approve the issuance or sale of shares, or contract for the sale of shares or determine the designations and relative rights, preferences and limitations of a class or series of shares, except that the board of directors may authorize a committee or officer to do so within limits specifically prescribed by the board of directors. The committee shall then have full power within the limits set by the board of directors to adopt any final resolution setting forth all preferences, limitations and relative rights of such class or series and to authorize an amendment of the articles of incorporation stating the preferences, limitations and relative rights of a class or series for filing with the Secretary of State under the California Corporations Code. Sections 4, 5, 6, 7, 8 or 12 of Article III, which govern meetings, notice, waiver of notice, quorum, voting requirements and action without a meeting of the board of directors, shall apply to committees and their members appointed under this Section 11. Neither the designation of any such committee, the delegation of authority to such committee, nor any action by such committee pursuant to its authority shall alone constitute compliance by any member of the board of directors or a member of the committee in question with his responsibility to conform to the standard of care set forth in Article III, Section 14 of these bylaws. Section 12. INFORMAL ACTION BY DIRECTORS. Any action required or permitted to be taken at a meeting of the directors or any committee designated by the board of directors may be taken without a meeting if a written consent (or counterparts thereof) that sets forth the action so taken is signed by all of the directors entitled to vote with respect to the action taken. Such consent shall have the same force and effect as a unanimous vote of the directors or committee members and may be stated as such in any document. Unless the consent specifies a different effective time or date, action taken under this Section 12 is effective at the time or date the last director signs a writing describing the action taken, unless, before such time, any director has revoked his consent by a writing signed by the director and received by the president or the secretary of the corporation. Section 13. TELEPHONIC MEETINGS. The board of directors may permit any director (or any member of a committee designated by the board) to participate in a regular or special meeting of the board of directors or a committee thereof through the use of any means of 11 communication by which all directors participating in the meeting can hear each other during the meeting. A director participating in a meeting in this manner is deemed to be present in person at the meeting. Section 14. STANDARD OF CARE. A director shall perform his duties as a director, including without limitation his duties as a member of any committee of the board, in good faith, in a manner he reasonably believes to be in the best interests of the corporation, and with the care an ordinarily prudent person in a like position would exercise under similar circumstances. In performing his duties, a director shall be entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by the persons herein designated. However, he shall not be considered to be acting in good faith if he has knowledge concerning the matter in question that would cause such reliance to be unwarranted. A director shall not be liable to the corporation or its shareholders for any action he takes or omits to take as a director if, in connection with such action or omission, he performs his duties in compliance with this Section 14. The designated persons on whom a director is entitled to rely are (i) one or more officers or employees of the corporation whom the director reasonably believes to be reliable and competent in the matters presented, (ii) legal counsel, public accountant, or other person as to matters which the director reasonably believes to be within such person's professional or expert competence, or (iii) a committee of the board of directors on which the director does not serve if the director reasonably believes the committee merits confidence. ARTICLE IV OFFICERS AND AGENTS Section 1. GENERAL. The officers of the corporation shall be a president, a secretary and a treasurer or chief financial officer, each of whom shall be appointed by the board of directors and shall be a natural person eighteen years of age or older. One person may hold more than one office. The board of directors or an officer or officers so authorized by the board may appoint such other officers, assistant officers, committees and agents, including a chairman of the board, one or more vice presidents, assistant secretaries and assistant treasurers, as they may consider necessary. Except as expressly prescribed by these bylaws, the board of directors or the officer or officers authorized by the board shall from time to time determine the procedure for the appointment of officers, their authority and duties and their compensation, provided that the board of directors may change the authority, duties and compensation of any officer who is not appointed by the board. Section 2. APPOINTMENT AND TERM OF OFFICE. The officers of the corporation to be appointed by the board of directors shall be appointed at each annual meeting of the board held after each annual meeting of the shareholders. If the appointment of officers is not made at such meeting or if an officer or officers are to be appointed by another officer or officers of the corporation, such appointments shall be made as determined by the board of directors or the appointing person or persons. Each officer shall hold office until the first of the following 12 occurs: his successor shall have been duly appointed and qualified, his death, his resignation, or his removal in the manner provided in Section 3. Section 3. RESIGNATION AND REMOVAL. An officer may resign at any time by giving written notice of resignation to the president, secretary or other person who appoints such officer. The resignation is effective when the notice is received by the corporation unless the notice specifies a later effective date. Any officer or agent may be removed at any time with or without cause by the board of directors or an officer or officers authorized by the board. Such removal does not affect the contract rights, if any, of the corporation or of the person so removed. The appointment of an officer or agent shall not in itself create contract rights. Section 4. VACANCIES. A vacancy in any office, however occurring, may be filled by the board of directors, or by the officer or officers authorized by the board, for the unexpired portion of the officer's term. If an officer resigns and his resignation is made effective at a later date, the board of directors, or officer or officers authorized by the board, may permit the officer to remain in office until the effective date and may fill the pending vacancy before the effective date if the board of directors or officer or officers authorized by the board provide that the successor shall not take office until the effective date. In the alternative, the board of directors, or officer or officers authorized by the board of directors, may remove the officer at any time before the effective date and may fill the resulting vacancy. Section 5. PRESIDENT. The president shall preside at all meetings of shareholders and all meetings of the board of directors unless the board of directors has appointed a chairman, vice chairman, or other officer of the board and has authorized such person to preside at meetings of the board of directors. Subject to the direction and supervision of the board of directors, the president shall be the chief executive officer of the corporation, and shall have general and active control of its affairs and business and general supervision of its officers, agents and employees. Unless otherwise directed by the board of directors, the president shall attend in person or by substitute appointed by him, or shall execute on behalf of the corporation written instruments appointing a proxy or proxies to represent the corporation, at all meetings of the stockholders of any other corporation in which the corporation holds any stock. On behalf of the corporation, the president may in person or by substitute or by proxy execute written waivers of notice and consents with respect to any such meetings. At all such meetings and otherwise, the president, in person or by substitute or proxy, may vote the stock held by the corporation, execute written consents and other instruments with respect to such stock, and exercise any and all rights and powers incident to the ownership of said stock, subject to the instructions, if any, of the board of directors. The president shall have custody of the treasurer's bond, if any. The president shall have such additional authority and duties as are appropriate and customary for the office of president and chief executive officer, except as the same may be expanded or limited by the board of directors from time to time. 13 Section 6. VICE PRESIDENTS. The vice presidents shall assist the president and shall perform such duties as may be assigned to them by the president or by the board of directors. In the absence of the president, the vice president, if any (or, if more than one, the vice presidents in the order designated by the board of directors, or if the board makes no such designation, then the vice president designated by the president, or if neither the board nor the president makes any such designation, the senior vice president as determined by first election to that office), shall have the powers and perform the duties of the president. Section 7. SECRETARY. The secretary shall (i) prepare and maintain as permanent records the minutes of the proceedings of the shareholders and the board of directors, a record of all actions taken by the shareholders or board of directors without a meeting, a record of all actions taken by a committee of the board of directors in place of the board of directors on behalf of the corporation, and a record of all waivers of notice of meetings of shareholders and of the board of directors or any committee thereof, (ii) see that all notices are duly given in accordance with the provisions of these bylaws and as required by law, (iii) serve as custodian of the corporate records and of the seal of the corporation and affix the seal to all documents when authorized by the board of directors, (iv) keep at the corporation's registered office or principal place of business a record containing the names and addresses of all shareholders in a form that permits preparation of a list of shareholders arranged by voting group and by class or series of shares within each voting group, that is alphabetical within each class or series and that shows the address of, and the number of shares of each class or series held by, each shareholder, unless such a record shall be kept at the office of the corporation's transfer agent or registrar, (v) maintain at the corporation's principal office the originals or copies of the corporation's articles of incorporation, bylaws, minutes of all shareholders' meetings and records of all action taken by shareholders without a meeting for the past three years, all written communications within the past three years to shareholders as a group or to the holders of any class or series of shares as a group, a list of the names and business addresses of the current directors and officers, a copy of the corporation's most recent corporate report filed with the Secretary of State, and financial statements showing in reasonable detail the corporation's assets and liabilities and results of operations for the last three years, (vi) have general charge of the stock transfer books of the corporation, unless the corporation has a transfer agent, (vii) authenticate records of the corporation, and (viii) in general, perform all duties incident to the office of secretary and such other duties as from time to time may be assigned to him by the president or by the board of directors. Assistant secretaries, if any, shall have the same duties and powers, subject to supervision by the secretary. The directors and/or shareholders may however respectively designate a person other than the secretary or assistant secretary to keep the minutes of their respective meetings. Any books, records, or minutes of the corporation may be in written form or in any form capable of being converted into written form within a reasonable time. Section 8. TREASURER OR CHIEF FINANCIAL OFFICER. The treasurer or chief financial officer shall be the principal financial officer of the corporation, shall have the care and custody of all funds, securities, evidences of indebtedness and other personal property of the corporation 14 and shall deposit the same in accordance with the instructions of the board of directors. Subject to the limits imposed by the board of directors, he shall receive and give receipts and acquittances for money paid in on account of the corporation, and shall pay out of the corporation's funds on hand all bills, payrolls and other just debts of the corporation of whatever nature upon maturity. He shall perform all other duties incident to the office of the treasurer and, upon request of the board, shall make such reports to it as may be required at any time. He shall, if required by the board, give the corporation a bond in such sums and with such sureties as shall be satisfactory to the board, conditioned upon the faithful performance of his duties and for the restoration to the corporation of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. He shall have such other powers and perform such other duties as may from time to time be prescribed by the board of directors or the president. The assistant treasurers, if any, shall have the same powers and duties, subject to the supervision of the treasurer. The treasurer or chief financial officer shall also be the principal accounting officer of the corporation. He shall prescribe and maintain the methods and systems of accounting to be followed, keep complete books and records of account as required by the California Corporations Code, prepare and file all local, state and federal tax returns, prescribe and maintain an adequate system of internal audit and prepare and furnish to the president and the board of directors statements of account showing the financial position of the corporation and the results of its operations. ARTICLE V STOCK Section 1. CERTIFICATES. The board of directors shall be authorized to issue any of its classes of shares with or without certificates. The fact that the shares are not represented by certificates shall have no effect on the rights and obligations of shareholders. If the shares are-represented by certificates, such shares shall be represented by consecutively numbered certificates signed, either manually or by facsimile, in the name of the corporation by the president or one or more vice presidents and the secretary or an assistant secretary. In case any officer who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer before such certificate is issued, such certificate may nonetheless be issued by the corporation with the same effect as if he were such officer at the date of its issue. All certificates shall be consecutively numbered, and the names of the owners, the number of shares, and the date of issue shall be entered on the books of the corporation. Each certificate representing shares shall state upon its face: (i) That the corporation is organized under the laws of California; (ii) The name of the person to whom issued; (iii) The number and class of the shares and the designation of the series, if any, that the certificate represents; 18 (iv) The par value, if any, of each share represented by the certificate; (v) A conspicuous statement, on the front or the back, that the corporation will furnish to the shareholder, on request in writing and without charge, information concerning the designations, preferences, limitations, and relative rights applicable to each class, the variations in preferences, limitations, and rights determined for each series, and the authority of the board of directors to determine variations for future classes or series; and (vi) Any restrictions imposed by the corporation upon the transfer of the shares represented by the certificate. If shares are not represented by certificates, within a reasonable time following the issue or transfer of such shares, the corporation shall send the shareholder a complete written statement of all of the information required to be provided to holders of uncertificated shares by the California Corporations Code. Section 2. CONSIDERATION FOR SHARES. Certificated or uncertificated shares shall not be issued until the shares represented thereby are fully paid. The board of directors may authorize the issuance of shares for consideration consisting of any tangible or intangible property or benefit to the corporation, including cash, promissory notes, services performed or other securities of the corporation. Future services shall not constitute payment or partial payment for shares of the corporation. The promissory note of a subscriber or an affiliate of a subscriber shall not constitute payment or partial payment for shares of the corporation unless the note is negotiable and is secured by collateral, other than the shares being purchased, having a fair market value at least equal to the principal amount of the note. For purposes of this Section 2, "promissory note" means a negotiable instrument on which there is an obligation to pay independent of collateral and does not include a non-recourse note. Section 3. LOST CERTIFICATES. In case of the alleged loss, destruction or mutilation of a certificate of stock, the board of directors may direct the issuance of a new certificate in lieu thereof upon such terms and conditions in conformity with law as the board may prescribe. The board of directors may in its discretion require an affidavit of lost certificate and/or a bond in such form and amount and with such surety as it may determine before issuing a new certificate. Section 4. TRANSFER OF SHARES. Upon surrender to the corporation or to a transfer agent of the corporation of a certificate of stock duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, and receipt of such documentary stamps as may be required by law and evidence of compliance with all applicable securities laws and other restrictions, the corporation shall issue a new certificate to the person entitled thereto, and cancel the old certificate. Every such transfer of stock shall be entered on the stock books of the corporation which shall be kept at its principal office or by the person and at the place designated by the board of directors. 16 Except as otherwise expressly provided in Article II, Sections 7 and 11, and except for the assertion of dissenters' rights to the extent provided in the California Corporations Code, the corporation shall be entitled to treat the registered holder of any shares of the corporation as the owner thereof for all purposes, and the corporation shall not be bound to recognize any equitable or other claim to, or interest in, such shares or rights deriving from such shares on the part of any person other than the registered holder, including without limitation any purchaser, assignee or transferee of such shares or rights deriving from such shares, unless and until such other person becomes the registered holder of such shares, whether or not the corporation shall have either actual or constructive notice of the claimed interest of such other person. Section 5. TRANSFER AGENT, REGISTRARS AND PAYING AGENTS. The board may at its discretion appoint one or more transfer agents, registrars and agents for making payment upon any class of stock, bond, debenture or other security of the corporation. Such agents and registrars may be located either within or outside California. They shall have such rights and duties and shall be entitled to such compensation as may be agreed. 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. 17 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 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 18 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 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 19 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. ARTICLE VII Section 1. PROVISION OF INSURANCE. By action of the board of directors, notwithstanding any interest of the directors in the action, the corporation may purchase and maintain insurance, in such scope and amounts as the board of directors deems appropriate, on behalf of any person who is or was a director, officer, employee, fiduciary or agent of the corporation, or who, while a director, officer, employee, fiduciary or agent of the corporation, is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, fiduciary or agent of any other foreign or domestic profit or nonprofit corporation or of any partnership, joint venture, trust, profit or nonprofit unincorporated association, limited liability company, other enterprise or employee benefit plan, against any liability asserted against, or incurred by, him in that capacity or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of Article VI or applicable law. Any such insurance may be procured from any insurance company designated by the board of directors of the corporation, whether such insurance company is formed under the laws of California or any other jurisdiction of the United States or elsewhere, including any insurance company in which the corporation has an equity interest or any other interest, through stock ownership or otherwise. ARTICLE VIII MISCELLANEOUS Section 1. SEAL. The board of directors may adopt a corporate seal, which shall be circular in form and shall contain the name of the corporation and the words, "Seal, California." Section 2. FISCAL YEAR. The fiscal year of the corporation shall be as established by the board of directors. 20 Section 3. AMENDMENTS. The board of directors shall have power, to the maximum extent permitted by the California Corporations Code, to make, amend and repeal the bylaws of the corporation at any regular or special meeting of the board unless the shareholders, in making, amending or repealing a particular bylaw, expressly provide that the directors may not amend or repeal such bylaw. The shareholders also shall have the power to make, amend or repeal the bylaws of the corporation at any annual meeting or at any special meeting called for that purpose. Section 4. RECEIPT OF NOTICES BY THE CORPORATION. Notices, shareholder writings consenting to action, and other documents or writings shall be deemed to have been received by the corporation when they are actually received: (1) at the registered office of the corporation in California; (2) at the principal office of the corporation (as that office is designated in the most recent document filed by the corporation with the secretary of state for California designating a principal office) addressed to the attention of the secretary of the corporation; (3) by the secretary of the corporation wherever the secretary may be found; or (4) by any other person authorized from time to time by the board of directors or the president to receive such writings, wherever such person is found. Section 5. GENDER. The masculine gender is used in these bylaws as a matter of convenience only and shall be interpreted to include the feminine and neuter genders as the circumstances indicate. Section 6. CONFLICTS. In the event of any irreconcilable conflict between these bylaws and either the corporation's articles of incorporation or applicable law, the latter shall control. Section 7. DEFINITIONS. Except as otherwise specifically provided in these bylaws, all terms used in these bylaws shall have the same definition as in the California Corporations Code. 21 EX-5.01 8 EX5.01 LAW OFFICE OF GARY A. AGRON 5445 DTC PARKWAY SUITE 520 ENGLEWOOD, COLORADO 80111 TELEPHONE (303) 770-7254 FACSIMILE (303) 770-7257 EXHIBIT 5.01 June 3, 1997 Retrospettiva, Inc. 8825 West Olympic Blvd. Beverly Hills, CA 90211 Re: Registration Statement on Form SB-2 Ladies and Gentlemen: We are counsel for Retrospettiva, Inc., a California corporation (the "Company") in connection with its proposed public offering under the Securities Act of 1933, as amended, of up to 575,000 Units of its securities, each Unit consisting of two shares of no par value common stock ("Common Stock") and one common stock purchase warrant ("Warrant") through a Registration Statement on Form SB-2 ("Registration Statement") as to which this opinion is a part, to be filed with the Securities and Exchange Commission (the "Commission"). In connection with rendering our opinion as set forth below, we have reviewed and examined originals or copies identified to our satisfaction of the following: (1) Articles of Incorporation, and amendments thereto, of the Company as filed with the Secretary of State of the State of California. (2) Corporate minutes containing the written deliberations and resolutions of the Board of Directors and shareholders of the Company. (3) The Registration Statement and the Preliminary Prospectus contained within the Registration Statement. (4) The other exhibits to the Registration Statement. Retrospettiva, Inc. June 3, 1997 Page 2 We have examined such other documents and records, instruments and certificates of public officials, officers and representatives of the Company, and have made such other investigations as we have deemed necessary or appropriate under the circumstances. Based upon the foregoing and in reliance thereon, it is our opinion that the Units, Common Stock, Warrants and Common Stock issuable upon exercise of the Warrants offered under the Registration Statement will, upon the purchase, receipt of full payment, issuance and delivery in accordance with the terms of the offering described in the Registration Statement, be fully and validly authorized, legally issued, fully paid and non-assessable. We hereby consent to the use of this opinion as an exhibit to the Registration Statement and to the use of our name under the caption "Legal Matters" in the Prospectus constituting a part thereof. Very truly yours, Gary A. Agron GAA/mdi EX-10.01 9 EX10.01 RETROSPETTIVA, INC. 1996 STOCK OPTION PLAN ARTICLE I. ESTABLISHMENT AND PURPOSE 1.1 ESTABLISHMENT. Retrospettiva, Inc., a California corporation (the "Company"), hereby establishes a stock option plan for officers, directors, employees and consultants who provide services to the Company, as described herein, which shall be known as the 1996 Stock Option Plan (the "Plan"). It is intended that certain of the options issued under the Plan to employees of the Company shall constitute "Incentive Stock Options" within the meaning of section 422A of the Internal Revenue Code ("Code"), and that other options issued under the Plan shall constitute "Nonstatutory Options" under the Code. The Board of Directors of the Company (the "Board") shall determine which options are to be Incentive Stock Options and which are to be Nonstatutory Options and shall enter into option agreements with recipients accordingly. 1.2 PURPOSE. The purpose of this Plan is to enhance the Company's stockholder value and financial performance by attracting, retaining and motivating the Company's officers, directors, key employees and consultants and to encourage stock ownership by such individuals by providing them with a means to acquire a proprietary interest in the Company's success through stock ownership. ARTICLE II. DEFINITIONS 2.1 DEFINITIONS. Whenever used herein, the following capitalized terms shall have the meanings set forth below, unless the context clearly requires otherwise. (a) "Board" means the Board of Directors of the Company. (b) "Code" means the Internal Revenue Code of 1986, as amended. (c) "Committee" shall mean the Committee provided for by Article IV hereof. (d) "Company" means Retrospettiva, Inc., a California corporation. (e) "Consultant" means any person or entity, including an officer or director of the Company who provides services (other than as an Employee) to the Company and shall include a Nonemployee Director, as defined below. (f) "Date of Exercise" means the date the Company receives notice, by an Optionee, of the exercise of an Option pursuant to section 8.1 of the Plan. Such notice shall indicate the number of shares of Stock the Optionee intends to exercise. (g) "Employee" means any person, including an officer or director of the Company who is employed by the Company. (h) "Fair Market Value" means the fair market value of Stock upon which an Option is granted under this Plan. (i) "Incentive Stock Option" means an Option granted under this Plan which is intended to qualify as an "incentive stock option" within the meaning of section 422A of the Code. (j) "Nonemployee Director" means a member of the Board who is not an employee of the Company at the time an Option is granted hereunder. (k) "Nonstatutory Option" means an Option granted under the Plan which is not intended to qualify as an Incentive Stock Option within the meaning of section 422A of the Code. Nonstatutory Options may be granted at such times and subject to such restrictions as the Board shall determine without conforming to the statutory rules of section 422A of the Code applicable to Incentive Stock Options. (l) "Option" means the right, granted under the Plan, to purchase Stock of the Company at the option price for a specified period of time. For purposes of this Plan, an Option may be either an Incentive Stock Option or a Nonstatutory Option. (m) "Optionee" means an Employee or Consultant holding an Option under the Plan. (n) "Parent Corporation" shall have the meaning set forth in section 425(e) of the Code with the Company being treated as the employer corporation for purposes of this definition. (o) "Significant Shareholder" means an individual who, within the meaning of section 422A(b)(6) of the Code, owns securities possessing more than ten percent of the total combined voting power of all classes of securities of the Company. In determining whether an individual is a Significant Shareholder, an individual shall be treated as owning securities owned by certain relatives of the individual and certain securities owned by corporations in which the individual is a shareholder; partnerships in which the individual is a partner; and estates or trusts of which the individual is a beneficiary, all as provided in section 425(d) of the Code. (p) "Stock" means the no par value common stock of the Company. 2 2.2 GENDER AND NUMBER. Except when otherwise indicated by the context, any masculine terminology when used in this Plan also shall include the feminine gender, and the definition of any term herein in the singular also shall include the plural. ARTICLE III. ELIGIBILITY AND PARTICIPATION 3.1 ELIGIBILITY AND PARTICIPATION. All Employees are eligible to participate in this Plan and receive Incentive Stock Options and/or Nonstatutory Options hereunder. All Consultants are eligible to participate in this Plan and receive Nonstatutory Options hereunder. Optionees in the Plan shall be selected by the Board from among those Employees and Consultants who, in the opinion of the Board, are in a position to contribute materially to the Company's continued growth and development and to its long-term financial success. ARTICLE IV. ADMINISTRATION 4.1 ADMINISTRATION. The Board shall he responsible for administering the Plan. The Board is authorized to interpret the Plan; to prescribe, amend, and rescind rules and regulations relating to the Plan; to provide for conditions and assurances deemed necessary or advisable to protect the interests of the Company; and to make all other determinations necessary or advisable for the administration of the Plan, but only to the extent not contrary to the express provisions of the Plan. Determinations, interpretations or other actions made or taken by the Board, pursuant to the provisions of this Plan, shall be final and binding and conclusive for all purposes and upon all persons. The Plan shall be administered by the standing Compensation Committee of the Board (the "Committee") which is an executive committee of the Board, and consists of not less than three (3) members of the Board, at least two of whom are not executive officers or salaried employees of the Company. The members of the Committee may be directors who are eligible to receive Options under the Plan, but Options may be granted to such persons only by action of the full Board and not by action of the Committee. The Committee shall have full power and authority, subject to the limitations of the Plan and any limitations imposed by the Board, to construe, interpret and administer the Plan and to make determinations which shall be final, conclusive and binding upon all persons, including, without limitation, the Company, the stockholders, the directors and any persons having any interests in any Options which may be granted under the Plan, and, by resolution or resolution providing for the creation and issuance of any such Option, to fix the terms upon which, the time or times at or within which, and the price or prices at which any Stock may be purchased from the Company upon the exercise of Options, which terms, time or times and price or prices shall, in every case, be set forth or incorporated by reference in the instrument or instruments evidencing such Option, and shall be consistent with the provisions of the Plan. The Board may from time to time remove members from or add members to, the Committee. The Board may terminate the Committee at any time. Vacancies on the 3 Committee, howsoever caused, shall be filled by the Board. The Committee shall select one of its members as Chairman, and shall hold meetings at such times and places as the Chairman may determine. A majority of the Committee at which a quorum is present, or acts reduced to or approved in writing by all of the members of the Committee, shall be the valid acts of the Committee. A quorum shall consist of two-thirds (2/3) of the members of the Committee. Where the Committee has been created by the Board, references herein to actions to be taken by the Board shall be deemed to refer to the Committee as well, except where limited by the Plan or the Board. The Board shall have all of the enumerated powers of the Committee but shall not be limited to such powers. No member of the Board or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Option granted under it. 4.2 SPECIAL PROVISIONS FOR GRANTS TO OFFICERS OR DIRECTORS. Rule 16b-3 under the Securities and Exchange Act of 1934 (the "Act") provides that the grant of a stock option to a director or officer of a company subject to the Act will be exempt from the provisions of section 16(b) of the Act if the conditions set forth in said Rule are satisfied. Unless otherwise specified by the Board, grants of Options hereunder to individuals who are officers or directors of the Company shall be made in a manner that satisfies the conditions of said Rule. ARTICLE V. STOCK SUBJECT TO THE PLAN 5.1 NUMBER. The total number of shares of Stock hereby made available and reserved for issuance under the Plan shall be 750,000. The aggregate number of shares of Stock available under this Plan shall be subject to adjustment as provided in section 5.3. The total number of shares of Stock may be authorized but unissued shares of Stock, or shares acquired by purchase as directed by the Board from time to time in its discretion, to be used for issuance upon exercise of Options granted hereunder. 5.2 UNUSED STOCK. If an Option shall expire or terminate for any reason without having been exercised in full, the unpurchased shares of Stock subject thereto shall (unless the Plan shall have terminated) become available for other Options under the Plan. 5.3 ADJUSTMENT IN CAPITALIZATION. In the event of any change in the outstanding shares of Stock by reason of a stock dividend or split, recapitalization, reclassification or other similar corporate change, the aggregate number of shares of Stock set forth in section 5.1 shall be appropriately adjusted by the Board to reflect such change. The Board's determination shall be conclusive; provided, however, that fractional shares shall be rounded to the nearest whole share. In any such case, the number and kind of shares of Stock that are subject to any Option (including any Option outstanding after termination of employment) and the Option price per share shall be proportionately and appropriately adjusted without any change in the aggregate Option price to be paid therefor upon exercise of the Option. 4 ARTICLE VI. DURATION OF THE PLAN 6.1 DURATION OF THE PLAN. The Plan shall be in effect until April 30, 2006 unless extended by the Company's shareholders. Any Options outstanding at the end of said period shall remain in effect in accordance with their terms. The Plan shall terminate before the end of said period, if all Stock subject to it has been purchased pursuant to the exercise of Options granted under the Plan. ARTICLE VII. TERMS OF STOCK OPTIONS 7.1 GRANT OF OPTIONS. Subject to section 5.1, Options may be granted to Employees or Consultants at any time and from time to time as determined by the Board; provided, however, that Consultants may receive only Nonstatutory Options, and may not receive Incentive Stock Options. The Board shall have complete discretion in determining the number of Options granted to each Optionee. In making such determinations, the Board may take into account the nature of services rendered by such Employees or Consultants, their present and potential contributions to the Company, and such other factors as the Board in its discretion shall deem relevant. The Board also shall determine whether an Option is to be an Incentive Stock Option or a Nonstatutory Option. In the case of Incentive Stock Options the total Fair Market Value (determined at the date of grant) of shares of Stock with respect to which incentive stock options are exercisable for the first time by the Optionee during any calendar year under all plans of the Company under which incentive stock options may be granted (and all such plans of any Parent Corporations and any subsidiary corporations of the Company) shall not exceed $100,000. (Hereinafter, this requirement is sometimes referred to as the "$100,000 Limitation.") Nothing in this Article VII shall be deemed to prevent the grant of Options permitting exercise in excess of the maximums established by the preceding paragraph where such excess amount is treated as a Nonstatutory Option. The Board is expressly given the authority to issue amended or replacement Options with respect to shares of Stock subject to an Option previously granted hereunder. An amended Option amends the terms of an Option previously granted (including an extension of the terms of such Option) and thereby supersedes the previous Option. A replacement Option is similar to a new Option granted hereunder except that it provides that it shall be forfeited to the extent that a previously granted Option is exercised, or except that its issuance is conditioned upon the termination of a previously granted Option. 7.2 NO TANDEM OPTIONS. Where an Option granted under the Plan is intended to be an Incentive Stock Option, the Option shall not contain terms pursuant to which the exercise of the Option would affect the Optionee's right to exercise another Option, or vice versa, such that the Option intended to be an Incentive Stock Option would be deemed a tandem stock option within the meaning of the regulations under section 422A of the Code. 5 7.3 OPTION AGREEMENT; TERMS AND CONDITIONS TO APPLY UNLESS OTHERWISE SPECIFIED. As determined by the Board on the date of grant, each Option shall be evidenced by an Option agreement (the "Option Agreement") that includes the nontransferability provisions required by section 10.2 hereof and specifies: whether the Option is an Incentive Stock Option or a Nonstatutory Option; the Option price; the term (duration) of the Option; the number of shares of Stock to which the Option applies; any vesting or exercisability restrictions which the Board may impose; in the case of an Incentive Stock Option, a provision implementing the $100,000 Limitation; and any other terms or conditions which the Board may impose. All such terms and conditions shall be determined by the Board at the time of grant of the Option. If not otherwise specified by the Board, the following terms and conditions shall apply to Options granted under the Plan: (a) TERM. The Option shall be exercisable to purchase Stock for a period of ten years from the date of grant, as evidenced by the execution date of the Option Agreement. (b) EXERCISE OF OPTION. Unless an Option is terminated as provided hereunder, an Optionee may exercise his Option for up to, but not in excess of, the number of shares of Stock subject to the Option specified below, based on the Optionee's number of years of continuous service with the Company from the date on which the Option is granted. In the case of an Optionee who is an Employee, continuous service shall mean continuous employment; in the case of an Optionee who is a Consultant, continuous service shall mean the continuous provision of consulting services. In applying said limitations, the amount of shares, if any, previously purchased by the Optionee under the Option shall be counted in determining the amount of shares the Optionee can purchase at any time. The Optionee may exercise his Option in the following amounts: (i) After one (1) year of continuous services to the Company, the Optionee may purchase up to 33.3% of the shares of Stock subject to the Option; (ii) After two (2) years of continuous services to the Company, the Optionee may purchase up to 66.6% of the shares of Stock subject to the Option; (iii) After three years of continuous services to the Company, the Optionee may purchase all shares of Stock subject to the Option. The Board may specify terms and conditions other than those set forth above, in its discretion. 6 All Option Agreements shall incorporate the provisions of the Plan by reference, with certain provisions to apply depending upon whether the Option Agreement applies to an Incentive Stock Option or to a Nonstatutory Option. 7.4 OPTION PRICE. No Incentive Stock Option granted pursuant to this Plan shall 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 percent of the Fair Market Value of the Stock on the date of grant. The Option price for Nonstatutory Options shall be established by the Board and shall not be less than 100 percent of the Fair Market Value of the Stock on the date of grant. 7.5 TERM OF OPTIONS. Each Option shall expire at such time as the Board shall determine, provided, however, that no Option shall be exercisable later than ten years from the date of its grant. 7.6 EXERCISE OF OPTIONS. Options granted under the Plan shall be exercisable at such times and be subject to such restrictions and conditions as the Board shall in each instance approve, which need not be the same for all Optionees. 7.7 PAYMENT. Payment for all shares of Stock shall be made at the time that an Option, or any part thereof, is exercised, and no shares shall be issued until full payment therefor has been made. Payment shall be made (i) in cash or certified funds, or (ii) if acceptable to the Board, in Stock or in some other form; provided, however, in the case of an Incentive Stock Option, that said other form of payment does not prevent the Option from qualifying for treatment as an Incentive Stock Option within the meaning of the Code. ARTICLE VIII. WRITTEN NOTICE, ISSUANCE OF STOCK CERTIFICATES, STOCKHOLDER PRIVILEGES 8.1 WRITTEN NOTICE. An Optionee wishing to exercise an Option shall give written notice to the Company, in the form and manner prescribed by the Board. Full payment for the shares exercised pursuant to the Option must accompany the written notice. 8.2 ISSUANCE OF STOCK CERTIFICATES. As soon as practicable after the receipt of written notice and payment, the Company shall deliver to the Optionee or to a nominee of the Optionee a certificate or certificates for the requisite number of shares of Stock. 8.3 PRIVILEGES OF A STOCKHOLDER. An Optionee or any other person entitled to exercise an Option under this Plan shall not have stockholder privileges with respect to any Stock covered by the Option until the date of issuance of a stock certificate for such stock. 7 ARTICLE IX. TERMINATION OF EMPLOYMENT OR SERVICES Except as otherwise expressly specified by the Board for Nonstatutory Options, all Options granted under this Plan shall be subject to the following termination provisions: 9.1 DEATH. If an Optionee's employment in the case of an Employee, or provision of services as a Consultant, in the case of a Consultant, terminates by reason of death, the Option may thereafter be exercised at any time prior to the expiration date of the Option or within 12 months after the date of such death, whichever period is the shorter, by the person or persons entitled to do so under the Optionee's will or, if the Optionee shall fail to make a testamentary disposition of an Option or shall die intestate, the Optionee's legal representative or representatives. The Option shall be exercisable only to the extent that such Option was exercisable as of the date of Optionee's death. 9.2 TERMINATION OTHER THAN FOR CAUSE OR DUE TO DEATH. In the event of an Optionee's termination of employment, in the case of an Employee, or termination of the provision of services as a Consultant, in the case of a Consultant, other than by reason of death, the Optionee may exercise such portion of his Option as was exercisable by him at the date of such termination (the "Termination Date") at any time within three (3) months of the Termination Date; provided, however, that where the Optionee is an Employee, and is terminated due to disability within the meaning of Code section 422A, he may exercise such portion of his Option as was exercisable by him on his Termination Date within one year of his Termination Date. In any event, the Option cannot be exercised after the expiration of the term of the Option. Options not exercised within the applicable period specified above shall terminate. In the case of an Employee, a change of duties or position within the Company, shall not be considered a termination of employment for purposes of this Plan. The Option Agreements may contain such provisions as the Board shall approve with reference to the effect of approved leaves of absence upon termination of employment. 9.3 TERMINATION FOR CAUSE. In the event of an Optionee's termination of employment, in the case of an Employee, or termination of the provision of services as a Consultant, in the case of a Consultant, which termination is by the Company for cause, any Option or Options held by him under the Plan, to the extent not exercised before such termination, shall forthwith terminate. ARTICLE X. RIGHTS OF OPTIONEES 10.1 SERVICE. Nothing in this Plan shall interfere with or limit in any way the right of the Company to terminate any Employee's employment, or any Consultant's services, at any time, nor confer upon any Employee any right to continue in the employ of the Company, or upon any Consultant any right to continue to provide services to the Company. 8 10.2 NONTRANSFERABILITY. Except as otherwise specified by the Board for Nonstatutory Options, Options granted under this Plan shall be nontransferable by the Optionee, other than by will or the laws of descent and distribution, and shall be exercisable during the Optionee's lifetime only by the Optionee. ARTICLE XI. OPTIONEE-EMPLOYEE'S TRANSFER OR LEAVE OF ABSENCE 11.1 OPTIONEE-EMPLOYEE'S TRANSFER OR LEAVE OF ABSENCE. For Plan purposes: (a) A transfer of an Optionee who is an Employee within the Company, or (b) a leave of absence for such an Optionee (i) which is duly authorized in writing by the Company, and (ii) if the Optionee holds an Incentive Stock Option, which qualifies under the applicable regulations under the Code which apply in the case of Incentive Stock Options, shall not be deemed a termination of employment. However, under no circumstances may an Optionee exercise an Option during any leave of absence, unless authorized by the Board. ARTICLE XII. AMENDMENT, MODIFICATION AND TERMINATION OF THE PLAN 12.1 AMENDMENT, MODIFICATION, AND TERMINATION OF THE PLAN. The Board may at any time terminate, and from time to time may amend or modify the Plan, provided, however, that no such action of the Board, without approval of the stockholders, may: (a) increase the total amount of Stock which may be purchased through Options granted under the Plan, except as provided in Article V; (b) change the class of Employees or Consultants eligible to receive Options; No amendment, modification or termination of the Plan shall in any manner adversely affect any outstanding Option under the Plan without the consent of the Optionee holding the Option. ARTICLE XIII. ACQUISITION, MERGER AND LIQUIDATION 13.1 ACQUISITION. In the event that an Acquisition occurs with respect to the Company, the Company shall have the option, but not the obligation, to cancel Options outstanding as of the effective date of Acquisition, whether or not such Options are then exercisable, in return for payment to the Optionees of an amount equal to a reasonable estimate of an amount (hereinafter the "Spread") equal to the difference between the net amount per share of Stock payable in the Acquisition, or as a result of the Acquisition, less the exercise price of the Option. In estimating the Spread, appropriate adjustments to give effect to the existence of the Options shall be made, 9 such as deeming the Options to have been exercised, with the Company receiving the exercise once payable thereunder, and treating the shares receivable upon exercise of the Options as being outstanding in determining the net amount per share. For purposes of this section, an "Acquisition" shall mean any transaction in which substantially all of the Company's assets are acquired or in which a controlling amount of the Company's outstanding shares are acquired, in each case by a single person or entity or an affiliated group of persons and/or entities. For purposes of this section a controlling amount shall mean more than 50% of the issued and outstanding shares of stock of the Company. The Company shall have such an option regardless of how the Acquisition is effectuated, whether by direct purchase, through a merger or similar corporate transaction, or otherwise. In cases where the acquisition consists of the acquisition of assets of the Company, the net amount per share shall be calculated on the basis of the net amount receivable with respect to shares upon a distribution and liquidation by the Company after giving effect to expenses and charges, including but not limited to taxes, payable by the Company before the liquidation can be completed. Where the Company does not exercise its option under this section 13.1, the remaining provisions of this Article XIII shall apply, to the extent applicable. 13.2 MERGER OR CONSOLIDATION. Subject to any required action by the stockholders, if the Company shall be the surviving corporation in any merger or consolidation, any Option granted hereunder shall pertain to and apply to the securities to which a holder of the number of shares of Stock subject to the Option would have been entitled in such merger or consolidation. 13.3 OTHER TRANSACTIONS. A dissolution or a liquidation of the Company or a merger and consolidation in which the Company is not the surviving corporation shall cause every Option outstanding hereunder to terminate as of the effective date of such dissolution, liquidation, merger or consolidation. However, the Optionee either (i) shall be offered a firm commitment whereby the resulting or surviving corporation in a merger or consolidation will tender to the Optionee an option (the "Substitute Option") to purchase its shares on terms and conditions both as to number of shares and otherwise, which will substantially preserve to the Optionee the rights and benefits of the Option outstanding hereunder granted by the Company, or (ii) shall have the right immediately prior to such dissolution, liquidation, merger, or consolidation to exercise any unexercised Options whether or not then exercisable, subject to the provisions of this Plan. The Board shall have absolute and uncontrolled discretion to determine whether the Optionee has been offered a firm commitment and whether the tendered Substitute Option will substantially preserve to the Optionee the rights and benefits of the Option outstanding hereunder. In any event, any Substitute Option for an Incentive Stock Option shall comply with the requirements of Code section 425(a). ARTICLE XIV. SECURITIES REGISTRATION 14.1 SECURITIES REGISTRATION. In the event that the Company shall deem it necessary or desirable to register under the Securities Act of 1933, as amended, or any other applicable 10 statute, any Options or any Stock with respect to which an Option may be or shall have been granted or exercised, or to qualify any such Options or Stock under the Securities Act of 1933, as amended, or any other statute, then the Optionee shall cooperate with the Company and take such action as is necessary to permit registration or qualification of such Options or Stock. Unless the Company has determined that the following representation is unnecessary, each person exercising an Option under the Plan may be required by the Company, as a condition to the issuance of the shares pursuant to exercise of the Option, to make a representation in writing (a) that the Optionee is acquiring such shares for his own account for investment and not with a view to, or for sale in connection with, the distribution of any part thereof, (b) that before any transfer in connection with the resale of such shares, the Optionee will obtain the written opinion of counsel for the Company, or other counsel acceptable to the Company, that such shares may be transferred. The Company may also require that the certificates representing such shares contain legends reflecting the foregoing. ARTICLE XV. TAX WITHHOLDING 15.1 TAX WITHHOLDING. Whenever shares of Stock are to be issued in satisfaction of Options exercised under this Plan, the Company shall have the power to require the recipient of the Stock to remit to the Company an amount sufficient to satisfy federal, state and local withholding tax requirements. ARTICLE XVI. INDEMNIFICATION 16.1 INDEMNIFICATION. To the extent permitted by law, each person who is or shall have been a member of the Board shall be indemnified and held harmless by the Company against and from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him in connection with or resulting from any claim, action, suit, or proceeding to which he may be a party or in which he may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid by him in settlement thereof, with the Company's approval, or paid by him in satisfaction of judgment in any such action, suit or proceeding against him, provided he shall give the Company an opportunity, at its own expense, to handle and defend the same before he undertakes to handle and defend it on his own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company's articles of incorporation or bylaws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless. ARTICLE XVII. REQUIREMENTS OF LAW 17.1 REQUIREMENTS OF LAW. The granting of Options and the issuance of shares of Stock upon the exercise of an Option shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. 11 17.2 GOVERNING LAW. The Plan and all agreements hereunder shall be construed in accordance with and governed by the laws of the state of California. ARTICLE XVIII. EFFECTIVE DATE OF PLAN 18.1 EFFECTIVE DATE. The Plan shall be effective on May 1, 1996, the date of its adoption by the Company's stockholders. ARTICLE XIX. COMPLIANCE WITH CODE 19.1 COMPLIANCE WITH CODE. Incentive Stock Options granted hereunder are intended to qualify as Incentive Stock Options under Code section 422A. If any provision of this Plan is susceptible to more than one interpretation, such interpretation shall be given thereto as is consistent with Incentive Stock Options granted under this Plan being treated as Incentive Stock Options under the Code. ARTICLE XX. NO OBLIGATION TO EXERCISE OPTION 20.1 NO OBLIGATION TO EXERCISE. The granting of an Option shall impose no obligation upon the holder thereof to exercise such Option. Dated at Beverly Hills, California, May 1, 1996. RETROSPETTIVA, By /s/ [ILLEGIBLE] -------------------------------- President 12 AMENDMENT NUMBER 1 TO 1996 STOCK OPTION PLAN By Resolution of the Board of Directors of Retrospettiva, Inc. (the "Company") dated November 25, 1996, the Company's 1996 Stock Option Plan is hereby amended by adding a new Article XXI which reads as follows: "ARTICLE XXI. BOARD MODIFICATION OF CERTAIN TERMS 21.1 Board Modification of Certain Terms. In its discretion, the Board may delete the requirements of Section 7.3(b) and the time requirements for the exercise of an option as set forth in Article IX regarding specific grants of options." Any and all other terms and conditions of the Company's 1996 Stock Option Plan not amended or modified as stated above remain the same and in full force and effect. The foregoing is effective as of November 25, 1996. RETROSPETTIVA, INC. By -------------------------------- Michael D. Silberman, Secretary EX-10.02 10 EX10.02 SOUTHERN CALIFORNIA CHAPTER OF THE [LOGO] SOCIETY OF INDUSTRIAL AND OFFICE REALTORS,-R- INC. INDUSTRIAL REAL ESTATE LEASE (SINGLE-TENANT FACILITY) ARTICLE ONE: BASIC TERMS This Article One contains the Basic Terms of this Lease between the Landlord and Tenant named below. Other Articles, Sections and Paragraphs of the Lease referred to in this Article One explain and define the Basic Terms and are to be read in conjunction with the Basic Terms. Section 1.01. DATE OF LEASE: June 21, 1994 Section 1.02. LANDLORD (INCLUDE LEGAL ENTITY): David Miller, as Trustee of the David Miller and Edis Miller Family Trust dated January 15, 1987 Address of Landlord: 2350 Century Hill, Century City, California 90067 Section 1.03. TENANT (INCLUDE LEGAL ENTITY): Boro Vukadinovic/ RETROSPETTIVA INC. Address of Tenant: 8825 West Olympic Boulevard, Beverly Hills, California 90211 Section 1.04. PROPERTY: (include street address, approximate square footage and description) An approximately 2,200 rentable square feet of a building commonly known as 8825 West Olympic Boulevard, Beverly Hills, CA 90211 Section 1.05. LEASE TERM: 4 years 0 months beginning on August 30, 1994 or such other date as is specified in this Lease, and ending on August 29, 1998 or any other date mutually agreed upon by Landlord and Tenant. Section 1.06. PERMITTED USES: (See Article Five) import/export and trading of clothing and related apparel Section 1.07. TENANT'S GUARANTOR: (If none, so state) None Section 1.08. BROKERS: (See Article Fourteen) (If none, so state) Landlord's Broker: None Tenant's Broker: None Section 1.09. COMMISSION PAYABLE TO LANDLORD'S BROKER: (See Article Fourteen) $ N/A Section 1.10. INITIAL SECURITY DEPOSIT: (See Section 3.03) $2,200.00 Section 1.11. VEHICLE PARKING SPACES ALLOCATED TO TENANT: two (2) parking spaces in the rear of the Property nearest in proximity to the alley. Tenant may obtain additional parking spaces (if then available) on an unreserved basis and at a cost of Fifty Dollars ($50.00) per space per month. The location of said additional spaces shall be on the premises located at 8825 West Olympic Boulevard, Beverly Hills, California 90211 Section 1.12. RENT AND OTHER CHARGES PAYABLE BY TENANT: (a) BASE RENT: Two Thousand Two Hundred and no/100 --- Dollars ($2,200.00) per month for the first twelve (12) months, as provided in Section 3.O1, and shall be increased on the first day of the thirteenth (13th), twenty-fifth (25th) and thirty-seventh (37th) month(s) after the Commencement Date, as provided in Section 3.02. (If (ii) is completed, then (i) and Section 3.02 are inapplicable.) (b) OTHER PERIODIC PAYMENTS: (i) Real Property Taxes (See Section 4.02); (ii) Utilities (See Section 4.03); (iii) Insurance Premiums (See Section 4.04); (iv) Impounds for Insurance Premiums and Property Taxes (See Section 4.07); (v) Maintenance, Repairs and Alterations (See Article Six). Section 1.13. LANDLORD'S SHARE OF PROFIT ON ASSIGNMENT OR SUBLEASE: (See Section 9.05) one hundred percent (100%) of the Profit (the "Landlord's Share"). Section 1.14. RIDERS: The following Riders are attached to and made a part of this Lease: (If none, so state) Rider to Industrial Real Estate Lease 1 ARTICLE TWO: LEASE TERM Section 2.01. LEASE OF PROPERTY FOR LEASE TERM. Landlord leases the Property to Tenant and Tenant leases the Property from Landlord for the Lease Term. The Lease Term is for the period stated in Section 1.05 above and shall begin and end on the dates specified in Section 1.05 above, unless the beginning or end of the Lease Term is changed under any provision of this Lease. The "Commencement Date" shall be the date specified in Section 1.05 above for the beginning of the Lease Term, unless advanced or delayed under any provision of this Lease. Section 2.02. DELAY IN COMMENCEMENT. Landlord shall not be liable to Tenant if Landlord does not deliver possession of the Property to Tenant on the Commencement Date for any reason whatsoever, including, without limitation, the failure of the existing tenant of the Property to vacate the Property prior to the Commencement Date. Landlord's non-delivery of the Property to Tenant on that date shall not affect this Lease or the obligations of Tenant under this Lease except that the Commencement Date shall be delayed until Landlord delivers possession of the Property to Tenant and the Lease Term shall be extended for a period equal to the delay in delivery of possession of the Property to Tenant, plus the number of days necessary to end the Lease Term on the last day of a month. If Landlord does not deliver possession of the Property to Tenant within sixty (60) days after the Commencement Date, Tenant may elect to cancel this Lease by giving written notice to Landlord within ten (10) days after the sixty (60) -day period ends. If Tenant gives such notice, the Lease shall be cancelled and neither Landlord nor Tenant shall have any further obligations to the other. If Tenant does not give such notice, Tenant's right to cancel the Lease shall expire and the Lease Term shall commence upon the delivery of possession of the Property to Tenant. If delivery of possession of the Property to Tenant is delayed, Landlord and Tenant shall, upon such delivery, execute an amendment to this Lease setting forth the actual Commencement Date and expiration date of the Lease. Failure to execute such amendment shall not affect the actual Commencement Date and expiration date of the Lease. Section 2.03. EARLY OCCUPANCY. If Tenant occupies the Property prior to the Commencement Date, Tenant's occupancy of the Property shall be subject to all of the provisions of this Lease. Early occupancy of the Property shall advance the expiration date of this Lease. Tenant shall pay Base Rent and all other charges specified in this Lease for the early occupancy period. Section 2.04. HOLDING OVER. Tenant shall vacate the Property upon the expiration or earlier termination of this Lease. Tenant shall reimburse Landlord for and indemnify Landlord against all damages which Landlord incurs from Tenant's delay in vacating the Property. If Tenant does not vacate the Property upon the expiration or earlier termination of the Lease and Landlord thereafter accepts rent from Tenant, Tenant's occupancy of the Property shall be a "month-to-month" tenancy, subject to all of the terms of this Lease applicable to a month-to-month tenancy, except that the Base Rent then in effect shall be increased by twenty-five percent (25%). ARTICLE THREE: BASE RENT Section 3.01. TIME AND MANNER OF PAYMENT. On or before the execution of this Lease, Tenant shall pay Landlord the Base Rent in the amount stated in Paragraph 1.12(a) above for the first month of the Lease Term. Except as provided below, the first day of the second month of the Lease Term and each month thereafter, Tenant shall pay Landlord the Base Rent, in advance, without offset, deduction or prior demand. The Base Rent shall be payable at Landlord's address or at such other place as Landlord may designate in writing. Notwithstanding anything to the contrary contained herein, Tenant shall not be obligated to pay Base Rent for the second full calendar month of the Lease Term. Section 3.02. COST OF LIVING INCREASES. The Base Rent shall be increased on each date (the "Rental Adjustment Date") stated in Paragraph 1.12(a) above in accordance with the increase in the United States Department of Labor, Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers (all items for the geographical Statistical Area in which the Property is located on the basis of 1982-1984 = 100) (the "Index") as follows: (a) The Base Rent (the "Comparison Base Rent") in effect immediately before each Rental Adjustment Date shall be increased by the percentage that the Index has increased from the date (the "Comparison Date") on which payment of the Comparison Base Rent began through the month in which the applicable Rental Adjustment Date occurs. The Base Rent shall not be reduced by reason of such computation. Landlord shall notify Tenant of each increase by a written statement which shall include the Index for the applicable Comparison Date, the Index for the applicable Rental Adjustment Date, the percentage increase between those two Indices, and the new Base Rent. Any increase in the Base Rent provided for in this Section 3.02 shall be subject to any minimum or maximum increase, if provided for in Paragraph 1.12(a). (b) Tenant shall pay the new Base Rent from the applicable Rental Adjustment Date until the next Rental Adjustment Date. Landlord's notice may be given after the applicable Rental Adjustment Date of the increase, and Tenant shall pay Landlord the accrued rental adjustment for the months elapsed between the effective date of the increase and Landlord's notice of such increase within ten (10) days after Landlord's notice. If the format or components of the Index are materially changed after the Commencement Date, Landlord shall substitute an index which is published by the Bureau of Labor Statistics or similar agency and which is most nearly equivalent to the Index in effect on the Commencement Date. The substitute index shall be used to calculate the increase in the Base Rent unless Tenant objects to such index in writing within fifteen (15) days after receipt of Landlord's notice. If Tenant objects, Landlord and Tenant shall submit the selection of the substitute index for binding arbitration in accordance with the rules and regulations of the American Arbitration Association at its office closest to the Property. The costs of arbitration shall be borne equally by Landlord and Tenant. 2 Section 3.03. SECURITY DEPOSIT; INCREASES. (a) Upon the execution of this Lease, Tenant shall deposit with Landlord a cash Security Deposit in the amount set forth in Section 1.10 above. Landlord may apply all or part of the Security Deposit to any unpaid rent or other charges due from Tenant or to cure any other defaults of Tenant. If Landlord uses any part of the Security Deposit, Tenant shall restore the Security Deposit to its full amount within ten (10) days after Landlord's written request. Tenant's failure to do so shall be a material default under this Lease. No interest shall be paid on the Security Deposit. Landlord shall not be required to keep the Security Deposit separate from its other accounts and no trust relationship is created with respect to the Security Deposit. Section 3.04. TERMINATION; ADVANCE PAYMENTS. Upon termination of this Lease under Article Seven (Damage or Destruction), Article Eight (Condemnation) or any other termination not resulting from Tenant's default, and after Tenant has vacated the Property in the manner required by this Lease, Landlord shall refund or credit to Tenant (or Tenant's successor) the unused portion of the Security Deposit, any advance rent or other advance payments made by Tenant to Landlord, and any amounts paid for real property taxes and other reserves which apply to any time periods after termination of the Lease. ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT Section 4.01. ADDITIONAL RENT. All charges payable by Tenant other than Base Rent are called "Additional Rent." Unless this Lease provides otherwise, Tenant shall pay all Additional Rent then due with the next monthly installment of Base Rent. The term "rent" shall mean Base Rent and Additional Rent. Section 4.02. PROPERTY TAXES. (a) REAL PROPERTY TAXES. Subject to Paragraph 4.02(c) below, Tenant shall pay all real property taxes on the Project (as defined below) including any fees, taxes or assessments against, or as a result of, any tenant improvements installed on the Property by or for the benefit of Tenant) during the Lease Term. Subject to Paragraph 4.02(c) and Section 4.07 below, such payment shall be made at least ten (10) days prior to the delinquency date of the taxes. Within such ten (10) -day period, Tenant shall furnish Landlord with satisfactory evidence that the real property taxes have been paid. Landlord shall reimburse Tenant for any real property taxes paid by Tenant covering any period of time prior to or after the Lease Term. If Tenant fails to pay the real property taxes when due, Landlord may pay the taxes and Tenant shall reimburse Landlord for the amount of such tax payment as Additional Rent. (b) DEFINITION OF "REAL PROPERTY TAX." "Real property tax" means: (i) any fee, license fee, license tax (including, without limitation, the City of Beverly Hills license tax) business license fee, commercial rental tax, levy, charge, assessment, penalty or tax imposed by any taxing authority against the Property or the Project; (ii) any tax on the Landlord's right to receive, or the receipt of, rent or income from the Property or against Landlord's business of leasing the Property; (iii) any tax or charge for fire protection, streets, sidewalks, road maintenance, refuse or other services provided to the Property or the Project by any governmental agency; (iv) any tax imposed upon this transaction or based upon a re-assessment of the Property or the Project due to a change of ownership, as defined by applicable law, or other transfer of all or part of Landlord's interest in the Property or the Project; and (v) any charge or fee replacing any tax previously included within the definition of real property tax. "Real property tax" does not, however, include Landlord's federal or state income, franchise, inheritance or estate taxes. (c) JOINT ASSESSMENT. See Rider. (d) PERSONAL PROPERTY TAXES. (i) Tenant shall pay all taxes charged against trade fixtures, furnishings, equipment or any other personal property belonging to Tenant. Tenant shall try to have personal property taxed separately from the Property. (ii) If any of Tenant's personal property is taxed with the Property, Tenant shall pay Landlord the taxes for the personal property within fifteen (15) days after Tenant receives a written statement from Landlord for such personal property taxes. (e) TENANT'S RIGHT TO CONTEST TAXES. Tenant may attempt to have the assessed valuation of the Property reduced or may initiate proceedings to contest the real property taxes. If required by law, Landlord shall join in the proceedings brought by Tenant. However, Tenant shall pay all costs of the proceedings, including any costs or fees incurred by Landlord. Upon the final determination of any proceeding or contest, Tenant shall immediately pay the real property taxes due, together with all costs, charges, interest and penalties incidental to the proceedings. If Tenant does not pay the real property taxes when due and contests such taxes, Tenant shall not be in default under this Lease for nonpayment of such taxes if Tenant deposits funds with Landlord or opens as interest-bearing account reasonably acceptable to Landlord in the joint names of Landlord and Tenant. The amount of such deposit shall be sufficient to pay the real property taxes plus a reasonable estimate of the interest, costs, charges and penalties which may accrue if Tenant's action is unsuccessful, less any applicable tax impounds previously paid by Tenant to Landlord. The deposit shall be applied to the real property taxes due, as determined at such proceedings. The real property taxes shall be paid under protest from such deposit if such payment under protest is necessary to prevent the Property from being sold under a "tax sale" or similar enforcement proceeding. 3 Section 4.03. UTILITIES. Tenant shall pay, directly to the appropriate supplier, the cost of all natural gas, heat, light, power, sewer service, telephone, water, refuse disposal, gardening other utilities and services supplied to the Property. However, if any services or utilities are jointly metered with other property, Landlord shall make a reasonable determination of Tenant's proportionate share of the cost of such utilities and services and Tenant shall pay such share to Landlord within fifteen (15) days after receipt of Landlord's written statement. Section 4.04. INSURANCE POLICIES. (a) LIABILITY INSURANCE. During the Lease Term, Tenant shall maintain a policy of commercial general liability insurance (sometimes known as broad form comprehensive general liability insurance) insuring Tenant against liability for bodily injury, property damage (including loss of use of property) and personal injury arising out of the operation, use or occupancy of the Property. Tenant shall name Landlord as an additional insured under such policy. The initial amount of such insurance shall be Five Hundred Thousand Dollars ($500,000) or more per occurrence and shall be subject to periodic increase based upon inflation, increased liability awards, recommendation of Landlord's professional insurance advisers and other relevant factors. The liability insurance obtained by Tenant under this Paragraph 4.04(a) shall (i) be primary and non-contributing; (ii) contain cross-liability endorsements; and (iii) insure Landlord against Tenant's performance under Section 5.05, if the matters giving rise to the indemnity under Section 5.05 result from the negligence of Tenant. The amount and coverage of such insurance shall not limit Tenant's liability nor relieve Tenant of any other obligation under this Lease. Landlord may also obtain comprehensive public liability insurance in an amount and with coverage determined by Landlord insuring Landlord against liability arising out of ownership, operation, use or occupancy of the Property. The policy obtained by Landlord shall not be contributory and shall not provide primary insurance. (b) PROPERTY AND RENTAL INCOME INSURANCE. During the Lease Term, Landlord shall maintain policies of insurance covering loss of or damage to the Property in the full amount of its replacement value. Such policy shall contain an Inflation Guard Endorsement and shall provide protection against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, special extended perils (all risk), sprinkler leakage and any other perils which Landlord deems reasonably necessary. Landlord shall have the right to obtain flood and earthquake insurance if required by any lender holding a security interest in the Property. Landlord shall not obtain insurance for Tenant's fixtures or equipment or building improvements installed by Tenant on the Property. During the Lease Term, Landlord shall also maintain a rental income insurance policy, with loss payable to Landlord, in an amount equal to one year's Base Rent, plus estimated real property taxes and insurance premiums. Tenant shall be liable for the payment of any deductible amount under Landlord's or Tenant's insurance policies maintained pursuant to this Section 4.04, in an amount not to exceed Ten Thousand Dollars ($10,000). Tenant shall not do or permit anything to be done which invalidates any such insurance policies. (c) PAYMENT OF PREMIUMS. Subject to Section 4.07, Tenant shall pay all premiums for the insurance policies described in Paragraphs 4.04(a) and (b) (whether obtained by Landlord or Tenant) within fifteen (15) days after Tenant's receipt of a copy of the premium statement or other evidence of the amount due, except Landlord shall pay all premiums for non-primary comprehensive public liability insurance which Landlord elects to obtain as provided in Paragraph 4.04(a). If insurance policies maintained by Landlord cover improvements on real property other than the Property, Landlord shall deliver to Tenant a statement of the premium applicable to the Property showing in reasonable detail how Tenant's share of the premium was computed. If the Lease Term expires before the expiration of an insurance policy maintained by Landlord, Tenant shall be liable for Tenant's prorated share of the insurance premiums. Before the Commencement Date, Tenant shall deliver to Landlord a copy of any policy of insurance which Tenant is required to maintain under this Section 4.04. At least thirty (30) days prior to the expiration of any such policy, Tenant shall deliver to Landlord a renewal of such policy. As an alternative to providing a policy of insurance, Tenant shall have the right to provide Landlord a certificate of insurance, executed by an authorized officer of the insurance company, showing that the insurance which Tenant is required to maintain under this Section 4.04 is in full force and effect and containing such other information which Landlord reasonably requires. (d) PERSONAL PROPERTY INSURANCE. See Rider. (e) GENERAL INSURANCE PROVISIONS. (i) Any insurance which Tenant is required to maintain under this Lease shall include a provision which requires the insurance carrier to give Landlord not less than thirty (30) days' written notice prior to any cancellation or modification of such coverage. (ii) If Tenant fails to deliver any policy, certificate or renewal to Landlord required under this Lease within the prescribed time period or if any such policy is cancelled or modified during the Lease Term without Landlord's consent, Landlord may obtain such insurance, in which case Tenant shall reimburse Landlord for the cost of such insurance within fifteen (15) days after receipt of a statement that indicates the cost of such insurance. (iii) Tenant shall maintain all insurance required under this Lease with companies holding a "General Policy Rating" of A-12 or better, as set forth in the most current issue of "Best Key Rating Guide". Landlord and Tenant acknowledge the insurance markets are rapidly changing and that insurance in the form and amounts described in this Section 4.04 may not be available in the future. Tenant acknowledges that the insurance described in this Section 4.04 is for the primary benefit of Landlord. If at any time during the Lease Term, Tenant is unable to maintain the insurance required under the Lease, Tenant shall nevertheless maintain insurance coverage which is customary and commercially reasonable in the insurance industry for Tenant's type of business, as that coverage may change from time to time. Landlord makes no representation as to the adequacy of such insurance to protect Landlord's or Tenant's interests. Therefore, Tenant shall obtain any such additional property or liability insurance which Tenant deems necessary to protect Landlord and Tenant. 4 (iv) Unless prohibited under any applicable insurance policies maintained, Landlord and Tenant each hereby waive any and all rights of recovery against the other, or against the officers, employees, agents or representatives of the other, for loss of or damage to its property or the property of others under its control, if such loss or damage is covered by any insurance policy in force (whether or not described in this Lease) at the time of such loss or damage. Upon obtaining the required policies of insurance, Landlord and Tenant shall give notice to the insurance carriers of this mutual waiver of subrogation. Section 4.05. LATE CHARGES. Tenant's failure to pay rent promptly may cause Landlord to incur unanticipated costs. The exact amount of such costs are impractical or extremely difficult to ascertain. Such costs may include, but are not limited to, processing and accounting charges and late charges which may be imposed on Landlord by any ground lease, mortgage or trust deed encumbering the Property. Therefore, if Landlord does not receive any rent payment within ten (10) days after it becomes due, Tenant shall pay Landlord a late charge equal to ten percent (l0%) of the overdue amount. The parties agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of such late payment. Section 4.06. INTEREST ON PAST DUE OBLIGATIONS. Any amount owed by Tenant to Landlord which is not paid when due shall bear interest at the rate of fifteen percent (15%) per annum from the due date of such amount. However, interest shall not be payable on late charges to be paid by Tenant under this Lease. The payment of interest on such amounts shall not excuse or cure any default by Tenant under this Lease. If the interest rate specified in this Lease is higher than the rate permitted by law, the interest rate is hereby decreased to the maximum legal interest rate permitted by law. Section 4.07. IMPOUNDS FOR INSURANCE PREMIUMS AND REAL PROPERTY TAXES. If requested by any ground lessor or lender to whom Landlord has granted a security interest in the Property, or if Tenant is more than ten (10) days late in the payment of rent more than once in any consecutive twelve (12) -month period, Tenant shall pay Landlord a sum equal to one-twelfth (1/12) of the annual real property taxes and insurance premiums payable by Tenant under this Lease, together with each payment of Base Rent. Landlord shall hold such payments in a non-interest bearing impound account. If unknown, Landlord shall reasonably estimate the amount of real property taxes and insurance premiums when due. Tenant shall pay any deficiency of funds in the impound account to Landlord upon written request. If Tenant defaults under this Lease, Landlord may apply any funds in the impound account to any obligation then due under this Lease. ARTICLE FIVE: USE OF PROPERTY Section 5.01. PERMITTED USES. Tenant may use the Property only for the Permitted Uses set forth in Section 1.06 above. Section 5.02. MANNER OF USE. Tenant shall not cause or permit the Property to be used in any way which constitutes a violation of any law, ordinance, or governmental regulation or order, which annoys or interferes with the rights of other tenants of Landlord, or which constitutes a nuisance or waste. Tenant shall obtain and pay for all permits, including a Certificate of Occupancy, required for Tenant's occupancy of the Property and shall promptly take all actions necessary to comply with all applicable statutes, ordinances, rules, regulations, orders and requirements regulating the use by Tenant of the Property, including the Occupational Safety and Health Act. Section 5.03. HAZARDOUS MATERIALS. As used in this Lease, the term "Hazardous Material" means any flammable items, explosives, radioactive materials, hazardous or toxic substances, material or waste or related materials, including any substances defined as or included in the definition of "hazardous substances", "hazardous wastes", "hazardous materials" or "toxic substances" now or subsequently regulated under any applicable federal, state or local laws or regulations, including without limitation petroleum-based products, paints, solvents, lead, cyanide, DDT, printing inks, acids, pesticides, ammonia compounds and other chemical products, asbestos, PCBs and similar compounds, and including any different products and materials which are subsequently found to have adverse effects on the environment or the health and safety of persons. Tenant shall not cause or permit any Hazardous Material to be generated, produced, brought upon, used, stored, treated or disposed of in or about the Property by Tenant, its agents, employees, contractors, sublessees or invitees without the prior written consent of Landlord. Landlord shall be entitled to take into account such other factors or facts as Landlord may reasonably determine to be relevant in determining whether to grant or withhold consent to Tenant's proposed activity with respect to Hazardous Material. In no event, however, shall Landlord be required to consent to the installation or use of any storage tanks on the Property. Section 5.04. SIGNS AND AUCTIONS. Tenant shall not place any signs on the Property without Landlord's prior written consent. Tenant shall not conduct or permit any auctions or sheriffs sales at the Property. 5 Section 5.05. INDEMNITY. Tenant shall indemnify Landlord against and hold Landlord harmless from any and all costs, claims or liability arising from: (a) Tenant's use of the Property; (b) the conduct of Tenant's business or anything else done or permitted by Tenant to be done in or about the Property, including any contamination of the Property or any other property resulting from the presence or use of Hazardous Material caused or permitted by Tenant; (c) any breach or default in the performance of Tenant's obligations under this Lease; (d) any misrepresentation or breach of warranty by Tenant under this Lease; or (e) other acts or omissions of Tenant. Tenant shall defend Landlord against any such cost, claim or liability at Tenant's expense with counsel reasonably acceptable to Landlord or, at Landlord's election, Tenant shall reimburse Landlord for any legal fees or costs incurred by Landlord in connection with any such claim. As a material part of the consideration to Landlord, Tenant assumes all risk of damage to property or injury to persons in or about the Property arising from any cause, and Tenant hereby waives all claims in respect thereof against Landlord, except for any claim arising out of Landlord's gross negligence or willful misconduct. As used in this Section, the term "Tenant" shall include Tenant's employees, agents, contractors and invitees, if applicable. Section 5.06. LANDLORD'S ACCESS. Landlord or its agents may enter the Property at all reasonable times to show the Property to potential buyers, investors or tenants or other parties; to do any other act or to inspect and conduct tests in order to monitor Tenant's compliance with all applicable environmental laws and all laws governing the presence and use of Hazardous Material: or for any other purpose Landlord deems necessary. Landlord shall give Tenant prior notice of such entry, except in the case of an emergency. Landlord may place customary "For Sale" or "For Lease" signs on the Property. Section 5.07. QUIET POSSESSION. If Tenant pays the rent and complies with all other terms of this Lease, Tenant may occupy and enjoy the Property for the full Lease Term, subject to the provisions of this Lease. ARTICLE SIX: CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND ALTERATIONS Section 6.01. EXISTING CONDITIONS. Tenant accepts the Property in its condition as of the execution of the Lease, subject to all recorded matters, laws, ordinances, and governmental regulations and orders. Except as provided herein, Tenant acknowledges that neither Landlord nor any agent of Landlord has made any representation as to the condition of the Property or the suitability of the Property for Tenant's intended use. Tenant represents and warrants that Tenant has made its own inspection of and inquiry regarding the condition of the Property and is not relying on any representations of Landlord or any Broker with respect thereto. If Landlord or Landlord's Broker has provided a Property Information Sheet or other Disclosure Statement regarding the Property, a copy is attached as an exhibit to the Lease. See Rider. Section 6.02. EXEMPTION OF LANDLORD FROM LIABILITY. Landlord shall not be liable for any damage or injury to the person, business (or any loss of income therefrom), goods, wares, merchandise or other property of Tenant. Tenant's employees, invitees, customers or any other person in or about the Property, whether such damage or injury is caused by or results from: (a) fire, steam, electricity, water, gas or rain; (b) the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures or any other cause; (c) conditions arising in or about the Property or from other sources or places; or (d) any act or omission of any other tenant of Landlord. Landlord shall not be liable for any such damage or injury even though the cause of or the means of repairing such damage or injury are not accessible to Tenant. The provisions of this Section 6.02 shall not, however, exempt Landlord from liability for Landlord's gross negligence or willful misconduct. Section 6.03. LANDLORD'S OBLIGATIONS. Subject to the provisions of Article Seven (Damage or Destruction) and Article Eight (Condemnation), Landlord shall have absolutely no responsibility to repair, maintain or replace any portion of the Property at any time, other than the roof and exterior walls, all of which shall be maintained by Landlord at Landlord's sole cost and expense. Tenant waives the benefit of any present or future law which might give Tenant the right to repair the Property at Landlord's expense or to terminate the Lease due to the condition of the Property. Section 6.04. TENANT'S OBLIGATIONS. (a) Except as provided in Article Seven (Damage or Destruction) and Article Eight (Condemnation), Tenant shall keep all portions of the Property (including structural, nonstructural, interior, exterior (including that portion of the parking lot servicing the Property), and landscaped areas, portions, systems and equipment) other than the roof and exterior walls in good order, condition and repair (including interior repainting and refinishing, as needed). If any portion of the Property or any system or equipment in the Property which Tenant is obligated to repair cannot be fully repaired or restored, Tenant shall promptly replace such portion of the Property or system or equipment in the Property, regardless of whether the benefit of such replacement extends beyond the Lease Term; but if the benefit or useful life of such replacement extends beyond the Lease Term (as such term may be extended by exercise of any options), the useful life of such replacement shall be prorated over the remaining portion of the Lease Term (as extended), and Tenant shall be liable only for that portion of the cost which is applicable to the Lease Term (as extended). Tenant shall maintain a preventive maintenance contract providing for the regular inspection and maintenance of the heating and air conditioning system by a licensed heating and air conditioning contractor. If any part of the Property is damaged by any act or omission of Tenant, Tenant shall pay Landlord the cost of repairing or replacing such damaged property, whether or not Landlord would otherwise be obligated to pay the cost of maintaining or repairing such property. It is the intention of Landlord and Tenant that at all times Tenant shall maintain the portions of the Property which Tenant is obligated to maintain in an attractive, first-class and fully operative condition. (b) Tenant shall fulfill all of Tenant's obligations under this Section 6.04 at Tenant's sole expense. If Tenant fails to maintain, repair or replace the Property as required by this Section 6.04, Landlord may, upon ten (10) days' prior notice to Tenant (except that no notice shall be required in the case of an emergency), enter the Property and perform such maintenance or repair (including replacement, as needed) on behalf of Tenant. In such case, Tenant shall reimburse Landlord for all costs incurred in performing such maintenance or repair immediately upon demand. 6 Section 6.05. ALTERATIONS, ADDITIONS, AND IMPROVEMENTS. (a) Tenant shall not make any alterations, additions, or improvements to the Property without Landlord's prior written consent, including non-structural alterations. Landlord may require Tenant to provide demolition and/or lien and completion bonds in form and amount satisfactory to Landlord. Tenant shall promptly remove any alterations, additions, or improvements constructed in violation of this Paragraph 6.05(a) upon Landlord's written request. All alterations, additions, and improvements shall be done in a good and workmanlike manner, in conformity with all applicable laws and regulations, and by a contractor approved by Landlord. Upon completion of any such work, Tenant shall provide Landlord with "as built" plans, copies of all construction contracts, and proof of payment for all labor and materials. (b) Tenant shall pay when due all claims for labor and material furnished to the Property. Tenant shall give Landlord at least twenty (20) days' prior written notice of the commencement of any work on the Property, regardless of whether Landlord's consent to such work is required. Landlord may elect to record and post notices of non-responsibility on the Property. (c) See Rider. Section 6.06. CONDITION UPON TERMINATION. Upon the termination of the Lease, Tenant shall surrender the Property to Landlord, broom clean and in the same condition as received except for ordinary wear and tear which Tenant was not otherwise obligated to remedy under any provision of this Lease. However, Tenant shall not be obligated to repair any damage which Landlord is required to repair under Article Seven (Damage or Destruction). In addition, Landlord may require Tenant to remove any alterations, additions or improvements (whether or not made with Landlord's consent) prior to the expiration of the Lease and to restore the Property to its prior condition, all at Tenant's expense. All alterations, additions and improvements which Landlord has not required Tenant to remove shall become Landlord's property and shall be surrendered to Landlord upon the expiration or earlier termination of the Lease, except that Tenant may remove any of Tenant's machinery or equipment which can be removed without material damage to the Property. Tenant shall repair, at Tenant's expense, any damage to the Property caused by the removal of any such machinery or equipment. In no event, however, shall Tenant remove any of the following materials or equipment (which shall be deemed Landlord's property) without Landlord's prior written consent: any power wiring or power panels; lighting or lighting fixtures; wall coverings; drapes, blinds or other window coverings; carpets or other floor coverings; heaters, air conditioners or any other heating or air conditioning equipment; fencing or security gates; or other similar building operating equipment and decorations. ARTICLE SEVEN: DAMAGE OR DESTRUCTION Section 7.01. PARTIAL DAMAGE TO PROPERTY. (a) Tenant shall notify Landlord in writing immediately upon the occurrence of any damage to the Property. If the Property is only partially damaged (i.e., less than fifty percent (50%) of the Property is untenantable as a result of such damage or less than fifty percent (50%) of Tenant's operations are materially impaired) and if the proceeds received by Landlord from the insurance policies described in Paragraph 4.04(b) are sufficient to pay for the necessary repairs, this Lease shall remain in effect and Landlord shall repair the damage as soon as reasonably possible. Landlord may elect (but is not required) to repair any damage to Tenant's fixtures, equipment, or improvements. (b) If the insurance proceeds received by Landlord are not sufficient to pay the entire cost of repair, or if the cause of the damage is not covered by the insurance policies which Landlord maintains under Paragraph 4.04(b), Landlord may elect either to (i) repair the damage as soon as reasonably possible, in which case this Lease shall remain in full force and effect, or (ii) terminate this Lease as of the date the damage occurred. Landlord shall notify Tenant within thirty (30) days after receipt of notice of the occurrence of the damage whether Landlord elects to repair the damage or terminate the Lease. If Landlord elects to repair the damage, Tenant shall pay Landlord the "deductible amount" (if any) under Landlord's insurance policies and, if the damage was due to an act or omission of Tenant, or Tenant's employees, agents, contractors or invitees, the difference between the actual cost of repair and any insurance proceeds received by Landlord. If Landlord elects to terminate this Lease, Tenant may elect to continue this Lease in full force and effect, in which case Tenant shall repair any damage to the Property and any building in which the Property is located. Tenant shall pay the cost of such repairs, except that upon satisfactory completion of such repairs, Landlord shall deliver to Tenant any insurance proceeds received by Landlord for the damage repaired by Tenant. Tenant shall give Landlord written notice of such election within ten (10) days after receiving Landlord's termination notice. (c) If the damage to the Property occurs during the last six (6) months of the Lease Term and such damage will require more than thirty (30) days to repair, either Landlord or Tenant may elect to terminate this Lease as of the date the damage occurred, regardless of the sufficiency of any insurance proceeds. The party electing to terminate this Lease shall give written notification to the other party of such election within thirty (30) days after Tenant's notice to Landlord of the occurrence of the damage. 7 Section 7.02. SUBSTANTIAL OR TOTAL DESTRUCTION. If the Property is substantially or totally destroyed by any cause whatsoever (i.e., the damage to the Property is greater than partial damage as described in Section 7.01), and regardless of whether Landlord receives any insurance proceeds, this Lease shall terminate as of the date the destruction occurred. Notwithstanding the preceding sentence, if the Property can be rebuilt within six (6) months after the date of destruction, Landlord may elect to rebuild the Property at Landlord's own expense, in which case this Lease shall remain in full force and effect. Landlord shall notify Tenant of such election within thirty (30) days after Tenant's notice of the occurrence of total or substantial destruction. If Landlord so elects, Landlord shall rebuild the Property at Landlord's sole expense, except that if the destruction was caused by an act or omission of Tenant, Tenant shall pay Landlord the difference between the actual cost of rebuilding and any insurance proceeds received by Landlord. Section 7.03. TEMPORARY REDUCTION OF RENT. If the Property is destroyed or damaged and Landlord or Tenant repairs or restores the Property pursuant to the provisions of this Article Seven, any rent payable during the period of such damage, repair and/or restoration shall be reduced according to the degree, if any, to which Tenant's use of the Property is impaired. However, the reduction shall not exceed the sum of one year's payment of Base Rent, insurance premiums and real property taxes. Except for such possible reduction in Base Rent, insurance premiums and real property taxes, Tenant shall not be entitled to any compensation, reduction, or reimbursement from Landlord as a result of any damage, destruction, repair, or restoration of or to the Property. Section 7.04. WAIVER. Tenant waives the protection of any statute, code or judicial decision which grants a tenant the right to terminate a lease in the event of the substantial or total destruction of the leased property. Tenant agrees that the provisions of Section 7.02 above shall govern the rights and obligations of Landlord and Tenant in the event of any substantial or total destruction to the Property. ARTICLE EIGHT: CONDEMNATION If all or any portion of the Property is taken under the power of eminent domain or sold under the threat of that power (all of which are called "Condemnation"), this Lease shall terminate as to the part taken or sold on the date the condemning authority takes title or possession, whichever occurs first. If more than twenty percent (20%) of the floor area of the building in which the Property is located, or which is located on the Property, is taken, either Landlord or Tenant may terminate this Lease as of the date the condemning authority takes title or possession, by delivering written notice to the other within ten (10) days after receipt of written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority takes title or possession). If neither Landlord nor Tenant terminates this Lease, this Lease shall remain in effect as to the portion of the Property not taken, except that the Base Rent and Additional Rent shall be reduced in proportion to the reduction in the floor area of the Property. Any Condemnation award or payment shall be distributed in the following order: (a) first, to any ground lessor, mortgagee or beneficiary under a deed of trust encumbering the Property, the amount of its interest in the Property; (b) second, to Tenant, only the amount of any award specifically designated for loss of or damage to Tenant's trade fixtures or removable personal property; and (c) third, to Landlord, the remainder of such award, whether as compensation for reduction in the value of the leasehold, the taking of the fee, or otherwise. If this Lease is not terminated, Landlord shall repair any damage to the Property caused by the Condemnation, except that Landlord shall not be obligated to repair any damage for which Tenant has been reimbursed by the condemning authority. If the severance damages received by Landlord are not sufficient to pay for such repair, Landlord shall have the right to either terminate this Lease or make such repair at Landlord's expense. ARTICLE NINE: ASSIGNMENT AND SUBLETTING Section 9.01. LANDLORD'S CONSENT REQUIRED. No portion of the Property or of Tenant's interest in this Lease may be acquired by any other person or entity, whether by sale, assignment, mortgage, sublease, transfer, operation of law, or act of Tenant, without Landlord's prior written consent, except as provided in Section 9.02 below. Landlord has the right to grant or withhold its consent as provided in Section 9.05 below. Any attempted transfer without consent shall be void and shall constitute a non-curable breach of this Lease. If Tenant is a partnership, any cumulative transfer of more than twenty percent (20%) of the partnership interests shall require Landlord's consent. If Tenant is a corporation, any change in the ownership of a controlling interest of the voting stock of the corporation shall require Landlord's consent. Section 9.02. TENANT AFFILIATE. Tenant may assign this Lease or sublease the Property, without Landlord's consent, to any corporation which controls, is controlled by or is under common control with Tenant, or to any corporation resulting from the merger of or consolidation with Tenant ("Tenant's Affiliate"). In such case, any Tenant's Affiliate shall assume in writing all of Tenant's obligations under this Lease. Section 9.03. NO RELEASE OF TENANT. No transfer permitted by this Article Nine, whether with or without Landlord's consent, shall release Tenant or change Tenant's primary liability to pay the rent and to perform all other obligations of Tenant under this Lease. Landlord's acceptance of rent from any other person is not a waiver of any provision of this Article Nine. Consent to one transfer is not a consent to any subsequent transfer. If Tenant's transferee defaults under this Lease, Landlord may proceed directly against Tenant without pursuing remedies against the transferee. Landlord may consent to subsequent assignments or modifications of this Lease by Tenant's transferee, without notifying Tenant or obtaining its consent. Such action shall not relieve Tenant's liability under this Lease. 8 Section 9.04. OFFER TO TERMINATE. If Tenant desires to assign the Lease or sublease the Property, Tenant shall have the right to offer, in writing, to terminate the Lease as of a date specified in the offer. If Landlord elects in writing to accept the offer to terminate within twenty (20) days after notice of the offer, the Lease shall terminate as of the date specified and all the terms and provisions of the Lease governing termination shall apply. If Landlord does not so elect, the Lease shall continue in effect until otherwise terminated and the provisions of Section 9.05 with respect to any proposed transfer shall continue to apply. Section 9.05. LANDLORD'S CONSENT. (a) Tenant's request for consent to any transfer described in Section 9.01 shall set forth in writing the details of the proposed transfer, including the name, business and financial condition of the prospective transferee, financial details of the proposed transfer (e.g., the term of and the rent and security deposit payable under any proposed assignment or sublease), and any other information Landlord deems relevant. Landlord shall have the right to withhold consent, if reasonable, or to grant consent, based on the following factors: (i) the business of the proposed assignee or subtenant and the proposed use of the Property; (ii) the net worth and financial reputation of the proposed assignee or subtenant; (iii) Tenant's compliance with all of its obligations under the Lease; and (iv) such other factors as Landlord may reasonably deem relevant. If Landlord objects to a proposed assignment solely because of the net worth and/or financial reputation of the proposed assignee, Tenant may nonetheless sublease (but not assign), all or a portion of the Property to the proposed transferee, but only on the other terms of the proposed transfer. (b) If Tenant assigns or subleases, the following shall apply: (i) Tenant shall pay to Landlord as Additional Rent under the Lease the Landlord's Share (stated in Section 1.13) of the Profit (defined below) on such transaction as and when received by Tenant, unless Landlord gives written notice to Tenant and the assignee or subtenant that Landlord's Share shall be paid by the assignee or subtenant to Landlord directly. The "Profit" means (A) all amounts paid to Tenant for such assignment or sublease, including "key" money, monthly rent in excess of the monthly rent payable under the Lease, and all fees and other consideration paid for the assignment or sublease, including fees under any collateral agreements, less (B) costs and expenses directly incurred by Tenant in connection with the execution and performance of such assignment or sublease for real estate broker's commissions and costs of renovation or construction of tenant improvements required under such assignment or sublease. Tenant is entitled to recover such costs and expenses before Tenant is obligated to pay the Landlord's Share to Landlord. The Profit in the case of a sublease of less than all the Property is the rent allocable to the subleased space as a percentage on a square footage basis. (ii) Tenant shall provide Landlord a written statement certifying all amounts to be paid from any assignment or sublease of the Property within thirty (30) days after the transaction documentation is signed, and Landlord may inspect Tenant's books and records to verify the accuracy of such statement. On written request, Tenant shall promptly furnish to Landlord copies of all the transaction documentation, all of which shall be certified by Tenant to be complete, true and correct. Landlord's receipt of Landlord's Share shall not be a consent to any further assignment or subletting. The breach of Tenant's obligation under this Paragraph 9.05(b) shall be a material default of the Lease. Section 9.06. NO MERGER. No merger shall result from Tenant's sublease of the Property under this Article Nine, Tenant's surrender of this Lease or the termination of this Lease in any other manner. In any such event, Landlord may terminate any or all subtenancies or succeed to the interest of Tenant as sublandlord under any or all subtenancies. ARTICLE TEN: DEFAULTS; REMEDIES Section 10.01. COVENANTS AND CONDITIONS. Tenant's performance of each of Tenant's obligations under this Lease is a condition as well as a covenant. Tenant's right to continue in possession of the Property is conditioned upon such performance. Time is of the essence in the performance of all covenants and conditions. Section 10.02. DEFAULTS. Tenant shall be in material default under this Lease: (a) If Tenant abandons the Property or if Tenant's vacation of the Property results in the cancellation of any insurance described in Section 4.04; (b) If Tenant fails to pay rent or any other charge when due; (c) If Tenant fails to perform any of Tenant's non-monetary obligations under this Lease for a period of thirty (30) days after written notice from Landlord; provided that if more than thirty (30) days are required to complete such performance, Tenant shall not be in default if Tenant commences such performance within the thirty (30) -day period and thereafter diligently pursues its completion. However, Landlord shall not be required to give such notice if Tenant's failure to perform constitutes a non-curable breach of this Lease. The notice required by this Paragraph is intended to satisfy any and all notice requirements imposed by law on Landlord and is not in addition to any such requirement. 9 (d) (i) If Tenant makes a general assignment or general arrangement for the benefit of creditors; (ii) if a petition for adjudication of bankruptcy or for reorganization or rearrangement is filed by or against Tenant and is not dismissed within thirty (30) days; (iii) if a trustee or receiver is appointed to take possession of substantially all of Tenant's assets located at the Property or of Tenant's interest in this Lease and possession is not restored to Tenant within thirty (30) days; or (iv) if substantially all of Tenant's assets located at the Property or of Tenant's interest in this Lease is subjected to attachment, execution or other judicial seizure which is not discharged within thirty (30) days. If a court of competent jurisdiction determines that any of the acts described in this subparagraph (d) is not a default under this Lease, and a trustee is appointed to take possession (or if Tenant remains a debtor in possession) and such trustee or Tenant transfers Tenant's interest hereunder, then Landlord shall receive, as Additional Rent, the excess, if any, of the rent (or any other consideration) paid in connection with such assignment or sublease over the rent payable by Tenant under this Lease. (e) If any guarantor of the Lease revokes or otherwise terminates, or purports to revoke or otherwise terminate, any guaranty of all or any portion of Tenant's obligations under the Lease. Unless otherwise expressly provided, no guaranty of the Lease is revocable. Section 10.03. REMEDIES. On the occurrence of any material default by Tenant, Landlord may, at any time thereafter, with or without notice or demand and without limiting Landlord in the exercise of any right or remedy which Landlord may have: (a) Terminate Tenant's right to possession of the Property by any lawful means, in which case this Lease shall terminate and Tenant shall immediately surrender possession of the Property to Landlord. In such event, Landlord shall be entitled to recover from Tenant all damages incurred by Landlord by reason of Tenant's default, including (i) the worth at the time of the award of the unpaid Base Rent, Additional Rent and other charges which Landlord had earned at the time of the termination; (ii) the worth at the time of the award of the amount by which the unpaid Base Rent, Additional Rent and other charges which Landlord would have earned after termination until the time of the award exceeds the amount of such rental loss that Tenant proves Landlord could have reasonably avoided; (iii) the worth at the time of the award of the amount by which the unpaid Base Rent, Additional Rent and other charges which Tenant would have paid for the balance of the Lease term after the time of award exceeds the amount of such rental loss that Tenant proves Landlord could have reasonably avoided; and (iv) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under the Lease or which in the ordinary course of things would be likely to result therefrom, including, but not limited to, any costs or expenses Landlord incurs in maintaining or preserving the Property after such default, the cost of recovering possession of the Property, expenses of reletting, including necessary renovation or alteration of the Property, Landlord's reasonable attorneys' fees incurred in connection therewith, and any real estate commission paid or payable. As used in subparts (i) and (ii) above, the "worth at the time of the award" is computed by allowing interest on unpaid amounts at the rate of fifteen percent (15%) per annum, or such lesser amount as may then be the maximum lawful rate. As used in subpart (iii) above, the "worth at the time of the award" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of the award, plus one percent (1%). If Tenant has abandoned the Property, Landlord shall have the option of (i) retaking possession of the Property and recovering from Tenant the amount specified in this Paragraph 10.03(a), or (ii) proceeding under Paragraph 10.03(b); (b) Maintain Tenant's right to possession, in which case this Lease shall continue in effect whether or not Tenant has abandoned the Property. In such event, Landlord shall be entitled to enforce all of Landlord's rights and remedies under this Lease, including the right to recover the rent as it becomes due; (c) Pursue any other remedy now or hereafter available to Landlord under the laws or judicial decisions of the state in which the Property is located. Section 10.04. REPAYMENT OF "FREE" RENT. If this Lease provides for a postponement of any monthly rental payments, a period of "free" rent or other rent concession, such postponed rent or "free" rent is called the "Abated Rent". Tenant shall be credited with having paid all of the Abated Rent on the expiration of the Lease Term only if Tenant has fully, faithfully, and punctually performed all of Tenant's obligations hereunder, including the payment of all rent (other than the Abated Rent) and all other monetary obligations and the surrender of the Property in the physical condition required by this Lease. Tenant acknowledges that its right to receive credit for the Abated Rent is absolutely conditioned upon Tenant's full, faithful and punctual performance of its obligations under this Lease. If Tenant defaults and does not cure within any applicable grace period, the Abated Rent shall immediately become due and payable in full and this Lease shall be enforced as if there were no such rent abatement or other rent concession. In such case Abated Rent shall be calculated based on the full initial rent payable under this Lease. Section 10.05. AUTOMATIC TERMINATION. Notwithstanding any other term or provision hereof to the contrary, the Lease shall terminate on the occurrence of any act which affirms the Landlord's intention to terminate the Lease as provided in Section 10.03 hereof, including the filing of an unlawful detainer action against Tenant. On such termination, Landlord's damages for default shall include all costs and fees, including reasonable attorneys' fees that Landlord incurs in connection with the filing, commencement, pursuing and/or defending of any action in any bankruptcy court or other court with respect to the Lease; the obtaining of relief from any stay in bankruptcy restraining any action to evict Tenant; or the pursuing of any action with respect to Landlord's right to possession of the Property. All such damages suffered (apart from Base Rent and other rent payable hereunder) shall constitute pecuniary damages which must be reimbursed to Landlord prior to assumption of the Lease by Tenant or any successor to Tenant in any bankruptcy or other proceeding. Section 10.06. CUMULATAIVE REMEDIES. Landlord's exercise of any right or remedy shall not prevent it from exercising any other right or remedy. 10 ARTICLE ELEVEN: PROTECTION OF LENDERS Section 11.01. SUBORDINATION. Landlord shall have the right to subordinate this Lease to any ground lease, deed of trust or mortgage encumbering the Property, any advances made on the security thereof and any renewals, modifications, consolidations, replacements or extensions thereof, whenever made or recorded. Tenant shall cooperate with Landlord and any lender which is acquiring a security interest in the Property or the Lease. Tenant shall execute such further documents and assurances as such lender may require, provided that Tenant's obligations under this Lease shall not be increased in any material way (the performance of ministerial acts shall not be deemed material), and Tenant shall not be deprived of its rights under this Lease. Tenant's right to quiet possession of the Property during the Lease Term shall not be disturbed if Tenant pays the rent and performs all of Tenant's obligations under this Lease and is not otherwise in default. If any ground lessor, beneficiary or mortgagee elects to have this Lease prior to the lien of its ground lease, deed of trust or mortgage and gives written notice thereof to Tenant, this Lease shall be deemed prior to such ground lease, deed of trust or mortgage whether this Lease is dated prior or subsequent to the date of said ground lease, deed of trust or mortgage or the date of recording thereof. Section 11.02. ATTORNMENT. If Landlord's interest in the Property is acquired by any ground lessor, beneficiary under a deed of trust, mortgagee, or purchaser at a foreclosure sale, Tenant shall attorn to the transferee of or successor to Landlord's interest in the Property and recognize such transferee or successor as Landlord under this Lease. Tenant waives the protection of any statute or rule of law which gives or purports to give Tenant any right to terminate this Lease or surrender possession of the Property upon the transfer of Landlord's interest. Section 11.03. SIGNING OF DOCUMENTS. Tenant shall sign and deliver any instrument or documents necessary or appropriate to evidence any such attornment or subordination or agreement to do so. If Tenant fails to do so within ten (10) days after written request, Tenant hereby makes, constitutes and irrevocably appoints Landlord, or any transferee or successor of Landlord, the attorney-in-fact of Tenant to execute and deliver any such instrument or document. Section 11.04. ESTOPPEL CERTIFICATES. (a) Upon Landlord's written request, Tenant shall execute, acknowledge and deliver to Landlord a written statement certifying: (i) that none of the terms or provisions of this Lease have been changed (or if they have been changed, stating how they have been changed); (ii) that this Lease has not been cancelled or terminated; (iii) the last date of payment of the Base Rent and other charges and the time period covered by such payment; (iv) that Landlord is not in default under this Lease (or, if Landlord is claimed to be in default, stating why); and (v) such other representations or information with respect to Tenant or the Lease as Landlord may reasonably request or which any prospective purchaser or encumbrancer of the Property may require. Tenant shall deliver such statement to Landlord within ten (10) days after Landlord's request. Landlord may give any such statement by Tenant to any prospective purchaser or encumbrancer of the Property. Such purchaser or encumbrancer may rely conclusively upon such statement as true and correct. (b) If Tenant does not deliver such statement to Landlord within such ten (10) -day period, Landlord, and any prospective purchaser or encumbrancer, may conclusively presume and rely upon the following facts: (i) that the terms and provisions of this Lease have not been changed except as otherwise represented by Landlord; (ii) that this Lease has not been cancelled or terminated except as otherwise represented by Landlord; (iii) that not more than one month's Base Rent or other charges have been paid in advance; and (iv) that Landlord is not in default under the Lease. In such event, Tenant shall be estopped from denying the truth of such facts. Section 11.05. TENANT'S FINANCIAL CONDITION. Within ten (10) days after written request from Landlord, Tenant shall deliver to Landlord such financial statements as Landlord reasonably requires to verify the net worth of Tenant or any assignee, subtenant, or guarantor of Tenant. In addition, Tenant shall deliver to any lender designated by Landlord any financial statements required by such lender to facilitate the financing or refinancing of the Property. Tenant represents and warrants to Landlord that each such financial statement is a true and accurate statement as of the date of such statement. All financial statements shall be confidential and shall be used only for the purposes set forth in this Lease. ARTICLE TWELVE: LEGAL COSTS Section 12.01 LEGAL PROCEEDINGS. If Tenant or Landlord shall be in breach or default under this Lease, such party (the "Defaulting Party") shall reimburse the other party (the "Nondefaulting Party") upon demand for any costs or expenses that the Nondefaulting Party incurs in connection with any breach or default of the Defaulting Party under this Lease, whether or not suit is commenced or judgment entered. Such costs shall include legal fees and costs incurred for the negotiation of a settlement, enforcement of rights or otherwise. Furthermore, if any action for breach of or to enforce the provisions of this Lease is commenced, the court in such action shall award to the party in whose favor a judgment is entered, a reasonable sum as attorneys' fees and costs. The losing party in such action shall pay such attorneys' fees and costs. Tenant shall also indemnify Landlord against and hold Landlord harmless from all costs, expenses, demands and liability Landlord may incur if Landlord becomes or is made a party to any claim or action (a) instituted by Tenant against any third party, or by any third party against Tenant, or by or against any person holding any interest under or using the Property by license of or agreement with Tenant; (b) for foreclosure of any lien for labor or material furnished to or for Tenant or such other person; (c) otherwise arising out of or resulting from any act or transaction of Tenant or such other person; or (d) necessary to protect Landlord's interest under this Lease in a bankruptcy proceeding, or other proceeding under Title 11 of the United States Code, as amended. Tenant shall defend Landlord against any such claim or action at Tenant's expense with counsel reasonably acceptable to Landlord or, at Landlord's election, Tenant shall reimburse Landlord for any legal fees or costs Landlord incurs in any such claim or action. 11 Section 12.02. LANDLORD'S CONSENT. Tenant shall pay Landlord's reasonable attomeys' fees incurred in connection with Tenant's request for Landlord's consent under Article Nine (Assignment and Subletting), or in connection with any other act which Tenant proposes to do and which requires Landlord's consent. ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS Section 13.01. NON-DISCRIMINATION. Tenant promises, and it is a condition to the continuance of this Lease, that there will be no discrimination against, or segregation of, any person or group of persons on the basis of race, color, sex, creed, national origin or ancestry in the leasing, subleasing, transferring, occupancy, tenure or use of the Property or any portion thereof. Section 13.02. LANDLORD'S LIABILITY; CERTAIN DUTIES. (a) As used in this Lease, the term "Landlord" means only the current owner or owners of the fee title to the Property or the leasehold estate under a ground lease of the Property at the time in question. Each Landlord is obligated to perform the obligations of Landlord under this Lease only during the time such Landlord owns such interest or title. Any Landlord who transfers its title or interest is relieved of all liability with respect to the obligations of Landlord under this Lease to be performed on or after the date of transfer. However, each Landlord shall deliver to its transferee all funds that Tenant previously paid if such funds have not yet been applied under the terms of this Lease. (b) Tenant shall give written notice of any failure by Landlord to perform any of its obligations under this Lease to Landlord and to any ground lessor, mortgagee or beneficiary under any deed of trust encumbering the Property whose name and address have been furnished to Tenant in writing. Landlord shall not be in default under this Lease unless Landlord (or such ground lessor, mortgagee or beneficiary) fails to cure such non-performance within thirty (30) days after receipt of Tenant's notice. However, if such non-performance reasonably requires more than thirty (30) days to cure, Landlord shall not be in default if such cure is commenced within such thirty (30) -day period and thereafter diligently pursued to completion. (c) Notwithstanding any term or provision herein to the contrary, the liability of Landlord for the performance of its duties and obligations under this Lease is limited to Landlord's interest in the Property, and neither the Landlord nor its partners, shareholders, officers or other principals shall have any personal liability under this Lease. Section 13.03. SEVERABILITY. A determination by a court of competent jurisdiction that any provision of this Lease or any part thereof is illegal or unenforceable shall not cancel or invalidate the remainder of such provision or this Lease, which shall remain in full force and effect. Section 13.04. INTERPRETATION. The captions of the Articles or Sections of this Lease are to assist the parties in reading this Lease and are not a part of the terms or provisions of this Lease. Whenever required by the context of this Lease, the singular shall include the plural and the plural shall include the singular. The masculine, feminine and neuter genders shall each include the other. In any provision relating to the conduct, acts or omissions of Tenant, the term "Tenant" shall include Tenant's agents, employees, contractors, invitees, successors or others using the Property with Tenant's expressed or implied permission. Section 13.05. INCORPORATION OF PRIOR AGREEMENTS; MODIFICATIONS. This Lease is the only agreement between the parties pertaining to the lease of the Property and no other agreements are effective. All amendments to this Lease shall be in writing and signed by all parties. Any other attempted amendment shall be void. Section 13.06. NOTICES. All notices required or permitted under this Lease shall be in writing and shall be personally delivered or sent by certified mail, return receipt requested, postage prepaid. Notices to Tenant shall be delivered to the address specified in Section 1.03 above, except that upon Tenant's taking possession of the Property, the Property shall be Tenant's address for notice purposes. Notices to Landlord shall be delivered to the address specified in Section 1.02 above. All notices shall be effective upon delivery. Either party may change its notice address upon written notice to the other party. Section 13.07. WAIVERS. All waivers must be in writing and signed by the waiving party. Landlord's failure to enforce any provision of this Lease or its acceptance of rent shall not be a waiver and shall not prevent Landlord from enforcing that provision or any other provision of this Lease in the future. No statement on a payment check from Tenant or in a letter accompanying a payment check shall be binding on Landlord. Landlord may, with or without notice to Tenant, negotiate such check without being bound to the conditions of such statement. Section 13.08. NO RECORDATION. Tenant shall not record this Lease without prior written consent from Landlord. However, either Landlord or Tenant may require that a "Short Form" memorandum of this Lease executed by both parties be recorded. The party requiring such recording shall pay all transfer taxes and recording fees. Section 13.09. BINDING EFFECT; CHOICE OF LAW. This Lease binds any party who legally acquires any rights or interest in this Lease from Landlord or Tenant. However, Landlord shall have no obligation to Tenant's successor unless the rights or interests of Tenant's successor are acquired in accordance with the terms of this Lease. The laws of the state in which the Property is located shall govern this Lease. 12 Section 13.10. CORPORATE AUTHORITY; PARTNERSHIP AUTHORITY. If Tenant is a corporation, each person signing this Lease on behalf of Tenant represents and warrants that he has full authority to do so and that this Lease binds the corporation. Within thirty (30) days after this Lease is signed, Tenant shall deliver to Landlord a certified copy of a resolution of Tenant's Board of Directors authorizing the execution of this Lease or other evidence of such authority reasonably acceptable to Landlord. If Tenant is a partnership, each person or entity signing this Lease for Tenant represents and warrants that he or it is a general partner of the partnership, that he or it has full authority to sign for the partnership and that this Lease binds the partnership and all general partners of the partnership. Tenant shall give written notice to Landlord of any general partner's withdrawal or addition. Within thirty (30) days after this Lease is signed, Tenant shall deliver to Landlord a copy of Tenant's recorded statement of partnership or certificate of limited partnership. Section 13.11. JOINT AND SEVERAL LIABILITY. All parties signing this Lease as Tenant shall be jointly and severally liable for all obligations of Tenant. Section 13.12. FORCE MAJEURE. If Landlord cannot perform any of its obligations due to events beyond Landlord's control, the time provided for performing such obligations shall be extended by a period of time equal to the duration of such events. Events beyond Landlord's control include, but are not limited to, acts of God, war, civil commotion, labor disputes, strikes, fire, flood or other casualty, shortages of labor or material, government regulation or restriction and weather conditions. Section 13.13. EXECUTION OF LEASE. This Lease may be executed in counterparts and, when all counterpart documents are executed, the counterparts shall constitute a single binding instrument. Landlord's delivery of this Lease to Tenant shall not be deemed to be an offer to lease and shall not be binding upon either party until executed and delivered by both parties. Section 13.14. SURVIVAL. All representations and warranties of Landlord and Tenant shall survive the termination of this Lease. ARTICLE FOURTEEN: BROKERS Section 14.04. NO OTHER BROKERS. Tenant represents and warrants to Landlord that Tenant has had no dealings with any agents, brokers, finders or other parties with whom Tenant has dealt who are or may be entitled to any commission or fee with respect to this Lease or the Property. ADDITIONAL PROVISIONS MAY BE SET FORTH IN A RIDER OR RIDERS ATTACHED HERETO OR IN THE BLANK SPACE BELOW. IF NO ADDITIONAL PROVISIONS ARE INSERTED, PLEASE DRAW A LINE THROUGH THE SPACE BELOW. See Rider. 13 Landlord and Tenant have signed this Lease at the place and on the dates specified adjacent to their signatures below and have initialled all Riders which are attached to or incorporated by reference in this Lease. "LANDLORD" Signed on June 22, 1994 /s/ DAVID MILLER ----------------------------------- David Miller, as Trustee of the David Miller and Edis Miller Family Trust dated January 19, l987 at 8825 West Olympic By: ------------------------------- Its: ------------------------------- By: ------------------------------- Its: ------------------------------- "TENANT" Signed on June 22, 1994 /s/ BORO VUKADINAVIC ----------------------------------- Boro Vukadinavic, individually at RETROSPETTIVA INC. ----------------------------------- ----------------------------------- By: ------------------------------- Its: ------------------------------- By: ------------------------------- Its: ------------------------------- IN ANY REAL ESTATE TRANSACTION, IT IS RECOMMENDED THAT YOU CONSULT WITH A PROFESSIONAL, SUCH AS A CIVIL ENGINEER, INDUSTRIAL HYGIENIST OR OTHER PERSON WITH EXPERIENCE IN EVALUATING THE CONDITION OF THE PROPERTY, INCLUDING THE POSSIBLE PRESENCE OF ASBESTOS, HAZARDOUS MATERIALS AND UNDERGROUND STORAGE TANKS. THIS PRINTED FORM LEASE HAS BEEN DRAFTED BY LEGAL COUNSEL AT THE DIRECTION OF THE SOUTHERN CALIFORNIA CHAPTER OF THE SOCIETY OF INDUSTRIAL AND OFFICE REALTORS,-REGISTERED TRADEMARK- INC. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE SOUTHERN CALIFORNIA CHAPTER OF THE SOCIETY OF INDUSTRIAL AND OFFICE REALTORS,-REGISTERED TRADEMARK- INC., ITS LEGAL COUNSEL, THE REAL ESTATE BROKERS NAMED HEREIN, OR THEIR EMPLOYEES OR AGENTS, AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT OR TAX CONSEQUENCES OF THIS LEASE OR OF THIS TRANSACTION. LANDLORD AND TENANT SHOULD RETAIN LEGAL COUNSEL TO ADVISE THEM ON SUCH MATTERS AND SHOULD RELY UPON THE ADVICE OF SUCH LEGAL COUNSEL. 14 RIDER TO INDUSTRIAL REAL ESTATE LEASE This Rider to Industrial Real Estate Lease (this "Rider") is attached to and forms a part of the Industrial Real Estate (Single-Tenant Facility) (the "Lease") dated June 21, 1994 between David Miller, as Trustee of the David Miller and Edis Miller Family Trust dated January 19, 1987, as Landlord, and Boro Vukadinovic/Magellan, jointly and severally, as Tenant, covering the property located at 8825 W. Olympic Boulevard, Beverly Hills, California, as more particularly described in the Lease. Capitalized terms used herein and not otherwise defined shall have the same meaning as set forth in the Lease. In the event of any conflict or inconsistency between the terms and provisions of this Rider and the terms and provisions of the Lease, the terms and provisions of this Rider shall prevail. The terms and provisions of the Lease are hereby modified or supplemented as follows: 1. SECTION 4.02(c). JOINT ASSESSMENT. Section 4.02(c) is hereby deleted in its entirety and the following is hereby inserted in its place: "Landlord and Tenant hereby acknowledge and agree that the Property is assessed together with the real property adjacent thereto commonly known as 8827 West Olympic Boulevard, Beverly Hills, California ("Adjacent Property"). The Property and the Adjacent Property are together referred to herein as the "Project." Notwithstanding any provision of Section 4.02(a) to the contrary, and subject to the provisions of Paragraph 4.07 below, with respect to the Project Tax (as defined below) only, Tenant shall pay twenty- five percent (25%) of such Project Tax in excess of Eleven Thousand Five Hundred Fifty-Five and No/100 Dollars ($11,555.00) in each calendar year during the Lease Term. Notwithstanding the preceding sentence, with respect to any and all partial calendar years during the Lease Term, the Eleven Thousand Five Hundred Fifty-Five and No/100 Dollars ($11,555.00) figure shall be prorated based on the actual number of calendar months, or portion thereof, in which the Lease is in effect in the applicable calendar year. As used herein, the term "Project Tax" means only the tax imposed against the Project as shown on each annual tax bill for the Project, which tax is payable in two installments, one by no later than December 10 of the year in which the tax bill is received, and the other by no later than April 10 of the year following the year in which the tax bill is received." 2. SECTION 4.04. INSURANCE POLICIES. The following is hereby added after Section 4.04(c) as a new Section 4.04(d): "(d) PERSONAL PROPERTY INSURANCE. During the Lease Term, Tenant shall maintain policies of insurance covering loss of or damage to Tenant's trade fixtures, furnishings, equipment, inventory, leasehold improvements made by Tenant and other personal property belonging to Tenant at the Property in the full amount of their replacement value. Such policy shall contain an inflation guard endorsement and shall provide protection against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, special extended perils (all risk), sprinkler leakage and other perils which Landlord may reasonably require." -1- 3. SECTION 6.01. EXISTING CONDITIONS. The following is hereby added at the end of Section 6.01: "Tenant hereby acknowledges and agrees that (i) all alterations, additions or improvements which Tenant desires to make in order to prepare the Property for Tenant's occupancy shall be subject to Landlord's prior written consent, and shall be made by Tenant at Tenant's sold cost and expense; and (ii) any and all such alterations, additions and improvements shall be performed by Tenant in strict accordance with the provisions of Section 6.05. Notwithstanding any provision of this Section 6.01 to the contrary, Landlord warrants to Tenant that the existing plumbing, electrical and HVAC systems in the Property shall be in good operating condition on the earlier of (i) the Commencement Date or (ii) the date that Tenant first occupies the Property. If a non-compliance with said warranty exists as of the earlier of (i) the Commencement Date or (ii) the date that Tenant first occupies the Property, Landlord shall promptly, after receipt of written notice from Tenant setting forth with specificity the nature and extent of such non-compliance, rectify the same at Landlord's expense. If Tenant does not give Landlord written notice of any non-compliance with this warranty within thirty (30) days after the earlier of (i) the Commencement Date or (ii) the date that Tenant first occupies the Property, correction of all non-compliances shall be the obligation of Tenant at Tenant's sole cost and expense. Except for Landlord's obligation to correct any non-compliance with this warranty as provided above, nothing contained herein shall require Landlord to maintain or repair the plumbing, electrical or HVAC systems during the Lease Term. 4. SECTION 6.05. ALTERATIONS, ADDITIONS, AND IMPROVEMENTS. The following is hereby added after Section 6.05(b) as a new Section 6.05(c): "(c) Tenant shall keep the Property free and clear of all liens, security interests and encumbrances (collectively, 'Liens') arising out of or in connection with any alterations, additions or improvements made by or for Tenant, or any labor, services or materials provided for or at the request of Tenant. Tenant shall indemnify and defend Landlord, and hold Landlord harmless, from and against (i) all Liens; (ii) the removal of all Liens and any actions or proceedings related thereto; and (iii) any and all losses, costs, damages, liabilities and expenses (including, without limitation, attorneys' fees) incurred by Landlord in connection with the foregoing. If Tenant fails to keep the Property free from Liens, then (A) without in any way limiting any other rights or remedies available to Landlord as a result thereof, (B) without inquiry into the validity of such Liens, and (C) without regard to any defense or offset Tenant may have against the claimant on whose behalf the Lien was filed, Landlord may take such action as Landlord deems necessary to -2- discharge such Liens, including, without limitation, making payment to the claimant on whose behalf the Lien was filed, in which event Tenant shall pay to Landlord upon demand any such sum so paid by Landlord." IN WITNESS WHEREOF, Landlord and Tenant have executed this Rider concurrently with their execution of the Lease. "LANDLORD" /s/ DAVID MILLER ----------------------------------- David Miller, as Trustee of the David Miller and Edis Miller Family Trust dated January 19, 1987 "TENANT" /s/ BORO VUKADINOVIC ----------------------------------- Boro Vukadinovic, individually RETROSPETTIVA, INC. By: President ------------------------------- Its ---------------------------- By: ------------------------------- Its ---------------------------- -3- [LOGO] BANK OF AMERICA APPLICATION AND AGREEMENT FOR COMMERCIAL LETTER OF CREDIT To: Bank of America National Trust and Savings Association ("Bank") A. APPLICATION. _________________________________________ ("Customer") requests Bank to issue an irrevocable commercial letter of credit ("Letter of Credit") as follows: / / Full text teletransmission / / Airmail with brief preliminary teletransmission advice / / Airmail / /Courier 1. Advising bank and address (if left blank, Bank will select advising bank) - ----------------------------------------------------------------------------- FOR BANK USE ONLY 2. L/C No. --------------------------------- - ----------------------------------------------------------------------------- 3. Expiration Date: DRAFTS TO BE DRAWN AND PRESENTED TO THE NEGOTIATING OR PAYING BANK ON OR BEFORE: ___________________________________________ , 19 ______ 4. For account of (Customer Name and Address) 5. In favor of (Beneficiary Name and Address) 6. Amount: ________________________________________________________________ _________________________________________________________________________ __________________________________________________ (In word and figures.) Currency ________________________________________________________________ _________________________________________________________________________ 7. Covering ________% of invoice value. (FULL INVOICE VALUE UNLESS OTHERWISE SPECIFIED.) 8. Available by drafts at (Tenor) _________________________________ on Bank, Bank's branch or Bank's correspondent, at Bank's option, or Bank may waive draft requirement. 9. Partial Shipment: / / Permitted / / Not Permitted 10. Transhipment (NOT APPLICABLE TO AIR SHIPMENTS OR COMBINED TRANSPORT SHIPMENTS.) / / Permitted / / Not Permitted 11. Shipment/Dispatch/Taking in Charge from/At Latest For Transportation To _______________________________________________________________________________ 12. Merchandise to be described in invoice as (OMIT UNNECESSARY DETAILS AND SPECIFY PRICE BASIS IN BOX 13). _______________________________________________________________________________ _______________________________________________________________________________ 13. Price basis (CHECK ONE): / / FOB / / CFR / / CIF / / Other: ____________________________________ 14. Documents required (Check applicable boxes below): / / Signed commercial invoice in duplicate. / / Marine and war insurance policy or certificate for 110% invoice value in duplicate. Insurance to be effected by: __________________________________________ / / Original clean / / Air / / Truck / / Rail transport document. Consigned to: _________________________________________________________ Notify (if different from consignee): / / Full set of original clean on board vessel marine bill of lading, to order of shipper, blank endorsed, marked: "Notify _____________________ _____________________________________________________________________." / / Full set of original clean / / on board vessel / / on board inland carrier combined transport bill of lading, to order of shipper, blank endorsed, marked: "Notify ___________________________________________." Bill of lading marked (select one): / / freight prepaid / / freight collect. / / Other documents:_______________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ 15. Special Instructions to be included in the Letter of Credit:_______________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ Special Instructions for Bank of America: _________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ DOCUMENTS MUST BE PRESENTED TO THE NEGOTIATING OR PAYING BANK NO LATER THAN ___ DAYS AFTER DATE OF TRANSPORT DOCUMENT (ON BOARD VALIDATION APPLICABLE FOR OCEAN SHIPMENT) BUT WITHIN THE VALIDITY OF THE LETTER OF CREDIT. ALL DOCUMENTS TO BE FORWARDED IN ONE COVER, BY AIRMAIL, UNLESS OTHERWISE STATED UNDER SPECIAL INSTRUCTIONS. ___________________________________________________________________________ CUSTOMER UNDERSTANDS THAT THE FINAL FORM OF THE LETTER OF CREDIT MAY BE SUBJECT TO SUCH REVISIONS AND CHANGES AS ARE DEEMED NECESSARY OR APPROPRIATE BY BANK'S LETTER OF CREDIT ISSUING UNIT AND CUSTOMER HEREBY CONSENTS TO SUCH REVISIONS AND CHANGES. B. AGREEMENT. In consideration of Bank issuing for the account of Customer the Letter of Credit, Customer agrees to the following: 1. Customer shall pay Bank, on demand, all amounts paid by Bank under or in respect of the Letter of Credit. 2. Customer shall pay Bank, on demand, commissions and fees for issuance of the Letter of Credit, amendments to the Letter of Credit, payments under the Letter of Credit, automatic extensions of the Letter of Credit, cancellation of the Letter of Credit, and other services in the amounts Customer and Bank may agree, or, in the absence of such agreement, in the amounts customarily charged by Bank on the date of Bank's demand. 3. All payments and deposits by Customer under this Application and Agreement shall be made at the branch or office Bank may designate from time to time. Bank shall have no obligation to pay Customer interest on any deposit made by Customer under this Application and Agreement. 4. (a) All payments and deposits by Customer under this Application and Agreement shall be in the currency in which the Letter of Credit is payable, except that Bank may, at its option, require payments and deposits by Customer under this Application and Agreement to be made in U.S. Dollars if the Letter of Credit is payable in a foreign currency. (b) The amount of each payment and each deposit by Customer under this Application and Agreement in U.S. Dollars for a Letter of Credit payable in a foreign currency shall be determined by converting the relevant amount to U.S. Dollars at the Conversion Rate in effect: (i) with respect to each payment under Paragraph B.1., on the date the payment is made by Bank under or in respect of the Letter of Credit; and (ii) with respect to each payment not falling under the preceding clause (i) and each deposit, on the date of Bank's demand for such payment or deposit. (c) If a U.S. Dollar deposit by Customer under this Application and Agreement for a Letter of Credit payable in a foreign currency becomes less than the U.S. Dollar equivalent of the undrawn amount of the Letter of Credit because of any variation in rates of exchange, Customer shall deposit with Bank, on demand, additional amounts in U.S. Dollars so that the total amount deposited by Customer under this Application and Agreement is not less than the U.S. Dollar equivalent of the undrawn amount of the Letter of Credit, determined by using the Conversion Rate on the date of Bank's latest demand. (d) "Conversion Rate" means the rate quoted by Bank in San Francisco, California, for the purchase from Bank of the relevant foreign currency with U.S. Dollars. 5. Customer shall reimburse or compensate Bank, on demand, for all costs incurred, losses suffered and payments made by Bank which are applied or allocated by Bank to the Letter of Credit (as determined by Bank) by reason of any and all present or future reserve, deposit, assessment or similar requirements against (or against any class of or change in or in the amount of assets or liabilities of, or commitments or extensions of credit by, Bank. 6. If Bank determines that any law, rule, regulation, or guideline regarding capital adequacy affects or would affect the amount of capital required to be maintained by Bank or any corporation controlling Bank and that (taking into consideration Bank's policies with respect to capital adequacy and Bank's desired return on capital) the amount of required capital is increased as a result of Bank's obligations under the Letter of Credit, then, on demand, Customer shall pay Bank additional amounts sufficient as specified by Bank to compensate Bank for such increase. 7. Customer will obtain, or cause to be obtained, insurance on all goods described in the Letter of Credit. The insurance will cover fire and other usual risks, and any additional risks Bank may request. Customer authorizes and empowers Bank to collect the proceeds of any insurance and apply such proceeds against any of Customer's obligations to Bank under this Application and Agreement. 8. Customer represents and warrants to Bank that Customer has obtained all import and export licenses and other governmental approvals required for the goods and the documents described in the Letter of Credit. 9. All directions and correspondence relating to the Letter of Credit are to be sent at Customer's risk and expense. 10. (a) Customer hereby grants to Bank a security interest in the following described property, whether now owned or hereafter acquired by Customer ("Collateral"): (i) All goods and documents described in the Letter of Credit; (ii) All negotiable and nonnegotiable documents of title covering any of the above-described property; (iii) All rights under contracts of insurance covering any of the above described property; (iv) All deposit accounts now or hereafter maintained with Bank with respect to the Letter of Credit; and (v) All proceeds of any of the above described property. (b) The Collateral secures and will secure all obligations and liabilities of Customer to Bank under or in respect of this Application and Agreement, whether now existing or hereafter incurred or created, whether due or to become due, and whether absolute or contingent. (c) If Customer defaults under any provision of this Application and Agreement, Bank may enforce the security interest granted hereunder pursuant to the California Uniform Commercial Code or any other applicable law. In the event of any deficiency, Customer will immediately pay the same to Bank. (d) In the event the Collateral should suffer any decline in value, Customer shall, on demand, deliver to Bank additional Collateral satisfactory to Bank. 11. Customer shall pay interest, on demand, on any amount not paid when due under this Application and Agreement from the due date until payment in full at a rate per annum equal to the rate of interest publicly announced from time to time by Bank in San Francisco, California, as its reference rate plus three percentage points. The reference rate is set by Bank based on various factors, including Bank's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some credits. Bank may price credit at, above or below the reference rate. Any change in Bank's reference rate shall take effect at the opening of business on the day specified in Bank's public announcement of a change in Bank's reference rate. Interest will be computed on the basis of a 365 day year and actual days elapsed. 12. Customer authorizes Bank to charge any of Customer's accounts with Bank for all amounts then due and payable to Bank under this Application and Agreement. 13. Customer shall pay, on demand, all costs, expenses, and attorneys' fees (including allocated costs for in-house legal services) incurred by Bank in connection with (a) any dispute concerning the Letter of Credit or this Application and Agreement, or (b) the enforcement of this Application and Agreement. 14. If any arbitration award, judgment or order is given or made for the payment of any amount due under this Application and Agreement and such arbitration award, judgment or order is expressed in a currency other than the currency required under this Application and Agreement, Customer shall indemnify Bank against and hold Bank harmless from all loss and damage incurred by Bank as a result of any variation in rates of exchange between the date of such arbitration award, judgment or order and the date of payment (or, in the case of partial payments, the date of each partial payment) thereof. This indemnity shall constitute an obligation separate and independent from the other obligations contained in this Application and Agreement, shall give rise to a separate and independent cause of action, shall apply irrespective of any indulgence granted by Bank from time to time, and shall continue in full force and effect notwithstanding any arbitration award, judgment or order for a liquidated sum in respect of an amount due under this Application and Agreement. 15. The word "Customer" in this Application and Agreement refers to each signer (other than Bank) of this Application and Agreement. If this Application and Agreement is signed by more than one Customer, their obligations under this Application and Agreement shall be joint and several. 16. Subject to the laws, customs, and practices of the trade in the area where the beneficiary is located, the Letter of Credit will be subject to, and performance under the Letter of Credit by Bank, its correspondents, and the beneficiary will be governed by, the "Uniform Customs and Practice for Documentary Credits (1983 Revision), International Chamber of Commerce, Publication No. 400," or by later Uniform Customs and Practice fixed by later Congresses of the International Chamber of Commerce as in effect on the date the Letter of Credit is issued. 17. This Application and Agreement shall be governed by and construed under the laws of the State of California, to the jurisdiction of which the parties hereto submit. 18. Any controversy among the parties arising out of or relating to this Application and Agreement or the Letter of Credit shall at the request of any party be determined by arbitration. The arbitration shall be conducted in San Francisco, California, under the United States Arbitration Act (Title 9, U.S. Code), notwithstanding any choice of law provision in this Application and Agreement or the Letter of Credit, and pursuant to the Commercial Rules of the American Arbitration Association. The arbitrators shall give effect to statutes of limitation in determining any claim. Any controversy concerning whether an issue is arbitrable shall be determined by the arbitrators. Judgment upon the arbitration award may be entered in any court having jurisdiction. This Paragraph shall not limit the right of any party to this Application and Agreement or the Letter of Credit to exercise lawful self-help remedies or to obtain provisional or ancillary remedies from a court of competent jurisdiction before, during, or after the pendency of any arbitration. The seeking, obtaining or exercising of such a remedy does not waive the right of any party, including the party who sought such remedy, to resort to arbitration. Notwithstanding the foregoing, no controversy shall be submitted to arbitration under this Paragraph without the consent of all parties if, at the time of the proposed submission, such controversy arises from or relates to an obligation to Bank which is secured by real property collateral. This Application and Agreement is executed by Customer on________________, 19__. _____________________________________ Name of Customer By___________________________________ Title _______________________________ By___________________________________ Title _______________________________ ___________________________________________________________________________ FOR OFFICE USE ONLY ___________________________________________________________________________ FX-150 TO: / / TRADE FINANCE SERVICES - Concord #6569 / / TRADE FINANCE SERVICES - Los Angeles # 5655 ___________________________________________________________________________ COMMISSION / / Per MISC-42 / / Other _________________________________________ / / Charge Branch / / Charge customer account directly / / Commissions and Charges only / / Drawings, Commissions, and Charges / / Prepaid-UFE attached ___________________________________________________________________________ BANK OFFICER NAME (Type or Print) BANKAMERINET NO. DDA CUSTOMER A/C# ___________________________________________________________________________ BANK OFFICER SIGNATURE BRANCH/DEPT. NAME BRANCH/DEPT. NO. ___________________________________________________________________________ BANK OFFICER SIGNATURE _______________________________________ ASSIGNMENT OF LEASE This Assignment of Lease ("Assignment") is entered into this 16th day of April, 1996 by and between Boro Vukadinovic as Assignor ("Boro") and Retrospettiva, Inc., a California corporation as Assignee ("Retro"). EXPLANATORY NOTES A. An industrial Real Estate Lease dated June 21, 1994 was entered into by and between David Miller, as Trustee of the David Miller and Edis Miller Family Trust dated January 15, 1987 as landlord ("Landlord") and Boro as tenant regarding approximately 2,200 rentable square feet of a building commonly known as 8825 West Olympia Boulevard, Beverly Hills, California 90211 which was amended by a First Amendment of Lease dated October 19, 1994 (collectively, the "Lease"), a copy of which is attached hereto as Exhibit A and made a part hereof. B. Boro and Retro desire, among other things, to have (i) Boro assign to Retro all of Boro's interest as tenant in the Lease, (ii) Retro assume all obligations of tenant pursuant to the Lease and (iii) Retro guarantee full performance of all tenant obligations under the Lease by Retro and indemnify and hold Boro harmless from any and all claims and damages resulting from non- performance by Retro as tenant under the Lease. C. Retro is controlled by Boro and Section 9.02 of the Lease permits the assignment of the tenant's interest, without the Landlord's consent, to any corporation which, among other things, is controlled by the tenant. In consideration of the foregoing explanatory notes and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Boro and Retro agree as set forth below. 1. ASSIGNMENT. Boro hereby assigns and transfers all of his right, interest and title, including any security deposits and prepaid rents, to Retro. 2. ASSUMPTION OF OBLIGATIONS. Retro hereby assumes all obligations, monetary and otherwise, of Boro as tenant pursuant to the Lease, warrants and guarantees to Boro that it will timely perform all duties and obligations as tenant under the Lease and agrees to indemnify and hold Boro harmless from any and all duties, obligations, claims and damages, including but not limited to attorney's fees and court costs, resulting from this Assignment and Retro's nonperformance of any obligations or duties as tenant under the Lease. 3. REPRESENTATIONS OF BORO. Boro represents that the Lease is in full force and effect, that there are no agreements between Boro and the Landlord other than those contained in the Lease, that neither the Landlord nor Boro are in default under any section or provision of the Lease and that this Assignment does not require any approval, written or otherwise, by the Landlord. Boro further represents that he controls Retro as required under Section 9.02 of the Lease for an assignment without Landlord's consent. 4. MISCELLANEOUS PROVISIONS. 4.1. ENTIRE AGREEMENT. This Assignment represents the entire agreement between Boro and Retro with respect to the subject matter contained herein, and shall supersede all other agreements, undertakings and communications of any kind, whether written or oral. 4.2. HEADINGS. The headings contained herein are for convenience only and have no force or effect. 4.3. BINDING EFFECT. This Assignment shall be binding upon the parties hereto and shall inure to the benefit of their assignees, successors, heirs or representatives. 4.4. ASSIGNMENT. This Assignment or the rights of tenant under the Lease may not be assigned by Retro without the prior written consent of Boro which shall not be unreasonably withheld. If Retro does assign its rights under the Lease, the indemnification provision under Section 2 above shall remain in full force and effect. IN WITNESS WHEREOF, Boro and Retro have entered into this Assignment effective on the date set forth above. RETROSPETTIVA, INC. /s/ BORO VUKADINOVIC By: /s/ ILLEGIBLE - ------------------------------------- ------------------------------- BORO VUKADINOVIC President 2 FIRST AMENDMENT OF LEASE 1. IDENTIFICATION AND PARTIES. This First Amendment of Lease (this "Amendment"), dated for identification purposes only October 19, 1994, is entered into by and between David Miller, as Trustee of the David Miller and Edis Miller Family Trust dated January 15, 1987 ("Landlord"), and Boro Vukadinovic/Magellan, jointly and severally ("Tenant"). 2. RECITALS. 2.1. Landlord and Tenant are parties to that certain Industrial Real Estate Lease dated June 21, 1994, covering approximately 2,200 rentable square feet of a building commonly known as 8825 West Olympic Boulevard, Beverly Hills, California 90211 (the "Lease"). Capitalized terms used herein and not otherwise defined shall have the same definitions as set forth in the Lease. 2.2. Landlord and Tenant desire, among other things, to extend the Lease Term upon and subject to the following terms, provisions and conditions, and to agree to other matters as set forth herein. In consideration of the foregoing recitals and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant agree as set forth below. 3. AMENDMENT. 3.1. LEASE TERM. Section 1.05 of the Lease is hereby amended to provide that the Lease Term shall be for a period of five (5) years and one (1) month beginning on January 1, 1995 and ending on January 31, 2000. 3.2. EARLY OCCUPANCY. Section 2.03 of the Lease is hereby deleted in its entirety and is replaced with the following: "Landlord shall permit Tenant to occupy the Property prior to the Commencement Date from September 15, 1994 to December 31, 1994, provided that Tenant's occupancy of the Property shall be subject to all of the provisions of this Lease. Early occupancy of the Property shall not advance the expiration date of this Lease. Tenant shall not pay Base Rent but shall pay all other charges specified in this Lease for the early occupancy period commencing on September 15, 1994 and ending on November 30, 1994. Tenant shall pay Base Rent and all other charges specified in this Lease for the early occupancy period commencing on December 1, 1994 and ending on December 31, 1994. For purposes of this Lease, Landlord's forgiveness of Tenant's obligation to pay Base Rent for the early occupancy period from September 15, 1994 through and including November 30, 1994 shall be deemed to constitute 'Abated Rent' as defined herein." 3.3. BASE RENT. Section 3.01 of the Lease is hereby deleted in its entirety and is replaced with the following: "TIME AND MANNER OF PAYMENT. On or before the execution of this Tenant shall pay Landlord the Base Rent in the amount stated in Paragraph 1.12(a) above for the month of December 1994. On the first day of the first month of the Lease Term and each month thereafter, Tenant shall pay Landlord the Base Rent, in advance, without offset, deduction or prior demand. The Base Rent shall be payable at Landlord's address or at such other place as Landlord may designate in writing." 4. MISCELLANEOUS PROVISIONS. 4.1. ENTIRE AGREEMENT. The Lease, as amended by this Amendment, represents the entire agreement between Landlord and Tenant with respect to the subject matter hereof, and shall supersede all other agreements, undertakings and communications of any kind, whether written or oral. 4.2. NO OTHER MODIFICATIONS. Except as expressly amended hereby, the Lease is unchanged and all other terms, covenants and conditions of the Lease shall continue in full force and effect. 4.3. FURTHER ASSURANCES. From time to time, upon the reasonable request of either Landlord or Tenant, the other party shall take further actions and shall execute such further instruments and documents as are necessary or desirable to implement the terms, provisions and conditions hereof. All reasonable costs thereof shall be paid for by the requesting party. 4.4. COUNTERPARTS. This Amendment may be executed in one or more duplicate counterparts, each of which shall be deemed an original, but all of which together, when executed, shall constitute one and the same instrument. IN WITNESS WHEREOF, Landlord and Tenant have entered into this Amendment on the dates set forth opposite their respective signatures below. "LANDLORD" Date: 10-19-94 /s/ DAVID MILLER -------- ----------------------------------- David Miller, as Trustee of the David Miller and Edis Miller Family Trust dated January 19, 1987 [SIGNATURES CONTINUED ON THE FOLLOWING PAGE] 2 "TENANT" Date: 10-19-94 /s/ BORO VUKADINOVIC -------- ----------------------------------- BORO VUKADINOVIC, individually Magellan, a ------------------ Date: By: ------------- ------------------------------- Its: ------------------------------- Date: By: ------------- ------------------------------- Its: ------------------------------- 3 EX-10.03 11 EX10.03 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT is entered into as of the 20th day of April, 1996, by and between RETROSPETTIVA, INC., a California corporation (the "Employer"), and BORIVOJE VUKADINOVIC (the "Employee"). The Employer hereby employs the Employee on a full-time basis, and the Employee hereby accepts such full-time employment on the terms and conditions hereinafter set forth. 1. EMPLOYMENT. Employee is employed as Chief Executive Officer and President. Employee shall perform all duties assigned by the Board of Directors of the Employer and shall devote full time, attention and loyalty to the affairs of the Employer. 2. TERM. Subject to the provisions for termination provided in paragraphs 9 and 10, the initial term of this Agreement shall commence on the date hereof and terminate three years from the date hereof. This Agreement may be extended by the mutual written agreement of the Employee and the Employer. 3. CASH AND COMMON STOCK COMPENSATION. For all services rendered by the Employee under this Agreement, the Employer shall pay to the Employee commencing the 1st of the month subsequent to the closing of the Employer's private placement dated on or about April 1996, a salary of $95,000 per year for the full term of the Agreement. Nothing contained herein shall prohibit Employer's Board of Directors from increasing this salary in the future based upon Employee's performance. 4. ELIGIBILITY FOR OPTIONS. Employee shall be entitled to receive options and to purchase 500,000 shares of the company's common stock under the Employer's employee stock option and bonus plan subject to cancellation as described therein. 5. BENEFITS. Employee shall receive such benefits, including health insurance, life insurance, automobile allowance, vacation time etc., as shall be 1 agreed upon by the parties in a written letter of understanding, a copy of which shall be attached hereto. 6. RESPONSIBILITIES OF EMPLOYEE. The Employee shall devote such time as is necessary or is deemed necessary by the Board of Directors of the Employer to carry out all required duties and will devote full time to the Employer during normal business hours. The Employee shall at all times faithfully, with diligence and to the Employee's best ability, experience and talents, perform all the duties that may be required pursuant to the express and implicit terms hereof to the reasonable satisfaction of the Employer. 7. WORKING FACILIT!ES. The Employee shall be furnished with all facilities and services suitable to Employee's position and adequate for performance of Employee's duties. 8. EXPENSES. The Employee is authorized to incur reasonable expenses for promoting the business of the Employer, including expenses for entertainment, travel, lodging, promotion equipment rentals and purchases, engagement of contract labor associated with the foregoing and similar items. The Employer shall reimburse the Employee for all such expenses on the presentation by the Employee of itemized accounts of such expenditures in accordance with guidelines set forth by the Internal Revenue Service. 9. DISABILITY. Employee shall be entitled to continue to receive Employee's salary hereunder if unable to perform duties by reason of illness or incapacity for a period of up to and including a maximum of one year. Thereafter, Employee shall not receive any further compensation until Employee returns to full employment as required hereunder. Should Employee be absent from employment for whatever cause for the continuous period of more than one year, the Employer may terminate this Agreement, and all obligations of the Employer hereunder shall cease upon such termination. 10. TERM!NATION. The Company may terminate this Agreement for cause upon the majority vote of the Board of Directors by written notice to the 2 Employee. For the purposes hereof, "cause" shall be defined as meaning (i) such conduct by the Employee which constitutes a breach of this Agreement or (ii) a failure to fully, competently and adequately perform employee's duties or (iii) breach of Employee's fiduciary duty or (iv) improper or illegal conduct of the Employee which, in the opinion of the Board of Directors of the Employer, adversely affects the Employer, its reputation or operations. 11. CONFIDENTIALITY; COVENANT NOT TO COMPETE. The Employee shall not divulge to others any information obtained during the course of Employee's employment relating to the business, operations, customers, proprietary information or trade secrets of the Employer, without the written permission of the Employer. If this Agreement is terminated for any reason other than due to a breach by Employer, the Employee agrees not to own, hold an interest of any kind in, be employed by, operate or manage, directly or indirectly, any business engaged in any type of apparel manufacturing or any business in the same business as the Employer in the state of California for a period of two years from the date of such termination. 11. NOTICES. All notices required or authorized hereunder shall be deemed sufficiently given if in writing and sent by registered or certified mail, return receipt requested and postage prepaid to the other party at his or its last known address. 12. ASSIGNNMENT OF AGREEMENT. Neither party may assign or otherwise transfer this Agreement or any of its rights or obligations hereunder without the prior written consent to such assignment or transfer by the other party hereto; and all the provisions of this Agreement shall be binding upon the respective employees, successors, heirs and assigns of the parties. 13. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. This Agreement and the representations, warranties, covenants and other agreements (however characterized or described) by both parties and contained 3 herein or made pursuant to the provisions hereof shall survive the execution and delivery of this Agreement. 14. FURTHER INSTRUMENTS. The parties shall execute and deliver any and all such other instruments and shall take any and all such other actions as may be reasonably necessary to carry the intent of this Agreement into full force and effect. 15. SEVERABILITY. If any provision of this Agreement shall be held, declared or pronounced void, voidable, invalid, unenforceable or inoperative for any reason by any court of competent jurisdiction, governmental authority or otherwise, such holding, declaration or pronouncement shall not affect adversely any other provisions of this Agreement, which shall otherwise remain in full force and effect and be enforced in accordance with its terms, and the effect of such holding, declaration or pronouncement shall be limited to the territory or jurisdiction in which made. 16. WAIVER. All rights and remedies of either party under this Agreement are cumulative and not exclusive of any other rights and remedies provided by law. No delay or failure on the part of either party in the exercise of any right or remedy arising from a breach of this Agreement shall operate as a waiver of any subsequent right or remedy arising from a subsequent breach of this Agreement. The consent of any party where required hereunder to any act or occurrence shall not be deemed to be a consent to any other act or occurrence. 17. GENERAL PROVISIONS. This Agreement shall be construed and enforced in accordance with, and governed by, the laws of the state of California. Except as otherwise expressly stated herein, time is of the essence in performing under this Agreement. This Agreement embodies the entire agreement and understanding between the parties and supersedes all prior agreements and understandings relating to the subject matter of this Agreement, and this Agreement may not be modified or amended or any term or provision hereof waived or discharged except in writing signed by the party against whom 4 such amendment, modification, waiver or discharge is sought to be enforced. The headings of this Agreement are for convenience in reference only and shall not limit or otherwise affect the meaning thereof. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original but all of which taken together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first above written. "Employee" "Employer" RETROSPETTIVA, INC. /s/ BORIJOVE VUKADINOVIC /s/ BORIJOVE VUKADINOVIC - ----------------------------------- ---------------------------------- Borijove Vukadinovic Borijove Vukadinovic Chief Executive Officer 5 AMENDMENT OF EMPLOYMENT AGREEMENT This Amendment of Employment Agreement is entered into as of the ____ day of August, 1996, by and between Retrospettiva, Inc., a California corporation (the "Employer"), and Boroivoge Vukadinovic (the "Employee"). WHEREAS, on April 20, 1996, Employer and Employee entered into an Employment Agreement (the "Employment Agreement") whereby Employee employed Employee as its Chief Executive Officer and President subject to the terms and conditions of the Employment Agreement; and WHEREAS, the parties hereto desire to amend the Employment Agreement. NOW, THEREFORE, in consideration of the mutual promises, covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged between the parties, it is agreed as follows: 1. Amendment of Employment Agreement. Section numbered 11, "Confidentiality; Covenant Not To Compete" is hereby amended by changing the second paragraph of such section from a covenant not to compete for two years to a covenant not to compete for three years from the date of this Amendment of Agreement. 2. Effectiveness of Terms of Employment Agreement. Except as amended above, all terms and conditions of the Employment Agreement shall remain the same and in full force and effect. This Agreement is executed effective on the date first written above. Employer: RETROSPETTIVA, INC. By: ------------------------------- Michael D. Silberman Chief Financial Officer Employee: ---------------------------------- Boroivoge Vukadinovic SECOND AMENDMENT OF EMPLOYMENT AGREEMENT This Second Amendment of Employment Agreement is entered into as of the _____ day of April, 1997, by and between Retrospettiva, Inc., a California corporation (the "Employer"), and Boroivoge Vukadinovic (the "Employee"). WHEREAS, on April 20, 1996, Employer and Employee entered into an Employment Agreement (the "Employment Agreement") whereby Employee employed Employee as its Chief Executive Officer and President subject to the terms and conditions of the Employment Agreement; and WHEREAS, the Employment Agreement was previously amended in August 1996 (the "First Amendment"); and WHEREAS, the parties hereto desire to further amend the Employment Agreement, including the First Amendment. NOW, THEREFORE, in consideration of the mutual promises, covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged between the parties, it is agreed as follows: 1. Amendment of Employment Agreement. Section numbered 3, "Cash and Common Stock Compensation" is hereby amended to read as follows: "3. CASH AND COMMON STOCK COMPENSATION. For all services rendered by the Employee under this Agreement, the Employer shall pay to the Employee a salary of Ninety Five Thousand dollars ($95,000) per year for the full term of the Employment Agreement commencing the first (lst) day of the month subsequent to the earlier of (i) the closing of an initial public offering of Employer's securities, or (ii) the closing of a merger by Employer with or the closing of the acquisition of Employer by a public company. Nothing contained herein shall prohibit Employer's Board of Directors from increasing this salary in the future based upon Employee's performance." 2. Effectiveness of Terms of Employment Agreement and First Amendment. Except as amended above, all terms and conditions of the Employment Agreement including the First Amendment shall remain the same and in full force and effect. This Agreement is executed effective on the date first written above. Employer: RETROSPETTIVA, INC. By: ------------------------------- Michael D. Silberman Chief Financial Officer Employee: ---------------------------------- Boroivoge Vukadinovic 2 EX-10.04 12 EX10.04 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT is entered into as of the 20th day of April, 1996, by and between RETROSPETTIVA, INC., a California corporation (the "Employer"), and MICHAEL D. SILBERMAN (the "Employee"). The Employer hereby employs the Employee on a full-time basis, and the Employee hereby accepts such full-time employment on the terms and conditions hereinafter set forth. 1. EMPLOYMENT Employee is employed as Chief Financial Officer. Employee shall perform all duties assigned by the Board of Directors of the Employer and Shall devote full time, attention and loyalty to the affairs of the Employer. 2. TERM. Subject to the provisions for termination provided in paragraphs 9 and 10, the initial term of this Agreement shall commence on the date hereof and terminate three years from the date hereof. This Agreement may be extended by the mutual written agreement of the Employee and the Employer. 3. CASH AND COMMON STOCK COMPENSATION For all services rendered by the Employee under this Agreement, the Employer shall pay to the Employee commencing the 1st of the month subsequent to the closing of the Employer's private placement dated on or about April 1996, a salary of $75,000 per year for the full term of the Agreement. Nothing contained herein shall prohibit Employer's Board of Directors from increasing this salary in the future based upon Employee's performance. In addition, Employee shall receive upon execution of this Agreement 34,000 shares of Employees Common Stock and a signing bonus of $50,000. 4. ELIGIBILITY FOR OPTIONS. Employee shall be entitled to receive options to purchase 150,000 shares of Employer's stock under the Employer's employee stock option and bonus plan. 5. BENEFITS. Employee shall receive such benefits, including health insurance, life insurance, automobile allowance, vacation time etc., as shall be 1 agreed upon by the parties in a written letter of understanding, a copy of which shall be attached hereto. 6. RESPONSIBILITIES OF EMPLOYEE. The Employee shall devote such time as is necessary or is deemed necessary by the Board of Directors of the Employer to carry out all required duties and will devote full time to the Employer during normal business hours. The Employee shall at all times faithfully, with diligence and to the Employee's best ability, experience and talents, perform all the duties that may be required pursuant to the express and implicit terms hereof to the reasonable satisfaction of the Employer. 7. WORKING FACILITIES. The Employee shall be furnished with all facilities and services suitable to Employee's position and adequate for the performance of Employee's duties. 8. EXPENSES. The Employee is authorized to incur reasonable expenses for promoting the business of the Employer, including expenses for entertainment, travel, lodging, promotion equipment rentals and purchases, engagement of contract labor associated with the foregoing and similar items. The Employer shall reimburse the Employee for all such expenses on the presentation by the Employee of Itemized accounts of such expenditures in accordance with guidelines set forth by the Internal Revenue Service. 9. DISABILITY. Employee shall be entitled to continue to receive Employee's salary hereunder if unable to perform duties by reason of illness or incapacity for a period of up to and including a maximum of one year. Thereafter, Employee shall not receive any further compensation until Employee returns to full employment as required hereunder. Should Employee be absent from employment for whatever cause for the continuous period of more than one year, the Employer may terminate this Agreement, and all obligations of the Employer hereunder shall cease upon such termination. 10. TERMINATION. The Company may terminate this Agreement for cause upon the majority vote of the Board of Directors by written notice to the 2 Employee. For the purposes hereof, "cause" shall be defined as meaning (i) such conduct by the Employee which constitutes a breach of this Agreement or (ii) a failure to fully, competently and adequately perform employee's duties or (iii) breach of Employee's fiduciary duty or (iv) improper or illegal conduct of the Employee which, in the opinion of the Board of Directors of the Employer, adversely affects the Employer, its reputation or operations. 11. CONFIDENTIALITY; COVENANT NOT TO COMPETE. The Employee shall not divulge to others any information obtained during the course of Employee's employment relating to the business, operations, customers, proprietary information or trade secrets of the Employer, without the written permission of the Employer. If this Agreement is terminated for any reason other than due to a breach by Employer, the Employee agrees not to own, hold an interest of any kind in, be employed by, operate or manage, directly or indirectly, any business engaged in any type of apparel manufacturing or any business in the same business as the Employer in the state of California for a period of two years from the date of such termination. 11. NOTICES. All notices required or authorized hereunder shall be deemed sufficiently given if in writing and sent by registered or certified mail, return receipt requested and postage prepaid to the other party at his or its last known address. 12. ASSIGNMENT OF AGREEMENT. Neither party may assign or otherwise transfer this Agreement or any of its rights or obligations hereunder without the prior written consent to such assignment or transfer by the other party hereto; and all the provisions of this Agreement shall be binding upon the respective employees, successors, heirs and assigns of the parties. 13. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. This Agreement and the representations, warranties, covenants and other agreements (however characterized or described) by both parties and contained 3 herein or made pursuant to the provisions hereof shall survive the execution and delivery of this Agreement. 14. FURTHER INSTRUMENTS. The parties shall execute and deliver any and all such other instruments and shall take any and all such other actions as may be reasonably necessary to carry the intent of this Agreement into full force and effect. 15. SEVERABILITY. If any provision of this Agreement shall be held, declared or pronounced void, voidable, invalid, unenforceable or inoperative for any reason by any court of competent jurisdiction, governmental authority or otherwise, such holding, declaration or pronouncement shall not affect adversely any other provisions of this Agreement, which shall otherwise remain in full force and effect and be enforced in accordance with its terms, and the effect of such holding, declaration or pronouncement shall be limited to the territory or jurisdiction in which made. 16. WAIVER. All rights and remedies of either party under this Agreement are cumulative and not exclusive of any other rights and remedies provided by law. No delay or failure on the part of either party in the exercise of any right or remedy arising from a breach of this Agreement shall operate as a waiver of any subsequent right or remedy arising from a subsequent breach of this Agreement. The consent of any party where required hereunder to any act or occurrence shall not be deemed to be a consent to any other act or occurrence. 17. GENERAL PROVISIONS. This Agreement shall be construed and enforced in accordance with, and governed by, the laws of the state of California. Except as otherwise expressly stated herein, time is of the essence in performing under this Agreement. This Agreement embodies the entire agreement and understanding between the parties and supersedes all prior agreements and understandings relating to the subject matter of this Agreement, and this Agreement may not be modified or amended or any term or provision discharged except in writing signed by the party against whom 4 such amendment, modification, waiver or discharge is sought to be enforced. The headings of this agreement are for convenience in reference only and shall not limit or otherwise affect the meaning thereof. This agreement may be executed in any number of counterparts, each of which shall be deemed an original but all of which taken together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this agreement on the day and year first above written. "Employee" "Employer" RETROSPETTIVA, INC. /s/ MICHAEL D. SILBERMAN By: /s/ BORIJOVE VUKADINOVIC - ------------------------------- --------------------------------- Michael D. Silberman Borijove Vukadinovic Chief Executive Officer 5 AMENDMENT OF EMPLOYMENT AGREEMENT This Amendment of Employment Agreement is entered into as of the 25th day of November, 1996, by and between Retrospettiva, Inc., a California corporation (the "Employer"), and Michael D. Silberman (the "Employee"). EXPLANATORY STATEMENTS 1. Employer and Employee entered into an Employment Agreement dated as of April 20, 1996 (the "Employment Agreement") whereby the Employer employed the Employee. 2. The Employer and Employee desire to amend and modify certain terms and conditions of the Employment Agreement. NOW, THEREFORE, in consideration of the mutual promises contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Employment Agreement is hereby amended and modified as follows: 1. Section numbered 3, "Cash and Common Stock Compensation" is amended to read as follows: "For all services rendered by the Employee under this Agreement, the Employer shall pay to the Employee, commencing the first of the month subsequent to the closing of the Employer's initial public offering of its securities (the "IPO"), a salary of $60,000 per year for the full term of this Agreement. Nothing contained herein shall prohibit Employer's Board of Directors from increasing the salary in the future based upon Employee's performance. In addition, Employee shall receive upon execution of this Agreement 34,000 shares of Employer's no par value Common Stock (the "Common Stock") of which 20,350 shares may be offered and sold by Employee as part of the IPO." 2. Section numbered 4, "Eligibility for Options" is hereby amended to read as follows: "Employee shall be entitled to receive options to purchase a total of 50,000 shares of Employer's Common Stock pursuant to the Employer's Incentive Stock Option Plan with options to purchase 25,000 shares of Common Stock at an exercise price of $7.50 per share and 25,000 shares of Common Stock at $9.00 per share with all options exercisable for a period of ten (10) years and vested as of the date of this Agreement." 3. Section numbered 5, "Benefits" is hereby amended by the addition of the following at the end of such section: "Notwithstanding the foregoing, Employee shall be entitled to two weeks paid vacation annually for each one year of employment with Employer with such Employment to commence for purposes of this section on April 20, 1996." 4. Any and all other terms and conditions of the Employment Agreement not amended or modified herein shall remain the same and in full force and effect. Employer: RETROSPETTIVA, INC. By: --------------------------------------- Borivoje Vukadinovic Chief Financial Officer Employee: ---------------------------------------- Michael D. Silberman 2 SECOND AMENDMENT OF EMPLOYMENT AGREEMENT This Amendment of Employment Agreement is entered into as of the 2nd day of June 1997, by and between Retrospettiva, Inc., a California corporation (the "Employer"), and Michael D. Silberman (the "Employee"). EXPLANATORY STATEMENTS 1. Employer and Employee entered into an Employment Agreement dated as of April 20, 1996 (the "Employment Agreement") whereby the Employer employed the Employee. 2. The Employment Agreement was amended as of November 25, 1996. 3. The Employer and Employee desire to further amend and modify certain terms and conditions of the Employment Agreement. NOW, THEREFORE, in consideration of the mutual promises contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Employment Agreement is hereby amended and modified as follows: 1. The last sentence of Section numbered 3, "Cash and Common Stock Compensation" is amended to read as follows: "In addition, Employee shall receive upon execution of this Agreement 34,000 shares of Employer's no par value Common Stock (the "Common Stock") of which 25,000 shares may be offered and sold by Employee as part of the IPO." 2. Any and all other terms and conditions of the Employment Agreement not amended or modified herein shall remain the same and in full force and effect. Employer: RETROSPETTIVA, INC. By: --------------------------------------- Michael D. Silberman, Secretary Employee: ---------------------------------------- Michael D. Silberman EX-11.01 13 EX11.01 COMPUTATION OF EARNINGS PER COMMON SHARE THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ------------------------ -------------------------- 1995 1996 1996 1997 --------- --------- ----------- ----------- (UNAUDITED) (UNAUDITED) PRIMARY EARNINGS Net income 680,495 772,802 296,673 350,305 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 0.17 0.20 --------- --------- --------- --------- --------- --------- --------- --------- FULLY DILUTED EARNINGS Net income 680,495 772,802 296,673 350,305 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 0.17 0.20 --------- --------- --------- --------- --------- --------- --------- ---------
EX-23.1 14 EX23.1 [Letterhead] CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS As independent certified public accountants, 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. /s/ A.J. ROBBINS, P.C. A.J. ROBBINS, P.C. CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS Denver, Colorado June 12, 1997 EX-27.01 15 EX27.01
5 YEAR YEAR 3-MOS 3-MOS DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1997 DEC-31-1995 DEC-31-1996 MAR-31-1996 MAR-31-1997 0 110,777 0 741,256 0 0 0 0 0 2,099,893 0 1,305,001 0 (17,196) 0 (17,196) 0 3,112,678 0 2,404,271 0 5,662,907 0 4,507,674 0 106,576 0 106,576 0 (45,190) 0 (49,597) 0 5,857,542 0 4,667,902 0 4,797,053 0 3,139,054 0 0 0 0 0 0 0 0 0 0 0 0 0 154,000 0 272,054 0 906,489 0 1,256,794 0 5,857,542 0 4,667,902 11,379,826 12,902,195 4,639,169 5,093,857 11,379,826 12,902,195 4,639,169 5,093,857 9,976,933 11,006,053 3,957,211 4,345,060 230,301 170,179 51,371 47,788 280,816 362,621 78,572 102,440 0 0 0 0 21,241 61,457 12,342 13,264 875,495 1,313,087 539,673 585,305 195,000 540,285 243,000 235,000 680,495 772,802 296,673 350,305 0 0 0 0 0 0 0 0 0 0 0 0 680,495 772,802 296,673 350,305 0.39 0.44 0.17 0.20 0.39 0.44 0.17 0.20
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