<Page>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 17, 2002
REGISTRATION NO. 333-68862
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
PRO ELITE, INC.
<Table>
NEW JERSEY 5190 22-3161866
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation or Organization) Industrial Identification Number)
Classification Code Number)
</Table>
--------------------------
100 DORIGO LANE,
SECAUCUS, NEW JERSEY 07094
(201) 601-0400
(Address and Telephone Number of Principal Executive Offices)
ROBERT POLSKY
CEO, PRESIDENT, CHAIRMAN OF THE BOARD
100 DORIGO LANE,
SECAUCUS, NEW JERSEY 07094
(201) 601-0400
(Name, Address and Telephone Number for Agent for Service)
--------------------------
Copies to:
JEFFREY A. RINDE, ESQ.
BONDY & SCHLOSS LLP
60 EAST 42ND STREET, 37TH FLOOR
NEW YORK, NEW YORK 10165
TELEPHONE (212) 661-3535
FACSIMILE (212) 972-1677
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) 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 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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
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: / /
THE REGISTRANT HEREBY AMENDS THIS 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 SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8 (A), MAY DETERMINE.
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- --------------------------------------------------------------------------------
<Page>
SUBJECT TO COMPLETION, DATED APRIL 17, 2002
PROSPECTUS
PRO ELITE, INC.
13,350,000 SHARES
------------------
This prospectus covers up to 13,350,000 shares of the common stock, par
value $.0001 per share of Pro Elite, Inc., a New Jersey corporation, which may
be sold by certain shareholders named in this prospectus.
The shares of common stock offered by this prospectus may be sold by the
selling shareholders from time to time in transactions on the open market or in
negotiated transactions, in each case at prices satisfactory to them. Pro Elite
will bear all of the expenses of this offering but will receive none of the
proceeds from any shares sold.
LOOK CAREFULLY AT THE RISK FACTORS BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
NEITHER THE SEC NOR ANY OTHER REGULATORY BODY HAS APPROVED THESE SHARES OR
DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE. IT IS ILLEGAL FOR
ANYONE TO TELL YOU OTHERWISE.
------------------------
The date of this prospectus is , 2002
<Page>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS INFORMATION THAT WE PRESENT MORE FULLY
ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD READ THIS ENTIRE PROSPECTUS CAREFULLY.
OUR BUSINESS
Pro Elite, Inc. was incorporated in New Jersey in 1992. We are in the
business of marketing premium "branded apparel" which in this context means
apparel, such as shirts, hats, and sweaters, that have had a sports or corporate
logo, name and/or slogan applied by means of embroidering to the apparel. During
the fiscal year ended February 28, 2001, approximately 55% of our sales were in
the sports logo market, including the NFL, and approximately 45% were in the
corporate market. However, during the fiscal year ended February 29, 2000,
approximately half of our sales were in the sports logo market and half were in
the corporate logo market. We deal only in premium quality apparel and
embroidering as opposed to mass merchandised apparel exhibiting printed sports
logos and names.
We engage various contractors for the supply of apparel and then contract
with other companies to apply specified embroidered logos, names and/or slogans
to the apparel. Once the finished goods are delivered, we then distribute the
finished product through a variety of distribution channels. Currently, our only
licensing arrangement for the sports logo market is with Collegiate Licensing
Company and is non-exclusive.
We previously had a license agreement with NFL Properties to distribute NFL
branded apparel. This license was terminated pursuant to a settlement agreement
as of March 31, 2001.
OUR EXECUTIVE OFFICES
Our executive offices are located at 100 Dorigo Lane, Secaucus, New Jersey
07094. Our telephone number is (201) 601-0400.
THE OFFERING
<Table>
Description of shares........................ Common stock par value $.0001 per share.
Common stock outstanding before this
offering................................... 6,703,043 shares
Common stock offered by selling
securityholders............................ 13,350,000 shares
Common stock outstanding after conversion or
exercise of preferred stock and warrants
held by selling securityholders............ 14,386,377 shares
Proceeds..................................... Because we are conducting the offering on
behalf of selling securityholders, they will
receive all of the proceeds from the sale of
their shares. To the extent that they
exercise their warrants into shares of our
common stock, Pro Elite will receive proceeds
in the amount of the aggregate exercise price
of any warrants exercised. We plan to use
these amounts for general working capital.
Although we will not receive the proceeds
from the sale of shares in this offering, we
will pay all of the expenses of the offering,
including, without limitation, professional
fees and printing expenses.
Risk Factors................................. An investment in our common stock involves a
high degree of risk, and should be considered
only by persons who can afford the loss of
their entire investment. See "Risk Factors."
</Table>
2
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We are registering the common stock covered by this prospectus in order to
fulfill obligations we have under various agreements with the selling
securityholders.
180,000 of the shares being offered underlie Class A Common Stock Purchase
Warrants which were issued to investors in a private offering commencing
January 30, 2001. Each of these warrants entitles the holder to purchase one
share of our common stock at a price of $1.25 per share until August 31, 2002.
180,000 of the shares being offered underlie Class B Common Stock Purchase
Warrants, which were also issued in the January 30, 2001 private offering. Each
Class B warrant entitles the holder to purchase one share of our common stock at
$2.50 per share until August 31, 2002.
20,000 of the shares being offered underlie Class C Common Stock Purchase
Warrants which were issued to investors in a private offering commencing
May 31, 2001. Each of these warrants entitles the holder to purchase one share
of our common stock at a price of $1.25 per share until May 31, 2002. 20,000 of
the shares being offered underlie Class D Common Stock Purchase Warrants, which
were also issued in the January 30, 2001 private offering. Each Class D warrant
entitles the holder to purchase one share of our common stock at $2.50 per share
until May 31, 2002.
12,000,000 of the shares being offered underlie 1,200,000 shares of our
preferred stock, $.0001 par value, which are held by two of our executive
officer/directors.
The remaining 1,450,000 shares being offered are held directly by selling
shareholders and were issued in private offerings.
For the year ended February 28, 2001, we had sales of $1,250,112 and a net
loss of $714,644. For the nine months ended November 30, 2001 we had sales of
$681,088 and net loss of $313,951.
3
<Page>
SUMMARY HISTORICAL FINANCIAL DATA
The following table presents summary historical financial information for
the nine months ended November 30, 2001 and 2000 and the fiscal years ended
February 28, 2001 and February 29, 2000, and certain balance sheet information.
The data was taken from our financial statements appearing elsewhere in this
prospectus, and you should read the actual financial statements for a complete
presentation of this information.
<Table>
<Caption>
FOR THE NINE
MONTHS ENDED FOR THE YEAR ENDED
NOVEMBER 30, ---------------------------
---------------------------- FEBRUARY 28, FEBRUARY 29,
2001 2000 2001 2000
---------- --------- ------------ ------------
OPERATING DATA
Sales................................... $ 681,088 $ 913,514 $1,250,112 $1,668,680
Cost of sales........................... 555,312 586,337 996,826 1,419,516
Operating expenses...................... 616,370 676,317 904,448 911,016
Loss from operations.................... (490,594) (349,140) (651,162) (661,852)
Income from litigation settlement....... 621,685 (1) -- -- --
Interest expense........................ 506,796 (1) 47,197 63,482 64,779
Extraordinary gain...................... 61,754 (1) -- -- 38,500
Net loss................................ $ (313,951) $(396,337) $ (714,644) $ (688,131)
Basic net loss per common share
outstanding........................... $ (0.22)(1) $ (.70) $ (1.25) $ (1.38)(2)
Basic weighted average number of shares
of common stock outstanding........... 1,420,952 562,337 572,298 497,355
BALANCE SHEET DATA
Current assets.......................... 373,799 642,688 875,684
Total assets............................ 442,341 728,655 1,060,003
Current liabilities..................... 420,586 1,247,597 619,387
Long-term liabilities................... 547,155 310,757 0
Stockholders' equity (deficiency)....... (525,400) (829,699) 440,616
Working capital (deficit)............... (46,787) (604,909) 256,297
</Table>
- ------------------------
(1) Includes $.44 per share applicable to income from litigation settlement,
$.04 per share applicable to extraordinary gain and $.32 per share
applicable to a $450,000 charge for beneficial conversion rights.
(2) Includes $.08 per share applicable to extraordinary gain.
4
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RISK FACTORS
You should carefully consider the following risk factors before purchasing
our common stock. If any of the following risks actually occurs, our business,
financial condition and operating results could be adversely affected. If that
happens, the trading price of our common stock could decline, and you could lose
part or all of your investment.
WE HAVE INCURRED SIGNIFICANT OPERATING LOSSES, HAVE AN ACCUMULATED DEFICIT AND
MAY ENCOUNTER DIFFICULTY IN MEETING OUR EXISTING DEBT OBLIGATIONS AS THEY
BECOME DUE.
We incurred a loss before extraordinary gain of approximately $376,000 in
the nine months ended November 30, 2001, a net loss of $715,000 in the fiscal
year ended February 28, 2001 and a loss before extraordinary gain of $727,000 in
the fiscal year ended February 29, 2000. We had working capital and
stockholders' deficiencies of $47,000 and $525,000, respectively, at
November 30, 2001. In addition, we had outstanding notes and other loans payable
in the aggregate principal amount of $643,392 at November 30, 2001. Although we
are not currently in default on any of our outstanding obligations, our
financial condition poses a risk that we may have difficulty meeting our
obligations in the future.
OUR AUDITORS HAVE EXPRESSED DOUBT ABOUT OUR VIABILITY AS A GOING CONCERN.
Pro Elite's independent public accountants have included an explanatory
paragraph in their report on our financial statements as of and for the year
ended February 28, 2001 which states that our operations have generated
recurring losses and we had working capital and stockholders' deficiencies as of
February 28, 2001. Such matters raise substantial doubt about our ability to
continue as a going concern. See "Financial Statements and Report of Independent
Public Accountants" included elsewhere in this prospectus.
WE WILL REQUIRE ADDITIONAL FINANCING IN ORDER TO GROW.
If we do not have sufficient cash resources, our growth could be limited
unless we are able to obtain additional capital through additional debt or
equity financing. There can be no assurance that we will be able to obtain such
financing if and when it is needed. As a result, we may be unable to implement
or manage our expansion strategy, which may have an adverse effect on our
business or future prospects. We believe that our current operations are only
sufficient to sustain our business through November 2002.
WE CANNOT BE CERTAIN OF PRO ELITE'S ABILITY TO IMPLEMENT ITS GROWTH STRATEGY.
As part of our growth strategy, Pro Elite seeks to develop existing
merchandise categories and increase distribution. We cannot be certain that
these strategies will be successful. Our success depends on various factors,
including strength of Pro Elite's brand name, competitive conditions, our
ability to manage increased sales and expansion, the availability of desirable
locations and the negotiation of terms with retailers.
OUR INDUSTRY IS HIGHLY COMPETITIVE.
The market for branded apparel is highly competitive. Within each of our
geographic markets, we face significant competition from global and regional
branded apparel companies, as well as retailers that market apparel under their
own labels. These and other competitors pose significant challenges to our
potential market share in our major U.S. markets and make it more difficult to
make gains in newer markets. Pro Elite also competes with other apparel
companies for the production capacity of independent manufacturers that produce
our apparel. Many of our competitors are significantly larger and have
substantially greater financial, distribution, marketing and other resources and
have achieved greater recognition for their brand names for product lines or
certain products than Pro Elite.
5
<Page>
Increased competition by existing and future competitors could result in
reductions in display areas in retail locations, reductions in sales or in
prices of our products.
WE HAVE LOST A SIGNIFICANT LICENSING AGREEMENT AND RELATIONSHIP WITH NFL
PROPERTIES AND MAY BE UNABLE TO OBTAIN LICENSES WHICH WE ARE CURRENTLY
SEEKING.
As of March 31, 2001, our license agreement with National Football League
Properties (NFLP) expired. As part of a litigation settlement with NFLP, we
agreed to liquidate our NFL branded merchandise by June 30, 2001. Sales of
apparel embroidered with the NFL logo accounted for more than 50% of our sales
during fiscal 2001. The loss of this relationship has caused a significant
decline in our sales revenues which we may not be able to offset with new
licensing or distribution arrangements. We may be unable to obtain licenses we
are currently seeking with the National Basketball Association and the World
Wrestling Federation.
WE DEPEND ON INDEPENDENT MANUFACTURERS.
Our products are produced by various independent manufacturers. Although Pro
Elite enters into a number of purchase order commitments each season, we do not
have long-term contracts with any manufacturer. None of the manufacturers used
by Pro Elite produces our products exclusively.
Although our internal and vendor operating guidelines promote ethical
business practices, and our sourcing personnel periodically visit and monitor
the operations of our independent manufacturers, we do not control these vendors
or their labor practices. The violation of labor or other laws by an independent
manufacturer of Pro Elite, or their divergence from ethical labor practices,
could result in adverse publicity for Pro Elite and could cause a decline in our
sales revenue.
PRO ELITE DEPENDS ON KEY SUPPLIERS.
Certain of the specialty fabrics used by Pro Elite and manufactured to our
custom specification may be available, in the short-term, from only one or a
very limited number of sources. While Pro Elite believes we could identify and
qualify additional factories to produce these materials, the unavailability of
such manufacturers could limit our ability to have products manufactured and
cause a decline in our sales revenue.
PRO ELITE ENGAGES IN ADVANCE PURCHASES OF PRODUCTS.
To minimize purchasing costs, the time necessary to fill customer orders and
the risk of non-delivery, we place orders for our products with our
manufacturers prior to the time we have received all of our customers' orders
and maintain an inventory of certain products that we anticipate will be in
greater demand. There is no assurance, however, that we will be able to sell the
products we have ordered from manufacturers or that we have in our inventory.
Customers may cancel orders 45 days prior to the date of the shipment of the
products. Inventory levels in excess of customer demand may result in inventory
write-downs and the sale of excess inventory at discounted prices, which could
cause our gross profit to decline.
PRO ELITE DEPENDS ON THE COLLECTIBILITY OF RECEIVABLES.
We extend credit to our customers based on an assessment of a customer's
financial circumstances, generally without requiring collateral. To assist in
the scheduling of production and the shipping of seasonal products, we offer
customers discounts for placing pre-season orders and extended payment terms for
taking delivery before the peak shipping season. These extended payment terms
increase our exposure to the risk of uncollectible receivables. Financial
difficulties of customers could inhibit our ability to collect receivables which
would cause a negative impact on our profitability and a decline in our cash
flow.
6
<Page>
WE DEPEND ON PROPRIETARY RIGHTS.
Pro Elite uses trademarks, some of which are registered, and licenses and
distributes trademarked items from third parties. We believe these registered
and common law trademarks have significant value and are important to our
ability to create and sustain demand for our products. There is no assurance
that these trademarks do not or will not violate the proprietary rights of
others, that they would be upheld if challenged or that we would, in that event,
not be prevented from using these trademarks any of which could have a material
adverse effect on our business. We could incur substantial costs in legal
actions relating to our use of intellectual property or the use of our
intellectual property rights by others, even if our defense of such suits is
successful.
WE DEPEND UPON KEY PERSONNEL FOR FUTURE SUCCESS.
Our future success will depend to a large extent on the continued
contributions of Robert Polsky, our Chairman and Chief Executive Officer, and
Michael Polsky, our President and Secretary. In addition, while each of these
officers has signed an employment agreement with Pro Elite, the existence of
such an agreement does not assure us of their continued services. Our future
success and plans for growth also depend on our ability to attract, train and
retain personnel in all areas of our business. The loss of the services of
either of Messrs. Polsky or one or more of our other key personnel, or the
inability of Pro Elite to continue to attract qualified personnel, could result
in increased costs to hire replacement personnel or the inability to continue
our business.
SEASONAL FLUCTUATIONS AND ECONOMIC CYCLICALITY COULD AFFECT OUR OPERATING
RESULTS.
Our results of operations have fluctuated and may continue to fluctuate
significantly from period to period. Results of operations in any period should
not be considered indicative of the results to be expected for any future
period. The sale of Pro Elite's products is subject to substantial cyclical
fluctuation including those resulting from general economic conditions and
changes in consumer behavior. Sales tend to decline in periods of recession or
uncertainty regarding future economic prospects that affect consumer spending,
particularly on discretionary items. This cyclicality and any related
fluctuation in consumer demand could cause our sales revenues to decline during
extensive recessionary periods.
WE DEPEND ON CONSUMER PREFERENCES.
Any change in consumer preferences or consumer interest in our products
could have a material adverse effect on our business. In addition, although we
believe our products have not been significantly affected by past fashion
trends, changes in fashion trends could have a greater impact as we expand our
product offerings. Furthermore, decisions about product designs often are made
in advance of consumer acceptance. Although we attempt to manage our inventory
risk through early commitments by retailers, production orders must generally be
placed with manufacturers before all of a season's orders are received by us.
Failure to anticipate and respond to changes in consumer preferences and demands
could lead to, among other things, lower sales, excess inventories and lower
margins.
WE HAVE NEVER DECLARED OR PAID CASH DIVIDENDS ON OUR COMMON STOCK AND DO NOT
INTEND TO DO SO.
We currently intend to retain future earnings in our business and do not
intend to pay any cash dividends on shares of our common stock in the
foreseeable future. Furthermore, certain of our credit facilities prevent us
from declaring or paying any dividends on our capital stock without prior
written consent.
7
<Page>
THERE IS ONLY A LIMITED PUBLIC MARKET FOR OUR SHARES.
The shares of our common stock are publicly traded, but their market is
limited. We cannot be certain that this market can be sustained. Our shares have
been delisted from the OTC Bulletin Board because we are not a reporting company
under the Securities Exchange Act of 1934. Pro Elite does intend to become a
reporting company in order for the trading of its common stock to resume on the
OTC Bulletin Board. However, if we cannot maintain a market for our common
stock, an investor may be unable to sell their shares at a favorable price.
OUR COMMON STOCK IS SUBJECT TO THE PENNY STOCK RULE.
We expect trading in our securities to be conducted on the OTC Bulletin
Board and/or the "pink sheets." As long as the common stock is not quoted on
Nasdaq or at any time that Pro Elite has less than $2,000,000 in net tangible
assets, trading in the common stock is covered by Rule 15g-9 under the
Securities Exchange Act for non-Nasdaq and non-exchange listed securities. Under
that rule, broker-dealers who recommend covered securities to persons other than
established customers and accredited investors must make a special written
suitability determination for the purchaser and receive the purchaser's written
agreement to a transaction prior to sale. Securities are exempt from this rule
if the market price is at least $5.00 per share.
The SEC has adopted regulations that generally define a penny stock to be
any equity security that has a market price of less than $5.00 per share,
subject to certain exemptions. Such exemptions include an equity security listed
on Nasdaq and an equity security issued by an issuer that has (i) net tangible
assets of at least $2,000,000, if such issuer has been in continuous operation
for three (3) years; (ii) net tangible assets of at least $5,000,000, if such
issuer has been in continuous operation for less than three (3) years; or
(iii) average revenue of at least $6,000,000 for the proceeding three
(3) years. Unless such an exemption is available, the regulations require the
delivery of a disclosure schedule explaining the penny stock market and the
risks associated therewith prior to any transaction involving a penny stock. Our
Common Stock is presently subject to the regulations on penny stocks, which
could have a severe adverse effect on the market liquidity for the common stock
due to these limitations on the ability of broker-dealers to sell the common
stock in the public market.
PRO ELITE IS CONTROLLED BY OUR PRINCIPAL SHAREHOLDERS.
Currently, Robert Polsky, the Chief Executive Officer and Michael Polsky,
the President, beneficially own a substantial percentage of the outstanding
Common Stock. In addition, after giving effect to the issuance to
Messrs. Polsky of the 1,200,000 shares in the aggregate of our preferred stock
as of the date of the offering, they will have authority to cast ten votes for
each preferred share held in any action taken by the common stockholders either
by consent or at a meeting. As a result, acting together they will be able to
control all matters requiring approval by the shareholders of Pro Elite,
including the election of directors and the amendment of our articles of
incorporation, without the cooperation of other shareholders.
MANY OF OUR OUTSTANDING SHARES ARE ELIGIBLE FOR FUTURE SALE WHICH COULD HAVE A
DILUTIVE EFFECT ON THE MARKET.
As of April 12, 2002, we had 6,703,043 shares of common stock outstanding.
On a fully diluted basis, the shares being offered by this prospectus constitute
approximately 200% of such shares. Sales of a substantial number of shares of
our common stock in the public market, including sales of shares under this
prospectus, or the prospect of such sales, could adversely affect the market
price of the common stock and our ability to raise capital in the future in the
equity markets.
8
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OUR BOARD OF DIRECTORS HAS AUTHORITY TO ISSUE PREFERRED STOCK WITHOUT FURTHER
APPROVAL OF OUR STOCKHOLDERS.
Our Certificate of Incorporation, as amended, permits the board of directors
to designate and issue up to 12,000,000 shares of preferred stock without
additional action by our shareholders. Only 1,200,000 such shares are currently
issued and outstanding.
THIS DOCUMENT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE ASSUMPTIONS BY US
AND ARE UNCERTAIN.
Although we believe that the assumptions underlying the forward-looking
statements contained herein are reasonable, any of the assumptions could be
inaccurate, and therefore, there can be no assurance that the forward-looking
statements included herein will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by us or any other person that our objectives and plans will be
achieved.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Pro Elite is seeking to re-establish its listing on the OTC Bulletin Board,
which now requires all listed companies to be registered with the SEC under
Section 13 or 15(d) of the Securities Exchange Act of 1934 and to be current in
its required filings once so registered. Our common stock currently trades on
the over-the-counter "pink sheets" under the symbol PETE.
The table below sets forth the quarterly low bid and high ask prices for our
common stock for each quarter during the period from March 1, 2000 through
February 28, 2002. Our shares were quoted on the OTC Bulletin Board through
March 9, 2000 thereafter the prices are as quoted in the pink sheets:
<Table>
<Caption>
2001 2002
------------------- -------------------
QUARTER HIGH LOW HIGH LOW
- ------- -------- -------- -------- --------
1st.................................. $ 1.00 $0.20 $5.00 $0.125
2nd.................................. $ 0.90 $0.20 $2.10 $0.10
3rd.................................. $ 1.125 $0.12 $1.05 $0.30
4th.................................. $ 5.00 $0.20 $1.25 $0.25
</Table>
The prices represented above are bid and ask prices, which represent prices
between broker-dealers, do not include retain mark-ups, mark-downs or any
commissions to broker-dealers and may not reflect prices in actual transactions.
Effective January 13, 2001, we effected a 1:6 reverse split of our common stock.
The prices quoted above for periods prior to that date have been adjusted to
give effect to the reverse split. As of August 30, Pro Elite had approximately
46 holders of record.
We have never paid cash dividends and do not intend to pay any cash
dividends with respect to our common stock in the foreseeable future. We intend
to retain any earnings for use in the operation of our business. Our board of
directors will determine dividend policy in the future based upon, among other
things, our results of operations, financial condition, contractual restrictions
and other factors deemed relevant at the time. We intend to retain appropriate
levels of our earnings, if any, to support our business activities.
9
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CAPITALIZATION
The following table sets forth our capitalization as of November 30, 2001.
The table should be read in conjunction with our consolidated financial
statements and related notes appearing elsewhere in this prospectus.
<Table>
<Caption>
NOVEMBER 30,
2001
-------------
Short-term debt............................................. $ 124,237 (1)
-----------
Long-term debt.............................................. 519,155 (2)
-----------
Stockholders' deficiency
Series A Preferred stock, par value $.0001 per share;
authorized--12,000,000 shares; issued and
outstanding--1,200,000 shares........................... 120
Common stock, par value $.0001 per share;
authorized--50,000,000 shares; issued and
outstanding--1,703,043 shares........................... 170
Additional paid-in capital.................................. 2,439,315
Subscription receivable for 1,200,000 shares of Series A
Preferred Stock........................................... (576,000)
Accumulated deficit......................................... (2,389,005)
-----------
Total stockholders' deficiency........................ (525,400)
-----------
Total capitalization.................................. $ 117,992
===========
</Table>
- ------------------------
(1) Excludes accounts payable and accrued expenses of $296,349.
(2) Excludes $28,000 of accrued interest.
10
<Page>
SELECTED FINANCIAL DATA
The following selected financial data has been derived from the financial
statements of Pro Elite as of and for the nine months ended November 30, 2001
and for the years ended February 28, 2001 and February 29, 2000. The following
selected financial data should be read in conjunction with and are qualified in
their entirety by Pro Elite's audited and unaudited Financial Statements and the
notes thereto as well as "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this prospectus.
<Table>
<Caption>
FOR THE NINE
MONTHS FOR THE YEAR ENDED
ENDED ---------------------------
NOVEMBER 30, FEBRUARY 28, FEBRUARY 29,
2001 2001 2000
------------- ------------ ------------
(UNAUDITED)
OPERATING DATA
Sales.................................................... $ 681,088 $1,250,112 $1,668,680
Cost of Sales............................................ 555,312 996,826 1,419,516
Operating expenses....................................... 616,370 904,448 911,016
Loss from operations..................................... (490,594) (651,162) (661,852)
Income from litigation settlement........................ 621,685(1) -- --
Interest expense......................................... 506,796(1) 63,482 64,779
Extraordinary gain....................................... 61,754(1) -- 38,500
Net loss................................................. $(313,951) $ (714,644) $ (688,131)
Basic net loss per common share outstanding.............. $ (0.22)(1) $ (1.25) (1.38)(2)
Basic weighted average number of shares of common stock
outstanding............................................ 1,420,952 572,298 497,355
BALANCE SHEET DATA
Current assets........................................... 373,799 642,688 875,684
Total assets............................................. 442,341 728,655 1,060,003
Current liabilities...................................... 420,586 1,247,597 619,387
Long-term liabilities.................................... 547,155 310,757 0
Stockholders' equity (deficiency)........................ (525,400) (829,699) 440,616
Working Capital (deficit)................................ (46,787) (604,909) 256,297
</Table>
- ------------------------
(1) Includes $.44 per share applicable to income from litigation settlement,
$.04 per share applicable to extraordinary gain and $.32 per share
applicable to a $450,000 charge for beneficial conversion rights.
(2) Includes $.08 per share applicable to extraordinary gain.
11
<Page>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
GENERAL
Our business is the marketing of branded apparel. The two primary
distribution channels we have developed are (1) the sale of sports branded
apparel through a license with Collegiate Licensing, and (2) the sale of
corporate branded apparel through contacts with individual companies. In keeping
with our corporate strategy we seek to develop new sports licenses and to
implement new product presentations for corporate branded apparel.
We are investigating branding licenses with additional sports organizations
and intend to seek licenses with such sports associations where research
indicates that a market for branded apparel exists. As we identify specific
potential markets for sports branded apparel, we intend to seek out new
licenses. For those licenses that do not perform we plan either to terminate the
licenses or allow them to expire. Pro Elite's new marketing strategies for
corporate apparel will continue to focus on providing our corporate clients with
appropriate casual wear suitable for today's corporate casual look, in addition
to casual wear that will carry the client's name into corporate sponsored
extracurricular activities such as golf tournaments. However, there can be no
assurance that our corporate strategies can be successfully executed or that
increased revenues will result from these strategies. Consumer tastes and
preferences may not be attracted to Pro Elite's licensed brands, and our
corporate branding strategy may not result in improved sales.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to accounts receivable, inventories, property and equipment, stock based
compensation, income taxes and contingencies. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Note 2 of the notes to financial statements included elsewhere in this
prospectus sets forth the principal accounting policies, assumptions and bases
for estimates used in preparing our financial statements are summarized below.
REVENUE RECOGNITION
Sales are recognized when the earnings process is complete and
collectibility is assured, which is usually when the goods are shipped to
customers. The Company closely monitors the extension of credit to its customers
while maintaining appropriate allowances for potential credit losses.
INVENTORIES
Inventories, consisting primarily of raw materials (apparel that has not
been embroidered) are stated at the lower of cost or market. Cost is determined
by the first-in, first-out method. Management monitors and periodically reviews
inventory quantities and agings and when appropriate inventory is sold at lower
than normal margins in order to reduce the levels of excess on older goods.
12
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FURNITURE AND EQUIPMENT
Furniture and equipment is stated at cost, net of accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets which range from five to seven years.
INCOME TAXES
As of November 30, 2001, we had net operating loss carryforwards of
approximately $1,672,000 available to reduce future federal and state taxable
income which, if not used, will expire at various dates through February 28,
2020.
As of November 30, 2001, our deferred tax assets consisted of the effects of
temporary differences attributable to the following:
<Table>
<Caption>
Net operating loss carryforwards............................ $ 669,000
Allowance for doubtful accounts............................. 12,000
Valuation of inventories.................................... 30,000
---------
711,000
Less valuation allowance.................................... (711,000)
Total..................................................... $ --
=========
</Table>
Due to the uncertaintities related to, among other things, the changes in
the ownership of Pro Elite, which could subject those loss carryforwards to
substantial annual limitations, and the extent and timing of our future taxable
income, we offset the deferred tax assets by an equivalent valuation allowance
as of November 30, 2001.
ADVANCES TO OFFICERS
As of November 30, 2001, we had receivables of $56,970 from officers that
were noninterest bearing and due on demand. Management believes that the
advances will be repaid prior to November 30, 2002.
ADVANCES FROM RELATED PARTY
As of November 30, 2001, we had received advances from a related party
totalling $37,430 that were non-interest bearing and due on demand.
RESULTS OF OPERATIONS
As of March 31, 2001, our license agreement with National Football League
Properties expired. This license accounted for more than 50% of our sales during
fiscal 2001 and approximately 70-75% of our sales during fiscal 2000. As part of
a litigation settlement with NFL Properties, we agreed to liquidate our NFL
branded merchandise by June 30, 2001. In order to do so, we had to sharply
reduce our sale prices for this merchandise. This affected our sales, costs of
sales and net loss for fiscal 2001 and for the nine months ended November 30,
2001.
NINE MONTHS ENDED NOVEMBER 30, 2001 COMPARED WITH NINE MONTHS ENDED
NOVEMBER 30, 2000
Sales decreased $232,426 (25%) to $681,088 for the nine months ended
November 30, 2001 from $913,514 for the nine months ended November 30, 2000. The
decrease was partially due to reduced pricing on NFL branded sportswear in our
effort to liquidate the line prior to the deadline imposed by the litigation
settlement.
13
<Page>
Cost of sales decreased $31,025 (5.3%) to $555,312 for the nine months ended
November 30, 2001 from $586,337 for the nine months ended November 30, 2000.
This disproportionately small decrease in cost of sales, as compared with the
(25%) decrease in sales, resulted from our need to close-out our inventory of
NFL merchandise prior to the deadline under our settlement with them.
Selling, general and administrative expenses decreased $59,947 (8.9%) to
$616,370 for the nine months ended November 30, 2001 from $676,317 in the nine
months ended November 30, 2000. The decrease in operating expenses resulted from
a reduction in the percentage commission paid to our national sales force.
INCOME FROM LITIGATION SETTLEMENT
As explained above and in Note 11 to the Audited Financial Statements
included elsewhere in this prospectus, in September 1999, we entered into a
settlement agreement with NFL Properties with respect to our payment of license
and royalty fees which NFL Properties claimed were owed and past due. Pursuant
to the terms of the settlement agreement, we agreed with NFL Properties that if
we complied with all of the terms of the license and royalty agreement through
March 31, 2001, NFL Properties would waive the payment of license and royalty
fees aggregating $621,685 it claimed we owed prior to the settlement. We had
accrued license and royalty fees in that amount as of February 28, 2001. We
complied with all of the terms of the license and royalty agreement through
March 31, 2001 and, accordingly, we reversed the amount accrued and recognized
an equivalent gain from the litigation settlement during the nine months ended
November 30, 2001.
CHARGE FOR BENEFICIAL CONVERSION RIGHTS
We had outstanding a 10% Convertible Promissory Note which was convertible
into common stock at a conversion rate of $.045 per share when it was issued on
April 12, 2001. The conversion rate was substantially below the fair value of
our common stock which was approximately $.133 per share at that time. As
further explained in Note 6 to the Unaudited Consolidated Financial Statements
included elsewhere in this prospectus, we incurred a charge of $450,000 in the
nine months ended November 30, 2001 for the beneficial conversion rights
associated with the issuance of the 10% Convertible Promissory Note.
Other interest expense increased $9,599 (20.3%) to $56,796 for the nine
months ended November 30, 2001 from $47,197 for the nine months ended
November 30, 2000. The increase resulted from additional debt, primarily in
connection with the convertible debenture.
We had a loss before extraordinary gain of $375,705 during the nine months
ended November 30, 2001, as compared to a net loss of $396,337 for the nine
months ended November 30, 2000. However, during the nine months ended
November 30, 2001, we had an extraordinary gain of $61,754 from the
extinguishment of debt which reduced our net loss to $313,951.
YEAR ENDED FEBRUARY 28, 2001 COMPARED WITH YEAR ENDED FEBRUARY 29, 2000
Sales declined $418,568 (25%) to $1,250,112 for the year ended February 28,
2001 from $1,668,680 in the year ended February 29, 2000. This decrease resulted
from the loss of our NFL license and the resulting decline in sales prices on
NFL branded apparel. Sales of NFL branded apparel accounted for 37% of our sales
during fiscal 2000 and 45% of our sales during fiscal 2001. An additional factor
resulting in reduced sales was a shift in consumer taste from sports branded
apparel to designer or equipment branded apparel such as "Nike", "No Fear" and
"Tommy Hilfiger".
Cost of sales declined $422,690 (30%) to $996,826 for the year ended
February 28, 2001 from $1,419,516 in the year ended February 29, 2000. This
corresponded to, and resulted from, the decline in sales. In addition, as a
result of the litigation settlement with the NFLP, our license expired on
14
<Page>
March 31, 2001 although our rights to liquidate related merchandise did not
terminate until June 30, 2001. Included in cost of sales for the year ended
February 28, 2001 is a charge of $75,000 for the carrying value of NFLP related
inventory that we estimated could not be sold.
Selling, general and administrative expenses decreased $6,568 to $904,448
for the year ended February 28, 2001 from $911,016 in the year ended
February 29, 2000. The relatively insignificant decrease in operating expenses
resulted mainly from our efforts to better combine costs.
Interest expense declined $1,297 (2%) to $63,482 for the year ended
February 28, 2001 from $64,779 for the year ended February 29, 2000. The
decrease resulted from the general decline in our business which resulted in
reduced borrowing against receivables and inventory.
As a result of the foregoing factors, we experienced a net loss of $714,644
for the year ended February 28, 2001 as compared to a net loss of $688,131 for
the year ended February 29, 2000. Excluding the extraordinary gain, our net
operating loss was $726,631 in the year ended February 29, 2000.
LIQUIDITY AND CAPITAL RESOURCES
We had a working capital deficit of $46,787 and a cash balance of $712 at
November 30, 2001. Net cash used for our operating activities during the nine
months ended November 30, 2001 was $163,104. Our working capital deficit as of
February 28, 2001 was $604,909. Net cash used for our operating activities for
that year was $284,331.
Our independent auditors have included an explanatory paragraph in their
report on our financial statements as of and for the year ended February 28,
2001 which states that our operations have generated recurring losses and we had
working capital and stockholders' deficiencies as of February 28, 2001. Such
matters raise substantial doubt about our ability to continue as a going
concern.
In April 2000 we sold 41,667 shares of our common stock for a total
aggregate consideration of $100,000, or $2.40 per share. We sold an additional
16,666 shares of common stock for aggregate consideration of $25,000, or $1.50
per share in July 2000. Since April 2000 to date, we issued 30,665 shares of
common stock having a fair market value of $60,355 as compensation for services
provided by various vendors, consultants, and attorneys. The number of shares
stated has been adjusted to give effect to a 1:6 reverse split of our common
stock effective January 13, 2001.
On April 13, 2001, we issued an Amended and Restated 10% Convertible
Promissory Note in the original principal amount of $450,000. $255,000 of the
proceeds were used to make full payment in settlement of a litigation with
Connecticut Bank of Commerce, formerly our primary lender. The 10% Convertible
Promissory Note was convertible into common stock at a conversion rate of $.045
per share when it was issued on April 12, 2001. The conversion rate was
substantially below the fair value of our common stock which was approximately
$.133 per share at that time. As further explained in Note 6 to the Unaudited
Consolidated Financial Statements included elsewhere in this prospectus, we
incurred a charge of $450,000 in the nine months ended November 30, 2001 for the
beneficial conversion rights associated with the issuance of the 10% Convertible
Promissory Note. On February 15, 2002, after ongoing negotiations with the
holder of the note, we reached an agreement with the holder pursuant to which he
agreed to accept 5,000,000 shares of common stock in full satisfaction of the
note. The 5,000,000 shares have been placed in escrow with our counsel pursuant
to an escrow agreement which provides for sale of such shares in accordance with
Rule 144 as they become eligible for such sale and according to the volume
limitations thereunder. The proceeds of sales of these 5,000,000 shares are to
be applied to pay down the note up to an amount of $500,000. Any shares
remaining in escrow after payment of the $500,000 to the investor are to be
returned to Pro Elite. As part of this arrangement, we have exchanged litigation
releases with the holder of the note. In addition, the holder has executed a
proxy with respect to his shares in favor of our current officers and directors.
15
<Page>
Commencing January 31, 2001, we issued 180,000 units at $0.50 per unit in a
private placement pursuant to Rule 506 of Regulation D to accredited investors
only. Each unit consisted of one share of the Company's common stock, one
Class A Common Stock Purchase Warrant to purchase one share of our common stock
at a price of $1.25 per share until January 31, 2002 and one Class B Common
Stock Purchase Warrant to purchase one share of the Company's common stock
exercisable at $2.50 per share until January 31, 2002.
In April 2001, we issued an additional 750,000 shares of common stock to a
single investor at a price of $.14 per share in a private sale.
On May 31, 2001, the Company issued 20,000 units at $0.50 per unit in a
private placement pursuant to Rule 506 of Regulation D to one accredited
investor only. Each unit consisted of one share of the Company's common stock,
one Class C Common Stock Purchase Warrant to purchase one share of our common
stock at a price of $1.25 per share until May 31, 2002 and one Class D Common
Stock Purchase Warrant to purchase one share of the Company's common stock
exercisable at $2.50 per share until May 31, 2002.
In August 2001, we received a $50,000 loan which bears interest at 10%. The
loan was initially intended to mature on November 3, 2001 but was extended to
May 3, 2002. In connection with such loan, the lender received warrants to
purchase 25,000 shares of our common stock at $.50 per share through August 1,
2006 and options to purchase 250,000 shares of our common stock at $.20 per
share, also through August 1, 2006. The value of the warrants and options of
$8,250 was charged to interest expense for the nine months ended November 30,
2001.
In September 2001, we received $10,000 from an investor who received a note
convertible into shares of our common stock at $.20 per share or, at the
discretion of the noteholder, payable with 10% interest within 90 days from the
date of issue.
On November 3, 2001, the Company sold 166,666 shares of common stock for
aggregate consideration of $25,000. The buyer also received warrants to purchase
166,666 shares of common stock at $.15 per share that are exercisable through
December 2, 2004.
We believe our current operations can sustain us through at least November
2002. In order to achieve our sales and marketing goals, we will need
approximately $1,000,000 in additional financing. While there are no written
commitments for this financing, we have verbal commitments from investors to
provide us with the necessary financing. In addition, we intend to seek one or
more asset-based financing arrangements.
In order to implement our long term corporate strategy, we will need
additional working capital to fund inventory necessary to support our sales
initiatives. In order to meet our liquidity needs, we will have to obtain
additional financing either by taking on additional debt or issuing additional
equity. We believe that if we are able to re-list our common stock on the OTC
Bulletin Board, this will significantly enhance our ability to obtain funding
through the issuance of equity securities. We cannot be certain that we will
obtain funds necessary to support our corporate strategy or that if funded, that
strategy will succeed. In the event funds are not available, we intend to focus
on increasing sales for self-funding and implementing our strategic plan on a
reduced scale. No assurance can be given that we will be able to achieve
profitability through increased sales or self-funding our strategy.
OUR STRATEGY
In response to the sales decline, our strategy is to increase sales by
focusing on making up for lost marketing opportunities with NFL branded apparel,
bringing in new licensed brands and expanding our branded corporate apparel
market. This strategy is contingent on a number of factors that may not occur
and no assurance can be made that sales in the next fiscal year will improve.
Factors that could adversely affect sales would be a lack of customer acceptance
of our branded apparel and a lack of working capital to secure the necessary
finished product to make sales. See "Liquidity and Capital Resources."
16
<Page>
BUSINESS
INTRODUCTION
Pro Elite was founded in 1992 by Bob and Michael Polsky. Both had experience
in the apparel business and in the "branded apparel" business (described below)
and sought to develop their own business. Pro Elite is a New Jersey corporation
with its offices located at 100 Dorigo Lane, Secaucus, New Jersey 07094. We may
be reached by telephone at (201) 601-0400.
Pro Elite is in the business of marketing premium "branded apparel" which in
this context means apparel, such as shirts, hats, and sweaters, that have had a
sports or corporate logo, name and/or slogan applied by means of embroidering to
the apparel. We deal only in premium quality apparel which is of a higher
quality of fabric and uses embroidered logos as opposed to mass merchandised
apparel which exhibits pre-printed sports logos and names. We engage various
contractors for the supply of apparel and then contract with other companies to
apply specified embroidered logos, names and/or slogans to the apparel. Once the
finished goods are delivered, we then distributes the finished product through a
variety of means further discussed below.
We have two primary markets in which we operate for branded apparel. The
first market consists of the sale and distribution of apparel exhibiting
licensed sports logos, names and/or slogans. The second market is the sale and
distribution of apparel exhibiting corporate logos, names and/or slogans to
specific corporate customers at their request.
LICENSED PRODUCTS
In the licensed sports logos market, we work with the Collegiate Licensing
Company to market apparel exhibiting the logos and names of collegiate teams
associated with the Collegiate Licensing. As discussed further below in the
Trademarks and Licensing section, Pro Elite contracts with Collegiate Licensing
on a periodic basis for the production of collegiate branded apparel. The
apparel exhibiting collegiate logos and names is directed at fans of those
sports teams interested in premium quality branded apparel. Given the specialty
market for this type of quality branded apparel, we concentrate on distribution
through stadium shops, department stores, specialty shops, and other retailers
such as the QVC television-shopping channel. Pro Elite generates less than
approximately 1% of its revenues from the sale of Collegiate Licensing logo
products.
Pro Elite previously had a license agreement with NFL Properties to
distribute NFL branded apparel. The license was terminated pursuant to a
settlement agreement as of March 31, 2001. The NFL Properties license was a
significant source of revenue for Pro Elite. However, we propose to increase
business through the acquisition of additional sports franchise licenses. Pro
Elite is actively seeking licenses with the National Basketball Association, and
the World Wrestling Federation. However, there can be no assurance that we can
obtain licenses with these organizations, or that licenses with these entities
will result in significant revenues to Pro Elite.
CORPORATE PRODUCTS
We employ the same product development process in the corporate logos market
as the licensed products market. That is, the contracting for quality pieces of
apparel that are then provided to a different contractor for the application of
embroidered logos, names, and slogans. However, our marketing and distribution
of corporate branded apparel is distinctly different from that of our licensed
products market. Our strategy in the corporate branded apparel market is not
directed to retail distribution for the general public. Rather, it is directed
at corporations seeking to provide employees with appropriate corporate casual
apparel and/or promotional branded apparel for the corporation to either sell or
give away to the public. Consequently, licenses for the marketing of corporate
apparel are not needed.
17
<Page>
We believe that the corporate branded apparel market is underserved and
growing due to the advent of casual Fridays and the overall move toward causal
dress in the workplace. As companies struggle to define appropriate dress codes
for both the back office and those offices dealing with the public, many
businesses are finding that making corporate branded apparel available to
employees is the answer. Additionally, companies are discovering that branded
apparel is an effective way to engage in self-promotion and advertising through
Company sponsored catalogs, made available to employees and customers, and
giveaways connected with sponsored media events such as golf tournaments and
concerts. Regardless of the client's corporate purpose, Pro Elite seeks to be
the preferred provider of premium quality corporate branded apparel.
OTHER MARKETS
Pro Elite has entered two additional markets related to our core business of
branded apparel. We have recently developed a new embroidered apparel line
trademarked as "Just Hafta". The line consists of embroidered shirts featuring
activities such as golf, fishing, and tennis. While we have the license to use
the the Just Hafta-TM- trademark and stylized logos, we are not presently
distributing any products under them. Eventually, we may market and distribute
Just Hafta-TM- apparel through department stores and specialty shops, in
addition to licensing other apparel marketers to produce and sell apparel using
the Just Hafta-TM- trademark and stylized logos. We have also licensed our
corporate name and logo to a Japanese sportswear company to be exhibited on
sportswear sold in Japan. The Just Hafta-TM- and Japanese license markets do not
constitute significant markets at present for Pro Elite.
DISTRIBUTION
Distribution of our products as discussed above varies by market. The
distribution of licensed branded apparel is accomplished through manufacture's
representatives, direct marketing to collegiate stadium shops, college
bookstores, and marketers such as the QVC shopping channel, Boise Marketing, SFX
Entertainment, and Host Marriott. Marketing of corporate branded apparel is
accomplished through manufacture's representatives, trade shows and direct
marketing. Just Hafta is presently marketed in the same manner as licensed
products. The Company also belongs to and markets through the "Specialty
Advertising Trade Information Center", a national organization of approximately
35,000 distributors that sell products to corporations.
COMPETITION
The marketing of logo embroidered apparel is keenly competitive in the
United States. There are several companies that compete directly with us in
several of our marketing venues from professional sports team logo apparel to
corporate logo apparel. Some of these companies have greater market recognition
and substantially greater financial, technical, marketing, distribution, and
other resources than we possess. The competition is based primarily on brand
recognition, product differentiation and quality, style and production
flexibility. Our future growth and financial success depend on our ability to
further penetrate and expand our distribution channels. The barriers to entry in
the logo embroidered apparel market are low given the various contractors
available for the production of embroidered apparel and the non-exclusive nature
of Pro Elite's licenses. This along with the rapid changes in consumer
preferences in leisure apparel constitutes significant risk factors in our
operations.
SUPPLIERS AND CUSTOMERS
Pro Elite has established relationships with its contractors for the supply
of apparel and contract embroidering. The Company's major suppliers (and the
percentage of revenue attributable to such) are: Gold Seven, Inc. (50%),
Amrav, Inc. (10%), Ready Made Garment Corporation (10%), and Y & Z, LLC (5%). No
customer accounted for more than ten percent of our sales during fiscal 2000 or
2001 or the nine months ended November 30, 2001.
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TRADEMARKS AND LICENSES
Pro Elite has registered its name and logo as a trademark with the United
States Office of Patents and Trademarks. The mark consists of Pro Elite's logo
and Pro Elite's name in stylized text. Pro Elite obtained the registration on
May 27, 1997. As was discussed above, Pro Elite has entered into a licensing
agreement regarding this trademark with a Japanese company. The licensee has the
right to use the Pro Elite trademark on athletic sportswear sold in Japan
through March 15, 2005 with an option to renew.
In February 1999, the Company was a party plaintiff in an action against the
NFL Properties. The action was filed to prevent the NFL Properties from
terminating the Company's license. On September 9, 1999, the parties settled the
action with a new non-exclusive license agreement that ran through March 31,
2001.
Collegiate Licensing is licensed by various colleges and universities for
the purpose of sub-licensing the production of branded apparel. Pro Elite
contracts with Collegiate Licensing on an as needed basis at pre-published
prices from Collegiate Licensing for the production of collegiate branded
apparel for those colleges and universities represented by Collegiate Licensing.
Collegiate Licensing has over 100 colleges and universities that it represents
for licensing purposes, many of which are the premier college sports teams of
the country. Pro Elite's arrangement with Collegiate Licensing is non-exclusive.
OTHER INFORMATION
Pro Elite's research and development activities are limited to
investigations of consumer preferences to identify appropriate apparel to brand
and identify markets that may exist for sports franchise branded apparel. Pro
Elite also engages in limited research and development to target businesses that
would be interested in corporate branded apparel. To date, Pro Elite has not
invested a significant amount of funds in research and development. Pro Elite is
unaware of any governmental regulations, environmental or otherwise, that would
have a material effect or cost on Pro Elite. Pro Elite currently employs seven
people on a full time basis.
LEGAL PROCEEDINGS
We are not a party to any pending legal proceeding, and none of the
Company's property is the subject of a pending legal proceeding.
DESCRIPTION OF PROPERTY
The Company's principal place of business and warehouse is leased. The
Company has no significant ownership interest in any real or personal property
beyond normal office and warehouse equipment and furniture.
The Company has no investments in real estate, interests in real estate,
real estate mortgages, or securities of or interests in persons primarily
engaged in real estate activities. Further, the Company has no policy respecting
investments in real estate, interests in real estate, real estate mortgages, or
securities of or interests in persons primarily engaged in real estate
activities.
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MANAGEMENT
The following table sets forth information regarding the Company's executive
officers and directors:
<Table>
<Caption>
NAME AGE POSITION
- ---- -------- --------
Robert Polsky............................. 75 Chairman of the Board, Chief Executive
Officer and Director
Michael Polsky............................ 34 President, Secretary and Director
</Table>
The following is a summary of the business experience of each of our
executive officers and directors:
Robert Polsky has been the Chief Executive Officer of Pro Elite, Inc. since
he co-founded it in 1992. Before starting Pro Elite with his son, Michael,
Mr. Polsky was the President and founder of Cliff Engle, Ltd., a licensed
product supplier to all major sports. Prior to 1984, Mr. Polsky was President of
Act III and Rosemary Reid Swimwear, both were divisions of Jonathan Logan Co. In
addition, Mr. Polsky also worked with Puritan Fashions, Calvin Klein Jeans
Division and was President of Dianne Von Furstenburg Sportswear Division.
Michael Polsky has been the President of Pro Elite since 1992. Prior to
co-founding Pro Elite, Mr. Polsky was a Vice President of Sales for Cliff
Engle, Ltd. Mr. Polsky attended Blair Academy and NorthEastern University.
EMPLOYMENT AGREEMENTS
Messrs. Polsky have entered into Employment Agreements with Pro Elite, each
dated as of January 31, 2001. The agreement for Robert Polsky is for a term of
five years with automatic renewal thereafter unless either party gives the other
sixty (60) days written notice. The agreement provides for a base salary of
$60,000 during the first year which is subject to adjustment for subsequent
years by the board of directors. The agreement also provides for a bonus of up
to $30,000 for each year of the term.
The agreement for Michael Polsky is for a term of ten years with automatic
renewal thereafter unless either party gives the other sixty (60) days written
notice. The agreement provides for a base salary of $125,000 during the first
year which is subject to adjustment for subsequent years by the board of
directors. The agreement further provides that for any year in which our
revenues increase over the preceding year, Mr. Polsky's salary shall be
increased by a minimum of $25,000. The agreement also provides for a bonus of up
to $90,000 for each year of the term.
Both agreements allow for participation in Pro Elite's standard benefit
plans. They also contain non-competition and non-disclosure provisions.
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EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
compensation earned during Pro Elite's last three fiscal years by our Chairman
and Chief Executive Officer and our President and Secretary in total annual
salary and bonus:
ANNUAL COMPENSATION
<Table>
<Caption>
OTHER ANNUAL
FISCAL SALARY BONUS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(1) ($) ($)
- --------------------------- -------- -------- -------- ------------
Robert Polsky, Chairman and
Chief Executive Officer............................ 2001 $ 60,000 -- --
2000 60,000
1999 60,000
Michael Polsky, President and
Secretary.......................................... 2001 $125,000 -- --
2000 125,000
1999 125,000
</Table>
- ------------------------
(1) Does not include use of automobiles provided by Pro Elite to both of
Messrs. Polsky at a cost per year of approximately $7,200 for Robert Polsky
and approximately $8,200 for Michael Polsky.
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PRINCIPAL AND SELLING SECURITY HOLDERS
The shares of common stock may be offered and sold from time to time by the
shareholders or by their transferees, pledgees, donees or their successors
pursuant to this prospectus. The following table sets forth certain information
about the selling shareholders. Except as otherwise provided, none of the
selling shareholders has, or within the past three years has had, any position,
office or other material relationship with Pro Elite or any of its predecessors
or affiliates.
In addition, the table sets forth certain information concerning the
beneficial ownership of our common stock as of the date of this prospectus, by
(i) each person known by us to be the beneficial owner of more than 5% of our
common stock, (ii) each of our named executive officers, (iii) each of our
directors, and (iv) all directors and executive officers as a group. Unless
otherwise indicated, each of the stockholders has sole voting and investment
power with respect to the shares beneficially owned.
<Table>
<Caption>
SHARES
SHARES BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(2) OFFERING(2)
--------------------- NUMBER OF -------------------
NAME AND ADDRESS(1) CLASS NUMBER PERCENT SHARES OFFERED NUMBER PERCENT
- ------------------- ------------ ---------- -------- -------------- -------- --------
Robert Polsky, Chairman of the Board,
Chief Executive Officer and
Director........................... Preferred(3) 300,000 25% -- -0- --
Common(3) 3,000,000 31% 3,000,000 -0- --
Michael Polsky, President and
Director........................... Preferred(3) 900,000 75% -- -0- --
Common(3) 9,157,197 58% 9,000,000 157,197
Nicole Polsky........................ Common 157,197 2.3% -0- 157,197
George Bally......................... Common 1,050,000(4) 15% 1,050,000 -0- --
Bradley P. Barnes.................... Common 150,000(5) 2.2% 150,000 -0- --
Cecil Diaz........................... Common 60,000(6) .8% 60,000 -0-
Carmine J. Russo..................... Common 30,000(7) .4% 30,000 -0- --
W. Ray Wallace....................... Common 60,000(8) .8% 60,000 -0- --
</Table>
- ------------------------
(1) The address for Messrs. Robert and Michael Polsky, Nicole Polsky, George
Bally and Bradley P. Barnes is c/o Pro Elite, Inc., 100 Dorigo Lane,
Secaucus, New Jersey 07094.
(2) Percentage ownership is calculated for each holder on a fully diluted basis,
giving effect to all shares beneficially owned and treating all such shares
as issued and outstanding for purposes of the calculation. Shares
beneficially owned after the offering assumes sale of all shares offered for
sale by each selling shareholder.
(3) Each share of Series A Convertible Preferred Stock is convertible into ten
shares of Pro Elite's common stock and its holder is entitled to ten votes
per share for each matter brought before the shareholders.
(4) Includes 100,000 shares underlying Class A Common Stock Purchase Warrants
and 100,000 Class B Common Stock Purchase Warrants. The Class A warrants
entitle the holder thereof to purchase shares of common stock at an exercise
price of $1.25 per share, and the Class B warrants entitle the holder
thereof to purchase shares of common stock at an exercise price of $2.50 per
share. The warrants are currently exercisable and expire August 31, 2002.
(5) Includes 50,000 shares underlying Class A Common Stock Purchase Warrants and
50,000 Class B Common Stock Purchase Warrants. The Class A warrants entitle
the holder thereof to purchase
22
<Page>
shares of common stock at an exercise price of $1.25 per share, and the
Class B warrants entitle the holder thereof to purchase shares of common
stock at an exercise price of $2.50 per share. The warrants are currently
exercisable and expire August 31, 2002.
(6) Includes 20,000 shares underlying Class A Common Stock Purchase Warrants and
20,000 Class B Common Stock Purchase Warrants. The Class A warrants entitle
the holder thereof to purchase shares of common stock at an exercise price
of $1.25 per share, and the Class B warrants entitle the holder thereof to
purchase shares of common stock at an exercise price of $2.50 per share. The
warrants are currently exercisable and expire August 31, 2002.
(7) Includes 10,000 shares underlying Class A Common Stock Purchase Warrants and
10,000 Class B Common Stock Purchase Warrants. The Class A warrants entitle
the holder thereof to purchase shares of common stock at an exercise price
of $1.25 per share, and the Class B warrants entitle the holder thereof to
purchase shares of common stock at an exercise price of $2.50 per share. The
warrants are currently exercisable and expire August 31, 2002.
(8) Includes 20,000 shares underlying Class C Common Stock Purchase Warrants and
20,000 Class D Common Stock Purchase Warrants. The Class C warrants entitle
the holder thereof to purchase shares of common stock at an exercise price
of $1.25 per share, and the Class B warrants entitle the holder thereof to
purchase shares of common stock at an exercise price of $2.50 per share. The
warrants are currently exercisable and expire May 31, 2002.
23
<Page>
PLAN OF DISTRIBUTION
All shares to be registered pursuant to this prospectus will be sold by the
selling security holders. See "Selling Security Holders." The selling
stockholders may, from time to time, sell all or a portion of the shares of
common stock on any market upon which the common stock may be quoted, in
privately negotiated transactions or otherwise, at fixed prices that may be
changed, at market prices prevailing at the time of sale, at prices related to
such market prices or at negotiated prices. The shares of common stock may be
sold by the selling stockholders by one or more of the following methods,
without limitation,
- block trades in which the broker or dealer so engaged will attempt to sell
the shares of common stock as agent but may position and resell a portion
of the block as principal to facilitate the transaction,
- purchases by broker or dealer as principal and resale by such broker or
dealer for its account pursuant to this prospectus,
- an exchange distribution in accordance with the rules of such exchange,
- ordinary brokerage transactions and transactions in which the broker
solicits purchasers,
- privately negotiated transactions,
- market sales (both long and short to the extent permitted under the
federal securities laws), and
- a combination of any such methods of sale.
In effecting sales, brokers and dealers engaged by the selling stockholders
may arrange for other brokers or dealers to participate. Brokers or dealers may
receive commissions or discounts from the selling stockholders (or, if any such
broker-dealer acts as agent for the purchaser of such shares, from such
purchaser) in amounts to be negotiated which are not expected to exceed those
customary in the types of transactions involved. Broker-dealers may agree with
the selling stockholders to sell a specified number of such shares of common
stock at a stipulated price per share, and, to the extent such broker-dealer is
unable to do so acting as agent for the selling stockholders, to purchase as
principal any unsold shares of common stock at the price required to fulfill the
broker-dealer commitment to the selling stockholders. Broker-dealers who acquire
shares of common stock as principal may thereafter resell those shares of common
stock from time to time in transactions (which may involve block transactions
and sales to and through other broker-dealers, including transactions of the
nature described above) in the over-the-counter market or otherwise at prices
and on terms then prevailing at the time of sale, at prices then related to the
then-current market price or in negotiated transactions and, in connection with
such resales, may pay to or receive from the purchasers of such shares of common
stock commissions as described above. The selling stockholders may also sell the
shares of common stock in accordance with Rule 144 under the Securities Act,
subject to satisfaction of the requirements under the rule, rather than pursuant
to this prospectus.
From time to time, the selling stockholders may pledge their shares of
common stock under the margin provisions of customer agreements. Upon default by
the selling stockholders, the broker may offer and sell the pledged shares of
common stock from time to time. Upon sales of the shares of common stock, the
selling stockholders intend to comply with the prospectus delivery requirements,
under the Securities Act, by delivering a prospectus to each purchaser in the
transaction. We intend to file any amendments or other necessary documents in
compliance with the Securities Act which may be required in the event a selling
stockholder defaults under any customer agreement with brokers.
To the extent required under the Securities Act, a supplemental prospectus
will be filed, disclosing, the name of any broker-dealers, the number of shares
of common stock involved, the price at which the common stock is to be sold, the
commissions paid or discounts or concessions allowed to such broker-
24
<Page>
dealers, where applicable, that such broker-dealers did not conduct any
investigation to verify the information set out or incorporated by reference in
this prospectus, as supplemented, and other facts material to the transaction.
We and the selling stockholders will be subject to applicable provisions of
the Exchange Act and the rules and regulations under it, including, without
limitation, Rule 10b-5 and, insofar as the selling stockholders are distribution
participants and we, under certain circumstances, may be a distribution
participant, Regulation M. All of the foregoing may affect the marketability of
the common stock.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There were no material interests, direct or indirect, of directors,
executive officers or senior officers of the Company or any known associate or
affiliate in any transaction during either of the Company's last two fiscal
years, or in any proposed transaction, which has materially affected or would
materially affect the Company or any of its subsidiaries and which is not
otherwise disclosed herein.
DESCRIPTION OF SECURITIES
Pro Elite is presently authorized to issue 50,000,000 shares of common
stock, $.0001 par value per share. Pro Elite presently has 6,703,043 shares of
common stock outstanding.
Pro Elite is authorized to issue 12,000,000 shares of preferred stock,
$.0001 par value per share with such rights and preferences as the board of
directors, in its discretion, may determine. 1,200,000 of such shares are
currently outstanding and held by Messrs. Robert and Michael Polsky, our
Chairman and Chief Executive and our President. Because the board of directors,
consisting of Messrs. Polsky, has the discretion to determine the rights and
preferences of the preferred stock, this could delay, defer or prevent a change
in control of Pro Elite.
Pro Elite has appointed Computershare Investor Services 12039 West Alameda
Parkway, Suite Z-2, Lakewood, CO 80228 as its transfer agent and registrar.
Our shareholders do not have a preemptive right to acquire Pro Elite's
unissued shares. There are no provisions, other than the Pro Elite's articles
and by-laws and the New Jersey Statutes, that govern the voting of our shares.
We have not to date paid any dividends on our common stock. There are no
provisions, other than as may be set forth in the New Jersey Statutes, that
prohibit or limit the payment of dividends.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, Pro Elite will have outstanding 19,103,043
shares of common stock, assuming exercise or conversion of only the preferred
stock and warrants into shares offered and sold hereby. Of these shares, only
13,936,377 shares will be freely tradable without restriction (except for
restrictions imposed by certain state regulatory authorities) or registration
under the Securities Act, except that any shares purchased by an "affiliate" of
Pro Elite (as defined in the rules and regulations promulgated under the
Securities Act) will be subject to the resale limitations under Rule 144 under
the Securities Act. The remaining shares of outstanding Common Stock were issued
and sold by Pro Elite in private transactions in reliance upon exemptions from
registration under the Act. Such shares may be sold only pursuant to an
effective registration statement filed by Pro Elite or an applicable exemption,
including the exemption contained in Rule 144 promulgated under the Act.
In general, under Rule 144 as currently in effect, a shareholder, including
an affiliate of Pro Elite may sell shares of Common Stock after at least one
year has elapsed since such shares were acquired from Pro Elite or an affiliate
of Pro Elite. The number of shares of Common Stock which may be sold within any
three-month period is limited to the greater of: (i) one percent of the then
outstanding
25
<Page>
Common Stock or (ii) the average weekly trading volume in the Common Stock
during the four calendar weeks preceding the date on which notice of such sale
was filed under Rule 144.
Certain other requirements of Rule 144 concerning availability of public
information, manner of sale and notice of sale must also be satisfied. In
addition, a shareholder who is not an affiliate of Pro Elite (and who has not
been an affiliate of Pro Elite for 90 days prior to the sale) and who has
beneficially owned shares acquired from Pro Elite or an affiliate of Pro Elite
for over two years may resell the shares of Common Stock without compliance with
the foregoing requirements under Rule 144.
No predictions can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price of the Common Stock prevailing from time to time. Nevertheless, sales of
substantial amounts of Common Stock, or the perception that such sales may
occur, could have a material adverse effect on prevailing market prices.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for Pro
Elite by Bondy & Schloss LLP, New York, New York.
CHANGE IN ACCOUNTANTS
As of May 22, 2001, the Board of Directors of Pro Elite appointed J.H. Cohn
LLP as Pro Elite's independent auditors and determined not to reappoint Mark A.
Feinberg. The report of Mark A. Feinberg on the financial statements as of and
for the two fiscal years ended February 29, 2000 and 1999 did not contain an
adverse opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope, or accounting principles. During Pro Elite's two most
recent fiscal years preceding such change in accountants and any subsequent
interim period preceding such change in accountants, there were no disagreements
with Mark A. Feinberg on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, nor were there
any other events that required reporting under SEC regulations.
EXPERTS
The financial statements of Pro Elite as of and for the year ended
February 28, 2001, appearing in this prospectus, have been audited by J.H. Cohn
LLP, independent public accountants, as set forth in their report thereon which
contains an explanatory paragraph with respect to Pro Elite's ability to
continue as a going concern. The financial statements of Pro Elite for the year
ended February 29, 2000, appearing in this prospectus, have been audited by
Mark A. Feinberg, independent public accountant, as set forth in his report
thereon. The financial statements are included in reliance upon such reports
given upon the authority of each of these firms as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION ABOUT US
This prospectus is a part of a registration statement on Form SB-2 we filed
with the SEC under the Securities Act. This prospectus omits certain information
contained in the registration statement, and we refer you to the registration
statement and to the exhibits to the registration statement for additional
information about the common stock and us. Upon registration we will file
annual, quarterly and special reports, and other information with the SEC. You
may read and copy any document we file with the SEC at the SEC's public
reference room located at 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the SEC's public reference rooms located at it's regional offices in New York,
New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0300 for
further information on the operation of public reference rooms. You can also
obtain copies of this material from the SEC's Internet web site
(http://www.sec.gov) that contains reports, proxy statements and other
information regarding registrants that file electronically with the SEC.
26
<Page>
PRO ELITE, INC.
INDEX TO FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
--------
Reports of Independent Accountants.......................... F-2/3
Balance Sheet February 28, 2001............................. F-4
Statements of Operations Years Ended February 28, 2001 and
February 29, 2000......................................... F-5
Statements of Changes in Stockholders' Deficiency Years
Ended February 28, 2001 and February 29, 2000............. F-6
Statements of Cash Flows Years Ended February 28, 2001 and
February 29, 2000......................................... F-7
Notes to Financial Statements............................... F-8
Condensed Balance Sheet November 30, 2001................... F-18
Condensed Statements of Operations Nine Months Ended
November 30, 2001 and 2000................................ F-19
Condensed Statement of Changes in Stockholders' Deficiency
Nine Months Ended
November 30, 2001......................................... F-20
Condensed Statements of Cash Flows Nine Months Ended
November 30, 2001 and 2000................................ F-21
Notes to Condensed Financial Statements..................... F-22
</Table>
* * *
F-1
<Page>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Pro Elite, Inc.
We have audited the accompanying balance sheet of Pro Elite, Inc. as of
February 28, 2001, and the related statements of operations, changes in
stockholders' deficiency and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 audit provides 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 Pro Elite, Inc. as of
February 28, 2001, and its results of operations and cash flows for the year
then ended, in conformity with accounting principles generally accepted in the
United States of America.
The financial statements referred to above have been prepared assuming that
the Company will continue as a going concern. As further discussed in Note 3 to
the financial statements, the Company's operations have generated recurring
losses and it had working capital and stockholders' deficiencies as of
February 28, 2001. Such matters raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans concerning these
matters are also described in Note 3. The accompanying financial statements do
not include any adjustments that might result from the outcome of these
uncertainties.
J.H. COHN LLP
Roseland, New Jersey
July 11, 2001, except for the effects
of the matters described in Note 12
as to which the date is February 15, 2002
F-2
<Page>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Pro Elite, Inc.
Secaucus, New Jersey
I have audited the accompanying balance sheets of Pro Elite, Inc. as of
February 28, 1999 and February 29, 2000 and the related statements of income,
retained earnings and cash flows of Pro Elite, Inc. for the years then ended.
These financial statements are the responsibility of the Company's management.
My responsibility is to express an opinion on these financial statements based
on my audit.
I conducted my audit in accordance with auditing standards generally
accepted in the United States of America. 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. I believe that my audit provides a reasonable
basis for my opinion.
In my opinion, the financial statements referred to above fairly present, in
all material respects, the results of operations and cash flows of Pro
Elite, Inc. for the year ended February 29, 2000, in conformity with accounting
principles generally accepted in the United States of America.
Mark A. Feinberg
Certified Public Accountant
Fair Lawn, New Jersey
June 15, 2000
F-3
<Page>
PRO ELITE, INC.
BALANCE SHEET
FEBRUARY 28, 2001
<Table>
ASSETS
Current assets:
Cash...................................................... $ 55,436
Accounts receivable, net of allowance for doubtful
accounts of $20,802..................................... 203,147
Inventories............................................... 324,559
Advances to officers...................................... 55,543
Other current assets...................................... 4,003
----------
Total current assets.................................... 642,688
Furniture and equipment, net of accumulated depreciation and
amortization of $101,468.................................. 41,182
Other assets................................................ 44,785
----------
Total................................................... $ 728,655
==========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable.......................................... $ 149,944
Accrued expenses.......................................... 679,615
Line of credit borrowings................................. 397,727
Current portion of long-term debt......................... 20,311
----------
Total current liabilities............................... 1,247,597
Long-term debt, net of current portion...................... 310,757
----------
Total liabilities....................................... 1,558,354
----------
Commitments and contingencies
Stockholders' deficiency:
Series A preferred stock, par value $.0001 per share;
12,000,000 shares authorized; 1,200,000 shares issued
and outstanding......................................... 120
Common stock, par value $.0001 per share; 50,000,000
shares authorized; 716,377 shares issued and
outstanding............................................. 71
Additional paid-in capital................................ 1,821,164
Subscription receivable for 1,200,000 shares of Series A
preferred stock......................................... (576,000)
Accumulated deficit....................................... (2,075,054)
----------
Total stockholders' deficiency.......................... (829,699)
----------
Total................................................... $ 728,655
==========
</Table>
See Notes to Financial Statements.
F-4
<Page>
PRO ELITE, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED FEBRUARY 28, 2001 AND FEBRUARY 29, 2000
<Table>
<Caption>
2001 2000
---------- ----------
Sales....................................................... $1,250,112 $1,668,680
Cost of sales............................................... 996,826 1,419,516
---------- ----------
Gross profit................................................ 253,286 249,164
---------- ----------
Operating expenses:
Selling expenses.......................................... 254,820 184,919
General and administrative expenses....................... 649,628 726,097
---------- ----------
Totals.................................................. 904,448 911,016
---------- ----------
Loss from operations........................................ (651,162) (661,852)
Interest expense............................................ 63,482 64,779
---------- ----------
Loss before extraordinary item.............................. (714,644) (726,631)
Extraordinary item--gain on extinguishment of debt.......... 38,500
---------- ----------
Net loss.................................................... $ (714,644) $ (688,131)
========== ==========
Basic loss per common share:
Loss before extraordinary item............................ $ (1.25) $ (1.46)
Extraordinary gain........................................ .08
---------- ----------
Net loss.................................................. $ (1.25) $ (1.38)
========== ==========
Basic weighted average common shares outstanding............ 572,298 497,355
========== ==========
</Table>
See Notes to Financial Statements.
F-5
<Page>
PRO ELITE, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
YEARS ENDED FEBRUARY 28, 2001 AND FEBRUARY 29, 2000
<Table>
<Caption>
SERIES A
PREFERRED STOCK COMMON STOCK ADDITIONAL
-------------------- --------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- -------- ---------- -------- ----------
Balance, March 1, 1999............................... 2,984,152 $298 $ 994,702
Net loss.............................................
---------- ---- ----------
Balance, February 29, 2000........................... 2,984,152 298 994,702
Effect of 1-for-6 reverse split...................... (2,486,773) (249) 249
Effects of issuance of common stock in exchange for
services........................................... 30,665 3 60,352
Sale of shares of common stock through private
placements......................................... 58,333 6 124,994
Sale of units of common stock and warrants through
private placements................................. 130,000 13 64,987
Subscription for purchase of Series A preferred
stock.............................................. 1,200,000 $120 575,880
Net loss.............................................
--------- ---- ---------- ---- ----------
Balance, February 28, 2001........................... 1,200,000 $120 716,377 $ 71 $1,821,164
========= ==== ========== ==== ==========
<Caption>
SUBSCRIPTION
RECEIVABLE
FOR PREFERRED STOCK
--------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
--------- --------- ----------- ---------
Balance, March 1, 1999............................... $ (672,279) $ 322,721
Net loss............................................. (688,131) (688,131)
----------- ---------
Balance, February 29, 2000........................... (1,360,410) (365,410)
Effect of 1-for-6 reverse split......................
Effects of issuance of common stock in exchange for
services........................................... 60,355
Sale of shares of common stock through private
placements......................................... 125,000
Sale of units of common stock and warrants through
private placements................................. 65,000
Subscription for purchase of Series A preferred
stock.............................................. 1,200,000 $(576,000)
Net loss............................................. (714,644) (714,644)
--------- --------- ----------- ---------
Balance, February 28, 2001........................... 1,200,000 $(576,000) $(2,075,054) $(829,699)
========= ========= =========== =========
</Table>
See Notes to Financial Statements.
F-6
<Page>
PRO ELITE, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED FEBRUARY 28, 2001 AND FEBRUARY 29, 2000
<Table>
<Caption>
2001 2000
--------- ---------
Operating activities:
Net loss.................................................. $(714,644) $(688,131)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Provision for bad debts................................. 22,478 1,371
Depreciation and amortization........................... 15,677 15,384
Effects of issuance of common stock in exchange for
services.............................................. 60,355
Gain on extinguishment of debt.......................... (38,500)
Changes in operating assets and liabilities:
Accounts receivable................................... (15,481) 501,525
Inventories........................................... 272,887 379,796
Advances to officers.................................. (53,617) (1,926)
Other current assets.................................. 7,945 69,310
Other assets.......................................... 9,279 (53,914)
Accounts payable and accrued expenses................. 110,790 56,467
--------- ---------
Net cash provided by (used in) operating
activities........................................ (284,331) 241,382
--------- ---------
Investing activities--purchases of furniture and
equipment................................................. (8,757) (28,286)
--------- ---------
Financing activities:
Net repayments of line of credit borrowings............... (45,660) (183,038)
Proceeds from long-term borrowings........................ 225,000
Repayments of long-term borrowings........................ (23,279) (47,153)
Proceeds from sale of common stock and units of common
stock and warrants...................................... 190,000
--------- ---------
Net cash provided by (used in) financing
activities........................................ 346,061 (230,191)
--------- ---------
Net increase (decrease) in cash............................. 52,973 (17,095)
Cash, beginning of year..................................... 2,463 19,558
--------- ---------
Cash, end of year........................................... $ 55,436 $ 2,463
========= =========
Supplemental disclosure of cash flow information:
Interest paid............................................. $ 62,376 $ 64,112
========= =========
</Table>
See Notes to Financial Statements.
F-7
<Page>
PRO ELITE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
Pro Elite, Inc. (the "Company") was incorporated during 1992 in New
Jersey. It is in the business of marketing and distributing premium
"branded apparel" such as shirts, hats and sweaters that have a sports or
corporate logo, name or slogan applied by means of embroidering to the
apparel.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America
("USGAAP") requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual
results could differ from those estimates.
Revenue recognition:
Sales are recognized when revenue is realized or becomes realizable
and has been earned. In general, revenue is recognized when risk and
title to the product transfers to the customer, which usually occurs
at the time of shipment of the related product. Amounts billed
related to shipping and handling are included in revenue.
Inventories:
Inventories, consisting primarily of raw materials (apparel that has
not been embroidered) are stated at the lower of cost or market. Cost
is determined by the first-in, first-out method.
Furniture and equipment:
Furniture and equipment is stated at cost, net of accumulated
depreciation. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets which range from five
to seven years.
Advertising:
The Company expenses the cost of advertising and promotions as
incurred. Advertising costs charged to operations amounted to
approximately $91,000 and $10,000 in 2001 and 2000, respectively.
Income taxes:
The Company accounts for income taxes pursuant to the asset and
liability method which requires deferred income tax assets and
liabilities to be computed annually for temporary differences between
the financial statement and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future based on
enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. The income tax
provision or credit is the tax payable or refundable for the period
plus or minus the change during the period in deferred tax assets and
liabilities.
F-8
<Page>
PRO ELITE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Reverse split:
The numbers of common shares and the per share amounts in these notes
and the accompanying financial statements have been retroactively
adjusted, where appropriate, for a 1-for-6 reverse split effected on
January 13, 2001.
Net earnings (loss) per common share:
The Company presents "basic" earnings (loss) per common share and, if
applicable, "diluted" earnings per common share pursuant to the
provisions of Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128"). Basic earnings (loss) per common
share is calculated by dividing the income or loss applicable to
common stock by the weighted average number of common shares
outstanding during each period. The calculation of diluted earnings
per common share is similar to that of basic earnings per common
share, except that the income or loss applicable to common stock and
the weighted average number of common shares outstanding during each
period are adjusted for the effects of the assumed issuance of all
potentially dilutive common shares, such as those issuable upon the
exercise of warrants and the conversion of debt or preferred stock.
Diluted earnings per share amounts have not been presented in the
accompanying statement of operations for 2001 because the Company had
a net loss for that year and, accordingly, the assumed effects of the
exercise of outstanding warrants, adjusted for the application of the
treasury stock method, and the assumed effects of the conversion of
outstanding shares of preferred stock would have been anti-dilutive.
Diluted earnings per share amounts have not been presented in the
accompanying statement of operations for 2000 because the Company did
not have any potentially dilutive common shares outstanding in that
year.
Stock based compensation:
In accordance with Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the
Company will recognize the cost of preferred or common shares,
options, warrants and other equity instruments issued to nonemployees
as consideration for services as expense over the periods in which
the related services are rendered by a charge to compensation cost or
another appropriate expense account and a corresponding credit to
additional paid-in capital. Generally, cost will be determined based
on the fair value of the equity instruments at the date of issuance.
The fair value of shares, options, warrants and similar equity
instruments will be estimated based on the Black-Scholes
option-pricing model, which meets the criteria set forth in
SFAS 123, and the assumption that all of the options or other equity
instruments will ultimately vest. The effect of actual forfeitures
will be recognized as they occur.
Recent accounting pronouncements:
The Financial Accounting Standards Board and the Accounting Standards
Executive Committee of the American Institute of Certified Public
Accountants had issued certain accounting pronouncements as of
February 28, 2001 that will become effective in subsequent periods;
however, management of the Company does not believe that any of
F-9
<Page>
PRO ELITE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
those pronouncements would have significantly affected the Company's
financial accounting measurements or disclosures had they been in
effect during 2001 and 2000 or that they will have a significant
affect at the time they become effective.
Segment information:
The Company is subject to the provisions of Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131"). Pursuant to the
provisions of SFAS 131, the Company is reporting segment sales in the
same format reviewed by the Company's management (the "management
approach"). The Company has two primary markets in which it sells
branded apparel: the licensed sports logo market and the corporate
logo market. While the Company does track sales in each of these
markets, it does not track the costs of such sales, as the costs are
substantially the same for both markets. In addition, none of the
Company's net assets are associated with a particular market.
The net sales for each market during 2001 and 2000 were as follows:
<Table>
<Caption>
MARKET 2001 2000
- ------ ---------- ----------
Licensed sports logos........................ $ 537,548 $ 600,725
Corporate logos.............................. 712,564 1,067,955
---------- ----------
Totals....................................... $1,250,112 $1,668,680
========== ==========
</Table>
NOTE 3--BASIS OF PRESENTATION:
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. However, the Company
incurred a net loss of approximately $715,000 in 2001 and a loss before
extraordinary gain of approximately $727,000 in 2000. As of February 28,
2001, the Company had a cash balance of only $55,000 and working capital
and stockholders' deficiencies of $605,000 and $830,000, respectively.
Sales decreased from $1,669,000 in 2000 to $1,250,000 in 2001. In
addition, the Company's license agreement with National Football League
Properties expired on March 31, 2001 and it agreed to liquidate all
apparel embroidered with National Football League logos by June 30, 2001.
Sales of such apparel accounted for 45% of the Company's total sales in
2001. Although the Company was able to reduce its working capital
deficiency primarily through a settlement in, effectively, March 2001 of
a portion of its obligations arising from sales of products with National
Football League logos (see Note 10), management believes that, in the
absence of a substantial increase in sales, it is probable that the
Company will continue to incur losses from operations and negative cash
flows from operating activities through at least February 28, 2002 and
that the Company will need to obtain additional equity or debt financing
and/or extend the due dates of or restructure some of its obligations to
be able to sustain its operations until it can achieve profitability.
Such matters raise substantial doubt about the Company's ability to
continue as a going concern.
Management believes that the commercial success and profitability of the
Company will depend primarily on whether the Company can increase sales
by making potential corporate customers aware of its ability to develop
and distribute premium apparel with corporate logos
F-10
<Page>
PRO ELITE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--BASIS OF PRESENTATION: (CONTINUED)
and developing a proprietary line of sportswear. To enable the Company to
sustain its operations through at least February 28, 2002 and,
ultimately, complete its marketing and development program and achieve
profitability, management plans to: (i) seek additional financing for the
Company through private sales of debt and equity securities, loans from
financial institutions and/or investments by strategic partners in joint
ventures established to sell mer-chandise developed by the Company,
(ii) issue equity securities in lieu of cash to pay for certain services
provided to the Company and/or (iii) seek the extension of due dates of
certain obligations of the Company. However, management cannot assure
that the Company will be able to obtain any additional equity or debt
financing or extend the due dates of or restructure any of its
obligations and, accordingly, management cannot assure that the Company
will be able to sustain its operations through at least February 28,
2002.
The accompanying financial statements do not include any adjustments
related to the recoverability and classification of assets or the amount
and classifications of liabilities that might be necessary should the
Company be unable to continue as a going concern.
NOTE 4--ADVANCES TO OFFICERS:
As of February 28, 2001, the Company had receivables of $55,543 from
officers that were noninterest bearing and due on demand. Management
believes that the advances will be repaid prior to February 28, 2002.
NOTE 5--FURNITURE AND EQUIPMENT:
Furniture and equipment consisted of the following at February 28, 2001:
<Table>
<Caption>
ESTIMATED
USEFUL
LIVES AMOUNT
--------- --------
Furniture............................................... 7 years $ 41,283
Computer hardware....................................... 5 years 43,995
Equipment............................................... 5 years 27,064
Computer software....................................... 5 years 30,308
--------
142,650
Less accumulated depreciation and amortization.......... 101,468
--------
Total................................................. $ 41,182
========
</Table>
NOTE 6--REVOLVING LINE OF CREDIT:
As of February 28, 2001, the Company had outstanding borrowings of
$397,727 under a line of credit provided by a bank that was due to expire
on January 31, 2001. The agreement with the bank originally provided for
borrowings based on specified percentages of the Company's accounts
receivable and inventories up to a maximum of $600,000, with interest
payable at 2.5% above the prime interest rate. Since, among other things,
the Company did not repay the outstanding borrowings as of the scheduled
expiration date, it was in default under the terms of the agreement and,
as a result, the interest rate increased to 5.5% above the prime rate, an
effective rate of 15.25% at February 28, 2001. On April 2, 2001, the
Company and the bank
F-11
<Page>
PRO ELITE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--REVOLVING LINE OF CREDIT: (CONTINUED)
entered into a settlement agreement with respect to the amount payable by
the Company (see Note 12).
NOTE 7--LONG-TERM DEBT:
Long-term debt consisted of the following at February 28, 2001:
<Table>
Notes payable in installments through:
January 1, 2003 (A)....................................... $ 42,016
August 23, 2003 (B)....................................... 59,500
Advances payable (C)........................................ 225,000
Other notes payable......................................... 4,552
--------
331,068
Less current portion........................................ 20,311
--------
Long-term portion........................................... $310,757
========
</Table>
(A) The remaining balance of the note is payable in varying monthly
installments of principal and interest ranging from $1,000 to $5,000
and a final installment of approximately $31,000 on January 1, 2003.
The note was issued to an investor (the "First Investor") to settle
disputes related to an obligation that arose prior to March 1, 1999
when the First Investor made a noninterest bearing advance of $50,000
to the Company with the understanding that the amount advanced would
be convertible into shares of the Company's common stock pursuant to
terms that would be subsequently negotiated, but without any formal
agreement as to the specific terms related to the conversion rate or
eventual repayment if the obligation was not converted. The Company
is accounting for the excess of the amounts to be paid pursuant to
the settlement agreement over the amount originally advanced
prospectively as interest expense. Based on the repayment terms set
forth in the settlement agreement, the note bears an effective
interest rate of 41.8%.
(B) The remaining balance of this noninterest bearing note is payable in
monthly installments of $1,000 and a final installment of $29,500 on
August 23, 2003. The note was issued with an original principal
balance of $126,500 in September 1999 to a lender to settle disputes
related to the repayment of an obligation that arose prior to
March 1, 1999 when the lender made a noninterest bearing loan of
$165,000 to the Company that had no specific due date. Under USGAAP,
the excess of the principal balance of the original loan over the
principal balance of the note issued as a result of the debt
restructuring which totaled $38,500 is reflected as an extraordinary
gain on extinguishment of debt in the accompanying 2000 statement of
operations, and there are no charges to interest expense in periods
subsequent to the restructuring.
(C) During the year ended February 28, 2001, another investor (the
"Second Investor") made a $225,000 advance to the Company with an
initial understanding that the amount advanced would be convertible
into shares of the Company's common stock pursuant to terms that
would be subsequently negotiated, but without any formal agreement at
the time of the advance and as of February 28, 2001 as to the
specific terms related to, among other things, the conversion rate.
F-12
<Page>
PRO ELITE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--LONG-TERM DEBT: (CONTINUED)
As explained in Note 12, on April 12, 2001, the Second Investor made
another $225,000 advance to the Company (the total advances of
$450,000 are referred to herein as the "Advances Payable"), and the
Company and the Second Investor reached an agreement pursuant to
which the Company issued a note to the Second Investor in the
principal amount of $450,000 that was supposed to: (i) be convertible
into common stock at any time at a conversion rate of $.045 per
share, (ii) bear interest at 10% payable through the issuance of
shares of common stock based on a conversion rate of $.045 per share
and (iii) be converted or repaid by April 12, 2002. The Company
initially agreed to prepay the interest through the issuance of
1,000,000 shares of common stock. In addition, on August 3, 2001, the
Second Investor agreed to subordinate its rights to the repayment of
the Advances Payable to the rights to the repayment of another note
payable by the Company in exchange for the issuance of 500,000
additional shares of the Company's common stock.
However, disputes arose between the Company and the Second Investor
related to the terms of the agreement, and the Company never issued
any of the 1,500,000 shares related to the payment of interest or the
subordination agreement.
As explained in Note 12, on February 15, 2002, the Company and the
Second Investor entered into certain agreements pursuant to which the
Second Investor will be entitled to receive a maximum of $500,000 as
payment for the $450,000 principal balance of the Advances Payable
and $50,000 of interest thereon from the gross proceeds of the sale
of up to 5,000,000 shares of the Company's common stock. Pursuant to
an escrow agreement, the Company agreed to transfer 5,000,000 shares
to an escrow agent. The Second Investor will have the right during
the escrow period to advise the escrow agent to sell shares from time
to time pursuant to Rule 144 of the Securities Act of 1933, as
amended (the "Act"), only at a price equal to or greater than the
average between the highest bid and lowest asked price of the shares
as quoted on the "pink sheets" or the OTC Bulletin Board for the five
trading days preceding the sale. Certain officers and directors of
the Company will hold the voting rights attributable to the escrowed
shares. The escrow period will end on the earlier of the date as of
which all of the shares have been sold or gross proceeds from sales
of the shares total $500,000. Any shares that remain in escrow after
the receipt of gross proceeds of $500,000 will be returned to the
Company's treasury.
The Company is accounting for the transactions with the Second
Investor as a $450,000 loan with respect to which it will be required
to repay the principal and up to $50,000 of interest from the
proceeds of the eventual sale of shares of its common stock. The
interest expense will be recorded on a straight-line basis over the
period from April 12, 2001 to April 11, 2002.
Since the Company will not be required to use current assets or incur
current liabilities in the repayment of the Advances Payable, the
outstanding principal balance of $225,000 as of February 28, 2001 has
been classified as a noncurrent liability. The principal balance of
F-13
<Page>
PRO ELITE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--LONG-TERM DEBT: (CONTINUED)
the remainder of the Company's long-term obligations totaled $106,068
as of February 28, 2001, which is payable in the years subsequent to
February 28, 2001 as follows:
<Table>
<Caption>
YEAR ENDING
FEBRUARY 28, AMOUNT
- --------------------- --------
2002........ $20,311
2003........ 50,257
2004........ 35,500
</Table>
NOTE 8--STOCKHOLDERS' EQUITY:
Preferred stock:
On January 30, 2001, the Company's Articles of Incorporation were
amended to authorize the issuance of up to 12,000,000 shares of
Series A preferred stock with a par value of $.0001 per share.
Holders of Series A preferred stock are entitled to per share
dividends equivalent to any dividends declared on the Company's
common stock and may convert each share of Series A preferred stock
at any time into ten shares of common stock. Holders of Series A
preferred stock are also entitled to cast ten votes for each share of
Series A preferred stock held on all matters to be voted on by the
Company's common stockholders.
On January 31, 2001, two officers of the Company entered into
subscription agreements whereby they were issued a total of 1,200,000
shares of Series A preferred stock and became obligated to pay the
Company aggregate consideration of $576,000 (or $.48 per share),
which approximated the fair value of the Company's common stock as of
the date of the agreement. The subscriptions are payable in five
installments totaling $115,200 annually commencing on December 31,
2001. The officers hold the voting rights for and the rights to
receive any dividends from the subscribed shares. Accordingly, the
Company will include the effects of the assumed conversion of the
subscribed preferred shares in its computations of fully diluted
earnings per share.
Sale of common stock:
During 2001, the Company sold a total of 58,333 shares of common
stock through private placements intended to be exempt from
registration under the Act for aggregate gross proceeds of $125,000,
of which $100,000 was attributable to the sale of 41,667 shares of
common stock at $2.40 per share and $25,000 was attributable to the
sale of 16,666 shares of common stock at $1.50 per share. The Company
did not incur any material incremental costs in connection with the
private placements.
On January 31, 2001, the Company commenced an offering for the sale
of up to 2,000,000 units of common stock and warrants at $.50 per
unit through a private placement intended to be exempt from
registration under the Act. Each unit consists of one share of common
stock, one Class A warrant and one Class B warrant. Each Class A
warrant is exercisable at $1.25 per share and each Class B warrant is
exercisable at $2.50 per share through January 31, 2002. The warrants
are redeemable at the option of the Company at $.05 per warrant upon
30-days' written notice provided the Company's common stock has a
closing bid price for the 20 consecutive trading days prior to the
date of notice of at least $2.50 per share with respect to the
redemption of the Class A warrants and $5.00 per share with respect
to the redemption of the Class B warrants. As
F-14
<Page>
PRO ELITE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--STOCKHOLDERS' EQUITY: (CONTINUED)
of February 28, 2001, the Company had received aggregate gross
proceeds of $65,000 from the sale of 130,000 units (see Note 12).
The Company did not allocate any of the proceeds from the sale of
units to the value of the warrants.
Issuance of common stock in exchange for services:
During 2001, the Company issued 30,665 shares of common stock with an
estimated aggregate fair value of $60,355 for professional and other
services which was charged to general and administrative expenses.
NOTE 9--INCOME TAXES:
As of February 28, 2001, the Company had net operating loss carryforwards
of approximately $1,784,000 available to reduce future Federal and state
taxable income which, if not used, will expire at various dates through
February 28, 2021.
As of February 28, 2001, the Company's deferred tax assets consisted of
the effects of temporary differences attributable to the following:
<Table>
Net operating loss carryforwards............................ $ 713,000
Allowance for doubtful accounts............................. 8,000
Valuation of inventories.................................... 30,000
---------
751,000
Less valuation allowance.................................... (751,000)
---------
Total..................................................... $ --
=========
</Table>
Due to the uncertainties related to, among other things, the changes in
the ownership of the Company, which could subject those loss
carryforwards to substantial annual limitations, and the extent and
timing of its future taxable income, the Company offset the deferred tax
assets by an equivalent valuation allowance as of February 28, 2001.
The Company had also offset the potential benefits of approximately
$471,000 and $222,000 from its net deferred tax assets by equivalent
valuation allowances as of February 29, 2000 and February 28, 1999,
respectively. As a result of the increase in the valuation allowance of
$280,000 and $249,000 during 2001 and 2000, respectively, there are no
credits for income taxes reflected in the accompanying statements of
operations to offset pre-tax losses.
NOTE 10--COMMITMENTS AND CONTINGENCIES:
Employment agreements:
On January 31, 2001, the Company entered into employment agreements
with two of its officers that provide for aggregate minimum annual
compensation of $185,000 for the period from February 1, 2001 through
January 31, 2006 and $125,000 for the period from February 1, 2006
through January 31, 2011.
Litigation settlement with major licensor:
Approximately 45% and 37% of the Company's sales during 2001 and
2000, respectively, were of products embroidered with the National
Football League logos pursuant to a
F-15
<Page>
PRO ELITE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--COMMITMENTS AND CONTINGENCIES: (CONTINUED)
license agreement with National Football League Properties, Inc.
("NFLP") which expired effectively on June 30, 2001.
In September 1999, the Company entered into a settlement agreement
with NFLP with respect to the payment of license and royalty fees by
the Company which NFLP claimed were owed and past due. Pursuant to
the terms of the settlement agreement, the Company and NFLP agreed
that if the Company complied with all of the terms of the license and
royalty agreement through March 31, 2001, NFLP would waive the
payment of license and royalty fees aggregating $621,685 it claimed
the Company owed prior to the settlement. The Company has accrued
license and royalty fees in that amount as of February 28, 2001.
Management believes the Company complied with all of the terms of the
license and royalty agreement through March 31, 2001 and,
accordingly, the Company will reverse the amount accrued and
recognize an equivalent gain from the litigation settlement as of
March 31, 2001. In addition, the Company recorded a $75,000 inventory
reserve as of February 28, 2001 and an equivalent charge to cost of
sales for the year then ended for management's estimate of the
carrying value of the NFLP inventory which the Company will not be
able to sell by June 30, 2001.
Concentrations of credit risk:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and accounts
receivable. The Company maintains cash in bank deposit accounts the
balances of which, at times, may exceed Federal insurance limits
(there was no such excess as of February 28, 2001). Exposure to
credit risk is reduced by placing such deposits in major financial
institutions and monitoring their credit ratings.
Exposure to concentration of credit risk with respect to accounts
receivable is generally limited by the Company closely monitoring the
extension of credit to its customers, the short payment terms
extended by the Company, the large number of customers comprising the
Company's customer base and the Company's maintenance of appropriate
allowances for potential credit losses.
Facility lease:
The Company leases its office and warehouse facilities under a
noncancelable operating lease that expires on August 31, 2002 and
requires monthly rental payments of $6,800. Rent expense totaled
$81,600 during 2001 and 2000.
NOTE 11--FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company's material financial instruments at February 28, 2001 for
which disclosure of estimated fair value is required by certain
accounting standards consisted of cash, accounts receivable, advances to
officer, accounts payable, accrued expenses, line of credit borrowings
and long-term debt. In the opinion of management, cash, accounts
receivable, accounts payable and accrued expenses were carried at values
that approximated their fair values because of their liquidity and/or
their short term maturities. However management does not believe that it
is practicable to estimate the fair values of (i) the advances to
officers because these loans were made to related parties or (ii) the
fair values of the line of credit and long-term borrowings because such
obligations are subject to the terms of various settlement or
restructuring agreements resulting in part from the Company's financial
condition and those terms could not be obtained from any independent
source.
F-16
<Page>
PRO ELITE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--SUBSEQUENT EVENTS:
On April 2, 2001, the Company and the bank that provided it with the
revolving line of credit (see Note 6) entered into a settlement agreement
whereby the Company was only required to repay a total of $325,000.
Accordingly, the Company will recognize an extraordinary gain from the
extinguishment of this debt of approximately $62,000 as of April 2, 2001
which represents the difference between the amount paid and the
outstanding principal balance and accrued interest as of that date of
approximately $387,000.
As explained in Note 8, the Company commenced a private offering for the
sale of up to 2,000,000 units of common stock and warrants at $.50 per
unit on January 31, 2001. During the period from March 1, 2001 through
April 30, 2001, the date the offering expired, the Company received
aggregate gross proceeds of $25,000 from the sale of an additional 50,000
units.
On May 31, 2001, the Company commenced another offering for the sale of
up to 2,000,000 units of common stock and warrants at $.50 per unit
through a private placement intended to be exempt from registration under
the Act. During the period from May 31, 2001 through July 15, 2001, the
date the offering expired, the Company received aggregate gross proceeds
of $10,000 from the sale of 20,000 units. Each unit consists of one share
of common stock, one Class C warrant and one Class D warrant. Each
Class C warrant is exercisable at $1.25 per share and each Class D
warrant is exercisable at $2.50 per share through May 31, 2002. The
warrants will be redeemable at the option of the Company at $.05 per
warrant upon terms equivalent to those of the Company's Class A and
Class B warrants (see Note 8).
The Company will not allocate any of the proceeds from the sale of units
to the value of the warrants.
On April 6, 2001, the Company sold 750,000 shares of common stock for
aggregate cash consideration of $100,000 or $.133 per share.
As more fully explained in Note 7, (i) on April 12, 2001, the Second
Investor made another $225,000 advance to the Company increasing the
total Advances Payable to $450,000; (ii) the Company and the Second
Investor reached an agreement pursuant to which the Company issued a note
to the Second Investor in the principal amount of the Advances Payable
that was supposed to be convertible into common stock at a conversion
rate of $.045 per share and bear interest at 10% payable through the
issuance of 1,000,000 shares of common stock; (iii) on August 3, 2001,
the Second Investor agreed to subordinate its rights to the repayment of
the Advances Payable in exchange for the issuance of 500,000 additional
shares of the Company's common stock; (iv) disputes arose between the
Company and the Second Investor and the Company never issued any of the
1,500,000 shares related to the payment of interest or the subordination
agreement; and (v) on February 15, 2002, the Company and the Second
Investor entered into certain agreements pursuant to which the Second
Investor will be entitled to receive a maximum of $500,000 as payment for
the $450,000 principal balance of the Advances Payable and $50,000 of
interest thereon from the gross proceeds of the sale of up to 5,000,000
shares of the Company's common stock subject to the terms of an escrow
agreement.
* * *
F-17
<Page>
PRO ELITE, INC.
CONDENSED BALANCE SHEET
NOVEMBER 30, 2001
(UNAUDITED)
<Table>
ASSETS
Current assets:
Cash...................................................... $ 712
Accounts receivable, net of allowance for doubtful
accounts of $29,692..................................... 168,910
Inventories............................................... 122,207
Receivable from sale of common stock...................... 25,000
Advances to officers...................................... 56,970
-----------
Total current assets.................................... 373,799
Furniture and equipment, net of accumulated depreciation and
amortization of $111,797.................................. 33,825
Other assets................................................ 34,717
-----------
Total................................................... $ 442,341
===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable.......................................... $ 251,733
Accrued expenses.......................................... 44,616
Advances from related party............................... 37,430
Other short-term borrowings............................... 60,000
Current portion of long-term debt......................... 26,807
-----------
Total current liabilities............................... 420,586
Long-term debt, net of current portion...................... 519,155
Accrued interest............................................ 28,000
-----------
Total liabilities....................................... 967,741
-----------
Commitments and contingencies
Stockholders' deficiency:
Series A preferred stock, par value $.0001 per share;
12,000,000 shares authorized; 1,200,000 shares issued
and outstanding......................................... 120
Common stock, par value $.0001 per share; 50,000,000
shares authorized; 1,703,043 shares issued and
outstanding............................................. 170
Additional paid-in capital................................ 2,439,315
Subscription receivable for 1,200,000 shares of Series A
preferred stock......................................... (576,000)
Accumulated deficit....................................... (2,389,005)
-----------
Total stockholders' deficiency.......................... (525,400)
-----------
Total................................................... $ 442,341
===========
</Table>
See Notes to Condensed Financial Statements.
F-18
<Page>
PRO ELITE, INC.
CONDENSED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED NOVEMBER 30, 2001 AND 2000
(UNAUDITED)
<Table>
<Caption>
2001 2000
--------- ---------
Sales....................................................... $ 681,088 $ 913,514
Cost of sales............................................... 555,312 586,337
--------- ---------
Gross profit................................................ 125,776 327,177
--------- ---------
Operating expenses:
Selling expenses.......................................... 141,416 196,952
General and administrative expenses....................... 474,954 479,365
--------- ---------
Totals................................................ 616,370 676,317
--------- ---------
Loss from operations........................................ (490,594) (349,140)
--------- ---------
Other income (expense):
Income from litigation settlement......................... 621,685
Interest expense:
Charge for beneficial conversion rights................. (450,000)
Other................................................... (56,796) (47,197)
--------- ---------
Totals................................................ 114,889 (47,197)
--------- ---------
Loss before extraordinary item.............................. (375,705) (396,337)
Extraordinary item--gain on extinguishment of debt.......... 61,754
--------- ---------
Net loss.................................................... $(313,951) $(396,337)
========= =========
Basic loss per common share:
Loss before extraordinary item............................ $ (.26) $ (.70)
Extraordinary gain........................................ .04
--------- ---------
Net loss.................................................. $ (.22) $ (.70)
========= =========
Basic weighted average common shares outstanding............ 1,420,952 562,337
========= =========
</Table>
See Notes to Condensed Financial Statements.
F-19
<Page>
PRO ELITE, INC.
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
NINE MONTHS ENDED NOVEMBER 30, 2001
(UNAUDITED)
<Table>
<Caption>
SERIES A
PREFERRED STOCK COMMON STOCK ADDITIONAL
-------------------- -------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- -------- --------- -------- ----------
Balance, March 1, 2001............................... 1,200,000 $120 716,377 $ 71 $1,821,164
Sale of common stock through private placement....... 750,000 75 99,925
Sale of units of common stock and warrants through
private placements................................. 70,000 7 34,993
Other sales of common stock and warrants through
private placement.................................. 166,666 17 24,983
Effects of issuance of warrants as consideration for
loan............................................... 8,250
Effects of issuance of beneficial conversion rights
in connection with revision of agreement related to
advances payable................................... 450,000
Net loss.............................................
--------- ---- --------- ---- ----------
Balance, November 30, 2001........................... 1,200,000 $120 1,703,043 $170 $2,439,315
========= ==== ========= ==== ==========
<Caption>
SUBSCRIPTION
RECEIVABLE
FOR PREFERRED STOCK
--------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
--------- --------- ----------- ---------
Balance, March 1, 2001............................... 1,200,000 $(576,000) $(2,075,054) $(829,699)
Sale of common stock through private placement....... 100,000
Sale of units of common stock and warrants through
private placements................................. 35,000
Other sales of common stock and warrants through
private placement.................................. 25,000
Effects of issuance of warrants as consideration for
loan............................................... 8,250
Effects of issuance of beneficial conversion rights
in connection with revision of agreement related to
advances payable................................... 450,000
Net loss............................................. (313,951) (313,951)
--------- --------- ----------- ---------
Balance, November 30, 2001........................... 1,200,000 $(576,000) $(2,389,005) $(525,400)
========= ========= =========== =========
</Table>
See Notes to Condensed Financial Statements.
F-20
<Page>
PRO ELITE, INC.
CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED NOVEMBER 30, 2001 AND 2000
(UNAUDITED)
<Table>
<Caption>
2001 2000
--------- ---------
Operating activities:
Net income (loss)......................................... $(313,951) $(396,337)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Provision for bad debts................................. 5,698 3,192
Depreciation and amortization........................... 10,366 11,445
Amortization of debt discount........................... 8,250
Effects of issuance of common stock in exchange for
services.............................................. 60,355
Income from litigation settlement....................... (621,685)
Charges to interest expense for effects of issuance of
beneficial conversion rights.......................... 450,000
Gain on extinguishment of debt.......................... (61,754)
Changes in operating assets and liabilities:
Accounts receivable................................... 28,539 (22,914)
Inventories........................................... 202,352 68,429
Advances to officers.................................. (1,427) (10,175)
Other current assets.................................. 4,003 (22,323)
Other assets.......................................... 10,030 35,410
Accounts payable and accrued expenses................. 116,475 149,376
--------- ---------
Net cash used in operating activities............... (163,104) (123,542)
--------- ---------
Investing activities--purchases of furniture and equipment (2,971) (2,236)
--------- ---------
Financing activities:
Net repayments of line of credit borrowings............... (335,973) (43,994)
Advances from related party............................... 37,430
Proceeds from other short-term borrowings................. 60,000
Proceeds from long-term borrowings........................ 225,000 100,000
Repayments of long-term borrowings........................ (10,106) (11,245)
Proceeds from sale of common stock and units of common
stock and warrants...................................... 135,000 125,000
--------- ---------
Net cash provided by financing activities........... 111,351 169,761
--------- ---------
Net increase (decrease) in cash............................. (54,724) 43,983
Cash, beginning of period................................... 55,436 2,463
--------- ---------
Cash, end of period......................................... $ 712 $ 46,446
========= =========
</Table>
See Notes to Condensed Financial Statements.
F-21
<Page>
PRO ELITE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--UNAUDITED CONDENSED FINANCIAL STATEMENTS:
In the opinion of management, the accompanying unaudited condensed financial
statements reflect all adjustments, consisting of normal recurring accruals,
necessary to present fairly the financial position of Pro Elite, Inc. (the
"Company") as of November 30, 2001, its results of operations and cash flows for
the nine months ended November 30, 2001 and 2000 and its changes in
stockholders' deficiency for the nine months ended November 30, 2001. Pursuant
to the rules and regulations of the United States Securities and Exchange
Commission (the "SEC"), certain information and disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America ("USGAAP") have been condensed or
omitted from these financial statements unless significant changes have taken
place since the end of the most recent fiscal year. Accordingly, these unaudited
condensed financial statements should be read in conjunction with the Company's
audited financial statements as of February 28, 2001 and for the years ended
February 28, 2001 and February 29, 2000 and the notes to those financial
statements (the "Audited Financial Statements") and the other information
included elsewhere herein.
The results of operations for the nine months ended November 30, 2001 are
not necessarily indicative of the results to be expected for the year ending
February 28, 2002.
NOTE 2--BASIS OF PRESENTATION:
The accompanying unaudited condensed financial statements have been prepared
assuming that the Company will continue as a going concern. However, the Company
incurred a loss before extraordinary gain of approximately $376,000 in the nine
months ended November 30, 2001 and, as shown in the Audited Financial
Statements, a net loss of $715,000 in the year ended February 28, 2001 and a
loss before extraordinary gain of $727,000 in the year ended February 29, 2000.
As of November 30, 2001, the Company had a cash balance of only $700 and working
capital and stockholders' deficiencies of $47,000 and $525,000, respectively. In
addition, the Company's license agreement with National Football League
Properties expired on March 31, 2001 and it was required to liquidate all
apparel embroidered with National Football League logos by June 30, 2001. Sales
of such apparel accounted for 4% of the Company's total sales in the nine months
ended November 30, 2001 and 45% and 37% of the Company's total sales in the
years ended February 28, 2001 and February 29, 2000, respectively. Such matters
raise substantial doubt about the Company's ability to continue as a going
concern. Management believes that as a result of sales increases in each of the
months in the period from December 1, 2001 through March 31, 2002 compared to
the sales in the same month in the prior year the Company's results of
operations and cash flows for the twelve-month period ending November 30, 2002
may improve substantially. However, management also believes that the Company
may need to obtain additional equity or debt financing and/or extend the due
dates of or restructure some of its obligations during the twelve-month period
ending November 30, 2002.
Management believes that the commercial success and profitability of the
Company will depend primarily on whether the Company can increase sales by
making potential corporate customers aware of its ability to develop and
distribute premium apparel with corporate logos and developing a proprietary
line of sportswear. To enable the Company to sustain its operations through at
least November 30, 2002 and, ultimately, complete its marketing and development
program and achieve profitability, management plans to: (i) seek additional
financing for the Company through private sales of debt and equity securities,
loans from financial institutions and/or investments by strategic partners
F-22
<Page>
PRO ELITE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2--BASIS OF PRESENTATION: (CONTINUED)
in joint ventures established to sell merchandise developed by the Company,
(ii) issue equity securities in lieu of cash to pay for certain services
provided to the Company, (iii) ask the holders to convert convertible debentures
issued by the Company into shares of common stock (see Notes 5 and 9 herein)
and/or (iv) seek the extension of due dates of certain other obligations of the
Company. However, management cannot assure that the Company will be able to
obtain any additional equity or debt financing or extend the due dates of or
restructure any of its obligations and, accordingly, management cannot assure
that the Company will be able to sustain its operations through at least
November 30, 2002.
The accompanying unaudited condensed financial statements do not include any
adjustments related to the recoverability and classification of assets or the
amount and classifications of liabilities that might be necessary should the
Company be unable to continue as a going concern.
NOTE 3--NET EARNINGS (LOSS) PER COMMON SHARE:
As explained in Note 2 to the Audited Financial Statements, the Company
presents "basic" earnings (loss) per common share and, if applicable, "diluted"
earnings per common share pursuant to the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). Pursuant to
SFAS 128, basic loss per share amounts were computed based on the net loss for
the nine months ended November 30, 2001 and 2000 (there were no dividends
applicable to outstanding shares of Series A preferred stock) and the weighted
average number of common shares actually outstanding during each period.
Diluted earnings per share amounts have not been presented in the
accompanying condensed statement of operations for the nine months ended
November 30, 2001 because the Company had a net loss for that period and,
accordingly, the assumed effects of the exercise of outstanding warrants,
adjusted for the application of the treasury stock method, and the assumed
effects of the conversion of a note payable, advances payable and shares of
preferred stock, would have been anti-dilutive. Diluted earnings per share
amounts have not been presented in the accompanying condensed statement of
operations for the nine months ended November 30, 2000 because the Company did
not have any potentially dilutive common shares outstanding in that period.
NOTE 4--INCOME TAXES:
As of November 30, 2001, the Company had net operating loss carryforwards of
approximately $1,672,000 available to reduce future Federal and state taxable
income which, if not used, will expire at various dates through February 28,
2022.
F-23
<Page>
PRO ELITE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 4--INCOME TAXES: (CONTINUED)
As of November 30, 2001, the Company's deferred tax assets consisted of the
effects of temporary differences attributable to the following:
<Table>
Net operating loss carryforwards............................ $ 669,000
Allowance for doubtful accounts............................. 12,000
Valuation of inventories.................................... 30,000
---------
711,000
Less valuation allowance.................................... (711,000)
---------
Total..................................................... $ --
=========
</Table>
Due to the uncertainties related to, among other things, the changes in the
ownership of the Company, which could subject those loss carryforwards to
substantial annual limitations, and the extent and timing of its future taxable
income, the Company offset the deferred tax assets by an equivalent valuation
allowance as of November 30, 2001.
The Company had also offset the potential benefits from its net deferred tax
assets by an equivalent valuation allowance during the year ended February 29,
2000. As a result of a decrease in the valuation allowance of $40,000 during the
nine months ended November 30, 2001 and an increase in the valuation allowance
of $186,000 during the nine months ended November 30, 2000, there are no credits
for income taxes reflected in the accompanying condensed statements of
operations to offset pre-tax losses.
NOTE 5--ADVANCES FROM RELATED PARTY AND OTHER SHORT-TERM BORROWINGS:
As of November 30, 2001, the Company had received advances from a related
party totaling $37,430 that were noninterest bearing and due on demand. It also
had two outstanding short-term notes payable with principal balances of $50,000
and $10,000, respectively.
The $50,000 note, which was issued on August 3, 2001 to an investor (the
"Third Investor"), bears interest at 10% and was initially payable on
November 3, 2001. However, the maturity date was subsequently extended to
May 3, 2002. As additional consideration for the loan, the Third Investor
received warrants to purchase 25,000 shares of the Company's common stock that
are exercisable at $.50 per share through August 1, 2006 and options to purchase
250,000 shares of the Company's common stock that are exercisable at $.20 per
share through August 1, 2006. The Company valued the warrants and options issued
to the Third Investor at an estimated fair value of $8,250 based on the
Black-Scholes option-pricing model. Accordingly, the Company initially increased
additional paid-in capital by a total of $8,250 and reduced the carrying value
of the $50,000 note by $8,250 for the debt discount attributable to the fair
value of the warrants and options issued to the Third Investor. The debt
discount was amortized to interest expense over the initial term of the $50,000
note.
The $10,000 note, which was issued on September 4, 2001 to an investor (the
"Fourth Investor"), bears interest at 10% and was initially payable on
February 7, 2002. However, the maturity date was subsequently extended to
May 7, 2002. This note is convertible into shares of common stock at any time at
a conversion rate of $.20 per share.
F-24
<Page>
PRO ELITE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 6--LONG-TERM DEBT:
Long-term debt consisted of the following at November 30, 2001:
<Table>
Note payable in installments through:
January 1, 2003 (A)....................................... $ 41,399
August 23, 2003 (A)....................................... 52,500
Advances payable (B)........................................ 450,000
Other notes payable......................................... 2,063
--------
545,962
Less current portion........................................ 26,807
--------
Long-term portion........................................... $519,155
========
</Table>
- ------------------------
(A) See Note 7 to the Audited Financial Statements.
(B) As explained in Note 7 to the Audited Financial Statements, (i) on
April 12, 2001, a second investor (the "Second Investor") made another
$225,000 advance to the Company (the total advances of $450,000 made by
the Second Investor are referred to herein as the "Advances Payable");
(ii) the Company and the Second Investor reached an agreement pursuant to
which the Company issued a note to the Second Investor in the principal
amount of the Advances Payable that was supposed to be convertible into
common stock at a conversion rate of $.045 per share and bear interest at
10% payable through the issuance of 1,000,000 shares of common stock;
(iii) on August 3, 2001, the Second Investor agreed to subordinate its
rights to the repayment of the Advances Payable in exchange for the
issuance of 500,000 additional shares of the Company's common stock;
(iv) disputes arose between the Company and the Second Investor and the
Company never issued any of the 1,500,000 shares related to the payment
of interest or the subordination agreement; and (v) on February 15, 2002,
the Company and the Second Investor entered into certain agreements
pursuant to which the Second Investor will be entitled to receive a
maximum of $500,000 as payment for the $450,000 principal balance of the
Advances Payable and $50,000 of interest thereon from the gross proceeds
of the sale of up to 5,000,000 shares of the Company's common stock
subject to the terms of an escrow agreement.
Based on the selling price for shares sold on April 6, 2001 (see Note 7
herein), the Company's common stock had a fair value of approximately
$.133 per share on April 12, 2001, the date the Company agreed to allow
the Second Investor to convert the Advances Payable into common stock at
$.045 per share. Pursuant to USGAAP, such excess constituted a beneficial
conversion feature or right for which the value is measured by the
difference between the aggregate conversion price and the fair value of
the common stock into which the debt is convertible, multiplied by the
number of shares into which the debt is convertible. Accordingly, the
beneficial conversion rights attributable to the Advances Payable at the
time they became convertible had an aggregate fair value of approximately
$880,000, which equaled the excess of the aggregate amount the Second
Investor would have received if the Second Investor had converted the
Advances Payable and sold the 10,000,000 shares of common stock it would
have received for approximately $1,330,000 based on the fair market value
of $.133
F-25
<Page>
PRO ELITE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 6--LONG-TERM DEBT: (CONTINUED)
per share on April 12, 2001 over the aggregate conversion price of
$450,000. Pursuant to USGAAP, the Company was required to charge the
lesser of the principal amount of the Advances Payable ($450,000) or the
fair value of the Advances Payable ($880,000) to interest expense at the
time the Advances Payable first became convertible. Accordingly, the
Company charged $450,000 to interest expense on April 12, 2001.
NOTE 7--STOCKHOLDERS' EQUITY:
As explained in Notes 8 and 12 to the Audited Financial Statements, on
January 31, 2001, the Company commenced an offering for the sale of up to
2,000,000 units of common stock and warrants at $.50 per unit through a private
placement intended to be exempt from registration under the Securities Act of
1933 (the "Act"). During the period from March 1, 2001 through April 30, 2001,
the date the offering expired, the Company received aggregate gross proceeds of
$25,000 from the sale of an additional 50,000 units.
As explained in Note 12 to the Audited Financial Statements, on May 31,
2001, the Company commenced another offering for the sale of up to 2,000,000
units of common stock and warrants at $.50 per unit through a private placement
intended to be exempt from registration under the Act. During the period from
May 31, 2001 through July 15, 2001, the date the offering expired, the Company
received aggregate gross proceeds of $10,000 from the sale of 20,000 units.
The Company did not allocate any of the proceeds from the sale of units to
the value of the warrants.
On April 6, 2001, the Company sold 750,000 shares of common stock for
aggregate cash consideration of $100,000, or $.133 per share.
On November 3, 2001, the Company sold 166,666 shares of common stock for
aggregate consideration of $25,000, or $.15 per share, which was paid in cash in
December 2001. The buyer also received warrants to purchase 166,666 shares of
common stock at $.15 per share that are exercisable through December 2, 2004.
The Company did not allocate any of the proceeds to the value of the common
stock.
F-26
<Page>
PRO ELITE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 7--STOCKHOLDERS' EQUITY: (CONTINUED)
As of November 30, 2001, the Company had shares of common stock reserved for
issuance as follows:
<Table>
Shares issuable upon conversion of:
$10,000 note payable at $.20 per share through May 7,
2002.................................................... 50,000
Advances Payable (A) (B).................................. 10,000,000
Series A preferred stock (A).............................. 12,000,000
Shares issuable upon exercise of:
Class A warrants exercisable at $1.25 per share through
January 31, 2002........................................ 180,000
Class B warrants exercisable at $2.50 per share through
January 31, 2002........................................ 180,000
Class C warrants exercisable at $1.25 per share through
May 31, 2002............................................ 20,000
Class D warrants exercisable at $2.50 per share through
May 31, 2002............................................ 20,000
Warrants exercisable at $.15 per share through
December 2, 2004........................................ 166,666
Warrants exercisable at $.50 per share through August 1,
2006.................................................... 25,000
Options exercisable at $.20 per share through August 1,
2006.................................................... 250,000
----------
Total................................................... 22,891,666
==========
</Table>
- ------------------------
(A) See Note 6 herein and Notes 7, 9 and 12 to the Audited Financial
Statements.
(B) As a result of the agreements entered into on February 15, 2002, the
maximum number of shares issuable to the Second Investor in connection
with the repayment of the note will be 5,000,000 shares.
NOTE 8--SEGMENT INFORMATION:
The Company is subject to the provisions of Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS 131"). Pursuant to the provisions of SFAS 131, the
Company is reporting segment sales in the same format reviewed by the Company's
management (the "management approach"). The Company has two primary markets in
which it sells branded apparel: the licensed sports logo market and the
corporate logo market. While the Company does track sales in each of these
markets, it does not track the costs of such sales, as the costs are
substantially the same for both markets. In addition, none of the Company's net
assets are associated with a particular market.
The net sales for each market during the nine months ended November 30, 2001
and 2000 were as follows:
<Table>
<Caption>
MARKET 2001 2000
- ------ -------- --------
Licensed sports logos................................... $ 27,243 $411,081
Corporate logos......................................... 653,845 502,433
-------- --------
Totals.................................................. $681,088 $913,514
======== ========
</Table>
F-27
<Page>
PRO ELITE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 9--LITIGATION SETTLEMENT WITH MAJOR LICENSOR:
As explained in Note 10 to the Audited Financial Statements, in
September 1999, the Company entered into a settlement agreement with National
Football League Properties, Inc. ("NFLP") with respect to the payment of license
and royalty fees by the Company which NFLP claimed were owed and past due.
Pursuant to the terms of the settlement agreement, the Company and NFLP agreed
that if the Company complied with all of the terms of the license and royalty
agreement through March 31, 2001, NFLP would waive the payment of license and
royalty fees aggregating $621,685 it claimed the Company owed prior to the
settlement. The Company had accrued license and royalty fees in that amount as
of February 28, 2001. The Company complied with all of the terms of the license
and royalty agreement through March 31, 2001 and, accordingly, it reversed the
amount accrued and recognized an equivalent gain from the litigation settlement
during the nine months ended November 30, 2001.
NOTE 10--EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT:
On April 2, 2001, the Company and the bank that provided it with the
revolving line of credit (see Note 6 to the Audited Financial Statements)
entered into an agreement whereby the Company was only required to repay a total
of $325,000 to settle its obligation to repay the outstanding principal balance
of its line of credit borrowings and the accrued interest thereon as of that
date which totaled $386,754. Accordingly, the Company recognized an
extraordinary gain from the extinguishment of this debt of $61,754 during the
nine months ended November 30, 2001.
* * *
F-28
<Page>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WE HAVE NOT AUTHORIZED ANY UNDERWRITER, DEALER, SALESPERSON OR OTHER PERSON
TO GIVE ANY INFORMATION OR REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS.
YOU MUST NOT RELY ON ANY UNAUTHORIZED INFORMATION. THIS PROSPECTUS DOES NOT
OFFER TO SELL OR BUY ANY SHARES IN ANY JURISDICTION WHERE IT IS UNLAWFUL TO DO
SO.
------------------------
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
Prospectus Summary.................... 2
Summary Historical Financial
Data................................ 4
Risk Factors.......................... 5
Market for Common Equity and Related
Stockholder Matters................. 9
Capitalization........................ 10
Selected Financial Data............... 11
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 12
Business.............................. 16
Management............................ 19
Principal and Selling Security
Holders............................. 21
Plan of Distribution.................. 23
Certain Relationships and Related
Transactions........................ 24
Description of Securities............. 24
Shares Eligible for Future Sale....... 24
Legal Matters......................... 25
Experts............................... 25
Where You Can Find More Information
About Us............................ 25
Index to Financial Statements......... F-1
</Table>
------------------------
UNTIL , 2002 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS
THAT BUY SELL OR TRADE THE SHARES AND WARRANTS INCLUDED IN THESE UNITS, WHETHER
OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE DEALERS' OBLIGATIONS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
PRO ELITE, INC.
SHARES OF COMMON STOCK
$.0001 PAR VALUE
---------------------
PROSPECTUS
---------------------
, 2002
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Page>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company is organized under the laws of the State of New Jersey.
Section 14A:3-5 of the New Jersey Revised Statutes, in general, empowers a New
Jersey corporation to indemnify any person who was or is a party or is
threatened to be made a party to any lawsuit or proceeding (other than an action
by or in the right of that corporation) due to the fact that such person is or
was a director, officer, employee or agent of that corporation, or is or was
serving at the request of that corporation as a director, officer, employee or
agent of another corporation or entity. A corporation is also allowed, in
advance of the final disposition of a lawsuit or proceeding, to pay the expenses
(including attorneys' fees) incurred by any officer, director, employee or agent
in defending the action, as long as the person undertakes to repay this amount
if it is ultimately determined that he or she is not entitled to be indemnified
by the corporation. In addition, New Jersey law allows a corporation to
indemnify these persons against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by any of
them in connection with the lawsuit or proceeding if (a) he or she acted in good
faith and in a manner he or she reasonably believed to be in or not opposed to
the best interests of the corporation, and (b) with respect to any criminal
action or proceeding, had no reasonable cause to believe his or her conduct was
unlawful.
A New Jersey corporation also can indemnify its officers and directors in an
action by or in the right of the corporation to procure a judgment in its favor
under the same conditions, except that judicial approval is needed to indemnify
any officer or director who is adjudged to be liable to the corporation. Where
an officer or director is successful on the merits or otherwise in the defense
of any such action, the corporation must indemnify him or her against the
expenses (including attorneys' fees) which he or she actually and reasonably
incurred in connection with this action. The indemnification provided by New
Jersey law is not deemed to be exclusive of any other rights to which an officer
or director may be entitled under any corporation's own organizational
documents, agreements or otherwise.
As permitted by Section 14A:3-5 of the Revised New Jersey Statutes, Article
Seven of our restated certificate of incorporation provides that we will
indemnify each person who is or was our director, officer, employee or agent
(including the heirs, executors, administrators or estate of these individuals)
or is or was serving at our request as a director, officer, employee or agent of
another entity, to the fullest extent that the law permits. This indemnification
is exclusive of any other rights to which any of these individuals otherwise may
be entitled. The indemnification also continues after a person ceases to be a
director, officer, employee or agent of our company and inures to the benefit of
the heirs, executors and administrators of these individuals. Expenses
(including attorneys' fees) incurred in defending any lawsuit or proceeding are
also paid by us in advance of the final disposition of these lawsuits or
proceedings after we receive an undertaking from the indemnified person to repay
this amount if it is ultimately determined that he or she is not entitled to be
indemnified by us. Article Seven further provides that a director or officer
shall not be personally liable, or shall be liable only to the extent therein
provided, to the corporation or its shareholders for damages for breach of any
duty owed to the corporation or its shareholders, except that such provision
shall not relieve a director or officer from liability for any breach of duty
based upon an act or omission (a) in breach of such person's duty of loyalty to
the corporation or its shareholders, (b) not in good faith or involving a
knowing violation of law or (c) resulting in receipt by such person of an
improper personal benefit. As used above, an act or omission in breach of a
person's duty of loyalty means an act or omission which that person knows or
believes to be contrary to the best interests of the corporation or its
shareholders in connection with a matter in which he has a material conflict of
interest. The Company's By-laws also provide that, to the fullest extent
permitted by law, we will indemnify any person who is a party or
II-1
<Page>
otherwise involved in any proceeding because of the fact that he or she is or
was a director or officer of our company or was serving at our request.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT
OF 1933 MAY BE PERMITTED TO OUR DIRECTORS, OFFICERS AND CONTROLLING PERSONS
PURSUANT TO ANY OF THESE FOREGOING PROVISIONS, OR OTHERWISE, WE HAVE BEEN
ADVISED THAT IN THE OPINION OF THE SEC SUCH INDEMNIFICATION IS AGAINST PUBLIC
POLICY AS EXPRESSED IN THE SECURITIES ACT AND IS, THEREFORE, UNENFORCEABLE.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses incurred in connection
with the issuance and distribution of the securities being registered hereby
expected to be incurred by the Company:
<Table>
SEC registration fee................................... $ 569.63
State securities law fees and expenses................. $ 7,000
Printing and engraving expenses........................ $ 35,000
Legal fees and expenses................................ $ 60,000
Accounting fees and expenses........................... $ 70,000
Miscellaneous.......................................... $ 5,000
-----------
Total................................................ $177,569.63
===========
</Table>
- ------------------------
* To be completed by amendment.
All amounts in the above table are estimated except the SEC registration
fee.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In April 2000, the Company made a private sale of 41,667 shares of Common
Stock for a total aggregate consideration of $100,000, or $2.40 per share.
The Company sold an additional 16,666 shares of Common Stock for an
aggregate consideration of $25,000, or $1.50 per share, in July 2000.
Since April 2000 to date the Company issued 30,665 shares of common stock
having a fair value of $60,355 as compensation for services provided by various
vendors, consultants, and attorneys.
All of the above issuances were performed under and in reliance on
Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"),
as each of them was made to a single investor whom the Company believes to be a
sophisticated investor, and none of the issuances was in connection with any
public offering. The number of shares reflected for each issuance listed above
has been adjusted to give effect to a 1:6 reverse stock split of the Company's
common stock as of January 13, 2001.
Commencing January 31, 2001, the Company issued 180,000 units at $0.50 per
unit in a private placement pursuant to Rule 506 of Regulation D. The Company
did not engage in a general solicitation of investors in the offering and
offered the units to accredited investors only. Each unit consisted of one share
of the Company's common stock, one Class A Common Stock Purchase Warrant to
purchase one share of our common stock at a price of $1.25 per share until
January 31, 2002 and one Class B Common Stock Purchase Warrant to purchase one
share of the Company's common stock exercisable at $2.50 per share until
January 31, 2002.
In April 2001, the Company issued 750,000 shares of its common stock to
Mr. George Bally at a price of $.14 per share in a private sale in reliance on
Section 4(2) of the Securities Act, as the sale was to a single, sophisticated,
accredited investor and not in connection with a public offering.
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<Page>
On April 13, 2001, the Company issued to Mr. Joseph Blumenthal a 10%
Convertible Promissory Note in the original principal amount of $450,000. The
note states that it is convertible at a rate of $.045 per share into shares of
the Company common stock. The Company issued this note also in reliance on
Section 4(2) of the Securities Act, as it was issued to a single investor and
not in connection with a public offering.
On May 31, 2001, the Company issued 20,000 units at $0.50 per unit in a
private placement pursuant to Rule 506 of Regulation D to one accredited
investor only. Each unit consisted of one share of the Company's common stock,
one Class C Common Stock Purchase Warrant to purchase one share of our common
stock at a price of $1.25 per share until May 31, 2002 and one Class D Common
Stock Purchase Warrant to purchase one share of the Company's common stock
exercisable at $2.50 per share until May 31, 2002.
In August 2001, the Company received a $50,000 loan which bears interest at
10% and was initially intended to mature on November 3, 2001 but was extended to
May 3, 2002. In connection with such loan, the Company issued to the lender
warrants to purchase 25,000 shares of its common stock at $.50 per share and
options to purchase 250,000 shares at $.20 per share. The options and warrants
expire on August 1, 2006. The company issued these securities in reliance on
Section 4(2) of the Securities Act, as it was issued to a single investor and
not in connection with a public offering.
In September 2001, the Company received a $10,000 loan which bears interest
at 10%. The loan is convertible into shares of the Company's common stock at
$.20 per share. The Company issued this note in reliance on Section 4(2) of the
Securities Act, as it was issued to a single investor and not in connection with
a public offering.
On November 3, 2001, the Company sold 166,666 shares of common stock for
aggregate consideration of $25,000 or $.15 per share. The Buyer also receives
warrants to purchase 166,666 shares of common stock of $.15 per share that are
exercisable through December 2, 2004.
ITEM 27. EXHIBITS
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Certificate of Incorporation, as amended**
3.2 By-Laws**
4.1 Specimen certificate for common stock**
4.2 Specimen certificate for preferred stock**
4.3 Class A Common Stock Purchase Warrant**
4.4 Class B Common Stock Purchase Warrant**
4.5 Class C Common Stock Purchase Warrant**
4.6 Class D Common Stock Purchase Warrant**
5.1 Opinion of Bondy & Schloss LLP
10.1 Employment Agreement of Mr. Robert Polsky**
10.2 Employment Agreement of Mr. Michael Polsky**
10.3 Consulting Agreement by and between the Company and TK
Investor Relations Group Inc.**
10.4 Consulting Agreement by and between the Company and
Pathfinder International Group, Inc.**
10.5 Agreement by and between the Company and Fleer/Skybox
International LP.**
16.1 Letter from Feinberg & Company regarding change in
accountants
23.1 Consent of J.H. Cohn LLP
23.2 Consent of Mark A. Feinberg
23.3 Consent of Bondy & Schloss LLP (included as part of Exhibit
5.1)**
</Table>
- ------------------------
* To be filed by amendment.
** Previously filed.
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<Page>
ITEM 28. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to;
(i) Include any prospectus required by Section 10(a)(3) for the
Securities Act of 1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information set forth in the Registration Statement; and
(iii) Include any additional changed material information on the plan
of distribution.
(2) For determining liability under the Securities Act, treat each such
post- effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
BONA FIDE offering thereof.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer 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 small business
issuer 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 the Securities Act and will be governed by the final adjudication
of such issue.
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<Page>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, 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 authorized this
Amendment No. 2 to its registration statement to be signed on its behalf by the
undersigned, in the City of Secaucus, State of New Jersey on April 16, 2002.
<Table>
PRO ELITE, INC.
By: /s/ ROBERT POLSKY
-----------------------------------------
Robert Polsky
CEO AND CHAIRMAN OF THE BOARD
</Table>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to its Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<Table>
<Caption>
NAME TITLE DATE
---- ----- ----
Chairman of the Board
/s/ ROBERT POLSKY Executive Officer and Director
-------------------------------------- (Principal Financial and April 16, 2002
Robert Polsky Accounting Officer)
/s/ MICHAEL POLSKY
-------------------------------------- President, Secretary and April 16, 2002
Michael Polsky Director
</Table>
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