As filed with the Securities and Exchange Commission on August 11, 1997
REGISTRATION NO. 333-29181
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
COLLECTIBLES USA, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 5999 13-3906920
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
ONE BATTERY PARK PLAZA, 24TH FLOOR
NEW YORK, NEW YORK 10004
(212) 344-1271
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
RONALD P. RAFALOFF
CHAIRMAN OF THE BOARD
COLLECTIBLES USA, INC.
ONE BATTERY PARK PLAZA, 24TH FLOOR
NEW YORK, NEW YORK 10004
(212) 344-1271
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
DAVID W. POLLAK, ESQ. PAUL JACOBS, ESQ.
MORGAN, LEWIS & BOCKIUS LLP FULBRIGHT & JAWORSKI L.L.P.
101 PARK AVENUE 666 FIFTH AVENUE
NEW YORK, NEW YORK 10178 NEW YORK, NEW YORK 10103
(212) 309-6058 (212) 318-3000
------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please 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 AUGUST 11, 1997
PROSPECTUS
2,700,000 SHARES
COLLECTIBLES USA, INC.
COMMON STOCK
------------
All of the 2,700,000 shares of Common Stock offered hereby are being issued
and sold by Collectibles USA, Inc. ("Collectibles USA"). Prior to this offering,
there has been no public market for the Common Stock, and there can be no
assurance that a trading market will develop after the sale of the shares
offered hereby. It is currently anticipated that the initial public offering
price will be between $ and $ per share. See "Underwriting" for a discussion of
the factors to be considered in determining the initial public offering price.
Collectibles USA has applied for quotation of the Common Stock on the Nasdaq
National Market under the symbol "COUS."
------------
See "Risk Factors" beginning on page 10 for a discussion of certain factors
that SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
Per Share ...... $ $ $
Total(3) ...... $ $ $
================================================================================
(1) For information regarding indemnification of the Underwriters and certain
compensation payable to the Representatives of the Underwriters, see
"Underwriting."
(2) Before deducting expenses of this offering payable by Collectibles USA
estimated at $ .
(3) Collectibles USA has granted to the Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to 405,000 additional
shares of Common Stock solely to cover over-allotments, if any, on the same
terms and conditions as the shares offered hereby. If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and $ , respectively. See
"Underwriting."
The shares of Common Stock are being offered by the several Underwriters
when, as and if delivered to and accepted by the Underwriters, subject to their
right to reject any order in whole or in part and to certain other conditions.
It is expected that delivery of the certificates representing the shares of
Common Stock will be made on or about , 1997 at the offices of Ladenburg
Thalmann & Co. Inc., New York, New York.
LADENBURG THALMANN & CO. INC.
The date of this Prospectus is , 1997
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration becomes effective.
This prospectus shall not constitute an offer to sell or the solicitation of an
offer to buy nor shall there be any sale of these securities in any State in
which such offer, solicitation or sale would be unlawful prior to registration
or qualification under the securities law of any such State.
<PAGE>
Photographs of:
1. Interior of Crystal Galaxy
2. Exterior of Crystal Galaxy
3. Interior of North Pole City
4. Interior of American Royal Arts Gallery
5. Precious Moments figurine
6. Armani figurine
7. Crystal Dragon
8. Garfield/Odie Cel
9. Beauty and the Beast figurine
10. Cherished Teddies
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SYNDICATE SHORT-COVERING TRANSACTIONS
AND THE IMPOSITION OF A PENALTY BID. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
Garfield\R is a registered trademark of Paws, Incorporated; The Simpsons\R
and Anastasia\R are registered trademarks of Twentieth Century Fox Film
Corporation; and Bugs Bunny\R, Elmer Fudd\R, Yosemite Sam\R, and Tweety and
Sylvester\R are registered trademarks of Time Warner Entertainment Company, L.P.
This Prospectus includes trademarks other than those identified in this
paragraph. Such trademarks are the property of their respective owners. The use
of any such trademark herein is in an editorial form only, and to the benefit of
the owner thereof, with no intention of infringement of the trademark.
<PAGE>
PROSPECTUS SUMMARY
Concurrently with the closing of the offering made hereby (the "Offering"),
Collectibles USA, Inc. plans to acquire, in separate transactions (collectively,
the "Acquisitions"), in exchange for consideration including cash and shares of
its common stock, par value $.01 per share (the "Common Stock"), six separate
retailers of contemporary collectibles and three separate marketers of animation
art (each, a "Founding Company" and collectively, the "Founding Companies").
Unless otherwise indicated, references herein to "Collectibles USA" mean
Collectibles USA, Inc., and references to the "Company" mean Collectibles USA
and the Founding Companies, collectively.
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Unless otherwise indicated (I) all information and share and
per share data in this Prospectus (i) give effect to the Acquisitions, (ii)
assume the Underwriters' over-allotment option is not exercised, (iii) assume an
initial public offering price of $11.00 per share, (iv) assume the conversion of
all outstanding shares of the Company's Series A Convertible Preferred Stock,
liquidation value $50 per share (the "Series A Convertible Preferred Stock"),
into approximately $1.0 million in cash and 61,741 shares of Common Stock and
(v) give effect to a 1,016.604-for-1 share dividend on the Common Stock effected
as of May 12, 1997 (the "Stock Split") and (II) all references to Common Stock
include both Common Stock and restricted voting common stock, par value $.01 per
share (the "Restricted Common Stock"), of the Company.
The Company has adopted a 52/53 week fiscal year ending on the last Sunday
in January. With respect to the Company, references to "Fiscal 1997" mean the
year ended January 26, 1997. With respect to the financial information of the
Combined Founding Companies, references to "Fiscal 1995," "Fiscal 1996" and
"Fiscal 1997" mean a combination of the fiscal years of each of the Founding
Companies for such year.
THE COMPANY
Collectibles USA was founded to create a national retailer of collectibles
merchandise and marketer of animation art. Collectibles USA has entered into
agreements to acquire six retailers of contemporary collectibles and three
marketers of animation art simultaneously with the closing of the Offering. Upon
the consummation of these Acquisitions, the Company believes that it will be a
leading retailer of contemporary collectibles and a leading marketer of
animation art in the United States. The Company's 16 collectibles stores are
located in California (2), Florida, Illinois (6), Nevada (2), New Jersey (2),
Oklahoma (2) and Virginia. In addition, certain stores sell collectibles through
database direct mail, inbound and outbound telemarketing operations and over the
Internet. The Company sells animation art primarily through database direct
mail, telemarketing and the Internet to both retail and wholesale customers, and
operates five animation art galleries located in California, New York (2),
Pennsylvania and Washington.
The Company's collectibles merchandise includes figurines and sculptures
made from porcelain, ceramic and resin, and a wide selection of crystal items
including functional and decorative products. The Company also sells collectible
cottages and villages, collectible prints and lithographs, collectible Christmas
ornaments and other holiday collectibles. The Company's merchandise is produced
by leading vendors such as Lladr-, Department 56 (manufacturer of The Original
Snow Village and The Heirloom Village Collection product lines), Giuseppe
Armani, Goebel U.S.A. (manufacturer of the Hummel product line), Waterford,
Baccarat, Lalique, Swarovski, Disney and Enesco (manufacturer of the Precious
Moments and Cherished Teddies product lines). See "Business -- Collectibles
Stores." The Company's animation art galleries carry a full spectrum of
animation artwork, including original production cels (i.e., a painting of a
character or object on a transparent acetate sheet), limited editions, sericels,
model sheets and original drawings. In addition, the Company has licenses or
rights, some of which are exclusive, to design, produce and market animation art
featuring a wide variety of well known characters, including Garfield\R, The
Simpsons\R and Anastasia\R, and is also an authorized dealer of limited editions
and sericels created by Disney and Warner Brothers.
3
<PAGE>
According to Unity Marketing's The Collectibles Industry Report 1997
("Unity Marketing"), the collectibles industry grew approximately 11.9% in 1996,
generating over $9 billion in primary sales (i.e., sales of new merchandise), of
which approximately 79% were generated by retail sales (including TV shopping)
and approximately 21% were generated by direct response marketing. The
contemporary collectibles industry is serviced by approximately 10,000 specialty
retail collectibles stores nationwide, most of which have less than a 1% market
share. Collectibles are also sold by mid-to-upscale department stores, home
furnishing stores, small specialty import stores, gift stores, card shops, TV
shopping, collectors clubs, and other gallery and print stores. According to
Unity Marketing, an estimated 31 million Americans identify themselves as
collectors.
The Company believes that the typical collector makes more than one
collectibles purchase per year, and the typical collecting household maintains
more than one collection. The Company's target retail customer is between 45 and
64 years old, and encompasses a broad range of income levels. According to the
U.S. Department of Commerce Bureau of the Census, the 45 to 64 year old
population reached approximately 45 million in 1996 and is expected to grow to
approximately 66 million during the next ten years, representing a projected
growth rate of close to three times the rate for the overall population. The
Company believes that collecting will become increasingly important to consumers
ages 45 to 64 because this generation of collectors has high levels of
discretionary income and has demonstrated nostalgic characteristics.
The Company's goal is to become the leading retailer of contemporary
collectibles and the leading marketer of animation art in the United States. The
Company will seek to achieve this goal by emphasizing growth through
acquisitions and implementing a national operating strategy that enhances
internal revenue growth and profitability.
Key elements of the Company's growth strategy include:
o Grow Through Acquisitions. The Company believes that the collectibles
industry is highly fragmented with significant opportunities for
consolidation. The Company intends to acquire profitable, well-managed
collectibles retailers and animation art marketers that may provide new
categories of merchandise that may be cross-sold to the Company's existing
customer base. The Company believes that it will be an attractive acquiror
due to its (i) strategy of retaining owners and management of acquired
companies, (ii) access to capital and (iii) ability to offer sellers
immediate liquidity for their business as well as an ongoing equity stake
in the Company. The Company has developed an extensive database of
acquisition candidates within the collectibles and animation art
industries and believes it will be well positioned to implement its
acquisition program promptly following the Offering. Although the Company
will consider opportunities to make larger acquisitions, the Company's
target candidate for acquisition is expected to have $2 to $5 million in
annual sales, demonstrated profitability and one to four retail locations.
o Develop Prototype Store Formats. Although the Company intends to focus
initially on acquiring other retailers of collectibles and marketers of
animation art, the Company expects to complement its acquisition growth
with new store openings. Over the next 12 months, the Company plans to
develop two prototype store formats: a "superstore" format of
approximately 18,000 square feet, designed for either free-standing or
strip mall locations, and a mall-based format, of approximately 1,500
square feet. The Company does not intend to open new stores over the next
12 months.
Key elements of the Company's national operating strategy include:
o Strengthen and Expand Vendor Relationships. Vendors in the collectibles
industry often recognize retailers based on certain volume levels and
reputation. At the discretion of vendors, preferred gallery status is
conferred upon collectibles stores based on factors such as (i) a proven
ability to market and sell large quantities of merchandise, (ii)
exceptional customer
4
<PAGE>
service, (iii) creditworthiness and (iv) strong vendor relationships. Many
of the Founding Companies have achieved preferred gallery status with key
vendors which entitles them to volume discounts, co-op advertising funds,
shipping allowances and other benefits. The Company believes that as a
leading retailer of collectibles merchandise and a leading marketer of
animation art in the United States, it will have a competitive advantage
in leveraging its vendor relationships. In addition, the Company believes
that it will be able to establish exclusive relationships with vendors for
certain product lines and items. Certain vendors already have expressed a
willingness to develop products, such as porcelain figurines, resin
figurines and cels, on an exclusive basis for the Company.
o Expand and Improve Database Direct Mail, Telemarketing and Internet
Marketing Programs. The Founding Companies have developed databases that
often detail the buying patterns and merchandise preferences of existing
and potential customers and enable the Founding Companies to conduct
targeted database direct mail, telemarketing and Internet marketing
programs. In order to develop a comprehensive marketing program for use on
a Company-wide basis, the Company intends to combine and enhance the
existing customer databases of its Founding Companies and to introduce
database direct mail, telemarketing and Internet marketing programs at
Founding Companies and future companies to be acquired which are not
utilizing such programs.
o Improve Operating Procedures. Initially the Company intends to focus on
developing a centralized system to monitor the operations of the Founding
Companies by auditing sales receipts, accounts payables, payroll,
purchases and inventory levels and by implementing centralized cash
management operations. The Company also will evaluate implementing
appropriate systems, such as Company-wide point-of-sale systems, at its
stores. The Company further intends to enhance operations at the store
level by implementing improved training programs and incentive systems for
experienced managers and by creating a corporate-level merchandising
function to more effectively manage the Company's merchandising decisions,
product displays and product assortment. Although in the near term the
Company expects to incur higher operating expenses, the Company
anticipates that in the future it will achieve long-term economies of
scale and enhanced store-level performance as a result of these efforts.
o Capitalize on Local Strengths. By maintaining significant operating
autonomy at the local level, the Company intends to capitalize on local
strengths, such as name recognition, customer loyalty and service. In
addition, the Company anticipates that certain of the principals of the
Founding Companies will assist in establishing and refining practices for
Company-wide operations.
THE ACQUISITIONS
Collectibles USA was incorporated in Delaware in January 1996 and was
founded to create a national retailer of collectibles merchandise and marketer
of animation art products. Concurrently with, and as a condition to, the closing
of the Offering, Collectibles USA will acquire by merger all of the issued and
outstanding capital stock of nine Founding Companies, six of which are retailers
of contemporary collectibles and three of which are marketers of animation art.
The aggregate consideration that will be paid by Collectibles USA to acquire the
Founding Companies consists of approximately $9.2 million in cash and 2,246,996
shares of Common Stock. In addition, approximately $1.7 million and $4.5 million
of the net proceeds of the Offering will be used, respectively, to repay
indebtedness of the Founding Companies incurred to fund S Corporation
distributions to their stockholders and to repay other indebtedness. Prior to
the Acquisitions, the Company will have conducted no operations and generated no
revenue. The Company's senior management group was assembled during June through
August of 1997.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company ..................... 2,700,000 shares
Common Stock to be outstanding after the Offering ...... 6,199,919 shares(1)
Use of Proceeds ....................................... To pay the cash portion of the purchase
price of the Founding Companies; repay
certain indebtedness of the Founding
Companies; pay required cash amounts in
connection with the conversion of the
Series A Convertible Preferred Stock upon
consummation of the Offering; repay the
principal amount outstanding under
certain subordinated notes held by an
affiliate of the Company; and for general
corporate purposes, which is expected to
include future acquisitions. See "Use of
Proceeds" and "Certain Transactions."
Proposed Nasdaq National Market Symbol .................. COUS
</TABLE>
- ----------
(1) Includes (i) 2,246,996 shares to be issued to the owners of the Founding
Companies, (ii) 61,741 shares to be issued to holders of the Series A
Convertible Preferred Stock and (iii) 1,016,602 shares of Restricted Common
Stock held by various sponsors of the transactions described herein. See
"Principal Stockholders." Each share of Restricted Common Stock is entitled
to four-tenths of a vote on all matters submitted to stockholders.
Restricted Common Stock is convertible into Common Stock under certain
circumstances. See "Description of Capital Stock -- Common Stock and
Restricted Common Stock." Excludes (i) 1,179,987 shares of Common Stock
reserved for issuance under the Company's stock option plans, of which
options to purchase 165,000 shares have been granted and options to
purchase 330,000 shares will be granted concurrently with the consummation
of the Offering and (ii) 270,000 shares of Common Stock reserved for
issuance upon the exercise of warrants to be issued to the Representatives
of the Underwriters and their designees, exercisable at 120% of the initial
public offering price (the "Representatives' Warrants"). See "Management --
1997 Long-Term Incentive Plan," "-- 1997 Non-Employee Directors' Stock
Plan" and "Underwriting."
RISK FACTORS
Collectibles USA was founded in January 1996 but has conducted no
operations and generated no revenue to date. Collectibles USA has entered into
agreements to acquire the Founding Companies simultaneously with the closing of
the Offering. Approximately $9.2 million of the net proceeds of the Offering
will be paid in cash to the owners of the Founding Companies (some of whom will
become officers, directors or key employees of the Company). The Common Stock
offered hereby involves a high degree of risk and immediate and substantial
dilution. See "Risk Factors."
6
<PAGE>
SUMMARY PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Collectibles USA will acquire the Founding Companies simultaneously with,
and as a condition to, the consummation of the Offering. For financial statement
presentation purposes, however, American Royal Arts Corp., one of the Founding
Companies, has been identified as the "accounting acquiror." The following table
presents the unaudited pro forma combined financial data for the Company, as
adjusted for (i) the effects of the Acquisitions; (ii) the effects of certain
pro forma adjustments to the historical financial statements described below;
and (iii) the consummation of the Offering and the application of the net
proceeds therefrom. This information should be read together with "Selected
Financial Data," the Unaudited Pro Forma Combined Financial Statements and the
notes thereto and the historical financial statements for American Royal Arts
Corp. and certain of the other Founding Companies and the respective notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA(2)
----------------------------------------
YEAR ENDED THREE MONTHS ENDED
JANUARY 31, 1997 APRIL 30, 1997
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<S> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Net sales ............................................. $ 25,909 $ 5,811
Cost of sales .......................................... 11,931 2,852
=========== ===========
Gross profit .......................................... 13,978 2,959
Selling, general and administrative expenses(3) ...... 9,926 2,816
Goodwill amortization(4) .............................. 447 103
----------- -----------
Operating income ....................................... 3,605 40
Interest and other income (expense), net(5) ............ 308 54
----------- -----------
Income before taxes .................................... 3,913 94
Net income .......................................... $ 2,114 $ 51
=========== ===========
Net income per share ................................. $ .38 .01
=========== ===========
Shares used in computing net income per share(6) ...... 5,516,795 5,516,795
<CAPTION>
APRIL 30, 1997
------------------------------------
PRO FORMA
COMBINED(7) AS ADJUSTED(8)
------------------ ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit) .............................. $ (6,313)(9) $15,862
Total assets ............................................. 34,860 39,073
Long-term obligations, net of current maturities and notes
payable to stockholders(10) ........................... 2,898 --
Stockholders' equity .................................... 10,997 33,618
</TABLE>
- ----------
(1) The pro forma combined statement of operations data assume that the
Acquisitions and the Offering were closed on February 1, 1996 and are not
necessarily indicative of the results the Company would have obtained had
these events actually then occurred or of the Company's future results.
(2) The year ended January 31, 1997 includes American Royal Arts for the year
ended January 31, 1997, Stone's Hallmark for the year ended November 30,
1996, and Crystal Galleria, North Pole City, Little Elegance, Reef
Hallmark, Animation USA, Filmart and Crystal Palace for the year ended
December 31, 1996. The three months ended April 30, 1997 includes American
Royal Arts for the three months ended April 30, 1997, Stone's Hallmark for
the three months ended May 31, 1997, North Pole City, Crystal Galleria,
Little Elegance, Reef Hallmark, Animation USA, Filmart and Crystal Palace
for the three months ended March 31, 1997.
7
<PAGE>
(3) The pro forma combined statement of operations data reflect an aggregate of
approximately $930,000 and $150,000 for year ended January 31, 1997 and the
three months ended April 30, 1997, respectively, in pro forma reductions in
salary and benefits to the owners of the Founding Companies to which they
have agreed prospectively and certain other adjustments, including the
effect of revisions of certain lease agreements between certain
stockholders of the Founding Companies and such Founding Companies.
Selling, general and administrative expenses do not include the
non-recurring, non-cash compensation charge (the "Compensation Charge") of
$1.4 million for the year ended January 31, 1997. See "Certain
Transactions."
(4) Reflects amortization of the goodwill to be recorded as a result of the
Acquisitions over a 40-year period and computed on the basis described in
the Notes to the Unaudited Pro Forma Combined Financial Statements.
(5) Includes the reduction of pro forma interest expense attributed to the
repayment of debt with a portion of the net proceeds from the Offering.
(6) Includes (i) 1,191,182 shares outstanding prior to the Offering, (ii)
2,246,996 shares to be issued to the owners of the Founding Companies,
(iii) 61,741 shares to be issued to holders of the Series A Convertible
Preferred Stock, (iv) 60,000 shares (determined to be common stock
equivalents for purposes of computing earnings per share) of the 165,000
shares issuable upon the exercise of outstanding options and (v) 1,956,876
of the 2,700,000 shares to be sold in the Offering to pay the cash portion
of the consideration for the Acquisitions, repay indebtedness relating to
the S Corporation Distributions, repay indebtedness of the Founding
Companies and pay expenses of the Offering. Excludes options to purchase
330,000 shares to be granted concurrently with the consummation of the
Offering and 270,000 shares reserved for issuance upon exercise of the
Representatives' Warrants. See "Management -- 1997 Long-Term Incentive
Plan," "-- 1997 Non-Employee Directors' Stock Plan" and "Underwriting."
(7) The pro forma combined balance sheet data assume that the Acquisitions were
closed on April 30, 1997. The pro forma combined balance sheet data are
based upon preliminary estimates, available information and certain
assumptions that management deems appropriate and should be read in
conjunction with the other financial statements and notes thereto included
elsewhere in this Prospectus.
(8) Reflects the consummation of the Offering. See "Use of Proceeds."
(9) Includes $9.2 million payable to owners of the Founding Companies,
representing the cash portion of the consideration for the Acquisitions to
be paid with a portion of the net proceeds from the Offering.
(10) Several of the Founding Companies are S Corporations. Prior to the
Acquisitions, these Founding Companies will make distributions to their
stockholders totaling $1.7 million, representing substantially all of their
previously taxed undistributed earnings (the "S Corporation
Distributions"). In order to pay the S Corporation Distributions, the
Founding Companies will borrow $1.7 million from existing sources, which
will be repaid from the net proceeds of the Offering.
8
<PAGE>
SUMMARY INDIVIDUAL FOUNDING COMPANY FINANCIAL DATA
The following table presents certain summary statements of operations data
for the Founding Companies for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS PERIOD
FISCAL(1) ENDED APRIL 30, 1997(1)
-------------------------------------- ------------------------
1995 1996 1997 1996 1997
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
American Royal Arts
Sales ................................................ $3,897,785 $4,051,072 $4,288,612 $ 980,975 $1,100,477
Gross profit .......................................... 2,182,760 2,491,154 2,782,828 607,027 754,035
Selling, general and administrative expenses(2) ...... 1,587,875 1,759,886 1,778,138 444,053 482,519
Stone's Hallmark
Sales ................................................ $3,488,838 $4,281,040 $4,985,549 $1,097,433 $1,380,711
Gross profit .......................................... 1,689,219 2,012,350 2,488,975 553,073 507,381
Selling, general and administrative expenses(2) ...... 1,430,695 1,787,457 2,117,010 430,332 526,865
Crystal Galleria(3)
Sales ................................................ $2,503,075 $2,794,361 $3,727,285 $ 778,315 $ 999,437
Gross profit .......................................... 1,315,177 1,461,184 1,942,369 397,323 530,198
Selling, general and administrative expenses(2) ...... 730,906 875,180 1,564,229 337,963 423,865
North Pole City
Sales ................................................ $2,562,024 $2,865,249 $3,521,373 $ 376,475 $ 581,424
Gross profit .......................................... 1,190,985 1,373,610 1,900,911 199,317 292,107
Selling, general and administrative expenses(2) ...... 989,561 1,077,684 1,393,205 318,735 447,199
Little Elegance(3)
Sales ................................................ $3,113,114 $2,707,793 $2,598,270 $ 281,967 $ 370,818
Gross profit .......................................... 1,362,429 1,238,268 1,251,609 136,162 175,965
Selling, general and administrative expenses(2) ...... 1,260,761 1,179,842 1,229,978 294,351 307,078
Reef Hallmark(3)
Sales ................................................ $1,419,294 $1,838,788 $2,492,809 $ 557,651 $ 581,159
Gross profit .......................................... 633,618 737,030 1,191,341 273,167 258,379
Selling, general and administrative expenses(2) ...... 484,960 628,543 934,764 204,129 262,120
Animation USA(3)
Sales ................................................ $1,212,497 $1,731,856 $1,716,410 $ 448,828 $ 340,760
Gross profit .......................................... 600,536 833,341 876,127 243,531 204,138
Selling, general and administrative expenses(2) ...... 626,514 773,523 845,100 201,745 187,556
Filmart(3)
Sales ................................................ $ 760,653 $1,053,089 $1,445,848 $ 263,170 $ 231,456
Gross profit .......................................... 503,716 541,720 947,928 161,231 117,725
Selling, general and administrative expenses(2) ...... 452,189 492,577 539,178 104,483 163,604
Crystal Palace(3)
Sales ................................................ $1,103,714 $1,129,960 $1,132,782 $ 235,517 $ 225,099
Gross profit .......................................... 415,965 467,809 595,517 82,431 119,302
Selling, general and administrative expenses(2) ...... 466,737 478,785 455,299 110,537 118,836
</TABLE>
- ----------
(1) The fiscal years presented are as follows: American Royal Arts -- the years
ended October 31, 1994 and 1995 and the year ended January 31, 1997;
Stone's Hallmark -- the years ended November 30, 1994, 1995 and 1996; North
Pole City -- the years ended March 31, 1995 and 1996 and December 31, 1996;
and Crystal Galleria, Little Elegance, Reef Hallmark, Animation USA,
Filmart and Crystal Palace -- the years ended December 31, 1994, 1995 and
1996. The interim periods presented are as follows: American Royal Arts --
the three months ended April 30, 1996 and 1997; Stone's Hallmark -- the
three months ended May 31, 1996 and 1997; North Pole City, Crystal
Galleria, Little Elegance, Reef Hallmark, Animation USA, Filmart and
Crystal Palace -- the three months ended March 31, 1996 and 1997.
(2) Selling, general and administrative expenses have not been adjusted for
aggregate reductions in salary and benefits to the owners of the Founding
Companies to which they have agreed prospectively and for revisions to
certain lease agreements between one of the Founding Companies and its
stockholders, or for increased costs associated with the Company's new
corporate management and with being a public company.
(3) The summary statements of operations data is unaudited for the following
companies: Reef Hallmark and Filmart for Fiscal 1995; Animation USA for
Fiscal 1995 and Fiscal 1996; and Little Elegance and Crystal Palace for
Fiscal 1995, Fiscal 1996 and Fiscal 1997 and the three month periods ended
April 30, 1996 and 1997 for all Founding Companies.
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RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating the Company and its
business before purchasing shares of Common Stock offered hereby. This
Prospectus contains, in addition to historical information, forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in the following risk factors, "Management's Discussions and Analysis of
Financial Condition and Results of Operations," "Business" and elsewhere in this
Prospectus.
ABSENCE OF COMBINED FINANCIAL AND OPERATING HISTORY; ABILITY TO INTEGRATE
OPERATIONS
Collectibles USA was founded in January 1996 but has conducted no
operations and generated no revenue to date. Collectibles USA has entered into
agreements to acquire the Founding Companies simultaneously with the closing of
the Offering. The Founding Companies have been operating as separate,
independent entities and there can be no assurance that the Company will be able
to integrate these businesses on a cost-effective basis or at all. In addition,
there can be no assurance that the recently assembled management group will be
able to oversee the combined entity and effectively implement the Company's
operating or growth strategies. The pro forma combined financial results of the
Founding Companies cover periods when the Founding Companies and Collectibles
USA were not under common control or management and, therefore, may not be
indicative of the Company's future financial or operating results. The success
of the Company will depend on management's ability to centralize and integrate
certain administrative and accounting functions and otherwise integrate the
Founding Companies and businesses acquired in the future into one organization
in a profitable manner. In particular, the Company will need to consolidate its
internal systems for reporting financial and other information, including
inventory levels, deemed significant by management. The internal systems for
accumulating such information at each of the Founding Companies vary in degree
of sophistication, and, in some cases, are not adequate for the Company's
anticipated needs. Failure to successfully develop a consolidated system for
reporting such information could have a material adverse effect on the Company's
financial condition and results of operations. The inability of the Company to
successfully integrate the Founding Companies would have a material adverse
effect on the Company's financial condition and results of operations and would
make it unlikely that the Company's acquisition program will be successful. See
"Business -- Business Strategy" and "-- Management Information Systems and
Controls." The Company expects to incur additional management and other
administrative expenses after the Acquisitions. There can be no assurance that
these expenses will be offset by savings resulting from the consolidation of the
Founding Companies. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
RELIANCE ON THE IDENTIFICATION AND INTEGRATION OF SATISFACTORY ACQUISITION
CANDIDATES; RELIANCE ON ACQUISITION FINANCING
The Company's future growth depends in large part on its ability to
increase its sales and the markets it serves through the acquisition of
additional collectibles retailers and animation art marketers. The Company's
inability to achieve its acquisition goals could have a material adverse effect
on the Company's financial condition and results of operations. There can be no
assurance that the Company will be able to identify or acquire additional
businesses on acceptable terms, effectively and profitably integrate into the
Company businesses acquired in the future, or achieve sales and profitability
that justify the investment therein. Acquisitions may involve a number of
special risks, including adverse short-term effects on the Company's reported
operating results; diversion of management's attention; dependence on retaining,
hiring and training key personnel; risks associated with unanticipated problems
or legal liabilities; and amortization of acquired intangible assets, some or
all of which could have a material adverse effect on the Company's financial
condition and results of operations. In addition, to the extent that
consolidation becomes more prevalent in the industry, the prices for attractive
acquisition candidates may increase. The Company intends to use shares of Common
Stock for a portion of the consideration for future acquisitions. If the Common
Stock does not maintain a sufficient value or if potential acquisition
candidates are unwilling to accept shares of Common Stock as part of
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the consideration for the sale of their businesses, then the Company may be
required to utilize more of its cash resources, if available, in order to pursue
its acquisition program. If the Company does not have sufficient cash resources,
its growth could be limited unless it is able to obtain additional capital
through financings or alternative means. See "Business -- Business Strategy" and
the Unaudited Pro Forma Combined Financial Statements and the notes thereto
included elsewhere in this Prospectus.
MANAGEMENT OF GROWTH AND ATTRACTION AND RETENTION OF QUALIFIED MANAGEMENT
The Company expects to grow primarily through acquisitions. Management
expects to expend significant time and effort in evaluating, completing and
integrating acquisitions. The Company will need to implement additional systems,
procedures and controls to support adequately the Company's operations as they
expand. Any future growth will also impose significant added responsibilities on
members of senior management, including the need to identify, recruit and
integrate new senior level managers and executives. There can be no assurance
that such additional management will be identified and retained by the Company.
In addition, none of the Company's officers or senior management have had
experience managing a consolidated company, which requires, among other things,
the ability to manage many individual stores geographically dispersed throughout
the country. The inability of the Company to manage its growth efficiently and
effectively, or to attract and retain additional qualified management. See
"Business -- Growth Strategy."
DEPENDENCE ON LICENSES
The Company markets many of its animation art products through retail and
wholesale channels pursuant to licensing arrangements. The Company has licenses
or rights to design, produce and distribute animation art featuring a wide
variety of well known characters such as Garfield\R, The Simpsons\R and
Anastasia\R. These arrangements are limited in scope, expire between March 1998
and September 1999, and authorize the sale of specified licensed products for a
defined period of time, generally two to four years. The agreements may be
terminated prior to their expiration date under certain circumstances, including
the Company's failure to comply with the product approval provisions. The
success of licensing arrangements depends on many factors, including the
reasonableness of license fees in relation to revenue generated by sales of
licensed products and the continued popularity of the licensed products. The
termination, cancellation or inability to renew any existing licensing
arrangements, coupled with the inability to develop and enter into new licensing
arrangements, could have a material adverse effect on the Company's financial
condition and results of operations. In addition, certain of the Founding
Companies are authorized dealers of limited editions and sericels manufactured
by Disney and Warner Brothers, which are sold through retail channels. There can
be no assurance that such status will not be revoked or that any such revocation
would not have a material adverse effect on the Company's financial condition
and results of operations. In addition, the Company is an authorized dealer of
art produced by Warner Brothers/Hanna-Barbera, Disney and artist Chuck Jones.
The Company's authorized dealer agreements can generally be terminated by the
other party with or without cause on short notice. Termination of any of the
Company's authorized dealer agreements could have a material adverse effect on
the Company's financial condition and results of operations. Certain of the
authorized dealer agreements require the vendor's consent to the Acquisitions.
Although the Company is seeking consents authorizing the Acquisitions where
required by the terms of such authorized dealer agreements, there can be no
assurance that such consents will be obtained. The failure to obtain any such
consents could have a material adverse effect on the Company's financial
condition and results of operations. See "Business -- Licenses."
NEED FOR ADDITIONAL CAPITAL
The Company expects that it will use significant amounts of capital for
acquisitions of other collectibles retailers and animation art marketers, for
operating purposes (including the acquisition and implementation of a management
information system) and to facilitate internal growth. The Company intends to
use shares of Common Stock for a portion of the consideration for future
acquisitions. If the Common Stock does not maintain a sufficient value or if
potential acquisition candidates are unwilling
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<PAGE>
to accept Common Stock as part of the consideration for the sale of their
businesses, then the Company may be required to utilize more of its cash
resources, if available, in order to pursue its acquisition program. If the
Company does not have sufficient cash resources, its growth could be limited.
Using cash to complete acquisitions and finance internal growth could
substantially limit the Company's financial flexibility; using debt could result
in financial covenants that limit the Company's operations and financial
flexibility; and using equity may result in significant dilution of the
ownership interests of the then existing stockholders of the Company. The timing
and amount of any such capital requirements cannot be predicted. The Company
intends to seek a $15.0 million credit facility with a syndicate of commercial
banks to be used for acquisitions, working capital and other general corporate
purposes. There can be no assurance that the Company will be able to obtain such
financing if, and when, it is needed or that, if available, it will be available
on terms the Company deems acceptable. As a result, the Company might be unable
to pursue its acquisition strategy successfully or to achieve operating
efficiencies, which could have a material adverse effect on the Company's
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- Combined" and "Business -- Business Strategy."
FACTORS AFFECTING INTERNAL GROWTH
The Company's ability to generate internal earnings growth will be affected
by, among other factors, its ability to expand the range of merchandise offered
to customers, increase sales to existing customers, increase market share in a
given market, attract and retain qualified employees, purchase inventory at
acceptable prices, open additional stores and reduce operating costs and
overhead. The Company's inability to generate internal earnings growth could
have a material adverse effect on the Company's financial condition and results
of operations.
DEPENDENCE ON KEY COLLECTIBLES VENDORS AND RISKS ASSOCIATED WITH DEPENDENCE ON
FOREIGN VENDORS
The Company's performance depends, in large part, on its ability to
purchase contemporary collectibles merchandise in sufficient quantities at
competitive prices. Although the Company purchases collectibles merchandise from
over 100 vendors, one vendor, Hallmark, accounted for approximately 11% of the
Company's pro forma net sales in Fiscal 1997. The Company has no long-term
purchase contracts or other contractual assurances of continued supply, pricing
or access to new products. Because customers of collectibles merchandise often
collect specific product lines, the inability of the Company to obtain
collectibles merchandise from a particular vendor could have a material adverse
effect on its financial condition and results of operations. Moreover, there can
be no assurance that vendors will continue to manufacture desirable collectibles
merchandise or that vendors will not discontinue manufacturing product lines
that have proved popular. In addition, one of the Founding Companies, as a
retailer of merchandise imported from Italy, is subject to certain risks that
typically do not affect other retailers, including the need to order merchandise
significantly in advance of delivery, fluctuations in the value of currency, and
the obligation to pay for such merchandise at the time it is loaded for
transport to designated U.S. destinations. There can be no assurance that the
Company will be able to acquire desired merchandise in sufficient quantities on
terms acceptable to the Company, or that an inability to acquire suitable
merchandise, or the loss of one or more key vendors, will not have a material
adverse effect on the Company's financial condition and results of operations.
See "Business -- Business Strategy -- National Operating Strategy."
COMPETITION
The collectibles and animation art industries are highly fragmented and
competitive. In addition to other collectibles retailers and animation art
marketers, the Company competes with mid-to-upscale department stores, gift
stores, card shops, TV shopping, collectors clubs and other gallery and print
stores. The Company's animation art galleries compete, in certain cases, with
the owners of the licensed characters, including Disney and Warner Brothers, who
sell products through their own stores and other marketing channels. Many of the
Company's competitors are larger and have substantially greater
12
<PAGE>
financial, marketing and other resources than the Company. In addition, although
the primary points of competition are service and availability of desired
merchandise, there can be no assurance that pricing competition will not
develop. Other retailing companies with significantly greater capital and other
resources than the Company may enter or expand their operations in the
collectibles industry, which could change the competitive dynamics of the
industry. In addition, as the Company's animation art licenses and rights
expire, the Company will compete with other marketers of animation art for the
right to design, produce and market artistic creations based on the applicable
licensed character. Because retailers of collectibles and marketers of animation
art products generally do not own the proprietary rights to the products that
they sell, the barriers to entry to these industries are not significant.
Therefore, there can be no assurance that additional participants will not enter
the market or that the Company could compete effectively with such entrants. See
"Business -- Competition."
In addition, it is possible that there will be competition to acquire
additional businesses if the collectibles or animation art industries undergo
broader consolidation. Such competition could lead to higher prices being paid
for such companies. The Company believes that its decentralized management
strategy and other operating strategies make it an attractive acquiror of other
collectibles retailers and animation art marketers. However, there can be no
assurance that the Company's acquisition program will be successful.
SEASONALITY; FLUCTUATION OF QUARTERLY OPERATING RESULTS
The collectibles industry, and to a lesser extent the animation art
industry, can be subject to seasonal variations in demand. For example, most of
the Company's collectibles operations experience the greatest demand during the
winter holiday shopping period. Although the animation art industry experiences
less seasonal variations in demand, sales of animation art also generally
increase during the winter holiday season. Consequently, certain of the Founding
Companies have historically been most profitable during the fourth quarter of
the Company's fiscal year. Quarterly results may also be materially affected by
the timing of acquisitions, the timing and magnitude of acquisition assimilation
costs, the costs of opening new stores, the timing of new product introductions,
the gain or loss of significant customers or product lines and variations in
merchandise mix. The Company makes decisions about purchases of inventory well
in advance of the time at which such products are intended to be sold.
Accordingly, the Company's performance in any particular quarter may not be
indicative of the results that can be expected for any other quarter or for the
entire year. Significant deviations from projected demand for collectibles
merchandise could have a material adverse effect on the Company's financial
condition and quarterly or annual results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
EFFECT OF FLUCTUATIONS IN THE GENERAL ECONOMY
Demand for collectibles merchandise and animation art is affected by the
general economic conditions in the United States. When economic conditions are
favorable and discretionary income increases, purchases of non-essential items
like collectibles merchandise and animation art generally increase. When
economic conditions are less favorable, sales of collectibles merchandise and
animation art are generally lower. In addition, the Company may experience more
competitive pricing pressure during economic downturns. Therefore, any
significant economic downturn or any future changes in consumer spending habits
could have a material adverse effect on the Company's financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
CHANGES IN CUSTOMER TASTE
The markets for the Company's products are subject to changing customer
tastes and the need to create and market new products. Demand for collectibles
and animation art products is influenced by the popularity of certain themes,
cultural and demographic trends, marketing and advertising expenditures and
general economic conditions. Because these factors can change rapidly, customer
demand also can shift quickly. Some collectibles appeal to customers for only a
limited time. The success of new
13
<PAGE>
product introductions depends on various factors, including product selection
and quality, sales and marketing efforts, timely production and delivery and
consumer acceptance. The Company may not always be able to respond quickly and
effectively to changes in customer taste and demand due to the amount of time
and financial resources that may be required to bring new products to market. If
the Company were to materially misjudge the market, certain inventory of the
Company may remain unsold. The inability to respond quickly to market changes
could have a material adverse effect on the Company's financial condition and
results of operations. See "Business -- Marketing."
RISKS ASSOCIATED WITH MARKETING AND TELEMARKETING STRATEGY
One of the Company's significant strategies for improved marketing is the
consolidation of the databases of the various Founding Companies and of any
companies acquired in the future for database direct mail, telemarketing and
Internet marketing efforts. There can be no assurance that the Company will be
able to integrate these databases successfully or that, once integrated, some of
the databases will not be discovered to contain overlapping information. In
addition, the Company has not previously conducted its marketing programs
according to practices common to the database direct mail, telemarketing and
Internet industries, including practices such as the systematic measurement of
the response rates generated from its databases or the categorization of entries
in the databases by past behavior. The costs for a new information technology
system to effect such integration could be substantial, as could the amount of
time needed to acquire and implement such a system. The inability to integrate
the various databases successfully, or in a timely and cost effective manner,
could have a material adverse effect on the Company's financial condition and
results of operations. In addition, while the Founding Companies have
historically charged customers the costs of overnight and ground delivery of
merchandise, they have not charged, and the Company does not intend to charge,
customers for the costs of catalog mailings and paper. Material increases in
paper or catalog delivery costs or the inability to charge customers for the
costs of overnight or ground delivery of merchandise could have a material
adverse effect on the Company's financial condition and results of operations.
See "Business -- Marketing."
SALES TAX CONSIDERATIONS
Various states are increasingly seeking to impose sales or use taxes on
inter-state mail order sales and are aggressively auditing sales tax returns of
mail order businesses. Complex legal issues arise in these areas, relating,
among other things, to the required nexus of a business with a particular state,
which may permit the state to require a business to collect such taxes. Although
the Company believes that each of the Founding Companies has adequately provided
for sales taxes on its mail order sales, there can be no assurance as to the
effect of actions taken by state tax authorities on the Company's financial
condition or results of operations. Furthermore, prior to the Acquisitions, each
Founding Company has collected sales taxes only on sales to customers in states
in which such Founding Company conducts its operations. In the future, the
Company may be required to collect sales tax on sales made to customers in all
of the states in which it conducts its operations. The imposition of sales taxes
on mail order sales generally has a negative effect on mail order sales levels.
All of the factors cited above may negatively affect the Company's financial
condition and results of operations in the future. Any such impact cannot
currently be quantified.
DEPENDENCE ON KEY PERSONNEL
The Company's operations are dependent on the continued efforts of senior
management of Collectibles USA and of the Founding Companies. Furthermore, the
Company will likely be dependent on the senior management of companies that may
be acquired in the future. Although the Company has entered into employment
agreements with senior management of Collectibles USA and of the Founding
Companies, there can be no assurance that any individual will continue in such
capacity for any particular period of time. The loss of key personnel, or the
inability to hire and retain qualified employees, could have a material adverse
effect on the Company's financial condition and results of operations. The
Company does not intend to carry key-person life insurance on any of its
employees. See "Management."
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<PAGE>
MISREPRESENTATIONS AND BREACHES BY THE SELLERS AND THE FOUNDING COMPANIES IN
THE ACQUISITIONS
In consummating the Acquisitions, the Company is relying upon certain
representations, warranties and indemnities made by the former owners of the
Founding Companies and the Founding Companies themselves with respect to each of
the Acquisitions, as well as its own due diligence investigations. There can be
no assurance that such representations and warranties will be true and correct,
that the Company's due diligence will uncover all material adverse facts
relating to the operations and financial condition of the Founding Companies
that are acquired or that all of the conditions to the Company's obligations to
consummate the Acquisitions will be satisfied. Any material misrepresentations
could have a material adverse effect on the Company's financial condition or
results of operations.
CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS
Following the completion of the Acquisitions and the Offering, the
Company's officers and directors, various sponsors of the transaction, and
stockholders of the Founding Companies, and entities affiliated with them, will
beneficially own approximately 54.9% of the outstanding shares of Common Stock
(51.6% if the Underwriters' over-allotment option is exercised in full). These
holders of Common Stock will control in the aggregate approximately 50.6% of the
votes of all shares of Common Stock and, if acting in concert, generally will be
able to exercise control over the Company's affairs, to elect the entire board
of directors of Collectibles USA (the "Board of Directors") and to control the
disposition of any matter submitted to a vote of stockholders. See "Principal
Stockholders."
PROCEEDS OF OFFERING PAYABLE TO AFFILIATES
Approximately $15.4 million, or approximately 65.4%, of the net proceeds of
the Offering will be paid in cash to the owners of the Founding Companies (some
of whom will become officers, directors or key employees of the Company) or will
be used to repay certain indebtedness of the Founding Companies. Approximately
$2.3 million of the $4.5 million of indebtedness at July 1, 1997 to be repaid is
held by certain stockholders and affiliates of the Founding Companies. Included
in the expenses of the Offering are approximately $1.0 million to pay required
cash amounts in connection with the conversion of the Series A Convertible
Preferred Stock upon consummation of the Offering and $1.3 million to repay,
upon consummation of the Offering, the principal amount outstanding under the
$300,000 5% note due December 31, 1997 (the "CEFC Note-1"), the $555,000 5% note
due December 31, 1997 (the "CEFC Note-2") and the $400,000 5% note due December
31, 1997 (the "CEFC Note-3", and, together with the CEFC Note-1 and the CEFC
Note-2, the "CEFC Notes"), which notes are held by an affiliate of the Company.
The proceeds from the sale of the Series A Convertible Preferred Stock and the
CEFC Notes were used by the Company to pay various expenses incurred in
connection with its efforts to complete the Acquisitions and effect the
Offering. Net proceeds available for acquisitions, working capital and other
uses by the Company will be approximately $8.2 million, or 34.6% of the net
proceeds of the Offering (approximately $12.3 million, or 44.4% of the net
proceeds of the Offering, if the Underwriters' over-allotment option is
exercised in full). See "Use of Proceeds" and "Certain Transactions."
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON THE PRICE OF THE COMMON
STOCK
The 2,700,000 shares being sold in the Offering will be freely tradeable
unless acquired by affiliates of the Company. The market price of the Common
Stock of the Company could be adversely affected by the sale of substantial
amounts of shares of Common Stock of the Company in the public market following
the Offering.
Simultaneously with the closing of the Offering, the stockholders of the
Founding Companies will receive, in the aggregate, 2,246,996 shares of Common
Stock as a portion of the consideration for their businesses. These shares are
not being offered by this Prospectus and have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), and, therefore, may
not be sold unless registered under the Securities Act or sold pursuant to an
exemption from registration, such as the exemption provided by Rule 144
promulgated under the Securities Act. These shares are being offered
15
<PAGE>
and sold pursuant to the private placement exemption from registration provided
by Section 4(2) of the Securities Act. The stockholders who will receive these
shares have agreed with the Company not to sell, transfer or otherwise dispose
of any of these shares for one year following consummation of the Offering. Such
stockholders also have certain piggyback registration rights with respect to
these shares and, upon certain future registrations by the Company, such
restricted shares will be eligible for resale in the public market. In addition,
existing holders of Common Stock of the Company as of the date hereof hold, in
the aggregate, 1,191,182 shares. See "Certain Transactions." None of these
shares have been registered under the Securities Act and, accordingly, may not
be sold unless registered under the Securities Act or sold pursuant to an
exemption from registration, such as the exemption provided by Rule 144.
The Company and its officers and directors have agreed not to, directly or
indirectly, offer, issue, sell, contract to sell or otherwise dispose of any
shares of Common Stock or any securities exercisable for or convertible or
exchangeable into Common Stock (the "Securities") for a period of 180 days after
the date of this Prospectus (the "Lockup Period") without the prior written
consent of Ladenburg Thalmann & Co. Inc., except for the grant of employee stock
options by the Company and except that the Company may issue shares of Common
Stock (i) in connection with acquisitions, (ii) pursuant to the exercise of
options granted under the Company's stock option plans and (iii) upon conversion
of the Series A Convertible Preferred Stock and the Restricted Common Stock in
accordance with their respective terms. In addition, certain stockholders of the
Company designated by the Representatives who beneficially own an aggregate of
1,121,182 shares of Common Stock and the owners of each of the Founding
Companies have agreed, subject to certain exceptions, not to, directly or
indirectly, offer, sell, contract to sell or otherwise dispose of any Securities
for a period of 180 days after the date of this Prospectus without the prior
written consent of Ladenburg Thalmann & Co. Inc. After such periods, all of such
shares will be eligible for sale in accordance with Rule 144 promulgated under
the Securities Act, subject to the volume, holding period and other limitations
of Rule 144. See "Underwriting."
Pursuant to the Company's stock option plans the Company has issued options
to acquire 165,000 shares of Common Stock, which options are immediately
exercisable, and concurrently with the consummation of the Offering, will issue
options to acquire 330,000 shares of Common Stock, which options will not be
exercisable until after the expiration of the Lockup Period. The Company intends
to register the shares issuable upon exercise of options granted under the
Company's stock option plans and, upon such registration, such shares will be
eligible for resale in the public market. See "Management -- 1997 Long-Term
Incentive Plan," and "-- 1997 Non-Employee Directors' Stock Plan."
Upon completion of the Offering, the Company has agreed to issue to the
Representatives and their designees, for their own accounts, warrants to
purchase an aggregate of 270,000 shares of Common Stock exercisable during the
five-year period commencing on the date of this Prospectus, at an exercise price
equal to 120% of the initial public offering price. The Company has agreed to
grant certain registration rights to the holders of these warrants. The
existence or exercise of these warrants could materially adversely affect the
Company's ability to raise additional financing at a time when it may be
advantageous to do so. See "Underwriting."
The Company plans to register up to an additional 2,500,000 shares of
Common Stock with the Securities and Exchange Commission (the "Commission")
under the Securities Act as soon as practicable after completion of the Offering
for use by the Company as all or a portion of the consideration to be paid in
conjunction with future acquisitions. These shares may be freely tradeable after
their issuance, unless the sale of such shares is contractually restricted. The
piggyback registration rights described above will not apply to the registration
statement to be filed with respect to these additional shares.
See "Shares Eligible for Future Sale."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common
Stock. Application has been made for quotation of the Common Stock on the Nasdaq
National Market. However, there can be no assurance that, following the
Offering, a regular trading market for the Common Stock will develop or be
sustained. The initial public offering price will be determined by negotiations
among the Company and
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<PAGE>
the Representatives of the Underwriters and may bear no relationship to the
market price of the Common Stock after the Offering. See "Underwriting." The
market price of the Common Stock could be subject to significant fluctuations in
response to variations in quarterly operating results and other factors. In
addition, the stock market in recent years has experienced extreme price and
volume fluctuations that often have been unrelated or disproportionate to the
operating performance of companies. Factors such as actual or anticipated
operating results, growth rates, changes in estimates by analysts, market
conditions in the industry, announcements by competitors, regulatory actions and
general economic conditions will vary from period to period. As a result of the
foregoing, the Company's operating results and prospects from time to time may
be below the expectations of public market analysts and investors. Any such
event would likely result in a material adverse effect on the price of the
Common Stock.
DIVIDEND POLICY; RESTRICTIONS ON PAYMENT
The Company has never paid cash dividends and anticipates that for the
foreseeable future, its earnings will be retained for the operation and
expansion of its business and for general corporate purposes and that it will
not pay cash dividends. In addition, the Company anticipates that any credit
facility to which it becomes a party will limit the payment of cash dividends
without the lender's consent. See "Dividend Policy."
IMMEDIATE AND SUBSTANTIAL DILUTION
The purchasers of the shares of Common Stock offered hereby will experience
immediate dilution in the net tangible book value of their shares of $8.25 per
share. In the event the Company issues additional shares of Common Stock in the
future, including shares which may be issued in connection with future
acquisitions, purchasers of the Common Stock in the Offering may experience
further dilution in the net tangible book value per share of Common Stock of the
Company. See "Dilution."
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS
The Board of Directors of the Company is empowered to issue preferred stock
in one or more series without stockholder action. The existence of this
"blank-check" preferred stock provision could render more difficult or
discourage an attempt to obtain control of the Company by means of a tender
offer, merger, proxy contest or otherwise. Certain provisions of the Delaware
General Corporation Law may also discourage takeover attempts that have not been
approved by the Board of Directors. See "Description of Capital Stock."
SIGNIFICANT MATERIALITY OF GOODWILL
The Company believes that the carrying value of the Founding Companies'
tangible assets approximates their fair value and has not identified any
significant intangible assets associated with the Founding Companies.
Accordingly, upon completion of the Acquisitions, the Company anticipates that a
significant portion of its pro forma total assets will consist of goodwill and
will be amortized over a 40 year period. However, the Company will periodically
evaluate whether events and circumstances after the Acquisitions are consummated
indicate that the remaining balance of goodwill may not be recoverable by
comparing estimated undiscounted cash flows from the related operations to the
carrying amount of goodwill. If the carrying amount of goodwill were greater
than the undiscounted future cash flow, an impairment loss would be
recognized.
17
<PAGE>
THE COMPANY
Collectibles USA was founded to create a national retailer of collectibles
merchandise and marketer of animation art products. Concurrently with, and as a
condition to, the closing of the Offering, Collectibles USA will acquire the
nine Founding Companies. A brief description of each of the Founding Companies
is set forth below.
COLLECTIBLES STORES
Crystal Galleria, Inc. and Base, Inc. d/b/a Crystal Galleria and d/b/a
Crystal Galaxy ("Crystal Galleria"). Crystal Galleria is a retailer of a wide
range of contemporary collectibles such as crystal, porcelain figurines and art
glass from vendors, including Swarovski, Baccarat, Waterford, Lalique, Lladro
and Giuseppe Armani. Crystal Galleria has been in operation since 1992 and has
three mall-based stores, of which two are located in the Forum Shops at Caesar's
and the Tower Shops at Stratosphere in Las Vegas, Nevada and one is located in
The Tysons Corner Center in McLean, Virginia. Crystal Galleria's stores carry an
average of approximately 3,200 stock keeping units ("SKUs"), average
approximately 1,800 square feet in size and, in the fiscal year ended December
31, 1996, generated sales of $3.7 million. Upon consummation of the Offering,
Vincent J. Browne, one of the owners of the Crystal Galleria stores, will remain
the President of Crystal Galleria and will serve as a director of the Company.
Vincent J. Browne, Inc. d/b/a Crystal Palace, Inc. ("Crystal Palace").
Crystal Palace is a retailer of a wide range of contemporary collectibles such
as crystal, plates, figurines and Murano glass from vendors, including
Waterford, Swarovski, Disney, Lladr-, Goebel U.S.A. (manufacturer of the Hummel
product line) and the Bradford Exchange. Crystal Palace has been in operation
since 1985 and has two mall-based stores of which one is located in San Diego,
California and one is located in El Cajon, California. Crystal Palace's stores
carry an average of approximately 2,600 SKUs, average approximately 1,050 square
feet in size and, in the fiscal year ended December 31, 1996, generated sales of
$1.1 million. Upon consummation of the Offering, Vincent J. Browne, the sole
owner of Crystal Palace, will remain the President of Crystal Palace and will
serve as a director and as the Executive Vice President -- Mall Operations of
the Company.
St. George, Inc. d/b/a Little Elegance and d/b/a Under the Mistletoe
("Little Elegance"). Little Elegance is a retailer of contemporary collectibles
such as figurines and lighted houses from vendors, including Enesco
(manufacturer of the Precious Moments and Cherished Teddies product lines),
Department 56 (manufacturer of The Original Snow Village and The Heirloom
Village Collection product lines), Lladro and Swarovski. Little Elegance has
been in operation since 1969 and has two mall-based stores, of which one is
located in Wayne, New Jersey and one is located in Woodbridge, New Jersey.
Little Elegance's stores carry an average of approximately 10,000 SKUs, average
approximately 3,700 square feet in size and, in the fiscal year ended December
31, 1996, generated sales of $2.6 million. Upon consummation of the Offering,
Keith Holt, the general manager of Little Elegance, will become the President of
Little Elegance.
DKG Enterprises, Inc. d/b/a North Pole City Gifts & Collectibles and d/b/a
North Pole City ("North Pole City"). North Pole City is a retailer and marketer
of Christmas and other contemporary collectibles such as ornaments, lighted
houses and figurines from vendors, including Department 56, Enesco, Giuseppe
Armani and Disney. North Pole City has been in operation since 1984. It has one
"superstore" of approximately 15,000 square feet of retail space and a
free-standing retail outlet of approximately 1,500 square feet both located in
Oklahoma City, Oklahoma. North Pole City carries approximately 13,900 SKUs and
generated sales of $3.7 million in the fiscal year ended March 31, 1997. Upon
consummation of the Offering, David K. Green, an owner of North Pole City, will
remain the President of North Pole City and will serve as a director and as the
Executive Vice President -- Operations of the Company as well as the President
- -- Collectibles Division.
Elwell Stores, Inc. d/b/a The Reef Hallmark Shop ("Reef Hallmark"). Reef
Hallmark is a retailer and marketer of contemporary collectibles, including
ornaments, figurines, lighthouses, lighted houses and crystals from vendors,
including Enesco, Swarovski, Disney, Department 56 and Hallmark. Reef
18
<PAGE>
Hallmark has been in operation since 1959 and has one strip mall-based store
located in West Palm Beach, Florida. Reef Hallmark carries approximately 5,000
SKUs (excluding greetings cards), is approximately 4,000 square feet in size
and, in the fiscal year ended December 31, 1996, generated sales of $2.5
million. In the fiscal year ended December 31, 1996, approximately 18% of Reef
Hallmark's sales were from Hallmark products. Upon consummation of the Offering,
Roy C. Elwell, the sole owner of Reef Hallmark, will remain the President of
Reef Hallmark and will serve as a director and as the Executive Vice President
- -- Corporate Development of the Company. Reef Hallmark will continue to use the
"Hallmark" designation for the immediate future.
Stone's Shops, Inc. ("Stone's Hallmark"). Stone's Hallmark is a retailer of
contemporary collectibles, ornaments, figurines, lighthouses and lighted houses
from vendors, including Enesco, Boyds, Cast Art, Disney, Department 56, Seraphim
Angels and Hallmark. Stone's Hallmark has been in the contemporary collectibles
business since 1979 and has stores located in Rockford (4), Freeport and
Rochelle, Illinois. Stone's Hallmark's stores carry approximately 10,000 SKUs
(excluding greeting cards), range from approximately 3,000 to 18,500 square feet
(15,750 of which is used as retail space) in size and, in the fiscal year ended
November 30, 1996, generated sales of $5.0 million. In the fiscal year ended
November 30, 1996, approximately 34% of Stone's Hallmark's sales were from
Hallmark products. Upon consummation of the Offering, David J. Stone, who
together with his wife is the owner of Stone's Hallmark, will remain the
President of Stone's Hallmark and will serve as a director of the Company.
Stone's Hallmark will continue to use the "Hallmark" designation for the
immediate future.
ANIMATION ART GALLERIES
American Royal Arts Corp. ("American Royal Arts"). American Royal Arts is a
retail and wholesale marketer specializing in the sale of animation art,
including limited editions, production cels, sericels, lithographs and vintage
animation. American Royal Arts produces animation art under various license
arrangements, certain of which are exclusive to it. American Royal Arts has been
in operation since 1987 and has one gallery located in Westbury, New York, which
also houses its telemarketing operations. American Royal Arts' gallery is
approximately 5,500 square feet in size, includes its telemarketing operations
and, in the year ended January 31, 1997, generated sales of $4.3 million. Upon
consummation of the Offering, Jerry Gladstone, sole owner of American Royal
Arts, will remain the President of American Royal Arts and will serve as a
director, as the Executive Vice President of Marketing and as the President --
Animation Division of the Company.
Animation U.S.A., Inc. ("Animation USA"). Animation USA is a retail and
wholesale marketer of animation art such as vintage original production cels,
limited edition cels and sericels. Animation USA has been in operation since
1990 and has two free-standing galleries, of which one is located in Seattle,
Washington and one is located in San Francisco, California. Animation USA's
galleries average approximately 1,200 square feet in size and, in the fiscal
year ended December 31, 1996, generated sales of $1.7 million. Upon consummation
of the Offering, David M. Vice and Laine Ross, the two owners of Animation USA,
will remain the President and Vice President, respectively, of Animation USA.
Filmart Productions Inc. d/b/a Cartoon World, d/b/a Filmart Galleries and
d/b/a Animation Art Resources ("Filmart"). Filmart is a retail marketer of
animation art such as vintage original production cels, limited edition cels and
sericels. Filmart has been in operation since 1991 and has two free-standing
galleries, of which one is located in Philadelphia, Pennsylvania and one is
located in Huntington, New York. Filmart's galleries average approximately 2,225
square feet in size and, in the fiscal year ended December 31, 1996, generated
sales of $1.4 million. In January 1996, Filmart acquired Animation Art
Resources, previously owned by Susan M. Spiegel for a 50% interest in Filmart.
Upon consummation of the Offering, Aron Laikin and Susan M. Spiegel, the two
owners of Filmart, will remain the Chief Operating Officer and President,
respectively, of Filmart. In addition, Susan M. Spiegel will serve as a director
of the Company.
ACQUISITIONS CONSIDERATION
The aggregate consideration to be paid by Collectibles USA in the
Acquisitions consists of approximately $9.2 million in cash and 2,246,996 shares
of Common Stock. The Company will also assume all of the indebtedness of the
Founding Companies (approximately $4.5 million as of July 1,
19
<PAGE>
1997), which indebtedness will be repaid with a portion of the net proceeds of
the Offering. In addition, prior to the consummation of the Acquisitions,
Crystal Galleria, American Royal Arts and Filmart will make distributions to
their stockholders of approximately $250,000, $486,000 and $1,000,000,
respectively, representing S Corporation earnings previously taxed to their
respective stockholders. The Founding Companies will incur indebtedness of
approximately $1.7 million to fund these distributions. The consideration to be
paid by Collectibles USA for the Founding Companies was determined by
negotiations between Collectibles USA and representatives of the Founding
Companies. See "Certain Transactions."
The Company's executive offices are located at One Battery Park Plaza, 24th
Floor, New York, New York 10004, and its telephone number at that address is
(212) 344-1271.
USE OF PROCEEDS
The net proceeds from the sale by the Company of the 2,700,000 shares of
Common Stock offered hereby, are estimated to be approximately $23.6 million
($27.8 million if the Underwriters' over-allotment option is exercised in full),
based upon an assumed initial public offering price of $11.00 per share, after
deducting the estimated underwriting discount and offering expenses payable by
the Company including (i) approximately $1.0 million to pay required cash
amounts in connection with the conversion of the Series A Convertible Preferred
Stock upon consummation of the Offering and (ii) $1.3 million to repay the
principal amount of indebtedness outstanding under the CEFC Notes. The Company
intends to use approximately $9.2 million of the net proceeds of the Offering to
pay the cash portion of the purchase price for the Founding Companies, all of
which will be paid to former stockholders of the Founding Companies.
Approximately $1.7 million of the net proceeds will be used to repay
indebtedness incurred by three of the Founding Companies to make the S
Corporation Distributions to certain former owners of the Founding Companies,
which S Corporation Distributions represented S Corporation retained earnings
previously taxed to such holders. An additional approximately $4.5 million, as
of July 1, 1997, of the net proceeds of the Offering will be used to repay
estimated other outstanding indebtedness of the Founding Companies. The portion
of this $4.5 million debt that was incurred during Fiscal 1997 was $2.4 million
and the use of proceeds for such debt was to finance the opening of new stores
and to provide working capital. Approximately $2.3 million of the $4.5 million
has been personally guaranteed by stockholders of the Founding Companies who
will become officers, directors or beneficial owners of 5% or more of the
Company's Common Stock upon consummation of the Offering. Such indebtedness bore
interest at a weighted average per annum interest rate of 10.0% in Fiscal 1997
and matures at varying dates between January 2003 and February 2005. The
remaining indebtedness bore interest at a per annum interest rate of 9.0% in
Fiscal 1997 and matures at various dates from May 2001 through March 2004. See
"Certain Transactions."
The approximately $8.2 million of remaining net proceeds will be used for
working capital and for general corporate purposes, which are expected to
include future acquisitions of companies operating in the collectibles or
animation art industries. The Company currently has no agreements, arrangements
or understandings, and is not currently engaged in negotiations, with respect to
other acquisitions. Pending such uses, the Company intends to invest the net
proceeds of the Offering in short-term, investment-grade, interest-bearing
instruments. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources -- Combined."
DIVIDEND POLICY
The Company has never paid cash dividends and anticipates that for the
foreseeable future its earnings will be retained for the operation and expansion
of its business and for general corporate purposes and that it will not pay cash
dividends. In addition, the Company anticipates that any credit facility to
which it becomes a party will include restrictions on the ability of the Company
to pay dividends without the lender's consent.
Prior to the consummation of the Acquisitions, certain of the Founding
Companies intend to make S Corporation Distributions, aggregating $1.7 million,
to owners of the Founding Companies.
20
<PAGE>
DILUTION
The deficit in pro forma net tangible book value of the Company as of April
30, 1997 was approximately $5.6 million, or $1.59 per share of Common Stock,
after giving effect to the Acquisitions. The deficit in net tangible book value
per share represents the amount of total tangible assets of the Company reduced
by the amount of total liabilities and divided by the number of shares of Common
Stock issued and outstanding after giving effect to the Acquisitions and the
conversion of the Series A Convertible Preferred Stock. Net tangible book value
dilution per share represents the difference between the amount per share paid
by purchasers of shares of Common Stock in the Offering and the pro forma net
tangible book value per share of Common Stock immediately after completion of
the Offering. After giving effect to the sale of 2,700,000 shares of Common
Stock by the Company and the application of the estimated net proceeds therefrom
as described under "Use of Proceeds," the pro forma net tangible book value of
the Company as of April 30, 1997 would have been approximately $17.0 million, or
$2.75 per share. This represents an immediate increase in pro forma net tangible
book value of $4.34 per share as of April 30, 1997 to stockholders and an
immediate dilution in pro forma net tangible book value of $8.25 per share to
new investors purchasing Common Stock in the Offering. The following table
illustrates this dilution per share to new investors:
Assumed initial public offering price per share ......... $11.00
Pro forma deficit in net tangible book value per share at
April 30, 1997 before the Offering ..................... $(1.59)
Increase per share attributable to sale of Common Stock
in the Offering ....................................... 4.34
-------
Pro forma net tangible book value per share
after the Offering .................................... 2.75
------
Dilution per share to new investors ..................... 8.25
======
The following table sets forth, on a pro forma basis to give effect to the
Acquisitions and the S Corporation Distributions, the average price per share
paid by the existing stockholders and the new investors adjusted to give effect
to the sale of 2,700,000 shares of Common Stock offered hereby at an assumed
initial public offering price of $11.00 per share, and before deducting the
estimated underwriting discount and offering expenses payable by the Company:
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION PAID
----------------------- -------------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- --------- ---------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1) ...... 3,499,919 56.5% $ (6,609,995) (28.6)% $ (1.89)
New investors .................. 2,700,000 43.5 29,700,000 128.6 11.00
--------- ------ ------------ ----------
Total ........................ 6,199,919 100.0% 23,090,005 100.0%
========= ====== ============ ==========
</TABLE>
- ----------
(1) Total consideration paid by existing stockholders represents the combined
stockholders' equity of the Company before the Offering, adjusted to
reflect: (i) the payment of $9.2 million in cash to the stockholders of the
Founding Companies as partial consideration for the Acquisitions; (ii)
repayment of indebtedness relating to the distribution of $1.7 million to
the stockholders of the Founding Companies representing S Corporation
earnings previously taxed to such stockholders prior to the Acquisitions;
(iii) the transfer of certain non-operating assets to the stockholders of
the Founding Companies with an approximate book value of $68,000 in
connection with the Acquisitions; and (iv) the conversion of the Series A
Convertible Preferred Stock. See "Certain Transactions."
The foregoing computations assume no exercise of stock options. Upon
consummation of the Offering, there will be outstanding options to purchase (i)
165,000 shares of Common Stock at $7.00 per share and (ii) 330,000 shares of
Common Stock at the initial public offering price. To the extent the holders of
these options exercise such options, there will be further dilution to new
investors. See "Capitalization."
21
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization and current maturities of
long-term obligations and notes payable to stockholders at April 30, 1997: (i)
on a pro forma basis to give effect to the Acquisitions; and (ii) as adjusted to
give effect to both the Acquisitions and the Offering. This table should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Unaudited Pro Forma Combined Financial
Statements of the Company and the related notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
APRIL 30, 1997
-------------------------
PRO FORMA
COMBINED AS ADJUSTED
---------- ------------
(IN THOUSANDS)
<S> <C> <C>
Line of credit, current maturities of long-term obligations and
notes payable to stockholders(1) .............................. $ 4,557 $ --
======== ========
Long-term obligations and notes payable to stockholders, less
current maturities(1)(2) ....................................... $ 2,898 $ --
-------- --------
Stockholders' equity:
Preferred Stock: $.01 par value, 5,000,000 shares
authorized; 20,000 shares issued and outstanding, pro
forma combined; and no shares issued and outstanding,
as adjusted ................................................ 1,000 --
Common Stock: $.01 par value, 31,200,000 shares
authorized; 3,438,178(3) shares issued and outstanding,
pro forma combined; and 6,199,919 shares issued and
outstanding, as adjusted(3)(4) .............................. 34 62
Additional paid-in capital .................................... 9,521 33,114
Retained earnings ............................................. 442 442
-------- --------
Total stockholders' equity .................................... 10,997 33,618
-------- --------
Total capitalization ....................................... $13,895 $33,618
======== ========
</TABLE>
- ----------
(1) For a description of the Company's outstanding indebtedness, see Notes to
Unaudited Pro Forma Combined Financial Statements and the notes to the
Founding Companies' Financial Statements.
(2) Includes $1.7 million of indebtedness which reflects S Corporation
Distributions that will be funded through borrowings.
(3) Includes (i) 2,246,996 shares to be issued to the owners of the Founding
Companies and (ii) 1,016,602 shares of Restricted Common Stock.
(4) Also includes 61,741 shares to be issued to holders of Series A Convertible
Preferred Stock upon consummation of the Offering. Excludes 495,000 shares
of Common Stock issuable upon exercise of outstanding options or options to
be granted concurrently with the consummation of the Offering under the
Company's stock option plans and 270,000 shares reserved for issuance upon
exercise of the Representatives' Warrants. See "Management -- 1997
Long-Term Incentive Plan," "-- 1997 Non-Employee Directors' Stock Plan" and
"Underwriting."
22
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Collectibles USA will acquire the Founding Companies simultaneously with
and as a condition to the consummation of the Offering. For financial statement
presentation purposes, however, American Royal Arts, one of the Founding
Companies, has been identified as the "accounting acquiror." The following
selected historical financial data for American Royal Arts at October 31, 1995
and 1996, and January 31, 1997, and for the years ended October 31, 1994, 1995
and 1996, and January 31, 1997, have been derived from the audited financial
statements of American Royal Arts included elsewhere in this Prospectus. The
following selected historical financial data for American Royal Arts at October
31, 1992, 1993 and 1994, and April 30, 1997, and for the years ended October 31,
1992 and 1993 and for the three months ended April 30, 1996 and 1997 have been
derived from unaudited financial statements of American Royal Arts, which have
been prepared on the same basis as the audited financial statements and, in the
opinion of American Royal Arts, reflect all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of such data. The
following selected unaudited pro forma financial data present certain data for
the Company, as adjusted for: (i) the effects of the Acquisitions; (ii) the
effects of certain pro forma adjustments to the historical financial statements;
and (iii) the consummation of the Offering. See the Unaudited Pro Forma
Financial Combined Statements and the notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
FISCAL YEAR ENDED OCTOBER 31, JANUARY 31, ENDED APRIL 30,
------------------------------------------------ ------------- ---------------
1992 1993 1994 1995 1996 1997 1996 1997
-------- -------- -------- -------- -------- ------------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
AMERICAN ROYAL ARTS:
Net sales ..................... $2,002 $2,840 $3,898 $4,051 $4,121 $4,289 $981 $1,100
Cost of sales .................. 835 1,119 1,715 1,560 1,571 1,506 374 346
------- ------- ------- ------- ------- ------- ----- -------
Gross profit .................. 1,167 1,721 2,183 2,491 2,550 2,783 607 754
Selling, general and
administrative expenses ...... 1,044 1,288 1,588 1,760 1,764 1,778 444 483
------- ------- ------- ------- ------- ------- ----- -------
Income from operations ......... 123 433 595 731 786 1,005 163 271
Interest income (expense), net 5 6 7 18 24 24 1 6
------- ------- ------- ------- ------- ------- ----- -------
Net income ..................... $ 128 $ 439 $ 602 $ 749 $ 810 $1,029 $164 $ 277
======= ======= ======= ======= ======= ======= ===== =======
<CAPTION>
<S> <C> <C>
PRO FORMA COMBINED(1):
Net sales ..................................................................... $ 25,909 $ 5,811
Cost of sales .................................................................. 11,931 2,852
----------- -----------
Gross profit .................................................................. 13,978 2,959
Selling, general and administrative expenses(2) ................................. 9,926 2,816
Goodwill amortization(3) ...................................................... 447 103
----------- -----------
Operating income ............................................................... 3,605 40
Interest and other income (expense), net(4) .................................... 308 54
----------- -----------
Income before taxes ............................................................ 3,913 94
Net income ..................................................................... $ 2,114 $ 51
=========== ===========
Net income per share ............................................................ $ .38 $ .01
=========== ===========
Shares used in computing pro forma net income per share(5) ..................... 5,516,795 5,516,795
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31, APRIL 30, 1997
-------------------------------------- ------------- -------------------------------------------
PRO FORMA AS
1992 1993 1994 1995 1996 1997 ACTUAL COMBINED(6) ADJUSTED(7)
------ ------ ------ -------- -------- ------------- -------- -------------------- ------------
BALANCE SHEET DATA
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AMERICAN ROYAL ARTS:
Working capital ......... $117 $384 $297 $ 703 $ 567 $ 686 $ 672 $ (6,313) (8) $15,862
Total assets ............ 516 860 875 1,430 1,439 1,482 1,451 34,860 39,073
Long-term obligations
net of current maturities
and long-term notes
payable to stockholders(9) -- -- 100 -- -- -- -- 2,898 --
Stockholders' equity ...... 151 416 475 867 696 807 784 10,997 33,618
</TABLE>
- ----------
(1) The pro forma combined statement of operations data assume that the
Acquisitions and the Offering were closed on February 1, 1996 and are not
necessarily indicative of the results the Company would have obtained had
these events actually then occurred or of the Company's future results. The
year ended January 31, 1997 includes American Royal Arts for the year ended
January 31, 1997, Stone's Hallmark for the year ended November 30, 1996,
and Crystal Galleria, North Pole City, Little Elegance, Reef Hallmark,
Animation USA, Filmart and Crystal Palace for the year ended December 31,
1996. The three months ended April 30, 1997 presented includes American
Royal Arts for the three months ended April 30, 1997, Stone's Hallmark for
the three months ended May 31, 1997, North Pole City, Crystal Galleria,
Little Elegance, Reef Hallmark, Animation USA, Filmart and Crystal Palace
for the three months ended March 31, 1997.
(2) The pro forma combined statement of operations data reflect an aggregate of
approximately $930,000 and $150,000 for year ended January 31, 1997 and the
three months ended April 30, 1997, respectively, in pro forma reductions in
salary and benefits to the owners of the Founding Companies to which they
have agreed prospectively and certain other adjustments, including the
effect of revisions of certain lease agreements between certain
stockholders of the Founding Companies and such Founding Companies.
Selling, general and administrative expenses do not include the
non-recurring, non-cash compensation charge of $1.4 million for the year
ended January 31, 1997. See "Certain Transactions."
(3) Reflects amortization of the goodwill to be recorded as a result of the
Acquisitions over a 40-year period and computed on the basis described in
the Notes to the Unaudited Pro Forma Combined Financial Statements.
(4) Includes the reduction of pro forma interest expense attributed to the
repayment of debt with a portion of the net proceeds of the Offering.
(5) Includes (i) 1,191,182 shares outstanding prior to the Offering, (ii)
2,246,996 shares to be issued to the owners of the Founding Companies,
(iii) 61,741 shares to be issued to holders of the Series A Convertible
Preferred Stock, (iv) 60,000 shares (determined to be common stock
equivalents for purposes of computing earnings per share) of the 165,000
shares issuable upon the exercise of outstanding options and (v) 1,956,876
of the 2,700,000 shares to be sold in the Offering to pay the cash portion
of the consideration for the Acquisitions, repay indebtedness relating to
the S Corporation Distributions, repay indebtedness of the Founding
Companies and pay expenses of the consummation of the Offering. Excludes
options to purchase 330,000 shares to be granted concurrently with the
consummation of the Offering and 270,000 shares reserved for issuance upon
exercise of the Representatives' Warrants. See "Management -- 1997
Long-Term Incentive Plan," "-- 1997 Non-Employee Directors' Stock Plan" and
"Underwriting."
(6) The pro forma combined balance sheet data assume that the Acquisitions were
closed on April 30, 1997. The pro forma combined balance sheet data are
based upon preliminary estimates, available information and certain
assumptions that management deems appropriate and should be read in
conjunction with the other financial statements and notes thereto included
elsewhere in this Prospectus.
(7) Reflects the consummation of the Offering. See "Use of Proceeds."
(8) Includes $9.2 million payable to owners of the Founding Companies,
representing the cash portion of the consideration for the Acquisitions to
be paid with a portion of the net proceeds from the Offering.
(9) Several of the Founding Companies are S Corporations. Prior to the
Acquisitions, these Founding Companies will make distributions to their
stockholders totaling $1.7 million, representing the S Corporation
Distributions. In order to pay the S Corporation Distributions, the
Founding Companies will borrow $1.7 million from existing sources, which
will be repaid from the net proceeds of the Offering.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company was founded to create a national retailer of collectibles
merchandise and marketer of animation art. The Company's collectibles
merchandise includes figurines and sculptures made from porcelain, ceramic and
resin, and a wide selection of crystal items including functional and decorative
products. The Company also sells collectible cottages and villages, collectible
prints and lithographs, collectible Christmas ornaments and other holiday
collectibles. The Company's animation art galleries carry a full spectrum of
animation artwork, including original production cels, limited editions,
sericels, model sheets and original drawings. In addition, the Company has
licenses or rights, some of which are exclusive, to design, produce and market
animation art.
The Company's net sales will be derived primarily from the sale of
collectibles and animation art. Costs of sales will consist primarily of the
cost of merchandise sold. Selling, general and administrative expenses will
consist primarily of salaries and benefits, advertising, store, office and
warehouse rent and utilities, communications and professional fees.
The Founding Companies have been managed throughout the periods presented
as independent private companies, and their results of operations reflect tax
structures (S corporations and C corporations), which have influenced, among
other things, their historical levels of owners' compensation. Selling, general
and administrative expenses for the periods presented are therefore affected by
the amount of compensation and related benefits that the former owners and
certain key employees received from their respective businesses during these
periods. These former owners and key employees have agreed to certain reductions
in salaries and benefits in connection with the acquisition of their businesses
by the Company (the "Compensation Differential"). The Compensation Differential
for Fiscal 1997 and for the three months ended April 30, 1997 was $866,000 and
$134,000, respectively, and have been reflected as a pro forma adjustment in the
Unaudited Pro Forma Combined Statement of Operations. See "Management --
Employment Agreements."
Collectibles USA, which has conducted no operations to date, intends to
integrate the Founding Companies, their operations and administrative functions
over a period of time. This integration process may present opportunities for
(i) enhanced vendor relationships resulting in collective buying opportunities,
co-op advertising funds, shipping allowances and exclusive merchandise and (ii)
obtaining additional sales through shared customer lists and expansion of direct
mail programs, advertising campaigns, in-store artist signing events and
Internet promotions. This integration may necessitate additional costs and
expenditures for corporate management and administration, corporate expenses
related to being a public company, systems integration and facilities expansion.
These various costs and potential cost savings may make comparison of historical
operating results not comparable to, or indicative of, future performance. The
Company believes that neither the anticipated savings nor the anticipated costs
can be quantified because the Acquisitions have not occurred, and there have
been no combined operating results upon which to base the assumptions. As a
result, they have not been included in the unaudited pro forma financial
information presented herein.
Upon completion of the Acquisitions, the Company anticipates that a
significant portion of its pro forma total assets will be goodwill and will be
amortized over a 40 year period. However, the Company will periodically evaluate
whether events and circumstances after the Acquisitions are consummated indicate
that the remaining balance of goodwill may not be recoverable by comparing the
estimated undiscounted cash flows from the related operations to the carrying
amount of goodwill. If the carrying amount of goodwill were greater than the
undiscounted future cash flow, an impairment loss would be recognized.
The Company's future success is dependent upon a number of factors which
include, among others, the ability to integrate operations, reliance on the
identification and integration of satisfactory acquisitions candidates, reliance
on acquisition financing, the ability to manage growth and to attract and retain
qualified management, dependence on licenses, the need for additional capital,
dependence on key collectibles vendors and risks associated with dependence on
foreign vendors, competition and seasonality and quarterly fluctuations. See
"Risk Factors."
25
<PAGE>
Historically, the fourth quarter of the Company's fiscal year has accounted
for a greater portion of the Company's operating income than have each of the
first three quarters of the Company's fiscal year. This is primarily due to
increased activity as a result of the holiday season. In the future, the Company
expects that it will experience quarterly variations in operating results,
principally as a result of the seasonal nature of the industry. Numerous other
factors also may cause significant fluctuations in the Company's quarterly
sales, including the timing of new product introductions, the amount and timing
of sales contributed by new stores, the timing of personal appearances of
particular artists at the store locations when a customer may purchase
merchandise to be signed by the artist ("in-store artist signing events"), and
general economic conditions. Additional factors may cause fluctuations in
expenses including the costs associated with the opening of new stores, the
integration of acquired stores into the operations of the Company and corporate
expenses to support the Company's expansion strategy.
Due to the relatively low levels of inflation experienced in Fiscal 1995,
1996 and 1997, inflation did not have a significant effect on the operating
results of the combined Founding Companies in those fiscal years.
Combined Founding Companies
With respect to the financial information of the Combined Founding
Companies, references to "Fiscal 1995," "Fiscal 1996" and "Fiscal 1997" mean a
combination of the fiscal years of each of the Founding Companies for such year.
References to April 30, 1996 and 1997 mean, respectively, the three months ended
April 30, 1996 and 1997 with respect to American Royal Arts; the three months
ended May 31, 1996 and 1997 with respect to Stone's Hallmark; and the three
months ended March 31, 1996 and 1997 with respect to North Pole City, Crystal
Galleria, Little Elegance, Reef Hallmark, Animation USA, Filmart and Crystal
Palace.
RESULTS OF OPERATIONS -- COMBINED
The Combined Founding Company Statements of Operations data for Fiscal
1995, Fiscal 1996, and Fiscal 1997 do not purport to present the combined
Founding Companies in accordance with generally accepted accounting principles,
but represent merely a summation of the net sales, cost of sales, gross profit
and selling, general and administrative expenses for the applicable fiscal years
of the individual Founding Companies on an historical basis, and exclude the
effects of pro forma adjustments. This data will not be comparable to and may
not be indicative of the Company's post-combination results of operations
because (i) the Founding Companies were not under common control or management
and had different tax structures (S corporations and C corporations) during the
periods presented and (ii) the Company will use the purchase method to establish
a new basis of accounting to record the Acquisitions.
The following table sets forth certain combined selected financial data and
as a percentage of net sales of the Founding Companies on a historical basis and
excludes the effects of pro forma adjustments for the periods indicated (dollars
in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL APRIL 30,
-------------------------------------------------------- -------------------------------------
1995 1996 1997 1996 1997
------------------ ------------------ ------------------ ----------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Combined Founding Companies
Statements of Operations Data:
Net sales ............... $20,061 100.0% $22,453 100.0% $25,909 100.0% $5,020 100.0% $5,811 100.0%
Cost of sales ............ 10,167 50.7% 11,297 50.3% 11,931 46.1% 2,367 47.1% 2,852 49.1%
-------- ------ -------- ------ -------- ------ ------- ------ ------- ------
Gross Profit ............ $ 9,894 49.3% $11,156 49.7% $13,978 53.9% $2,653 52.9% $2,959 50.9%
======== ====== ======== ====== ======== ====== ======= ====== ======= ======
</TABLE>
UNAUDITED INTERIM RESULTS
Net Sales. Net sales were $5.8 million for the three months ended April 30,
1997 as compared to $5.0 million for the prior comparable period. The increase
in sales of $791,000, or 15.8%, was primarily due to (i) an increase in
contemporary collectibles sales as a result of the opening of a Crystal Galleria
store, in August 1996 and an increased demand for certain contemporary
collectible products and (ii) an
26
<PAGE>
increase in animation art sales as a result of growth of the customer database,
continued marketing efforts focused on telemarketing, and direct mail
advertising, principally offset by a decrease in sales at Animation USA and
Filmart due to a decrease in the number of in-store artist signing events.
Cost of Sales. Cost of sales increased to $2.9 million, or 49.1% of net
sales, in the three months ended April 30, 1997 from $2.4 million, or 47.1% of
net sales, in the prior comparable period. Cost of sales as a percentage of net
sales increased primarily due to an increase in sales of collectibles items with
lower profit margins.
FISCAL 1997 COMPARED TO FISCAL 1996
Net Sales. Net sales were $25.9 million for Fiscal 1997 as compared to
$22.5 million for Fiscal 1996. The increase in sales of $3.4 million, or 15.4%,
was primarily due to (i) an increase in contemporary collectibles sales as a
result of Stone's Hallmark remodeling and expansion of one store, a full year of
operation of one new Crystal Galleria store that opened in November 1995, and a
partial year of operation of another Crystal Galleria store that opened in
August 1996 and (ii) an increase in animation art sales as a result of in-store
artist signing events, growth of the customer database and continued marketing
efforts focused on telemarketing, direct mail advertising and Internet
marketing.
Cost of Sales. Cost of sales increased to $11.9 million, or 46.1%, of net
sales in Fiscal 1997 from $11.3 million, or 50.3% of net sales, in Fiscal 1996.
Cost of sales as a percentage of net sales decreased primarily due to an
increase in animation art sales that have higher product margins, such as
vintage production cels, art sold through licenses and retail sales as compared
to wholesale sales.
FISCAL 1996 COMPARED TO FISCAL 1995
Net Sales. Net sales were $22.5 million for Fiscal 1996 as compared to
$20.1 million for Fiscal 1995. The increase in sales of $2.4 million, or 11.9%,
was primarily due to an increase in contemporary collectibles sales as a result
of an opening of one Crystal Galleria store in November 1995, the remodeling and
expansion of the Reef Hallmark store and a full year operation of a new Stone's
Hallmark store that opened in November 1994.
Cost of Sales. Cost of sales increased to $11.3 million, or 50.3% of net
sales, in Fiscal 1996, from $10.2 million, or 50.7% of net sales, in Fiscal
1995. Cost of sales as a percentage of net sales decreased primarily due to
sales of collectibles and animation art with higher profit margins.
LIQUIDITY AND CAPITAL RESOURCES -- COMBINED
On a combined basis, the Founding Companies generated $164,000 during the
three months ended April 30, 1997 and $1.5 million of net cash from operating
activities during both Fiscal 1997 and Fiscal 1996. Net cash used in investing
activities by the Founding Companies on a combined basis was $638,000 and
$785,000 during Fiscal 1997 and Fiscal 1996, respectively. Most of the cash used
in investing activities during these periods was used for purchases of property
and equipment. Net cash used in financing activities by the Founding Companies
on a combined basis was $115,000 during the three months ended April 30, 1997
and $1.1 million during Fiscal 1997, whereas net cash provided by financing
activities was $33,000 in Fiscal 1996. Most of the cash used in financing
activities during these periods was used for net payments on long-term debt and
distributions to stockholders. The combined cash position of the Founding
Companies decreased by $268,000 from $1.4 million in Fiscal 1996 to $1.1 million
in Fiscal 1997 and increased to $1.3 million in the three months ended April 30,
1997.
The Company anticipates that its cash flow from operations will provide
cash in excess of the Company's normal working capital needs, debt service
requirements and planned capital expenditures for property and equipment. On a
combined basis, the Founding Companies made capital expenditures of $708,000 and
$802,000 in Fiscal 1997 and Fiscal 1996, respectively. The Company currently has
no capital commitments although it anticipates making capital expenditures of
approximately $1.6 million in Fiscal 1998. The Company intends to continue
pursuing acquisition opportunities. The timing, size or success of any
acquisition efforts and the associated potential capital commitments are
unpredictable. The
27
<PAGE>
Company expects to fund future acquisitions primarily through a combination of
borrowings and issuances of additional equity. The Company intends to seek a
$15.0 million credit facility to be used for acquisitions, working capital and
other general corporate purposes. See "Risk Factors."
Assuming the Company obtains the $15.0 million credit facility it intends
to seek, the Company believes that funds generated from operations, together
with the net proceeds from the Offering, will be sufficient to finance its
current operations, planned acquisitions and planned capital expenditures at
least through the second quarter of the next twelve months. In the event the
Company does not obtain a credit facility and does not otherwise obtain an
acceptable line of credit or additional financing, the Company's ability to make
acquisitions and its liquidity and capital resources would be adversely
affected.
American Royal Arts
American Royal Arts has been identified as the accounting acquiror for
financial statement presentation purposes. American Royal Arts has an October 31
year end. To coincide with the Company's adoption of a 52/53 week fiscal year
ending on the last Sunday in January, American Royal Arts has been presented on
a fiscal year ended on January 31, 1997 in addition to the fiscal years ended
October 31, 1994, 1995 and 1996.
American Royal Arts is a retail and wholesale marketer of animation art.
RESULTS OF OPERATIONS -- AMERICAN ROYAL ARTS
The following table sets forth certain selected financial data for American
Royal Arts on a historical basis and as a percentage of net sales for the
periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
FISCAL YEAR ENDED OCTOBER 31, JANUARY 31, THREE MONTHS ENDED APRIL 30,
------------------------------------------------------ ------------------ ----------------------------------
1994 1995 1996 1997 1996 1997
----------------- ------------------ ----------------- ------------------ --------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ........... $3,898 100.0% $4,051 100.0% $4,121 100.0% $ 4,289 100.0% $981 100.0% $1,100 100.0%
Cost of sales ........ 1,715 44.0 1,560 38.5 1,571 38.1 1,506 35.1 374 38.1 346 31.5
------- ------ ------- ------ ------- ------ -------- ------ ----- ------ ------- ------
Gross profit ........ 2,183 56.0 2,491 61.5 2,550 61.9 2,783 64.9 607 61.9 754 68.5
Selling, general and
administrative
expenses ........... 1,588 40.7 1,760 43.4 1,764 42.8 1,778 41.5 444 45.3 483 43.9
------- ------ ------- ------ ------- ------ -------- ------ ----- ------ ------- ------
Income from
operations ........... 595 15.3 731 18.1 786 19.1 $ 1,005 23.4% 163 16.6 271 24.6
Other income (expense):
Interest expense -- -- (5) (0.1) -- -- -- -- -- -- -- --
Interest income ..... 7 0.2 23 0.5 24 0.6 24 0.6 1 0.1 6 0.5
------- ------ ------- ------ ------- ------ -------- ------ ----- ------ ------- ------
Net income ........... $ 602 15.5% $ 749 18.5% $ 810 19.7% $ 1,029 24.0% $164 16.7% $ 277 25.1%
======= ====== ======= ====== ======= ====== ======== ====== ===== ====== ======= ======
</TABLE>
UNAUDITED INTERIM RESULTS
Net Sales. Net sales were $1.1 million for the three months ended April 30,
1997 as compared to $981,000 for the three months ended April 30, 1996. The
increase in sales of $119,000, or 12.1%, was primarily due to increased sales
volume from the introduction of a direct mail marketing program, partially
offset by a decrease in telemarketing sales.
Cost of Sales. Cost of sales decreased to $346,000, or 31.5% of net sales,
in the three months ended April 30, 1997 from $374,000, or 38.1% of net sales,
in the three months ended April 30, 1996. Cost of sales as a percentage of net
sales decreased primarily due to the increase in sales of art with high gross
margins sold through the introduction of a direct mail program.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $483,000, or 43.9% of net sales, in the three
months ended April 30, 1997 as compared to $444,000, or 45.3% of net sales, in
the three months ended April 30, 1996, an increase of $39,000, or 8.8%,
principally due to an increase in advertising and postage associated with the
new direct mail program and, to a lesser extent, an increase in trade show
expenses.
28
<PAGE>
YEAR ENDED JANUARY 31, 1997 COMPARED TO FISCAL YEAR ENDED OCTOBER 31, 1995
Net Sales. Net sales were $4.3 million for the year ended January 31, 1997
as compared to $4.1 million for the fiscal year ended October 31, 1995, an
increase of $238,000, or 5.9%. The increase was principally due to an increase
in telemarketing sales as a result of the growth of the customer database and,
to a lesser extent, due to an increase in special event sales, such as in-store
artist signing events. The increase was partially offset by a decrease in
wholesale sales, which was a result of a management decision to place less
emphasis on wholesale sales and more emphasis on retail sales which carry a
higher gross margin.
Cost of Sales. Cost of sales decreased to $1.5 million, or 35.1% of net
sales, for the year ended January 31, 1997 from $1.6 million, or 38.5% of net
sales, in the fiscal year ended October 31, 1995. Cost of sales as a percentage
of net sales decreased primarily due to increased sales of animation art with
higher product margins, such as vintage production cels, art sold through
licenses and a higher proportion of retail sales as compared to wholesale sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses remained consistent at $1.8 million, but decreased as a
percentage of net sales to 41.5% in the year ended January 31, 1997 from 43.4%
in the fiscal year ended October 31, 1995, primarily due to economies of scale
associated with increased sales.
FISCAL YEAR ENDED OCTOBER 31, 1995 COMPARED TO FISCAL YEAR ENDED OCTOBER 31,
1994
Net Sales. Net sales were $4.1 million in the fiscal year ended October 31,
1995 as compared to $3.9 million in the fiscal year ended October 31, 1994, an
increase of $153,000, or 3.9%. This increase was principally due to an increase
in wholesale sales resulting from the license obtained in the fiscal year ended
October 31, 1994 for animation art featuring Garfield.
Cost of Sales. Cost of sales decreased to $1.6 million, or 38.5% of net
sales, in the fiscal year ended October 31, 1995 from $1.7 million, or 44.0% of
net sales, in the fiscal year ended October 31, 1994. Cost of sales as a
percentage of net sales decreased primarily due to increased sales of animation
art with higher product margins, such as vintage production cels and art sold
through licenses.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the fiscal year ended October 31, 1995 were $1.8
million, or 43.4% of net sales, as compared to $1.6 million, or 40.7% of net
sales, in the fiscal year ended October 31, 1994, an increase of $172,000, or
10.8%, principally due to an increase in salaries and commissions resulting from
the addition of sales representatives to the telemarketing department and, to a
lesser extent, to warehousing costs from a storage facility leased in February
1995.
LIQUIDITY AND CAPITAL RESOURCES -- AMERICAN ROYAL ARTS
American Royal Arts had working capital of $672,000 and $686,000 at April
30, 1997 and January 31, 1997, respectively. The primary source of this working
capital was cash flow from operations, which was $277,000 and $1.3 million for
the three months ended April 30, 1997 and the year ended January 31, 1997,
respectively. Cash provided by operating activities was used primarily to
finance the purchase of merchandise inventories, reduce accounts payable and
accrued liabilities and fund distributions to stockholders.
Cash used for investing activities was $22,000 for the year ended January
31, 1997, representing purchases of property and equipment.
INDIVIDUAL FOUNDING COMPANIES
The selected historical financial information presented in the tables below
for the fiscal years of the individual Founding Companies (excluding American
Royal Arts, which is presented above) is derived from the respective audited
financial statements of the individual Founding Companies included
29
<PAGE>
elsewhere herein. The following discussion should be read in conjunction with
the "Summary Individual Founding Company Financial Data" and the separate
company financial statements and related notes thereto appearing elsewhere in
this Prospectus.
STONE'S HALLMARK
Stone's Hallmark is a retailer of contemporary collectibles, Hallmark cards
and gifts, and operates five contemporary specialty collectibles stores and one
outlet store.
RESULTS OF OPERATIONS -- STONE'S HALLMARK
The following table sets forth certain selected financial data for Stone's
Hallmark on a historical basis and as a percentage of net sales for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NOVEMBER 30, SIX MONTHS ENDED MAY 31,
------------------------------------------------------------- --------------------------------------
1994 1995 1996 1996 1997
--------------------- ----------------- --------------------- ----------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales .................. $3,489 100.0% $4,281 100.0% $4,986 100.0% $2,772 100.0% $3,226 100.0%
Cost of sales ............... 1,800 51.6 2,269 53.0 2,497 50.1 1,453 52.4 1,821 56.4
------- ------ ------ ------ ------- ------ ------- ------ ------- ------
Gross profit ............... 1,689 48.4 2,012 47.0 2,489 49.9 1,319 47.6 1,405 43.6
Selling, general and
administrative expenses. 1,431 41.0 1,787 41.7 2,117 42.4 950 34.3 969 30.0
------- ------ ------ ------ ------- ------ ------- ------ ------- ------
Income from operations ...... 258 7.4 225 5.3 372 7.5 369 13.3 436 13.5
Other income (expense):
Interest expense ............ (4) (0.1) (11) (0.3) (3) (0.1) -- -- (1) (0.1)
------- ------ ------ ------ ------- ------ ------- ------ ------- ------
Income before income
taxes ..................... 254 7.3 214 5.0 369 7.4 369 13.3 435 13.5
Provision for income taxes. 146 4.2 128 3.0 194 3.9 194 7.0 161 5.0
------- ------ ------ ------ ------- ------ ------- ------ ------- ------
Net income .................. $ 108 3.1% $ 86 2.0% $ 175 3.5% $ 175 6.3% $ 274 8.4%
======= ====== ====== ====== ======= ====== ======= ====== ======= ======
</TABLE>
UNAUDITED INTERIM RESULTS
Net Sales. Net sales were $3.2 million for the six months ended May 31,
1997 as compared to $2.8 million for the six months ended May 31, 1996. The
increase in sales of $454,000, or 16.3%, was largely due to an increased demand
for certain contemporary collectible products in the six months ended May 31,
1997.
Cost of Sales. Cost of sales increased to $1.8 million, or 56.4% of net
sales, in the six months ended May 31, 1997 from $1.5 million, or 52.4% of net
sales, in the six months ended May 31, 1996. Cost of sales as a percentage of
net sales increased due to an increase in contemporary collectibles sales that
have lower profit margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $969,000, or 30.0% of net sales, in the six months
ended May 31, 1997 as compared to $950,000, or 34.3% of net sales, in the six
months ended May 31, 1996, an increase of $19,000, or 2.0%, primarily
attributable to an increase in advertising. The decrease as a percentage of net
sales was primarily due to economies of scale associated with increased sales.
FISCAL YEAR ENDED NOVEMBER 30, 1996 COMPARED TO FISCAL YEAR ENDED NOVEMBER 30,
1995
Net Sales. Net sales were $5.0 million for the fiscal year ended November
30, 1996 as compared to $4.3 million for the fiscal year ended November 30,
1995. The increase in sales of $705,000, or 16.5%, was primarily due to a
remodeling of a store and, to a lesser extent, to an increase in the number of
in-store artist signing events in the fiscal year ended November 30, 1996.
Cost of Sales. Cost of sales increased to $2.5 million, or 50.1% of net
sales, in the fiscal year ended November 30, 1996 from $2.3 million, or 53.0% of
net sales, in the fiscal year ended November 30, 1995. Cost of sales as a
percentage of net sales decreased due to an increase in contemporary
collectibles sales that have higher profit margins.
30
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $2.1 million, or 42.4% of net sales, in the fiscal
year ended November 30, 1996 as compared to $1.8 million, or 41.7% of net sales,
in the fiscal year ended November 30, 1995, an increase of $330,000, or 18.4%,
primarily due to an increase in owners compensation.
FISCAL YEAR ENDED NOVEMBER 30, 1995 COMPARED TO FISCAL YEAR ENDED NOVEMBER 30,
1994
Net Sales. Net sales were $4.3 million for the fiscal year ended November
30, 1995 as compared to $3.5 million for the fiscal year ended November 30,
1994. The increase in sales of $792,000, or 22.7%, was primarily due to the
opening of a new store in November 1994 and a full year of operation of another
store which was remodeled and significantly expanded in February 1994.
Cost of Sales. Cost of sales increased to $2.3 million, or 53.0% of net
sales, in the fiscal year ended November 30, 1995 from $1.8 million, or 51.6% of
net sales, in the fiscal year ended November 30, 1994. Cost of sales as a
percentage of net sales increased due to the product mix.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the fiscal year ended November 30, 1995 were $1.8
million, or 41.7% of net sales, as compared to $1.4 million, or 41.0% of net
sales, in the fiscal year ended November 30, 1994, an increase of $357,000, or
24.9%, primarily due to the addition of employees associated with a new store
opening in November 1994, and the expansion of another store in February 1994
and, to a lesser extent, due to an increase in retail facilities leased.
LIQUIDITY AND CAPITAL RESOURCES -- STONE'S HALLMARK
Stone's Hallmark had working capital of $1.6 million and $1.3 million at
May 31, 1997 and November 30, 1996, respectively. The primary source of this
working capital was cash flows from operations and debt and equity financing.
Cash provided by operating activities was $259,000 and $89,000 in the six
months ended May 31, 1997 and the fiscal year ended November 30, 1996,
respectively. The increases in cash each period were due to higher net income
before depreciation and amortization. The working capital increases were
primarily related to the cash from the growth in sales.
Cash used for investing activities was $86,000 for the fiscal year ended
November 30, 1996 and was principally related to purchases of property and
equipment.
CRYSTAL GALLERIA
Crystal Galleria is a retailer of contemporary collectibles operating three
stores, two located in Las Vegas, Nevada and one in McLean, Virginia.
RESULTS OF OPERATIONS -- CRYSTAL GALLERIA
The following table sets forth certain selected financial data for Crystal
Galleria on a historical basis and as a percentage of net sales for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------- --------------------------------
1994 1995 1996 1996 1997
------------------ ------------------ ------------------ ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ............... $ 2,503 100.0% $ 2,794 100.0% $ 3,727 100.0% $778 100.0% $999 100.0%
Cost of sales ......... 1,188 47.5 1,333 47.7 1,785 47.9 381 49.0 469 46.9
------- ------ ------- ------ ------- ------ ----- ------ ----- ------
Gross profit ............ 1,315 52.5 1,461 52.3 1,942 52.1 397 51.0 530 53.1
Selling, general and
administrative expenses 731 29.2 875 31.3 1,564 42.0 338 43.4 424 42.5
------- ------ ------- ------ ------- ------ ----- ------ ----- ------
Income from operations 584 23.3 586 21.0 378 10.1 59 7.6 106 10.6
Other income (expense):
Interest expense ...... (38) (1.5) (58) (2.1) (112) (3.0) (12) (1.5) (37) (3.7)
Other, net ............ -- -- -- -- (12) (0.3) (12) (1.5) -- --
------- ------ ------- ------ ------- ------ ----- ------ ----- ------
Net income ............ $ 546 21.8% $ 528 18.9% $ 254 6.8% $ 35 4.6% $ 69 6.9%
======= ====== ======= ====== ======= ====== ===== ====== ===== ======
</TABLE>
31
<PAGE>
UNAUDITED INTERIM RESULTS
Net Sales. Net sales were $999,000 for the three months ended March 31,
1997 as compared to $778,000 for the three months ended March 31, 1996. The
increase in sales of $221,000, or 28.4%, was primarily a result of a new store
which opened in August 1996, and, to a lesser extent, to the growth in sales of
another new store which opened in November 1995.
Cost of Sales. Cost of sales increased to $469,000, or 46.9% of net sales,
for the three months ended March 31, 1997 from $381,000, or 49.0% of net sales,
for the three months ended March 31, 1996. Cost of sales as a percentage of net
sales decreased due to an increase in contemporary collectibles sales that have
higher profit margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the three months ended March 31, 1997 were $424,000,
or 42.5% of net sales, as compared to $338,000, or 43.4% of net sales, in the
three months ended March 31, 1996, an increase of $86,000 or 25.4%. This
increase is primarily due to a new store which opened in August 1996, with an
offsetting decrease in advertising expense in another store.
FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1995
Net Sales. Net sales were $3.7 million for the fiscal year ended December
31, 1996 as compared to $2.8 million for the fiscal year ended December 31,
1995. The increase in sales of $933,000, or 33.4%, was primarily a result of a
full year of operations of a new store which opened in November 1995 and, to a
lesser extent, to a partial year of operations of another new store which opened
in August 1996.
Cost of Sales. Cost of sales increased to $1.8 million, or 47.9% of net
sales, in the fiscal year ended December 31, 1996 from $1.3 million, or 47.7% of
net sales, in the fiscal year ended December 31, 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the fiscal year ended December 31, 1996 were $1.6
million, or 42.0% of net sales, as compared to $875,000, or 31.3% of net sales,
in the fiscal year ended December 31, 1995, an increase of $689,000, or 78.7%.
This increase was primarily due to a full year of operations of a new store
which opened in November 1995 and, to a lesser extent, to the opening of another
new store in August 1996. The 10.7% increase in this expense as a percentage of
net sales was due to the opening of the two stores mentioned above due to the
fact that new stores incur expenses that are disproportionate to the net sales
generated compared to an established store.
Interest Expense. Interest expense increased to $112,000 in the fiscal year
ended December 31, 1996 from $58,000 in the fiscal year ended December 31, 1995.
The increase was attributable to increased borrowings to finance the opening of
a new store in August 1996 and a full year of operations of another new store
that opened in November 1995.
FISCAL YEAR ENDED DECEMBER 31, 1995 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1994
Net Sales. Net sales were $2.8 million for the fiscal year ended December
31, 1995 as compared to $2.5 million for the fiscal year ended December 31,
1994. The increase in sales of $291,000, or 11.6%, was due to the opening of a
new store in November 1995.
Cost of Sales. Cost of sales increased to $1.3 million, or 47.7% of net
sales, in the fiscal year ended December 31, 1995 from $1.2 million, or 47.5% of
net sales, in the fiscal year ended December 31, 1994.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the fiscal year ended December 31, 1995 were
$875,000, or 31.3% of net sales, as compared to $731,000, or 29.2% of net sales,
in the fiscal year ended December 31, 1994, an increase of $144,000, or 19.7%,
due to opening of a new store in November 1995 and to the fact that new stores
incur expenses that are disproportionate to the net sales generated compared to
an established store.
32
<PAGE>
Interest Expense. Interest expense increased to $58,000 in the fiscal year
ended December 31, 1995 from $38,000 in the fiscal year ended December 31, 1994.
The increase was attributable to increased borrowings to finance the opening of
the new store in the fiscal year ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES -- CRYSTAL GALLERIA
Crystal Galleria had a working capital deficit of $335,000 and $383,000 at
March 31, 1997 and at December 31, 1996, respectively. The primary reason for
the working capital deficit at March 31, 1997 was cash used in operating
activities of $10,000 for the three months ended March 31, 1997 and $90,000 of
additional borrowings on payables to stockholders. The primary reason for the
working capital deficit at December 31, 1996 was cash used in operating
activities, which was $191,000 for the fiscal year ended December 31, 1996. The
decrease in operating cash flows for the fiscal year ended December 31, 1996 was
primarily due to a decrease in net income before depreciation and amortization,
combined with an increase in year-end merchandise inventories and a decrease in
year-end accounts payable and accrued liabilities.
Cash used for investing activities was $315,000 for the fiscal year ended
December 31, 1996 representing purchases of property and equipment.
North Pole City
North Pole City is a retailer of Christmas merchandise and contemporary
collectibles.
RESULTS OF OPERATIONS -- NORTH POLE CITY
The following table sets forth certain selected financial data for North
Pole City on a historical basis and as a percentage of net sales for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
--------------------------------------------------------------
1995 1996 1997
------------------- ------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales .......................................... $2,562 100.0% $2,865 100.0% $3,726 100.0%
Cost of sales .................................... 1,371 53.5 1,492 52.1 1,733 46.5
------ ------ ------ ------ ------ ------
Gross profit ....................................... 1,191 46.5 1,373 47.9 1,993 53.5
Selling, general and administrative expenses ...... 990 38.6 1,077 37.6 1,522 40.8
------ ------ ------ ------ ------ ------
Income from operations ........................... 201 7.9 296 10.3 471 12.7
Other income (expense):
Interest expense ................................. (41) (1.6) (57) (2.0) (82) (2.2)
Other, net ....................................... 8 0.3 10 0.4 38 1.0
------ ------ ------ ------ ------ ------
Income before income taxes ........................ 168 6.6 249 8.7 427 11.5
Provision for income taxes ........................ 66 2.6 96 3.4 168 4.5
------ ------ ------ ------ ------ ------
Net income ....................................... $ 102 4.0% $ 153 5.3% $ 259 7.0%
====== ====== ====== ====== ====== ======
</TABLE>
FISCAL YEAR ENDED MARCH 31, 1997 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1996
Net Sales. Net sales were $3.7 million for the fiscal year ended March 31,
1997 as compared to $2.9 million for the fiscal year ended March 31, 1996. The
increase in sales of $861,000, or 30.1%, was primarily due to continued
marketing efforts focused on telemarketing, advertising in national publications
and Internet marketing of collectibles merchandise. This increase was also due
to a lesser extent, by the remodeling and expansion of the store.
Cost of Sales. Cost of sales increased to $1.7 million, or 46.5% of net
sales, for the fiscal year ended March 31, 1997 from $1.5 million, or 52.1% of
net sales, for the fiscal year ended March 31, 1996. Cost of sales as a
percentage of net sales decreased due to the change in product mix to
collectibles with higher margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the fiscal year ended March 31, 1997 were $1.5
million, or 40.8% of net sales, as compared to $1.1 million, or 37.6% of net
sales, in the fiscal year ended March 31, 1996, an increase of $444,000, or
41.2%, primarily due to increased advertising and an increase in salaries for
additional personnel.
33
<PAGE>
Interest Expense. Interest expense increased to $82,000 in the fiscal year
ended March 31, 1997 from $57,000 in the fiscal year ended March 31, 1996. The
increase was attributable to additional borrowings used to finance store
expansion and to purchase inventory.
FISCAL YEAR ENDED MARCH 31, 1996 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1995
Net Sales. Net sales were $2.9 million for the fiscal year ended March 31,
1996 as compared to $2.6 million for the fiscal year ended March 31, 1995. The
increase in sales of $303,000, or 11.8%, was primarily a result of increased
marketing efforts focused on telemarketing, advertisements in national
publications and Internet marketing of collectibles merchandise.
Cost of Sales. Cost of sales increased to $1.5 million, or 52.1% of net
sales, in the fiscal year ended March 31, 1996 from $1.4 million, or 53.5% of
net sales, in the fiscal year ended March 31, 1995. Cost of sales as a
percentage of net sales decreased due to the change in product mix to
collectibles with higher margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the fiscal year ended March 31, 1996 were $1.1
million, or 37.6% of net sales, as compared to $990,000, or 38.6% of net sales,
in the fiscal year ended March 31, 1995, an increase of $88,000, or 8.9%,
primarily due to an increase in salaries for additional personnel.
Interest Expense. Interest expense increased to $57,000 in the fiscal year
ended March 31, 1996 from $41,000 in the fiscal year ended March 31, 1995. The
increase was attributable to increased borrowings to finance remodeling and
expansion of the store.
LIQUIDITY AND CAPITAL RESOURCES -- NORTH POLE CITY
North Pole City had working capital of $1.0 million at March 31, 1997. The
primary source of this working capital in the fiscal year ended March 31, 1997
was cash flow from operations, which was $167,000. Cash used in operating
activities was primarily related to the purchase of merchandise inventories,
payments on accounts payable and accrued liabilities, and a decrease in customer
deposits.
Cash used for investing activities was $143,000 for the fiscal year ended
March 31, 1997 representing purchases of property and equipment.
REEF HALLMARK
Reef Hallmark is a retailer of contemporary collectibles, Hallmark cards
and gifts, located in West Palm Beach, Florida.
RESULTS OF OPERATIONS -- REEF HALLMARK
The following table sets forth certain selected financial data for Reef
Hallmark on a historical basis and as a percentage of net sales for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
----------------------------------------- ---------------------------------------------
1995 1996 1996 1997
------------------- ------------------- ------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ........................ $1,839 100.0% $2,493 100.0% $558 100.0% $ 581 100.0%
Cost of sales ..................... 1,102 59.9 1,301 52.2 285 51.0 323 55.5
------ ------ ------ ------ ----- ------ ------ --------
Gross profit ..................... 737 40.1 1,192 47.8 273 49.0 258 44.5
Selling, general and administrative
expenses ........................ 629 34.2 935 37.5 204 36.6 262 45.1
------ ------ ------ ------ ----- ------ ------ --------
Income from operations ............ 108 5.9 257 10.3 69 12.4 (4) (0.6)
Other income (expense):
Interest expense ............... (41) (2.2) (49) (2.0) (12) (2.1) (11) (1.9)
Other, net ..................... -- -- (12) (0.5) -- -- -- --
------ ------ ------ ------ ----- ------ ------ --------
Net income ........................ $ 67 3.7% $ 196 7.8% $ 57 10.3% $ (15) (2.5)%
====== ====== ====== ====== ===== ====== ====== ========
</TABLE>
34
<PAGE>
UNAUDITED INTERIM RESULTS
Net Sales. Net sales were $581,000 for the three months ended March 31,
1997 as compared to $558,000 for the three months ended March 31, 1996. The
increase in sales of $24,000, or 4.2%, was primarily a result of the Easter
holiday occurring in the first quarter of 1997, whereas the Easter holiday
occurred in the second quarter of 1996.
Cost of Sales. Cost of sales increased to $323,000, or 55.5% of net sales,
in the three months ended March 31, 1997 from $285,000, or 51.0% of net sales,
in the three months ended March 31, 1996. Cost of sales as a percentage of net
sales increased due to a change in product mix to collectibles with lower
margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the three months ended March 31, 1997 were $262,000,
or 45.1% of net sales, as compared to $204,000, or 36.6% of net sales, in the
three months ended March 31, 1996, an increase of $58,000, or 28.4%, primarily
due to an increase in advertising expenditures and, to a lesser extent, salaries
for additional sales personnel.
FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1995
Net Sales. Net sales were $2.5 million for the fiscal year ended December
31, 1996 as compared to $1.8 million for the fiscal year ended December 31,
1995. The increase in sales of $654,000, or 35.6%, was primarily a result of
increased telemarketing and direct mail advertising and, to a lesser extent, to
increased in-store artist signing events.
Cost of Sales. Cost of sales increased to $1.3 million, or 52.2% of net
sales, in the fiscal year ended December 31, 1996 from $1.1 million, or 59.9% of
net sales, in the fiscal year ended December 31, 1995. Cost of sales as a
percentage of net sales decreased due to the change in product mix to
collectible items with higher margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the fiscal year ended December 31, 1996 were
$935,000, or 37.5% of net sales, as compared to $629,000, or 34.2% of net sales,
in the fiscal year ended December 31, 1995, an increase of $306,000, or 48.7%,
primarily due to an increase in advertising expenditures and lease expenditures
in connection with the significant expansion of retail square footage in July
1995 and, to a lesser extent, due to salaries for additional sales personnel.
LIQUIDITY AND CAPITAL RESOURCES -- REEF HALLMARK
Reef Hallmark had working capital of $74,000 and $171,000 at March 31, 1997
and December 31, 1996, respectively. The primary source of this working capital
was cash flow from operations, which was $135,000 for the fiscal year ended
December 31, 1996. The decrease in working capital at March 31, 1997 was due to
cash used in operating activities, which was $73,000 for the three months ended
March 31, 1997. The increases in cash in each period were due to higher net
income before depreciation and amortization, which was partially offset by the
cash used for working capital. The working capital increases were principally
related to the purchase of merchandise inventories.
Cash used for investing activities was $29,000 for the fiscal year ended
December 31, 1996 representing the purchase of property and equipment as well as
expenditures necessary to support growth in Reef Hallmark's sales. During the
period January 1, 1995 through December 31, 1996, Reef Hallmark's capital
expenditures totaled $184,000.
FILMART
Filmart is a retail marketer of animation art with a gallery located in
Philadelphia, Pennsylvania and a gallery located in Huntington, New York.
35
<PAGE>
RESULTS OF OPERATIONS -- FILMART
The following table sets forth certain selected financial data for Filmart
on a historical basis and as a percentage of net sales for the periods indicated
(dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------------- ----------------------------------
1995 1996 1996 1997
--------------------- --------------------- --------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales .................................... $1,053 100.0% $1,446 100.0% $263 100.0% $232 100.0%
Cost of sales ................................. 511 48.6 498 34.4 102 38.7 114 49.1
------- ------ ------- ------ ----- ------ ----- ------
Gross profit ................................. 542 51.4 948 65.6 161 61.3 118 50.9
Selling, general and administrative expenses 493 46.8 539 37.3 104 39.7 163 70.7
------- ------ ------- ------ ----- ------ ----- ------
Income from operations ........................ 49 4.7 409 28.3 57 21.6 (45) (19.8)
Other income (expense):
Interest expense .............................. (4) (0.4) (1) (0.1) -- -- -- --
Other, net .................................... 74 7.1 279 19.3 56 21.4 56 24.3
------- ------ ------- ------ ----- ------ ----- ------
Net income .................................... $ 119 11.3% $ 687 47.5% $113 42.8% $ 11 4.6%
======= ====== ======= ====== ===== ====== ===== ======
</TABLE>
UNAUDITED INTERIM RESULTS
Net Sales. Net sales were $232,000 for the three months ended March 31,
1997 as compared to $263,000 for the three months ended March 31, 1996. The
decrease in sales of $32,000, or 12.1%, was primarily the result of fewer
telemarketing personnel in the first quarter of 1997. Filmart is a member of
several barter companies, within which Filmart trades artwork for various goods
and services from other barter company members. Barter transactions involving
artwork for various goods and services are valued at the market value of the
goods or services received. Filmart recognized $86,000 of sales through such
barter companies in each of the three months ended March 31, 1997 and 1996,
respectively.
Cost of Sales. Cost of sales increased to $114,000, or 49.1% of net sales,
for the three months ended March 31, 1997 from $102,000, or 38.7% of net sales
for the three months ended March 31, 1996. Cost of sales as a percentage of net
sales increased primarily due to sales of consigned merchandise which has a
lower gross profit margin.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended March 31, 1997 were $163,000,
or 70.7% of net sales, as compared to $104,000, or 39.7% of net sales, for the
three months ended March 31, 1996, an increase of $59,000, or 56.6%, primarily
due to an increase in advertising and in-store artist signing events.
Other Income. Consulting fees recorded as other income remained constant
at $56,000 for the three months ended March 31, 1997 and the three months ended
March 31, 1996.
FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1995
Net Sales. Net sales were $1.4 million for the fiscal year ended December
31, 1996 as compared to $1.1 million for the fiscal year ended December 31,
1995. The increase in sales of $393,000, or 37.3%, was primarily a result of
increased special events such as in-store artist signing events, growth of the
customer database, increased advertising and, to a lesser extent, to the
addition of sales representatives with enhanced product knowledge. Filmart
recognized $248,000 and $32,000 of sales through barter companies in the fiscal
years ended December 31, 1996 and 1995, respectively.
Cost of Sales. Cost of sales decreased to $498,000, or 34.4% of net sales,
in the fiscal year ended December 31, 1996 from $511,000, or 48.6% of net sales,
in the fiscal year ended December 31, 1995. Cost of sales as a percentage of net
sales decreased primarily due to sales of animation art with higher margins,
primarily vintage production cels.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the fiscal year ended December 31, 1996 were
$539,000, or 37.3% of net sales, as compared to $493,000, or 46.8% of net sales,
in the fiscal year ended December 31, 1995, an increase of $47,000, or 9.5%,
primarily due to an increase in commissions. The decrease in this cost as a
percentage of net sales was primarily due to economies of scale associated with
increased sales.
36
<PAGE>
Other Income. Other income increased to $279,000 in the fiscal year ended
December 31, 1996 from $74,000 in the fiscal year ended December 31, 1995. The
increase of $205,000 is a result of increased consulting fees and proceeds from
an insurance claim reimbursement.
LIQUIDITY AND CAPITAL RESOURCES -- FILMART
Filmart had working capital of $990,000 and $976,000 at March 31, 1997 and
December 31, 1996, respectively. The primary sources of working capital at March
31, 1997 were prepayments made for advertising and advances to shareholders. The
increase in working capital at December 31, 1996 was the result of cash flow
from operations, as well as prepayments made for advertising and advances to
shareholders.
Cash used for operating activities was $74,000 for the three months ended
March 31, 1997. Cash provided by operating activities was $131,000 for the year
ended December 31, 1996.
ANIMATION USA
Animation USA is a retail marketer of animation art with a gallery located
in Seattle, Washington and a gallery located in San Francisco, California.
RESULTS OF OPERATIONS -- ANIMATION USA
The following table sets forth certain selected financial data for
Animation USA on a historical basis and data as a percentage of net sales for
the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------------
1996 1997
--------------------- --------------------
<S> <C> <C> <C> <C>
Net sales .......................................... $449 100.0% $341 100.0%
Cost of sales .................................... 205 45.7 137 40.1
----- ------ ----- ------
Gross profit ....................................... 244 54.3 204 59.9
Selling, general and administrative expenses ...... 202 44.9 187 55.0
----- ------ ----- ------
Income from operations ........................... 42 9.3 17 4.9
Other income (expense):
Interest expense ................................. (2) (0.4) (3) (0.8)
Other, net ....................................... -- -- -- --
----- ------ ----- ------
Income before taxes .............................. 40 8.9 14 4.1
Income tax expenses (benefit) ..................... (1) (0.2) 5 1.5
----- ------ ----- ------
Net income ....................................... $ 41 9.1% $ 9 2.5%
===== ====== ===== ======
</TABLE>
UNAUDITED INTERIM RESULTS
Net Sales. Net sales were $341,000 for the three months ended March 31,
1997 as compared to $449,000 for the three months ended March 31, 1996. The
decrease in sales of $108,000, or 24.1%, was primarily attributable to a
decrease in the number of in-store artist signing events in the first quarter of
1997.
Cost of Sales. Cost of sales decreased to $137,000, or 40.1% of net sales,
in the three months ended March 31, 1997 from $205,000, or 45.7% of net sales in
the three months ended March 31, 1996. Cost of sales as a percentage of net
sales decreased due to increased marketing efforts placing a greater emphasis on
the sale of higher gross margin products in the first quarter of 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the three months ended March 31, 1997 were $187,000,
or 55.0% of net sales, as compared to $202,000, or 44.9% of net sales, in the
three months ended March 31, 1996, a decrease of $14,000, or 7.0%. This decrease
was largely due to a decrease in advertising expense related to the decrease in
the number of in-store artist signing events and, to a lesser extent, to a
decrease in sales commissions and office supplies.
37
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES -- ANIMATION USA
Animation USA had a working capital deficit of $21,000 and $30,000, at
March 31, 1997 and December 31, 1996, respectively. The primary reason for the
working capital deficit at March 31, 1997 was an increase of $15,000 in amounts
outstanding under the line of credit. The primary reason for the working capital
deficit at December 31, 1996 was cash used in operating activities of $71,000.
The decrease in cash for the periods was due to lower net income before
depreciation, and the decrease in accounts payable and accrued liabilities, the
purchase of merchandise inventories, and a decrease in customer deposits.
Cash used for investing activities was $29,000 for the fiscal year ended
December 31,1996. These activities represent the purchase of property and
equipment. No cash was used for investing activities for the three months ended
March 31, 1997.
38
<PAGE>
BUSINESS
OVERVIEW
Collectibles USA was founded to create a national retailer of collectibles
merchandise and marketer of animation art. Collectibles USA has entered into
agreements to acquire six retailers of contemporary collectibles and three
marketers of animation art simultaneously with the closing of the Offering. Upon
the consummation of these Acquisitions, the Company believes that it will be a
leading retailer of contemporary collectibles and a leading marketer of
animation art in the United States. The Company sells its collectibles products
through two superstores, one free-standing retail location, seven mall-based
stores and six upscale strip-mall stores. The Company's 16 collectibles stores
are located in California (2), Florida, Illinois (6), Nevada (2), New Jersey
(2), Oklahoma (2) and Virginia. In addition, certain stores sell collectibles
through database direct mail, inbound and outbound telemarketing operations and
over the Internet. The Company sells animation art primarily through database
direct mail, telemarketing and the Internet to both retail and wholesale
customers, and operates five animation art galleries located in California, New
York (2), Pennsylvania and Washington.
The Company's collectibles merchandise includes figurines and sculptures
made from porcelain, ceramic and resin, and a wide selection of crystal items
including functional and decorative products. The Company also sells collectible
cottages and villages, collectible prints and lithographs, collectible Christmas
ornaments and other holiday collectibles. The Company's merchandise is produced
by leading vendors such as Lladr-, Department 56 (manufacturer of The Original
Snow Village and The Heirloom Village Collection product lines), Giuseppe
Armani, Goebel U.S.A. (manufacturer of the Hummel product line), Waterford,
Baccarat, Lalique, Swarovski, Disney and Enesco (manufacturer of the Precious
Moments and Cherished Teddies product lines). See "-- Collectibles Stores." The
Company's animation art galleries carry a full spectrum of animation artwork,
including original production cels, limited editions, sericels, model sheets and
original drawings. In addition, the Company has licenses or rights, some of
which are exclusive, to design, produce and market animation art featuring a
wide variety of well known characters, including Garfield\R, The Simpsons\R and
Anastasia\R, and is also an authorized dealer of limited editions and sericels
created by Disney and Warner Brothers.
The Company's target retail customer is between 45 and 64 years old, and
encompasses a broad range of income levels. The Company believes that the
typical collector makes more than one collectibles purchase per year, and the
typical collecting household maintains more than one collection. Moreover,
collectibles also are purchased as gifts and as decorative items. The Company's
animation art galleries also target a wide range of customers from entry level
collectors with relatively small collections to high-end, experienced collectors
of vintage pieces.
INDUSTRY OVERVIEW
According to Unity Marketing's The Collectibles Industry Report 1997, the
collectibles industry grew approximately 11.9% in 1996, generating over $9
billion in primary sales (i.e., sales of new merchandise), of which
approximately 79% were generated by retail sales (including TV shopping) and
approximately 21% were generated by direct response marketing. The contemporary
collectibles industry is serviced by approximately 10,000 specialty retail
collectibles stores nationwide. Collectibles are also sold by mid-to-upscale
department stores, home furnishing stores, small specialty import stores, gift
stores, card shops, TV shopping, collectors clubs and other gallery and print
stores. The industry includes sales of a wide variety of manufactured
collectible items, including figurines and sculptures, dolls, crystal, collector
plates, cottages, lighthouses, Christmas ornaments and other holiday
collectibles and art such as lithographs and prints. According to Unity
Marketing, an estimated 31 million Americans identify themselves as collectors.
The animation art industry includes sales of vintage original production
cels, limited editions produced by studios, sericels and original animation
produced by licensees such as the Company bearing the likenesses of popular
animated characters through art galleries, gift shops and auction houses, as
well as database direct mail, telemarketing and the Internet. Although
statistical information on the animation art industry is limited and marketing
tools such as "collectors clubs" are not yet
39
<PAGE>
common in the industry, the Company believes that the industry is growing. In
recognition of the industry's emerging importance and profitability, auction
houses such as Sotheby's and Christie's are active in the secondary market of
animation through their public auctions.
The Company's target consumer base represents a growing part of the United
States population. According to the U.S. Department of Commerce Bureau of the
Census, the 45 to 64 year old population reached approximately 45 million in
1996 and is expected to grow to approximately 66 million during the next ten
years, representing a projected growth rate of close to three times the rate for
the overall population. The Company believes that collecting will become
increasingly important to consumers ages 45 to 64 because this generation of
collectors has high levels of discretionary income and has demonstrated
nostalgic characteristics.
The Company believes that the highly fragmented nature of the collectibles
and animation art industries creates significant consolidation opportunities.
The retail collectibles market is highly fragmented with over 10,000 retail
stores, most of which have less than a 1% market share. In addition, most of the
participants in these industries lack the capital to expand or a viable exit
strategy. The Company believes that the favorable growth outlook for the
collectibles and animation art industries resulting from the growing demographic
base, coupled with the fragmented nature of these industries, will make it well
positioned to pursue its growth strategies. The Company estimates that there are
over 200 collectibles retailers in the United States with retail sales in excess
of $2 million annually.
BUSINESS STRATEGY
The Company's goal is to become the leading retailer of contemporary
collectibles and the leading marketer of animation art in the United States. The
Company will seek to achieve this goal by emphasizing growth through
acquisitions and implementing a national operating strategy that enhances
internal revenue growth and profitability.
GROWTH STRATEGY
Key elements of the Company's growth strategy include:
Grow Through Acquisitions. The Company believes that the collectibles
industry is highly fragmented with significant opportunities for
consolidation. The Company intends to acquire profitable, well-managed
collectibles retailers and animation art marketers that may provide new
categories of merchandise that may be cross-sold to the Company's existing
customer base. The Company believes that it will be an attractive acquiror
due to its (i) strategy of retaining owners and management of acquired
companies, (ii) access to capital and (iii) ability to offer sellers
immediate liquidity for their business as well as an ongoing equity stake in
the Company. The Company has developed an extensive database of acquisition
candidates within the collectibles and animation art industries and believes
it will be well positioned to implement its acquisition program promptly
following the Offering. Within the past several months, the Company has
contacted the owners of a number of collectibles retailers and animation art
marketers, several of whom have expressed interest in having their businesses
acquired by the Company. The Company currently has no binding agreements to
effect any acquisition and is not now engaged in any negotiations to acquire
any company. The Company, however, expects that its future acquisitions will
be based on criteria such as anticipated return on capital, and the
acquisition candidate's opportunities for growth and ability to meet other
strategic objectives. Although the Company will consider opportunities to
make larger acquisitions, the Company's target candidate for acquisition is
expected to have $2 to $5 million in annual sales, demonstrated
profitability, and one to four retail locations. The Company's research
indicates that there are more collectibles retailers meeting its criteria
than there are animation art marketers. To help it identify prospective
targets, the Company has retained a consultant with knowledge of the
collectibles and animation art industries. See "Certain Transactions --
Transactions Involving Certain Officers, Directors and Stockholders." In
addition, the Company plans to hire an additional senior executive with
acquisition experience after the Offering. There can be no assurance that the
Company's acquisition program will be successful, and the Company cannot
predict when, if ever, it will make its first acquisition after the
Offering.
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As consideration for future acquisitions, the Company intends to use
various combinations of Common Stock and cash or, possibly, notes. To
facilitate its acquisition strategy, the Company intends to register
2,500,000 additional shares of Common Stock under the Securities Act within
90 days after the closing of this Offering. These shares will be available
for use by the Company as consideration for future acquisitions.
Develop Prototype Store Formats. Although the Company intends to focus
initially on acquiring other retailers of collectibles and marketers of
animation art, the Company expects to complement its acquisition growth with
new store openings. Over the next 12 months, the Company plans to develop two
prototype store formats: a "superstore" format of approximately 18,000 square
feet, designed for either free-standing or strip mall locations, and a
mall-based format, of approximately 1,500 square feet. The Company does not
intend to open new stores over the next 12 months.
NATIONAL OPERATING STRATEGY
Key elements of the Company's national operating strategy include:
Strengthen and Expand Vendor Relationships. Vendors in the collectibles
industry often recognize retailers based on certain volume levels and
reputation. At the discretion of vendors, preferred gallery status is
conferred upon collectibles stores based on factors such as (i) a proven
ability to market and sell large quantities of merchandise, (ii) exceptional
customer service, (iii) creditworthiness and (iv) strong vendor
relationships. Many of the Founding Companies have achieved preferred gallery
status with key vendors which entitles them to volume discounts, co-op
advertising funds, shipping allowances and other benefits. The Company
believes that as a leading retailer of collectibles merchandise and a leading
marketer of animation art in the United States, it will have a competitive
advantage in leveraging its vendor relationships. In addition, as an industry
leader, the Company believes that it will be able to establish exclusive
relationships with vendors for certain product lines and items. Certain
vendors already have expressed a willingness to develop products, such as
porcelain figurines, resin figurines and cels, on an exclusive basis for the
Company. As a result of the Acquisitions, the Company believes that certain
of the Founding Companies will be able to benefit from the vendor
relationships that the other Founding Companies have established with each of
their individual vendors.
To ensure that the Company maximizes its relationships with vendors, the
Company intends to create a position for a general merchandising manager to
oversee and coordinate merchandising and vendor relationships. It is
anticipated that a general merchandising manager will be able to use the
Company's reputation in the collectibles and animation art industries to
leverage its vendor relationships.
Expand and Improve Database Direct Mail, Telemarketing and Internet
Marketing Programs. The Founding Companies have developed databases
aggregating approximately 205,000 customers. These databases often detail the
buying patterns and merchandise preferences of existing and potential
customers and enable the Founding Companies to conduct targeted database
direct mail, telemarketing and Internet marketing programs. In order to
develop a comprehensive marketing program for use on a Company-wide basis,
the Company intends to combine and enhance the existing customer databases of
its Founding Companies and to introduce database direct mail, telemarketing
and Internet marketing programs at Founding Companies and future companies to
be acquired which are not utilizing such programs. The Company anticipates
that such a program will be developed by mid-1998. All of the Founding
Companies which market animation art generate a majority of their sales from
database direct mail and telemarketing efforts. The Company believes there
are significant opportunities to expand the database direct mail and
telemarketing expertise developed by the animation art galleries to its
collectibles business. The Company also plans to incorporate on a
Company-wide basis the use of certain marketing programs, advertising
campaigns, artist signing events and other promotions, which have proved
successful at individual Founding Companies.
Improve Operating Procedures. Initially the Company intends to focus on
developing a centralized system to monitor the operations of the Founding
Companies by auditing sales receipts, accounts payables, payroll, purchases
and inventory levels and by implementing centralized cash
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management operations. The Company also will evaluate implementing
appropriate systems, such as Company-wide point-of-sale systems, at its
stores. The Company further intends to enhance operations at the store level
by implementing improved training programs and incentive systems for
experienced managers and by creating a corporate-level merchandising function
to more effectively manage the Company's merchandising decisions, product
displays and product assortment. Although in the near term the Company
expects to incur higher operating expenses, the Company anticipates that in
the future it will achieve long-term economies of scale and enhanced
store-level performance as a result of these efforts. The Company also
expects to experience benefits of consolidation with respect to improved
training practices, its ability to attract and retain qualified personnel and
customer service.
Capitalize on Local Strengths. Notwithstanding the strengths that a
national organization can provide, the Company believes that an important
factor for success in the collectibles industry is local relationships. By
maintaining significant operating autonomy at the local level, the Company
intends to capitalize on local strengths, such as name recognition, customer
loyalty and service. In addition, the Company anticipates that certain of the
principals of the Founding Companies will assist it in establishing and
refining practices for Company-wide operations.
COLLECTIBLES STORES
The Company will sell collectibles merchandise through two superstores, two
free-standing retail locations, nine mall-based stores and five upscale
strip-mall stores which are located in seven states. The stores range in size
from approximately 1,000 to 15,000 square feet of retail space and carry from
1,500 to 13,800 SKUs. Additionally, the Company utilizes database direct mail,
telemarketing and the Internet to sell its collectibles merchandise. The
Company's porcelain figurines and sculptures are produced by vendors such as
Lladr-, Goebel U.S.A. (manufacturer of the Hummel product line) and Giuseppe
Armani. The resin figurines which the Company sells are obtained from vendors
such as Enesco (manufacturer of the Precious Moments and Cherished Teddies
product lines). The Company's collectibles stores also sell crystal figurines
and functional items, such as crystal vases, produced by vendors such as
Swarovski, Waterford, Baccarat, and Lalique. In addition, the Company sells
collectible cottages and villages produced by Department 56 (manufacturer of The
Original Snow Village and The Heirloom Village Collections product lines).
Merchandising. Each of the Company's collectibles stores carries a product
assortment that is merchandised by product line and vendor and that is selected
to provide items that are distinctive and specifically suited to the tastes of
its customers. The stores generally carry different but overlapping lines of
collectibles merchandise because each store selects merchandise which appeals to
the preferences of customers within its area. Although the general categories of
the collectibles merchandise stay the same from store to store, individual items
within each general product group change to respond to the interests and demands
of customers of each store. Consequently, stores such as the Forum Shops at
Caesar's that are frequented by customers with more disposable income tend to
carry products which retail for prices higher than those carried by stores that
serve customers with less disposable income.
While the price of collectibles ranges from $5 to $25,000, Unity Marketing
reported in 1995 that the average collector household spends $500 annually.
Customers in higher income brackets tend to purchase the Company's higher-end
items which range in price from $1,500 to $4,000. Stores that target middle
income customers carry merchandise which ranges in price from $50 to $250.
In selecting a product, the Company considers customer demand for the lines
and, in the case of new lines, quality, dependability of delivery and cost.
Currently, each Founding Company individually determines which products to
purchase. Such purchasing decisions primarily are made by attending shows
sponsored by manufacturers, communicating with representatives of manufacturers
and participating in test sales of collectibles merchandise. Some of the
collectibles stores vary their inventory on a seasonal basis in order to
generate more sales related to Christmas and other holidays and occasions.
Manufacturers seeking to increase consumer interest occasionally expand or
retire certain collectibles within their product lines and produce event pieces
such as bridal and Easter pieces, which
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are occasionally marketed in connection with artist signings to generate
excitement about their introduction to the market. Two of the Founding Companies
are affiliated with Hallmark and sell greeting cards and Hallmark novelties in
addition to collectibles merchandise.
To ensure that the Company maximizes its relationships with vendors, the
Company intends to create a position for a general merchandising manager to
oversee and coordinate merchandising and vendor relationships. Certain vendors
have expressed a willingness to develop exclusive products for the Company.
Most of the Company's contemporary collectibles merchandise is manufactured
overseas; however, it is purchased directly from the manufacturer's
representatives in the United States. The Company purchases collectibles
merchandise from over 70 vendors, including Hallmark, sales of which accounted
for approximately 11% of the Company's pro forma net sales in Fiscal 1997.
Certain suppliers of collectibles merchandise to the Founding Companies, such as
Enesco or Department 56, provide in their agreements with such Founding
Companies that the vendor will furnish an ongoing supply of products within the
vendor's particular production limitations and obligate the vendor to develop
point-of-sale material to support the Founding Companies' advertising programs.
Pursuant to such agreements, it is the responsibility of the Founding Company to
operate at least five days a week or throughout the calendar year, to promote
and foster the collectibility status of the vendor's merchandise, to organize
promotional events such as "open houses," to purchase certain levels of
merchandise or display certain pieces in a series, to adhere to a vendor's
pricing schedule and to maintain a satisfactory creditworthiness. A Founding
Company's failure to fulfill its obligations to a vendor may entitle the vendor
to suspend its supply of collectibles merchandise. Several of the Founding
Companies have achieved standards of quality and reputation which qualify them
for the preferred gallery status recognized by their important vendors. Such
status typically confers benefits such as greater co-op advertising
contributions, preferred access to specialized merchandise and increased access
to artists for signings and other in-store and off-site special events. The
Company makes decisions about purchases of inventory well in advance of the time
at which such products are intended to be sold. Significant deviations from
projected demand for collectibles merchandise could have a material adverse
effect on the Company's financial condition and results of operations. Higher
priced collectibles generally are sold on a consignment basis which permits the
Company to expand its array of collectibles merchandise without encumbering
working capital.
In order to attract and retain the loyalty of collectibles customers and to
position its stores as destination retail locations, certain of the Founding
Companies utilize innovative merchandising and display techniques. One of the
stores has built a reputation based on entertaining in-store displays which have
included a model train, a grind organ and unique displays which highlight a
particular vendor's merchandise. Other of the Company's collectibles stores have
gained recognition based on their promotional practices, including producing and
distributing videotapes of the store's business operations and employing games
of chance with prizes corresponding to a vendor's particular collectibles theme.
Marketing. Currently, the Founding Companies advertise independently of
each other, primarily through print advertising and direct mail contacts.
Certain of the Founding Companies, namely North Pole City, Little Elegance, Reef
Hallmark and Stone's Hallmark, advertise their merchandise in catalogs that are
produced by a national collectibles catalog publishing syndicate such as Parade
of Gifts and Gift Creations Concepts. Such catalog consortiums allow members to
use the published catalog for individual sales purposes. Membership in such
catalog consortiums entitles the Company to exclusive pieces produced by Enesco
and Department 56. The Company plans to evaluate its use of catalog consortiums
in the future, including opportunities for preparing such catalogs itself.
The Company also participates in loyalty-based marketing programs such as
"collector clubs" which reward members with privileges such as access to
exclusive member pieces, detailed information about collections and invitations
to special events.
The Company's collectibles stores' databases contain approximately 140,000
customers, often detailing the buying patterns and merchandising preferences of
current and potential customers. This extensive database assists the Company in
database direct mail and telemarketing programs. Three of
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the Company's collectibles stores have home pages on the Internet which they use
to educate consumers, display samples of their collectibles merchandise, inform
customers of upcoming product availability dates and special events and allow
customers to place orders. Customers can contact Little Elegance at
www.little-elegance.com, North Pole City at www.northpolecity.com, and Stone's
Hallmark at virtual bit.com/stones. Sales over the Internet have not constituted
a significant portion of the Company's sales to date.
Following the Offering, the Company intends to increase its print
advertising efforts, including advertising in specialty collectibles magazines
and inserting promotional and seasonal sales circulars in local newspapers, and
increase its efforts in other media, including radio and television. The Company
also intends to initiate programs utilizing its customer database to stimulate
additional sales around birthdays and anniversaries, and such holidays as
Mother's Day. In addition, the Company also plans to expand promotional events
such as artist signings and sponsored charitable activities, which have proven
successful at individual Founding Companies.
Customer Service. The Company's goal is to provide exceptional customer
service. The Company generally ships orders within 24 to 72 hours. In addition,
the Company places special orders on behalf of its customers with manufacturers
for hard-to-find items and notifies its customers in advance of receiving
limited edition pieces in advance of their availability in stores. The Company
generally accepts returns on its merchandise within 14 to 30 days of sale. All
of the Company's stores are open seven days a week. In recognition of the
Founding Companies' dedication to customer service and from their commitment and
experience in merchandising a particular vendor's collectibles merchandise, the
Founding Companies have received numerous titles of distinction such as Boyds
Bears Gold Paw (Stone's Hallmark), Cherished Teddies Adoption Center (North Pole
City and Stone's Hallmark), Department 56 Gold Key Dealer (Little Elegance,
North Pole City, Reef Hallmark and Stone's Hallmark), Fenton Glass Showcase
Dealer (Stone's Hallmark), Giuseppe Armani Art Headquarter Store (North Pole
City), Giuseppe Armani Preferred Dealer (Crystal Galleria), Hallmark Gold Crown
(Reef Hallmark and Stone's Hallmark), Lladro Millennium Dealer (Crystal
Galleria), Lladro Vanguard Dealer (Crystal Palace), Roman Premiere Dealer
(Little Elegance) and Swarovski Preferred Dealer (Crystal Galleria). Three of
the Founding Companies (Little Elegance, Reef Hallmark and Stone's Hallmark) are
among the approximately 40 stores nationwide designated as Precious Moments
Century Circle Dealers by Enesco which entitles them to exclusive Precious
Moments collectibles pieces.
ANIMATION ART GALLERIES
The Company's five animation art galleries are each located in or near
suburbs of metropolitan areas. These galleries are located in California, New
York (2), Pennsylvania and Washington. The Company generates most of its
animation art sales through database direct mail and telemarketing operations.
Merchandising. The Company's animation art galleries carry a wide
assortment of animation artwork, including original production cels, limited
editions, sericels, model sheets and original drawings. A "cel" is a painting of
a character or object on a transparent acetate sheet. An original vintage
production cel, which is created by an original drawing, is hand painted and is
the final result of the artistic process that creates animation used in the
actual film production, whereas limited edition cels although created in the
same manner, generally recreate animation scenes from popular animated films for
which original production cels are no longer available. Sericels are limited
editions that are created by hand painting an image onto a master cel and then
produced in large quantities through a printing process. Model sheets are a
group of original pencil drawings of animated characters in a variety of poses
and expressions. Prices for animation art are typically higher than for
contemporary collectibles, beginning at approximately $100 and ranging up to
$100,000, with an average sale price of approximately $750. Animation art sales
generally are less seasonal than sales of collectibles.
The Company designs and manufactures limited editions and sericels under
license from the owners of popular characters, and purchases original production
cels from the studio that created the art, another dealer or a private collector
for sale to both retail and wholesale customers. The Company sells on
consignment limited edition animation cels created by Virgil Ross, under license
from Warner Brothers,
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featuring classic Warner Brothers' characters such as Bugs Bunny\R, Elmer
Fudd\R, Yosemite Sam\R, and Tweety and Sylvester\R in classic scenes. The
Company also holds licenses or rights to design, produce and distribute
animation art bearing the likeness of The Simpsons\R, Anastasia\R, and
Garfield\R, both alone and with certain Norman Rockwell images. The Company's
designs for art featuring such licensed characters are generally subject to
prior approval by the licensor. Pursuant to an oral understanding, the Company
also distributes limited edition comic strip art from Jeff MacNelly (Shoe),
Johnny Hart (B.C. and Wizard of Id), Chris Browne (Hagar the Horrible), Bryant
Parker (Wizard of Id), Roger Bollen (Animal Crackers), Myron Woldman (Popeye and
Betty Boop) and Sidney Harris. The Company has a similar oral understanding with
Don Orielo (Felix the Cat\R). The Company acquires this limited edition comic
strip art at discount wholesale prices and in turn distributes it through
wholesale and retail sales. There are no written agreements governing these
distribution arrangements and, therefore, there can be no assurance that one or
more of these distributor arrangements will not be terminated. One of the
Founding Companies has been granted an exclusive license by HBO\R Animation to
manufacture and sell artwork using material from the first season of Spawn and
Spicy City. The Company is an authorized dealer of art produced by Warner
Brothers/Hanna-Barbera, Disney and artist Chuck Jones. The Company's authorized
dealer agreements can generally be terminated by the other party with or without
cause on short notice. Certain of the authorized dealer agreements require the
vendor's consent to the Acquisitions. Although the Company is seeking consents
authorizing the Acquisitions where required by the terms of such authorized
dealer agreements, there can be no assurance that such consents will be
obtained.
The animation art sold by the Company is produced by the Company under
certain licenses or rights with a majority of the art being obtained from the
studios or artists that create the art, including Disney and Warner
Brothers/Hanna-Barbera. The art is either bought from the artist or studio or is
sold by the Company on a consignment basis.
The Company generates its design ideas by closely collaborating with the
studio that licenses the character to be included in the artwork. It generally
takes an average of six weeks to create a new piece of original animation art.
During this period, the Company's artists, or artists working as independent
contractors, generate a prototype design which is thereafter submitted to the
artist or animation studio for its approval.
Marketing. A significant portion of the Company's animation art marketing
efforts is conducted through database direct mail, telemarketing and Internet
marketing programs, which utilize databases aggregating approximately 65,000
customers. These databases detail the buying patterns and merchandise
preferences of current and potential customers and enable the Founding Companies
to conduct targeted database direct mail, telemarketing and Internet marketing
programs. The Company's animation art marketing efforts also include advertising
in newspapers and animation art magazines. While each of the Founding Companies
will continue to advertise locally, the Company will evaluate opportunities to
consolidate its advertising functions on a national basis. Two of the Company's
animation art marketers have home pages on the Internet which they use to
educate customers about their animation art and special events. Customers can
contact American Royal Arts and Animation USA at www.ara-animation.com and
www.animationusa.com, respectively. Sales over the Internet have not constituted
a significant portion of the Company's sales to date.
All of the Founding Companies which market animation art generate a
majority of their sales from database direct mail and telemarketing efforts. One
of the Company's significant strategies for improved marketing is the
consolidation of the databases of the various Founding Companies for
comprehensive database direct mail and telemarketing efforts along lines that
have proved successful at the Founding Companies where these operations generate
significant amounts of sales. The Company believes one of the significant
opportunities presented by the consolidation of the Founding Companies is the
cross-marketing possibilities to the combined customer databases of the Founding
Companies.
One of the Founding Companies, Filmart, has an agreement with Vista Media,
Inc. ("Vista"), a non-affiliated, third party, whereby Filmart receives print,
radio and television advertising services from Vista in exchange for providing
to Vista consulting services consisting of designing animation characters and
business logos, providing art direction for Vista's publications and providing
business advice in the animation industry. The agreement expires on August 31,
1997; however, by mutual consent such agreement can be extended to August 31,
1998.
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Customer Service. The Company's animation art customer orders generally are
shipped within two to four weeks. Once an order is received, the gallery frames,
mats and, in some cases, arranges for the artist to personally sign the
purchased art. The Company's animation art galleries generally are open six days
a week and by appointment. Outbound telemarketing efforts and inbound calls
generally occur during store hours.
TRAINING PROGRAMS
The Company's goal is to provide exceptional customer service. The owners
of the Founding Companies either serve as store or gallery managers or seek to
hire entrepreneurial managers who are energetic and knowledgeable about the
collectibles and animation art industries. Each of the Founding Companies has
developed varying levels of training programs. Some of the training programs
involve video presentations, utilize material prepared by vendors, consist of
vendor-sponsored training conducted by representatives or consist of one-on-one
training conducted by managers. As part of its emphasis on customer service, the
Company plans to evaluate each Founding Company's training program and develop a
Company-wide training program for new hires.
MANAGEMENT INFORMATION SYSTEMS AND CONTROLS
The Founding Companies currently have a variety of accounting, inventory
and financial reporting systems at varying degrees of sophistication, none of
which have previously operated on a combined basis. The Company intends to
centralize its accounting and financial reporting activities at its
headquarters; however, basic accounting activities will continue to be conducted
at the regional and local level. The Company will need to coordinate and
integrate the information systems hardware and software currently in place at
the Founding Companies to ensure that the Company's financial and other
information reporting functions are conducted satisfactorily. Failure to
successfully develop a consolidated system for reporting such information could
have a material adverse effect on the Company's financial condition and results
of operations.
In order to improve operating procedures, the Company initially will focus
on developing a centralized system to monitor the operations of the Founding
Companies by auditing sales receipts, accounts payables, payroll, purchases and
inventory levels and by implementing centralized cash management operations. The
Company also will evaluate implementing appropriate systems, such as
Company-wide point-of-sale systems, at its stores. The Company further intends
to enhance operations at the store level by implementing improved training
programs and incentive systems for experienced managers and by creating a
corporate-level merchandising function to more effectively manage the Company's
merchandising decisions, product displays and product assortment. See "Risk
Factors -- Absence of Combined Financial and Operating History; Ability to
Integrate Operations," and "-- Management of Growth and Attraction and Retention
of Qualified Management."
COMPETITION
The collectibles and animation art industries are highly fragmented and
competitive. In addition to other collectibles retailers and animation art
marketers, the Company competes with mid-to-upscale department stores, home
furnishing stores, small specialty import stores, gift stores, card shops, TV
shopping, collectors clubs and other gallery and print stores. The Company's
animation art galleries compete, in certain cases, with the owners of the
licensed characters, including Disney and Warner Brothers, who sell products
through their own stores and other marketing channels. Management believes that
its stores and galleries compete on the basis of depth and breadth of
merchandise assortment and customer service in addition to name recognition and
established vendor relationships. In order to maintain the goodwill inherent in
the names and reputations of each of the Founding Companies, the Company does
not expect to rename the existing stores and galleries.
Many of the Company's competitors are larger and have substantially greater
financial, marketing and other resources than the Company. In addition, although
the primary points of competition are service and availability of desired
merchandise, there can be no assurance that pricing competition will
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not develop. Other retailing companies with significantly greater capital and
other resources than the Company may enter or expand their operations in the
collectibles industry, which could change the competitive dynamics of the
industry. In addition, as the Company's animation art licenses and rights
expire, it will compete with other marketers of animation art for the right to
design, produce and market artistic creations based on the applicable licensed
character. Because retailers of collectibles and marketers of animation art
products generally do not own the proprietary rights to the products that they
sell, the barriers to entry to these industries are not significant. Therefore,
there can be no assurance that additional participants will not enter the market
or that the Company will be able to compete effectively with such entrants.
In addition, it is possible that there will be competition to acquire
additional businesses if the collectibles or animation art industries undergo
broader consolidation. Such competition could lead to higher prices being paid
for such companies. The Company believes that its decentralized management
strategy and other operating strategies make it an attractive acquiror of other
collectibles retailers and animation art marketers. There can be no assurance,
however, that the Company's acquisition program will be successful.
LICENSES
The Company produces some of its animation art under agreements which
generally permit the Company to market original production animation cels and
original canvas acrylic paintings, and to manufacture and market limited edition
cels, lithographs and sericels featuring characters such as Garfield\R, The
Simpsons\R and Anastasia\R. The Company's designs for art featuring such
licensed characters are generally subject to prior approval by the licensor.
The Company's license arrangements often require the payment of
non-refundable advances and guaranteed minimum royalties. Royalties to the
Company's licensors typically range from 30% to 50% of the price at which the
art is sold. Minimum guaranteed payments under the Company's license agreements
currently aggregate approximately $623,000 through 1999. As a result of
increased competition for licenses, the Company may, in the future, be required
to pay licensors higher royalties and higher minimum guaranteed payments in
order to obtain attractive properties for the development of existing and new
product lines.
The Company's licensing arrangements are limited in scope and duration,
authorizing the sale of specified licensed products for a defined period of
time, generally two to four years. In connection with the Acquisitions, the
Company has extended the term of certain of its licenses such that they expire
between March 1998 and September 1999. Pursuant to most of the license
agreements, the licensor has agreed to negotiate renewal of the license 90 days
before expiration, provided the Company is in compliance with the terms of the
license. The license agreements provide that they may be terminated prior to
their expiration date under certain circumstances, including the Company's
failure to comply with the product approval provisions. The termination,
cancellation or inability to renew any existing licensing arrangement, coupled
with the inability to develop and enter into new licensing arrangements, could
have a material adverse effect on the Company's financial condition and results
of operations. The Company believes that it maintains excellent relationships
with its licensors.
The Company's authorized dealer agreements can generally be terminated by
the other party with or without cause or on short notice. Termination of any of
the Company's authorized dealer agreements could have a material adverse effect
on the Company's financial condition and results of operations. Certain of the
authorized dealer agreements require the vendor's consent to the Acquisitions.
Although the Company is seeking consents authorizing the Acquisitions where
required by the terms of its authorized dealer agreements, there can be no
assurance that such consents will be obtained. The Company believes it maintains
excellent relations with the companies with which it has authorized dealer
agreements.
FACILITIES
The Company maintains 27 facilities consisting of 21 retail locations
(which in some cases also contain offices) and six warehouse or distribution
facilities (which in some cases also contain offices). All of the Company's
facilities are leased. The facilities range in size from approximately 400
square feet
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to 20,000 square feet and are located in ten states. The Company believes that
its facilities are adequate to meet its needs for the foreseeable future. The
Company's corporate headquarters are located in approximately 1,000 square feet
of a leased office space in New York City, New York.
The Company maintains a significant amount of inventory in order to be
assured a sufficient supply of products to its customers. Certain of the
Founding Companies currently operate their own warehouses at or near the
location of its store or stores to warehouse overflow merchandise. The largest
off-site storage facility is approximately 10,500 square feet. As the Company's
sales reach certain levels, it may consider combining its off-site storage
facilities into a single facility.
EMPLOYEES
At April 30, 1997, the Company employed 235 persons, of which two were
full-time employees at the Company's headquarters, 121 were part-time employees
in its retail stores and distribution centers, and 107 were full-time employees
in the stores, offices and distribution centers. Of the Company's employees, 25
are dedicated to database direct mail and telemarketing operations. Many other
employees are partially engaged in database direct mail and telemarketing
activities. During the Company's peak holiday selling season, the Company
typically hires additional part-time employees. The employees of the Company are
not covered by any collective bargaining agreement. The Company considers its
relationship with its employees to be good.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceeding which could have a
material adverse effect on its financial condition and results of operations.
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MANAGEMENT
DIRECTORS, OFFICERS AND CONSULTANT
The following table sets forth information concerning the Company's
directors and executive officers and those persons who will become directors,
executive officers and consultants upon consummation of the Offering:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------- ----- --------------------------------------------------------
<S> <C> <C>
Ronald P. Rafaloff(1) ......... 49 Chairman of the Board
W. Randolph Ellspermann ...... 47 President and Chief Executive Officer; Director(3)
Vincent J. Browne ............ 60 Executive Vice President -- Mall Operations; President
-- Crystal Galleria and Crystal Palace; Director(3)
Neil J. DePascal, Jr. ......... 47 Executive Vice President and Chief Financial Officer
Roy C. Elwell .................. 41 Executive Vice President -- Corporate Development;
President -- Reef Hallmark; Director(3)
Jerry Gladstone ............... 37 Executive Vice President -- Marketing; President --
Animation Division; President -- American Royal Arts;
Director(3)
David K. Green ............... 39 Executive Vice President -- Operations; President --
Collectibles Division; President -- North Pole City;
Director(3)
Susan M. Spiegel ............... 41 President -- Filmart; Director(3)
David J. Stone ............... 64 President -- Stone's Hallmark; Director(3)
Michael A. Baker ............... 51 Consultant
Paul T. Shirley(1)(2)(3) ...... 56 Director(3)
</TABLE>
- ----------
(1) Member of compensation committee.
(2) Member of audit committee.
(3) Director nominees will become directors of the Company upon consummation of
the Offering.
Ronald P. Rafaloff has served as the Chairman of the Board since June 1996.
Ronald P. Rafaloff has been the Chief Executive Officer and a principal owner of
RGR Financial Corp., a securities broker-dealer providing investment services to
retail, corporate and pension plan clients, since its inception in March 1996.
Prior to forming RGR Financial Corp., Ronald P. Rafaloff was a senior vice
president at Smith Barney, Inc., a leading investment bank, from October 1992 to
June 1996.
W. Randolph Ellspermann has served as President and Chief Executive Officer
since August 11, 1997 and will become a director of the Company upon
consummation of the Offering. From January 1997 to August 1997, Mr. Ellspermann
was a Senior Vice President of Auto-By-Tel Corporation ("Auto-By-Tel"), an
Internet commerce company that markets automotive and auxiliary services in
North America. Since July 1996, he has been the Chief Operating Officer of
Auto-By-Tel Acceptance Corporation, a subsidiary of Auto-By-Tel. From November
1993 to June 1996, Mr. Ellspermann was employed by Mark III Industries, a van
conversion company, where he last served as Chief Operating Officer and Chief
Financial Officer. From June 1986 to June 1993, Mr. Ellspermann was employed by
subsidiaries of Securities Pacific Corporation, including five years as Chief
Executive Officer of Security Pacific Information Services Corp. and two years
as Chief Financial Officer of Security Pacific Auto Finance. Mr. Ellspermann's
background also includes 13 years with Ford Motor Company and Ford Motor Credit
Company in a variety of finance and management positions. He has been a director
and officer of Crystal Galleria since its founding in 1992.
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Vincent J. Browne will become the Executive Vice President -- Mall
Operations and a director of the Company upon consummation of the Offering. He
is the President and a director of Crystal Galleria and has served in such
capacities since its incorporation in 1992. He is the President and a director
of Crystal Palace and has served in such capacities since its incorporation in
1988.
Neil J. DePascal, Jr. has served as Executive Vice President and Chief
Financial Officer of the Company since August 11, 1997. From 1992 to 1997, he
served as Treasurer of Owen Healthcare, Inc., a Houston based provider of
hospital pharmacy management services. From March 1992 until September 1992, he
provided financial consulting services to American Medical Response, Inc.
("AMR"), a Boston based company engaged in the provision of a national ambulance
service network, during and immediately following such company's initial public
offering. Mr. DePascal is a Certified Public Accountant and is a member of the
American Institute of Certified Public Accountants and the Texas Society of
Certified Public Accountants.
Roy C. Elwell will become the Executive Vice President -- Corporate
Development and a director of the Company upon consummation of the Offering. He
is the President and a director of Reef Hallmark and has served in such
capacities since its incorporation in 1984. He currently serves on the Florida
District Advisory Board for Hallmark Cards Incorporated. Mr. Elwell served as a
member of the Enesco Corporation Retail Advisory Board from January 1990 to
December 1990.
Jerry Gladstone will become the Executive Vice President -- Marketing, the
President of the Company's Animation Division and a director of the Company upon
consummation of the Offering. He has served in the capacity of President of
American Royal Arts since 1984 and is currently a director of American Royal
Arts. He recently has been selected by Disney to be a member of its first
Preferred Gallery Advisory Board.
David K. Green will become the Executive Vice President -- Operations,
President -- Collectibles Division and a director of the Company upon
consummation of the Offering. He is the President and a director of North Pole
City and has served in such capacities since its incorporation in 1984. He was a
member of the advisory board of Gift Creations Concepts, a collectibles catalog
publisher, in 1995.
Susan M. Spiegel will become a director of the Company upon consummation
of the Offering. She is the President and a director of Filmart and has served
in such capacities since 1996. Ms. Spiegel founded Animation Art Resources, a
private gallery dealing in high-end vintage animation artworks. She served as a
member of the Board of Directors of The Philadelphia Art Alliance from 1989 to
1995. Ms. Spiegel served on Disney's Preferred Gallery Council for the Art
Editions Division during 1995.
David J. Stone will become a director of the Company upon consummation of
the Offering. He is the President of Stone's Hallmark and has served in that
capacity since its incorporation in 1981 and serves as a director of Stone's
Hallmark.
Michael A. Baker has served as a consultant to the Company since the
Company's inception. In such capacity, he will consult with officers and
directors of the Company, will attend meetings of the Board of Directors and
will provide guidance concerning management and operation of the Company's
business, including potential acquisitions. Mr. Baker was a founder of Allwaste,
Inc., a Houston based industrial services company and has served as director
since November 1984. Mr. Baker was a founder and director of American Medical
Response, Inc. from February 1992 until February 1997. He served from June 1989
to October 1991 as an officer and director of Sanifill, Inc., a Houston based
landfill development company founded by Mr. Baker and others. Mr. Baker
currently serves as an outside consultant to various private companies.
Paul T. Shirley will become a director of the Company upon consummation of
the Offering. He has served as Chief Executive Officer and President of American
Medical Response, Inc. since August 1995 and has been a director of AMR since
August 1992. From May 1993 to August 1995, he served as Chief Operating Officer
of AMR. He also served as Executive Vice President of AMR from August 1992 to
August 1995 and as Chief Executive Officer of American Medical Response West
from March 1989 until August 1992. From June 1963 until March 1989, he was
President of Santa Cruz Ambulance Service.
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Directors are elected at each annual meeting of stockholders. All officers
serve at the discretion of the Board of Directors, subject to terms of their
employment agreements, if any. See "-- Employment Agreements."
Directors' Compensation
Directors who are employees of the Company do not receive additional
compensation for serving as directors. Each director who is not an employee of
the Company receives a fee of $2,000 for attendance at each Board of Directors
meeting and $1,000 for each committee meeting (unless held on the same day as a
Board of Directors meeting). Directors of the Company are reimbursed for
out-of-pocket expenses incurred in attending meetings of the Board of Directors
or committees thereof, and for other expenses incurred in their capacity as
directors of the Company. Each non-employee director receives an option to
purchase 40,000 shares of Common Stock upon election to the Board of Directors
and an annual grant of an to option to purchase 5,000 shares of Common Stock.
See "Management -- 1997 Non-Employee Directors' Stock Plan."
EXECUTIVE COMPENSATION
Collectibles USA was incorporated in January 1996 and, prior to the
Offering, did not conduct any operations other than activities related to the
Acquisitions and the Offering. Collectibles USA did not pay any compensation
prior to January 1997. Collectibles USA's officers received compensation in an
aggregate amount of $2,903 in the fiscal year ended January 26, 1997.
EMPLOYMENT AGREEMENTS
W. Randolph Ellspermann and Neil J. DePascal, Jr.
In August 1997, Collectibles USA entered into an employment agreement with
each of W. Randolph Ellspermann and Neil J. DePascal, Jr. (each individually, an
"Executive"), pursuant to which Mr. Ellspermann will serve as President and
Chief Executive Officer and Mr. DePascal will serve as Executive Vice President
and Chief Financial Officer of the Company. The initial term of each agreement
is for three years. With respect to each such agreement, in the event that
either party does not notify the other of his or its intention not to renew the
employment agreement at least one year prior to the expiration of the initial
term, each agreement will automatically be extended thereafter for successive
one-year periods. In addition to providing for an annual base salary of $150,000
and a one-time $50,000 bonus for Mr. Ellspermann, and an annual base salary of
$140,000 for Mr. DePascal, each employment agreement provides that it is the
intention of the Company to allow participation by the Executive in a
to-be-established incentive bonus plan, pursuant to which it is contemplated
that officers and key employees will be eligible to receive year-end bonus
awards. Pursuant to their respective employment agreements, Mr. Ellspermann and
Mr. DePascal (i) have been granted stock options (the "$7 Options") to acquire,
respectively, 125,000 and 40,000 shares of Common Stock at a $7 exercise price
per share and (ii) concurrently with the consummation of the Offering will be
granted additional options (the "Additional Options") to acquire, respectively,
125,000 and 100,000 shares of Common Stock at the initial public offering price.
The $7 Options are fully vested. The Additional Options vest over a three year
period in one-third increments annually.
Each employment agreement provides that the Executive is generally
prohibited, during the term of his employment with the Company and for a period
of two years thereafter (subject to decrease under certain circumstances), from
(i) engaging in activities which are competitive with the Company or its
subsidiaries, (ii) soliciting employees of the Company or its subsidiaries away
from their employment, (iii) soliciting sales to customers of the Company or its
subsidiaries, (iv) soliciting acquisition candidates of the Company on behalf of
himself or any competitor for the purpose of acquiring such entity and (v)
disclosing information regarding customers of the Company.
Each employment agreement may be terminated by the Company by reason of the
Executive's death or permanent disability, for "cause" with ten days' notice, or
without "cause" with 30 days' notice. "Cause" is generally defined as the
Executive's (i) willful, material and irreparable breach of the
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employment agreement, (ii) gross negligence in the performance of material
duties, (iii) willful dishonesty or fraud, (iv) conviction of a felony, or (v)
chronic alcohol or illegal drug abuse. In the event of a termination for cause
or in the event of the Executive's voluntary resignation (except resignations
due to a Change of Control as described below) without cause, no severance will
be payable, and all of the Executive's unvested stock options will be forfeited
to the Company. If the Executive is terminated without cause, (i) he will
receive for the remainder of the initial term (which remainder shall not exceed
two years) or for one year, whichever is greater, his base salary (which for Mr.
Ellspermann shall be deemed not less than $200,000 per year), and (ii) all his
granted but unvested stock options will immediately vest.
In the event of a pending "Change in Control" of the Company and either (i)
the Company and the Executive have not received, at least five days prior to the
anticipated Change in Control, notice from the successor that such successor is
willing to assume the Company's obligations under the Executive's employment
agreement, or (ii) the Executive elects to terminate the employment agreement at
least five days prior to the anticipated Change in Control, then the Change in
Control will be deemed to be a termination of the employment agreement by the
Company without cause. Under such circumstances, Mr. Ellspermann's severance
payment will be three times his base salary at the rate then in effect (deemed
not less than $200,000 per year). Each Executive's employment agreement contains
a tax gross-up provision, such that he will be reimbursed by the Company or its
successor in the event that he incurs any excise taxes under Section 4999 of the
Internal Revenue Code as a result of the Change in Control.
A "Change in Control" under the agreements shall be deemed to have occurred
if: (i) any person, other than the Company or an employee benefit plan, acquires
directly or indirectly Beneficial Ownership (as defined in Section 13(d) of the
Securities Exchange Act of 1934, as amended) of any voting securities of the
Company which immediately after such acquisition represents at least 50% of the
total voting power of the then-outstanding voting securities of the Company,
unless the transaction pursuant to which such acquisition is made is approved by
at least two-thirds of the Board of Directors; (ii) certain individuals no
longer constitute a majority of the members of the Board; (iii) the stockholders
of the Company shall approve a merger, consolidation, recapitalization, or
reorganization of the Company, a reverse stock split of outstanding voting
securities, or consummation of any such transaction if stockholder approval is
not obtained, other than any such transaction which has been either (x) approved
by at least 66% of the members of the Board of Directors or (y) which would
result in at least 50% of the total voting power represented by the voting
securities of the surviving entity outstanding immediately after such
transaction being beneficially owned by at least 50% of the holders of
outstanding voting securities of the Company immediately prior to the
transaction, with the voting power of each such continuing holder relative to
other such continuing holders not substantially altered in the transaction; or
(iv) stockholders approve a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all or a substantial
portion of the Company's assets.
Other Key Executives and Employees of the Founding Companies
The Company has entered into employment agreements with 13 key executives
and employees of the Founding Companies which will become effective upon
consummation of the Offering. Each of the agreements with the 13 key executives
are identical differing only with respect to the position of employment, the
compensation level and the term of employment. Set forth below are the
identities of the key executives and their position of employment.
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EMPLOYEE POSITION OF EMPLOYMENT
------------------------- -----------------------------------------
Vincent J. Browne ...... President of Crystal Galleria
Roy C. Elwell ......... President of Reef Hallmark
Kim A. Elwell ......... Secretary and Treasurer of Reef Hallmark
Jerry Gladstone ......... President of American Royal Arts
David K. Green ......... President of North Pole City
Keith Holt ............ President of Little Elegance
Aron Laikin ............ Chief Operating Officer of Filmart
Laine Ross ............ Vice President of Animation USA
Susan M. Spiegel ...... President of Filmart
Robert St. George ...... President of Little Elegance
David J. Stone ......... President of Stone's Hallmark
Michael Stone ......... General Manager of Stone's Hallmark
David Vice ............ President of Animation USA
The initial term of each agreement commences on the date of the
consummation of the Offering and ends on the third anniversary except in the
case of Susan M. Spiegel and Aron Laikin, in which case the agreement ends on
the fifth anniversary thereof. With respect to each such agreement, in the event
that either party does not notify the other of his, her or its intention not to
renew such agreement, the agreement will automatically be extended thereafter
for successive one year periods. In addition to the base salaries ranging from
$25,000 to $50,000 per annum, the employment agreements provide that it is the
intention of the Company to allow participation of the executives in a
to-be-established incentive bonus plan, pursuant to which it is contemplated
that officers and key employees will be eligible to receive annual bonus
amounts, in the discretion of the Board of Directors, in amounts up to a maximum
of one hundred percent of the respective employee's base salary.
The employment agreements provide that the executives are generally
prohibited, during the term of their employment with the Company and for a
period of two years thereafter, from (i) engaging in activities which are
competitive with the Company or its subsidiaries, (ii) soliciting employees of
the Company or its subsidiaries away from their employment, (iii) soliciting
customers of the Company or its subsidiaries and (iv) soliciting acquisition
candidates of the Company on behalf of the executive or any competitor for the
purpose of acquiring such entity.
The employment agreements may be terminated by the Company by reason of the
death or permanent disability of the executive, for good cause upon ten days'
notice, or without cause upon 30 days' notice. Good cause is generally defined
as the executive's (i) willful and material breach of the employment agreement,
(ii) gross neglect of material duties, (iii) willful dishonesty or fraud, (iv)
conviction of a felony or (v) chronic alcohol or illegal drug abuse. In the
event of a termination for good cause or in the event of executive's voluntary
resignation without cause, no severance will be payable. In the event of the
Company's termination of an executive's employment without cause (i) such
executive will be entitled to receive a lump-sum severance payment equal to (a)
in the event termination occurs during the initial employment term, $100,000 per
year for the greater of the time period remaining under the initial term of the
agreement (not to exceed two years) or one year or (b) $100,000 in the event the
termination occurs after the initial employment term, and (ii) the time period
during which such executive is restricted from competing with the Company will
be shortened to one year.
In the event of a pending "Change in Control" of the Company , and either
(i) the Company and the executive have not received written notice at least five
days prior to the anticipated closing date of the transaction giving rise to the
Change in Control from the successor that such successor is willing to assume
the Company's obligations under the employment agreement, or (ii) the employee,
at his or her sole discretion, elects to terminate the employment agreement at
least five days prior to the anticipated closing of such transaction, then the
Change in Control will be deemed to be a termination of the employment agreement
by the Company without cause, except that (x) if such termination has been
effectuated pursuant to clause (i) above, the amount of severance due to the
employee would be three times the amount that otherwise would be calculated
under such circumstances (as described above), and the restrictive covenants in
the employment agreement will not apply, or (y) if such termination has been
effectuated pursuant to clause (ii) above, the amount of the employee's
severance payment would
53
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be two times the amount otherwise calculated, and the restrictive covenants of
the employment agreement will all apply for a period of two years from the
effective date of termination. Each employment agreement contains a tax gross-up
provision, such that the employee will be reimbursed by the Company or its
successor in the event that the employee incurs any excise taxes under Section
4999 of the Internal Revenue Code as a result of the Change in Control.
Each employment agreement deems a "Change in Control" to have occurred if:
(i) any person, other than the Company or an employee benefit plan, acquires
directly or indirectly Beneficial Ownership (as defined in Section 13(d) of the
Securities Exchange Act of 1934, as amended) of any voting securities of the
Company which immediately after such acquisition represents at least 50% or more
of the total voting power of the then-outstanding voting securities of the
Company, unless the transaction pursuant to which such acquisition is made is
approved by at least two-thirds of the Board of Directors; (ii) certain
designated individuals no longer constitute a majority of the members of the
Board of Directors; (iii) the stockholders of the Company shall approve a
merger, consolidation, recapitalization, or reorganization of the Company, a
reverse stock split of outstanding voting securities, or consummation of any
such transaction if stockholder approval is not obtained, other than any such
transaction which would result in at least 75% of the total voting power
represented by the voting securities of the surviving entity outstanding
immediately after such transaction being Beneficially Owned by at least 75% of
the holders of outstanding voting securities of the Company immediately prior to
the transaction, with the voting power of each such continuing holder relative
to other such continuing holders not substantially altered in the transaction;
or (iv) the stockholders of the Company shall approve a plan of complete
liquidation or an agreement for the sale or disposition of all or a substantial
portion of the Company's assets (i.e., 50% or more of the total assets of the
Company). None of the transactions that occurs in connection with the Offering
constitutes a Change in Control.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Ronald P. Rafaloff, the Company's Chairman of the Board is currently the
sole member of the Company's Compensation Committee and, in such capacity, he
participated in deliberations concerning the Company's executive compensation
policy during the fiscal year ended January 26, 1997. After the Offering, Paul
Shirley will become an additional member of the Company's Compensation Committee
and the Company's executive compensation policy will be established.
1997 LONG-TERM INCENTIVE PLAN
As of May 1997, the Board of Directors and the Company's stockholders
approved the Company's 1997 Long-Term Incentive Plan (the "Plan"). The maximum
number of shares of Common Stock that may be awarded pursuant to the Plan may
not exceed 15% of the aggregate number of shares of Common Stock outstanding at
the time of determination (which maximum will be 929,817 shares upon
consummation of the Offering). Awards may be settled in cash, shares, other
awards or other property, as determined by the compensation committee of the
Board of Directors. The number of shares reserved or deliverable under the Plan
(as well as the annual per-participant limit discussed below) is subject to
adjustment in the event of stock splits, stock dividends and other extraordinary
corporate events.
The purpose of the Plan is to provide executive officers (including
directors who also serve as executive officers), key employees, consultants and
other service providers with additional incentive by enabling such persons to
acquire or increase their ownership interest in the Company, thereby promoting a
closer identity of interests between such persons and the Company's
stockholders. Individual awards under the Plan may take the form of one or more
of: (i) either incentive stock options ("ISOs") or non-qualified stock options
("NQSOs"); (ii) stock appreciation rights ("SARs"); (iii) restricted or deferred
stock; (iv) dividend equivalents; (v) bonus shares and awards in lieu of Company
obligations to pay cash compensation; and (vi) other awards the value of which
is based in whole or in part upon the value of the Common Stock. Upon a change
of control of the Company (as defined in the Plan), certain conditions and
restrictions relating to an award with respect to the exercisability or
settlement of such award will lapse.
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The compensation committee has the authority under the Plan, among other
things, to: (i) select the officers and other key employees and consultants
entitled to receive awards under the Plan; (ii) determine the form of awards, or
combinations thereof, and whether such awards are to operate on a tandem basis
or in conjunction with other awards; (iii) determine the number of shares of
Common Stock or units or rights covered by an award; and (iv) determine the
terms and conditions of any awards granted under the Plan, including any
restrictions or limitations on transfer, any vesting schedules or the
acceleration thereof, any forfeiture or termination provisions (or waivers
thereof), and the exercise price at which shares of Common Stock may be
purchased pursuant to the grant of stock options under the Plan, in its
discretion, which discretion includes the ability to set an exercise price that
is below the fair market value of the shares of Common Stock covered by such
grant at the time of grant. In addition, unless otherwise provided by the
compensation committee, all restrictions relating to the continued performance
of services and/or the achievement of performance objectives will immediately
lapse upon a "change in control" of the Company (as defined in the Plan).
The number of shares of Common Stock that may be delivered upon exercise of
ISOs is limited to 300,000. Shares subject to ISOs will not be deemed delivered
if such ISOs are forfeited, expire or otherwise terminate without delivery of
the Common Stock to the Plan participant. In addition, no individual may receive
awards in any one calendar year relating to more than 150,000 shares of Common
Stock.
The grant of an option or SAR (including a stock-based award in the nature
of a purchase right) will create no tax consequences for the grantee or the
Company. A grantee will not have taxable income upon exercising an ISO (except
that the alternative minimum tax may apply) and the Company will receive no
deduction at that time. Upon exercising an option other than an ISO (including a
stock-based award in the nature of a purchase right), the participant must
generally recognize ordinary income equal to the difference between the exercise
price and fair market value of the freely transferable and nonforfeitable stock
received. In each case, the Company will be entitled to a deduction equal to the
amount recognized as ordinary income by the participant.
A participant's disposition of shares acquired upon the exercise of an
option, SAR or other stock-based award in the nature of a purchase right
generally will result in short-term capital gain or loss measured by the
difference between the sale price and the participant's tax basis in such shares
(or the exercise price of the option in the case of shares acquired by exercise
of an ISO and held for the applicable ISO holding periods). Generally, there
will be no tax consequences to the Company in connection with a disposition of
shares acquired under an option or other award, except that the Company will be
entitled to a deduction (and the participant will recognize ordinary taxable
income) if shares acquired upon exercise of an ISO are disposed of before the
applicable ISO holding periods have been satisfied.
With respect to awards granted under the Plan that may be settled either in
cash or in stock or other property that is either not restricted as to
transferability or not subject to a substantial risk of forfeiture, the
participant must generally recognize ordinary income equal to the cash or the
fair market value of stock or other property received. The Company will be
entitled to a deduction for the same amount. With respect to awards involving
stock or other property that is restricted as to transferability and subject to
a substantial risk of forfeiture, the participant must generally recognize
ordinary income equal to the fair market value of the shares or other property
received at the first time the shares or other property become transferable or
not subject to a substantial risk of forfeiture. The Company will be entitled to
a deduction in an amount equal to the ordinary income recognized by the
participant. A participant may elect under section 83(b) of the Internal Revenue
Code to be taxed at the time of receipt of shares or other property rather than
upon lapse of restrictions on transferability or the substantial risk of
forfeiture, but if the participant subsequently forfeits such shares or property
he would not be entitled to any tax deduction, including a capital loss, for the
value of the shares or property on which he previously paid tax.
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Section 162(m) of the Internal Revenue Code generally disallows a public
company's tax deduction for compensation to the chief executive officer and the
four other most highly compensated executive officers in excess of $1 million.
Compensation that qualifies as "performance-based compensation" is excluded from
the $1 million deductibility cap, and therefore remains fully deductible by the
corporation that pays it. The Company intends that options granted with an
exercise price equal to at least 100% of fair market value of the underlying
stock at the date of grant, and other awards the settlement of which is
conditioned upon achieving certain performance goals (based on performance
criteria described above), will qualify as such "performance-based
compensation," although other awards under the Plan may not so qualify.
The Plan will remain in effect until terminated by the Board of Directors.
The Plan may be amended by the Board of Directors without the consent of the
stockholders of the Company, except that any amendment, although effective when
made, will be subject to stockholder approval if required by any Federal or
state law or regulation or by the rules of any stock exchange or automated
quotation system on which the Common Stock may then be listed or quoted.
Options to purchase an aggregate of 165,000 shares have been issued under
the Plan at an exercise price of $7.00 per share. Concurrently with the
consummation of the Offering, the Company will grant options to purchase 250,000
shares of Common Stock, under the Plan at an exercise price equal to the initial
public offering price.
1997 NON-EMPLOYEE DIRECTORS' STOCK PLAN
The Company's 1997 Non-Employee Directors' Stock Plan (the "Directors'
Plan"), which was adopted by the Board of Directors and approved by the
Company's stockholders as of May 1997, provides for an automatic grant to each
non-employee director of an initial option to purchase 40,000 shares of Common
Stock upon commencement of the Offering or such person's subsequent initial
election to the Board of Directors. In addition, the Directors' Plan provides
for an automatic annual grant, after each annual meeting of stockholders
following the Offering, to each non-employee director of an option to purchase
5,000 shares of Common Stock; provided, however, that a non-employee director
will not be granted an annual option if he or she was granted an initial option
during the preceding three months.
The number of shares to be subject to initial or annual option grants after
the first annual meeting of stockholders following the Offering may be changed
by the Board of Directors. A total of 250,000 shares of Common Stock are
reserved for issuance under the Directors' Plan. The number of shares reserved,
as well as the number to be subject to automatically granted options, will be
adjusted in the event of stock splits, stock dividends and other extraordinary
corporate events.
Options granted under the Directors' Plan will have an exercise price per
share equal to the fair market value of a share at the date of grant. Options
will expire at the earlier of ten years after the date of grant or one year
after termination of service as a director. Options will become exercisable one
year after the date of grant, subject to acceleration by the Board of Directors,
and will be forfeited upon termination of service as a director for reasons
other than death or disability unless the director served for at least 11 months
after the date of grant or the option was otherwise exercisable at the date of
termination. In addition, the Directors' Plan permits non-employee directors to
elect to receive, in lieu of cash directors' fees, shares or credits
representing "deferred shares" to be settled at future dates, as elected by the
director. The number of shares or deferred shares received will be equal to the
number of shares which, at the date the fees would otherwise be payable, will
have an aggregate fair market value equal to the amount of such fees. Each
"deferred share" will be settled by delivery of a share of Common Stock at such
time may have been elected by the director prior to the deferral. In addition,
unless otherwise provided by the Board, all restrictions relating to the
continued performance of services of the directors will immediately lapse upon a
(i) "change in control" of the Company (as defined in the Plan), or (ii) with
respect to any particular director, the death or permanent disability of such
director.
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The grant of options under the Director's Plan will create no tax
consequences for the director or the Company. Upon exercising the option, the
director must generally recognize ordinary income equal to the difference
between the exercise price and the fair market value of the freely transferable
and nonforfeitable stock received. The Company will be entitled to a deduction
equal to the amount recognized as ordinary income by the director. A director's
disposition of shares acquired upon the exercise of an option generally will
result in capital gain or loss measured by the difference between the sale price
and the director's tax basis in such shares, and there generally will be no tax
consequences to the Company in connection with such disposition of shares.
Deferred fees received in the form of the freely transferable shares of Common
Stock under the Director's Plan will generally result in taxable income to the
director in the year or years in which they are paid to the director based on
the fair market value of the shares in the year they are paid. The Company
generally will be entitled to a tax deduction at the same time and in the
corresponding amount.
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CERTAIN TRANSACTIONS
Collectibles USA was initially capitalized in June 1996 by RGR Financial
Group LLC ("RGR"), which subscribed for 711,622 shares, Michael A. Baker, who
subscribed for 152,490 shares, and Capstone Partners LLC ("Capstone"), which
subscribed for 152,490 shares. Each paid consideration of $.10 per share (prior
to the Stock Split) and was issued the shares on June 16, 1996. Ronald P.
Rafaloff, Chairman of the Board of Directors of the Company, is a partner and a
principal owner of RGR.
In August 1996, Collectibles USA issued the CEFC Note-1 to Collectibles
Enterprises Funding Corp., a Delaware corporation ("CEFC"), which is owned by
RGR and Capstone. Upon consummation of the Offering, the principal amount of the
CEFC Note-1 will become due and payable immediately. No interest is payable on
the CEFC Note-1 in the event the Offering is consummated. The Company intends to
repay the CEFC Note-1 with a portion of the proceeds of the Offering.
In August 1996, Collectibles USA also issued the CEFC Note-2 to CEFC. Upon
consummation of the Offering, the principal amount of the CEFC Note-2 will
become due and payable immediately. No interest is payable on the CEFC Note-2 in
the event the Offering is consummated. The Company intends to repay the CEFC
Note-2 with a portion of the proceeds of the Offering.
In June 1997, Collectibles USA issued the CEFC Note-3 to CEFC. Upon
consummation of the Offering, the principal amount of the CEFC Note-3 will
become due and payable immediately. No interest is payable on the CEFC Note-3 in
the event the Offering is consummated. The Company intends to repay the CEFC
Note-3 with a portion of the proceeds of the Offering.
The proceeds of the CEFC Notes, which the Company believes were issued on
terms that were as favorable as those that could have been obtained from a third
party, were used by Collectibles USA to pay various expenses incurred in
connection with its efforts to complete the Acquisitions and effect the
Offering.
On May 12, 1997, Collectibles USA issued 20,000 shares of its Series A
Convertible Preferred Stock, liquidation value $50 per share, for an aggregate
consideration of $1.0 million, the proceeds of which were used by the Company to
pay various expenses incurred in connection with its efforts to complete the
Acquisitions and effect the Offering. Pursuant to the terms of the Series A
Convertible Preferred Stock, upon the consummation of the Offering, the Series A
Convertible Preferred Stock will automatically convert either (i) into that
number of shares of Common Stock, determined by (X) dividing the liquidation
value by (Y) an amount equal to 60% of the initial public offering price or, at
the option of the holder of the Series A Convertible Preferred Stock, (ii) into
that number of shares of Common Stock determined by (X) dividing the liquidation
value by (Y) an amount equal to 150% of the initial public offering price and
cash in an amount equal to the liquidation value. All of the holders of the
Series A Convertible Preferred Stock have elected conversion option (ii) in the
preceding sentence. As a result, upon consummation of the Offering, the Series A
Convertible Preferred Stock will convert into approximately $1.0 million in cash
and 61,741 shares of Common Stock. The Company intends to pay the required cash
amounts in connection with the conversion of the Series A Convertible Preferred
Stock with a portion of the proceeds of the Offering. The Series A Convertible
Preferred Stock was issued in reliance on the exemption from registration
afforded a private offering made under Section 4(2) of the Securities Act. See
"Description of Capital Stock -- Series A Convertible Preferred Stock."
In June 1997, the Company issued and sold 711,622 shares, 152,490 shares
and 152,490 shares of Restricted Common Stock to RGR, Michael A. Baker and
Capstone, respectively, in exchange for an identical number of shares of Common
Stock. See "Description of Capital Stock -- Common Stock and Restricted Common
Stock."
Simultaneously with the closing of the Offering, Collectibles USA will
acquire by merger all the issued and outstanding capital stock of the Founding
Companies, at which time each Founding Company will become a wholly owned
subsidiary of the Company. The aggregate consideration that will be paid by
Collectibles USA to acquire the Founding Companies consists of approximately
$9.2 million in cash and 2,246,996 shares of Common Stock. The Company intends
to repay approximately $4.5 million of the estimated outstanding indebtedness as
of July 1, 1997 of the Founding Companies at the
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closing of the Offering, which has been either personally guaranteed by, or is
owed directly to, certain stockholders of the Founding Companies or their
affiliates. In addition, prior to the Acquisitions certain of the Founding
Companies will make S Corporation Distributions of $1.7 million. In order to pay
the S Corporation Distributions, the Founding Companies will borrow $1.7 million
from existing sources, which will be repaid from the net proceeds of the
Offering.
The following table sets forth the approximate consideration to be paid to
the stockholders of the Founding Companies (i) in cash, (ii) in repayment of
debt and (iii) in shares of Common Stock, in each case subject to adjustments
through the date of the consummation of the Acquisition for changes in the
amount of debt outstanding and the amount of S Corporation earnings previously
taxed to stockholders of the Founding Companies which will be distributed to
such stockholders.
CASH DEBT SHARES
-------- -------- ----------
(DOLLARS IN THOUSANDS)
Collectibles Stores
- ---------------------------
Crystal Galleria ......... $1,000 $1,619 277,272
Crystal Palace ............ 175 362 62,000
Little Elegance ......... 400 843 85,000
North Pole City ......... 1,800 782 359,090
Reef Hallmark ............ 1,000 645 168,181
Stone's Hallmark ......... 1,350 65 350,000
Animation Art Galleries
- ---------------------------
American Royal Arts ...... 2,814 -- 563,636
Animation USA ............ 600 131 145,454
Filmart .................. 100 25 236,363
------- ------- ----------
TOTAL .................. $9,239 $4,472 2,246,996
======= ======= ==========
In addition, prior to consummation of the Acquisitions, Crystal Galleria,
American Royal Arts and Filmart will make distributions of approximately
$250,000, $486,000 and $1,000,000, respectively, representing S Corporation
earnings previously taxed to their respective stockholders. The Founding
Companies will also distribute approximately $68,000 in net book value of
certain non-operating assets less related obligations prior to consummation of
the Acquisitions.
The consummation of each Acquisition is subject to customary conditions.
These conditions include, among others, the accuracy on the closing date of the
Acquisitions of the representations and warranties of the Founding Companies,
their stockholders and of the Company, the performance by each of the parties of
their respective covenants, the nonexistence of a material adverse change in the
results of operations and the absence of material litigation.
The agreements relating to the Acquisitions may be terminated under certain
circumstances prior to the consummation of the Offering. Specifically, the
agreements may be terminated (i) by the mutual consent of the Board of Directors
of the Company and each Founding Company; (ii) if the Offering and the
Acquisitions are not consummated by October 31, 1997; or (iii) if a material
breach or default under the agreements shall exist and is not cured or waived.
Pursuant to the agreements relating to the Acquisitions, all stockholders
of each of the Founding Companies have agreed not to compete with the Company
for a period of three years commencing on the date of closing of the
Acquisitions.
Five of the Founding Companies have incurred indebtedness which has been
personally guaranteed by its stockholders. At July 1, 1997, the aggregate amount
of indebtedness of these Founding Companies that was personally guaranteed was
approximately $2.3 million. The Company intends to repay all of such
indebtedness upon the consummation of the Offering. See "Use of Proceeds."
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<TABLE>
<CAPTION>
COMPANY AMOUNT OF DEBT GUARANTEED GUARANTOR
- ------------------------- --------------------------- ------------------------
(IN THOUSANDS)
---------------------------
<S> <C> <C>
Crystal Galleria $ 546 Vincent J. Browne
Paul J. Applegate
Gary L. Schultz
W. Randolph Ellspermann
Crystal Palace 40 Vincent J. Browne
North Pole City 782 David K. Green
Little Elegance 400 Jean Holt
Keith N. Holt
Carmella Pugliese
Robert St. George
Reef Hallmark 535 Roy C. Elwell
Kim A. Elwell
-------
Total $2,303
=======
</TABLE>
In connection with the Acquisitions, individuals who will become directors
of the Company together with their spouses, will receive consideration for their
interests in the Founding Companies, subject to adjustments as described above,
as follows:
SHARES OF
CASH COMMON STOCK
--------------- -------------
(IN THOUSANDS)
Vincent J. Browne ...... $ 425 131,318
Roy C. Elwell ......... 1,000 168,181
David K. Green ......... 1,800 359,090
Jerry Gladstone ......... 2,814 563,636
Susan M. Spiegel ...... 50 118,182
David J. Stone ......... 1,350 350,000
TRANSACTIONS INVOLVING CERTAIN OFFICERS, DIRECTORS AND STOCKHOLDERS
Consulting Arrangements. The Company has entered into a consulting
agreement with RGR whereby, upon the consummation of the Offering, RGR will act
as a merger and acquisition advisory consultant to assist the Company in
implementing its strategy to acquire additional retailers of collectibles and
marketers of animation art and other related consulting services for a term of
one year. Pursuant to the terms of the Consulting Agreement, RGR will (i) assist
the Company in implementing its strategy to acquire additional retailers of
collectibles and marketers of animation art, (ii) assist the Company in
designing the Company's acquisition program and identifying and evaluating
potential acquisition candidates, their operations, historical performance and
future prospects and (iii) advise the Company in discussions and negotiations
with acquisition candidates. For all services rendered by RGR to the Company,
the Company will compensate RGR based upon each acquisition candidate with which
an acquisition is consummated. The consideration to be paid to RGR upon
consummation of a future acquisition will be 3.2% of the acquisition candidate's
pre-tax net income for its most recent fiscal year. RGR is a stockholder of the
Company and will, after the Offering, beneficially own 10.3% of the Company's
outstanding Common Stock. In addition, Mr. Ronald P. Rafaloff, who is Chairman
of the Board, President and Chief Executive Officer of the Company, is a partner
and a principal owner of RGR.
Michael A. Baker has served as consultant to the Company since the
Company's inception. In such capacity, he will consult with officers and
directors of the Company, will attend meetings of the Board of Directors and
will provide guidance concerning management and operation of the Company's
business, including potential acquisitions. Upon consummation of the Offering,
Mr. Baker will be granted options to acquire 25,000 shares of Common Stock.
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Real Property Leases. In connection with the Acquisitions, four of the
Founding Companies will renegotiate leases currently in place with former
stockholders of the Founding Companies and/or their affiliates. North Pole City
leases both of its facilities from David K. Green, the current owner of North
Pole City. The combined current monthly rent under such leases is approximately
$13,500. Prior to consummation of the Offering, the Company anticipates entering
into new leases covering these facilities at a combined monthly rent of $8,300
for a term of five years. Three other facilities of the Company will be leased
from former stockholders of the Founding Companies and/or their affiliates at
monthly rates ranging from $500 to $1,200. The Company believes that the monthly
rental amounts represent the fair market value of the leases.
Agreement and Release. The Company has entered into an Agreement and
Release with David L. Yankey, a former director and executive officer (the
"Officer"), whose employment terminated in June 1997, pursuant to which the
Officer (i) will receive within three days of the consummation of the Offering
$350,000 as severance payment, (ii) has agreed to transfer 70,000 shares of the
174,580 shares of Common Stock previously owned by him, (iii) has agreed to
enter into a 180-day lock-up arrangement with the Underwriters and (iv) has
agreed to release the Company (including its current and former officers,
directors, shareholders and representatives) and its successors and assigns from
any and all claims and demands. The Company also has agreed to release the
Officer from any and all claims (other than acts constituting material fraud,
theft or a felony) relating to such Officer's employment. To permit the Officer
to resell promptly his shares of Common Stock after expiration of the 180-day
lock-up period, the Company has agreed to prepare and file, at its cost, a
registration statement to effect the registration of such shares.
COMPANY POLICY
In the future, any transactions with directors, officers, employees or
affiliates of the Company are anticipated to be minimal and will, in any case,
be approved by a majority of the Board of Directors, including a majority of
disinterested members of the Board of Directors.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of the Common Stock as of August 11, 1997, and after giving effect to
the Acquisitions and the Offering, by (i) all persons known to the Company to be
the beneficial owner of 5% or more thereof, (ii) each director and nominee for
director, (iii) each executive officer and (iv) all officers, directors and
director nominees as a group. All persons listed have sole voting and investment
power with respect to their shares unless otherwise indicated.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
BEFORE OFFERING AFTER OFFERING
--------------------------- ---------------------------
NAME AND ADDRESS NUMBER PERCENT NUMBER PERCENT
- ----------------------------------------- --------------- --------- ---------------- --------
<S> <C> <C> <C> <C>
Ronald P. Rafaloff(1) 711,622 59.7% 641,622(2) 10.3%
One Battery Park Plaza, 24th Floor
New York, NY 10004-1405
W. Randolph Ellspermann 165,000(3) 12.5% 165,000(3) 2.6%
243 Martin Street, #420
Irvine, CA 92612
Vincent J. Browne -- -- 131,318 2.1%
7878 Sea Horn Court
Las Vegas, NV 89117
Neil J. DePascal, Jr. 70,000(4) 5.7% 70,000(4) 1.1%
6402 Rippling Hollow Drive
Spring, TX 77379
Roy C. Elwell -- -- 168,181 2.7%
1694 South Congress Avenue
Palm Springs, FL 33461
Jerry Gladstone -- -- 563,636 9.1%
473 Old Country Road
Westbury, NY 11590
David K. Green -- -- 359,090 5.8%
4201 South I-44
Oklahoma City, OK 73119
Susan M. Spiegel -- -- 118,182 1.9%
118 North Third Street
Philadelphia, PA 19106
David J. Stone -- -- 350,000 5.6%
2508 South Alpine Road
Rockford, IL 61108
Michael A. Baker 152,490 12.8% 137,490(2) 2.2%
3322 Albans
Houston, TX 77005
Paul T. Shirley -- -- 7,575(5) 0.1%
2821 S. Parker Road
Aurora, CO 80014
Capstone Partners LLC 152,490 12.8% 137,490(2) 2.2%
9 East 53rd Street, 3rd Floor
New York, NY 10019
RGR Financial Group LLC 711,622 59.7% 641,622(2) 10.3%
One Battery Park Plaza, 24th Floor
New York, NY 10004-1405
David L. Yankey 104,580 8.8% 104,580 1.7%
13500 Country Way
Los Altos Hills, CA 94022
All officers and directors and director 946,622 69.8% 2,574,604 41.4%
nominees as a group (10 persons)
</TABLE>
- ----------
(1) Represents 711,622 shares owned by RGR. Mr. Rafaloff is a partner and a
principal owner of RGR.
(2) Reflects shares transferred upon consummation of the Offering to certain
holders of notes issued by CEFC
(3) Includes 125,000 shares issuable upon the exercise of the $7 Options.
(4) Includes 40,000 shares issuable upon the exercise of the $7 Options.
(5) To be received upon conversion of subordinated debt issued by an affiliate
of the Company that is convertible into previously issued Common Stock.
These shares will be restricted stock within the meaning of the Securities
Act.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's authorized capital stock consists of 31,200,000 shares of
Common Stock, par value $.01 per share, of which 1,200,000 shares are designated
as Restricted Common Stock, par value $0.01 per share, and 5,000,000 shares of
preferred stock, par value $.01 per share (the "Preferred Stock"). As of the
date of this Prospectus, 174,580 shares of Common Stock are outstanding and held
of record by three persons, 1,016,602 shares of Restricted Common Stock are
outstanding and held of record by three persons and 20,000 shares of Series A
Convertible Preferred Stock are outstanding and held of record by 22 persons.
After giving effect to the Acquisitions and the Offering, there will be
5,183,317 shares of Common Stock and 1,016,602 shares of Restricted Common Stock
outstanding. The following summary of the terms and provisions of the Company's
capital stock does not purport to be complete and is qualified in its entirety
by reference to the Company's Amended and Restated Certificate of Incorporation
(the "Charter") and By-laws, which have been filed as exhibits to the Company's
registration statement, of which this Prospectus is a part, and applicable
law.
COMMON STOCK AND RESTRICTED COMMON STOCK
The holders of Common Stock are entitled to one vote for each share on all
matters voted upon by stockholders, including the election of directors. The
holders of Restricted Common Stock are entitled to elect one member of the
Company's Board of Directors and to four-tenths of a vote for each share held on
all other matters on which stockholders are entitled to vote. Holders of
Restricted Common Stock are not entitled to vote on the election of any other
directors. Any director, or the entire Board of Directors, may be removed at any
time, with cause, by a majority of the aggregate number of votes which may be
cast by the holders of outstanding shares of Common Stock and Restricted Common
Stock entitled to vote for the election of directors. Subject to the rights of
any then outstanding shares of Preferred Stock, the holders of Common Stock and
Restricted Common Stock are entitled to such dividends as may be declared in the
discretion of the Board of Directors out of funds legally available therefor.
See "Dividend Policy." Holders of Common Stock and holders of Restricted Common
Stock are entitled to share ratably in the net assets of the Company upon
liquidation after payment or provision for all liabilities and any preferential
liquidation rights of any Preferred Stock then outstanding. The holders of
Common Stock and holders of Restricted Common Stock have no preemptive rights to
purchase shares of capital stock of the Company. Shares of Common Stock and
Restricted Common Stock are not subject to any redemption provisions and are not
convertible into any other securities of the Company, except as provided in the
following paragraph.
Each share of Restricted Common Stock will automatically convert to Common
Stock on a share-for-share basis (i) in the event of a disposition of such share
of Restricted Common Stock by the holder thereof (other than a distribution
which is a distribution by a holder to its partners or beneficial owners, or a
transfer to a related party of such holder (as defined in Sections 267, 707, 318
and/or 4946 of the Internal Revenue Code of 1986)), (ii) in the event any person
acquires beneficial ownership of 15% or more of the outstanding shares of Common
Stock of the Company, (iii) in the event any person offers to acquire 15% or
more of the outstanding shares of Common Stock of the Company or (iv) earlier,
upon the affirmative vote of a majority of the aggregate number of votes which
may be cast by the holders of outstanding shares of Common Stock and Restricted
Common Stock. After July 1, 1998, the Board of Directors may elect to convert
any outstanding shares of Restricted Common Stock into shares of Common Stock in
the event 80% or more of the originally outstanding shares of Restricted Common
Stock have been previously converted into shares of Common Stock. All
outstanding shares of Common Stock and Restricted Common Stock are, and the
shares of Common Stock to be issued upon consummation of the Offering and the
Acquisitions will be upon payment therefor, fully paid and non-assessable.
The Company has applied for quotation of the Common Stock on the Nasdaq
National Market under the symbol "COUS." The Restricted Common Stock will not be
quoted on the Nasdaq National Market.
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<PAGE>
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors as shares of one or more classes or series. Subject to the provisions
of the Company's Charter and limitations prescribed by law, the Board of
Directors is expressly authorized to adopt resolutions to issue the shares, to
fix the number of shares and to change the number of shares constituting any
series, and to provide for or change the voting powers, designations,
preferences and relative, participating, optional or other special rights,
qualifications, limitations or restrictions thereof, including dividend rights
(including whether dividends are cumulative), dividend rates, terms of
redemption (including sinking fund provisions), redemption prices, conversion
rights and liquidation preferences of the shares constituting any class or
series of the Preferred Stock, in each case without any further action or vote
by the stockholders. Except for its Series A Convertible Preferred Stock
described below, the Company has not issued, and has no current plans to issue,
any shares of Preferred Stock of any class or series.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest, merger
or otherwise, and thereby to protect the continuity of the Company's management.
The issuance of shares of Preferred Stock pursuant to the Board of Directors'
authority described above may adversely affect the rights of the holders of the
Common Stock. For example, Preferred Stock issued by the Company may rank prior
to the Common Stock as to dividend rights, liquidation preference or both, may
have full or limited voting rights and may be convertible into shares of Common
Stock. Accordingly, the issuance of shares of Preferred Stock may discourage
bids for the Common Stock at a premium or may otherwise adversely affect the
market price of the Common Stock.
SERIES A CONVERTIBLE PREFERRED STOCK
In May 1997, the Company sold 20,000 shares of its Series A Convertible
Preferred Stock, liquidation value $50 per share, for aggregate consideration of
$1.0 million, the proceeds of which were used by the Company to pay various
expenses incurred in connection with its efforts to complete the Acquisitions
and effect the Offering. Pursuant to the terms of the Series A Convertible
Preferred Stock, upon the consummation of the Offering, the Series A Convertible
Preferred Stock will automatically convert either (i) into that number of shares
of Common Stock, determined by (X) dividing the liquidation value by (Y) an
amount equal to 60% of the initial public offering price or, at the option of
the holder of the Series A Convertible Preferred Stock, (ii) into that number of
shares of Common Stock determined by (X) dividing the liquidation value by (Y)
an amount equal to 150% of the initial public offering price and cash in an
amount equal to the liquidation value. All of the holders of the Series A
Convertible Preferred Stock have elected conversion option (ii) in the preceding
sentence. As a result, upon consummation of the Offering, the Series A
Convertible Preferred Stock will convert into approximately $1.0 million in cash
and 61,741 shares of Common Stock. The Company intends to pay the required cash
amounts in connection with the conversion of the Series A Convertible Preferred
Stock with a portion of the proceeds of the Offering.
STATUTORY BUSINESS COMBINATION PROVISION
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Section 203 provides, with certain
exceptions, that a Delaware corporation may not engage in any of a broad range
of business combinations with a person or an affiliate, or associate of such
person, who is an "interested stockholder" for a period of three years from the
date that such person became an interested stockholder unless: (i) the
transaction resulting in a person becoming an interested stockholder, or the
business combination, is approved by the Board of Directors of the corporation
before the person becomes an interested stockholder, (ii) the interested
stockholder acquired 85% or more of the outstanding voting stock of the
corporation in the same transaction that makes such person an interested
stockholder (excluding shares owned by persons who are both officers and
directors of the corporation, and shares held by certain employee stock
ownership plans), or (iii) on or after the date the person becomes an interested
stockholder, the business combination is approved by the corporation's Board of
Directors and by the holders of at least 66% of the corporation's
64
<PAGE>
outstanding voting stock at an annual or special meeting, excluding shares owned
by the interested stockholder. Under Section 203, an "interested stockholder" is
defined as any person who is (i) the owner of 15% or more of the outstanding
voting stock of the corporation or (ii) an affiliate or associate of the
corporation and who was the owner of 15% or more of the outstanding voting stock
of the corporation at any time within the three-year period immediately prior to
the date on which it is sought to be determined whether such person is an
interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by including in its certificate of incorporation or by-laws by
action of its stockholders to exempt itself from coverage. The Company has not
adopted such an amendment to the Charter or By-laws.
LIMITATION ON DIRECTORS' LIABILITIES
Pursuant to the Charter and under Delaware law, directors of the Company
are not liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty, except for liability in connection with a breach of
the duty of loyalty, for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, for dividend payments or
stock repurchases illegal under Delaware law or any transaction in which a
director has derived an improper personal benefit. The Company intends to enter
into indemnification agreements with each of its directors and executive
officers which will indemnify such person to the fullest extent permitted by the
Charter, its By-laws and the Delaware General Corporation Law. The Company also
intends to obtain directors' and officers' liability insurance.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is The Bank of New
York.
65
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The market price of the Common Stock could be adversely affected by the
sale of substantial amounts of Common Stock in the public market. Upon
consummation of the Offering, 6,199,919 shares of Common Stock and Restricted
Common Stock will be issued and outstanding. All of the 2,700,000 shares sold in
the Offering, except for shares acquired by affiliates of the Company, will be
freely tradeable. None of the remaining 3,499,919 shares were issued in a
transaction registered under the Securities Act, and, accordingly, such shares
may not be sold except in transactions registered under the Securities Act or
pursuant to an exemption from registration, including the exemption contained in
Rule 144 under the Securities Act.
In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of the acquisition of restricted shares of Common
Stock from the Company or from any affiliate of the Company, the acquiror or
subsequent holder thereof may sell, within any three-month period commencing as
of the date of this Prospectus, a number of shares that does not exceed the
greater of 1% of the then outstanding shares of Common Stock, or the average
weekly trading volume of Common Stock on the Nasdaq National Market during the
four calendar weeks preceding the date on which notice of the proposed sale is
sent to the Commission. Sales under Rule 144 are also subject to certain manner
of sale provisions, notice requirements and the availability of current public
information about the Company. If two years have elapsed since the later of the
date of the acquisition of restricted shares of Common Stock from the Company or
any affiliate of the Company, a person who is not deemed to have been an
affiliate of the Company at any time for 90 days preceding a sale would be
entitled to sell such shares under Rule 144 without regard to the volume
limitations, manner of sale provisions or notice requirements.
The Company and its officers and directors have agreed not to, directly or
indirectly, offer, issue, sell, contract to sell or otherwise dispose of any
shares of Common Stock or any securities exercisable for or convertible or
exchangeable into Common Stock (the "Securities") for a period of 180 days after
the date of this Prospectus (the "Lockup Period") without the prior written
consent of Ladenburg Thalmann & Co. Inc., except for the grant of employee stock
options by the Company and except that the Company may issue shares of Common
Stock (i) in connection with acquisitions, (ii) pursuant to the exercise of
options granted under the Company's stock option plans and (iii) upon conversion
of the Series A Convertible Preferred Stock and the Restricted Common Stock in
accordance with their terms. In addition certain stockholders of the Company
designated by the Representatives who beneficially own an aggregate of 1,121,182
shares of Common Stock and the owners of each of the Founding Companies have
agreed, subject to certain exceptions, not to, directly or indirectly, offer,
sell, contract to sell or otherwise dispose of any Securities for a period of
180 days after the date of this Prospectus without the prior written consent of
Ladenburg Thalmann & Co. Inc. After such periods, all of such shares will be
eligible for sale in accordance with Rule 144 promulgated under the Securities
Act, subject to the volume, holding period and other limitations of Rule 144."
See "Underwriting."
The Company has authorized the issuance of shares of Common Stock in
accordance with the terms of the Plan and the Directors' Plan. The maximum
number of shares of Common Stock that may be awarded pursuant to the Plan may
not exceed 15% of the aggregate number of shares of Common Stock outstanding at
the time of determination (which maximum will be 929,817 shares upon
consummation of the Offering). Options to purchase an aggregate of 495,000
shares of Common Stock have been granted or will be granted upon consummation of
the Offering under the Company's stock option plans. The Company intends to file
a registration statement on Form S-8 under the Securities Act registering the
issuance of shares upon exercise of options granted under the Plan and the
Directors' Plan. As a result, such shares will be eligible for resale in the
public market.
The Company has reserved 270,000 shares of Common Stock for issuance upon
exercise of the Representatives' Warrants. The holders of the Representatives'
Warrants have certain registration rights. See "Underwriting."
The Company currently intends to file a registration statement covering
2,500,000 additional shares of Common Stock under the Securities Act for its
use in connection with future acquisitions. These
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<PAGE>
shares generally will be freely tradeable after their issuance by persons not
affiliated with the Company unless the Company contractually restricts their
resale.
The former stockholders of the Founding Companies who will hold in the
aggregate 2,246,996 shares of Common Stock upon consummation of the Offering are
entitled to certain rights with respect to the registration of their shares of
Common Stock under the Securities Act. None of such persons has rights to
include shares of Common Stock for sale in the Offering. If the Company proposes
to register any of its securities under the Securities Act, such stockholders
are entitled to notice of such registration and are entitled to include, at the
Company's expense, all or a portion of their shares therein, subject to certain
conditions and subject to the right of any managing underwriter of any such
offering to include some or all of the shares for marketing reasons. In
addition, certain of such stockholders have certain limited demand registration
rights to require the Company to register shares held by them following the
second anniversary of the Offering. The Company is also obligated, at its cost,
to effect the registration of 104,580 shares of Common Stock held by a former
officer of the Company immediately upon expiration of the Lockup Period. See
"Certain Transactions -- Transactions Involving Certain Officers, Directors and
Stockholders."
Prior to the Offering, there has been no established trading market for
Common Stock, and no predictions can be made as to the effect that sales of
Common Stock under Rule 144, pursuant to a registration statement, or otherwise,
or the availability of shares of Common Stock for sale, will have on the market
price prevailing from time to time. Sales of substantial amounts of Common Stock
in the public market, or the perception that such sales could occur, could
depress the prevailing market price. Such sales may also make it more difficult
for the Company to issue or sell equity securities or equity-related securities
in the future at a time and price that it deems appropriate. See "Risk Factors
- -- Potential Effect of Shares Eligible for Future Sale on the Price of the
Common Stock."
67
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, a copy
of which has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part, the Underwriters named below (the "Underwriters")
have, severally and not jointly, agreed, through Ladenburg Thalmann & Co. Inc.
and , the Representatives of the Underwriters (the "Representatives"), to
purchase from the Company, and the Company has agreed to sell to the
Underwriters, the aggregate number of shares of Common Stock set forth opposite
their respective names:
NUMBER
NAME OF UNDERWRITERS OF SHARES
- -------------------------------------------- ----------
Ladenburg Thalmann & Co. Inc. ......
Total ........................... 2,700,000
=========
The Underwriters are committed to take and pay for all of the shares of
Common Stock offered hereby (other than those covered by the over-allotment
option described below), if any are purchased.
The Underwriters have advised the Company that they propose to offer all or
part of the Common Stock offered hereby directly to the public initially at the
price to the public set forth on the cover page of this Prospectus, that they
may offer shares to certain dealers at a price which represents a concession of
not more than $ per share, and the Underwriters may allow, and such dealers may
reallow, a concession of not more than $ per share to certain other dealers.
After the commencement of this offering, the price to the public and the
concessions may be changed.
The Company has granted to the Underwriters an option, exercisable within
30 days after the date of this Prospectus, to purchase up to an additional
405,000 shares of Common Stock at the same price per share as the initial
2,700,000 shares to be purchased by the Underwriters. The Underwriters may
exercise this option only to cover over-allotments, if any. To the extent the
Underwriters exercise this option, each of the Underwriters will have a firm
commitment, subject to certain conditions, to purchase the same percentage
thereof as the percentage of the initial 2,700,000 shares to be purchased by
that Underwriter.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including certain liabilities under the Securities Act, and to
contribute to payments the Underwriters may be required to make in respect
thereof.
The Company has agreed to issue to the Representatives and their designees,
for their own accounts, warrants to purchase an aggregate of 270,000 shares of
Common Stock, exercisable during the five-year period commencing on the date of
this Prospectus, at a price equal to 120% of the public offering price, subject
to adjustment in certain events. The Representatives' Warrants contain certain
registration rights relating to the shares issuable thereunder. For the life of
the Representatives' Warrants, the Representatives will have the opportunity to
profit from a rise in the market price for the Common Stock.
The Company and its officers and directors have agreed not to, directly or
indirectly, offer, issue, sell, contract to sell or otherwise dispose of any
shares of Common Stock or any securities exercisable for or convertible into or
exchangeable into Common Stock (the "Securities"), for a period of 180 days
after the date of this Prospectus (the "Lockup Period") without the prior
written consent of Ladenburg Thalmann & Co.
68
<PAGE>
Inc., except for the grant of employee stock options by the Company and except
that the Company may issue shares of Common Stock (i) in connection with
acquisitions, (ii) pursuant to the exercise of options granted under the Plan
and the Directors' Plan and (iii) upon conversion of the Series A Convertible
Preferred Stock and the Restricted Common Stock in accordance with their
respective terms. In addition certain stockholders of the Company designated by
the Representatives who beneficially own an aggregate of 1,121,182 shares of
Common Stock and the owners of each of the Founding Companies have agreed,
subject to certain exceptions, not to, directly or indirectly, offer, sell,
contract to sell or otherwise dispose of any Securities for a period of 180 days
after the date of this Prospectus without the prior written consent of Ladenburg
Thalmann & Co. Inc. After such periods, all of such shares will be eligible for
sale in accordance with Rule 144 promulgated under the Securities Act, subject
to the volume, holding period and other limitations of Rule 144.
Prior to this offering, there has been no public market for the Common
Stock. The proposed initial public offering price has been determined by
negotiations between the Company and the Representatives. Among the factors
considered in such negotiations were the Company's results of operations and
financial condition, prospects for the Company and for the industry in which the
Company operates, the Company's capital structure and the general condition of
the securities market. The estimated offering price set forth on the cover of
this Prospectus is subject to change as a result of market conditions and other
factors. See "Risk Factors -- No Prior Public Market; Possible Volatility of
Stock Price."
The Company has granted Ladenburg Thalmann & Co. Inc. a right of first
refusal, expiring on the second anniversary of the date of this Prospectus, to
act as a manager in any future public offering of the Company's equity
securities.
The Representatives have informed the Company that the Underwriters do not
expect sales to discretionary accounts to exceed 5% of the total number of
shares offered hereby and that the Underwriters do not intend to confirm sales
of shares to any account over which they exercise discretionary authority.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934. Over-allotment involves syndicate
sales of Common Stock in excess of the offering size, which creates a syndicate
short position. Stabilizing transactions permit bids to purchase the Common
Stock so long as the stabilizing bids do not exceed a specified maximum.
Syndicate covering transactions involve purchases of Common Stock in the open
market after the distribution has been completed in order to cover syndicate
short positions. Penalty bids permit the Underwriters to reclaim a selling
concession from a syndicate member when the Common Stock originally sold by such
syndicate member are purchased in a syndicate covering transaction to cover
syndicate short positions. Such stabilizing transactions, syndicate covering
transactions and penalty bids may cause the price of the Common Stock to be
higher than it would otherwise be in the absence of such transactions. None of
the transactions described in this paragraph is required, and, if they are
undertaken, they may be discontinued at any time.
69
<PAGE>
LEGAL MATTERS
Certain legal matters in connection with the Common Stock being offered
hereby will be passed upon for the Company by Morgan, Lewis & Bockius LLP, New
York, New York. Certain legal matters will be passed upon for the Underwriters
by Fulbright & Jaworksi L.L.P., New York, New York.
EXPERTS
The audited financial statements included in this Prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (together with all amendments, schedules and exhibits thereto the
"Registration Statement") under the Securities Act with respect to the Common
Stock offered hereby. This Prospectus, which is included as part of the
Registration Statement, does not contain all the information contained in the
Registration Statement, certain portions of which have been omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement and the exhibits and schedules
thereto. Statements made in the Prospectus as to the contents of any contract,
agreement or other document are not necessarily complete; with respect to each
such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference. The Registration Statement and the
exhibits thereto may be inspected, without charge, at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
at Citicorp Center, 500 West Madison Street, Room 1400, Chicago, IL 60661, and 7
World Trade Center, Suite 1300, New York, NY 10048 or on the Internet at
http://www.sec.gov. Copies of such material also can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates.
The Company intends to furnish to its stockholders annual reports
containing audited consolidated financial statements audited by Arthur Andersen
LLP, independent public accountants, and quarterly reports containing unaudited
consolidated financial statements for each of the first three quarters of each
fiscal year.
70
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Collectibles USA, Inc. Unaudited Pro Forma Combined Financial Statements
Basis of Presentation ................................................ F-3
Pro Forma Combined Balance Sheet (unaudited) ........................ F-4
Pro Forma Combined Statement of Operations
(unaudited) ......................................................... F-5
Notes to Unaudited Pro Forma Combined Financial Statements ............ F-7
Collectibles USA, Inc.
Report of Independent Public Accountants .............................. F-10
Balance Sheets ...................................................... F-11
Statements of Operations ............................................. F-12
Statements of Stockholders' Deficit ................................. F-13
Statements of Cash Flows ............................................. F-14
Notes to Financial Statements ....................................... F-15
Founding Companies
American Royal Arts Corp.
Report of Independent Public Accountants .............................. F-20
Balance Sheets ...................................................... F-21
Statements of Operations ............................................. F-22
Statements of Stockholders' Equity .................................... F-23
Statements of Cash Flows ............................................. F-24
Notes to Financial Statements ....................................... F-25
Stone's Shops, Inc.
Report of Independent Public Accountants .............................. F-29
Balance Sheets ...................................................... F-30
Statements of Operations ............................................. F-31
Statements of Shareholders' Equity .................................... F-32
Statements of Cash Flows ............................................. F-33
Notes to Financial Statements ....................................... F-34
Crystal Galleria, Inc. and Base, Inc.
Report of Independent Public Accountants .............................. F-39
Combined Balance Sheets ............................................. F-40
Combined Statements of Operations .................................... F-41
Combined Statements of Stockholders' Equity ........................... F-42
Combined Statements of Cash Flows .................................... F-43
Notes to Consolidated Financial Statements ........................... F-44
DKG Enterprises, Inc.
Report of Independent Public Accountants .............................. F-49
Balance Sheets ...................................................... F-50
Statements of Operations ............................................. F-51
Statements of Shareholders' Equity .................................... F-52
Statements of Cash Flows ............................................. F-53
Notes to Financial Statements ....................................... F-54
<PAGE>
<CAPTION>
PAGE
-----
<S> <C>
Elwell Stores, Inc.
Report of Independent Public Accountants ........................... F-59
Balance Sheets ...................................................... F-60
Statements of Operations ............................................. F-61
Statements of Shareholders' (Deficit) Equity ........................ F-62
Statements of Cash Flows ............................................. F-63
Notes to Financial Statements ....................................... F-64
Animation U.S.A, Inc.
Report of Independent Public Accountants ........................... F-68
Balance Sheets ...................................................... F-69
Statements of Operations ............................................. F-70
Statements of Shareholders' Equity ................................. F-71
Statements of Cash Flows ............................................. F-72
Notes to Financial Statements ....................................... F-73
Filmart Productions, Inc.
Report of Independent Public Accountants ........................... F-77
Balance Sheets ...................................................... F-78
Statements of Operations ............................................. F-79
Statements of Shareholders' Equity ................................. F-80
Statements of Cash Flows ............................................. F-81
Notes to Financial Statements ....................................... F-82
</TABLE>
F-2
<PAGE>
COLLECTIBLES USA, INC., AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma combined financial statements give effect to
the acquisitions by Collectibles USA, Inc. (Collectibles USA), of the
outstanding capital stock of American Royal Arts Corp. (American Royal Arts),
Stone's Shops, Inc. (Stone's Hallmark), Crystal Galleria, Inc. and Base, Inc.
(Crystal Galleria), DKG Enterprises, Inc. (North Pole City), St. George, Inc.
(Little Elegance), Elwell Stores, Inc. (Reef Hallmark), Animation U.S.A., Inc.
(Animation USA), Filmart Productions, Inc. (Filmart), Vincent J. Browne, Inc.
(Crystal Palace) (together, the Founding Companies). Collectibles USA and the
Founding Companies are hereinafter referred to as the Company. These
acquisitions (the Acquisitions) will occur simultaneously with the closing of
Collectibles USA's initial public offering (the Offering) and will be accounted
for using the purchase method of accounting. American Royal Arts, one of the
Founding Companies, has been designated the accounting acquiror in accordance
with Securities and Exchange Commission Staff Accounting Bulletin No. 97 which
states that the combining company which receives the largest portion of voting
rights in the combined corporation is presumed to be the acquiror for accounting
purposes.
To the extent the owners of the Founding Companies have agreed prospectively to
reductions in salary and benefits, these reductions have been reflected in the
unaudited pro forma combined statements of operations. With respect to other
potential cost savings, Collectibles USA has not and cannot quantify these
savings until completion of the acquisitions of the Founding Companies. It is
anticipated that these savings will be offset by additional costs and
expenditures for corporate management and administration, corporate expenses
related to being a public company, systems integration and facilities expansion.
However because these costs cannot be accurately quantified at this time, they
have not been included in the pro forma financial information of Collectibles
USA.
The unaudited pro forma combined balance sheet gives effect to the Acquisitions
and the Offering as if they had occurred on April 30, 1997. The unaudited pro
forma combined statements of operations gives effect to these transactions as if
they had occurred on February 1, 1996.
The pro forma adjustments are based on preliminary estimates, available
information and certain assumptions and may be revised as additional information
becomes available. The pro forma financial data do not purport to represent what
the Company's financial position or results of operations would actually have
been if such transactions in fact had occurred on those dates and are not
necessarily representative of the Company's financial position or results of
operations for any future period. Since the Founding Companies were not under
common control or management, historical combined results may not be comparable
to, or indicative of, future performance. The unaudited pro forma combined
financial statements should be read in conjunction with the other financial
statements and notes thereto included elsewhere in this Prospectus.
See "Risk Factors" included elsewhere herein.
F-3
<PAGE>
COLLECTIBLES USA, INC.
PRO FORMA COMBINED BALANCE SHEET -- APRIL 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
COLLECTIBLES AMERICAN STONE'S CRYSTAL NORTH
USA ROYAL ARTS HALLMARK GALLERIA POLE CITY
--------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents ........................ $ 57,117 $ 585,702 $ 319,436 $ 196,904 $ 11,274
Accounts receivable .............................. -- 74,880 -- 44,616 11,593
Merchandise inventories ........................... -- 597,790 2,769,832 1,157,519 2,200,281
Prepaid expenses and other current assets ......... -- 80,389 36,106 50,978 37,337
------------- ---------- ----------- ----------- -----------
Total current assets ........................... 57,117 1,338,761 3,125,374 1,450,017 2,260,485
Property and equipment, net ..................... 7,453 36,100 247,124 633,807 212,417
Other assets, net ................................. 2,451,965 76,635 -- -- 3,225
Goodwill, net .................................... -- -- -- -- --
------------- ---------- ----------- ----------- -----------
Total assets .................................... $ 2,516,535 $1,451,496 $3,372,498 $2,083,824 $2,476,127
============= ========== =========== =========== ===========
LIABILITIES AND
STOCKHOLDERS' (DEFICIT) EQUITY
Accounts payable and accrued liabilities ......... $ 1,735,769 $ 319,106 $1,478,542 $ 231,447 $ 561,634
Customer deposits ................................. -- 348,113 9,696 13,152 127,800
Federal income taxes payable ..................... -- -- -- -- 119,939
Pro forma cash consideration
due to Founding Companies ........................ -- -- -- -- --
Line of credit .................................... -- -- -- -- --
Notes payable to related party .................. -- -- 6,010 1,073,168 --
Current maturities of long-term obligations ...... 855,000 -- 14,400 467,149 442,989
------------- ---------- ----------- ----------- -----------
Total current liabilities ........................ 2,590,769 667,219 1,508,648 1,784,916 1,252,362
Deferred income taxes ........................... -- -- 530,456 -- 8,103
Long-term obligations, net of current maturities -- -- 28,800 114,014 346,989
Notes payable to stockholders ..................... -- -- -- -- --
------------- ---------- ----------- ----------- -----------
Total liabilities .............................. 2,590,769 667,219 2,067,904 1,898,930 1,607,454
Stockholders' (deficit) equity:
Preferred stock ................................. --
Common stock .................................... 11,912 1,584 1,000 8,000 500
Treasury stock ................................. -- (145,000) -- --
Additional paid-in capital ..................... 1,428,473 -- 39,000 -- --
Retained (deficit) earnings ..................... (1,514,619) 927,693 1,264,594 176,894 868,173
------------- ---------- ----------- ----------- -----------
Total stockholders' (deficit) equity ............ (74,234) 784,277 1,304,594 184,894 868,673
------------- ---------- ----------- ----------- -----------
Total liabilities and stockholders' equity ...... $ 2,516,535 $1,451,496 $3,372,498 $2,083,824 $2,476,127
============= ========== =========== =========== ===========
<PAGE>
<CAPTION>
LITTLE REEF ANIMATION CRYSTAL
ELEGANCE HALLMARK USA FILMART PALACE
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents ........................ $ 47,514 $ 106,299 $ 56,727 $ 2,319 $ 16,980
Accounts receivable .............................. 25,490 -- 16,360 411,041 --
Merchandise inventories ........................... 1,342,076 871,147 282,881 377,850 476,188
Prepaid expenses and other current assets ......... 13,209 1,512 37,207 379,913 --
----------- ---------- ----------- ----------- ----------
Total current assets ........................... 1,428,289 978,958 393,175 1,171,123 493,168
Property and equipment, net ..................... 219,593 117,353 69,162 32,465 30,458
Other assets, net ................................. 109,000 8,342 -- 7,922 --
Goodwill, net .................................... -- -- -- -- --
----------- ---------- ----------- ----------- ----------
Total assets .................................... $1,756,882 $1,104,653 $ 462,337 $1,211,510 $ 523,626
=========== ========== =========== =========== ==========
LIABILITIES AND
STOCKHOLDERS' (DEFICIT) EQUITY
Accounts payable and accrued liabilities ......... $ 450,876 $ 587,607 $ 231,526 $ 147,822 $ 183,946
Customer deposits ................................. 6,000 12,492 22,384 7,838 --
Federal income taxes payable ..................... -- -- 34,722 -- --
Pro forma cash consideration
due to Founding Companies ........................ -- -- -- -- --
Line of credit .................................... -- -- 87,014 -- 40,000
Notes payable to related party .................. 439,646 -- -- 25,444 --
Current maturities of long-term obligations ...... 400,529 305,246 38,454 -- --
----------- ---------- ----------- ----------- ----------
Total current liabilities ........................ 1,297,051 905,345 414,100 181,104 223,946
Deferred income taxes ........................... -- -- -- -- --
Long-term obligations, net of current maturities 3,000 352,491 -- -- --
Notes payable to stockholders ..................... -- -- -- -- 316,943
----------- ---------- ----------- ----------- ----------
Total liabilities .............................. 1,300,051 1,257,836 414,100 181,104 540,889
Stockholders' (deficit) equity:
Preferred stock .................................
Common stock .................................... 27,000 500 192,700 -- 45,000
Treasury stock ................................. -- -- -- -- --
Additional paid-in capital ..................... -- 99,275 -- -- --
Retained (deficit) earnings ..................... 429,831 (252,958) (144,463) 1,030,406 (62,263)
----------- ---------- ----------- ----------- ----------
Total stockholders' (deficit) equity ............ 456,831 (153,183) 48,237 1,030,406 (17,263)
----------- ---------- ----------- ----------- ----------
Total liabilities and stockholders' equity ...... $1,756,882 $1,104,653 $ 462,337 $1,211,510 $ 523,626
=========== ========== =========== =========== ==========
<PAGE>
<CAPTION>
PRO FORMA
PRO FORMA PRO FORMA POST ACQUISITIONS AS
TOTAL ADJUSTMENTS COMBINED ADJUSTMENTS ADJUSTED
------------- --------------- ------------- ------------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents ........................ $1,400,272 $ 1,400,000 $ 2,800,272 $ 6,664,694 $ 9,464,966
Accounts receivable .............................. 583,980 -- 583,980 -- 583,980
Merchandise inventories ........................... 10,075,564 -- 10,075,564 -- 10,075,564
Prepaid expenses and other current assets ......... 636,651 17,172 653,823 -- 653,823
----------- ------------- ------------ -------------- ------------
Total current assets ........................... 12,696,467 1,417,172 14,113,639 6,664,694 20,778,333
Property and equipment, net ..................... 1,605,932 (106,074) 1,499,858 -- 1,499,858
Other assets, net ................................. 2,657,089 -- 2,657,089 (2,451,965) 205,124
Goodwill, net .................................... -- 16,589,531 16,589,531 -- 16,589,531
----------- ------------- ------------ -------------- ------------
Total assets .................................... $16,959,488 $ 17,900,629 $34,860,117 $ 4,212,729 $39,072,846
=========== ============= ============ ============== ============
LIABILITIES AND
STOCKHOLDERS' (DEFICIT) EQUITY
Accounts payable and accrued liabilities ......... $5,928,275 $ -- $ 5,928,275 $ (1,713,832) $ 4,214,443
Customer deposits ................................. 547,475 -- 547,475 -- 547,475
Federal income taxes payable ..................... 154,661 -- 154,661 -- 154,661
Pro forma cash consideration
due to Founding Companies ........................ -- 9,238,920 9,238,920 (9,238,920) --
Line of credit .................................... 127,014 -- 127,014 (127,014) --
Notes payable to related party .................. 1,544,268 -- 1,544,268 (1,544,268) --
Current maturities of long-term obligations ...... 2,523,767 362,153 2,885,920 (2,885,920) --
----------- ------------- ------------ -------------- ------------
Total current liabilities ........................ 10,825,460 9,601,073 20,426,533 (15,509,954) 4,916,579
Deferred income taxes ........................... 538,559 -- 538,559 -- 538,559
Long-term obligations, net of current maturities 845,294 1,736,080 2,581,374 (2,581,374) --
Notes payable to stockholders ..................... 316,943 -- 316,943 (316,943) --
----------- ------------- ------------ -------------- ------------
Total liabilities .............................. 12,526,256 11,337,153 23,863,409 (18,408,271) 5,455,138
Stockholders' (deficit) equity:
Preferred stock ................................. -- 1,000,000 1,000,000 (1,000,000) --
Common stock .................................... 288,196 (253,814) 34,382 27,606 61,988
Treasury stock ................................. (145,000) 145,000 -- -- --
Additional paid-in capital ..................... 1,566,748 7,953,885 9,520,633 23,593,394 33,114,027
Retained (deficit) earnings ..................... 2,723,288 (2,281,595) 441,693 -- 441,693
----------- ------------- ------------ -------------- ------------
Total stockholders' (deficit) equity ............ 4,433,232 6,563,476 10,996,708 22,621,000 33,617,708
----------- ------------- ------------ -------------- ------------
Total liabilities and stockholders' equity ...... $16,959,488 $ 17,900,629 $34,860,117 $ 4,212,729 $39,072,846
----------- ------------- ------------ -------------- ------------
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-4
<PAGE>
COLLECTIBLES USA, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
AMERICAN
COLLECTIBLES ROYAL STONE'S CRYSTAL NORTH LITTLE
USA ARTS HALLMARK GALLERIA POLE CITY ELEGANCE
-------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales .................. $ -- $4,288,612 $4,985,549 $3,727,285 $3,521,373 $2,598,270
Cost of sales ............... -- 1,505,784 2,496,574 1,784,916 1,620,462 1,346,661
------------ ---------- ----------- ----------- ---------- ----------
Gross profit ............... -- 2,782,828 2,488,975 1,942,369 1,900,911 1,251,609
Selling, general and
administrative expenses. 1,442,492 1,778,138 2,117,010 1,564,229 1,393,205 1,229,978
Goodwill amortization ...... -- -- -- -- -- --
------------ ---------- ----------- ----------- ---------- ----------
Income from operations (1,442,492) 1,004,690 371,965 378,140 507,706 21,631
Other (income) expense:
Interest (income)
expense .................. 11,814 (24,027) 2,891 111,389 79,676 76,371
Other, net ............... -- -- -- 12,284 (40,343) (400)
------------ ---------- ----------- ----------- ---------- ----------
Income (loss) before
income taxes ............... (1,454,306) 1,028,717 369,074 254,467 468,373 (54,340)
Provision for income taxes. -- -- 193,941 -- 233,083 150
------------ ---------- ----------- ----------- ---------- ----------
Net income (loss) ......... $(1,454,306) $1,028,717 $ 175,133 $ 254,467 $ 235,290 $ (54,490)
============ ========== =========== =========== ========== ==========
Net income per share ......
Shares used in computing
net income per share (1).
<CAPTION>
REEF ANIMATION CRYSTAL PRO FORMA PRO FORMA
HALLMARK USA FILMART PALACE TOTAL ADJUSTMENTS COMBINED
------------ ------------ ---------- ------------ ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales .................. $2,492,809 $1,716,410 $1,445,848 $1,132,782 $25,908,938 $ -- $25,908,938
Cost of sales ............... 1,301,468 840,283 497,920 537,265 11,931,333 -- 11,931,333
----------- ----------- ---------- ----------- ----------- ------------- -----------
Gross profit ............... 1,191,341 876,127 947,928 595,517 13,977,605 -- 13,977,605
Selling, general and
administrative expenses. 934,764 845,100 539,178 455,299 12,299,393 (2,373,070)(a) 9,926,323
Goodwill amortization ...... -- -- -- -- -- 446,606 (b) 446,606
----------- ----------- ---------- ----------- ----------- ------------- -----------
Income from operations 256,577 31,027 408,750 140,218 1,678,212 1,926,464 3,604,676
Other (income) expense:
Interest (income)
expense .................. 48,826 9,349 1,056 29,500 346,845 (359,280)(c) (12,435)
Other, net ............... 11,520 -- (278,866) -- (295,805) -- (295,805)
----------- ----------- ---------- ----------- ----------- ------------- -----------
Income (loss) before
income taxes ............... 196,231 21,678 686,560 110,718 1,627,172 2,285,744 (d) 3,912,916
Provision for income taxes. -- 8,944 -- -- 436,118 1,363,295 1,799,413
----------- ----------- ---------- ----------- ----------- ------------- -----------
Net income (loss) ......... $ 196,231 $ 12,734 $ 686,560 $ 110,718 $ 1,191,054 $ 922,449 $ 2,113,503
=========== =========== ========== =========== =========== ============= ===========
Net income per share ...... $ .38
===========
Shares used in computing
net income per share (1). 5,516,795
===========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
- ----------
(1) Includes (i) 1,191,182 shares outstanding prior to the Offering, (ii)
2,246,996 shares to be issued to the owners of the Founding Companies,
(iii) 61,741 shares to be issued to holders of the Series A Convertible
Preferred Stock, (iv) 60,000 shares (determined to be common stock
equivalents for purposes of computing earnings per share) of the 165,000
shares issuable upon the exercise of outstanding options and (v) 1,956,876
of the 2,700,000 shares to be sold in the Offering to pay the cash portion
of the Acquisition consideration, to pay the S Corporation Distributions,
to repay indebtedness of the Founding Companies and to pay expenses of the
Offering.
F-5
<PAGE>
COLLECTIBLES USA, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THREE MONTHS ENDED APRIL 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
AMERICAN
COLLECTIBLES ROYAL STONE'S CRYSTAL NORTH LITTLE
USA ARTS HALLMARK GALLERIA POLE CITY ELEGANCE
-------------- ------------ ------------ ---------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net sales .................. $ -- $1,100,477 $1,380,711 $999,437 $ 581,424 $ 370,818
Cost of sales ............... -- 346,442 873,330 469,239 289,317 194,853
--------- ---------- ---------- --------- ---------- ----------
Gross profit ............... -- 754,035 507,381 530,198 292,107 175,965
Selling, general and
administrative expenses. 50,236 482,519 526,865 423,865 447,199 307,078
Goodwill amortization ...... -- -- -- -- -- --
--------- ---------- ---------- --------- ---------- ----------
Income from operations (50,236) 271,516 (19,484) 106,333 (155,092) (131,113)
Other (income) expense:
Interest (income)
expense ..................... 10,077 (5,858) 593 37,569 18,887 12,486
Other, net .................. -- -- -- -- (741) (651)
--------- ---------- ---------- --------- ---------- ----------
Income (loss) before
income taxes ............... (60,313) 277,374 (20,077) 68,764 (173,238) (142,948)
Provision for income taxes. -- -- (8,309) -- (65,039) 200
--------- ---------- ---------- --------- ---------- ----------
Net income (loss) ............ $ (60,313) $ 277,374 $ (11,768) $ 68,764 $ (108,199) $ (143,148)
========= ========== ========== ========= ========== ==========
Net income per share .........
Shares used in computing
net income per share (1).
<CAPTION>
REEF ANIMATION CRYSTAL PRO FORMA PRO FORMA
HALLMARK USA FILMART PALACE TOTAL ADJUSTMENTS COMBINED
------------- ----------- ------------ ---------- ------------ ------------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales .................. $ 581,159 $340,760 $ 231,456 $225,099 $5,811,341 $ -- $5,811,341
Cost of sales ............... 322,780 136,622 113,731 105,797 2,852,111 -- 2,852,111
--------- -------- ---------- --------- ---------- ------------- ----------
Gross profit ............... 258,379 204,138 117,725 119,302 2,959,230 -- 2,959,230
Selling, general and
administrative expenses. 262,120 187,556 163,604 118,836 2,969,878 (154,308)(a) 2,815,570
Goodwill amortization ...... -- -- -- -- -- 103,529 (b) 103,529
--------- -------- --------- -------- ---------- ------------- ----------
Income from operations (3,741) 16,582 (45,879) 466 (10,648) 50,779 40,131
Other (income) expense:
Interest (income)
expense ..................... 10,921 2,685 (374) 944 87,930 (84,220)(c) 3,710
Other, net .................. (90) -- (56,250) -- (57,732) -- (57,732)
--------- -------- --------- -------- ---------- ------------- ----------
Income (loss) before
income taxes ............... (14,572) 13,897 10,745 (478) (40,846) 134,999 (d) 94,153
Provision for income taxes. -- 5,268 -- -- (67,880) 111,186 43,306
--------- -------- --------- -------- ---------- ------------- ----------
Net income (loss) ............ $ (14,572) $ 8,629 $ 10,745 $ (478) $ 27,034 $ 23,813 $ 50,847
========= ======== ========= ======== ========== ============= ==========
Net income per share ......... $ .01
==========
Shares used in computing
net income per share (1). 5,516,795
==========
</TABLE>
- ----------
(1) Includes (i) 1,191,182 shares outstanding prior to the Offering, (ii)
2,246,996 shares to be issued to the owners of the Founding Companies,
(iii) 61,741 shares to be issued to holders of the Series A Convertible
Preferred Stock, (iv) 60,000 shares (determined to be common stock
equivalents for purposes of computing earnings per share) of the 165,000
shares issuable upon the exercise of outstanding options, and (v) 1,956,876
of the 2,700,000 shares to be sold in the Offering to pay the cash portion
of the Acquisition consideration, to pay the S Corporation Distributions,
to repay indebtedness of the Founding Companies and to pay expenses of the
Offering.
See accompanying notes to unaudited pro forma combined financial statements.
F-6
<PAGE>
COLLECTIBLES USA, INC., AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL:
Collectibles USA, Inc. (Collectibles USA) was founded to create a national
retailer of contemporary collectibles and marketer of animation art.
Collectibles USA has conducted no operations to date and will acquire the
Founding Companies concurrently with and as a condition to the closing of this
Offering. The historical financial statements reflect the financial position and
results of operations as follows: Collectibles USA as of April 27, 1997, and for
the period from inception (January 18, 1996) through January 26, 1997 and for
the twelve weeks ended April 27, 1997; American Royal Arts as of April 30, 1997
and the year ended January 31, 1997 and for the three months ended April 30,
1996 and 1997; Stone's Hallmark as of May 31, 1997 and for the year ended
November 30, 1996 and for the three months ended May 31, 1996 and 1997; and
North Pole City, Crystal Galleria, Little Elegance, Reef Hallmark, Animation
USA, Filmart and Crystal Palace as of March 31, 1997 and for the year ended
December 31, 1996 and for the three months ended March 31, 1996 and 1997. The
audited historical financial statements included elsewhere in this Prospectus
have been included in accordance with Securities and Exchange Commission (SEC)
Staff Accounting Bulletin No. 80.
2. ACQUISITION OF FOUNDING COMPANIES:
Concurrently and as a condition with the closing of the Offering, Collectibles
USA will acquire all of the outstanding capital stock of the Founding Companies.
The Acquisitions will be accounted for using the purchase method of accounting
with American Royal Arts being treated as the accounting acquiror. The following
table sets forth the consideration to be paid (a) in cash and (b) in shares of
Common Stock to the stockholders of each of the Founding Companies. For purposes
of computing the estimated purchase price for accounting purposes, the value of
the shares is determined using an estimated fair value of $8.25 per share, which
represents a discount of twenty-five percent from the assumed initial public
offering price due to restrictions on the sale and transferability of the shares
issued. The estimated purchase price for the acquisitions is based upon
preliminary estimates and is subject to certain purchase price adjustments at
and following closing. The table does not reflect distributions totaling $1.7
million constituting substantially all of the Founding Companies undistributed
earnings previously taxed to their stockholders ("S Corporation Distributions").
SHARES OF
CASH COMMON STOCK
-------- -------------
(IN THOUSANDS)
American Royal Arts ...... $2,814 563,636
Stone's Hallmark ......... 1,350 350,000
Crystal Galleria ......... 1,000 277,272
North Pole City ......... 1,800 359,090
Little Elegance ......... 400 85,000
Reef Hallmark ............ 1,000 168,181
Animation USA ............ 600 145,454
Filmart .................. 100 236,363
Crystal Palace ............ 175 62,000
------- ----------
Total .................. $9,239 2,246,996
======= ==========
F-7
<PAGE>
COLLECTIBLES USA, INC., AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS - (CONTINUED)
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
The following tables summarize unaudited pro forma combined balance sheet
adjustments:
<TABLE>
<CAPTION>
ADJUSTMENT
---------------------------------------------------------- PRO FORMA
(A) (B) (C) (D) ADJUSTMENTS
--------------- ------------- --------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents ........................ $ -- $ -- $ -- $1,400,000 $ 1,400,000
Deferred tax asset .............................. -- -- 17,172 -- 17,172
Property and equipment net ..................... -- (106,074) -- -- (106,074)
Goodwill, net .................................... -- -- 16,589,531 -- 16,589,531
------------ ---------- ------------ ----------- ------------
Total assets .................................... -- (106,074) 16,606,703 1,400,000 17,900,629
============ ========== ============ =========== ============
LIABILITIES AND STOCKHOLDERS'
(DEFICIT) EQUITY
Current maturities of long-term obligations -- (37,847) -- 400,000 362,153
Pro forma cash consideration due to
Founding Companies .............................. -- -- 9,238,920 -- 9,238,920
Long-term obligations, net of current
maturities .................................... 1,736,080 -- -- -- 1,736,080
------------ ---------- ------------ ----------- ------------
Total liabilities .............................. 1,736,080 (37,847) 9,238,920 400,000 11,337,153
Stockholders' (deficit) equity:
Series A preferred stock ........................ -- -- -- 1,000,000 1,000,000
Common stock .................................... -- -- (253,814) -- (253,814)
Additional paid-in capital ..................... (1,736,080) -- 9,689,965 -- 7,953,885
Retained (deficit) earnings ..................... -- (68,227) (2,213,368) -- (2,281,595)
Treasury stock ................................. -- -- 145,000 -- 145,000
------------ ---------- ------------ ----------- ------------
Total stockholders' (deficit) equity ......... (1,736,080) (68,227) 7,367,783 1,000,000 6,563,476
------------ ---------- ------------ ----------- ------------
Total liabilities and stockholders' (deficit)
equity .......................................... $ -- $ (106,074) $ 16,606,703 $1,400,000 $17,900,629
============ ========== ============ =========== ============
</TABLE>
<TABLE>
<CAPTION>
ADJUSTMENT
-------------------------------------------- POST ACQUISITION
(E) (F) (G) ADJUSTMENTS
-------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents .................................... $22,104,133 $(6,200,519) $(9,238,920) $ 6,664,694
Other current assets ....................................... (2,451,965) -- -- (2,451,965)
------------ ------------ ------------ -------------
Total assets ................................................ 19,652,168 (6,200,519) (9,238,920) 4,212,729
============ ============ ============ =============
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
EQUITY
Accounts payable and accrued liabilities ..................... (1,713,832) -- -- (1,713,832)
Pro forma cash consideration due to founding companies ...... -- -- (9,238,920) (9,238,920)
Line of credit ............................................. -- (127,014) -- (127,014)
Payment to related parties ................................. -- (1,544,268) -- (1,544,268)
Current maturities of long-term debt ........................ (1,255,000) (1,630,920) -- (2,885,920)
------------ ------------ ------------ -------------
Total current liabilities ................................. (2,968,832) (3,302,202) (9,238,920) (15,509,954)
Long-term debt, net of current maturities .................. -- (2,581,374) -- (2,581,374)
Payable to stockholders .................................... -- (316,943) -- (316,943)
Total liabilities .......................................... (2,968,832) (6,200,519) (9,238,920) (18,408,271)
Stockholders' (deficit) equity:
Series A preferred stock .................................... (1,000,000) -- -- (1,000,000)
Common stock ................................................ 27,606 -- -- 27,606
Additional paid-in capital ................................. 23,593,394 -- -- 23,593,394
------------ ------------ ------------ -------------
Total stockholders' (deficit) equity ..................... 22,621,000 -- -- 22,621,000
------------ ------------ ------------ -------------
Total liabilities and stockholders' (deficit) equity ......... $19,652,168 $(6,200,519) $(9,238,920) $ 4,212,729
============ ============ ============ =============
</TABLE>
F-8
<PAGE>
COLLECTIBLES USA, INC., AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS - (CONTINUED)
(a) Records the S Corporation Distributions.
(b) Records the distribution of certain assets and related obligations to
certain stockholders of the Founding Companies.
(c) Reflects the combinations of the Founding Companies including: (i) the
liability for cash consideration to be paid of $9,239,000; (ii) the issuance
of 2,246,996 shares of common stock to the stockholders of the Founding
Companies at $8.25 per share (or $18.5 million); (iii) the creation of
approximately $16,590,000 of goodwill and (iv) approximately $1,736,000
representing S Corporation Distributions to certain stockholders.
(d) Records proceeds from issuance of Series A Convertible Preferred Stock and
Collectibles Enterprise Funding Corp. (CEFC) Notes.
(e) Records the cash proceeds of $29.7 million from the issuance of shares of
Collectibles USA Common Stock net of estimated offerings costs of $6.1
million (based upon an estimated initial public offering price of $11.00 per
share and includes the payment of deferred offering costs of $2,452,000
incurred through April 30, 1997). Offering costs consist primarily of
underwriting commissions, accounting fees, legal fees and printing expenses.
(f) Reflects the repayment of debt with proceeds from the Offering.
(g) Records the cash portion of the consideration to be paid to the stockholders
of the Founding Companies in connection with the Acquisitions.
4. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
ADJUSTMENTS:
(a) Reflects the reductions in salaries and benefits to the owners of the
Founding Companies to which they have agreed prospectively and certain
other adjustments, including the effect of revisions to certain lease
agreements between certain owners of the Founding Companies and the
reduction in compensation expense relating to the non-recurring, non-cash
compensation charge related to Common Stock issued to management.
(b) Reflects the amortization of goodwill to be recorded as a result of the
Acquisitions over a 40 year period.
(c) Reflects the reduction of interest expense attributed to the repayment of
debt with a portion of the net proceeds of the Offering and an increase
in interest expense attributed to indebtedness incurred by three of the
Founding Companies for S Corporation Distributions.
(d) Reflects the incremental provision for federal and state income taxes
relating to the statements of operations adjustments and for income taxes
as if each S Corporation had been treated throughout the period as a C
Corporation.
F-9
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Collectibles USA, Inc.:
We have audited the accompanying balance sheet of Collectibles USA, Inc. (a
Delaware corporation), as of January 26, 1997 and April 27, 1997 and the related
statements of operations, stockholders' deficit and cash flows for the period
from inception (January 18, 1996) through January 26, 1997 and for the twelve
weeks ended April 27, 1997. 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 generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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 Collectibles USA, Inc., as of
January 26, 1997 and April 27, 1997 and the results of its operations and its
cash flows for the period from inception (January 18, 1996) through January 26,
1997 and for the twelve weeks ended April 27, 1997, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
July 15, 1997
F-10
<PAGE>
COLLECTIBLES USA, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
JANUARY 26, APRIL 27,
1997 1997
-------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ......................................................... $ 425,681 $ 57,117
------------
Receivable from affiliate .................................... 100,000 --
------------
Prepaid expenses and other current assets ..................... 7,500 --
------------ ------------
Total current assets ....................................... 533,181 57,117
Property and equipment, net ................................. -- 7,453
Deferred offering costs ....................................... 894,096 2,451,965
------------ ------------
Total assets ................................................ $ 1,427,277 $ 2,516,535
============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accrued liabilities .......................................... $ 586,198 $ 1,735,769
------------
Notes payable-related party ................................. 855,000 855,000
------------ ------------
Total current liabilities ................................. 1,441,198 2,590,769
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Series A Convertible Preferred Stock, $.01 par, 5,000,000
authorized, no shares outstanding. ........................ -- --
------------
Common Stock, $.01 par, 31,200,000 shares authorized, 1,191,182
shares outstanding .......................................... 11,912 11,912
Additional paid-in capital .................................... 1,428,473 1,428,473
Deficit ...................................................... (1,454,306) (1,514,619)
------------ ------------
Total stockholders' deficit ................................. (13,921) (74,234)
------------ ------------
Total liabilities and stockholders' deficit ............... $ 1,427,277 $ 2,516,535
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE>
COLLECTIBLES USA, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
INCEPTION
(JANUARY 18, TWELVE
1996) WEEKS
THROUGH ENDED
JANUARY 26, APRIL 27,
1997 1997
-------------- -------------
<S> <C> <C>
Net sales .......................................... $ -- $ --
Cost of sales .................................... -- --
Gross profit .................................... -- --
Selling, general and administrative expenses ...... 1,442,492 50,236
------------ ---------
Operating loss .................................... (1,442,492) (50,236)
Other expense:
Interest expense ................................. 11,814 10,077
------------ ---------
Net loss .......................................... $(1,454,306) $ (60,313)
============ =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE>
COLLECTIBLES USA, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
----------------------- PAID-IN STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT DEFICIT
----------- --------- ------------ --------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, inception (January 18, 1996) -- $ -- $ -- $ -- $ --
Initial capitalization .................. 1,016,602 10,166 (10,066) -- 100
Issuance of management shares ............ 174,580 1,746 1,438,539 -- 1,440,285
Net loss ................................. -- -- -- (1,454,306) (1,454,306)
---------- -------- ---------- ------------ ------------
BALANCE, January 26, 1997 .................. 1,191,182 11,912 1,428,473 (1,454,306) (13,921)
---------- -------- ---------- ------------ ------------
Net loss ................................. -- -- -- (60,313) (60,313)
---------- -------- ---------- ------------ ------------
BALANCE, April 27, 1997 .................. 1,191,182 $11,912 $1,428,473 $ (1,514,619) $ (74,234)
========== ======== ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-13
<PAGE>
COLLECTIBLES USA, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
INCEPTION
(JANUARY 18,
1996)
THROUGH
APRIL 27,
------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ...................................................... $(1,514,619)
Non-cash compensation charge on issuance of management shares. 1,440,285
Adjustments to reconcile net loss to net cash used in operating
activities-
Changes in operating assets and liabilities-
Increase in deferred offering costs ........................ (2,451,965)
Increase in accrued expenses .............................. 1,735,769
------------
Net cash used in operating activities .............................. (790,530)
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ........................ (7,453)
------------
Net cash used in investing activities .............................. (7,453)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of loan payable ..................... 855,000
Proceeds from issuance of common stock ........................ 100
------------
Net cash provided by financing activities ........................... 855,100
------------
NET INCREASE IN CASH .......................................... 57,117
CASH, beginning of period ....................................... --
------------
CASH, end of period ............................................. $ 57,117
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-14
<PAGE>
COLLECTIBLES USA, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Collectibles USA, Inc., a Delaware corporation (Collectibles USA or the
Company), WAS FOUNDED IN JANUARY 1996 to form a national retailer of
collectibles merchandise and marketer of animation art. Collectibles USA intends
to enter into definitive agreements to acquire nine businesses (the
Acquisitions), complete an initial public offering (the Offering) of its common
stock and, subsequent to the Offering, continue to acquire, through merger or
purchase, similar companies to expand its national operations.
Collectibles USA has not conducted any operations, and all activities to date
have related to the Offering and the Acquisitions. Collectibles USA did not
commence activities related to the Offering until June 1996. All expenditures to
date have been funded by the issuance of Series A Convertible Preferred Stock
(See Note 6) and promissory notes from Collectibles Enterprises Funding Corp.
(CEFC), an entity under common control founded to obtain and provide financing
for the Offering costs incurred by the Company. Collectibles USA is dependent
upon the Offering to execute the pending Acquisitions and to repay the
promissory notes to CEFC. There is no assurance that the pending Acquisitions
will be completed or that Collectibles USA will be able to generate future
operating revenues.
The Company's future success is dependent upon a number of factors which
include, among others, the ability to integrate operations, reliance on the
identification and integration of satisfactory acquisition candidates, reliance
on acquisition financing, the ability to manage growth and attract and retain
qualified management, dependence on licenses, the need for additional capital,
dependence on key collectibles vendors and risks associated with dependence on
foreign vendors, competition, and seasonality and quarterly fluctuations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Income Taxes
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are received or settled.
The Company has recorded a full valuation allowance against all deferred tax
assets due to the uncertainty of ultimate realizability. Accordingly, no income
tax benefit has been recorded for current-year losses.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
New Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 128, Earnings Per Share (SFAS No. 128). For the
Company, SFAS No. 128 will be effective for the 52/53 week fiscal year ending
January 25, 1998, SFAS No. 128 simplifies the standards required under current
accounting rules for computing earnings per share and replaces the presentation
of primary earnings per share and fully diluted earnings per share with a
presentation of basic earnings per share (basic EPS) and diluted earnings per
share (diluted EPS). Basic EPS excludes dilution and is
F-15
<PAGE>
COLLECTIBLES USA, INC.
NOTES TO FINANCIAL STATEMENTS- (CONTINUED)
determined by dividing income available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted EPS
reflects the potential dilution that could occur if securities and other
contracts to issue common stock were exercised or converted into common stock.
Diluted EPS is computed similarly to fully diluted earnings per share under
current accounting rules. The implementation of SFAS No. 128 is not expected to
have a material effect on the Company's earnings per share as determined under
current accounting rules.
3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
JANUARY 26, APRIL 27,
1997 1997
------------- -----------
<S> <C> <C>
Accrued professional expenses ...... $556,992 $1,589,697
Other accrued liabilities ......... 29,206 146,072
--------- -----------
$586,198 $1,735,769
========= ===========
</TABLE>
4. NOTES PAYABLE-RELATED PARTY:
CEFC, which is owned by RGR Financial Group, LLC (RGR) and Capstone Partners,
LLC (Capstone) was founded to obtain and provide financing for the Offering
costs incurred by the Company. In August 1996, the Company issued 5% notes of
$300,000 and $555,000 to CEFC, due December 31, 1997. Upon consummation of the
Offering, the principal amounts will become due and payable immediately. No
interest is due on such amounts in the event the Offering is consummated.
In June 1997, the Company issued to CEFC a $400,000 5% note due December 31,
1997. Upon consumation of the Offering, the principal amount will become due and
payable immediately. No interest is due on such amount in the event the Offering
is consummated.
5. RELATED-PARTY TRANSACTION:
The Company has entered into a consulting agreement with RGR whereby RGR will
act as a merger and acquisition advisory consultant to assist the Company in
implementing its strategy to acquire additional retailers of collectibles and
marketers of animation art and other related consulting services for a term of
one year. The consideration to be paid to RGR upon consummation of a future
acquisition will be 3.2% of the acquisition candidate's pre-tax net income for
its most recent fiscal year.
6. STOCKHOLDERS' EQUITY:
Common Stock and Restricted Common Stock
In May 1997, Collectibles USA effected a 1,016.604-for-one stock dividend for
each share of common stock (Common Stock) then outstanding and in June 1997,
increased the number of authorized shares of Common Stock to 31,200,000 of which
1,200,000 was designated Restricted Common Stock. The effects of the Common
Stock dividend have been retroactively reflected in the financial statements and
the accompanying notes.
In connection with the organization and initial capitalization of Collectibles
USA in June 1996, the Company issued 1,016,602 shares of Common Stock (at $.10
per share prior to the stock split) to RGR, Capstone and an individual who is to
become a director upon consummation of the Offering.
In November 1996, the Company issued a total of 174,580 shares of Common Stock
at $.01 per share (prior to the stock split). As a result, the Company recorded
a non-recurring, non-cash compensation charge of $1,440,285 representing the
difference between the amount paid for the shares and the deemed fair value of
the shares on the date of sale.
F-16
<PAGE>
COLLECTIBLES USA, INC.
NOTES TO FINANCIAL STATEMENTS- (CONTINUED)
In June 1997, RGR, Capstone and an individual who is to become a director upon
consummation of the Offering exchanged 1,016,602 shares of Common Stock for an
equal number of shares of restricted voting common stock (Restricted Common
Stock). The holders of the Restricted Common Stock are entitled to four-tenths
of one vote for each share held on all other matters on which they are entitled
to vote.
Each share of Restricted Common Stock will automatically convert to Common Stock
on a share-for-share basis (i) in the event of a disposition of such share of
Restricted Common Stock by the holder thereof (other than a distribution which
is a distribution by a holder to its partners or beneficial owners, or a
transfer to a related party of such holder (as defined), (ii) in the event any
person acquires beneficial ownership of 15% or more of the outstanding shares of
Common stock of the Company, (iii) in the event any person offers to acquire 15%
or more of the outstanding shares of Common stock of the Company, or (iv)
earlier, upon the affirmative vote of a majority of the aggregate number of
votes which may be cast by the holder of outstanding shares of Common Stock and
Restricted Common Stock.
After July 1, 1998, the Board of Directors may elect to convert any outstanding
shares of Restricted Common Stock into shares of Common Stock in the event 80%
or more of the originally outstanding shares of Restricted Common Stock have
been previously converted into shares of Common Stock.
Preferred Stock
In May 1997, the Company sold 20,000 shares of its Series A Convertible
Preferred Stock, liquidation value $50 per share (the Series A Convertible
Preferred Stock), for an aggregate consideration of $1,000,000, the proceeds of
which were used by the Company to pay various expenses incurred in connection
with its efforts to complete the Acquisitions and effect the Offering. Pursuant
to the terms of the Series A Convertible Preferred Stock, upon the consummation
of the Offering, the Series A Convertible Preferred Stock will automatically
convert either (i) into that number of shares of Common Stock, determined by (X)
dividing the liquidation value by (Y) an amount equal to 60% of the initial
public offering price or, at the option of the holder of the Series A
Convertible Preferred Stock, (ii) into that number of shares of Common Stock
determined by (X) dividing the liquidation value by (Y) an amount equal to 150%
of the initial public offering price and cash in an amount equal to the
liquidation value. All of the holders of the Series A Convertible Preferred
Stock have elected conversion option (ii) in the preceding sentence. As a
result, upon consummation of the Offering, the Series A Preferred Stock will
convert into $1,000,000 in cash and 61,741 shares of Common Stock (based upon an
assumed initial public offering price of $11.00 per share). The Company intends
to pay the required cash amounts in connection with the conversion of the Series
A Convertible Preferred Stock with a portion of the net proceeds of the
Offering.
Stock Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," allows entities to
choose between fair value-based method of accounting for employee stock options
or similar equity instruments and the current intrinsic, value-based method of
accounting prescribed by Accounting Principles Board (APB) Opinion No. 25.
Companies electing to remain with the accounting in APB Opinion No. 25 must make
pro forma disclosures of net income and earnings per share as if the fair value
method of accounting had been applied. The Company will provide pro forma
disclosure of net income and earnings per share, as applicable, in the notes to
future consolidated financial statements.
1997 Long-Term Incentive Plan
During May 1997, the Board of Directors and the Company's stockholders approved
the Company's 1997 Long-Term Incentive Plan (the Plan). The maximum number of
shares of Common Stock that may be awarded pursuant to the Plan may not exceed
15% of the aggregate number of shares of Common
F-17
<PAGE>
COLLECTIBLES USA, INC.
NOTES TO FINANCIAL STATEMENTS- (CONTINUED)
Stock outstanding at the time of determination which maximum will be 929,817
shares upon consummation of the Offering. Awards may be settled in cash, shares,
other awards or other property, as determined by the compensation committee of
the Board of Directors.
1997 Non-employee Directors' Stock Plan
The Company's 1997 Non-Employee Director's Stock Plan (the Directors' Plan),
which was adopted by the Board of Directors and approved by the Company's
stockholders in May 1997, provides for the automatic grant to each non-employee
director of an initial option to purchase 40,000 shares or such person's
subsequent initial election as a director and an automatic annual grant to each
non-employee director of an option to purchase 5,000 shares at each annual
meeting of stockholders thereafter at which such director is re-elected or
remains a director, unless such annual meeting is held within three months of
such person's initial option granted. All options will have an exercise price
per share equal to the fair market value of the Common Stock on the date of
grant and expire on the earlier of ten years from the date of grant or one year
after termination of service as a director. Options will become exercisable one
year after the date of grant, subject to acceleration by the Board of Directors,
and will be forfeited upon termination of service as a director for reasons
other than death or disability unless the director served for at least 11 months
after the date of grant or the option was otherwise exercisable at the date of
termination. The Directors' Plan also permits non-employee directors to elect to
receive, in lieu of cash directors' fees, shares or credits representing
"deferred shares" at future settlement dates, as selected by the director. The
number of shares or deferred shares received will equal the number of shares of
Common Stock which, at the date the fees would otherwise be payable, will have
an aggregate fair market value equal to the amount of such fees.
7. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
Wholly owned subsidiaries of Collectibles USA have signed definitive agreements
to acquire by merger or share exchange nine companies (the Founding Companies)
to be effective with the Offering. The companies to be acquired are Crystal
Galleria, Inc. and Base, Inc.; Vincent J. Browne, Inc.; St. George, Inc.; DKG
Enterprises, Inc.; Elwell Stores, Inc.; Stone's Shops, Inc.; American Royal Arts
Corp.; Animation U.S.A., Inc.; and Filmart Productions Inc. The aggregate
consideration that will be paid by Collectibles USA to acquire the Founding
Companies is approximately $9.2 million in cash and 2,246,996 shares of Common
Stock. In addition, the Company will repay $4.5 million of indebtedness of the
Founding Companies.
On June 13, 1997, Collectibles USA filed a registration statement on Form S-1
for the sale of its Common Stock. An investment in shares of Common Stock
offered by this Prospectus involves a high degree of risk, including, among
others, absence of a combined operating history, risks relating to the Company's
acquisition strategy, risks relating to acquisition financing, reliance on key
personnel and a substantial portion of the proceeds from the offering payable to
affiliates of the Founding Companies. See "Risk Factors" included elsewhere
herein.
The Company has agreed to issue to the representatives of the underwriters and
their designees, upon completion of the Offering, warrants covering an aggregate
of 270,000 shares of Common Stock. Such warrants are exercisable during the
five-year period commencing on the date of the prospectus relating to the
Offering at an exercise price equal to 120% of the initial public offering
price. The Company has agreed to grant certain registration rights to the
holders of these warrants.
In August 1997, the Company entered into employment agreements with two
executives that have an initial expiration date of 2000. The agreements are
thereafter automatically renewed for successive twelve-month terms, unless
terminated by the Company or the executive. Such agreements provide that, in the
case of termination without cause, the employees are entitled to payment of
their annual
F-18
<PAGE>
COLLECTIBLES USA, INC.
NOTES TO FINANCIAL STATEMENTS- (CONTINUED)
salaries (subject to a minimum amount) for the lesser of the remainder of the
term of the agreement or one year. Pursuant to the employment agreements, the
executives (i) have been granted stock options to acquire an aggregate of
165,000 shares of Common Stock at an exercise price of $7.00 per share and (ii)
will be granted additional stock options to acquire an aggregate of 225,000
shares of Common Stock concurrently with the consummation of the Offering at an
exercise price equal to the initial public offering price. In August, the
Company recorded a non recurring, non cash compensation charge of $206,250
related to the $7.00 options.
In August 1997, the Company entered into an Agreement and Release with a former
director and executive officer (the "Officer"), whose employment terminated in
June 1997, pursuant to which the Officer will receive within three days of the
consummation of the Offering $350,000 as a severance payment.
F-19
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American Royal Arts Corp.:
We have audited the accompanying balance sheets of American Royal Arts Corp. (a
Delaware corporation) as of October 31, 1995 and 1996, and January 31, 1997, and
the related statements of operations, stockholder's equity and cash flows for
each of the three years in the period ended October 31, 1996, and the year ended
January 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Royal Arts Corp. as of
October 31, 1995 and 1996, and January 31, 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
October 31, 1996, and the year ended January 31, 1997, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 5, 1997
F-20
<PAGE>
AMERICAN ROYAL ARTS CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31,
------------------------- JANUARY 31, APRIL 30,
1995 1996 1997 1997
------------ ------------ ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash .......................................... $ 547,990 $ 442,364 $ 609,523 $ 585,702
Accounts receivable ........................... 61,347 50,609 33,712 74,880
Merchandise inventories ..................... 599,713 707,161 611,943 597,790
Prepaid expenses and other current assets ... 56,789 109,221 105,914 80,389
---------- ---------- ---------- ----------
Total current assets ........................ 1,265,839 1,309,355 1,361,092 1,338,761
PROPERTY AND EQUIPMENT, net .................. 27,060 40,283 38,173 36,100
OTHER ASSETS, net .............................. 136,635 89,135 82,885 76,635
---------- ---------- ---------- ----------
Total assets .............................. $1,429,534 $1,438,773 $1,482,150 $1,451,496
========== ========== ========== ==========
LIABILITIES AND STOCKHOLDER'S
EQUITY
CURRENT LIABILITIES:
Customer deposits ........................... $ 115,804 $ 355,617 $ 334,131 $ 348,113
Accounts payable and accrued liabilities ...... 439,842 386,960 341,254 319,106
Current maturities of long-term obligations ... 7,268 -- -- --
---------- ---------- ---------- ----------
Total current liabilities .................. 562,914 742,577 675,385 667,219
COMMITMENTS AND CONTINGENCIES ..................
STOCKHOLDER'S EQUITY:
Convertible preferred stock, $100 par, 5,000
shares authorized, none outstanding ......... -- -- -- --
Common stock, $.01 par, 1,000,000 shares
authorized, 158,333.336 shares issued,
79,166.668 shares outstanding ............... 1,584 1,584 1,584 1,584
Less- Treasury stock, at cost (79,166.668
shares) .................................... (145,000) (145,000) (145,000) (145,000)
Retained earnings ........................... 1,010,036 839,612 950,181 927,693
---------- ---------- ---------- ----------
Total stockholder's equity .................. 866,620 696,196 806,765 784,277
---------- ---------- ---------- ----------
Total liabilities and stockholder's equity $1,429,534 $1,438,773 $1,482,150 $1,451,496
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
AMERICAN ROYAL ARTS CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR THREE MONTHS ENDED
YEAR ENDED OCTOBER 31, ENDED APRIL 30,
-------------------------------------- JANUARY 31, ----------------------
1994 1995 1996 1997 1996 1997
------------ ------------ ------------ ------------ ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
NET SALES ..................... $3,897,785 $4,051,072 $4,121,181 $4,288,612 $980,975 $1,100,477
COST OF SALES ............... 1,715,025 1,559,918 1,571,068 1,505,784 373,948 346,442
----------- ---------- ----------- ----------- --------- -----------
Gross profit ............... 2,182,760 2,491,154 2,550,113 2,782,828 607,027 754,035
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES ..................... 1,587,875 1,759,886 1,763,860 1,778,138 444,053 482,519
----------- ---------- ----------- ----------- --------- -----------
Income from operations ...... 594,885 731,268 786,253 1,004,690 162,974 271,516
OTHER INCOME (EXPENSE):
Interest expense ............ -- (4,602) -- -- -- --
Interest income ............ 7,442 22,802 24,184 24,027 1,361 5,858
----------- ---------- ----------- ----------- --------- -----------
NET INCOME .................. $ 602,327 $ 749,468 $ 810,437 $1,028,717 $164,335 277,374
=========== ========== =========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
AMERICAN ROYAL ARTS CORP.
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------- TREASURY RETAINED STOCKHOLDERS'
SHARES AMOUNT STOCK EARNINGS EQUITY
--------- --------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE AT OCTOBER 31, 1993 ............... 158,333 $ 1,584 $ -- $ 519,203 $ 520,787
Net income ................................. -- -- -- 602,327 602,327
Distributions .............................. -- -- -- (411,333) (411,333)
Purchase of treasury stock ............... -- -- (145,000) -- (145,000)
-------- -------- ---------- ---------- ----------
BALANCE AT OCTOBER 31, 1994 ............... 158,333 1,584 (145,000) 710,197 566,781
Net income ................................. -- -- -- 749,468 749,468
Distributions .............................. -- -- -- (449,629) (449,629)
-------- -------- ---------- ---------- ----------
BALANCE AT OCTOBER 31, 1995 ............... 158,333 1,584 (145,000) 1,010,036 866,620
Net income .............................. -- -- -- 810,437 810,437
Distributions .............................. -- -- -- (980,861) (980,861)
-------- -------- ---------- ---------- ----------
BALANCE AT OCTOBER 31, 1996 ............... 158,333 1,584 (145,000) 839,612 696,196
Net income ................................. -- -- -- 431,065 431,065
Distributions .............................. -- -- -- (320,496) (320,496)
-------- -------- ---------- ---------- ----------
BALANCE AT JANUARY 31, 1997 ............... 158,333 1,584 (145,000) 950,181 806,765
Net income (unaudited) ..................... -- -- -- 277,374 277,374
Distributions (unaudited) .................. -- -- -- (299,862) (299,862)
-------- -------- ---------- ---------- ----------
BALANCE AT APRIL 30, 1997 (unaudited) ...... 158,333 $ 1,584 $ (145,000) $ 927,693 $ 784,277
======== ======== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
AMERICAN ROYAL ARTS CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------------------
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income .................................... $ 602,327 $ 749,468 $ 810,437
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation and amortization ............... 9,583 11,393 58,470
Changes in operating assets and
liabilities-
Accounts receivable ........................ (49,826) 76,105 10,738
Merchandise inventories ..................... 126,103 (164,940) (107,448)
Prepaid expenses and other current
assets .................................... (21,416) (10,109) (52,432)
Customer deposits ........................... 50,231 62,097 239,813
Accounts payable and accrued liabilities. (134,282) 143,610 (52,882)
Other assets ................................. (150,000) 25,350 2,500
----------- ----------- -----------
Net cash provided by operating
activities ................................. 432,720 892,974 909,196
----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and equipment ............ (20,367) (8,930) (26,693)
Proceeds from sale of property and
equipment .................................... -- 1,195 --
----------- ----------- -----------
Net cash used in investing activities ...... (20,367) (7,735) (26,693)
----------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of long-term
obligations ................................. 100,000 -- --
Principal payments on long-term
obligations ................................. -- (92,732) (7,268)
Treasury stock purchased ..................... (145,000) -- --
Distributions to stockholder .................. (411,333) (449,629) (980,861)
----------- ----------- -----------
Net cash used in financing activities (456,333) (542,361) (988,129)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH ............... (43,980) 342,878 (105,626)
CASH, beginning of period ..................... 249,092 205,112 547,990
----------- ----------- -----------
CASH, end of period ........................... $ 205,112 $ 547,990 $ 442,364
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for interest ...... $ -- $ 4,602 $ --
<CAPTION>
YEAR THREE MONTHS ENDED
ENDED APRIL 30,
JANUARY 31, ---------------------------
1997 1996 1997
--------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income .................................... $ 1,028,717 $ 164,335 $ 277,374
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation and amortization ............... 39,346 10,176 9,273
Changes in operating assets and
liabilities-
Accounts receivable ........................ 34,150 33,775 (41,168)
Merchandise inventories ..................... 19,409 104,782 14,153
Prepaid expenses and other current
assets .................................... (47,213) 878 25,525
Customer deposits ........................... 178,569 122,677 13,982
Accounts payable and accrued liabilities. 13,852 (120,578) (22,148)
Other assets ................................. 2,500 2,500 --
------------- ----------- -----------
Net cash provided by operating
activities ................................. 1,269,330 318,545 276,991
------------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and equipment ............ (22,403) (12,823) (950)
Proceeds from sale of property and
equipment .................................... -- -- --
------------- ----------- -----------
Net cash used in investing activities ...... (22,403) (12,823) (950)
------------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of long-term
obligations ................................. -- -- --
Principal payments on long-term
obligations ................................. -- -- --
Treasury stock purchased ..................... -- -- --
Distributions to stockholder .................. (1,249,986) (325,253) (299,862)
------------- ----------- -----------
Net cash used in financing activities (1,249,986) (325,253) (299,862)
------------- ----------- -----------
NET INCREASE (DECREASE) IN CASH ............... (3,059) (19,531) (23,821)
CASH, beginning of period ..................... 612,582 612,582 609,523
------------- ----------- -----------
CASH, end of period ........................... $ 609,523 $ 593,051 $ 585,702
============= =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for interest ...... $ -- $ -- $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
AMERICAN ROYAL ARTS CORP.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
American Royal Arts Corp. (the Company) is a retail and wholesale marketer
specializing in the sale of animation art, including limited editions,
production cels, sericels, lithographs and vintage animation. American Royal
Arts produces animation art under various license arrangements certain of which
are exclusive to it. American Royal Arts has been in operation since 1987 and
has one gallery located in Westbury, New York, which also houses its
telemarketing operations.
Although the Company's business is not seasonal, sales fluctuations between
quarters do occur and are largely the result of the timing and frequency of
in-store artists signings and other promotional events.
The Company and its stockholder intend to enter into a definitive agreement with
Collectibles USA, Inc. (Collectibles), pursuant to which all outstanding shares
of the Company's common stock will be exchanged for cash and shares of
Collectibles common stock concurrent with the consummation of the initial public
offering of the common stock of Collectibles.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Merchandise Inventories
Merchandise inventories are stated at the lower of cost or market, determined by
the average cost method.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is determined using
the straight-line method based on the estimated useful life of the respective
asset. Leasehold improvements are amortized over the shorter of the estimated
useful life or the remaining lease term. Expenditures for major renewals and
betterments are capitalized while maintenance and repairs are expensed. When
property is retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the accounts and any resulting gain or loss is
reflected in the statements of operations.
Other Assets
On October 31, 1994, the Company purchased the stock of a 50 percent stockholder
for $45,000 in cash and a note of $100,000 to the former stockholder. In
addition, as part of the repurchase of stock, the Company entered into four
noncompete agreements with the former stockholder and related parties of the
stockholder. The total amount paid under the noncompete agreements was $150,000,
which is being amortized over the five-year lives of the agreements.
Revenue Recognition
The Company recognizes revenue from sales upon delivery of the merchandise to
the customer and receipt of payment. Customer deposits consist of collections on
layaway sales. Upon receipt of final payment, the item is delivered to the
customer and the sale is recorded as revenue.
Cost of Sales
Cost of sales includes costs of merchandise sold, framing and shipping costs.
Advertising Expenses
Advertising expenses are expensed in the month incurred. Advertising expenses
were approximately $316,000, $258,000, $141,000, $139,000 and $29,735 for the
years ended October 31, 1994, 1995 and 1996, for the year ended January 31,
1997, and for the three months ended April 30, 1997, respectively.
F-25
<PAGE>
AMERICAN ROYAL ARTS CORP.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Income Taxes
For income tax purposes, the Company and its stockholder have elected to be
treated as an S Corporation under the Internal Revenue Code and a similar
section in the state code. In accordance with the provisions of such elections,
the Company's income and losses were passed through to its stockholder;
accordingly, no provision for income taxes has been recorded.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, accounts receivable,
accounts payable and debt. The carrying amount of these financial instruments
approximates fair value due either to length of maturity or existence of
interest rates that approximate prevailing market rates.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Interim Financial Information
The interim financial statements as of April 30, 1997, and for the three months
ended April 30, 1996 and 1997, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED OCTOBER 31,
USEFUL LIVES ------------------------- JANUARY 31,
(YEAR) 1995 1996 1997
-------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Furniture, fixtures and equipment ...... 5-7 $ 35,142 $ 61,834 $ 62,332
Leasehold improvements .................. 3-5 28,148 28,148 28,516
--------- --------- ---------
63,290 89,982 90,848
Less- Accumulated depreciation ......... (36,230) (49,699) (52,675)
--------- --------- ---------
$ 27,060 $ 40,283 $ 38,173
========= ========= =========
</TABLE>
F-26
<PAGE>
AMERICAN ROYAL ARTS CORP.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Other assets consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------- JANUARY 31,
1995 1996 1997
---------- ---------- ------------
<S> <C> <C> <C>
Security deposits .............................. $ 16,635 $ 14,135 $ 14,135
Restrictive covenants, at cost, net of
accumulated amortization of $30,000,
$75,000 and $81,250 at October 31, 1995
and 1996, and January 31, 1997,
respectively .................................... 120,000 75,000 68,750
--------- --------- ---------
$136,635 $ 89,135 $ 82,885
========= ========= =========
</TABLE>
Accounts payable and accrued liabilities consist of the following:
OCTOBER 31,
------------------------- JANUARY 31,
1995 1996 1997
----------- ----------- ------------
Accounts payable, trade ............ $ 288,278 $ 289,288 $ 137,716
Accrued vacation and payroll ...... 26,181 31,604 22,623
Accrued royalties .................. 32,478 20,000 77,618
Other .............................. 92,905 46,068 103,297
---------- ---------- ----------
$ 439,842 $ 386,960 $ 341,254
========== ========== ==========
5. LONG-TERM OBLIGATIONS:
At October 31, 1995, the Company had $7,268 payable to a former stockholder, due
in monthly principal and interest (at 7 percent) installments of $7,310 over the
life of the note. The note was paid in fiscal year 1996.
The loan was collateralized by a security interest in the Company's accounts
receivable and inventory.
6. COMMITMENTS AND CONTINGENCIES:
Lease Obligations
The Company leases its retail facilities under operating leases expiring at
various dates through February 2000. Rent expense for the years ended October
31, 1994, 1995 and 1996, and for the year ended January 31, 1997, was
approximately $143,000, $170,000, $181,000 and $181,000, respectively. Rent
expense for the three months ended April 30, 1997 was $43,000. Future minimum
lease payments under noncancelable operating leases are as follows:
Year ending October 31,
1997 .................. $126,996
1998 .................. 34,168
1999 .................. 35,868
2000 .................. 12,148
---------
$209,180
=========
Litigation
The Company is subject to legal actions arising in the ordinary course of
business. Management does not believe that the outcome of any such legal action
would have a material adverse effect on the Company's financial position or
results of operations.
F-27
<PAGE>
AMERICAN ROYAL ARTS CORP.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Consignments
The Company has various consignment arrangements with certain artists to produce
and sell certain pieces of art. The consigned inventory is insured by the
Company. Under these arrangements, the Company is obligated to pay the artist a
royalty on the art sold.
Distribution Agreements
The Company maintains various distribution agreements with major studio
suppliers to purchase and distribute animation art. Some agreements contain
minimum annual purchase requirements which the Company had fulfilled as of
October 31, 1995 and 1996, and January 31, 1997, respectively. On February 1,
1997, the Company entered into a 15-month distribution agreement to purchase and
distribute animated art products with a major studio supplier.
7. SIGNIFICANT SUPPLIERS:
During the year ended October 31, 1995, three suppliers accounted for 56 percent
of total inventory purchases. During the year ended October 31, 1996, and for
the year ended January 31, 1997, 4 suppliers accounted for 52 percent of total
inventory purchases.
8. EVENT SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
The Company and its stockholder have entered into a definitive agreement with
Collectibles providing for the acquisition of the Company by Collectibles.
Prior to the acquisition, the Company will make a cash distribution of
approximately $486,000 which represents the Company's estimated S Corporation
accumulated adjustment account. Had this transaction been recorded at January
31, 1997, the effect on the accompanying balance sheet would be an increase in
liabilities of $486,000 and a decrease in shareholder's equity of $486,000. The
Company anticipates funding this distribution through borrowings.
F-28
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Stone's Shops, Inc.:
We have audited the accompanying balance sheets of Stone's Shops, Inc. (an
Illinois corporation), as of November 30, 1995 and 1996, and the related
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended November 30, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Stone's Shops, Inc., as of
November 30, 1995 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended November 30, 1996, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
April 19, 1997
F-29
<PAGE>
STONE'S SHOPS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30, MAY 31,
--------------------------- ------------
1995 1996 1997
------------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................... $ 74,915 $ 82,610 $ 319,436
Merchandise inventories .............................. 2,190,405 2,673,712 2,769,832
Prepaid expenses and other current assets ............ 42,738 86,681 36,106
------------ ------------ -----------
Total current assets .............................. 2,308,058 2,843,003 3,125,374
PROPERTY AND EQUIPMENT, net ........................... 273,828 286,837 247,124
------------ ------------ -----------
Total assets ....................................... $ 2,581,886 $ 3,129,840 $3,372,498
============ ============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Customer deposits .................................... $ 18,518 $ 25,946 $ 9,696
Accounts payable and accrued liabilities ............ 1,317,726 1,499,985 1,478,542
Current maturities of long-term obligations ......... 14,400 14,400 14,400
Payable to shareholder .............................. 11,000 30,000 6,010
------------ ------------ -----------
Total current liabilities ........................... 1,361,644 1,570,331 1,508,648
LONG-TERM OBLIGATIONS, net of current maturities ...... 43,200 28,800 28,800
DEFERRED INCOME TAXES ................................. 321,921 500,455 530,456
------------ ------------ -----------
Total liabilities ................................. 1,726,765 2,099,586 2,067,904
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value, 10,000 shares authorized,
1,000 shares outstanding ........................... 1,000 1,000 1,000
Additional paid-in capital ........................... 39,000 39,000 39,000
Retained earnings .................................... 815,121 990,254 1,264,594
------------ ------------ -----------
Total shareholders' equity ........................ 855,121 1,030,254 1,304,594
------------ ------------ -----------
Total liabilities and shareholders' equity ......... $ 2,581,886 $ 3,129,840 $3,372,498
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
STONE'S SHOPS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30, SIX MONTHS ENDED MAY 31,
----------------------------------------- ------------------------
1994 1995 1996 1996 1997
------------- ------------- ------------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES ........................ $ 3,488,838 $ 4,281,040 $ 4,985,549 $2,772,411 $3,226,212
COST OF SALES .................. 1,799,619 2,268,690 2,496,574 1,453,708 1,820,731
------------ ------------ ------------ ----------- -----------
Gross profit .................. 1,689,219 2,012,350 2,488,975 1,318,703 1,405,481
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ......... 1,430,695 1,787,457 2,117,010 948,627 968,861
------------ ------------ ------------ ----------- -----------
Income from operations ...... 258,524 224,893 371,965 370,076 436,620
OTHER EXPENSE:
Interest expense ............... 3,681 10,438 2,891 1,524 947
------------ ------------ ------------ ----------- -----------
INCOME BEFORE INCOME TAXES ...... 254,843 214,455 369,074 368,552 435,673
PROVISION FOR INCOME TAXES ...... 146,367 128,101 193,941 193,674 161,333
------------ ------------ ------------ ----------- -----------
NET INCOME ..................... 108,476 86,354 175,133 $ 174,878 274,340
============ ============ ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
STONE'S SHOPS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNTS CAPITAL EARNINGS EARNINGS
-------- --------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
BALANCE AT NOVEMBER 30, 1993 ...... 1,000 $ 1,000 $ 39,000 $ 620,291 $ 660,291
Net income ........................ -- -- -- 108,476 108,476
------ -------- --------- ----------- -----------
BALANCE AT NOVEMBER 30, 1994 ...... 1,000 1,000 39,000 728,767 768,767
Net income ........................ -- -- -- 86,354 86,354
------ -------- --------- ----------- -----------
BALANCE AT NOVEMBER 30, 1995 ...... 1,000 1,000 39,000 815,121 855,121
Net income ........................ -- -- -- 175,133 175,133
------ -------- --------- ----------- -----------
BALANCE AT NOVEMBER 30, 1996 ...... 1,000 1,000 39,000 990,254 1,030,254
Net Income (unaudited) ............ -- -- -- 274,340 274,340
------ -------- --------- ----------- -----------
BALANCE AT MAY 31, 1997
(unaudited) ..................... 1,000 $ 1,000 $ 39,000 $1,264,594 $1,304,594
====== ======== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
STONE'S SHOPS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NOVEMBER 30, SIX MONTHS ENDED MAY 31,
--------------------------------------- --------------------------
1994 1995 1996 1996 1997
------------ ------------- ------------ ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................... $ 108,476 $ 86,354 $ 175,133 $ 174,878 $ 274,340
Adjustments to reconcile net income to net cash
provided by operating activities- ..................
Depreciation and amortization ..................... 40,032 55,800 63,467 28,934 38,373
Loss on sale of assets ........................... - - 9,765 9,765 --
Changes in operating assets and liabilities- ......
Merchandise inventories ........................... (383,742) (540,902) (483,307) (311,825) (96,120)
Prepaid expenses and other current assets ......... 31,812 (7,726) (43,943) 6,800 50,575
Customer deposits ................................. 3,779 5,291 7,428 (18,518) (16,250)
Accounts payable and accrued liabilities ......... 116,900 443,413 182,259 36,678 (21,443)
Deferred income taxes .............................. 126,208 109,366 178,534 83,910 30,001
---------- ---------- ---------- ---------- ---------
Net cash provided by operating activities ......... 43,465 151,596 89,336 10,622 259,476
---------- ---------- ---------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............... (93,030) (113,260) (98,816) (89,098) --
Proceeds from sales of property and equipment ...... - - 12,575 17,961 1,340
---------- ---------- ---------- ---------- ---------
Net cash used in investing activities ............ (93,030) (113,260) (86,241) (71,137) 1,340
---------- ---------- ---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term obligations ......... - - (25,400) (14,400) (23,990)
Proceeds from issuance of long-term obligations and
loan payable to shareholder ........................ - 68,600 30,000 -- --
---------- ---------- ---------- ---------- ---------
Net cash provided by financing activities ......... - 68,600 4,600 (14,400) (23,990)
---------- ---------- ---------- ---------- ---------
NET (DECREASE) INCREASE IN CASH ..................... (49,565) 106,936 7,695 (74,915) 236,826
CASH AND CASH EQUIVALENTS, beginning of period 17,544 (32,021) 74,915 74,915 82,610
---------- ---------- ---------- ---------- ---------
CASH AND CASH EQUIVALENTS, end of period ............ $ (32,021) $ 74,915 $ 82,610 $ -- $ 319,436
========== ========== ========== ========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for-
Interest .......................................... $ 3,681 $ 10,438 $ 2,891 $ 1,524 $ 947
Income taxes ....................................... 11,474 - (1,238) -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
STONE'S SHOPS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Stone's Shops, Inc. (the Company) d/b/a Stone's Hallmark is a retailer of
contemporary collectibles, ornaments, figurines, lighthouses and lighted ceramic
houses from vendors, including Enesco, Boyds, Cast Art, Disney Classics,
Department 56, Seraphim Angels and Hallmark. Stone's Hallmark has been in the
contemporary collectibles business since 1979 and has stores located in Rockford
(4), Freeport and Rochelle, Illinois.
The Company's business is seasonal, with its highest levels occurring in its
first fiscal quarter. This period, which includes the Christmas selling season,
accounted for approximately 32.8 percent, 33.3 percent and 29.6 percent of the
Company's net sales for years ended November 30, 1994, 1995 and 1996,
respectively.
The Company and its shareholders intend to enter into a definitive agreement
with Collectibles USA, Inc. (Collectibles), pursuant to which all outstanding
shares of the Company's common stock will be exchanged for cash and shares of
Collectibles common stock concurrent with the consummation of the initial public
offering of the common stock of Collectibles.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
Merchandise Inventories
Merchandise inventories are stated at the lower of cost or market, determined by
the weighted average cost method.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization are
determined using the straight-line method based on the estimated useful life of
the respective asset. Leasehold improvements are amortized over the shorter of
the estimated useful life or the remaining lease term. Expenditures for major
renewals and betterments are capitalized while maintenance and repairs are
expensed. When property is retired or otherwise disposed of, the related cost
and accumulated depreciation are removed from the accounts and any resulting
gain or loss is reflected in the statements of operations.
Revenue Recognition
The Company recognizes revenue from in-store sales upon delivery of merchandise
to the customer and receipt of payment. Revenues from mail order sales are
recognized upon shipment to the customer and receipt of payment. Customer
deposits consist of collections on layaway sales. Layaways are recorded as
revenue upon receipt of final payment and delivery of the merchandise to the
customer.
Cost of Sales
Included in cost of sales are cost of merchandise sold and shipping costs.
Advertising Expenses
Advertising expenses are expensed in the month incurred. Advertising expenses
were $138,262, $145,412, $205,191 and $139,824 during the years ended November
30, 1994, 1995 and 1996 and the six months ended May 31, 1997, respectively.
F-34
<PAGE>
STONE'S SHOPS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, investments, accounts
payable and debt. The carrying amount of these financial instruments
approximates fair value due either to length of maturity or existence of
interest rates that approximate prevailing market rates unless otherwise
disclosed in these financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Interim Financial Information
The interim financial statements as of May 31, 1997, and for the six months
ended May 31, 1996 and 1997, are unaudited, and certain information and footnote
disclosures, normally included in financial statements prepared in accordance
with generally accepted accounting principles, have been omitted. In the opinion
of management, all adjustments, consisting only of normal recurring adjustments,
necessary to fairly present the financial position, results of operations and
cash flows with respect to the interim financial statements, have been included.
The results of operations for the interim periods are not necessarily indicative
of the results for the entire fiscal year.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED NOVEMBER 31,
USEFUL LIVES ----------------------------
(YEAR) 1995 1996
------------- ------------ -------------
<S> <C> <C> <C>
Furniture, fixtures and equipment ...... 5-7 $ 551,735 $ 635,770
Leasehold improvements .................. 5-7 163,511 165,719
Signs ................................. 5 15,477 15,477
Vehicles .............................. 3-5 94,378 72,073
---------- ----------
825,101 889,039
Less- Accumulated depreciation ......... (551,273) (602,202)
---------- ----------
$ 273,828 $ 286,837
========== ==========
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts payable and accrued liabilities consist of the following:
NOVEMBER 30,
----------------------------
1995 1996
------------- ------------
Accounts payable, trade ...... $ 1,034,257 $ 1,044,519
Accrued liabilities ......... 267,451 419,254
Taxes payable ............... 16,018 36,212
------------ ------------
$ 1,317,726 $ 1,499,985
============ ============
5. PAYABLE TO SHAREHOLDER AND LONG-TERM OBLIGATIONS:
Payable to Shareholder
The Company had borrowings from a shareholder totaling $11,000 and $30,000 at
November 30, 1995 and 1996, respectively. The borrowings are unsecured, bear no
interest and are payable upon demand.
F-35
<PAGE>
STONE'S SHOPS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Long-Term Obligations
The Company has an unsecured noninterest-bearing obligation to a landlord, which
is payable in monthly installments of $1,200 through November 1999.
Scheduled principal maturities of long-term obligations are as follows:
Year ending November 30,
1997 .................. $ 14,400
1998 .................. 14,400
1999 .................. 14,400
---------
$ 43,200
=========
6. INCOME TAXES:
The Company provides for income taxes under the asset and liability method which
provides the method for determining the appropriate asset and liability for
deferred taxes which are computed by applying applicable tax rates to temporary
(timing) differences. Therefore, expenses recorded for financial statement
purposes before they are deducted for tax purposes create temporary differences
which give rise to deferred tax assets. Expenses deductible for tax purposes
before they are recognized in the financial statements create temporary
differences which give rise to deferred tax liabilities.
Deferred income taxes are provided in recognition of temporary differences in
reporting certain transactions for financial reporting and income tax reporting
purposes.
The provision (benefit) for income taxes for the years ended November 30, 1994,
1995 and 1996, is as follows:
NOVEMBER 30,
-----------------------------------------
1994 1995 1996
-------------- ----------- ----------
Current ...... $ (38,738) $ 18,734 $ 15,407
Deferred ...... 185,105 109,367 178,534
---------- ---------- ----------
$ 146,367 $ 128,101 $ 193,941
========== ========== ==========
Actual income tax expense differs from income tax expense computed by applying
the U.S. federal statutory corporate tax rate of 34 percent to income before
income taxes as follows:
NOVEMBER 30,
-------------------------------
1994 1995 1996
--------- --------- ---------
Statutory federal rate ...................... 34.00% 34.00% 34.00%
Expenses not deductible for tax purposes .... 20.26 22.55 15.38
State income taxes ......................... 3.17 3.18 3.17
------- ------- -------
57.43% 59.73% 52.55%
======= ======= =======
F-36
<PAGE>
STONE'S SHOPS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
The significant components of the deferred tax assets and liabilities at
November 30, 1994, 1995 and 1996, are as follows:
NOVEMBER 30,
-----------------------------------------
1994 1995 1996
------------- -------------- ------------
Deferred tax assets-
Property and equipment ............ $ (3,123) $ (12,868) $ (16,369)
State taxes ........................ 9,333 14,135 21,974
---------- ---------- ----------
Total deferred tax asset ...... 6,210 1,267 5,605
---------- ---------- ----------
Deferred tax liabilities-
Inventory ........................ (209,385) (296,703) (468,284)
Accruals ........................ (9,380) (26,485) (37,776)
---------- ---------- ----------
Total deferred tax liabilities (218,765) (323,188) (506,060)
---------- ---------- ----------
Net deferred tax liabilities ......... $ (212,555) $ (321,921) $ (500,455)
========== ========== ==========
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. Management of the
Company believes the net deferred tax assets will be utilized in full based on
the nature of the assets, the Company's estimates of the timing of reversals of
temporary differences and the generation of taxable income before such
reversals.
7. COMMITMENTS AND CONTINGENCIES:
Lease Obligation
The Company leases its retail space under noncancelable leases that expire at
various dates through February 2004. The following represents future minimum
rental payments under these operating leases:
Year ending November 30,
1997 .................. $ 195,280
1998 .................. 223,279
1999 .................. 157,946
2000 .................. 138,946
Thereafter ............ 389,847
$1,105,298
===========
Litigation
The Company is subject to legal actions arising in the ordinary course of
business. Management does not believe that the outcome of any such legal action
would have a material adverse effect on the Company's financial position or
results of operations.
8. RELATED-PARTY TRANSACTIONS:
The Company leases certain of its retail space from a shareholder. Monthly lease
payments are approximately $2,000, which management believes approximates fair
market value.
F-37
<PAGE>
STONE'S SHOPS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
9. SIGNIFICANT SUPPLIERS:
During the years ended November 30, 1994, 1995 and 1996 three suppliers
accounted for 61% percent of total inventory purchases.
10. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
The Company and its shareholders have entered into a definitive agreement with
Collectibles providing for the acquisition of the Company by Collectibles.
Concurrent with the acquisition, the Company will enter into agreements with the
shareholders to lease retail and warehouse space used in the Company's
operations for a negotiated amount and term.
In connection with the acquisition, the Company will distribute certain assets
to the shareholders, consisting of automobiles with a total net carrying value
of approximately $29,851 as of November 30, 1996. Had these transactions been
recorded at November 30, 1996, the effect on the accompanying balance sheet
would be a decrease in assets of approximately $29,851 and shareholders' equity
of $29,851.
F-38
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Crystal Galleria, Inc. and Base, Inc.:
We have audited the accompanying combined balance sheets of Crystal Galleria,
Inc. and Base, Inc. (the Companies) (Nevada corporations), as of December 31,
1995 and 1996, and the related combined statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined 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 combined financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Companies, as of December 31, 1995 and 1996, and the results of their combined
operations and their combined cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 5, 1997
F-39
<PAGE>
CRYSTAL GALLERIA, INC. AND BASE, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1995 1996 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ................................................... $ 371,022 $ 165,745 $ 196,904
Accounts receivable, related party ..................... -- 33,204 44,616
Merchandise inventories ................................. 800,819 1,195,904 1,157,519
Prepaid expenses and other current assets ............... 156,921 121,710 50,978
----------- ----------- -----------
Total current assets ................................. 1,328,762 1,516,563 1,450,017
PROPERTY AND EQUIPMENT, net .............................. 415,492 655,857 633,807
----------- ----------- -----------
Total assets .......................................... $1,744,254 $2,172,420 $2,083,824
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Customer deposits ....................................... $ 3,203 $ 11,645 $ 13,152
Accounts payable and accrued liabilities ............... 566,660 431,186 231,447
Current maturities of long-term obligations ............ 287,093 473,101 467,149
Payable to stockholders ................................. 403,000 983,168 1,073,168
----------- ----------- -----------
Total current liabilities .............................. 1,259,956 1,899,100 1,784,916
LONG-TERM OBLIGATIONS, net of current maturities 147,635 117,190 114,014
----------- ----------- -----------
Total liabilities .................................... 1,407,591 2,016,290 1,898,930
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $10 par, 2,000 shares authorized, 800 shares
outstanding .......................................... 8,000 8,000 8,000
Retained earnings ....................................... 328,663 148,130 176,894
----------- ----------- -----------
Total stockholders' equity ........................... 336,663 156,130 184,894
----------- ----------- -----------
Total liabilities and stockholders' equity ............ $1,744,254 $2,172,420 $2,083,824
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-40
<PAGE>
CRYSTAL GALLERIA, INC. AND BASE, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------- --------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES .................. $2,503,075 $2,794,361 $3,727,285 $778,315 $999,437
COST OF SALES ............ 1,187,898 1,333,177 1,784,916 380,992 469,239
----------- ----------- ----------- --------- ---------
Gross profit ............ 1,315,177 1,461,184 1,942,369 397,323 530,198
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ... 730,906 875,180 1,564,229 337,963 423,865
----------- ----------- ----------- --------- ---------
Income from operations 584,271 586,004 378,140 59,360 106,333
OTHER EXPENSE:
Interest expense ......... 38,596 58,337 111,389 11,651 37,569
Other, net ............... -- -- 12,284 12,284 -
----------- ----------- ----------- --------- ---------
NET INCOME ............... $ 545,675 $ 527,667 $ 254,467 $ 35,425 $ 68,764
=========== =========== =========== ========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-41
<PAGE>
CRYSTAL GALLERIA, INC. AND BASE, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK TOTAL
------------------ RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
-------- ------- ----------- ------------
BALANCE AT DECEMBER 31, 1993 .... 400 $4,000 $ 159,821 $ 163,821
Net income ...................... -- -- 545,675 545,675
Distributions ................... -- -- (288,500) (288,500)
---- ------- ---------- ----------
BALANCE AT DECEMBER 31, 1994 .... 400 4,000 416,996 420,996
Issuance of common stock ....... 400 4,000 -- 4,000
Net income ...................... -- -- 527,667 527,667
Distributions ................... -- -- (616,000) (616,000)
---- ------- ---------- ----------
BALANCE AT DECEMBER 31, 1995 .... 800 8,000 328,663 336,663
Net income ...................... -- -- 254,467 254,467
Distributions ................... -- -- (435,000) (435,000)
---- ------- ---------- ----------
BALANCE AT DECEMBER 31, 1996 .... 800 8,000 148,130 156,130
Net income (unaudited) .......... -- -- 68,764 68,764
Distributions (unaudited) ....... -- -- (40,000) (40,000)
---- ------- ---------- ----------
BALANCE AT MARCH 31, 1997
(unaudited) ................... 800 $8,000 $ 176,894 $ 184,894
==== ======= ========== ==========
The accompanying notes are an integral part of these combined financial
statements.
F-42
<PAGE>
CRYSTAL GALLERIA, INC. AND BASE, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------- THREE MONTHS ENDED
MARCH 31,
-------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income ....................................... $ 545,675 $ 527,667 $ 254,467 $ 35,425 $ 68,764
Adjustments to reconcile net income to net cash
provided by (used in) operating activities- ...
Depreciation and amortization .................. 24,845 28,201 74,818 15,818 22,050
Changes in operating assets and liabilities- ...
Accounts receivable, related parties ......... (8,543) 13,638 (33,204) (3,298) (11,412)
Merchandise inventories ........................ (104,774) (218,350) (395,085) (48,624) 38,385
Prepaid expenses and other current assets ...... (1,737) (110,361) 35,211 66,545 70,732
Customer deposits .............................. 6,333 (4,356) 8,442 4,291 1,507
Accounts payable and accrued liabilities ...... (109,183) 426,441 (135,474) (371,223) (199,737)
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) operating
activities ................................. 352,616 662,880 (190,825) (301,066) (9,711)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............... (11,918) (281,936) (315,183) -- --
Proceeds from sale of property and equipment ...... 2,441 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net cash used in investing activities ......... (9,477) (281,936) (315,183) -- --
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term obligations
and payable to stockholders ..................... -- 506,000 830,168 185,000 111,465
Principal payments on payable to stockholders and
long-term obligations ........................... (56,055) (35,367) (94,437) (12,673) (30,595)
Proceeds from issuance of common stock ............ -- 4,000 -- -- --
Distributions to stockholders ..................... (288,500) (616,000) (435,000) (100,000) (40,000)
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) financing
activities ................................. (344,555) (141,367) 300,731 72,327 40,870
---------- ---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH .................. (1,416) 239,577 (205,277) (228,739) 31,159
CASH, beginning of period ........................ 132,861 131,445 371,022 371,022 165,745
---------- ---------- ---------- ---------- ----------
CASH, end of period .............................. $ 131,445 $ 371,022 $ 165,745 $ 142,283 $ 196,904
========== ========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest ......... $ 67,459 $ 42,703 $ 37,915 $ 14,789 $ 19,036
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-43
<PAGE>
CRYSTAL GALLERIA, INC. AND BASE, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Crystal Galleria, Inc. and Base, Inc. (the Companies) are retailers of a wide
range of contemporary collectibles such as crystal, porcelain figurines and art
glass from vendors, including Swarovski, Baccarat, Waterford, Lalique, Lladro,
and Armani. Crystal Galleria has been in operation since 1992 and has three
mall-based stores of which two are located in the Forum Shops at Caesar's and
the Tower Shops at Stratosphere in Las Vegas, Nevada and one is located in The
Tysons Corner Center in McLean, Virginia.
The Companies' business is seasonal, with its highest levels occurring in its
fourth quarter. This period, which includes the Christmas selling season,
accounted for approximately 29 percent, 34 percent and 36 percent of the
Companies' net sales for the years ended December 31, 1994, 1995 and 1996,
respectively.
The Companies and their stockholders intend to enter into a definitive agreement
with Collectibles USA, Inc. (Collectibles), pursuant to which all outstanding
shares of the Companies' common stock will be exchanged for cash and shares of
Collectibles common stock concurrent with the consummation of the initial public
offering of the common stock of Collectibles.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The combined financial statements include the accounts and the results of
operations of the Companies. All significant intercompany transactions and
balances have been eliminated in combination.
Merchandise Inventories
Merchandise inventories are stated at the lower of cost or market, determined by
the weighted average cost method.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is determined using
the straight-line method based on the estimated useful life of the respective
asset. Leasehold improvements are amortized over the shorter of the estimated
useful life or the remaining lease term. Expenditures for major renewals and
betterments are capitalized while maintenance and repairs are expensed. When
property is retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the accounts and any resulting gain or loss is
reflected in the combined statements of operations.
Revenue Recognition
The Companies recognize revenue upon delivery of merchandise to the customer and
receipt of payment. Customer deposits consist of collections on layaway sales.
Upon receipt of final payment, the item is delivered to the customer and the
sale is recorded as revenue.
Cost of Sales
Included in cost of sales are costs of merchandise sold and shipping costs.
Advertising Expenses
Advertising expenses are expensed in the month incurred. Advertising expenses
were $41,989, $51,544 and $39,369 during the years ended December 31, 1994, 1995
and 1996, respectively and approximately $10,248 for the three months ended
March 31, 1997.
F-44
<PAGE>
CRYSTAL GALLERIA, INC. AND BASE, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Income Taxes
For income tax purposes, the Companies and their stockholders have elected to be
treated as an S Corporation under the Internal Revenue Code and a similar
section in the state code. In accordance with the provisions of such elections,
the Companies' income and losses were passed through to its stockholders;
accordingly, no provision for income taxes has been recorded.
Fair Value of Financial Instruments
The Companies' financial instruments consist of cash, accounts receivable,
accounts payable and debt. The carrying amount of these financial instruments
approximates fair value due either to length of maturity or existence of
interest rates that approximate prevailing market rates.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Interim Financial Information
The interim financial statements as of March 31, 1997, and for the three months
ended March 31, 1996 and 1997, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results of the entire fiscal year.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
ESTIMATED DECEMBER 31,
USEFUL LIVES --------------------------
(YEARS) 1995 1996
------------- ------------- ------------
Furniture, fixtures and equipment ... 5 $ 67,680 $ 88,368
Leasehold improvements ............... 10 468,367 762,862
---------- ----------
536,047 851,230
Less- Accumulated depreciation ...... (120,555) (195,373)
---------- ----------
$ 415,492 $ 655,857
========== ==========
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts payable and accrued liabilities consist of the following:
DECEMBER 31,
----------------------
1995 1996
---------- ---------
Accounts payable, trade ...... $286,056 $204,276
Other ........................ 280,604 226,910
--------- ---------
$566,660 $431,186
========= =========
F-45
<PAGE>
CRYSTAL GALLERIA, INC. AND BASE, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
5. PAYABLE TO STOCKHOLDERS AND LONG-TERM OBLIGATIONS:
Payable to Stockholders
The Companies have borrowings from stockholders totaling $403,000, $983,168, and
$1,073,168 at December 31, 1995 and 1996 and March 31, 1997, respectively. The
borrowings are unsecured, bear interest at 9 percent and are payable on demand.
Interest is payable quarterly.
Long-Term Obligations
The Companies have two notes payable with a financial institution which are
payable on demand or, if no demand is made, due in monthly principal and
interest installments, each approximately $5,000, through June 2001 and July
2000, respectively, for each note. The interest rates for the notes payable are
10 percent and 10.75 percent, respectively. The notes payable are collateralized
by real property and personal guarantees of the stockholders as well as
substantially all assets of the Companies. The notes contain certain financial
covenants and restrictions. As of December 31, 1996, the Companies were not in
compliance with a certain financial covenant. However, subsequent to year end,
the Company obtained a waiver for the covenant.
The Companies have a note payable with a financial institution, due in monthly
principal and interest installments of $4,055 through June 2000. The interest
rate of the loan varies monthly at 2.75 percent over the lowest New York City
prime rate and was 11.25 percent at December 31, 1995, 11.0 percent at December
31, 1996, and 11.25 percent at March 31, 1997. In the event interest rates
increase enough to cause a principal balance to exist on the due date, a single
installment for the remaining principal balance will be due.
The note is guaranteed by the Small Business Administration for 85 percent of
the loan. The note is also collateralized by real property and personal
guarantees of the stockholders as well as substantially all assets of the
Companies. The agreement also restricts the Companies from paying dividends or
making certain other capital changes.
Scheduled principal maturities of long-term obligations are as follows:
Year ending December 31,
1997 .................. $473,101
1998 .................. 48,660
1999 .................. 48,660
2000 .................. 19,870
---------
$590,291
=========
F-46
<PAGE>
CRYSTAL GALLERIA, INC. AND BASE, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES:
Lease Obligations
The Companies lease retail facilities under operating leases that expire at
various dates through 2006. Rent expense for the years ended December 31, 1994,
1995 and 1996, was approximately $195,000, $234,000 and $432,000, respectively
and approximately $134,000 for the three months ended March 31, 1997. Certain
leases provide for contingent rentals based on sales levels and require payment
for all or part of the applicable real estate taxes, common area maintenance and
certain other allowable expenses. Included in the rent expense amounts is
contingent rent of approximately $118,000, $79,000 and $85,000 for the years
ended December 31, 1994, 1995 and 1996, respectively and approximately $21,000
for the three months ended March 31, 1997. Future minimum lease payments under
noncancelable operating leases are as follows:
Year ending December 31,
1997 .................. $ 433,532
1998 .................. 435,192
1999 .................. 459,043
2000 .................. 473,278
Thereafter ............ 2,139,977
-----------
$3,941,022
===========
Litigation
The Companies are subject to legal actions arising in the ordinary course of
business. Management does not believe that the outcome of any such legal action
would have a material adverse effect on the Companies' financial position or
results of operations.
7. RELATED-PARTY TRANSACTIONS:
The Companies have a receivable of approximately $33,000 as of December 31, 1996
and approximately $45,000 as of March 31, 1997, from a company that is wholly
owned by one of the stockholders of the Companies.
8. SIGNIFICANT SUPPLIERS:
During the years ended December 31, 1994 and 1995, one supplier accounted for 11
percent of total inventory purchases, and during the year ended December 31,
1996, two suppliers accounted for 29 percent of total inventory purchases.
F-47
<PAGE>
CRYSTAL GALLERIA, INC. AND BASE, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
9. EVENT SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
The Companies and their stockholders have entered into a definitive agreement
with Collectibles providing for the acquisition of the Companies by
Collectibles.
In connection with the acquisition, the Companies will distribute certain assets
to the stockholders, consisting of automobiles with a total net carrying value
of approximately $5,653 as of December 31, 1996. Additionally, the Companies
will make a cash distribution of approximately $250,000 prior to the acquisition
which represents the Companies' estimated S Corporation accumulated adjustment
account. Had these transactions been recorded at December 31, 1996, the effect
on the accompanying balance sheet would be a decrease in assets of approximately
$5,653 an increase in liabilities of approximately $250,000, and stockholders'
equity of $255,653. The Companies anticipate funding this distribution through
additional borrowings.
F-48
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To DKG Enterprises, Inc.:
We have audited the accompanying balance sheets of DKG Enterprises, Inc. (an
Oklahoma corporation), as of March 31, 1996 and 1997, and the related statements
of operations, shareholders' equity and cash flows for each of the three years
in the period ended March 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of DKG Enterprises, Inc., as of
March 31, 1996 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended March 31, 1997, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 29, 1997
F-49
<PAGE>
DKG ENTERPRISES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1996 1997
------------ -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ................................................ $ 3,160 $ 11,274
Accounts receivable ................................. -- 11,593
Merchandise inventories .............................. 1,749,476 2,200,281
Receivable from shareholder ........................... -- 21,504
Prepaid expenses and other current assets ............ 9,133 15,833
----------- -----------
Total current assets .............................. 1,761,769 2,260,485
PROPERTY AND EQUIPMENT, net ........................... 112,512 212,417
OTHER ASSETS .......................................... 3,225 3,225
----------- -----------
Total assets ....................................... $1,877,506 $2,476,127
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Customer deposits .................................... $ 14,753 $ 127,800
Accounts payable and accrued liabilities ............ 340,719 561,634
Federal income taxes payable ........................ 29,414 119,939
Line of credit ....................................... 395,000 410,000
Current maturities of long-term obligations ......... 31,459 32,989
----------- -----------
Total current liabilities ........................... 811,345 1,252,362
LONG-TERM OBLIGATIONS, net of current maturities ...... 380,329 346,989
DEFERRED INCOME TAXES ................................. 76,539 8,103
----------- -----------
Total liabilities ................................. 1,268,213 1,607,454
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $1.00 par, 25,000 shares authorized,
500 shares outstanding .............................. 500 500
Retained earnings .................................... 608,793 868,173
----------- -----------
Total shareholders' equity ........................ 609,293 868,673
----------- -----------
Total liabilities and shareholders' equity ......... $1,877,506 $2,476,127
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-50
<PAGE>
DKG ENTERPRISES, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED MARCH 31,
------------------------------------------
1995 1996 1997
------------ ------------ ------------
NET SALES ........................ $2,562,024 $2,865,249 $3,726,332
COST OF SALES ..................... 1,371,039 1,491,639 1,732,631
---------- ---------- ----------
Gross profit .................. 1,190,985 1,373,610 1,993,701
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ........................ 989,561 1,077,684 1,521,669
---------- ---------- ----------
Income from operations ...... 201,424 295,926 472,032
OTHER INCOME (EXPENSE):
Interest expense ............... (40,846) (57,511) (82,311)
Other, net ..................... 7,730 10,367 37,703
---------- ---------- ----------
INCOME BEFORE INCOME TAXES ...... 168,308 248,782 427,424
PROVISION FOR INCOME TAXES ...... 66,240 96,139 168,044
---------- ---------- ----------
NET INCOME ........................ $ 102,068 $ 152,643 $ 259,380
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE>
DKG ENTERPRISES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK TOTAL
------------------ RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
-------- ------- ---------- -------------
BALANCE AT MARCH 31, 1994 ...... 500 $500 $ 354,082 $ 354,582
Net income ..................... -- -- 102,068 102,068
---- ----- ---------- ----------
BALANCE AT MARCH 31, 1995 ...... 500 500 456,150 456,650
Net income ..................... -- -- 152,643 152,643
---- ----- ---------- ----------
BALANCE AT MARCH 31, 1996 ...... 500 500 608,793 609,293
Net income ..................... -- -- 259,380 259,380
---- ----- ---------- ----------
BALANCE AT MARCH 31, 1997 ...... 500 $500 $ 868,173 $ 868,673
==== ===== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE>
DKG ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------
1995 1996 1997
------------ ------------ --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................... $ 102,068 $ 152,643 $ 353,864
Adjustments to reconcile net income to net cash provided by
(used in) operating activities-
Depreciation ................................................ 36,123 41,330 48,284
Gain on sale of assets .................................... -- -- (5,684)
Conversion of interest to debt .............................. 8,690 -- --
Changes in operating assets and liabilities-
Accounts receivable ....................................... -- -- (17,161)
Merchandise inventories .................................... (485,778) (326,323) (450,805)
Prepaid expenses and other current assets .................. 586 (6,632) (37,753)
Customer deposits .......................................... 54,856 (40,103) 113,047
Accounts payable, accrued liabilities and federal income
taxes payable ............................................. 190,598 (88,133) 228,189
Deferred income taxes .................................... 721 32,880 (64,552)
---------- ---------- ------------
Net cash provided by (used in) operating activities ...... (92,136) (234,338) 167,429
---------- ---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ........................... (78,987) (67,012) (164,438)
Proceeds from sale of property and equipment .................. -- -- 21,933
---------- ---------- ------------
Net cash used in investing activities ..................... (78,987) (67,012) (142,505)
---------- ---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term obligations .................. (810,000) (507,450) (1,447,810)
Proceeds from issuance of long-term obligations and borrowings
on line of credit .......................................... 981,548 809,000 1,431,000
---------- ---------- ------------
Net cash provided by (used in) financing activities ...... 171,548 301,550 (16,810)
---------- ---------- ------------
NET INCREASE IN CASH .......................................... 425 200 8,114
CASH, beginning of period .................................... 2,535 2,960 3,160
---------- ---------- ------------
CASH, end of period .......................................... $ 2,960 $ 3,160 $ 11,274
========== ========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for-
Interest ................................................... $ 40,846 $ 51,511 $ 82,311
Income taxes ............................................. 100,339 50,084 47,325
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE>
DKG ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
DKG Enterprises, Inc. (the Company), d/b/a North Pole City is a retailer and
marketer of Christmas and other contemporary collectibles such as ornaments,
lighted houses and figurines from vendors, including Department 56, Enesco,
Giuseppe Armani and Disney. North Pole City has been in operation since 1984. It
has one "superstore" of approximately 15,000 square feet of retail space and a
free-standing retail outlet of approximately 1,500 square feet both located in
Oklahoma City, Oklahoma.
The Company's business is seasonal, with its highest levels occurring in its
third fiscal quarter. This period, which includes the Christmas selling season,
accounted for approximately 68 percent, 63 percent, and 67 percent of the
Company's net sales for years ended March 31, 1995 and 1996 and for the nine
months ended December 31, 1996, respectively.
The Company and its shareholders intend to enter into a definitive agreement
with Collectibles USA, Inc. (Collectibles), pursuant to which all outstanding
shares of the Company's common stock will be exchanged for cash and shares of
Collectibles common stock concurrent with the consummation of the initial public
offering of the common stock of Collectibles.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Merchandise Inventories
Merchandise inventories are stated at the lower of cost or market, determined by
the weighted average cost method.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization are
determined using the straight-line method based on the estimated useful life of
the respective asset. Leasehold improvements are amortized over the shorter of
the estimated useful life or the remaining lease term. Expenditures for major
renewals and betterments are capitalized while maintenance and repairs are
expensed. When property is retired or otherwise disposed of, the related cost
and accumulated depreciation are removed from the accounts and any resulting
gain or loss is reflected in the statements of operations.
Revenue Recognition
The Company recognizes revenue from in-store sales upon delivery of merchandise
to the customer and receipt of payment. Revenues from mail order sales are
recognized upon shipment to the customer and receipt of payment. Customer
deposits consist of collections on layaway sales. Layaways are recorded as
revenue upon receipt of final payment and delivery of the merchandise to the
customer.
Cost of Sales
Included in cost of sales are cost of merchandise sold and shipping costs.
Advertising Expenses
Advertising expenses are expensed in the month incurred, subject to reduction by
reimbursement from vendors. Advertising expenses, net of vendor reimbursements,
were approximately $106,000, $112,000 and $180,000 during the years ended March
31, 1995, 1996 and 1997, respectively.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, accounts receivable,
accounts payable and debt. The carrying amount of these financial instruments
approximates fair value due either to length of maturity or existence of
interest rates that approximate prevailing market rates unless otherwise
disclosed in these financial statements.
F-54
<PAGE>
DKG ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
ESTIMATED
USEFUL
LIVES
(YEARS) MARCH 31,
----------- --------------------------
1996 1997
------------ ------------
Furniture, fixtures and equipment .... 5 $ 297,553 $ 348,001
Leasehold improvements ................ 5 38,773 150,222
Vehicles ............................ 5 37,999 24,290
---------- ----------
374,325 522,513
Less- Accumulated depreciation ....... (261,813) (310,097)
---------- ----------
$ 112,512 $ 212,416
========== ==========
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts payable and accrued liabilities consist of the following:
MARCH 31,
------------------------
1996 1997
----------- ----------
Accounts payable, trade ............ $ 138,602 $ 248,502
Accrued liabilities .................. 132,000 132,000
Sales taxes and other payables ...... 70,117 181,132
---------- ----------
$ 340,719 561,634
========== ==========
5. LINE OF CREDIT AND LONG-TERM OBLIGATIONS:
Line of Credit
The Company has a line of credit with a bank, under which it may borrow up to
$700,000. The line of credit previously had an interest rate at the prime rate
plus 1.50 percent (9.75 percent at March 31, 1996) until May 1996 when renewed.
The renewed line of credit bears interest at the prime rate plus 1 percent (9.50
percent at March 31, 1997). Borrowings under the line of credit were $395,000
and $410,000 at March 31, 1996, and 1997, respectively. The line of credit is
secured by the Company's assets and the personal guarantee of a shareholder.
Long-Term Obligations
The Company has a note payable to a bank with a balance of approximately
$412,000 and $380,000 at March 31, 1996, and 1997, respectively. It matures on
February 27, 2005, and bears interest at the prime rate plus 1.25 percent (9.75
percent at March 31, 1996, and 1997). Interest and principal payments of
approximately $6,000 are due monthly. The note is secured by the Company's
assets and the personal guarantee of a shareholder.
F-55
<PAGE>
DKG ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
At March 31, 1997, future principal payments of long-term obligations are as
follows:
Year ending March 31,
1998 ............... 32,989
1999 ............... 38,774
2000 ............... 42,728
2001 ............... 47,085
Thereafter ......... 218,402
---------
$379,978
=========
6. INCOME TAXES:
The Company provides for income taxes under the asset and liability method which
provides the method for determining the appropriate asset and liability for
deferred taxes which are computed by applying applicable tax rates to temporary
(timing) differences. Therefore, expenses recorded for financial statement
purposes before they are deducted for tax purposes create temporary differences
which give rise to deferred tax assets. Expenses deductible for tax purposes
before they are recognized in the financial statements create temporary
differences which give rise to deferred tax liabilities.
Deferred income taxes are provided in recognition of temporary differences in
reporting certain transactions for financial reporting and income tax reporting
purposes.
The provision (benefit) for income taxes for the years ended March 31, 1995,
1996 and 1997 is as follows:
YEARS ENDED MARCH 31,
--------------------------------------
1995 1996 1997
---------- ---------- ------------
Current ...... $ 65,519 $ 63,259 $ 236,479
Deferred ...... 721 32,880 (68,435)
--------- --------- ---------
$ 66,240 $ 96,139 $ 168,044
========= ========= =========
Actual income tax expense differs from income tax expense computed by applying
the U.S. federal statutory corporate tax rate of 34 percent to income before
income taxes as follows:
YEARS ENDED MARCH 31,
---------------------------------
1995 1996 1997
---------- ---------- ---------
Statutory federal rate ..................... 34.00% 34.00% 34.00%
Expenses not deductible for tax purposes ... 1.25 .61 1.21
State income taxes ........................ 4.11 4.03 4.10
------- ------- -------
39.36% 38.64% 39.31%
======= ======= =======
F-56
<PAGE>
DKG ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
The significant components of the deferred tax assets and liabilities at March
31, 1995, 1996, and 1997 are as follows:
MARCH 31,
------------------------------------
1995 1996 1997
----------- ----------- ----------
Deferred tax assets-
Accruals .............................. 14,257 16,206 32,157
State taxes ........................... 2,346 4,113 435
---------- --------- ----------
Total deferred tax assets ......... 16,603 20,319 32,592
---------- --------- ----------
Deferred tax liabilities-
Inventory ........................... (56,854) (87,198) (22,814)
Property and equipment ............... $ (3,408) $ (9,660) $ (17,881)
---------- --------- ----------
Total deferred tax liabilities ...... (60,262) (96,858) (40,695)
---------- --------- ----------
Net deferred tax liabilities ............ $ (43,659) $ (76,539) $ (8,103)
========== ========= ==========
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. Management of the
Company believes the net deferred tax assets will be utilized in full based on
the nature of the assets, the Company's estimates of the timing of reversals of
temporary differences and the generation of taxable income before such
reversals.
7. COMMITMENTS AND CONTINGENCIES:
Lease Obligation
The Company leases its rental space and warehouse from a shareholder and leases
an automobile under operating leases that expire in February 1997, December 1997
and January 1999, respectively. Rental expense for the years ended March 31,
1995, 1996, and 1997 was approximately $108,000, $125,000 and $134,000,
respectively. The following represents future minimum rental payments under
noncancelable operating leases:
Year ending March 31,
1998 ............... $50,964
1999 ............... 10,220
--------
$61,184
========
Litigation
The Company is subject to legal actions arising in the ordinary course of
business. Management does not believe that the outcome of any such legal action
would have a material adverse effect on the Company's financial position or
results of operations.
8. RELATED-PARTY TRANSACTIONS:
The Company leases its rental space from a shareholder. Monthly lease payments
are approximately $14,115, which approximates fair market value.
F-57
<PAGE>
DKG ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
9. SIGNIFICANT SUPPLIERS:
During the years ended March 31, 1995, 1996, and 1997 one supplier accounted for
26 percent and two suppliers accounted for 32 percent and 35 percent,
respectively, of total inventory purchases.
10. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
The Company and its shareholders have entered into a definitive agreement with
Collectibles providing for the acquisition of the Company by Collectibles.
Concurrent with the acquisition, the Company will enter into agreements with the
shareholders to lease retail and warehouse space used in the Company's
operations for a negotiated amount and term.
F-58
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Elwell Stores, Inc.:
We have audited the accompanying balance sheets of Elwell Stores, Inc. (a
Florida corporation), as of December 31, 1995 and 1996, and the related
statements of operations, shareholders' deficit and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Elwell Stores, Inc., as of
December 31, 1995 and 1996, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 5, 1997
F-59
<PAGE>
ELWELL STORES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1995 1996 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ............................................................ $ 69,406 $ 113,084 $ 106,299
Merchandise inventories .......................................... 510,354 853,733 871,147
Prepaid expenses and other current assets ........................ 3,957 2,064 1,512
---------- ---------- ----------
Total current assets .......................................... 583,717 968,881 978,958
PROPERTY AND EQUIPMENT, net ....................................... 144,884 122,756 117,353
OTHER ASSETS ...................................................... 7,197 5,375 8,342
---------- ---------- ----------
Total assets ................................................... $ 735,798 $1,097,012 $1,104,653
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Customer deposits ................................................ $ -- $ 10,021 $ 12,492
Accounts payable and accrued liabilities ........................ 416,863 634,367 587,607
Current maturities of long-term obligations ..................... 72,377 153,303 305,246
---------- ---------- ----------
Total current liabilities .................................... 489,240 797,691 905,345
LONG-TERM OBLIGATIONS, net of current maturities .................. 353,730 368,333 352,491
---------- ---------- ----------
Total liabilities ............................................. 842,970 1,166,024 1,257,836
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' (DEFICIT) EQUITY:
Common stock, $5 par, 100 shares authorized and outstanding 500 500 500
Additional paid-in capital ....................................... 99,275 99,275 99,275
Deficit ......................................................... (206,947) (168,787) (252,958)
---------- ---------- ----------
Total shareholders' (deficit) equity ........................... (107,172) (69,012) (153,183)
---------- ---------- ----------
Total liabilities and shareholders' (deficit) equity ......... $ 735,798 $1,097,012 $1,104,653
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE>
ELWELL STORES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------- -------------------------
1995 1996 1996 1997
------------ ------------ ---------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES ........................ $1,838,788 $2,492,809 $557,651 $ 581,159
COST OF SALES ..................... 1,101,758 1,301,468 284,484 322,780
----------- ----------- -------- ---------
Gross profit .................. 737,030 1,191,341 273,167 258,379
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ........................ 628,543 934,764 204,129 262,120
----------- ----------- -------- ---------
Income from operations ......... 108,487 256,577 69,038 (3,741)
OTHER (INCOME) EXPENSE:
Interest expense ............... 41,058 48,826 11,627 10,921
Other, net ..................... 95 11,520 (60) (90)
----------- ----------- -------- ---------
NET INCOME ........................ $ 67,334 $ 196,231 $57,471 $ (14,572)
=========== =========== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-61
<PAGE>
ELWELL STORES, INC.
STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------------- PAID-IN SHAREHOLDERS'
SHARES AMOUNTS CAPITAL DEFICIT (DEFICIT) EQUITY
-------- --------- ------------ ------------ -----------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 ...... 100 $500 $99,275 $(174,805) $ (75,030)
Net income ........................ -- -- -- 67,334 67,334
Distributions ..................... -- -- -- (99,476) (99,476)
---- ----- -------- ---------- ----------
BALANCE AT DECEMBER 31, 1995 ...... 100 500 99,275 (206,947) (107,172)
Net income ..................... -- -- -- 196,231 196,231
Distributions ..................... -- -- -- (158,071) (158,071)
---- ----- -------- ---------- ----------
BALANCE AT DECEMBER 31, 1996 ...... 100 500 99,275 (168,787) (69,012)
Net loss (unaudited) ............ -- -- -- (14,572) (14,572)
Distributions (unaudited) ......... -- -- -- (69,599) (69,599)
---- ----- -------- ---------- ----------
BALANCE AT MARCH 31, 1997
(unaudited) ..................... 100 $500 $99,275 $(252,958) $ (153,183)
==== ===== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE>
ELWELL STORES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------- THREE MONTHS ENDED
MARCH 31,
--------------------------
1995 1996 1996 1997
------------- ------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .......................................... $ 67,334 $ 196,231 $ 57,471 $ (14,572)
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation and amortization ........................... 31,283 39,168 5,437 5,403
Loss on sale of assets .................................... -- 11,880 -- --
Changes in operating assets and liabilities- ............
Merchandise inventories ................................. (113,546) (343,379) (21,956) (17,414)
Prepaid expenses and other current assets ............... (1,541) 1,893 (1,836) 552
Customer deposits ....................................... -- 10,021 -- 2,471
Accounts payable and accrued liabilities ............... 120,475 217,504 (75,138) (46,760)
Other assets ............................................. (1,707) 1,822 (854) (2,967)
---------- ---------- --------- ---------
Net cash provided by operating activities ............... 102,298 135,140 (36,876) (73,287)
---------- ---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ........................ (120,475) (63,420) 7,479 --
Proceeds from sale of property and equipment ............... 15,884 34,500 -- --
---------- ---------- --------- ---------
Net cash used in investing activities .................. (104,591) (28,920) 7,479 --
---------- ---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term obligations ............ 453,666 590,009 57,157 150,000
Principal payments on long-term obligations ............... (314,834) (494,480) (13,413) (13,899)
Distributions to shareholders .............................. (99,476) (158,071) (29,441) (69,599)
---------- ---------- --------- ---------
Net cash provided by (used in) financing activities ... 39,356 (62,542) 14,303 66,502
---------- ---------- --------- ---------
NET INCREASE (DECREASE) IN CASH .............................. 37,063 43,678 (15,094) (6,785)
CASH, beginning of period .................................... 32,343 69,406 69,406 113,084
---------- ---------- --------- ---------
CASH, end of period .......................................... $ 69,406 $ 113,084 $ 54,312 $ 106,299
========== ========== ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest .................. $ 41,058 $ 48,826 $ 11,717 $ 10,921
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-63
<PAGE>
ELWELL STORES, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Elwell Stores, Inc. (the Company), d/b/a The Reef Hallmark Shop is a retailer
and marketer of contemporary collectibles, including ornaments, figurines,
lighthouses, lighted ceramic houses and crystals from vendors, including Enesco,
Swarovski, Disney, Department 56 and Hallmark. The Company has been in operation
since 1959 and has one strip mall-based store located in West Palm Beach,
Florida.
The Company's business is seasonal, with its highest levels of sales occurring
in its fourth fiscal quarter. This period, which includes the Christmas selling
season, accounted for approximately 34 percent and 31 percent of the Company's
net sales for the years ended December 31, 1995 and 1996, respectively.
The Company and its shareholders intend to enter into a definitive agreement
with Collectibles USA, Inc. (Collectibles), pursuant to which all outstanding
shares of the Company's common stock will be exchanged for cash and shares of
Collectibles common stock concurrent with the consummation of the initial public
offering of the common stock of Collectibles.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Merchandise Inventories
Merchandise inventories are stated at the lower of cost or market, determined by
the weighted average cost method.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is determined using an
accelerated method based on the estimated useful life of the respective asset.
Leasehold improvements are amortized over the shorter of the estimated useful
life or the remaining lease term. Expenditures for major renewals and
betterments are capitalized while maintenance and repairs are expensed. When
property is retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the accounts and any resulting gain or loss is
reflected in the statements of operations.
Revenue Recognition
The Company recognizes revenue from in-store sales upon delivery of merchandise
to the customer and receipt of payment. Revenues from mail order sales are
recognized upon shipment to the customer and receipt of payment. Customer
deposits are collections on layaway sales. Upon receipt of final payment, the
item is delivered to the customer and the sale is recorded as revenue.
Cost of Sales
Included in cost of sales are costs of merchandise sold and shipping costs.
Advertising Expenses
Advertising expenses are expensed in the month incurred, subject to reduction by
reimbursement from vendors. Advertising expenses, net of vendor reimbursements,
were approximately $71,000, $113,000 and $27,000 during the years ended December
31, 1995 and 1996 and the three months ended March 31, 1997, respectively.
Income Taxes
For income tax purposes, the Company and its shareholders have elected to be
treated as an S Corporation under the Internal Revenue Code and a similar
section in the state code. In accordance with the provisions of such elections,
the Company's income and losses were passed through to its shareholders;
accordingly, no provision for income taxes has been recorded.
F-64
<PAGE>
ELWELL STORES, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, accounts payable and debt.
The carrying amount of these financial instruments approximates fair value due
either to length of maturity or existence of interest rates that approximate
prevailing market rates.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Interim Financial Information
The interim financial statements as of March 31, 1997, and for the three months
ended March 31, 1996 and 1997, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
ESTIMATED
USEFUL LIVES
(YEARS) 1995 1996
------------- ----------- ------------
Furniture, fixtures and equipment 7 $ 82,963 $ 116,046
Leasehold improvements ............ 14 60,442 60,442
Vehicles ........................... 5 74,263 47,832
--------- ----------
217,668 224,320
Less- Accumulated depreciation ... (72,784) (101,564)
--------- ----------
$144,884 $ 122,756
========= ==========
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts payable and accrued liabilities consist of the following:
1995 1996
---------- ---------
Accounts payable, trade ...... $332,130 $512,982
Accrued liabilities ......... 66,000 99,000
Other ........................ 18,733 22,385
--------- ---------
$416,863 $634,367
========= =========
F-65
<PAGE>
ELWELL STORES, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
5. LONG-TERM OBLIGATIONS:
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
1995 1996
----------- -------------
<S> <C> <C>
Bank term loan due in monthly installments, including interest at prime plus
2% (11.25% at December 31, 1995), repaid in 1996 ........................... $368,269 $ --
Bank term loans due in monthly installments through November 2000,
including interest ranging from 7.5% to 10% ................................. 57,838 39,027
Note payable to bank, interest at 10.15%, principal and interest due
September 1997 ............................................................ -- 99,650
Bank term loan due in monthly installments, including interest at 8.25%,
through April 2004 ......................................................... -- 382,959
--------- ----------
426,107 521,636
Less- Current maturities ................................................... (72,377) (153,303)
--------- ----------
Long-term obligations, net of current maturities ........................ $353,730 $ 368,333
========= ==========
</TABLE>
The bank term loans are collateralized by personal guarantees of the
shareholders as well as the Company's property and equipment, and inventory.
The note payable due September 1997 is unsecured.
The Company maintains a $180,000 line of credit which expires in July 1997.
There were no borrowings on the line of credit as of December 31, 1995 and 1996.
The Company had borrowings of $150,000 on the line of credit as of March 31,
1997. The borrowings are collateralized by the personal guarantees of the
Company's shareholders.
Scheduled principal maturities of long-term obligations as of December 31, 1996,
are as follows:
Year ending December 31,
1997 .................. $153,303
1998 .................. 57,049
1999 .................. 53,909
2000 .................. 54,497
Thereafter ............ 202,878
---------
$521,636
=========
6. COMMITMENTS AND CONTINGENCIES:
Lease Obligations
The Company leases retail facilities under an operating lease, expiring on July
31, 2002. Additionally, the Company maintains an operating lease on an
automobile for an officer and shareholder of the Company. Rent expense for the
years ended December 31, 1995 and 1996, was approximately $72,000 and $94,000,
respectively. Future minimum lease payments under noncancelable operating leases
are as follows.
Year ending December 31,
1997 .................. $ 94,134
1998 .................. 96,360
1999 .................. 93,765
2000 .................. 97,515
Thereafter ............ 101,417
---------
$483,191
=========
F-66
<PAGE>
ELWELL STORES, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Litigation
The Company is subject to legal actions arising in the ordinary course of
business. Management does not believe that the outcome of any such legal action
would have a material adverse effect on the Company's financial position or
results of operations.
7. RELATED-PARTY TRANSACTIONS:
The Company leases warehouse space from a partnership made up of the Company's
shareholders and third parties. There are two warehouse spaces currently being
leased from the partnership, and both are on a month-to-month lease. Monthly
lease payments are approximately $1,300, which approximates fair market value.
8. SIGNIFICANT SUPPLIERS:
During the years ended December 31, 1995 and 1996, three suppliers accounted for
68 percent of total inventory purchases.
9. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
The Company and its shareholders have entered into a definitive agreement with
Collectibles providing for the acquisition of the Company by Collectibles.
Concurrent with the acquisition, the Company will enter into agreements with the
shareholders to lease warehouse space used in the Company's operations for a
negotiated amount and term.
In connection with the acquisition, the Company will distribute certain assets
to the shareholders, consisting of automobiles with a total net carrying value
of approximately $20,592 as of December 31, 1996. Had these transactions been
recorded at December 31, 1996, the effect on the accompanying balance sheet
would be a decrease in assets of approximately $44,485, liabilities of $23,893
and shareholders' equity of $20,592.
F-67
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Animation U.S.A., Inc.:
We have audited the accompanying balance sheet of Animation U.S.A., Inc. (a
Washington corporation), as of December 31, 1996, and the related statements of
operations, shareholders' equity 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 generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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 Animation U.S.A., Inc., as of
December 31, 1996, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 5, 1997
F-68
<PAGE>
ANIMATION U.S.A., INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
-------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ............................................................... $ 4,824 $ 56,727
Accounts receivable ................................................ -- 16,360
Merchandise inventories .......................................... 321,653 282,881
Prepaid expenses and other current assets ........................ 6,994 6,994
Deferred tax asset ................................................ 25,319 30,213
---------- ----------
Total current assets ............................................. 358,790 393,175
PROPERTY AND EQUIPMENT, net ....................................... 72,176 69,162
---------- ----------
Total assets ................................................... $ 430,966 $ 462,337
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Customer deposits ................................................ $ 13,775 $ 22,384
Accounts payable and accrued liabilities ........................... 231,714 231,526
Federal income taxes payable ....................................... 32,835 34,722
Line of credit ................................................... 72,494 87,014
Current maturities of long-term obligations ........................ 38,454 38,454
---------- ----------
Total current liabilities ....................................... 389,272 414,100
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Class A common stock, no par, 1,000,000 shares authorized, 196,840
shares
outstanding ...................................................... 85,200 85,200
Class B common stock, no par, 500,000 shares authorized and
outstanding ...................................................... 107,500 107,500
Deficit ............................................................ (151,006) (144,463)
---------- ----------
Total shareholders' equity ....................................... 41,694 48,237
---------- ----------
Total liabilities and shareholders' equity ..................... $ 430,966 $ 462,337
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-69
<PAGE>
ANIMATION U.S.A., INC.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ---------------------
1996 1996 1997
------------ ---------- --------
(UNAUDITED)
NET SALES ............................... $1,716,410 $448,828 $340,760
COST OF SALES ............................ 840,283 205,297 136,622
----------- -------- --------
Gross profit ............................ 876,127 243,531 204,138
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ............................... 845,100 201,745 187,556
----------- -------- --------
Income from operations ................ 31,027 41,786 16,582
OTHER EXPENSE:
Interest expense ...................... 9,349 1,749 2,685
----------- -------- --------
INCOME BEFORE INCOME TAXES ............. 21,678 40,037 13,897
PROVISION (BENEFIT) FOR INCOME TAXES .... 8,944 (800) 5,268
----------- -------- --------
NET INCOME ............................... 12,734 $40,837 8,629
=========== ======== ========
The accompanying notes are an integral part of these financial statements.
F-70
<PAGE>
ANIMATION U.S.A., INC.
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK TOTAL
------------------- -------------------- SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT DEFICIT EQUITY
--------- --------- --------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 ......... 190,000 $51,000 500,000 $107,500 $(154,776) $ 3,724
Conversion of shareholder loan to Class
A common stock ..................... 6,840 34,200 -- -- -- 34,200
Net income ........................... -- -- -- -- 12,734 12,734
Distributions ........................ -- -- -- -- (8,964) (8,964)
-------- -------- -------- --------- ---------- --------
BALANCE AT DECEMBER 31, 1996 ......... 196,840 85,200 500,000 107,500 (151,006) 41,694
Net income (unaudited) ............... -- -- -- -- 8,629 8,629
Distributions (unaudited) ............ -- -- -- -- (2,086) (2,086)
-------- -------- -------- --------- ---------- --------
BALANCE AT MARCH 31, 1997
(unaudited) ........................... 196,840 $85,200 500,000 $107,500 $(144,463) $ 48,237
======== ======== ======== ========= ========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-71
<PAGE>
ANIMATION U.S.A., INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, -------------------------
1996 1996 1997
------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................................. $ 12,734 $ 40,837 $ 8,629
Adjustments to reconcile net income to net cash used in operating activities-
Depreciation ............................................................... 12,057 3,014 3,014
Changes in operating assets and liabilities-
Accounts receivable ...................................................... -- (8,842) (16,360)
Merchandise inventories ................................................... (19,765) (22,114) 38,772
Deferred tax asset ...................................................... (6,932) -- (4,894)
Customer deposits ......................................................... (19,754) 21,995 8,609
Accounts payable and accrued liabilities ................................. (55,882) (49,850) (188)
Federal income taxes payable ............................................. 6,691 -- 1,887
--------- --------- ---------
Net cash (used in), provided by operating activities ..................... (70,851) (14,960) 39,469
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .......................................... (28,862) -- --
--------- --------- ---------
Net cash used in investing activities .................................... (28,862) -- --
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on line of credit and current maturities of long-term
obligations ............................................................... (18,860) (6,118) --
Proceeds from issuance of line of credit and current obligations ............ 46,454 -- 14,520
Distributions to shareholders ................................................ (8,964) (2,745) (2,086)
--------- --------- ---------
Net cash provided by financing activities ................................. 18,630 (8,863) 12,434
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH ............................................. (81,083) (23,823) 51,903
CASH, beginning of period ................................................... 85,907 85,907 4,824
--------- --------- ---------
CASH, end of period ......................................................... $ 4,824 $ 62,084 $ 56,727
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Conversion of shareholder loan to Class A common stock ..................... $ 34,200 $ -- $ --
Cash paid during the period for-
Interest .................................................................. 9,349 1,352 1,888
Income taxes ............................................................... 2,253 -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-72
<PAGE>
ANIMATION U.S.A., INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Animation U.S.A., Inc. (the Company), is a retail and wholesale marketer of
animation art such as vintage original production cels, limited edition cels and
sericels. Animation USA has been in operation since 1990 and has two
free-standing galleries, of which one is located in Seattle, Washington and one
is located in San Francisco, California.
Although the Company's business is not seasonal, sales fluctuations between
quarters do occur and are largely the result of the timing and frequency of
in-store artists signings and other promotional events.
The Company and its shareholders intend to enter into a definitive agreement
with Collectibles USA, Inc. (Collectibles), pursuant to which all outstanding
shares of the Company's common stock will be exchanged for cash and shares of
Collectibles common stock concurrent with the consummation of the initial public
offering of the common stock of Collectibles.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Merchandise Inventories
Merchandise inventories are stated at the lower of cost or market, determined by
the specific identification method.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is determined using
the straight-line method based on the estimated useful life of the respective
asset. Expenditures for major renewals and betterments are capitalized while
maintenance and repairs are expensed. When property is retired or otherwise
disposed of, the related cost and accumulated depreciation are removed from the
accounts and any resulting gain or loss is reflected in the statements of
operations.
Revenue Recognition
The Company recognizes revenue from sales upon delivery of merchandise to the
customer and receipt of payment. Customer deposits consist of collections on
layaway sales. Upon receipt of final payment, the item is delivered to the
customer and the sale is recorded as revenue.
Cost of Sales
Included in cost of sales are cost of merchandise sold, framing and shipping
costs.
Advertising Expenses
Advertising expenses are expensed in the month incurred and were approximately
$23,000 for the year ended December 31, 1996 and $7,600 for the three months
ended March 31, 1997.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, accounts payable and debt.
The carrying amount of these financial instruments approximates fair value due
either to length of maturity or existence of interest rates that approximate
prevailing market rates unless otherwise disclosed in these financial
statements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-73
<PAGE>
ANIMATION U.S.A., INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Interim Financial Information
The interim financial statements as of March 31, 1997, and for the three months
ended March 31, 1996 and 1997, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
3. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 1996, consist of the following:
ESTIMATED
USEFUL LIVES DECEMBER 31,
(YEARS) 1996
-------------- -------------
Vehicle ................................. 7 $ 25,707
Furniture, fixtures and equipment ...... 5-10 74,158
Leasehold improvements .................. 10 18,935
---------
118,800
Less-Accumulated depreciation ......... (46,624)
---------
$ 72,176
=========
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts payable and accrued liabilities at December 31, 1996, consist of the
following:
DECEMBER 31,
1996
-------------
Accounts payable, trade ...... $ 69,482
Accrued compensation ......... 150,000
Other ........................ 12,232
---------
$231,714
=========
5. LINE OF CREDIT AND CURRENT MATURITIES OF LONG-TERM OBLIGATIONS:
Line of Credit
The Company has a line of credit with a bank, under which it may borrow up to
$180,000. The line of credit bears interest at 10.75 percent. Borrowings under
the line of credit were $72,494 and $87,014 at December 31, 1996, and March 31,
1997, respectively. The line of credit is secured by the Company's inventory.
Current Maturities of Long-Term Obligations
The Company has two obligations to a bank of $22,000 and $16,454 bearing
interest at 10.75% and 8.49%, respectively, maturing through July 2002.
F-74
<PAGE>
ANIMATION U.S.A., INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
6. INCOME TAXES:
The Company provides for income taxes under the asset and liability method which
provides the method for determining the appropriate asset and liability for
deferred taxes which are computed by applying applicable tax rates to temporary
(timing) differences. Therefore, expenses recorded for financial statement
purposes before they are deducted for tax purposes create temporary differences
which give rise to deferred tax assets. Expenses deductible for tax purposes
before they are recognized in the financial statements create temporary
differences which give rise to deferred tax liabilities.
Deferred income taxes are provided in recognition of temporary differences in
reporting certain transactions for financial reporting and income tax reporting
purposes.
The provision for income taxes for the year ended December 31, 1996, is as
follows:
Current ...... $8,944
Deferred ...... --
-------
$8,944
=======
Actual income tax expense differs from income tax expense computed by applying
the U.S. federal statutory corporate tax rate of 34 percent to income before
income taxes as follows:
Statutory federal rate ........................ 34.0%
Expenses not deductible for tax purposes ...... 5.0
State income taxes ........................... 2.3
------
41.3%
======
The significant components of the deferred tax asset at December 31, 1996, are
as follows:
Deferred tax asset-
Accrued liabilities ............ $14,421
Other ........................ 10,898
--------
Total deferred tax asset ...... $25,319
========
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. Management of the
Company believes the net deferred tax asset will be utilized in full based on
the nature of the asset, the Company's estimates of the timing of reversals of
temporary differences and the generation of taxable income before such
reversals.
F-75
<PAGE>
ANIMATION U.S.A., INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES:
Lease Obligations
The Company leases retail facilities and computer equipment under operating
leases that expire through December 1999. Rent expense during 1996 was
approximately $133,000. Future minimum lease payments under noncancelable
operating leases are as follows:
Year ending December 31,
1997 .................. $127,720
1998 .................. 41,372
1999 .................. 7,161
---------
$176,253
=========
Litigation
The Company is subject to legal actions arising in the ordinary course of
business. Management does not believe that the outcome of any such legal action
would have a material adverse effect on the Company's financial position or
results of operations.
Distribution Agreement
On February 1, 1997, the Company entered into a 15-month distribution agreement
to purchase and distribute animated art products with a major studio supplier.
Stock Option Plan
Effective January 1, 1992, the Company adopted the Animation, U.S.A., Inc.
Employee Incentive Stock Option Plan (the Plan) providing for the grant of
options to officers and directors of the Company to purchase up to 50,000 shares
of its common stock. The Plan provides that options be granted at exercise
prices greater than or equal to the market value on the date the option is
granted as determined by the board of directors. As of December 31, 1996, no
options have been granted under the Plan. The Plan is subject to termination
upon the occurrence of certain events including a change in control as defined
by the Plan.
8. SIGNIFICANT SUPPLIERS:
During the year ended December 31, 1996, four suppliers accounted for 58 percent
of total inventory purchases.
9. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
The Company and its shareholders have entered into a definitive agreement with
Collectibles providing for the acquisition of the Company by Collectibles.
In connection with the acquisition, the Company will distribute certain assets
to the shareholders, consisting of automobiles net of distributed liabilities,
with a total net carrying value of approximately $8,407 as of December 31, 1996.
Had these transactions been recorded at December 31, 1996, the effect on the
accompanying balance sheet would be a decrease in liabilities of $13,954 and
shareholders' equity of $8,407.
F-76
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Filmart Productions Inc.:
We have audited the accompanying balance sheets of Filmart Productions Inc. (a
New York corporation) as of December 31, 1995 and 1996, and the related
statements of operations, shareholders' equity and cash flows for each of the
two years in the period ended December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Filmart Productions Inc. as of
December 31, 1995 and 1996, and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 5, 1997
F-77
<PAGE>
FILMART PRODUCTIONS INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1995 1996 1997
----------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ................................................ $ 29,981 $ 76,758 $ 2,319
Accounts receivable ................................. 17,073 13,116 20,202
Barter receivables .................................... 8,788 199,930 208,113
Merchandise inventories .............................. 396,298 375,258 377,850
Prepaid expenses and other current assets ............ 1,412 37,153 38,663
Prepaid advertising from barter transactions ......... 60,000 285,000 341,250
Advances to shareholder .............................. -- 176,722 182,726
---------- ------------ -----------
Total current assets .............................. 513,552 1,163,937 1,171,123
PROPERTY AND EQUIPMENT, net ........................... 52,897 36,521 32,465
OTHER ASSETS .......................................... 5,750 7,172 7,922
---------- ------------ -----------
Total assets ....................................... $ 572,199 $ 1,207,630 1,211,510
========== ============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Customer deposits .................................... $ 53,619 $ 32,778 $ 7,838
Accounts payable and accrued liabilities ............ 75,503 129,747 147,822
Payable to shareholder .............................. 109,976 25,444 25,444
---------- ------------ -----------
Total current liabilities ........................... 239,098 187,969 181,104
---------- ------------ -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par, 200 shares authorized, 100 shares
outstanding ....................................... -- -- --
Retained earnings .................................... 333,101 1,019,661 1,030,406
---------- ------------ -----------
Total shareholders' equity ........................ 333,101 1,019,661 1,030,406
---------- ------------ -----------
Total liabilities and shareholders' equity ......... $ 572,199 $ 1,207,630 $1,211,510
========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-78
<PAGE>
FILMART PRODUCTIONS INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH
YEAR ENDED DECEMBER 31, 31,
--------------------------- -----------------------
1995 1996 1996 1997
------------- ------------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES ........................ $ 1,053,089 $ 1,445,848 $263,170 $ 231,456
COST OF SALES .................. 511,369 497,920 101,939 113,731
----------- ----------- -------- ---------
Gross profit .................. 541,720 947,928 161,231 117,725
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ......... 492,577 539,178 104,483 163,604
----------- ----------- -------- ---------
Income from operations ...... 49,143 408,750 56,748 (45,879)
OTHER INCOME (EXPENSE):
Interest (expense) income ...... (4,619) (1,056) (264) 374
Other, net ..................... 74,350 278,866 56,250 56,250
----------- ----------- -------- ---------
NET INCOME ..................... $ 118,874 $ 686,560 $112,734 $ 10,745
=========== =========== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-79
<PAGE>
FILMART PRODUCTIONS INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- RETAINED SHAREHOLDERS'
SHARES AMOUNTS EARNINGS EARNINGS
-------- --------- ------------ --------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 ............... 100 $-- $ 222,080 $ 222,080
Capital contribution from forgiveness of loan
obligation by related party ............... -- -- 43,000 43,000
Net income ................................. -- -- 118,874 118,874
Distributions .............................. -- -- (50,853) (50,853)
---- ---- ---------- ----------
BALANCE AT DECEMBER 31, 1995 ............... 100 -- 333,101 333,101
Net income ................................. -- -- 686,560 686,560
BALANCE AT DECEMBER 31, 1996 ............... 100 -- 1,019,661 1,019,661
Net income (unaudited) ..................... -- -- 10,745 10,745
---- ---- ---------- ----------
BALANCE AT MARCH 31, 1997 (unaudited) ...... 100 $-- $1,030,406 $1,030,406
==== ==== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-80
<PAGE>
FILMART PRODUCTIONS INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH
YEAR ENDED DECEMBER 31, 31,
------------------------ -----------------------
1995 1996 1996 1997
----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income .......................................... $ 118,874 $ 686,560 $ 112,734 $ 10,745
Adjustments to reconcile net income to net cash
provided by operating activities- ..................
Depreciation and amortization ..................... 17,919 16,226 3,375 4,056
Changes in operating assets and liabilities- ......
Accounts receivable .............................. (17,073) 3,957 16,617 (7,086)
Barter receivables ................................. (8,788) (191,142) (7,037) (8,183)
Merchandise inventories ........................... (18,935) 21,040 (15,140) (2,592)
Prepaid expenses and other current assets ......... (1,412) (35,741) -- (1,510)
Prepaid advertising from barter transactions ...... (60,000) (225,000) (56,250) (56,250)
Advances to shareholder ........................... -- (176,722) (38,232) (6,004)
Customer deposits ................................. 53,619 (20,841) (3,424) (24,940)
Accounts payable and accrued liabilities ......... (30,947) 54,244 (26,122) 18,075
Other assets ....................................... (5,350) (1,422) (1,372) (750)
--------- ---------- --------- ---------
Net cash provided by (used in) operating
activities .................................... 47,907 131,159 (14,851) (74,439)
--------- ---------- --------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and equipment .................. (15,989) (150) -- --
Proceeds from sale of property and equipment ......... -- 300 3,842 --
--------- ---------- --------- ---------
Net cash provided by (used in) investing
activities .................................... (15,989) 150 3,842 --
--------- ---------- --------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of payable to shareholder 40,625 -- -- --
Principal payments on payable to shareholder ......... (20,624) (84,532) (18,972) --
Distributions to shareholders ........................ (50,853) -- -- --
--------- ---------- --------- ---------
Net cash used in financing activities ............ (30,852) (84,532) (18,972) --
--------- ---------- --------- ---------
NET INCREASE (DECREASE) IN CASH ........................ 1,066 46,777 (29,981) (74,439)
CASH, beginning of period .............................. 28,915 29,981 29,981 76,758
--------- ---------- --------- ---------
CASH, end of period .................................... $ 29,981 $ 76,758 $ -- $ 2,319
========= ========== ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Capital contribution from forgiveness of obligation
from related party ................................. $ 43,000 $ -- $ -- $ --
Cash paid during the period for interest ............ 4,619 1,056 264 135
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-81
<PAGE>
FILMART PRODUCTIONS INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Filmart Productions Inc. (the Company) d/b/a Cartoon World, d/b/a Filmart
Galleries and d/b/a Animation Art Resources is a retail marketer of animation
art such as vintage original production cels, limited edition cels and sericels.
Filmart has been in operation since 1991 and has two free-standing galleries, of
which one is located in Philadelphia, Pennsylvania and one is located in
Huntington, New York.
Effective January 1, 1996, the Company acquired Animation Collection, Inc. d/b/a
Animation Art Resources. The acquisition was accounted for as a pooling of
interests, and the assets, liabilities and results of operations of Animation
Art Resources have been included in the accompanying financial statements for
all years presented.
Although the Company's business is not seasonal, sales fluctuations between
quarters do occur and are largely the result of the timing and frequency of
in-store artists signings and other promotional events.
The Company and its shareholders intend to enter into a definitive agreement
with Collectibles USA, Inc. (Collectibles), pursuant to which all outstanding
shares of the Company's common stock will be exchanged for cash and shares of
Collectibles common stock concurrent with the consummation of the initial public
offering of the common stock of Collectibles.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Merchandise Inventories
Merchandise inventories are stated at the lower of cost or market, determined by
the specific identification method. Additionally, Filmart holds inventory on
consignment. Consigned inventory was valued at approximately $214,000, $364,000
and $390,000 as of December 31, 1995, 1996 and the three months ended March 31,
1997, respectively. Inventory held on consignment is excluded from Filmart's
inventory.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is determined using
the straight-line method based on the estimated useful life of the respective
asset. Expenditures for major renewals and betterments are capitalized while
maintenance and repairs are expensed. When property is retired or otherwise
disposed of, the related cost and accumulated depreciation are removed from the
accounts and any resulting gain or loss is reflected in the statements of
operations.
Revenue Recognition
The Company recognizes revenue from sales upon delivery of merchandise to the
customer and receipt of payment. Customer deposits consist of collections on
layaway sales. Upon receipt of final payment, the item is delivered to the
customer and the sale is recorded as revenue.
Barter Transactions
The Company is a member of several barter companies. Within each barter company,
the Company trades artwork for various goods and services from other barter
company members. Barter transactions involving artwork for various goods and
services are valued at the market value of the goods or services received. The
Company had $32,085, $248,030 and $86,495 of art sales through the barter
companies and received $28,441, $37,128 and $10,681 of goods and services
through the barter companies during the years ended December 31, 1995 and 1996,
and the three months ended March 31, 1997, respectively. As of December 31,
1995, 1996, and the three months ended March 31, 1997 the Company had barter
receivables of $8,788, $199,930 and $208,000, respectively.
F-82
<PAGE>
FILMART PRODUCTIONS INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
During 1995, the Company entered into a two-year agreement with a third party to
provide consulting services in exchange for advertising. During 1995 and 1996
and the three months ended March 31, 1997, the Company recognized $75,000,
$225,000 and $56,000, respectively, of consulting revenue as other income. At
December 31, 1995 and 1996 and March 31, 1997, the Company had prepaid
advertising expenses of $60,000, $285,000 and $341,000, respectively, related to
this agreement. The right to receive advertising under this agreement begins to
expire in 2000. The agreement provides for an automatic one-year extension
beginning in 1997.
Cost of Sales
Included in cost of sales are cost of merchandise sold, framing and shipping
costs.
Advertising Expenses
Advertising expenses are expensed in the month incurred. Advertising expenses
were approximately $74,000, $50,000 and $32,000 during the years ended December
31, 1995 and 1996 and the three months ended March 31, 1997, respectively.
Income Taxes
For income tax purposes, the Company and its shareholders have elected to be
treated as an S Corporation under the Internal Revenue Code and a similar
section in the state code. In accordance with the provisions of such elections,
the Company's income and losses were passed through to its shareholders;
accordingly, no provision for income taxes has been recorded.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, accounts receivable,
accounts payable and debt. The carrying amount of these financial instruments
approximates fair value due either to length of maturity or existence of
interest rates that approximate prevailing market rates.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Interim Financial Information
The interim financial statements as of March 31, 1997, and for the three months
ended March 31, 1996 and 1997, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
F-83
<PAGE>
FILMART PRODUCTIONS INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
ESTIMATED
USEFUL LIVES
(YEARS) 1995 1996
------------- ---------- -----------
Furniture, fixtures and equipment .... 5-7 $ 93,102 $ 92,951
Less- Accumulated depreciation ....... (40,205) (56,430)
--------- ---------
$ 52,897 $ 36,521
========= =========
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts payable and accrued liabilities consist of the following:
1995 1996
---------- ----------
Accounts payable, trade ...... $ 44,279 $ 113,466
Taxes payable ............... 11,251 6,354
Other ........................ 19,973 9,927
--------- ----------
$ 75,503 $ 129,747
========= ==========
5. PAYABLE TO SHAREHOLDER:
The Company had borrowings from a shareholder totaling $109,976 and $25,444 at
December 31, 1995 and 1996, respectively. The borrowings are unsecured,
interest-bearing and payable upon demand. The borrowings accrue interest at 4
percent annually. At December 31, 1995 and 1996, accrued interest on the
borrowings was $4,619 and $1,056, respectively.
6. COMMITMENTS AND CONTINGENCIES:
Lease Obligations
The Company leases retail facilities under operating leases that expire April
1999. Rent expense for the years ended December 31, 1994, 1995 and 1996, was
approximately $59,000, $59,000 and $68,000, respectively. Future minimum lease
payments under noncancelable operating leases are as follows:
Year ending December 31,
1997 .................. $ 47,328
1998 .................. 49,128
1999 .................. 16,576
----------
$ 113,032
==========
Litigation
The Company is subject to legal actions arising in the ordinary course of
business. Management does not believe that the outcome of any such legal action
would have a material adverse effect on the Company's financial position or
results of operations.
Distribution Agreements
The Company maintains various distribution agreements with major studio
suppliers to purchase and distribute animated art. Some agreements contain
minimum annual purchase requirements which the Company had fulfilled as of
December 31, 1995 and 1996, respectively.
F-84
<PAGE>
FILMART PRODUCTIONS INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
7. RELATED-PARTY TRANSACTIONS:
A significant shareholder of Collectibles has placed $50,195 on deposit with the
Company as of December 31, 1995, for the purchase of art. As of December 31,
1996, there were no amounts on deposit from the shareholder of Collectibles.
The Company had a note payable for $43,000 which bore interest at 7 percent to a
relative of a majority shareholder. In 1995, the note was converted to a note
payable by the majority shareholder, and the $43,000 was reclassified as a
capital contribution.
8. SALES TO SIGNIFICANT CUSTOMERS:
During 1996, 14 percent of the Company's net sales was to one customer. During
1994 and 1995, no customer accounted for more than 10 percent of total sales.
9. EVENT SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
The Company and its shareholders have entered into a definitive agreement with
Collectibles providing for the acquisition of the Company by Collectibles.
Prior to the acquisition, the Company will make a cash distribution of
approximately $900,000 prior to the acquisition which represents the Company's
estimated S Corporation accumulated adjustment account. Had this transaction
been recorded at December 31, 1996, the effect on the accompanying balance sheet
would be an increase in liabilities of $900,000 and a decrease in shareholders'
equity of $900,000. The Company anticipates funding this distribution through
borrowings.
F-85
<PAGE>
- ------------------------------------- -------------------------------------
NO DEALER, SALESPERSON OR OTHER
PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY
REPRESENTATION IN CONNECTION WITH
THIS OFFERING OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR 2,700,000 SHARES
REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS COLLECTIBLES USA, INC.
PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF OR THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE SUCH DATE. COMMON STOCK
------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary ........... 3
Risk Factors ................. 10
The Company .................... 18
Use of Proceeds .............. 20 -------------
Dividend Policy .............. 20
Dilution ....................... 21
Capitalization ................. 22 PROSPECTUS
Selected Financial Data ........ 23
Management's Discussion and
Analysis of Financial -------------
Condition and Results of
Operations................... 25
Business ....................... 39
Management .................... 49
Certain Transactions ........... 58
Principal Stockholders ........ 62
Description of Capital Stock .. 63
Shares Eligible for Future Sale 66
Underwriting ................. 68
Legal Matters ................. 70
Experts ....................... 70
Additional Information ........ 70
Index to Financial Statements .. F-1
------------------ LADENBURG THALMANN & CO. INC.
UNTIL _______, 1997 (25 DAYS AFTER
THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION,
MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR , 1997
SUBSCRIPTIONS.
- ------------------------------------- -------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses (other than underwriting
compensation expected to be incurred) in connection with the offering described
in this Registration Statement. All of such amounts (except the SEC Registration
Fee, the NASD Filing Fee and the Nasdaq National Market Inclusion Fee) are
estimated.
SEC Registration Fee ................................. $ 11,291
NASD Filing Fee .................................... 4,226
Nasdaq National Market Inclusion Fee ............... *
Blue Sky Fees and Expenses ........................... *
Printing and Engraving Costs ........................ *
Legal Fees and Expenses .............................. *
Accounting Fees and Expenses ........................ *
Transfer Agent and Registrar Fees and Expenses ...... 10,000
Miscellaneous ....................................... *
--------
Total ............................................. $ *
========
- ----------
* To be completed by amendment.
ITEM 14. Indemnification of Directors and Officers.
The Company's by-laws provide that the Company shall indemnify, to the
fullest extent permitted by Section 145 of the Delaware General Corporation Law,
as amended from time to time, all persons whom it may indemnify pursuant
thereto.
Section 145 of the Delaware General Corporation Law permits a corporation,
under specified circumstances, to indemnify its directors, officers, employees
or agents against expenses (including attorney's fees), judgments, fines and
amounts paid in settlements actually and reasonably incurred by them in
connection with any action (other than an action by or in the right of the
corporation), suit or proceeding brought by third parties by reason of the fact
that they were or are directors, officers, employees or agents of the
corporation, if such directors, officers, employees or agents acted in good
faith and in a manner they reasonably believed to be in or not opposed to the
best interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe their conduct was unlawful. In a
derivative action (i.e., one by or in the right of the corporation),
indemnification may be made only for expenses (including attorney's fees)
actually and reasonably incurred by persons who are or were directors, officers,
employees or agents of the corporation in connection with the defense or
settlement of an action or suit, and only with respect to any matter as to which
they shall have acted in good faith and in a manner they reasonably believed to
be in or not opposed to the best interests of the corporation, except that no
indemnification shall be made if such person shall have been adjudged liable to
the corporation, unless and only to the extent that the Court of Chancery or the
court in which the action or suit was brought shall determine upon application
that the defendant directors, officers, employees or agents are fairly and
reasonably entitled to indemnity for such expenses despite such adjudication of
liability.
Article Seventh of the Company's charter provides that the Company's
directors will not be personally liable to the Company or its stockholders for
monetary damages resulting from breaches of their fiduciary duty as directors
except (a) for any breach of the duty of loyalty to the Company or its
stockholders, (b) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (c) under Section 174 of
the Delaware General Corporation Law, which makes directors liable for unlawful
dividends or unlawful stock repurchases or redemptions or (d) for transactions
from which directors derive improper personal benefit.
II-1
<PAGE>
The Company will enter into indemnification agreements with its directors,
pursuant to which it has agreed to pay certain expenses, including attorneys'
fees, judgments, fines and amounts paid in settlement incurred by such directors
in connection with certain actions, suits or proceedings. These agreements
require directors to repay the amount of any expenses advanced if it shall be
determined that they shall not have been entitled to indemnification.
Under Section 6 of the Underwriting Agreement, the Underwriters are
obligated, under certain circumstances, to indemnify officers, directors and
controlling persons of the Company against certain liabilities under the
Securities Act.
ITEM 15. Recent Sales of Unregistered Securities.
The following information relates to securities of the Company issued or
sold within the past three years which were not registered under the Securities
Act of 1933, as amended (the "Securities Act"):
In June 1996, pursuant to subscription agreements, RGR Financial Group, LLC
("RGR") received 700 shares (711,622 shares as adjusted for the Stock Split (as
defined hereinafter)) of Common Stock and each of Michael A. Baker and Capstone
Partners, LLC ("Capstone") received 150 shares (152,490 shares as adjusted for
the Stock Split) of Common Stock, in each case for $.10 per pre-Stock Split
share.
In November 1996, the Company sold 171.729 shares (174,580 shares as
adjusted for the Stock Split) of Common Stock at $.01 per pre-Stock Split share
to David L. Yankey.
In August 1996, Collectibles Enterprises Funding Corp., a Delaware
corporation ("CEFC"), an affiliate of the Company, issued, in two transactions,
$855,000 principal amount of 5.0% convertible subordinated notes due December
31, 1997 (the "1996 Notes"). $300,000 of the 1996 Notes automatically convert
upon consummation of the Offering either (i) into Common Stock having a value,
at the initial public offering price, equal to 2.5 times the principal amount of
the note or (ii) into cash in the principal amount of the note plus Common Stock
having a value, at the initial public offering price, equal to 1.5 times the
principal amount of the note. $555,000 of the 1996 Notes automatically convert
either (i) into Common Stock having a value, at the initial public offering
price, equal to 1.66 times the principal amount of the note or (ii) into cash in
the principal amount of the note plus Common Stock having a value, at the
initial public offering price, equal to .66 times the principal amount of the
note.
In June 1997, CEFC issued $400,000 principal amount of 5.0% convertible
subordinated notes due December 31, 1997 (the "1997 Notes," and together with
the 1996 Notes, the "Notes"). The 1997 Notes automatically convert upon
consummation of the Offering either (i) into Common Stock having a value, at the
initial public offering price, equal to 1.66 times the principal amount of the
1997 Note or (ii) into cash in the principal amount of the 1997 Note plus Common
Stock having a value, at the initial public offering price, equal to .66 times
the principal amount of the note.
In August 1996, the Company sold a $300,000 5% note due December 31, 1997
(the "CEFC Note-1") to CEFC which is owned by RGR and Capstone. Upon
consummation of the Offering, the principal amount of the CEFC Note-1 will
become due and payable immediately. No interest is payable on the CEFC Note-1 in
the event the Offering is consummated. The Company intends to repay the CEFC
Note-1 with a portion of the proceeds of the Offering.
In August 1996, the Company also sold a $555,000 5% note due December 31,
1997 (the "CEFC Note-2") to CEFC. Upon consummation of the Offering, the
principal amount of the CEFC Note-2 will become due and payable immediately. No
interest is payable on the CEFC Note-2 in the event the Offering is consummated.
The Company intends to repay the CEFC Note-2 with a portion of the proceeds of
the Offering.
In June 1997, the Company sold a $400,000 5% note due December 31, 1997
(the "CEFC Note-3," and, together with the CEFC Note-1 and the CEFC Note-2, the
"CEFC Notes") to CEFC. Upon consummation of the Offering, the principal amount
of the CEFC Note-3 will become due and payable immediately. No interest is
payable on the CEFC Note-3 in the event the Offering is consummated. The Company
intends to repay the CEFC Note-3 with a portion of the proceeds of the Offering.
II-2
<PAGE>
The proceeds of the CEFC Notes were used by the Company to pay various
expenses incurred in connection with its efforts to complete the Acquisitions
and effect the Offering.
In May 1997, Collectibles USA issued 20,000 shares of its Series A
Convertible Preferred Stock, liquidation value $50 per share, for an aggregate
consideration of $1.0 million, the proceeds of which were used by the Company to
pay various expenses incurred in connection with its efforts to complete the
Acquisitions and effect the Offering. Pursuant to the terms of the Series A
Convertible Preferred Stock, upon the consummation of the Offering, the Series A
Convertible Preferred Stock will automatically convert either (i) into that
number of shares of Common Stock, determined by (X) dividing the liquidation
value by (Y) an amount equal to 60% of the initial public offering price or, at
the option of the holder of the Series A Convertible Preferred Stock, (ii) into
that number of shares of Common Stock determined by (X) dividing the liquidation
value by (Y) an amount equal to 150% of the initial public offering price and
cash in an amount equal to the liquidation value. All of the holders of the
Series A Convertible Preferred Stock have elected conversion option (ii) in the
preceding sentence. As a result, upon consummation of the Offering, the Series A
Convertible Preferred Stock will convert into approximately $1.0 million in cash
and 61,741 shares of Common Stock. The Company intends to pay the required cash
amounts in connection with the conversion of the Series A Convertible Preferred
Stock, with a portion of the proceeds of the Offering.
Effective May 12, 1997, the Company effected a 1,016.604-to-1 stock split
(the "Stock Split") on outstanding shares of Common Stock as of May 11, 1997.
Effective May 12, 1997, the Company issued and sold 1,016,602 shares of
Restricted Common Stock to RGR, Capstone and Michael A. Baker in exchange for
1,016,602 shares of Common Stock.
Each of these transactions was completed without registration of the
relevant security under the Securities Act in reliance upon the exemptions
provided by Section 4(2) of the Securities Act for transactions not involving a
sale or a public offering.
ITEM 16. Exhibits and Financial Statement Schedules.
(A) EXHIBITS
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- --------------------------------------------------------------------
1.1* Form of Underwriting Agreement
2.1** Form of Agreement and Plan of Organization (together with Schedule
identifying and distinguishing the substantially identical documents
which have been omitted herein as permitted by Item 601 of
Regulation S-K)
3.1 Amended and Restated Certificate of Incorporation of the Company
3.2 Certificate of Designation of Series A Convertible Preferred Stock
3.3** Amended and Restated By-Laws of the Company
4.1** Form of Common Stock certificate of the Company
5.1* Opinion of Morgan, Lewis & Bockius LLP
10.1 Employment Agreement, dated as of May 9, 1997, between the Company
and Jerry Gladstone (together with Schedule identifying and
distinguishing the substantially identical documents which have been
omitted herein as permitted by Item 601 of Regulation S-K)
10.2** 1997 Long-Term Incentive Plan
10.3** 1997 Non-Employee Directors' Stock Plan
10.4 Consulting Agreement, dated as of June 12, 1997, between the Company
and RGR
10.5* Form of Representatives' Warrant
10.6 Employment Agreement, dated as of August 11, 1997, between the
Company and W. Randolph Ellspermann
<PAGE>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- --------------------------------------------------------------------
10.7* Employment Agreement, dated as of August 11, 1997, between the
Company and Neil J. DePascal, Jr.
10.8 Licensing Agreement, dated March 26, 1996, between The Curtis
Publishing Company, Licensing Division and American Royal Arts
Corporation, together with Addendum No. 1 dated June 6, 1997.
10.9 Garfield Exclusive Licensing Agreement, effective as of January 1,
1995, between Mendelson/Paws Productions and American Royal Arts
Corp., together with Amendment No. 1 dated May 7, 1996.
10.10 Consignment Agreement, dated September 30, 1994, between Ross
Editions, Inc. and American Royal Arts Corp., together with
Amendment to Consignment Agreement, dated March 31, 1997.
10.11* Agreement and Release, dated August 11, 1997, between the Company
and David L. Yankey.
21** List of Subsidiaries (including state of incorporation and trade
name(s)) of the Company
23.1 Consent of Arthur Andersen LLP
23.2* Consent of Morgan, Lewis & Bockius LLP (contained in Exhibit 5.1)
27 Financial Data Schedule
99.1** Consent of each of Michael A. Baker, Vincent J. Browne, Roy C.
Elwell, Jerry Gladstone, David K. Green, Paul Shirley, Susan M.
Spiegel and David Stone to use their names as director nominees
99.2 Consent of W. Randolph Ellspermann
- ----------
* To be filed by amendment.
** Previously filed.
(B) FINANCIAL STATEMENT SCHEDULES
Not applicable.
ITEM 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in such
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance on Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it is declared effective.
II-4
<PAGE>
(2) That for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Amendment No. 1 to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on this 8th day of August, 1997.
COLLECTIBLES USA, INC.
BY: /s/ Ronald P. Rafaloff
--------------------------------------
Ronald P. Rafaloff
President, Chief Executive Officer
and Chairman of the Board
Pursuant to the requirement of the Securities Act of 1933, this
Registration Statement has been signed by the following person in the capacities
and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY IN WHICH SIGNED DATE
- --------------------------- ------------------------------------ ---------------
<S> <C> <C>
/s/ Ronald P. Rafaloff President, Chief Executive Officer August 8, 1997
----------------------- (Principal Executive, Financial
Ronald P. Rafaloff and Accounting Officer) and
Chairman of the Board
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER EXHIBIT DESCRIPTION NUMBER
- ---------- --------------------------------------------------------------------- -------
<S> <C>
1.1* Form of Underwriting Agreement
2.1** Form of Agreement and Plan of Organization (together with Schedule
identifying and distinguishing the substantially identical
documents which have been omitted herein as permitted by Item 601
of Regulation S-K)
3.1 Amended and Restated Certificate of Incorporation of the Company
3.2 Certificate of Designation of Series A Convertible Preferred Stock
3.3** Amended and Restated By-Laws of the Company
4.1** Form of Common Stock certificate of the Company
5.1* Opinion of Morgan, Lewis & Bockius LLP
10.1 Employment Agreement, dated as of May 9, 1997, between the Company
and Jerry Gladstone (together with Schedule identifying and
distinguishing the substantially identical documents which have
been omitted herein as permitted by Item 601 of Regulation S-K)
10.2** 1997 Long-Term Incentive Plan
10.3** 1997 Non-Employee Directors' Stock Plan
10.4 Consulting Agreement between, dated as of June 12, 1997, between
the Company and RGR
10.5* Form of Representatives' Warrant
10.6 Employment Agreement, dated as of August 11, 1997, between the
Company and W. Randolph Ellspermann
10.7* Employment Agreement, dated as of August 11, 1997, between the
Company and Neil J. DePascal, Jr.
10.8 Licensing Agreement, dated March 26, 1996, between The Curtis
Publishing Company, Licensing Division and American Royal Arts
Corporation, together with Addendum No. 1 dated June 6, 1997.
10.9 Garfield Exclusive Licensing Agreement, effective as of January 1,
1995, between Mendelson/Paws Productions and American Royal Arts
Corp., together with Amendment No. 1 dated May 7, 1996.
10.10 Consignment Agreement, dated September 30, 1994, between Ross
Editions, Inc. and American Royal Arts Corp., together with
Amendment to Consignment Agreement, dated March 31, 1997.
10.11* Agreement and Release, dated August 11, 1997, between the Company
and David L. Yankey.
21** List of Subsidiaries (including state of incorporation and trade
name(s)) of the Company
23.1 Consent of Arthur Andersen LLP
23.2* Consent of Morgan, Lewis & Bockius LLP (contained in Exhibit 5.1)
27 Financial Data Schedule
99.1** Consent of each of Michael A. Baker, Vincent J. Browne, Roy C.
Elwell, Jerry Gladstone, David K. Green, Paul Shirley, Susan M.
Spiegel and David Stone to use their names as director nominees
99.2 Consent of W. Randolph Ellspermann
- ----------
* To be filed by amendment.
** Previously filed.
</TABLE>
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
COLLECTIBLES USA, INC.
The undersigned, officer of COLLECTIBLES USA, INC., a corporation organized
and existing under the laws of the State of Delaware (the "Corporation"), does
hereby certify as follows:
FIRST: The name of the Corporation is
COLLECTIBLES USA, INC.
SECOND: The Certificate of Incorporation of the Corporation was filed in
the Office of the Secretary of State of the State of Delaware on January 18,
1996 under the name Collectibles Enterprises, Inc. The Corporation filed an
Amended and Restated Certificate of Incorporation in the Office of the Secretary
of State of the State of Delaware on May 12, 1997 and on June 11, 1997.
THIRD: This Amended and Restated Certificate of Incorporation was duly
adopted in accordance with the provisions of Sections 242 and 245 of the
Delaware General Corporation Law, the Board of Directors having duly adopted
resolutions setting forth and declaring advisable this Amended and Restated
Certificate of Incorporation, and in lieu of a vote of stockholders, written
consent to this Amended and Restated Certificate of Incorporation having been
given in accordance with Section 228 of the Delaware General Corporation Law.
FOURTH: This Amended and Restated Certificate of Incorporation is being
filed pursuant to Sections 242 and 245 of the Delaware General Corporation Law
in order to amend and restate the Amended and Restated Certificate of
Incorporation of the Corporation.
FIFTH: The Amended and Restated Certificate of Incorporation of the
Corporation is hereby amended and restated in its entirety as follows:
ARTICLE ONE
The name of the Corporation is:
COLLECTIBLES USA, INC.
ARTICLE TWO
The address of the Corporation's registered office in the State of Delaware
is 15 East North Street, in the City of Dover, County of Kent. The name of its
registered agent at such address is United Corporate Services, Inc.
1
<PAGE>
ARTICLE THREE
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the Delaware General Corporation
Law.
ARTICLE FOUR
The total number of shares of all classes of stock which the Corporation
shall have authority to issue is thirty-six million two hundred thousand
(36,200,000) shares, of which five million (5,000,000) shares, designated as
Preferred Stock, shall have a par value of one cent ($.01) per share (the
"Preferred Stock"), thirty-one million two hundred thousand (31,200,000) shares,
designated as Common Stock, shall have a par value of one cent ($.01) per share
(the "Common Stock"); of such Common Stock, one million two hundred thousand
(1,200,000) shares shall be designated as Restricted Voting Common Stock, par
value of one cent ($ .01) per share (the "Restricted Voting Common Stock").
A statement of the powers, preferences and rights, and the qualifications,
limitations or restrictions thereof, in respect of each class of stock of the
Corporation is as follows:
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors as shares of one or more classes or series. Subject to the provisions
of this Amended and Restated Certificate of Incorporation and the limitations
prescribed by law, the Board of Directors is expressly authorized by adopting
resolutions to issue the shares, fix the number of shares and change the number
of shares constituting any series, and to provide for or change the voting
powers, designations, preferences and relative, participating, optional or other
special rights, qualifications, limitations or restrictions thereof, including
dividend rights (and whether dividends are cumulative), dividend rates, terms of
redemption (including sinking fund provisions), a redemption price or prices,
conversion rights and liquidation preferences of the shares constituting any
class or series of the Preferred Stock, without any further action or vote by
the stockholders.
COMMON STOCK AND RESTRICTED VOTING COMMON STOCK
1. Dividends.
Subject to the preferred rights of the holders of shares of any class or
series of Preferred Stock as provided by the Board of Directors with respect to
any such class or series of Preferred Stock, the holders of the Common Stock,
including the Restricted Voting Common Stock, shall be entitled to receive, as
and when declared by the Board of Directors out of the funds of the Corporation
legally available therefor, such dividends (payable in cash, stock or otherwise)
as the Board of Directors may from time to time determine, payable to
stockholders of record on such dates, not exceeding 60 days preceding the
dividend payment dates, as shall be fixed for such purpose by the Board of
Directors in advance of payment of each particular dividend. All dividends on
the Common Stock shall be paid pari passu with dividends on Restricted Voting
Common Stock.
2. Liquidation.
2
<PAGE>
In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, after the distribution or payment
to the holders of shares of any class or series of Preferred Stock as provided
by the Board of Directors with respect to any such class or series of Preferred
Stock, the remaining assets of the Corporation available for distribution to
stockholders shall be distributed among and paid to the holders of Common Stock
and Restricted Voting Common Stock ratably in proportion to the number of shares
of Common Stock and Restricted Voting Common Stock held by them respectively.
3. Voting Rights.
Except as otherwise required by law or as provided by the Board of
Directors with respect to any class or series of Preferred Stock, the entire
voting power and all voting rights shall be vested exclusively in the Common
Stock and Restricted Voting Common Stock. Holders of Restricted Voting Common
Stock voting separately as a class shall be entitled to elect one member of the
Board of Directors, but shall not otherwise be entitled to vote in the election
of directors of the Corporation. Subject to the immediately preceding sentence,
and except as otherwise required by law, each holder of shares of Restricted
Voting Common Stock shall be entitled to .4 of a vote for each share of
Restricted Voting Common Stock standing in such holder's name on the books of
the Corporation. The holders of shares of Restricted Voting Common Stock shall
have no right to vote separately as a class except as set forth herein or as
specifically required by law. Except as otherwise required by law, each holder
of shares of Common Stock (other than Restricted Voting Common Stock) shall be
entitled to one vote for each share standing in such holder's name on the books
of the Corporation.
4. Conversion of the Restricted Voting Common Stock
Each share of Restricted Voting Common Stock will automatically convert
into Common Stock on a share for share basis (a) in the event of a transfer or
sale of such share of Restricted Voting Common Stock by the holder thereof
(other than a distribution by a holder to its partners or beneficial owners or a
transfer to a related party of such holder (as defined in Sections 267, 707, 318
and/or 4946 of the Internal Revenue Code of 1986)), (b) in the event any person
or group of persons acting in concert acquires beneficial ownership of 15% or
more of the outstanding shares of Common Stock of the Corporation other than in
connection with the Company's initial public offering, (c) in the event any
person or group of persons acting in concert offers to acquire 15% or more of
the outstanding shares of Common Stock of the Corporation other than in
connection with the Company's initial public offering or (d) in the event a
majority of the aggregate number of votes which may be cast by the holders of
outstanding shares of Common Stock and Restricted Voting Common Stock entitled
to vote approve such conversion.
ARTICLE FIVE
1. Board of Directors.
3
<PAGE>
The directors shall not be classified with respect to the time for which
they shall severally hold office. The directors shall be elected annually to
hold office until their successors have been duly elected and qualified at each
annual meeting of stockholders. At each annual meeting of stockholders at which
a quorum is present, the persons receiving a plurality of the votes cast shall
be directors. Election of directors need not be by written ballot unless the
By-laws of the Corporation so provide.
For so long as any shares of Restricted Voting Common Stock shall remain
outstanding, notwithstanding the foregoing, the holders of Restricted Voting
Common Stock voting seperately as a class shall be entitled to elect one member
of the Board of Directors, but shall not otherwise be entitled to vote in the
election of directors of the Corporation, and only the holders of Restricted
Voting Common Stock shall be entitled to remove such member from the Board of
Directors.
2. Vacancies.
Any vacancy on the Board of Directors resulting from death, retirement,
resignation, disqualification or removal from office or other cause, as well as
any vacancy resulting from an increase in the number of directors which occurs
between annual meetings of the stockholders at which directors are elected,
shall be filled only by a majority vote of the remaining directors then in
office, though less than a quorum, except that those vacancies resulting from
removal from office by a vote of the stockholders may be filled by a vote of the
stockholders at the same meeting at which such removal occurs. The directors
chosen to fill vacancies shall hold office for a term expiring at the end of the
next annual meeting of stockholders. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director. If the vacancy on the Board of Directors results from the death,
retirement, resignation, disqualification or removal from office of the director
elected by the holders of Restricted Voting Common Stock, only the holders of
Restricted Voting Common Stock shall be entitled to fill such vacancy.
Notwithstanding the foregoing, whenever the holders of one or more classes
or series of Preferred Stock shall have the right, voting separately as a class
or series, to elect directors, the election, term of office, filling of
vacancies, removal and other features of such directorships shall be governed by
the terms of the resolution or resolutions adopted by the Board of Directors
pursuant to ARTICLE FOUR applicable thereto, and each director so elected shall
not be subject to the provisions of this ARTICLE FIVE unless otherwise provided
therein.
3. Power to Make, Alter and Repeal By-laws.
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to make, alter and repeal the
By-laws of the Corporation.
ARTICLE SIX
The Corporation reserves the right to amend, alter, change or repeal any
provision in this Amended and Restated Certificate of Incorporation, in the
manner now or hereafter prescribed by statute.
4
<PAGE>
ARTICLE SEVEN
No director of the Corporation shall be liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law or (iv) for any transaction
from which the director derived an improper personal benefit.
ARTICLE EIGHT
The Corporation shall, to the fullest extent permitted by Section 145 of
the Delaware General Corporation Law, as the same may be amended and
supplemented, indemnify each director and officer of the Corporation from and
against any and all of the expenses, liabilities or other matters referred to in
or covered by said section and the indemnification provided for herein shall not
be deemed exclusive of any other rights to which those indemnified may be
entitled under any By-law, agreement, vote of stockholders, vote of
disinterested directors or otherwise, and shall continue as to a person who has
ceased to be a director or officer and shall inure to the benefit of the heirs,
executors and administrators of such persons and the Corporation may purchase
and maintain insurance on behalf of any director or officer to the extent
permitted by Section 145 of the Delaware General Corporation Law.
ARTICLE NINE
Whenever a compromise or arrangement is proposed between the Corporation
and its creditors or any class of them and/or between the Corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of the
Corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for the Corporation under the provisions of
section 291 of Title 8 of the Delaware Code or on the application of trustees in
dissolution or of any receiver or receivers appointed for the Corporation under
the provisions of section 279 of Title 8 of the Delaware Code, order a meeting
of the creditors or class of creditors, and/or of the stockholders or class of
stockholders of the Corporation, as the case may be, to be summoned in such
manner as the said court directs. If a majority in number representing
three-fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of the Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of the
Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of the Corporation, as the case may be, and also on the
Corporation.
[Signature Page to Follow]
5
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Amended and Restated
Certificate of Incorporation on behalf of the Corporation and does verify and
affirm, under penalty of perjury, that this Amended and Restated Certificate of
Incorporation is the act and deed of the Corporation and that the facts stated
herein are true as of this 8th day of July, 1997.
COLLECTIBLES USA, INC.
By:/s/ Ronald Rafaloff
-------------------------------
Name: Ronald P. Rafaloff
Title: President and Chief Executive Officer
COLLECTIBLES USA, INC.
CERTIFICATE OF DESIGNATION
OF
SERIES A CONVERTIBLE PREFERRED STOCK
------------------------------------
Pursuant to Section 151 of the Delaware General Corporation Law
The undersigned officer hereby certifies that:
A. He is the duly elected and acting officer of COLLECTIBLES
USA, INC., a Delaware corporation (the "Corporation").
B. On April 23, 1997, the Board of Directors of the
Corporation duly adopted resolutions in order to (i) amend and restate the
Corporation's existing Certificate of Incorporation (as so amended and restated,
the "Certificate of Incorporation") and (ii) designate the Series A Preferred
Stock (as set forth in the resolution below).
C. The resolution contained herein has not been modified,
altered or amended and is presently in full force and effect.
RESOLVED, that pursuant to the authority expressly vested in
the Board of Directors of the Corporation by Article Four of the Certificate of
Incorporation of the Corporation, the Board of Directors hereby fixes and
determines the voting rights, designations, preferences, qualifications,
privileges, limitations, restrictions, options, conversion rights and other
special or relative rights of the first series of the preferred stock, par value
$.01 per share (the "Preferred Stock"), which shall be designated as Series A
Convertible Preferred Stock (the "Series A Preferred Stock").
(1) Designation. There shall be a series of Preferred Stock
designated as "Series A Convertible Preferred Stock." The number of shares
initially constituting such series shall be 20,000.
(2) Rank. The Series A Preferred Stock shall, with respect to
dividend and other distribution rights, and rights on liquidation, dissolution
and winding up, rank (i) pari passu with any class of capital stock or series of
Preferred Stock hereafter created which expressly provides that it ranks pari
passu with the Series A Preferred Stock as to dividends, other distributions,
liquidation preference and/or otherwise (collectively, the "Parity Securities"),
and (ii) senior to (x) the Common Stock and all other securities of any class or
classes (however designated) of the Corporation (other than the Series A
Preferred Stock) the holders of which have the right, without limitation as to
amount, after payment on any securities entitled to a
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preference on dividends or other distributions upon any dissolution, liquidation
or winding up, either to all or to a share of the balance of payments upon such
dissolution, liquidation or winding up (collectively, the "Common Stock") and
(y) any other class of capital stock or series of Preferred Stock hereafter
created which does not expressly provide that it ranks pari passu with the
Series A Preferred Stock as to dividends, other distributions, liquidation
preference and/or otherwise (collectively, the "Junior Securities"). The terms
"Parity Securities" and "Junior Securities" as used herein with respect to any
class or series of capital stock shall only be deemed to refer to such class or
series to the extent it ranks (i) pari passu with or (ii) not pari passu with,
as applicable, the Series A Preferred Stock with respect to dividends, other
distributions, liquidation preference or otherwise. The Corporation shall not
issue any securities ranking senior to the Parity Securities with respect to
dividends, distributions, liquidation preference or otherwise.
(3) Dividends.
(a) In the event that the Corporation shall at any time or
from time to time declare, order, pay or make a dividend or other distribution
(whether in cash, securities or other property) on its Common Stock, the holders
of shares of the Series A Preferred Stock shall be entitled to receive from the
Corporation, with respect to each share of Series A Preferred Stock held, a
dividend or distribution that is the same dividend or distribution that would be
received by a holder of the number of shares of the Common Stock into which such
share of Series A Preferred Stock is convertible pursuant to the provisions of
Section (6) hereof on the record date for such dividend or distribution. Any
such dividend or distribution shall be declared, ordered, paid or made on the
Series A Preferred Stock at the same time such dividend or distribution is
declared, ordered, paid or made on the Common Stock.
(b) So long as any shares of Series A Preferred Stock shall be
outstanding, the Corporation shall not declare or pay or set apart for payment
any dividends or make any other distributions on, or make payment on account of
the purchase, redemption or other retirement of, any Junior Securities, whether
in cash, property or otherwise (other than dividends or distributions payable in
shares of the class or series upon which such dividends or distributions are
declared or paid), nor shall the Corporation make any distribution on any Junior
Securities, nor shall any Junior Securities be purchased or redeemed by the
Corporation or any of its Subsidiaries, nor shall any monies be paid or made
available for a sinking fund for the purchase or redemption of any Junior
Securities, unless with respect to all of the foregoing all dividends or other
distributions to which the holders of Series A Preferred Stock shall have been
entitled, pursuant to Section (3)(a) hereof, shall have been paid or declared
and a sum of money has been set apart for the full payment thereof; provided,
however, that the Corporation may reacquire the Common Stock issued to officers,
directors or employees of the Corporation if the Board of Directors approves
such reacquisition and the reacquisition is intended to further the
Corporation's efforts to effect an initial public offering of its Common Stock.
(c) In the event that full dividends are not paid or made
available to the
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holders of all outstanding shares of the Common Stock, Series A Preferred Stock
and any Parity Securities, and funds available for payment of dividends shall be
insufficient to permit payment in full to holders of all such stock of the full
preferential amounts to which they are then entitled, then the entire amount
available for payment of dividends shall be distributed first to the holders of
the Series A Preferred Stock and any other Parity Securities ratably among all
such holders in proportion to the full amount to which they would otherwise be
respectively entitled, and then to the holders of the Common Stock and all other
holders of Junior Securities ratably among all such holders in proportion to the
full amount to which they would otherwise be respectively entitled.
(4) Preference on Liquidation.
(a) In the event that the Corporation shall liquidate,
dissolve or wind up, whether voluntarily or involuntarily, no distribution shall
be made to the holders of shares of the Common Stock or other Junior Securities
(and no monies shall be set apart for such purpose) unless prior thereto, the
holders of shares of Series A Preferred Stock shall have received an amount per
share equal to the greater of (i) the sum of (x) the Liquidation Value, plus (y)
all declared, accrued but unpaid dividends thereon through the date of
distribution and (ii) ratable distributions determined with respect to the
holders of Series A Preferred Stock and the Common Stock on the basis of the
number of shares of Class A Common Stock into which such Series A Preferred
Stock could be converted pursuant to the provisions of Section (6) hereof
immediately prior to such distribution (the greater of (i) and (ii) above is
herein referred to as the "Series A Liquidation Preference"). The "Liquidation
Value" means $50 per share with respect to the Series A Preferred Stock.
(b) If, upon any such liquidation, dissolution or other
winding up of the affairs of the Corporation, the assets of the Corporation
shall be insufficient to permit the payment in full of the Series A Liquidation
Preference for each share of Series A Preferred Stock then outstanding and the
full liquidating payments on all Parity Securities, then the assets of the
Corporation remaining shall be ratably distributed among the holders of Series A
Preferred Stock and of any Parity Securities in proportion to the full amounts
to which they would otherwise be respectively entitled if all amounts thereon
were paid in full.
(c) Neither (i) the voluntary sale, conveyance, exchange or
transfer (for cash, shares of stock, securities or other consideration) of all
or substantially all the property or assets of the Corporation (ii) nor the
consolidation, merger or other business combination of the Corporation with or
into one or more corporations or other entities in which the consideration
received per share of Series A Preferred Stock is at least equal to the Series A
Liquidation Preference shall be deemed to be a liquidation, dissolution or
winding-up, voluntary or involuntary, of the Corporation. For purposes hereof,
the consideration received per share of Series A Preferred shall equal the cash
received per share plus the fair value per share of any non-cash consideration.
The fair value of such non-cash portion of the consideration shall be determined
by the Board of Directors of the Corporation in good faith.
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(5) Voting; Meetings.
(a) General. In addition to any voting rights provided in this
Certificate of Incorporation or by law, the Series A Preferred Stock shall vote
together with the Common Stock as a single class on all actions to be voted on
by the shareholders of the Corporation. Each share of Series A Preferred Stock
shall entitle the holder thereof to such number of votes per share on each such
action as shall equal the number of shares of the Common Stock (including
fractions of a share) into which each share of Series A Preferred Stock is then
convertible. Whenever any action is proposed to be taken by shareholders without
a meeting, the shareholders proposing to take such action shall provide prior
written notice of such action, at least seven days prior to the taking of such
action, to the holders, if any, of the Series A Preferred Stock then
outstanding.
(b) Class Vote. At any time when shares of Series A Preferred
Stock are outstanding, except where the vote or written consent of the holders
representing a greater number of shares of Series A Preferred Stock is required
by law or by the Certificate of Incorporation and in addition to any vote
required by law or by the Certificate of Incorporation, without the approval of
the holders representing at least a majority of the shares of Series A Preferred
Stock then outstanding, given in writing or by vote at a meeting, consenting or
voting (as the case may be) separately as a class, the Corporation shall not
amend or repeal any provision of, or add any provision to, the Certificate of
Incorporation or the Bylaws of the Corporation if such action would alter,
change or affect adversely the rights, preferences, privileges or powers of, or
the restrictions provided for the benefit of, the Series A Preferred Stock.
(c) Meetings. The holders of Series A Preferred Stock shall be
entitled to receive notice of all meetings of shareholders of the Corporation in
the same manner and at the same times as the holders of the Common Stock. A
special meeting of the shareholders of the Corporation shall be called by the
Chairman or Chief Executive Officer at the request in writing of holders of at
least fifty percent of the total number of shares of the Series A Preferred
Stock then outstanding.
(6) Conversion. The holders of Series A Preferred Stock shall
have the following conversion rights:
(a) Right to Convert. Subject to the provisions for adjustment
hereinafter set forth, upon the date of consummation of an initial public
offering (the "IPO") of the shares of Common Stock, the shares of the Series A
Preferred Stock shall automatically convert either (i) into that number of
whole, fully paid and nonassessable shares of the Common Stock (the "Conversion
Shares"), determined by (X) dividing the Liquidation Value by (Y) an amount
equal to 60% of the price at which each share of the Common Stock is offered to
the public in the IPO or, at the option of the holder of the Series A Preferred
Stock, (ii) into that number of whole shares of fully paid and nonassessable
shares of Common Stock (the "Conversion Shares") determined by (X) dividing the
Liquidation Value by (Y) an amount equal to 150% of the price
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at which the Common Stock is offered to the public in the IPO and cash in an
amount equal to the Liquidation Value. No adjustment shall be made for
fractional shares. The number of shares of the Common Stock deliverable upon
conversion of a share of Series A Preferred Stock, adjusted as hereinafter
provided, is referred to herein as the "Series A Conversion Ratio."
(b) Mechanics of Conversion. Each holder of Series A Preferred
Stock that desires to convert the same into shares of the Common Stock shall
surrender the certificate or certificates therefor, duly endorsed, at the
principal office of the Corporation or of any transfer agent for the Series A
Preferred Stock or the Common Stock, and shall give written notice to the
Corporation at such office that such holder elects to convert the same and
stating therein the number of shares of Series A Preferred Stock being converted
and setting forth the name or names in which such holder wishes the certificate
or certificates of shares of the Common Stock to be issued if such name or names
shall be different than that of such holder. Thereupon, the Corporation shall
issue and deliver to such holder (i) a certificate or certificates for the
number of validly issued, fully paid and nonassessable full shares of the Common
Stock to which such holder is entitled and (ii) if less than the full number of
shares of Series A Preferred Stock evidenced by the surrendered certificate or
certificates are being converted, a new certificate or certificates, of like
tenor, for the number of shares evidenced by such surrendered certificate or
certificates less the number of shares converted. Each conversion shall be
deemed to have been effected immediately prior to the close of business on the
date of such surrender of the shares to be converted so that the rights of the
holder thereof as to the shares being converted shall cease at such time except
for the right to receive shares of the Common Stock and any dividends declared,
accrued and unpaid in accordance herewith and the holder entitled to receive the
shares of the Common Stock issuable upon such conversion shall be treated for
all purposes as the record holder of such shares of the Common Stock at such
time.
(c) Adjustment of Series A Conversion Ratio. If and whenever
the Corporation issues or sells any shares of the Common Stock (other than
pursuant to a Permitted Issuance) for a consideration per share less than the
Market Price of the Common Stock then in effect, then immediately upon such
issuance or sale the Series A Conversion Ratio shall be increased to equal the
amount determined by multiplying the Series A Conversion Ratio in effect
immediately prior to such issuance or sale by a fraction, the numerator of which
will be the product derived by multiplying the Market Price per share of the
Common Stock determined as of the date of such issuance or sale by the number of
shares of the Common Stock Deemed Outstanding immediately after such issuance or
sale and the denominator of which will be the sum of (x) the number of shares of
the Common Stock Deemed Outstanding immediately prior to such issuance or sale
multiplied by the Market Price per share of the Common Stock determined as of
the date of such issuance or sale, plus (y) the consideration, if any, received
by the Corporation upon such issuance or sale. For purposes of this Section
(6)(c), the calculation of the number of shares of the Common Stock Deemed
Outstanding shall exclude the shares of the Common Stock issuable upon
conversion of the shares of Series A Preferred Stock.
(d) Adjustment for Stock Splits and Combinations. If the
Corporation at any
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time or from time to time after the Issue Date effects a subdivision of the
outstanding Common Stock or combines the outstanding shares of the Common Stock,
then, in each such case, the Series A Conversion Ratio in effect immediately
prior to such event shall be adjusted so that each holder of shares of Series A
Preferred Stock shall have the right to convert its shares of Series A Preferred
Stock into the number of shares of the Common Stock which it would have owned
after the event had such shares of Series A Preferred Stock been converted
immediately before the happening of such event. Any adjustment under this
Section (6)(d) shall become effective as of the date and time the subdivision or
combination becomes effective.
(e) Reorganization, Reclassification, Consolidation, Merger or
Sale. Any recapitalization, reorganization, reclassification, consolidation,
merger, sale of all or substantially all of the Corporation's assets to another
Person or other transaction which is effected in such a way that holders of the
Common Stock are entitled to receive (either directly or upon subsequent
liquidation) stock, securities or assets with respect to or in exchange for the
Common Stock is referred to herein as an "Organic Change." Prior to the
consummation of any Organic Change, the Corporation shall make appropriate
provision (in form and substance reasonably satisfactory to holders of Series A
Preferred Stock representing a majority of the Series A Preferred Stock then
outstanding) to insure that each of the holders of the Series A Preferred Stock
shall thereafter have the right to acquire and receive in lieu of or in addition
to (as the case may be) the shares of the Common Stock immediately theretofore
acquirable and receivable upon the conversion of such holder's Series A
Preferred Stock, such shares of stock, securities or assets as may be issuable
or payable with respect to or in exchange for the number of shares of the Common
Stock immediately theretofore acquirable and receivable upon conversion of such
holder's Series A Preferred Stock had such Organic Change not taken place. In
any such case, the Corporation shall make appropriate provision (in form and
substance reasonably satisfactory to the holders of Series A Preferred Stock
representing a majority of the Series A Preferred Stock then outstanding) with
respect to such holders' rights and interest to insure that the provisions
hereof shall thereafter be applicable to the Series A Preferred Stock
(including, in the case of any such consolidation, merger or sale in which the
successor entity or purchasing entity is other than the Corporation, an
immediate adjustment of the Series A Conversion Ratio to reflect the value for
the Series A Preferred Stock reflected by the terms of such consolidation,
merger or sale, if the value so reflected would cause an increase to the Series
A Conversion Ratio in effect immediately prior to such consolidation, merger or
sale). The Corporation shall not effect any such consolidation, merger or sale,
unless prior to the consummation thereof, the successor entity (if other than
the Corporation) resulting from such consolidation or merger or the corporation
purchasing such assets assumes by written instrument (which may be the agreement
of consolidation, merger or sale) (in form and substance reasonably satisfactory
to the holders of Series A Preferred stock representing a majority of the Series
A Preferred Stock then outstanding), the obligation to deliver to each such
holder such shares of stocks, securities or assets as, in accordance with the
foregoing provisions, such holder may be entitled to acquire.
(f) Certain Events. If, at any time or from time to time after
the Issue Date, any event occurs of the type contemplated by the provisions of
Section (6) but not expressly
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provided for by such provisions (including, without limitation, the granting of
stock appreciation rights, phantom stock rights or other rights having equity or
similar features but excluding any Permitted Issuance), then the Corporation's
Board of Directors shall make an appropriate adjustment in the Series A
Conversion Ratio so as to protect the rights of the holders of Series A
Preferred Stock; provided that no such adjustment shall decrease the Series A
Preferred Conversion Ratio obtainable as otherwise determined pursuant to
Section (6).
(g) No Fractional Shares Adjustments. No fractional shares
shall be issued upon conversion of the Series A Preferred Stock. If more than
one share of the Series A Preferred Stock is to be converted at one time by the
same stockholder, the number of full shares issuable upon such conversion shall
be computed on the basis of the aggregate amount of the shares to be converted.
Instead of any fractional shares of the Common Stock which would otherwise be
issuable upon conversion of any shares of Series A Preferred Stock the
Corporation will pay a cash adjustment in respect of such fractional interest in
an amount equal to the same fraction of the Market Price per share of the Common
Stock at the close of business on the day of conversion which such fractional
share of Series Preferred Stock would be convertible into on such date.
(h) Actions to Maintain Conversion Price Above Par Price.
Before taking any action which would cause an adjustment in the Series A
Conversion Ratio such that, upon conversion of the Series A Preferred Stock,
shares of the Common Stock with par value, if any, would be deemed to be issued
below the then par value of the Common Stock, the Corporation will take any
corporate action which may, in the opinion of its counsel, be reasonably
necessary in order that the Corporation may validly and legally issue fully paid
and non-assessable shares of the Common Stock at the Series A Conversion Ratio
as so adjusted.
(i) Certificate of Adjustment. In any case of an adjustment or
readjustment of the number of shares of the Common Stock or other securities
issuable upon conversion of the Series A Preferred Stock, the chief financial
officer or the president of the Corporation shall compute such adjustment or
readjustment in accordance with the provisions hereof and prepare and sign a
certificate showing such adjustment or readjustment, and shall mail such
certificate, by first class mail, postage prepaid, to each holder of Series A
Preferred Stock at the holder's address as shown in the Corporation's books. The
Certificate shall set forth such adjustment or readjustment, showing in detail
the facts upon which such adjustment or readjustment is based including a
statement of the number of shares of the Common Stock and the type and amount,
if any, of other property which at the time would be received upon conversion of
such holder's shares.
(7) Restriction on Transfer. Neither the Series A Preferred
Stock, nor any Conversion Shares, have been registered under the securities laws
of the United States of America or any state thereof. Accordingly, no shares of
the Series A Preferred Stock, nor any shares issuable upon conversion, may be
offered for sale, sold or transferred, in the absence of registration and
qualification under applicable federal and state securities laws or an exemption
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from such.
(8) Definitions. The following terms shall have the respective
meanings set forth below:
"Affiliate" means, with respect to any Person, any other
Person directly or indirectly controlling (including but not limited to all
directors and officers of such Person), controlled by, or under direct or
indirect common control with such Person. For purposes of this definition,
"controlling" (including with its correlative meanings, the terms "controlled
by" and "under common control with") as used with respect to any Person shall
mean the possession, directly or indirectly, of the power (i) to vote or direct
the vote of 10% or more of the securities having ordinary voting power for the
election of directors of such Corporation or (ii) to direct or cause the
direction of the management and policies of such corporation, whether through
the ownership of securities, by contract of otherwise.
"Business Day" means any day that is not a Saturday, a Sunday
or a day on which banks are required or permitted to be closed in the State of
New York.
"Common Stock" means the Common Stock and all other securities
of any class classes (however designated) of the Corporation (other than the
Series A Preferred Stock) the holders of which have the right, without
limitation as to amount, after payment on any securities entitled to a
preference on dividends or other distributions upon any dissolution, liquidation
or winding up, either to all or to a share of the balance of payments upon such
dissolution, liquidation or winding up; provided that if there is a change such
that the securities issuable upon conversion of the Series A Preferred Stock are
issued by an entity other than the Corporation or there is a change in the class
of securities so issuable, then the term "the Common Stock" shall mean one share
of the security issuable upon conversion of the Series A Preferred Stock if such
security is issuable in shares, or shall mean the smallest unit in which such
security is issuable if such security is not issuable in shares.
"Common Stock Deemed Outstanding" means, at any given time,
the number of shares of the Common Stock actually outstanding at such time, plus
the number of shares of the Common Stock deemed to be outstanding pursuant to
Section (6)(d)(i) or (ii) hereof.
"Independent Investment Bank" means any investment bank or
valuation firm chosen by the Corporation and consented to by the holders of a
majority of shares of Series A Preferred Stock then outstanding, which consent
shall not be unreasonably withheld, in each case, the costs and fees of which
shall be borne by the Corporation and the opinion of which shall be addressed to
the holders of the Series A Preferred Stock.
"Issue Date" means, as to any share of Series A Preferred
Stock, the date of original issuance thereof by the Corporation.
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"Junior Securities" has the meaning set forth in Section (2).
"Market Price" means, as to any security, the average of the
closing prices of such security's sales on all domestic securities exchanges on
which such security may at the time be listed, or, if there have been no sales
on any such exchange on any day, the average of the highest bid and lowest asked
prices on all such exchanges at the end of such day, or, if on any day such
security is not so listed, the average of the representative bid and asked
prices quoted on the Nasdaq National Market as of 4:00 P.M., New York time, on
such day, or, if on any day such security is not quoted on the Nasdaq National
Market, the average of the highest bid and lowest asked prices on such day in
the domestic over-the-counter market as reported by the National Quotation
Bureau, Incorporated, or any similar successor organization, in each such case
averaged over a period of 10 days consisting of the day as of which "Market
Price" is being determined and the 9 consecutive Business Days prior to such
day; provided that if such security is listed on any domestic securities
exchange the term "Business Days" as used in this sentence means business days
on which such exchange is open for trading. If at any time such security is not
listed on any domestic securities exchange or quoted on the Nasdaq National
Market or the domestic over-the-counter market, the "Market Price" shall be the
fair value thereof as determined in good faith by the Board of Directors of the
Corporation (determined without giving effect to any discount for minority
interest, any restrictions on transferability or any lack of liquidity of the
Common Stock or to the fact that the Corporation has no class of equity
registered under the Exchange Act), such fair value to be determined by
reference to the cash price that would be paid between a fully informed buyer
and seller under no compulsion to buy or sell; provided, however, (i) in the
event that holders of Series A Preferred Stock representing a majority of the
Series A Preferred Stock then outstanding disagree with the Board of Directors'
determination of the fair value or (ii) if such fair value is being determined
in connection with an issuance of securities solely to one or more Affiliates of
the Corporation, then in each such case if so required by such holders of Series
A Preferred Stock, such fair value shall be determined by an Independent
Investment Bank and the determination of such Independent Investment Bank shall
be final and binding on the Corporation and the holders of the Series A
Preferred Stock.
"Organic Change" has the meaning set forth in Section (6)(f).
"Parity Securities" has the meaning set forth in Section (2).
"Permitted Issuance" means the issuance by the Corporation of
shares of the Common Stock (i) upon conversion of the Series A Preferred Stock
or (ii) in connection with any dividend or distribution to the holders of the
Common Stock declared and made in accordance with Section (3) hereof.
"Person" means an individual, partnership, corporation, trust,
unincorporated organization, joint venture, government or agency, political
subdivision thereof, or any other entity of any kind.
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"Senior Securities" means any class or series of capital stock
of the Corporation other than Parity Securities or Junior Securities.
"Series A Conversion Ratio" has the meaning set forth in
Section (6)(a).
"Series A Liquidation Preference" has the meaning set forth in
Section (4)(a).
"Series A Preferred Stock" has the meaning set forth in
Section (1).
/s/ Ronald P. Rafaloff
------------------------------
Title: Assistant Secretary
Name: Ronald P. Rafaloff
10
EMPLOYMENT AGREEMENT BETWEEN THE COMPANY AND JERRY GLADSTONE
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement"), by and among Collectibles
USA, Inc., a Delaware corporation ("Collectibles"), American Royal Arts Corp., a
New York corporation and a wholly-owned subsidiary of Collectibles (the
"Company"), and Jerry Gladstone ("Employee"), is hereby entered into as of this
9th day of May, 1997 and shall become effective only as of the date of the
consummation of the initial public offering of the common stock of Collectibles.
This Agreement hereby supersedes any other employment agreements or
understandings, written or oral, between Employee and the Company and/or
Collectibles.
R E C I T A L S
The following statements are true and correct:
As of the date of this Agreement, the Company is engaged primarily in
the business of marketing collectible merchandise and animation art products.
Employee is employed hereunder by the Company in a confidential
relationship wherein Employee, in the course of his employment with the Company,
has and will continue to become familiar with and aware of information as to the
Company's and Collectibles' customers, specific manner of doing business,
including the processes, techniques and trade secrets utilized by the Company
and Collectibles, and future plans with respect thereto, all of which has been
and will be established and maintained at great expense to the Company and
Collectibles; this information is a trade secret and constitutes the valuable
good will of the Company and Collectibles. Therefore, in consideration of the
mutual promises, terms, covenants and conditions set forth herein and the
performance of each, it is hereby agreed as follows:
A G R E E M E N T S
1. EMPLOYMENT AND DUTIES.
(a) The Company hereby employs Employee as President of the Company. As
such, Employee shall have responsibilities, duties and authority reasonably
accorded to and expected of a President of the Company and will report directly
to the Board of Directors of the Company (the "Board"). Employee hereby accepts
this employment upon the terms and conditions herein contained and, subject to
paragraph 1(c), agrees to devote his time, attention and efforts to promote and
further the business of the Company.
(b) Employee shall faithfully adhere to, execute and fulfill all
policies established by the Company.
<PAGE>
(c) Employee shall not, during the term of his employment hereunder, be
engaged in any other business activity pursued for gain, profit or other
pecuniary advantage if such activity interferes with Employee's duties and
responsibilities hereunder. The foregoing limitations shall not be construed as
prohibiting Employee from making personal investments in such form or manner as
will neither require his services in the operation or affairs of the companies
or enterprises in which such investments are made nor violate the terms of
paragraph 3 hereof.
2. COMPENSATION.
For all services rendered by Employee, the Company shall compensate
Employee as follows:
(a) Base Salary. The base salary payable to Employee shall be $50,000
per year, payable on a regular basis in accordance with the Company's standard
payroll procedures but not less than monthly. On at least an annual basis, the
Board will review Employee's performance and may recommend increases to such
base salary if, in its discretion, any such increase is warranted. Such
recommended increase would, in all likelihood, require approval by the Board of
Directors of Collectibles or a duly constituted committee thereof.
(b) Incentive Bonus Plan. For 1997 and subsequent years, it is the
Company's intent to develop a written Incentive Bonus Plan (which may be
Collectibles' Incentive Bonus Plan) setting forth the criteria under which
Employee and other officers and key employees will be eligible to receive
year-end bonus awards.
(c) Executive Perquisites, Benefits And Other Compensation. Employee
shall be entitled to receive additional benefits and compensation from the
Company in such form and to such extent as specified below:
(d) Payment of all premiums for coverage for Employee and his dependent
family members under health, hospitalization, disability, dental, life and other
insurance plans that the Company or Collectibles may have in effect from time to
time, benefits provided to Employee under this clause (i) to be at least equal
to such benefits provided to Collectibles executives.
(e) Reimbursement for all business travel and other out-of-pocket
expenses reasonably incurred by Employee in the performance of his services
pursuant to this Agreement. All reimbursable expenses shall be appropriately
documented in reasonable detail by Employee upon submission of any request for
reimbursement, and in a format and manner consistent with Collectibles' expense
reporting policy.
(f) The Company shall provide Employee with other executive perquisites
as may be available to or deemed appropriate for Employee by the Board and
participation in all other Company-wide or Collectibles-wide employee benefits
as available from time to time.
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3. NON-COMPETITION AGREEMENT.
(a) Employee will not, during the period of his employment by or with
the Company, and for a period of two (2) years immediately following the
termination of his employment under this Agreement, for any reason whatsoever,
directly or indirectly, for himself or on behalf of or in conjunction with any
other person, persons, company, partnership, corporation or business of whatever
nature:
(i) engage, as an officer, director, shareholder, owner, partner,
joint venturer, or in a managerial capacity, whether as an employee,
independent contractor, consultant or advisor, or as a sales
representative, in any collectibles or animation art business in
direct competition with the Company or Collectibles, within the United
States or within 100 miles of any other geographic area in which the
Company or Collectibles or where any of the Company's or Collectibles'
subsidiaries conducts business, including any territory serviced by
the Company or Collectibles or any of such subsidiaries (the
"Territory");
(ii) call upon any person who is, at that time, within the
Territory, an employee of the Company or Collectibles (including the
respective subsidiaries thereof) in a managerial capacity for the
purpose or with the intent of enticing such employee away from or out
of the employ of the Company or Collectibles (including the respective
subsidiaries thereof);
(iii) call upon any person or entity which is, at that time, or
which has been, within one (1) year prior to that time, a customer of
the Company or Collectibles (including the respective subsidiaries
thereof) within the Territory for the purpose of soliciting or selling
products or services in direct competition with the Company or
Collectibles within the Territory; or
(iv) call upon any prospective acquisition candidate, on
Employee's own behalf or on behalf of any competitor, which candidate
was, to Employee's actual knowledge after due inquiry, either called
upon by the Company or Collectibles (including the respective
subsidiaries thereof) or for which the Company or Collectibles made an
acquisition analysis, for the purpose of acquiring such entity.
Notwithstanding the above, the foregoing covenant shall not be deemed
to prohibit Employee from acquiring as an investment not more than one percent
(1%) of the capital stock of a competing business, whose stock is traded on a
national securities exchange or over-the-counter.
(b) Because of the difficulty of measuring economic losses to the
Company and Collectibles as a result of a breach of the foregoing covenants, and
because of the immediate and irreparable damage that could be caused to the
Company and Collectibles for which they would have no other adequate remedy,
Employee agrees that the foregoing covenants may be enforced by Collectibles or
the Company in the event of breach by Employee, by injunctions and restraining
orders.
(c) It is agreed by the parties that the foregoing covenants in this
paragraph 3 impose a
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reasonable restraint on Employee in light of the activities and business of the
Company or Collectibles (including Collectibles' other subsidiaries) on the date
of the execution of this Agreement and the current plans of Collectibles
(including Collectibles' other subsidiaries); but it is also the intent of the
Company, Collectibles and Employee that such covenants be construed and enforced
in accordance with the changing activities, business and locations of the
Company and Collectibles (including Collectibles' other subsidiaries) throughout
the term of these covenants, whether before or after the date of termination of
the employment of Employee. For example, if, during the term of this Agreement,
the Company or Collectibles (including Collectibles' other subsidiaries) engages
in new and different activities, enters a new business or establishes new
locations for its current activities or business in addition to or other than
the activities or business enumerated under the Recitals above or the locations
currently established therefor, then Employee will be precluded from soliciting
the customers or employees of such new activities or business or from such new
location and from directly competing with such new business within the United
States or within 100 miles of its then-established operating location(s), if
outside the United States, through the term of the covenants contained in this
paragraph 3.
It is further agreed by the parties hereto that, in the event that
Employee shall cease to be employed hereunder, and shall enter into a business
or pursue other activities not in competition with the Company or Collectibles
(including Collectibles' other subsidiaries), or similar activities or business
in locations the operation of which, under such circumstances, does not violate
clause (i) of this paragraph 3, and in any event such new business, activities
or location are not in violation of this paragraph 3 or of employee's
obligations under this paragraph 3, if any, Employee shall not be chargeable
with a violation of this paragraph 3 if the Company or Collectibles (including
Collectibles' other subsidiaries) shall thereafter enter the same, similar or a
competitive (i) business, (ii) course of activities or (iii) location, as
applicable.
(d) The covenants in this paragraph 3 are severable and separate, and
the unenforceability of any specific covenant shall not affect the provisions of
any other covenant. Moreover, in the event any court of competent jurisdiction
shall determine that the scope, time or territorial restrictions of any specific
covenant as set forth are unreasonable, then it is the intention of the parties
that such restrictions be enforced to the fullest extent which the court deems
reasonable, and the Agreement shall thereby be reformed.
(e) All of the covenants in this paragraph 3 shall be construed as an
agreement independent of any other provision in this Agreement, and the
existence of any claim or cause of action of Employee against the Company or
Collectibles, whether predicated on this Agreement or otherwise, shall not
constitute a defense to the enforcement by Collectibles or the Company of such
covenants. It is specifically agreed that the period of two (2) years following
termination of employment stated at the beginning of this paragraph 3, during
which the agreements and covenants of Employee made in this paragraph 3 shall be
effective, shall be computed by excluding from such computation any time during
which Employee is in violation of any provision of this paragraph 3.
4. PLACE OF PERFORMANCE.
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(a) Employee understands that he may be requested by the Board or
Collectibles to relocate from his present residence to another geographic
location in order to more efficiently carry out his duties and responsibilities
under this Agreement or as part of a promotion or other increase in duties and
responsibilities. In such event, if Employee agrees to relocate, the Company
will pay all relocation costs to move Employee, his immediate family and their
personal property and effects. Such costs may include, by way of example, but
are not limited to, pre-move visits to search for a new residence, investigate
schools or for other purposes; temporary lodging and living costs prior to
moving into a new permanent residence; duplicate home carrying costs; all
closing costs on the sale of Employee's present residence and on the purchase of
a comparable residence in the new location; and added income taxes that Employee
may incur if any relocation costs are not deductible for tax purposes. The
general intent of the foregoing is that Employee shall not personally bear any
out-of-pocket cost as a result of the relocation, with an understanding that
Employee will use his best efforts to incur only those costs which are
reasonable and necessary to effect a smooth, efficient and orderly relocation
with minimal disruption to the business affairs of the Company and the personal
life of Employee and his family.
(b) Notwithstanding the above, if Employee is requested by the Board to
relocate and Employee refuses, such refusal shall not constitute "good cause"
for termination of this Agreement under the terms of paragraph 5(c).
5. TERM; TERMINATION; RIGHTS ON TERMINATION.
The term of this Agreement shall begin on the date hereof and continue
for three years (the "Term") and, unless terminated sooner as herein provided,
shall continue thereafter on a year-to-year basis on the same terms and
conditions contained herein in effect as of the time of renewal. This Agreement
and Employee's employment may be terminated in any one of the followings ways:
(a) Death. The death of Employee shall immediately terminate this
Agreement with no severance compensation due to Employee's estate.
(b) Disability. If, as a result of incapacity due to physical or mental
illness or injury, Employee shall have been absent from his full-time duties
hereunder for four (4) consecutive months, then thirty (30) days after receiving
written notice (which notice may occur before or after the end of such four (4)
month period, but which shall not be effective earlier than the last day of such
four (4) month period), the Company may terminate Employee's employment
hereunder provided Employee is unable to resume his full-time duties at the
conclusion of such notice period. Also, Employee may terminate his employment
hereunder if his health should become impaired to an extent that makes the
continued performance of his duties hereunder hazardous to his physical or
mental health or his life, provided that Employee shall have furnished the
Company with a written statement from a qualified doctor to such effect and
provided, further, that, at the Company's request made within thirty (30) days
of the date of such written statement, Employee shall submit to an examination
by a doctor selected by the Company who is reasonably acceptable to Employee and
such doctor shall have concurred in the conclusion of Employee's doctor. In the
event this Agreement is terminated as a result of Employee's disability,
Employee shall receive from the Company, in a lump-sum payment due within ten
(10) days of the effective date of termination, the base salary at the rate then
in effect for whatever time period is
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remaining under the Term of this Agreement or for one (1) year, whichever amount
is greater.
(c) Good Cause. The Company may terminate the Agreement ten (10) days
after written notice to Employee for good cause, which shall be: (1) Employee's
willful, material and irreparable breach of this Agreement; (2) Employee's gross
negligence in the performance or intentional nonperformance continuing for ten
(10) days after receipt of written notice of need to cure of any of Employee's
material duties and responsibilities hereunder; (3) Employee's willful
dishonesty, fraud or misconduct with respect to the business or affairs of the
Company or Collectibles which materially and adversely affects the operations or
reputation of the Company or Collectibles; (4) Employee's conviction of a felony
crime; or (5) chronic alcohol abuse or illegal drug abuse by Employee. In the
event of a termination for good cause, as enumerated above, Employee shall have
no right to any severance compensation.
(d) Without Cause. At any time after the commencement of employment,
Employee may, without cause, terminate this Agreement and Employee's employment,
effective thirty (30) days after written notice is provided to the Company.
Employee may only be terminated without cause by the Company during the Term
hereof if such termination is approved by at least two-thirds of the members of
the Board of Directors of Collectibles. Should Employee be terminated by the
Company without cause during the Term, Employee shall receive from the Company,
in a lump-sum payment due on the effective date of termination, equal to the
Severance Base Salary for whatever time period is remaining under the Term of
this Agreement (not to exceed two years) or for one (1) year, whichever amount
is greater. For purposes of this Agreement, the "Severance Base Salary" shall be
$100,000 per year. Should Employee be terminated by the Company without cause at
any time after the Term, Employee shall receive from the Company, in a lump-sum
payment due on the effective date of termination, a severance payment equal to
$100,000. Further, any termination without cause by the Company shall operate to
shorten the period set forth in paragraph 3(a) and during which the terms of
paragraph 3 apply to one (1) year from the date of termination of employment. If
Employee resigns or otherwise terminates his employment without cause pursuant
to this paragraph 5(d), Employee shall receive no severance compensation.
(e) Change In Control Of Collectibles. In the event of a "Change in
Control" of Collectibles (as defined in paragraph 12(e) below) during the Term,
refer to paragraph 12 below.
(f) Upon termination of this Agreement for any reason provided above,
Employee shall be entitled to receive all compensation earned and all benefits
and reimbursements due through the effective date of termination. Additional
compensation subsequent to termination, if any, will be due and payable to
Employee only to the extent and in the manner expressly provided above or in
paragraph 12. All other rights and obligations of Collectibles, the Company and
Employee under this Agreement shall cease as of the effective date of
termination, except that the Company's obligations under paragraph 9 herein and
Employee's obligations under paragraphs 3, 6, 7, 8 and 10 herein shall survive
such termination in accordance with their terms.
(g) If termination of Employee's employment arises out of the Company's
failure to pay
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Employee on a timely basis the amounts to which he is entitled under this
Agreement or as a result of any other breach of this Agreement by the Company,
as determined by a court of competent jurisdiction or pursuant to the provisions
of paragraph 16 below, the Company shall pay all amounts and damages to which
Employee may be entitled as a result of such breach, including interest thereon
and all reasonable legal fees and expenses and other costs incurred by Employee
to enforce his rights hereunder. Further, none of the provisions of paragraph 3
shall apply in the event this Agreement is terminated as a result of a breach by
the Company.
6. RETURN OF COMPANY PROPERTY.
All records, designs, patents, business plans, financial statements,
manuals, memoranda, lists and other property delivered to or compiled by
Employee by or on behalf of the Company, Collectibles or their representatives,
vendors or customers which pertain to the business of the Company or
Collectibles shall be and remain the property of the Company or Collectibles, as
the case may be, and be subject at all times to their discretion and control.
Likewise, all correspondence, reports, records, charts, advertising materials
and other similar data pertaining to the business, activities or future plans of
the Company or Collectibles which is collected by Employee shall be delivered
promptly to the Company without request by it upon termination of Employee's
employment for any reason.
7. INVENTIONS.
Employee shall disclose promptly to Collectibles and the Company any
and all significant conceptions and ideas for inventions, improvements and
valuable discoveries, whether patentable or not, which are conceived or made by
Employee, solely or jointly with another, during the period of employment or
within one (1) year thereafter, and which are directly related to the business
or activities of the Company or Collectibles and which Employee conceives as a
result of his employment by the Company. Employee hereby assigns and agrees to
assign all his interests therein to the Company or its nominee. Whenever
requested to do so by the Company, Employee shall execute any and all
applications, assignments or other instruments that the Company shall deem
necessary to apply for and obtain Letters Patent of the United States or any
foreign country or to otherwise protect the Company's interest therein.
8. TRADE SECRETS.
Employee agrees that he will not, during or after the Term of this
Agreement with the Company, disclose the specific terms of the Company's or
Collectibles' relationships or agreements with their respective significant
vendors or customers or any other significant and material trade secret of the
Company or Collectibles, whether in existence or proposed, to any person, firm,
partnership, corporation or business for any reason or purpose whatsoever.
9. INDEMNIFICATION.
In the event Employee is made a party to any threatened, pending or
completed action, suit or
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proceeding, whether civil, criminal, administrative or investigative (other than
an action by the Company or Collectibles against Employee), by reason of the
fact that he is or was performing services under this Agreement, then the
Company shall indemnify Employee against all expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement, as actually and
reasonably incurred by Employee in connection therewith. In the event that both
Employee and the Company are made a party to the same third-party action,
complaint, suit or proceeding, the Company or Collectibles agrees to engage
competent legal representation, and Employee agrees to use the same
representation, provided that if counsel selected by Collectibles shall have a
conflict of interest that prevents such counsel from representing Employee,
Employee may engage separate counsel and the Company or Collectibles shall pay
all attorneys' fees of such separate counsel. Further, while Employee is
expected at all times to use his best efforts to faithfully discharge his duties
under this Agreement, Employee cannot be held liable to the Company or
Collectibles for errors or omissions made in good faith where Employee has not
exhibited gross, willful and wanton negligence and misconduct or performed
criminal and fraudulent acts which materially damage the business of the
Company.
10. NO PRIOR AGREEMENTS.
Employee hereby represents and warrants to the Company that the
execution of this Agreement by Employee and his employment by the Company and
the performance of his duties hereunder will not violate or be a breach of any
agreement with a former employer, client or any other person or entity. Further,
Employee agrees to indemnify the Company for any claim, including, but not
limited to, attorneys' fees and expenses of investigation and all fees and
expenses incurred by the Company pursuant to paragraph 9, by any such third
party that such third party may now have or may hereafter come to have against
the Company based upon or arising out of any non-competition agreement,
invention or secrecy agreement between Employee and such third party.
11. ASSIGNMENT; BINDING EFFECT.
Employee understands that he has been selected for employment by the
Company on the basis of his personal qualifications, experience and skills.
Employee agrees, therefore, that he cannot assign all or any portion of his
performance under this Agreement. Subject to the preceding two (2) sentences and
the express provisions of paragraph 12 below, this Agreement shall be binding
upon, inure to the benefit of and be enforceable by the parties hereto and their
respective heirs, legal representatives, successors and assigns.
12. CHANGE IN CONTROL.
(a) Unless he elects to terminate this Agreement pursuant to (c) below,
Employee understands and acknowledges that the Company may be merged or
consolidated with or into another entity and that such entity shall
automatically succeed to the rights and obligations of the Company hereunder or
that the Company may undergo another type of Change in Control. In the event
such a merger or consolidation or other Change in Control is initiated prior to
the end of the Term, then the provisions of this paragraph 12 shall be
applicable.
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(b) In the event of a pending Change in Control wherein the Company and
Employee have not received written notice at least five (5) business days prior
to the anticipated closing date of the transaction giving rise to the Change in
Control from the successor to all or a substantial portion of the Company's
business and/or assets that such successor is willing as of the closing to
assume and agree to perform the Company's obligations under this Agreement in
the same manner and to the same extent that the Company is hereby required to
perform, then such Change in Control shall be deemed to be a termination of this
Agreement by the Company without cause during the Term and the applicable
portions of paragraph 5(d) will apply; provided, however, under such
circumstances, that the amount of the lump-sum severance payment due to Employee
shall be triple the amount calculated under the terms of paragraph 5(d) and the
non-competition provisions of paragraph 3 shall not apply whatsoever.
(c) In any Change in Control situation, Employee may, at his sole
discretion, elect to terminate this Agreement by providing written notice to the
Company at least five (5) business days prior to the anticipated closing of the
transaction giving rise to the Change in Control. In such case, the applicable
provisions of paragraph 5(d) will apply as though the Company had terminated the
Agreement without cause during the Term; provided, however, that under such
circumstances, the amount of the lump-sum severance payment due to Employee
shall be double the amount calculated under the terms of paragraph 5(d) and the
non-competition provisions of paragraph 3 shall all apply for a period of two
(2) years from the effective date of termination.
(d) For purposes of applying paragraph 5 under the circumstances
described in (b) and (c) above, the effective date of termination will be the
closing date of the transaction giving rise to the Change in Control and all
compensation, reimbursements and lump-sum payments due Employee must be paid in
full by the Company at or prior to such closing. Further, Employee will be given
at least 30 days to elect whether to exercise all or any of his vested options
to purchase Collectibles Common Stock, including any options with accelerated
vesting under the provisions of Collectibles' Long-Term Incentive Plan, such
that he may convert the options to shares of Collectibles Common Stock at or
prior to the closing of the transaction giving rise to the Change in Control, if
he so desires.
(e) A "Change in Control" shall be deemed to have occurred if:
(i) any person, other than Collectibles, a subsidiary of
Collectibles or an employee benefit plan of Collectibles, acquires
directly or indirectly Beneficial Ownership (as defined in Section
13(d) of the Securities Exchange Act of 1934, as amended) of any
voting security of the Company and immediately after such acquisition
such Person is, directly or indirectly, the Beneficial Owner of voting
securities representing 50% or more of the total voting power of all
of the then-outstanding voting securities of the Company, unless the
transaction pursuant to which such acquisition is made is approved by
at least two-thirds (2/3) of the Board;
(ii) the following individuals no longer constitute a majority of
the members of the Board of Directors of Collectibles: (A) the
individuals who, as of the closing date of Collectibles' initial
public offering, constitute the Board of Directors of Collectibles
(the "Original Directors"); (B) the individuals who thereafter are
elected to the Board of Directors of
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Collectibles and whose election, or nomination for election, to the
Board of Directors of Collectibles was approved by a vote of at least
two-thirds (2/3) of the Original Directors then still in office (such
directors becoming "Additional Original Directors" immediately
following their election); and (C) the individuals who are elected to
the Board of Directors of Collectibles and whose election, or
nomination for election, to the Board of Directors of Collectibles was
approved by a vote of at least two-thirds (2/3) of the Original
Directors and Additional Original Directors then still in office (such
directors also becoming "Additional Original Directors" immediately
following their election);
(iii) the stockholders of Collectibles shall approve a merger,
consolidation, recapitalization, or reorganization of Collectibles, a
reverse stock split of outstanding voting securities, or consummation
of any such transaction if stockholder approval is not obtained, other
than any such transaction which would result in at least 75% of the
total voting power represented by the voting securities of the
surviving entity outstanding immediately after such transaction being
Beneficially Owned by at least 75% of the holders of outstanding
voting securities of Collectibles immediately prior to the
transaction, with the voting power of each such continuing holder
relative to other such continuing holders not substantially altered in
the transaction; or
(iv) the stockholders of Collectibles shall approve a plan of
complete liquidation of Collectibles or an agreement for the sale or
disposition by Collectibles of all or a substantial portion of
Collectibles' assets (i.e., 50% or more of the total assets of
Collectibles).
None of the transactions that occur in connection with the initial public
offering of Collectibles shall constitute a Change in Control.
(f) Employee must be notified in writing by the Company at any time
that the Company anticipates that a Change in Control may take place.
(g) Employee shall be reimbursed by the Company or its successor for
any excise taxes that Employee incurs under Section 4999 of the Internal Revenue
Code of 1986, as a result of any Change in Control. Such amount will be due and
payable by the Company or its successor within ten (10) days after Employee
delivers a written request for reimbursement accompanied by a copy of his tax
return(s) showing the excise tax actually incurred by Employee.
13. COMPLETE AGREEMENT.
This Agreement is not a promise of future employment. Employee has no
oral representations, understandings or agreements with the Company or any of
its officers, directors or representatives covering the same subject matter as
this Agreement.
This written Agreement is the final, complete and exclusive statement
and expression of the agreement between the Company and Employee and of all the
terms of this Agreement, and it cannot be
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varied, contradicted or supplemented by evidence of any prior or contemporaneous
oral or written agreements. This written Agreement may not be later modified
except by a further writing signed by a duly authorized officer of the Company
and Employee, and no term of this Agreement may be waived except by writing
signed by the party waiving the benefit of such term.
14. NOTICE.
Whenever any notice is required hereunder, it shall be given in writing
addressed as follows:
To the Company: Collectibles USA, Inc.
2081 Landings Drive
Mountain View, CA 94043
To Employee: c/o American Royal Arts Corp.
473 Old Country Road
Westbury, New York 11590
Notice shall be deemed given and effective three (3) days after the deposit in
the U.S. mail of a writing addressed as above and sent first class mail,
certified, return receipt requested, or if sooner, when actually received.
Either party may change the address for notice by notifying the other party of
such change in accordance with this paragraph 14.
15. SEVERABILITY; HEADINGS.
If any portion of this Agreement is held invalid or inoperative, the
other portions of this Agreement shall be deemed valid and operative and, so far
as is reasonable and possible, effect shall be given to the intent manifested by
the portion held invalid or inoperative. The paragraph headings herein are for
reference purposes only and are not intended in any way to describe, interpret,
define or limit the extent or intent of the Agreement or of any part hereof.
16. ARBITRATION.
Any unresolved dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by arbitration, conducted
before a panel of three (3) arbitrators Mountain View, California, in accordance
with the rules of the American Arbitration Association then in effect. The
arbitrators shall not have the authority to add to, detract from, or modify any
provision hereof nor to award punitive damages to any injured party. The
arbitrators shall have the authority to order back-pay, severance compensation,
vesting of options (or cash compensation in lieu of vesting of options),
reimbursement of costs, including those incurred to enforce this Agreement, and
interest thereon in the event the arbitrators determine that Employee was
terminated without disability or good cause, as defined in paragraphs 5(b) and
5(c), respectively, or that the Company has otherwise materially breached this
Agreement. A decision by a majority of the arbitration panel shall be final and
binding. Judgment
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may be entered on the arbitrators' award in any court having jurisdiction. The
direct expense of the arbitrators shall be borne by the Company.
17. GOVERNING LAW.
This Agreement shall in all respects be construed according to the laws
of the State of Delaware.
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18. COUNTERPARTS.
This Agreement may be executed simultaneously in two (2) or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
American Royal Arts Corp.
By: /s/ Jerry Gladstone
------------------------------------
Name: Jerry Gladstone
------------------------------------
Title: President
------------------------------------
COLLECTIBLES USA, INC.
By: /s/ Ronald Rafaloff
------------------------------------
Name: Ronald Rafaloff
------------------------------------
Title: Assistant Secretary
------------------------------------
Jerry Gladstone
/s/ Jerry Gladstone
-------------------------------------
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SCHEDULE TO EXHIBIT 10.1
Identification of Substantially Identical Employment Agreements
1. Employment Agreement, by and among Collectibles USA, Inc.
("Collectibles"), Animation, U.S.A., Inc., a Washington corporation and a
wholly-owned subsidiary of Collectibles (the "Company"), and Laine Ross,
pursuant to which she shall be employed as Vice President of the Company, and
shall receive a base salary of $25,000 per year for an initial term of three
years.*
2. Employment Agreement, by and among Collectibles, American Royal Arts
Corp., a New York corporation and a wholly-owned subsidiary of Collectibles (the
"Company"), and Jerry Gladstone, pursuant to which he shall be employed as
President of the Company, and shall receive a base salary of $50,000 per year
for an initial term of three years.*
3. Employment Agreement, by and among Collectibles, Elwell Stores, Inc.
(d/b/a The Reef Hallmark Shop), a Florida corporation and a wholly-owned
subsidiary of Collectibles (the "Company"), and Roy C. Elwell, pursuant to which
he shall be employed as President of the Company, and shall receive a base
salary of $25,000 per year for an initial term of three years.*
4. Employment Agreement, by and among Collectibles, Crystal Galleria,
Inc., a Nevada corporation and a wholly-owned subsidiary of Collectibles (the
"Company"), and Vincent J. Browne, pursuant to which he shall be employed as
President of the Company, and shall receive a base salary of $50,000 per year
for an initial term of three years.*
5. Employment Agreement, by and among Collectibles, Stone's Shops,
Inc., an Illinois corporation and a wholly-owned subsidiary of Collectibles (the
"Company"), and Michael Stone, pursuant to which he shall be employed as General
Manager of the Company, and shall receive a base salary of $47,000 per year for
an initial term of three years.*
6. Employment Agreement, by and among Collectibles, St. George, Inc.
(d/b/a Little Elegance), a New Jersey corporation and a wholly-owned subsidiary
of Collectibles (the "Company"), and Robert St. George, pursuant to which he
shall be employed as President of the Company, and shall receive a base salary
of $25,000 per year for an initial term of three years.*
7. Employment Agreement, by and among Collectibles, DKG Enterprises,
Inc. (d/b/a North Pole City Gifts & Collectibles; d/b/a North Pole City), an
Oklahoma corporation and a wholly-owned subsidiary of Collectibles (the
"Company"), and David K. Green, pursuant to which he shall be employed as
President of the Company, and shall receive a base salary of $50,000 per year
for an initial term of three years.*
8. Employment Agreement, by and among Collectibles, Filmart Productions
Inc. (d/b/a Cartoon World; d/b/a Filmart Galleries), a New York corporation and
a wholly-owned subsidiary of Collectibles (the "Company"), and Susan M. Spiegel,
pursuant to which she shall be employed as President of the Company, and shall
receive a base salary of $25,000 per year for an initial term of five years.*
<PAGE>
9. Employment Agreement, by and among Animation, U.S.A., Inc., a
Washington corporation and a wholly-owned subsidiary of Collectibles, and David
Vice, pursuant to which he shall be employed as President of the Company, and
shall receive a base salary of $25,000 per year for an initial term of three
years.*
10. Employment Agreement, by and among Elwell Stores, Inc. (d/b/a The
Reef Hallmark Shop), a Florida corporation and a wholly-owned subsidiary of
Collectibles, and Kim A. Elwell, pursuant to which she shall be employed as
Secretary & Treasurer of the Company, and shall receive a base salary of $25,000
per year for an initial term of three years.*
11. Employment Agreement, by and among Stone's Shops, an Illinois
corporation and a wholly-owned subsidiary of Collectibles, and David Stone,
pursuant to which he shall be employed as President of the Company, and shall
receive a base salary of $20,000 per year for an initial term of three years.*
12. Employment Agreement, by and among St. George, Inc. (d/b/a Little
Elegance), a New Jersey corporation and a wholly-owned subsidiary of
Collectibles, and Keith Holt, pursuant to which he shall be employed as
President of the Company, and shall receive a base salary of $25,000 per year
for an initial term of three years.*
13. Employment Agreement, by and among Filmart Productions Inc. (d/b/a
Cartoon World; d/b/a Filmart Galleries), a New York corporation and a
wholly-owned subsidiary of Collectibles, and Aron Laikin, pursuant to which he
shall be employed as Chief Operating Officer of the Company, and shall receive a
base salary of $25,000 per year for an initial term of five years.*
* Pursuant to Item 601(b)(2) of Regulation S-K of the Securities Act of 1933, as
amended, supplemental copies of any omitted schedules or annexes will be
furnished to the Commission upon request.
-2-
CONSULTING AGREEMENT
This Consulting Agreement between Collectibles USA, Inc., a Delaware
corporation ("Company"), and RGR Financial Group, LLC ("Consultant"), a Delaware
limited liability corporation, is hereby entered into this 12th day of June,
1997 to be effective as of the consummation of the initial public offering of
the Company's common stock.
NOW, THEREFORE, in consideration of the mutual promises, terms,
covenants and conditions set forth herein and the performance of each, it is
hereby agreed as follows:
1. Duties.
(a) The Company hereby engages Consultant as a merger and acquisition
consultant to assist the Company in implementing its strategy to acquire
additional retailers of collectibles and marketers of animation art, including
to the extent requested by the Company, (i) assisting the Company in designing
the Company's acquisition program and identifying and evaluating potential
acquisition candidates, their operations, historical performance and future
prospects, and (ii) advising the Company in discussions and negotiations with
acquisition candidates.
(b) The consulting activities will be provided primarily by Ronald P.
Rafaloff and Gary Rafaloff on behalf of Consultant. Consultant hereby accepts
this engagement upon the terms and conditions herein contained and agrees to
devote a reasonable amount of time, attention and efforts to promote and further
the business and services of the Company.
(c) Consultant agrees to keep the Company informed of its activities
hereunder. Specifically, after identifying a potential acquisition candidate and
gathering appropriate information with respect thereto, Consultant will provide
all such information to the Chief Executive Officer of the Company, or his
designee, and discuss the desirability of proceeding with such potential
candidate with the Chief Executive Officer of the Company and any such
discussion with the potential acquisition candidate shall take place with the
Chief Executive Officer or his designee. No discussion with respect to a
possible purchase price of such potential acquisition candidate shall take place
without the prior approval of the Chief Executive Officer of the Company and
shall take place in the presence of, or with the prior approval of, the Chief
Executive Officer or his designee. Any such acquisition shall, of course, be
subject to prior approval of the Board of Directors.
2. Compensation.
(a) For all services rendered by Consultant to the Company, the Company
shall compensate the Consultant based upon each acquisition candidate with which
an acquisition is
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consummated in accordance with Exhibit A attached hereto. No such compensation
shall be paid until such time as an acquisition is consummated.
(b) The Company shall reimburse Consultant for all ordinary and
necessary business expenses lawfully and reasonably incurred by Consultant in
the performance of its services. All reimbursable expenses shall be
appropriately documented in reasonable detail by Consultant upon submission of
any request for reimbursement.
3. Term; Termination; Rights of Termination. The term of this Agreement
shall begin on the date of this Agreement and continue for a period of one (1)
year subject to further extension if agreed to by both parties hereto.
4. Taxes. It is mutually understood and agreed that in the performance
of its services under this Agreement, Consultant is at all times performing its
services as an independent contractor, and acknowledges that it is responsible
for payment of its federal income tax, employment taxes and social security
taxes for its employees. Further, Consultant will comply with all taxing
authorities, regulations and laws, whether federal or state.
5. Nondisclosure and Nonuse of Confidential Information. Except as
required by the nature of Consultant's duties or with the prior written approval
of an authorized officer of the Company, Consultant will never, during the term
of this Agreement or thereafter, use or disclose any confidential information of
the Company, any of its customers or any potential acquisition candidate,
including without limitation customer lists, market research, strategic plans or
other information or discoveries, inventions, improvements, know-how, methods or
other trade secrets, whether developed by Consultant or others. Consultant will
comply with the Company's policies and procedures for the protection of
confidential information.
6. Use and Return of Documents. Consultant will not disclose any
documents, record, tapes and other media that contain confidential information
and will not copy any such material or remove it from the Company's offices
except as approved by an authorized officer of the Company. Upon termination of
this Agreement, Consultant will return to the Company all copies of documents,
records, tapes, and other media that contain confidential information.
7. Remedies. Consultant acknowledges that in the event of a violation
by it of this Agreement the harm to the Company could be irreparable. Consultant
agrees that, in addition to any other remedies provided by law, the Company will
be entitled to obtain injunctive relief against any such violation without
having to post a bond.
8. Complete Agreement. There are no oral representations,
understandings, or agreements with the Company or any of its officers, directors
or representatives covering the same subject matter as this Agreement. This
written Agreement is the final, complete and exclusive statement and expression
of the agreement between the Company and Consultant and of
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all the terms of this Agreement, and it cannot be varied, contradicted or
supplemented by evidence of any prior or contemporaneous oral or written
agreements. This written Agreement may not be later modified except by a further
writing signed by the Company and Consultant, and no term of this Agreement may
be waived except by writing signed by the party waiving the benefit of such
terms.
9. No Waiver. No waiver by the parties hereto of any default or breach
of any term, condition or covenant of this Agreement shall be deemed to be a
waiver of any subsequent default or breach of the same or any other term,
condition or covenant contained herein.
10. Assignment; Binding Effect. Consultant understands that it may not
assign its rights or obligations hereunder without the prior written consent of
the Company. Subject to the preceding sentence, this Agreement shall be binding
upon and inure to the benefit of the parties thereto and their respective heirs,
successors and assigns. It is further understood and agreed that the Company may
be merged or consolidated with another entity and that any such entity shall
automatically succeed to the rights, powers and duties of the Company hereunder.
11. Notices. Whenever any notice is required hereunder, it shall be
given in writing addressed as follows:
To the Company: One Battery Park Plaza
24th Floor
New York, NY 10004-1405
To Consultant: One Battery Park Plaza
24th Floor
New York, NY 10004-1405
Notice shall be deemed given and effective seven (7) days after the deposit in
the U.S. mail of a writing addressed as above and sent first class mail,
certified, return receipt requested, or when actually received. Either party may
change the address for notice by notifying the other party of such change in
accordance with this paragraph 11.
12. Severability; Headings. If any portion of this Agreement is held
invalid or inoperative, the other portions of this Agreement shall be deemed
valid and operative and, so far as is reasonable and possible, effect shall be
given to the intent manifested by the portion held invalid or inoperative. The
paragraph headings herein are for reference purposes only and are not intended
in the way to describe, interpret, define or limit the extent or intent of this
Agreement or of any part hereof.
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13. Governing Law; Place of Performance. This Agreement shall in all
respects be construed according to the laws of the State of New York.
RGR Financial Group, LLC
By: /s/ Ronald Rafaloff
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Collectibles USA, Inc.
By: /s/ Ronald Rafaloff
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Exhibit A
Consultant shall be entitled to receive 3.2% of Pre-Tax Net Income for
the acquisition candidate. Pre-Tax Net Income is calculated based upon the
acquisition candidate's most recently completed fiscal year, with such additions
thereto as may be agreed to by the Chief Executive Officer of the Company, or
his designee, and the Consultant.
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EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement"), between Collectibles USA, Inc., a
Delaware corporation (the "Company"), and W. Randolph Ellspermann (the
"Executive") entered into as of this 11th day of August, 1997.
WHEREAS, the Company will be engaged primarily in the business of marketing
collectible merchandise and animation art products; and
WHEREAS, the Executive will be employed by the Company in a confidential
relationship wherein the Executive, in the course of his employment with the
Company, will become familiar with and aware of information as to the Company
and its subsidiaries and affiliates and their respective customers, the specific
manner of doing business, including the processes, techniques and trade secrets
utilized by the Company and its subsidiaries and affiliates, and future plans
with respect thereto, all of which has been and will be established and
maintained at great expense to the Company, which information is a trade secret
and constitutes the valuable good will of the Company; and
NOW, THEREFORE, in consideration of the mutual promises, terms, covenants
and conditions set forth herein and the performance of each, it is hereby agreed
as follows:
1. AGREEMENT SUPERSEDES ALL OTHER PRIOR UNDERSTANDINGS UPON EFFECTIVE DATE;
REPRESENTATIONS OF EXECUTIVE. This Agreement shall supersede any and all other
prior employment agreements, letters of intent, term sheets, arrangements,
and/or any other understanding, whether written or oral, between the Executive
and the Company or any subsidiary or affiliate thereof regarding any and all
matters relating to employment, compensation, benefits or similar matters. The
Executive hereby represents and warrants to the Company that the execution of
this Agreement by the Executive and his employment by the Company and the
performance of his duties hereunder will not violate or be a breach of any
agreement with a former employer, client or any other person or entity. Further,
the Executive agrees to indemnify the Company for any claim, including, but not
limited to, attorneys' fees and expenses of investigation and all fees and
expenses incurred by the Company, by any such third party that such third party
may now have or may hereafter come to have against the Company based upon or
arising out of any non-competition agreement, invention or secrecy agreement
between the Executive and such third party.
2. EMPLOYMENT AND DUTIES.
(a) Employment. The Company hereby employs the Executive as President and
Chief Executive Officer of the Company, and the Executive will report directly
to the Board of
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Directors of the Company (the "Board"). The Executive hereby accepts this
employment upon the terms and conditions herein contained and, subject to
Section 2(b), agrees to devote his working time, attention and efforts to
promote and further the business of the Company.
(b) Exclusivity of Services. The Executive shall not, during the Term, be
engaged in any other business activity pursued for gain, profit or other
pecuniary advantage except to the extent that such activity does not interfere
with the Executive's duties and responsibilities hereunder. The foregoing
limitations shall not be construed as prohibiting the Executive from making
personal investments in such form or manner as will neither require his services
in the operation or affairs of the companies or enterprises in which such
investments are made nor violate the terms of Section 5 of this Agreement.
(c) Location for Services. The Executive shall perform his services
hereafter at the Company's corporate headquarters which shall be located in such
metropolitan area as the Executive shall choose, subject to the consent of RGR
Financial Group, which consent shall not be unreasonably withheld. In the event
that the Executive must relocate his personal residence to a new geographical
area, the Company will pay all relocation costs to move Executive, his immediate
family and their personal property and affects. Such costs may include, by way
of example, but are not limited to, pre-move visits to search for a new
residence, investigate schools or for other purposes; temporary lodging and
living costs prior to moving into a new permanent residence; duplicate home
carrying costs; all closing costs on the sale of the Executive's present
residence and on the purchase of a comparable residence in the new location; and
added income taxes that Executive may incur if any relocation costs are not
deductible for tax purposes. The general intent of the foregoing is that
Executive shall not personally bear any out-of-pocket cost as a result of
relocation, with an understanding that Executive will use his best efforts to
incur only those costs which are reasonable and necessary to effect a smooth,
efficient and orderly relocation, with minimal disruption to the business
affairs of the company and the personal life of Executive and his family.
3. TERM. The term of this Agreement shall commence on the date hereof (the
"Effective Date") and shall end on the date which is the third anniversary of
the Effective Date (the "Initial Term"); provided, however, that in the event
that the Company or the Executive does not notify the other party on or prior to
the date which is one year prior to the expiration of the Initial Term (such
date, the "Notification Date") that it or he (as the case may be) desires that
the Initial Term not be extended beyond the termination of the Initial Term, the
term of this Agreement shall automatically be extended beyond the Initial Term
for successive one year periods on each anniversary of the Notification Date,
until either party gives notice to the other of its desire not to extend further
the term of this Agreement beyond the end of the then-extended term (the term of
this Agreement, whether during the Initial Term or any extension thereof, the
"Term").
4. COMPENSATION. For all services rendered by the Executive, the Company
shall compensate the Executive as follows:
(a) Base Salary. The base salary payable to the Executive during the Term
shall be at the rate of $150,000 per year, payable on a regular basis in
accordance with the Company's standard payroll procedures, but not less
frequently than on a monthly basis (the "Base Salary"). On at least an annual
basis, the Board shall review the Executive's performance and may make increases
to the Base Salary if, in its discretion, any such increase is warranted. Such
recommended increase shall require approval by the Board or a duly constituted
committee thereof.
(b) One Time Lump-Sum Payment. Within five business days after the date of
consummation of the Company's initial public offering (the "IPO") of Common
Stock, par value $.01 per share (the "Common Stock"), the Company shall pay to
the Executive a lump-sum amount equal to $50,000.
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(c) Incentive Bonus. It is the Company's intent to develop a written
Incentive Bonus Plan setting forth the criteria under which the Executive and
other key employees of the Company will be eligible to receive year-end bonus
awards.
(d) Executive Perquisites, Benefits And Other Compensation. The Executive
shall be entitled to receive additional benefits and compensation from the
Company in such form and to such extent as specified below:
(i) Payment of all premiums for coverage for the Executive and his
dependent family members under health, hospitalization, disability, dental,
life and other insurance plans that the Company may have in effect from
time to time, which benefits provided to the Executive under this clause
(i) shall be at least equal to such benefits provided to Company
executives.
(ii) Reimbursement for all business travel and other out-of-pocket
expenses reasonably incurred by the Executive in the performance of his
services pursuant to this Agreement. All reimbursable expenses shall be
appropriately documented in reasonable detail by the Executive upon
submission of any request for reimbursement, and in a format and manner
consistent with the Company's expense reporting policy.
(iii) Four (4) weeks paid vacation for each year during the period of
employment or such greater amount as may be afforded officers and key
employees generally under the Company's policies in effect from time to
time (pro-rated for any year in which the Executive is employed for less
than the full year).
(iv) The Company shall provide the Executive with other executive
perquisites as may be available to or deemed appropriate for the Executive
by the Board and participation in all other Company-wide employee benefits
as available from time to time, which may include participation in the
Company's Long-Term Incentive Plan.
(e) $7 Options. Promptly after the date hereof, the Executive shall be
granted stock options to purchase 125,000 shares of the Company's Common Stock,
at an exercise price of $7.00 per share (the "$7 Options"). Such options shall
vest immediately and the terms and conditions of such options shall be set forth
in an option grant between the parties hereto. In the event that (i) the
Executive's employment is terminated under the circumstances set forth in
Section 6(c), 6(d) or 6(f) of this Agreement, prior to the consumation of the
IPO (unless the IPO is not consummated within 60 days of the date hereof) or
(ii) the Executive's Employment is terminated under the circumstances set forth
in Section 6(c) or 6(f) of this Agreement prior to the date six months after the
consummation of the IPO, the Executive shall have five business days in which to
exercise the $7 Options and thereafter such options shall terminate and be of no
further force or effect. In the event that the Exeuctive's employment is
terminated under any other circumstances, the Executive shall have five years in
which to exercise the $7 options.
(f) IPO Stock Options. The Executive shall be granted additional stock
options (the "Additional Options") to purchase 125,000 shares of Common Stock
following the IPO, at the price per share offered to the public at the
commencement of the IPO, the terms and conditions of which shall be set forth in
an option agreement between the parties hereto. The Additional Options shall
vest over a three year period, with one-third of the options vesting on the
first anniversary of
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the Effective Date, one-third on the second anniversary of the Effective Date
and the remainder on the third anniversary of the Effective Date. Such options
may be exercised by the Executive any time prior to the later of (i) one year
after the end of the Initial Term or (ii) on year after the end of the
termination of the Executive's employment hereunder.
5. NON-COMPETITION AGREEMENT.
(a) General. Subject to Section 5(c), the Executive shall not, during the
period of his employment by or with the Company, and for a period of two (2)
years immediately following the termination of his employment under this
Agreement (such period, the "Restricted Period"), for any reason whatsoever,
directly or indirectly, for himself or on behalf of or in conjunction with any
other person, persons, company, partnership, corporation, entity or business of
whatever nature:
(i) engage, as an officer, director, shareholder, owner, partner,
joint venturer, or in any other capacity, whether as an agent, employee,
independent contractor, consultant or advisor, or as a sales
representative, in any collectibles or animation art business in
competition with the Company or its subsidiaries or affiliates, within 100
miles of (i) the principal executive offices of the Company or (ii) any
place to which the Company or its subsidiaries or affiliates provides
products or services or in which the Company is in the process of
initiating business operations during the Restricted Period (the
"Territory");
(ii) call upon or interview any person who is, at that time, within
the Territory, an employee of the Company (including the subsidiaries or
affiliates thereof) in a managerial capacity for the purpose or with the
intent of enticing such employee away from or out of the employ of the
Company (including the subsidiaries or affiliates thereof), provided that
the Executive shall be permitted to call upon and hire any member of his
immediate family;
(iii) call upon any person or entity which is, at that time, or which
has been, within one (1) year prior to that time, a customer of the Company
(including the subsidiaries or affiliates thereof) within the Territory for
the purpose of soliciting or selling products similar in nature to those
which are or were provided by the Company to such customer within the
Territory; or
(iv) call upon any prospective acquisition candidate, on the
Executive's own behalf or on behalf of any competitor, which candidate was,
to the Executive's actual knowledge after due inquiry, either called upon
by the Company (including the subsidiaries or affiliates thereof) or for
which the Company made an acquisition analysis, for the purpose of
acquiring such entity, provided that the Executive shall not be charged
with violating this section unless and until the Executive shall have
knowledge or notice that such prospective acquisition candidate was called
upon, or that an acquisition analysis was made for the purpose of acquiring
such entity; or
(v) disclose any information regarding customers, whether in existence
or proposed, of the Company (or the respective subsidiaries or affiliates
thereof) to any person, firm, partnership, corporation or business for any
reason or purpose whatever .
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Notwithstanding the above, the foregoing covenant shall not be deemed to
prohibit the Executive from acquiring as an investment not more than one
percent (1%) of the capital stock of a competing business, whose stock is
traded on a national securities exchange or over-the-counter.
(b) Equitable Remedies. Because of the difficulty of measuring economic
losses to the Company as a result of a breach of the foregoing covenants, and
because of the immediate and irreparable damage that could be caused to the
Company for which they would have no other adequate remedy, the Executive agrees
that the foregoing covenants may be enforced by the Company in the event of
breach by the Executive, by injunctions and restraining orders.
(c) Reasonable Restraint. It is agreed by the parties that the foregoing
covenants in this Section 5 impose a reasonable restraint on the Executive in
light of the activities and business of the Company (including the Company's
subsidiaries and affiliates) on the date of the execution of this Agreement and
the current plans of the Company (including the Company's subsidiaries and
affiliates); but it is also the intent of the Company and the Executive that
such covenants be construed and enforced in accordance with the changing
activities, business and locations of the Company (including the Company's
subsidiaries and affiliates) throughout the term of these covenants, whether
before or after the date of termination of the employment of the Executive. For
example, if, during the term of this Agreement, the Company (including the
Company's subsidiaries or affiliates) engages in new and different activities,
enters a new business or establishes new locations for its current activities or
business in addition to or other than the activities or business enumerated
under the whereas clauses above or the locations currently established therefor,
then the Executive will be precluded from soliciting the customers or employees
of such new activities or business or from such new location and from directly
competing with such new business within the territory through the Restricted
Period.
It is further agreed by the parties hereto that, in the event that the
Executive shall cease to be employed hereunder, and shall enter into a business
or pursue other activities not in competition with the Company (including the
Company's subsidiaries or affiliates), or similar activities or business in
locations the operation of which, under such circumstances, does not violate
clause (a)(i) of this Section 5, and in any event such new business, activities
or location are not in violation of this Section 5 or of employee's obligations
under this Section 5, if any, the Executive shall not be chargeable with a
violation of this Section 5 if the Company (including the Company's subsidiaries
or affiliates) shall thereafter enter the same, similar or a competitive (i)
business, (ii) course of activities or (iii) location, as applicable.
(d) Severability. The covenants in this Section 5 are severable and
separate, and the unenforceability of any specific covenant shall not affect the
provisions of any other covenant. Moreover, in the event any court of competent
jurisdiction shall determine that the scope, time or territorial restrictions of
any specific covenant as set forth are unreasonable, then it is the intention of
the parties that such restrictions be enforced to the fullest extent which the
court deems reasonable, and the Agreement shall thereby be reformed.
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(e) Independent Provisions. All of the covenants in this Section 5 shall be
construed as an agreement independent of any other provision in this Agreement,
and the existence of any claim or cause of action of the Executive against the
Company, whether predicated on this Agreement or otherwise, shall not constitute
a defense to the enforcement by the Company of any of such covenants. It is
specifically agreed that the period of two (2) years following termination of
employment stated at the beginning of this Section 5, during which the
agreements and covenants of the Executive made in this Section 5 shall be
effective, shall be computed by excluding from such computation any time during
which the Executive is in violation of any provision of this Section 5.
6. TERMINATION; RIGHTS ON TERMINATION. This Agreement and the Executive's
employment may be terminated in any one of the followings ways:
(a) Death. The death of the Executive shall immediately terminate this
Agreement, with no severance compensation due to the Executive's estate.
(b) Disability. If, as a result of incapacity due to physical or mental
illness or injury, the Executive shall have been absent from his full-time
duties hereunder for four (4) consecutive months, then thirty (30) days after
receiving written notice (which notice may occur before or after the end of such
four (4) month period, but which shall not be effective earlier than the last
day of such four (4) month period), the Company may terminate the Executive's
employment hereunder provided the Executive is unable to resume his full-time
duties at the conclusion of such notice period. In addition, the Executive may
terminate his employment hereunder if his health should become impaired to an
extent that makes the continued performance of his duties hereunder hazardous to
his physical or mental health or his life, provided that the Executive shall
have furnished the Company with a written statement from a qualified doctor to
such effect and provided, further, that, at the Company's request made within
thirty (30) days of the date of such written statement, the Executive shall
submit to an examination by a doctor selected by the Company who is reasonably
acceptable to the Executive and such doctor shall have concurred in the
conclusion of the Executive's doctor. In the event this Agreement is terminated
as a result of the Executive's disability, the Executive shall receive from the
Company, in a lump-sum payment due within ten (10) days of the effective date of
termination, the Base Salary at the rate then in effect for whatever time period
is remaining under the Term of this Agreement or for one (1) year, whichever
amount is greater. For the purposes of this Section 6(b), the Base Salary shall
be deemed to be not less than $200,000 per year.
(c) Cause. The Company may terminate the Agreement ten (10) days after
written notice to the Executive for "Cause," which shall be: (1) the Executive's
willful, material and irreparable breach of this Agreement; (2) the Executive's
gross negligence in the performance or intentional nonperformance continuing for
ten (10) days after receipt of written notice of need to cure of any of the
Executive's material duties and responsibilities hereunder; (3) the Executive's
willful dishonesty, fraud or misconduct with respect to the business or affairs
of the Company or its subsidiaries or affiliates which materially and adversely
affects the operations or reputation of the Company or its subsidiaries or
affiliates; (4) the Executive's conviction of a felony crime; or (5) chronic
alcohol abuse or illegal drug abuse by the Executive. In the event of a
termination for Cause, as enumerated above, the
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Executive shall receive no severance compensation, and all unvested stock
options granted pursuant to Section 4(f) hereof shall be forfeited to the
Company.
(d) Without Cause. At any time after his commencement of employment, the
Company may, without Cause, terminate this Agreement and the Executive's
employment, effective thirty (30) days after written notice is provided to the
Executive. In the event that the Executive is terminated by the Company without
Cause, the Executive shall receive from the Company the Base Salary for whatever
time period is remaining under the Term of this Agreement (not to exceed two
years) or for one (1) year, whichever amount is greater. For purposes of this
Section 6(d), the Base Salary shall be deemed to be not less than $200,000 per
year. Any termination without Cause by the Company shall operate to immediately
vest the Executive in his invested stock options granted pursuant to Section
4(f) hereof. Further, any termination without Cause by the Company shall operate
to shorten the Restricted Period set forth in Section 5 and during which the
terms of Section 5 apply to one (1) year from the date of termination of
employment.
(e) Change In Control Of The Company. In the event of a "Change in Control"
of the Company (as defined in Section 11 of this Agreement) during the Term,
refer to Section 11 of this Agreement.
(f) Resignation by Executive. If the Executive resigns or otherwise
terminates his employment hereunder (i) the Executive shall receive no severance
compensation, (ii) all unvested stock options granted pursuant to Section 4(f)
shall be forfeited to the Company and (iii) the Restricted Period shall remain
as set forth in Section 5 hereof.
(g) Survival and Continuing Obligations. Upon termination of this Agreement
for any reason provided above, the Executive shall be entitled to receive all
compensation earned and all benefits and reimbursements due through the
effective date of termination. Additional compensation subsequent to
termination, if any, will be due and payable to the Executive only to the extent
and in the manner expressly provided in this Section 6 or in Section 11. All
other rights and obligations of the Company and the Executive under this
Agreement shall cease as of the effective date of termination, except that the
Company's obligations under Section 6 herein and the Executive's obligations and
other matters under Sections 5, 7, 8 and 9 herein shall survive such termination
in accordance with their terms.
7. RETURN OF COMPANY PROPERTY. All records, designs, patents, business
plans, financial statements, manuals, memoranda, lists and other property
delivered to or compiled by the Executive by or on behalf of the Company or its
representatives, vendors or customers which pertain to the business of the
Company shall be and remain the property of the Company, as the case may be, and
be subject at all times to their discretion and control. Likewise, all
correspondence, reports, records, charts, advertising materials and other
similar data pertaining to the business, activities or future plans of the
Company which is collected by the Executive shall be delivered promptly to the
Company without request by it upon termination of the Executive's employment for
any reason.
8. INVENTIONS. The Executive shall disclose promptly to the Company any and
all significant conceptions and ideas for inventions, improvements and valuable
discoveries, whether patentable or not, which are conceived or made by the
Executive, solely or jointly with
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another, during the period of employment or within one (1) year thereafter, and
which are related to the business or activities of the Company or its
subsidiaries or affiliates and which the Executive conceives as a result of his
employment by the Company. The Executive hereby assigns and agrees to assign all
his interests therein to the Company or its nominee. Whenever requested to do so
by the Company, the Executive shall execute any and all applications,
assignments or other instruments that the Company shall deem necessary to apply
for and obtain Letters Patent of the United States or any foreign country or to
otherwise protect the Company's or its subsidiaries or affiliates interest
therein.
9. TRADE SECRETS. Executive agrees that during the course of performing
services for the Company, he has had and will have substantial access to and
contact with information or documents, including but not limited to trade
secrets, patents, copyrighted materials, proprietary computer software, systems
analyses, lists of actual or prospective customers, contracts, Company books and
records, financial data and other Confidential and Proprietary Information and
Materials (as that term is defined below) of the Company, the disclosure of
which to competitors of the Company or others would cause the Company to suffer
substantial and irreparable damage. Executive recognizes, therefore, that it is
in the Company's legitimate business interest to restrict his disclosure or use
of Confidential and Proprietary Information and Materials for any purposes other
than the services provided by him to the Company under this Agreement, and to
limit any potential appropriation of such Confidential and Proprietary
Information and Materials by him for the benefit of the Company's competitors
and to the detriment of the Company. Therefore, it is agreed that unless
Executive shall first secure the Company's written consent, Executive shall not
publish, disclose or use, or authorize any other person or entity to publish,
disclose or use, at any time before, during or subsequent to the Term of this
Agreement, any secret or confidential information, whether patentable or not, of
or about the Company, including any Confidential and Proprietary Information and
Materials (as that term is defined below) and any other secret or confidential
information of which Executive becomes aware of or informed during the Term of
this Agreement, whether or not developed by Executive, except as required in
Executive's duties to the Company. For purposes of this Agreement, "Confidential
and Proprietary Information and Materials" shall include, without limitation,
formulas, patterns, compilations, studies, strategies, programs, devices,
methods, techniques, and processes of or about or its business, customers or
suppliers, which derive independent economic value, actual or potential, from
not being generally known to, and not being readily ascertainable by proper
means by, other persons who can obtain economic value from their disclosure or
use and which are the subject of efforts to maintain their secrecy that are
reasonable under the circumstances.
All Confidential and Proprietary Information and Materials and all copies
of such information and materials relating to the Company's business, whether
prepared by Executive or otherwise coming into his possession, shall remain the
exclusive property of the Company and shall be returned to the Company upon the
Company's request or the termination of Executive's employment.
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10. ASSIGNMENT; BINDING EFFECT. The Executive understands that he has been
selected for employment by the Company on the basis of his personal
qualifications, experience and skills. The Executive agrees, therefore, that he
cannot assign all or any portion of his performance under this Agreement.
11. CHANGE IN CONTROL.
(a) General. Unless he elects to terminate this Agreement pursuant to (c)
below, the Executive understands and acknowledges that the Company may be merged
or consolidated with or into another entity and that such entity shall
automatically succeed to the rights and obligations of the Company hereunder.
(b) Severance Payments. In the event of a pending Change in Control wherein
the Company and the Executive have not received written notice at least five (5)
business days prior to the anticipated closing date of the transaction giving
rise to the Change in Control from the successor to all or a substantial portion
of the Company's business and/or assets that such successor is willing as of the
closing to assume and agree to perform the Company's obligations under this
Agreement in the same manner and to the same extent that the Company is hereby
required to perform, then such Change in Control shall be deemed to be a
termination of this Agreement by the Company without Cause during the Term and
the applicable portions of Section 6(d) will apply under such circumstances,
provided, however that the amount of the lump-sum severance payment due to the
Executive shall be three times the Base Salary at the rate then in effect (with
the Base Salary being deemed to be not less than $200,000 per year) and the
non-competition provisions of Section 5 shall not apply whatsoever.
(c) Voluntary Resignation. In any Change in Control situation, the
Executive may, at his sole discretion, elect to terminate this Agreement by
providing written notice to the Company at least five (5) business days prior to
the anticipated closing of the transaction giving rise to the Change in Control.
In such case, the applicable provisions of Section 6(d) will apply as though the
Company had terminated the Agreement without Cause during the Term.
(d) Application of Termination Provisions. For purposes of applying Section
6 under the circumstances described in Sections (b) and (c) above, the effective
date of termination will be the closing date of the transaction giving rise to
the Change in Control and all compensation, reimbursements and lump-sum payments
due the Executive must be paid in full by the Company at or prior to such
closing. Further, the Executive will be given sufficient time and opportunity to
elect whether to exercise all or any of his vested options to purchase the
Company's Common Stock, including any options with accelerated vesting under the
provisions of the Company's Long-Term Incentive Compensation Plan, such that he
may convert the options to shares of Company Common Stock at or prior to the
closing of the transaction giving rise to the Change in Control, if he so
desires.
(e) Definition. A "Change in Control" shall be deemed to have occurred if:
(i) any person, other than the Company or any employee benefit plan of
the Company, acquires directly or indirectly Beneficial Ownership (as
defined in Section 13(d) of the Securities Exchange Act of 1934, as
amended) of any voting security of the Company
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<PAGE>
and immediately after such acquisition such person is, directly or
indirectly, the Beneficial Owner of voting securities representing 50% or
more of the total voting power of all of the then-outstanding voting
securities of the Company, unless the transaction pursuant to which such
acquisition is made is approved by at least two-thirds (2/3) of the Board;
(ii) the following individuals no longer constitute a majority of the
members of the Board of Directors of the Company: (A) the individuals who,
as of the closing date of the Company's initial public offering, constitute
the Board of Directors of the Company (the "Original Directors"); (B) the
individuals who thereafter are elected to the Board of Directors of the
Company and whose election, or nomination for election, to the Board of
Directors of the Company was approved by a vote of at least two-thirds
(2/3) of the Original Directors then still in office (such directors
becoming "Additional Original Directors" immediately following their
election); and (C) the individuals who are elected to the Board of
Directors of the Company and whose election, or nomination for election, to
the Board of Directors of the Company was approved by a vote of at least
two-thirds (2/3) of the Original Directors and Additional Original
Directors then still in office (such directors also becoming "Additional
Original Directors" immediately following their election).
(iii) the stockholders of the Company shall approve a merger,
consolidation, recapitalization, or reorganization of the Company, a
reverse stock split of outstanding voting securities, or consummation of
any such transaction if stockholder approval is not obtained, other than
any such transaction which has been either (x) approved by at least 66% of
the members of the Board or (y) which would result in at least 50% of the
total voting power represented by the voting securities of the surviving
entity outstanding immediately after such transaction being Beneficially
Owned by at least 50% of the holders of outstanding voting securities of
the Company immediately prior to the transaction, with the voting power of
each such continuing holder relative to other such continuing holders not
substantially altered in the transaction; or
(iv) the stockholders of the Company shall approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by
the Company of all or a substantial portion of the Company's assets (i.e.,
50% or more of the total assets of the Company).
12. COMPLETE AGREEMENT. This written Agreement is the final, complete and
exclusive statement and expression of the agreement between the Company and the
Executive and of all the terms of this Agreement, and it cannot be varied,
contradicted or supplemented by evidence of any prior or contemporaneous oral or
written agreements. This written Agreement may not be later modified except by a
further writing signed by a duly authorized officer of the Company and the
Executive, and no term of this Agreement may be waived except by writing signed
by the party waiving the benefit of such term.
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<PAGE>
13. NOTICE. Whenever any notice is required hereunder, it shall be given in
writing addressed as follows:
To the Company: Collectibles USA, Inc.
c/o RGR Financial Group
One Battery Park Plaza
New York, NY 10004
With a copy to: Morgan, Lewis & Bockius LLP
101 Park Avenue
New York, NY 10178
Attn: David W. Pollak, Esq.
To the Executive: Mr. W. Randolph Ellspermann
2243 Martin Street
#420
Irvine, CA 92612
Notice shall be deemed given and effective three (3) days after the deposit in
the U.S. mail of a writing addressed as above and sent first class mail,
certified, return receipt requested, or if sooner, when actually received.
Either party may change the address for notice by notifying the other party of
such change.
14. SEVERABILITY; HEADINGS. If any portion of this Agreement is held
invalid or inoperative, the other portions of this Agreement shall be deemed
valid and operative and, so far as is reasonable and possible, effect shall be
given to the intent manifested by the portion held invalid or inoperative. The
Section headings herein are for reference purposes only and are not intended in
any way to describe, interpret, define or limit the extent or intent of the
Agreement or of any part hereof.
15. ARBITRATION. Any unresolved dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration,
conducted before a panel of three (3) arbitrators in New York, NY, in accordance
with the rules of the American Arbitration Association then in effect. The
arbitrators shall not have the authority to add to, detract from, or modify any
provision hereof nor to award punitive damages to any injured party. The
arbitrators shall have the authority to order back-pay, severance compensation,
vesting of options (or cash compensation in lieu of vesting of options), and
reimbursement of costs, including those incurred to enforce this Agreement. A
decision by the arbitration panel shall be final and binding. Judgment may be
entered on the arbitrators' award in any court having jurisdiction.
16. GOVERNING LAW. This Agreement shall in all respects be construed
according to the laws of the State of New York.
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17. COUNTERPARTS. This Agreement may be executed simultaneously in two (2)
or more counterparts, each of which shall be deemed an original and all of which
together shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
COLLECTIBLES USA, INC.
By: /s/ Ronald Rafaloff
-------------------------------------
Name: Ronald Rafaloff
-------------------------------------
Title: Chairman of the Board
-------------------------------------
W. RANDOLPH ELLSPERMANN
/s/ W. RANDOLPH ELLSPERMANN
------------------------------------------
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LICENSING AGREEMENT
AGREEMENT dated this twenty-sixth day of March, 1996, between THE CURTIS
PUBLISHING COMPANY, LICENSING DIVISION, (hereinafter referred to as "licensor"),
located 1000 Waterway Boulevard, Indianapolis, IN 46202, and AMERICAN ROYAL ARTS
CORPORATION, (hereinafter referred to as "licensee") located at 473 Old Country
Road, Westbury, NY 11590.
WITNESSETH:
WHEREAS, Licensor was engaged in publishing the magazine The Saturday Evening
Post;
WHEREAS, Licensor is the owner of a library of distinctive and well-know
copyrighted magazine illustrations produced for The Sunday Evening Post.
WHEREAS, Licensee desires to utilize certain of said illustrations for its
merchandise upon the terms and conditions set forth below.
NOW THEREFORE, in consideration of the mutual promises and undertakings herein
contained and for other good and valuable considerations, intending to be
legally bound, the parties agree as follows:
1. DEFINITION OF TERMS
(a) "Customer Sales" shall mean sales of Goods by Licensee
directly or through its authorized wholesalers,
representatives or distributors to retail establishments for
eventual resale to the consumer.
(b) "Mail Order Sales" shall mean sales of Goods by Licensee
directly to the consumer through direct mail solicitation or
catalogues.
(c) "Original Term" shall mean the period beginning on April 1,
1996 and ending on March 31, 1998.
(d) "Contract Year" shall mean the period commencing on January
1st and ending on December 31st of the same year.
(e) A "Premium" shall mean any article used for the purposes of
increasing the sale of another item, promoting or publicizing
any product or service, or used to motivate a sales force,
merchant, consumer, or any other person to perform any act.
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<PAGE>
(f) "Net Wholesale Selling Price" as used herein shall be defined
as meaning the price at which the Goods are sold to Licensee's
customers net of all returns actually made or allowed.
2. GRANT OF LICENSE
Subject to the limitations set forth in Paragraph 2(d) below, and the other
conditions of this Agreement, for the original term of this contract the
Licensor hereby grants to Licensee the rights to use the illustrations listed
under Schedule A below, (hereinafter referred to as "the Materials") on the
following merchandise (hereinafter referred to as "goods"):
(a) Description of Goods: A series of four (4) limited edition
lithographs of "Garfield Visits
Rockwell". Print run of 750 each plus 7
Artist's proofs of the four
illustrations to be marketed at
approximately $400 retail. Each piece
to be signed by Jim Davis of Paws,
Incorporated.
(b) Schedule A: Images for Schedule A to be selected.
(c) Market and Territory: Licensees shall only make sales of Goods
as described in Paragraph 1(a) and (b) above. The license
hereby granted extends to the United States, its territories,
and Canada.
(d) Limitations on License: No license is granted hereunder for
the use of Material for any purpose other than upon or in
connection with the Goods. No license is granted hereunder
for the manufacture, sale or distribution of Goods to be
used as premiums, for publicity purposes, in combination
sales, as giveaways, or to be disposed of under similar
methods of merchandising. In the event Licensee desires to
sell Goods for such purposes, Licensee acknowledges and
agrees that it must first seek and obtain a separate license
therefore from Licensor and that the user therefor must also
obtain a separate license from Licensor for such use of the
Goods.
(e) Exclusivity: For the Original Term of this Agreement, Licensor
shall not license any other person to use, in the Territory,
the Materials listed under Schedule A on the Goods listed in
Paragraph 2(a) and (b) above.
3. ROYALTIES
(a) Rate: In consideration of this license, the Licensee shall pay
the Licensor, during the Original Term of this Agreement and
any extension thereof, a royalty in the amount of eight
percent (8%) of the Net Selling Price of Goods sold. In
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<PAGE>
computing Net Selling Price, no costs incurred in other
advertising and promoting allowances, or distributing the
Goods or any indirect expenses shall be deducted.
4. ACCOUNTING
Not later than the fifteenth day after every quarter during the Original Term
and any extension thereof, and thereafter so long as any sales are made by the
Licensee pursuant to this Agreement, the Licensee shall furnish to the Licensor
a full, complete and accurate statement showing the number of Goods, which have
been sold by the Licensee and the selling price thereof during the preceding
month. For the purposes of this Agreement, an item is considered to be sold when
it is ordered and invoiced or shipped, whichever is sooner.
5. PAYMENT
Simultaneous with the rendition of the statement as aforesaid in Paragraph 4
above, the Licensee shall pay to the Licensor, subject to the provisions of
Paragraph 3, such royalties as the statement indicated are due the Licensor.
6. DURATION
Except as otherwise provided in the following paragraphs, upon completion of the
Original Term, all rights granted the Licensee shall automatically terminate.
7. QUALITY
Licensee acknowledges that if the Goods manufactured and sold by it are of
inferior quality in material and workmanship, the substantial good will which
the Licensor has built up and now possesses in the Material will be impaired.
Accordingly, Licensee warrants that the Goods will be of high standard and of
such appearance and quality as shall be reasonably adequate and suited to their
exploitation to best advantage. Licensee shall submit to Licensor finished art
work and/or a facsimile of all Goods to be manufactured, together with its
cartons and containers, including packaging and wrapping material, which shall
be approved in writing by the Licensor before the Goods are advertised,
distributed or sold. Any article submitted and not disapproved within fourteen
(14) days of the receipt of same by Licensor shall be deemed to have been
approved. After samples of the Goods have been approved pursuant to this
paragraph, Licensee shall not depart therefrom without written consent of the
Licensor. In the event there is a departure from the approved sample of Goods
made or distributed by Licensee, or in the event there is an occurrence
connected with any such Goods or Licensee which reflects unfavorably upon
Licensor, the Licensor shall have the right in the reasonable exercise of its
sole discretion to withdraw its approval of such Goods, at which time this
Agreement shall automatically terminate with respect to such Goods.
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<PAGE>
8. SAMPLES
Licensee shall supply Licensor with 1 sample of each of the complete Goods.
9. BOOKS AND RECORDS
The Licensee shall keep full, complete and accurate books of account and records
covering all transactions relating to the subject matter of this Agreement.
Licensor, through its authorized representative shall have the right to examine
such books of account and records and other documents and material in Licensee's
possession or under its control insofar as they relate to the manufacture and
sale of Goods. The Licensor shall have free and full access therefrom at any
reasonable hour of the day during which the Licensee's offices are open and in
any reasonable manner. Licensee need only retain such books of account and
records for a two-year period following the termination of this Agreement.
10. GOODWILL
The License acknowledges that the Material is unique and original and that the
Licensor is the owner thereof. The Licensee shall not, during the Original Term
of this Agreement or any time thereafter, dispute or contest, directly or
indirectly; the Licensor's ownership of the Material; The Licensor's exclusive
right (subject to this license) to use the Material; the validity of any of the
copyrights or trademarks pertaining thereto or the Licensor's ownership thereof.
Nor shall the Licensee assist or aid others in doing so. At the Licensor's
request, the Licensee shall cooperate with the Licensor in preventing or
stopping any infringement or unfair use by any third party of the Goods or the
Material. The Licensor shall bear the costs of preventing or stopping any such
infringement or unfair use, which it elects to pursue, and the Licensee's
obligation will be limited to providing full cooperation to Licensor.
11. LICENSEE'S EFFORTS
Licensee agrees that it will exercise its best efforts to manufacture,
distribute and sell the Goods within the territory. It is also agreed that
Licensee will use its best efforts to fulfill orders for Goods in a timely and
reasonable manner. Should there be an unforeseen delay in fulfilling customers'
order for Goods, Licensee will exercise all possible diligence in informing
those customers of the delay, and complying totally with Federal Trade
Commission regulations and all other relevant state and federal laws. In the
event of an unforeseen delay in fulfilling orders to customers, Licensee also
agrees that it will refrain from advertising or promoting Goods, or soliciting
orders from consumers until such problems are cured.
12. COPYRIGHT, ETC.
(a) The Licensor shall apply to register trademarks and claims to
copyright, and apply for design patents on the Goods and/or
the Material as may be reasonably necessary, in the Licensor's
sole discretion, to protect the Licensor's interests.
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<PAGE>
All applications for registration of claims to copyright shall
identify the Licensor as the copyright proprietor; all
applications to register trademarks shall identify the
Licensor as the trademark owner; and all applications for
design patents shall correctly identify the inventor and shall
be assigned to the Licensor.
(b) If the Licensor requires any specimens of the Goods, or any
photographic reproductions of the same, for use in filing
copyright, trademark or patent applications, the Licensee
shall provide the Licensor with the same at Licensee's
expense.
(c) At the Licensor's request, the Licensee shall execute
assignments in favor of the Licensor of any and all
copyrights, trademarks or other property rights of whatever
kind relating to the Goods and/or the Material without further
consideration.
(d) Licensee shall ensure and warrant that it will provide a
legally sufficient copyright notice on the Goods and/or the
packaging, wrapping, advertising and promotional material
bearing any reproductions of the Goods or the Material, in the
following format designated by Licensor:
(C) 19** The Curtis Publishing Company
or such other format as Licensor shall from time to time
direct. The Licensee further warrants that it will take such
precautions as necessary to insure that any reproductions made
by its customers also bear the Licensor's legal copyright
notice.
13. ADVERTISING/STYLE GUIDELINES
All advertisements and promotional materials which Licensee intends to use to
promote Goods shall be submitted to Licensor for its written approval prior to
publication. Licensor shall have fourteen (14) days from the date of receipt of
said material in which to approve or disapprove it. Such approval shall not be
unreasonably withheld by Licensor.
To the fullest extent possible, the style guidelines of the Licensor will be
followed in advertising, labeling and promotion.
14. RIGHT OF TERMINATION
Without prejudice to any other rights, Licensor shall have the right to
terminate this Agreement upon written notice to Licensee, sent by certified
mail, return receipt requested, at any time that any of the following may occur:
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<PAGE>
(a) If Licensee shall not have begun the bona fide manufacture or
production of the Goods licensed hereunder within ninety (90)
days from the commencement of the term hereof.
(b) If Licensee shall be unable to fulfill or obtain valid
purchase orders for the Goods throughout the territory hereof
for any reason for a period of six (6) months or more.
(c) If Licensee shall fail to make any payment due hereunder or to
deliver any of the statements herein referred to, and if such
default shall continue for a period of sixty (60) days.
(d) If Licensee shall be unable to pay its liabilities when due,
or shall make any assignment for the benefit of creditors, or
shall file any petition under Chapter 10, 11 or 12 of Title
11, United States Code, or file a voluntary petition in
bankruptcy or be adjudicated as bankrupt or insolvent, or if
any receiver is appointed for its business or property, or if
any trustee in United States government or of the several
states, Licensor shall have the right to terminate this
Agreement. Notwithstanding the foregoing, the Licensor shall,
at any time during the term of this contract, have the option
of demanding an assurance from Licensee of Licensee's ongoing
ability to perform the provisions of this contract, if, in the
reasonable opinion of Licensor, Licensee is unable to
adequately fulfill its requirements. If reasonable and
adequate assurance is not received by Licensor regarding
Licensee's ability to perform, Licensor shall have the right
to terminate this Agreement.
15. SALES AND AFTER EXPIRATION
Should this Agreement terminate for any reason or expire, Licensee may, at the
sole discretion of the Licensor, be permitted to sell its remaining inventory of
Goods for a period not to exceed one hundred and twenty (120) days following the
termination or expiration of this Agreement. Said request to sell remaining
inventory shall be sent to the Licensor within thirty (30) days before
expiration or from Licensee's receipt of any notice terminating the license
herein. However, the Licensee shall not, without prior written consent of the
Licensor, sell any such remaining Goods as distress merchandise or otherwise
than in the ordinary course of business. For the purpose of this Agreement, a
distress sale shall be defined as one in which the merchandise is sold for less
than fifty percent (50%) of the normal wholesale selling price. Licensee shall
pay royalties on all such sales in the manner provided for in this Agreement.
16. CESSATION OF USE
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<PAGE>
Except as otherwise provided in Paragraph 15, the Licensee shall, forthwith
upon the expiration of this Agreement or any extension thereof, or upon its
sooner termination, discontinue the manufacturing, printing, promotion,
advertising, sale and distribution of Goods.
17. RIGHTS RESERVED BY LICENSOR
Any and all rights in and to said Material which are not expressly granted to
the Licensee are hereby reserved by the Licensor. Any one or more of such
reserved rights may be exercised or enjoyed by the Licensor, directly or
indirectly, at any and all times.
18. REIMBURSEMENT OF EXPENSES
Licensee agrees to reimburse Licensor for all labor, material and other expenses
incurred by Licensor at the direct request of Licensee.
Licensee further agrees to reimburse Licensor for the cost of any royalties
audit deemed necessary and proper by Licensor, provided such audit finds a
discrepancy of five percent (5%) or more.
19. LICENSOR'S CLAIM
Whatever claim Licensor may have against Licensee hereunder for royalties and/or
for damages shall become a first lien upon all of said Goods manufactured or
produced pursuant to the terms of this Agreement in the possession or under the
control of Licensee or its agents upon the expiration or termination of this
Agreement.
20. REMEDIES
All specific remedies provided for in this Agreement shall be cumulative and
shall not be exclusive of one another or any of any other remedies available in
law or equity. The failure of the Licensor to insist upon the strict performance
of any of the convenants or terms hereof to be performed by the Licensee shall
not be construed as a waiver of such covenants of terms.
21. LICENSEE'S WARRANTY
Licensee hereby agrees to be solely responsible for, to defend and indemnify
Licensor and its respective officers, agents and employees, and to hold each of
them harmless from any claims, demand, causes or action or damages, including
reasonable attorney's fees arising out of the distribution or use of the Goods,
other than those based solely on Licensee's use of the Material authorized by
this Agreement. Licensee will obtain and maintain product liability insurance in
the minimum amount of five hundred thousand dollars ($500,000) providing
protection for Licensor and its respective officers, agents and employees
against any attorney's fees arising out of any alleged defects in Goods or any
use thereof, in an amount and providing coverage
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<PAGE>
satisfactory to Licensor. Such insurance policy shall provide that it may not be
canceled without at least ten days written notice by Licensor. Further, Licensor
will be furnished with a certificate of such insurance issued by the insuring
company.
22. LICENSOR'S WARRANTY
Licensor represents and warrants to Licensee that it is the sole owner and
proprietor of Material and has the power to enter into this Agreement. Licensor
hereby agrees to indemnify Licensee, its officers, agents and employees and to
hold them harmless against claims, demands, causes of action or damages, for
trademark or copyright infringement arising out of the use of the Material as
authorized by this Agreement, provided that Licensor is given immediate notice
of and shall have the option to undertake and conduct the defense of any such
claim, demand or cause of action. Licensee may, but shall not be obligated to,
join in such defense and be represented by its own counsel. All liabilities,
expenses, losses, damages and reasonable attorney's fees in connection with any
such claim shall be paid by the Licensor, except that if Licensee elects to be
represented by its own counsel, Licensee will pay its own attorney's fees.
Licensee agrees that while it may counsel Licensor concerning the disposition of
any such action, Licensor shall have the sole final decision concerning the
disposition of any action and the right to dispose of inventory and works in
progress as it sees fit.
23. NO PARTNERSHIP OR JOINT VENTURE
This Agreement does not constitute and shall not be construed as constituting a
partnership or joint venture between Licensor and Licensee. The Licensee shall
have no right to obligate or bind Licensor in any manner whatsoever and nothing
herein contained shall give or is intended to give any rights of any kind to any
third party.
24. NO ASSIGNMENT
The license hereby granted is and shall be personal to the Licensee and shall
not be assignable by any action of the Licensee or by operation of the law, and
any attempt at such assignment shall be null and void. The Licensee shall have
no right to grant any sub-licenses. Material change in ownership or corporate
firm of the Licensee shall render this Agreement null and void. This Agreement
shall inure to the benefit of and shall be binding upon the Licensor's
successors and assigns.
25. WAIVER AND MODIFICATION
No waiver or modification of any of the terms of this Agreement shall be valid
unless in writing and signed by the party against whom such modification or
waiver is sought to be enforced. No waiver by either party of a breach hereof of
a default hereunder shall be deemed a waiver by such party of a subsequent
breach or default of like or similar nature.
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26. NOTICE
Whenever notice is required to be given under this Agreement, it shall be deemed
to be good and sufficient notice if in writing, signed by an officer or an
authorized agent of the party serving such notice and sent by telegram, telex or
mailed by registered or certified mail, return receipt requested, to the other
party at the address stated above unless notification of a change of address is
given in writing.
27. CONSTRUCTION
This Agreement has been executed in the State of Indiana and shall be construed
in accordance with the laws of said State, irrespective of the forum in which
the Agreement or any part of it may come up for construction, interpretation, or
enforcement.
28. ENTIRE AGREEMENT
This Agreement contains the entire understanding of the parties. There are no
representations, warranties, promises, covenants or understandings other than
those herein contained.
IN WITNESS WHEREOF, the parties hereto have caused these presents to be signed
by their duly authorized officers as of the day and year first above written.
THE CURTIS PUBLISHING COMPANY AMERICAN ROYAL ARTS CORPORATION
LICENSING DIVISION
By: /s/ Illegible By: /s/ Jerry Gladstone
--------------------------------- --------------------------------
Title: President Title: President
-------------------------------- -------------------------------
Date: March 28, 1996 Date: April 10, 1996
-------------------------------- --------------------------------
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ADDENDUM TO LICENSING AGREEMENT
NO. 1
ADDENDUM TO THE LICENSING AGREEMENT DATED MARCH 26, 1996 BETWEEN THE CURTIS
PUBLISHING COMPANY, LICENSING DIVISION, HEREINAFTER REFERRED TO AS "LICENSOR"
AND AMERICAN ROYAL ARTS CORPORATION HEREINAFTER REFERRED TO AS "LICENSEE".
Paragraph 24 "No Assignment" shall be amended to state the following:
(a) The license hereby granted is and shall be personal to the Licensee
and shall not be assignable by any action of the Licensee or by
operation of law, and any attempt at such assignment shall be null and
void. The Licensee shall have no right to grant any sub-licenses.
Material change in ownership or corporate firm of the Licensee shall
render this Agreement null and void. This Agreement shall inure to the
benefit of and shall be binding upon the Licensor's successors and
assigns.
(b) Notwithstanding subsection (a) of this paragraph 24, Licensor
hereby consents and agrees to the acquisition by merger of all of the
outstanding shares of Licensee by Collectibles U.S.A., Inc., a Delaware
corporation residing at 2081 Landings Drive, Mountain View, California
94043
All other language and terms of the original agreement shall remain unchanged
and in effect.
IN WITNESS WHEREOF, the parties hereto have caused these presents to be signed
by their duly authorized officers as of the day and year first above written.
THE CURTIS PUBLISHING COMPANY AMERICAN ROYAL ARTS CORPORATION
LICENSING DIVISION
By: /s/ Illegible By: /s/ Jerry Gladstone
----------------------------- ------------------------------
Title: Senior Vice President Title: President
------------------------------ ------------------------------
Date: May 23, 1997 Date: June 2, 1997
------------------------------ ------------------------------
Contract ID #: AMERI 96-1G
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"GARFIELD" LICENSING AGREEMENT"
To: American Royal Arts Corp.
473 Old Country Road
Westbury, N.Y. 11590
Contact Person: Jerry Gladstone
Telephone: 516-997-2220
Fax: 516-997-2460
1. As the worldwide owner of the exploitation rights of the GARFIELD television
programs, based on characters that have and may appear in the GARFIELD and U.S.
Acres comic strips created by Jim Davis (the "Licensed Property"),
Mendelson/Paws Productions ("MPP") grants to you, under the terms and conditions
of this Agreement, AN EXCLUSIVE LICENSE to the distribution and sale and
advertisement of the following described articles ("Licensed Articles") solely
within the United States, its territories and possessions (the "Licensed
Territory"):
LICENSED ARTICLES:
Original production animation cels from GARFIELD prime time television
specials, and GARFIELD AND FRIENDS (US Acres) Saturday morning shows.
Distribution of the Licensed Articles are limited to animation and fine art
galleries, upscale gift stores, and catalog; provided, that you shall have a
limited right to offer to sell the Licensed Articles by auction with the advance
consent of MPP, which consent will not be unreasonably withheld. Notwithstanding
the foregoing, MPP shall have the right to limit the amount of Licensed Articles
released for sale during a calendar year, and to withhold certain cels entirely
from the market.
Notwithstanding the exclusivity granted by this Agreement, MPP shall have the
right of direct sales and/or to donate cels with no financial obligation to you.
MPP agrees to work with you in an effort to find suitable distributors for the
Licensed Articles outside of the Licensed Territory.
Specific trademark registrations or applications for trademark registration
within the scope of this license, if any, may be attached to this Agreement by
MPP.
This license includes the right to affix the Licensed Property on or to
packaging, advertising and promotional materials sold or used in connection with
the Licensed Articles ("Collateral Materials").
2
<PAGE>
2. THIS LICENSE WILL COMMENCE ON JANUARY 1, 1995 AND WILL CONTINUE UNTIL
DECEMBER 31, 1997, provided you honor the terms of this Agreement. So long as
you are in compliance with the terms of this Agreement and upon your written
request, MPP agrees to commence negotiations with you for a possible renewal of
this Agreement 90 days before the expiration date of this Agreement.
3. YOU AGREE TO PAY MPP ROYALTIES EQUAL TO 50.00% OF YOUR USUAL "NET SALES
PRICE" for all Licensed Articles sold to third parties in the course of your
sales activities, including those of your related entities. A Licensed Article
is considered "sold" when you first claim a right to payment. "Net Sales Price"
means gross sales price less sales tax but without deduction for any other items
like commissions, assessments, expenses, or uncollectible accounts. As a credit
against royalties, your non-refundable ADVANCE IS $0.00, which is due upon your
execution of this Agreement. In addition, you GUARANTEE that you will pay MPP
MINIMUM ROYALTIES IN THE AMOUNT OF $250,000.00 (which is over and above your
advance) payable on or before expiration or earlier termination of this
Agreement.
4. Throughout the term of this Agreement you agree to use reasonable and good
faith efforts to advertise, promote and sell the Licensed Articles in the
Licensed Territory. You have also agreed to sell the Licensed Articles at a
competitive price and to not discriminate against the Licensed Articles by
granting discounts or incentives in favor of your other products. In no event
will you "dump" or sell or offer to sell the Licensed Articles at a price below
cost. You further agree to not discount the price of the Licensed Articles from
the previously agreed upon retail and wholesale prices without the prior consent
of MPP, which consent will not be unreasonably withheld. If you are unable to
maintain regular sales of a particular Licensed Article, MPP will have the right
on 30 days advance notice to you to terminate the license granted by this
Agreement with respect to such Licensed Article.
5. You also agreed to exert your reasonable and good faith efforts to perform in
accordance with written Marketing Plans for the Licensed Articles that you
provide to MPP. If you have not already done so, you agree to provide MPP with
your initial Marketing Plan within 30 days of your signing of this Agreement.
Additional Marketing Plans will be done by you on each yearly anniversary of the
commencement date of this Agreement. Your Marketing Plans will describe for each
Licensed Article your marketing timetable, sales projections, channels and
methods of distribution, anticipated advertising support, and such other
information as MPP may reasonably request.
6. You agree that you will not grant sublicenses under this Agreement and that
you will not transfer or assign the license granted by this Agreement, and that
you will not delegate your duties to anyone else.
7. Before you may use the Licensed Property in any fashion, you agree to submit
to us for our approval the following materials for each Licensed Article: (1) a
generic sample of each Licensed Article showing the general quality of each
Licensed Article to be sold by you; (2) a concept for each proposed Licensed
Article, showing rough art and product design; (3) finished artwork for
3
<PAGE>
each Licensed Article; and (4) a pre-production prototype sample of each
Licensed Article, showing the exact form, finish and quality that each Licensed
Article will have when sold. You agree to get MPP' prior written approval for
each Licensed Article at each of the above steps, as well as our prior written
approval of any Collateral Materials for each Licensed Article.
Upon approval of the prototypes and/or Collateral Materials, you agree that all
Licensed Articles sold shall conform exactly to the approved prototype(s), and
that the Collateral Materials will not be modified in any fashion without the
advance consent of MPP. You agree to send immediately to MPP twelve production
samples from the first production run for all Collateral Materials. You agree
that you will not sell, distribute or use, or permit any third party to sell,
distribute or use any Licensed Article or any Collateral Material that is
damaged, defective, a second, or that otherwise fails to conform exactly to the
approved prototypes and/or Collateral Materials as approved.
MPP will respond to your requests for approval as soon as it reasonably can, and
in case of disapproval, MPP will explain to you why. MPP will exercise its
approval rights in good faith.
You agree that MPP may require the artwork of the Licensed Property to be
updated on Collateral Materials three years after MPP' first approval of the
item.
8. Unless MPP gives you permission in writing, all character art and editorial
for the Licensed Articles and Collateral Materials must be provided by MPP, and
only current art may be used. MPP will provide you with existing art at its
standard rates for reproduction, handling and mailing. All custom art work must
be done by MPP (unless you are authorized in writing by MPP), and you will be
charged a competitive price. If MPP authorizes you to do art and/or editorial
for Collateral Materials, you agree that all rights in such works, including but
not limited to the copyrights therein, and/or the trademarks, including goodwill
represented thereby, shall upon creation be transferred and assigned to Paws,
Incorporated (a member of the MPP joint venture) and shall be deemed to be the
property of Paws, Incorporated ("Paws"). The original media upon which all art
and editorial relating to the Property resides, whether created by you or any
other person at your request, shall be owned by Paws and will be delivered to us
with the items described in paragraph 19 below. You agree to execute and cause
to be executed by your employees and/or contractors such documents as MPP or
Paws may request to carry out the intent of this paragraph.
9. Paws will obtain in its own name and at its own expense trademark, copyright
or other proprietary protection for the Licensed Property or the Licensed
Articles and/or Collateral Materials as MPP or Paws deems appropriate. In order
for MPP and Paws to accomplish this, you agree to provide MPP and Paws upon
request with information relating to the date when a Licensed Article was first
placed on sale, the dates of first use of the Licensed Property on any Licensed
Article, and such other information as MPP or Paws may reasonably request,
including similar information relating to Collateral Materials. You agree that
you will not seek or obtain any trademark, copyright or other protection or take
any other action which might affect Paws' ownership of any of the rights in the
Licensed Property. You understand and agree that your use of the Licensed
Property shall inure to Paws' exclusive benefit and that you will not acquire
any
4
<PAGE>
rights in the Licensed Property by virtue of any use you may make of the
Licensed Property, other than as specifically set out in this Agreement.
You agree that the Licensed Articles and all Collateral Materials shall bear
such permanent copyright, trademark and other proprietary rights notices as MPP
may direct, and that no Licensed Article will be sold or distributed, and no
Collateral Materials will be used, that do not in each case bear such notices as
MPP may direct. You also agree that you will not, without the prior written
consent of MPP, affix to the Licensed Articles or any Collateral Materials any
copyright, trademark or other proprietary notices in your name or the name of
any other entity.
If MPP or Paws thinks it appropriate, you also agree to execute and cause to be
executed by your employees and/or contractors such documents as MPP or Paws may
request to carry out the intent of this paragraph.
10. You agree that the quality and style of the Licensed Articles as well as the
quality and style of all Collateral Materials shall be at least as high as the
best quality of similar products and promotional, advertising and packaging
material sold or distributed by you in the Licensed Territory. You also warrant
that the Licensed Articles and Collateral Materials: (1) will not infringe upon
or violate any rights of any third party; (2) will be of high standard in style,
appearance and quality; (3) will be safe for use by consumers and others; (4)
will be in compliance with all applicable governmental laws, rules or
regulations; and (5) will not be sold or distributed in any manner or in any
place not specifically authorized by this Agreement.
11. You agree that the Licensed Articles may not be used as gifts with
purchasers or as premiums (such as in connection with joint merchandising
programs; giveaways; or other kinds of promotional programs designed to promote
the sale of the Licensed Articles or other goods or services). The license
granted by this Agreement does not include the right to sell, distribute, or
offer to sell or distribute, the Licensed Articles for purposes of sale outside
of the Licensed Territory, or in connection with or in relation to the release
(theatrical or on TV) of a movie featuring the Licensed Property.
12. Within thirty (30) days after the end of each calendar quarter, you agree to
provide MPP with payment in U.S. dollars of all royalties due on all Licensed
Articles sold in such period, together with a complete and accurate statement of
your Net Sales of the Licensed Articles for such period. Each statement will
include information by s.k.u. as to the number, description and gross selling
price of the Licensed Articles shipped or sold by you during each such period,
the nature and amount of any allowable deductions, and such other information as
we may reasonably request. Each statement shall be due regardless of whether or
not royalties are payable with respect to such period.
Should MPP elect to do so during the term of this agreement or within 2 years
after the expiration or termination of this Agreement, you agree to allow MPP
(or its designee) access to your books and records and/or facilities and you
agree to cooperate with MPP in conducting an audit of your
5
<PAGE>
activities relating to this Agreement. Acceptance by MPP of any statement
furnished or royalty paid will not preclude MPP from questioning the correctness
thereof.
You also agree that time is of the essence with respect to all royalty payments
to be made under this Agreement, and that any sums of money that are owed to MPP
by you under this Agreement and not paid when due shall bear interest at the
rate of 12% per annum. If any audit performed by MPP, or on MPP' behalf,
identifies a shortfall of 5% or more in royalties due for any Licensed Article
in any calendar quarter, you agree to reimburse MPP for its reasonable charges
and expenses associated with conducting the audit.
All royalty payments and all royalty statements shall be submitted to MPP at:
Paws, Incorporated, 5440 E. County Road 450 N., Albany, Indiana, U.S.A.
47320-9728, or as may otherwise be directed by MPP in writing.
13. You agree to promptly advise MPP as soon as you become aware of any
unauthorized use of the Licensed Property and to reasonably cooperate with MPP
in stopping or attempting to stop any such infringing activity.
14. If requested by MPP to do so, you agree to deliver to authorized MPP
licensee(s), at your cost of duplication or fabrication plus 10%, a duplicate of
all molds, dies, films, patterns, or similar items from which any Collateral
Materials were made. Such licensees shall be authorized by MPP to use such
materials only for advertising and sales outside of the Licensed Territory.
15. MPP represents to you that it has the exclusive right to grant this license
to you, and if anyone claims that your approved use of the Licensed Property
infringes any ownership right or claim of another person, you agree to notify
MPP immediately. MPP will then take over the handling of the claim and protect
you against monetary losses (but excluding lost profits) that you sustain as a
result of such a claim. You agree to reasonably cooperate with MPP in handling
and resolving the claim, and to do nothing to interfere with the ability of MPP
to defend and resolve the same.
16. You agree to defend, indemnify and save MPP harmless from and against any
and all claims, demands, causes of action, judgments, damages, losses, costs and
expenses (including attorneys' fees) arising from any claim or demand made
against MPP by any third party and arising from or in connection with the
conduct of your business, or your activities under this Agreement (except for
claims covered by the preceding paragraph). Your obligation under this paragraph
will include any claims or demands arising out of the activities of and/or made
by your employees, agents, representatives, distributors, retailers, or
manufacturers.
17. You also agree to carry and maintain in effect at your expense during the
term of this Agreement (and for 3 years thereafter if it is a "claims made"
policy as opposed to an "occurrence" policy) Product Liability Insurance from a
qualified insurance company providing protection in the minimum amount of One
Million Dollars per person and Two Million Dollars per occurrence, and providing
protection against any claim, liability, damage, loss, cost or expense
6
<PAGE>
arising out of any alleged or actual defects or negligence or other fault
associated with the design, manufacture and/or sale or distribution of the
Licensed Articles. Such insurance shall name MPP, its directors, officers,
employees and agents, as additional insureds, and provide that no modification,
lapse or termination shall occur without 30 days advance written notice to MPP.
You agree to provide MPP with a certificate evidencing that such insurance is in
place.
18. MPP may terminate this Agreement upon written notice to you if you sell or
offer to sell: (a) any item not included within the description of Licensed
Article(s); or (b) any Licensed Article which has not been approved in advance
by MPP as required by the terms of this Agreement. If you should fail to perform
any of your other obligations under this Agreement, and such failure continues
for fifteen (15) days after MPP has notified you in writing of the failure, then
MPP may terminate this Agreement by notifying you in writing, whereupon all
accrued royalties, and guarantees, shall be immediately due and payable. Upon
expiration or termination of this Agreement, all rights granted in this
Agreement shall revert to MPP, and you agree to immediately stop doing
everything relating to the Licensed Articles and the Licensed Property. MPP will
also be entitled to suspend the performance of any of its duties, and to pursue
all other remedies available to MPP at law or in equity, and recover all of its
costs and expenses (including reasonable attorney fees) which it incurs in
enforcing its rights. You agree that MPP will be entitled to injunctive relief
(in addition to any other available remedies) with respect to any unauthorized
use of the Licensed Property. Written notice under this paragraph may be given
by facsimile transmittal.
19. Upon the earlier of (i) expiration of this Agreement; (ii) termination of
this Agreement; or (iii) regular sales are no longer being made for a particular
Article(s), you agree to deliver to MPP all molds, dies, films, patterns, or
similar items from which the Licensed Articles and any Collateral Materials were
made, together with all original art work. In addition, upon expiration or
earlier termination, you agree to terminate all agreements with manufacturers,
distributors, and others which relate to the manufacture, sale, distribution and
use of the Licensed Property and/or the Licensed Articles.
20. Thirty (30) days before expiration of this Agreement, you promise to give to
MPP a written inventory of all Licensed Articles in your possession or control,
whereupon you will have the non-exclusive right to sell-off the Licensed
Articles so listed for a period of 90 days following the expiration date of this
Agreement, subject to the payment of royalties on such sales in accordance with
the terms of this Agreement. MPP will have the right, if it so elects, to buy
any or all of the Licensed Articles listed on the inventory at your cost of
manufacture. You will not have any sell-off rights in the event of termination
of this Agreement, but you must nonetheless provide to us, within 15 days after
termination, a written inventory of all Licensed Articles in your possession or
control.
21. You agree that this Agreement does not create a partnership or joint venture
between you and MPP, and that you will have no power to obligate or bind MPP in
any manner whatsoever.
7
<PAGE>
22. You agree that no waiver by MPP of your failure to perform any of your
obligations under this Agreement and/or any material breach of any provision of
this Agreement shall be deemed a waiver of a subsequent failure and/or breach.
You acknowledge that you have had this Agreement reviewed by your attorney (or
have had the opportunity to do so), that you have had the opportunity to request
changes or revisions, and that you do not consider any provision herein to be
ambiguous or unclear; accordingly, you agree that any rule of contract
interpretation or construction to the effect that ambiguities or uncertainties
will be construed against the drafting party shall not be applied to the
interpretation or construction of this Agreement.
23. You agree to: (a) arrange for and pay the cost of shipping all of the
Licensed Articles from their current location to your warehouse in Long Island;
(b) obtain suitable storage space for the Licensed Articles at your expense, and
the facility must be secure, climate controlled, and equipped with a sprinkler
system; (c) obtain property and casualty insurance against the whole or partial
loss or destruction of the cels with limits of not less than $5 million and upon
terms reasonably satisfactory to MPP; (d) clean, sort, inventory and properly
store all of the Licensed Articles and to provide MPP with a complete and
accurate listing of the inventory not later than April 30, 1995; (e) discuss in
good faith with MPP the proper retail and wholesale price for each Licensed
Article to be marketed; (f) be solely responsible for all costs, including
advertising, catalogs, mailers, mailing expenses, sales expenses, production
expenses, expenses incidental to or associated with appearances by Jim Davis (or
other representatives of Paws, Incorporated, Film Roman, or Mendelson
Productions), administrative expenses, overhead expenses, et cetera.
MPP agrees to exert its best efforts to cause Jim Davis, Lee Mendelson and/or
Phil Roman to affix their signatures to the Licensed Articles so long as you
arrange and pay for the shipping and transportation of the Licensed Articles to
the appropriate persons for signature.
24. This Agreement constitutes the entire agreement between you and MPP, and
supersedes all prior discussions and agreements, and you agree that it will be
controlled by the laws of the State of Indiana, regardless of the place or
places of its physical execution and performance. This Agreement may only be
modified in writing, signed by both parties. If any term or provision is
declared invalid, all other provisions shall remain in full force and effect.
Each party agrees to notify the other of any change in mailing address or change
in operational personnel.
Mendelson/Paws Productions
By:
----------------------------
By:
----------------------------
Date:
----------------------------
8
<PAGE>
American Royal Arts Corp.
By: /s/ Jerry Gladstone
-------------------
Printed Name and Title: Jerry Gladstone, President
--------------------------
9
<PAGE>
05/06/97
GARFIELD AMENDMENT
American Royal Arts
Attn: Jerry Gladstone
473 Old Country Road
Westbury, N.Y. 11590
Dear Jerry:
This will confirm our mutual agreement to amend our Mendelson/Paws Productions
Agreement with a begin date of January 1, 1995, in the following particulars:
The expiration date is changed to December 31, 1998. Your minimum royalty
guarantee is changed for the contract period to $275,000 USD for the United
States. Your minimum royalty guarantee for your rights outside of the USA shall
remain at $15,000 USD.
Paws, on behalf of Mendelson/Paws Productions, consents to the assignment of the
Agreement from American Royal Arts to Collectibles U.S.A., Inc.
("Collectibles"), a Delaware corporation with a principal office at 2081
Landings Drive, Mountain View, California 94043, conditioned upon the completion
of the initial public offering of shares of Collectibles' common stock by
December 31, 1997.
All other terms remain in full force and effect.
Please acknowledge this amendment by signing and returning the original of this
letter to me.
Very truly yours,
/s/ Richard Hamilton
- -------------------------------
Richard Hamilton
Vice President
(317) 287-2365
FAX (317) 287-2220
Acknowledged and agreed to:
American Royal Arts
By: /s/ Jerry Gladstone
--------------------------
Jerry Gladstone, President
--------------------------
Printed Name and Title:
Date: May 7, 1997
--------------------------
Contract Number: TV-ARAS_USA01-3
CONSIGNMENT AGREEMENT
This Agreement is enterd into as of September 30, 1994, at Los Angeles,
California, between ROSS EDITIONS, INC., a California corporation ("Consignor")
whose address is: C/O Ring & Green, 1900 Avenue of the Stars, Suite 2300, Los
Angeles, California, 90067 and AMERICAN ROYAL ARTS CORP. ("Art Dealer"), of 473
Old Country Road, Westbury, New York, 11590. Consignor and Art Dealer hereby
agree as follows:
A. On or before October 31, 1994, Consignor will deliver to Art Dealer, at
Art Dealer's address as stated above works of fine art created by VIRGIL ROSS
("Artist"), as set forth on Exhibit "A" and attached hereto by reference ("Art
Work"), for purposes of sale by Art Dealer.
B. From the time the Art Work is delivered to Art Dealer until the
termination of this Agreement, Art Dealer shall hold the Art Work in trust for
the benefit of Consignor and shall be responsible for any loss of or damage to
the Art Work. The Art Work shall not be subject to claim by any of the Art
Dealer's creditors.
C. This Agreement shall terminate on December 31, 1995. On or before
September 30, 1995, Art Dealer shall notify Consignor in writing as to which
pieces if the Art Work not yet sold, Art Dealer wishes to purchase on or before
December 31, 1995. Any of the Art Work not so designated by Art Dealer remaining
in its inventory as of December 31, 1995, shall be returned to Consignor by
January 5, 1996. The Art Work will be offered for sale by Art Dealer until
December 31, 1995.
-4-
<PAGE>
D. Artist's name shall appear on all signs, advertisements, and other
writtern materials concerning the Art Work as follows: VIRGIL ROSS.
E. Art Dealer shall pay to Consignor thirty percent (30%) of the Retail
Price of each piece of Art Work sold ("Piece") to any person or entity except
Warner Bros. Art Dealer shall pay Consignor seventeen and one-half percent
(17.5%) of the Retail Price of each piece of Art Work sold to Warner Bros.
F. Art Dealer shall advance any and all funds necessary to complete the Art
Work including, but not limited to, making necessary arrangments with Magic
Brush or any other production house of like quality, for production of the Art
Work. Art Dealer shall deduct any actual expenses it paid to third parties to
produce the piece, and the actual cost of any frame for the piece provided by
the Art Dealer, from any money Art Dealer is obligated to pay Consignor pursuant
to Paragraph E.
G. Within thirty (30) days of the end of each month during the term of this
Agreement, Art Dealer shall provide Consignor with an accounting statement of
the sales of the Art Work by Art Dealer during the proceeding month. In
conjunction with any such statement, Art Dealer shall pay Consignor the amount
determined to be due for sales by Consignor pursuant to this Agreement. If Art
Dealer does not comply with the terms of this paragraph, Consignor shall have
the right to terminate this Agreement at which time Art Dealer shall return all
of the Art Work to Consignor.
H. Art Dealer shall maintain sufficient property damage and liability
insurance to cover any claims that may arise from either damage to the Art Works
or claims for injury that may arise from the use of the Art Work in an amount
equal to at least $1 Million Dollars.
-5-
<PAGE>
Art Dealer shall name Consignor as an additional insured on its insurance policy
and shall provide Consignor with a certificate of insurance.
I. Art Dealer shall take possession as Consignee of the original art work
VIRGIL ROSS set forth on Exhibit "B" attached hereto and incorporated herein by
reference (" Original Art Work") and shall sell the Original Art Work to anyone
except Art Dealer at the best price it can obtain. Any piece of Original Art
Work to be sold for $500 or less must have written approval of Consignor, prior
to sale. Proceeds from the sale of the Original Art Work shall be payable sixty
percent (60%) of the Retail Sales Price to Consignor and forty percent (40%) of
the Retail Sales Price to Art Dealer. Accounting for sales pursuant to this
paragraph shall be in accordance with paragraph G above.
J. The Art Work are to be sold at the prices set forth on Exhibit "A". Art
Dealer shall hold any funds received from the sale of any Art Work or Original
Art Work in trust for the benefit of Consignor, and will pay the funds to
Consignor under Paragraph G of this Agreement as set forth therein.
K. Photographs of the Art Work may be used in writtern advertisemente only
if approved by Consignor in writing.
L. Art Dealer agrees to provide to its customers Certificate of
Authenticity containing the information required by California Civil Code
Section 1744 and agrees to indemnify and hold Consignor harmless from any claims
by any person on the grounds there is a violation of said Section, unless due to
the negligence of Consignor.
-6-
<PAGE>
M. If an action is brought by either party to enforce any provisions of
this Agreement, the prevailing party shall be entitled to reasonable attorney's
fees and costs incurred in connection therewith.
N. This Agreement shall be interpreted under the laws of the State of
California.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
set forth herein.
ROSS EDITIONS, INC.
By: /s/ VIRGIL ROSS
-----------------------------------
VIRGIL ROSS, President
AMERICAN ROYAL ARTS CORP.
By: /s/ JERRY GLADSTONE
-----------------------------------
JERRY GLADSTONE, President
-7-
<PAGE>
AMENDED CONSIGNMENT AGREEMENT
This Amendment to Consignment Agreement is entered into as of March 31,
1997 at Los Angeles, California, between ROSS EDITIONS, INC., a California
corporation ("Consignor") whose address is: c/o Ring & Green, 1900 Avenue of the
Stars, Suite 2300, Los Angels, California 90067 and AMERICAN ROYAL ARTS
CORP.("Art Dealer"), of 473 Old Country Road, Westbury, New York, 11590.
Consignor and Art Dealer hereby agree as follows:
WHEREAS, as of September 30, 1994, Consignor and Art Dealer entered into a
Consignment Agreement, ("Agreement") which is incorporated herein by this
reference;
WHEREAS, the parties wish to amend the Agreement in certain respects;
NOW, THEREFORE, in consideration of the foregoing and of the covenants and
agreements contained herein and in the Agreement, and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto do hereby agree as follows:
1. The Agreement shall be extended through January 1, 1999. On or
before October 1, 1998, Art Dealer shall notify Consignor in writing of which
pieces of the art works not yet sold Art Dealer wished to purchase on or before
January 1, 1999. Any of the art work not so designated by Art Dealer remaining
in its inventory as of January 1, 1999 shall be returned to the Consignor on or
before January 11, 1999. The art works will be offered for sale by Art Dealer
until January 1, 1999.
2. Consignor may terminate this Agreement at any time without prejudice
or claim of breach by Art Dealer if Warner Bros. terminates its extended license
to Consignor to produce and sell the Art Works.
<PAGE>
3. Set forth on Exhibit A attached hereto is a list of (i) remaining
inventory to be produced and sold, and (ii) inventory already produced and ready
for sale pursuant to the terms of the Agreement.
4. Paragraph G is deleted and the following substituted therefor:
"Within thirty (30) days of the end of each calendar quarter during the
term of this Agreement, Art Dealer shall provide Consignor with an
accounting statement of the sales of the Art Work by Art Dealer during the
proceeding calendar quarter. In conjunction with any statement, Art Dealer
shall pay Consignor the amount determined to be due for sales by Consignor
pursuant to this Agreement. If Art Dealer does not comply with the terms of
this paragraph, Consignor shall have the right to terminate this Agreement
at which time Art Dealer shall return all of the Art Work to Consignor."
5. Except for the obligations contained in the Agreement as amended,
Consignor and Art Dealer hereby release each other from any and all claims they
have or may have against each other, known or unknown, except for sales from and
after the last reported sales by Art Dealer, arising out of the Agreement
through and including the date of this Amendment to Consignment Agreement.
6. Capitalized terms used herein and not otherwise defined herein shall
have the meanings ascribed to them in the Agreement.
7. Except as expessly modified by this amendment, all terms and
conditions of the Agreement shall remain in full force and effect.
8. This Amendment shall be governed in accordance with the laws of the
State of California without regard to the choice of law principles therof.
IN WITNESS WHEREOF, the parties have executed this Amendment to Consignment
Agreement as of the date set forth herein.
-2-
<PAGE>
ROSS EDITIONS, INC.
By: /s/ Illegible
---------------------------------
Authorized Representative
Co-Trustee Ross Family Trust
AMERICAN ROYAL ARTS CORP.
By: /s/ Jerry Gladstone, President
---------------------------------
JERRY GLADSTONE, President
-3-
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
and to all references to our Firm included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Houston, Texas
August 8, 1997
CONSENT OF
PERSON NAMED AS ABOUT TO BECOME A DIRECTOR
OF COLLECTIBLES USA, INC.
In conformity with Rule 438 of the Securities Act of 1933, as amended, the
undersigned hereby consents to be named, in the Registration Statement on Form
S-1 to be filed by Collectibles USA, Inc. (the "Company") with the Securities
and Exchange Commission, as a person about to become a director of the Company.
Date: August 7, 1997
/s/ W. Randolph Ellspermann
-----------------------------
Name: W. Randolph Ellspermann
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1997
<PERIOD-END> APR-30-1997
<EXCHANGE-RATE> 1
<CASH> 585,702
<SECURITIES> 0
<RECEIVABLES> 74,880
<ALLOWANCES> 0
<INVENTORY> 597,790
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0
0
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</TABLE>
