As filed with the Securities and Exchange Commission on June 13, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
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, PRESIDENT AND CHIEF EXECUTIVE OFFICER
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. [ ]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED MAXIMUM
TITLE OF EACH MAXIMUM AGGREGATE AMOUNT OF
CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(1)(2) FEE
<S> <C> <C> <C> <C>
Common Stock, $.01 par value ...... 3,105,000 shares $12.00 $37,260,000 $11,291
</TABLE>
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(1) Includes 405,000 shares which the Underwriters have the option to purchase
to cover over-allotments, if any. See "Underwriting."
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(a).
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.
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 13, 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 $1.0 million in cash and 60,606 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.
References to "Fiscal 1995," "Fiscal 1996" and "Fiscal 1997" mean,
respectively, the year ended December 31, 1994, 1995 and 1996 with respect to
six Founding Companies; November 30, 1994, 1995 and 1996 with respect to one
Founding Company; March 31, 1995, 1996 and 1997 with respect to one other
Founding Company; and October 31, 1994 and 1995 and January 31, 1997 with
respect to one other Founding 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 set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," 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 Lladro, 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). The Company's animation art
galleries carry a full spectrum of animation artwork,
3
<PAGE>
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.
According to Unity Marketing's The Collectibles Industry Report 1995
("Unity Marketing"), the collectibles industry grew approximately 13% in 1995,
generating over $8 billion in primary sales (i.e., sales of new merchandise), of
which approximately 76% were generated by retail sales (including TV shopping)
and approximately 24% were generated by direct response marketing. The
contemporary collectibles industry is serviced by approximately 9,500 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. According to Unity Marketing, an estimated 22 million
Americans identify themselves as collectors.
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 intends to acquire profitable,
well-managed collectibles retailers and animation art marketers that have
good reputations with vendors and customers and, where possible, 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 of other retailers and marketers due to its strategy of retaining
owners and management of acquired companies, its access to capital and its
ability to offer sellers cash for their business as well as an ongoing
equity stake in the Company. The Company has built an extensive database
of businesses 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 Open New Stores. 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. Other than
the anticipated opening of one or two prototype locations, the Company
currently 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. 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
4
<PAGE>
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 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.
Collectibles USA was incorporated in Delaware in January 1996. Its
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.
5
<PAGE>
THE OFFERING
Common Stock offered by the Company ..................... 2,700,000 shares
Common Stock to be outstanding after the Offering ...... 6,198,784 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 con-
nection with the
conversion of the
Series A Convertible
Preferred Stock upon
consummation of the
Offering; repay the
principal amount
outstanding under cer-
tain 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
- ----------
(1) Includes (i) 2,246,996 shares to be issued to the owners of the Founding
Companies, (ii) 60,606 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) options to purchase shares of
Common Stock which will be granted in connection with the Offering pursuant
to the Company's 1997 Long-Term Incentive Plan (the "Plan") and the 1997
Non-Employee Directors' Stock Plan (the "Directors' Plan") at an exercise
price equal to the initial public offering price 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
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
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.
PRO FORMA
FISCAL YEAR ENDED
JANUARY 31, 1997
---------------------------
(UNAUDITED, IN THOUSANDS,
EXCEPT SHARE AND
PER SHARE DATA)
STATEMENT OF OPERATIONS DATA(1):
Net sales $ 25,532
Gross profit 13,778
Selling, general and administrative expenses(2) 11,028
Goodwill amortization(3) 447
Operating income 2,304
Interest and other income (expense), net(4)(5) 182
Net income before taxes 2,486
Net income $ 687
==========
Net income per share $ .13
==========
Shares used in computing net income per share(6) 5,288,100
<TABLE>
<CAPTION>
JANUARY 31, 1997
------------------------------------
PRO FORMA
COMBINED(7) AS ADJUSTED(8)
------------------ ---------------
(UNAUDITED, IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)(5) $ (4,732)(9) $18,109
Total assets 34,742 43,121
Long-term obligations, net of current maturities and
notes payables to stockholders(5) 2,929 -
Stockholders' equity(5) 12,381 37,257
</TABLE>
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(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 pro forma combined statement of operations data reflect an aggregate of
approximately $950,000 in pro forma reductions in salary and benefits of
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. See "Certain Transactions."
7
<PAGE>
(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 from the Offering.
(5) 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. Accordingly, pro
forma interest expense has been increased, pro forma long-term obligations
have been increased and pro forma stockholders' equity has been reduced.
(6) Includes (i) 2,246,996 shares to be issued to the owners of the Founding
Companies, (ii) 60,606 shares to be issued to holders of the Series A
Convertible Preferred Stock and (iii) 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 and pay expenses of the Offering. Excludes options to
purchase shares which will be granted in connection with the Offering
pursuant to the Plan and the Directors' Plan at an exercise price equal to
the initial public offering price 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 January 31, 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.
8
<PAGE>
SUMMARY INDIVIDUAL FOUNDING COMPANY FINANCIAL DATA
The following table presents certain summary statements of operations data
for the Founding Companies for each of their three most recent fiscal years.
<TABLE>
<CAPTION>
FISCAL(1)
-----------------------------------------
1995 1996 1997
------------ ------------ -----------
<S> <C> <C> <C>
American Royal Arts
Sales $3,897,785 $4,051,072 $4,288,612
Gross profit 2,182,760 2,491,154 2,782,828
Selling, general and administrative expenses(2) 1,587,875 1,759,886 1,778,138
Stone's Hallmark
Sales $3,488,838 $4,281,040 $4,985,549
Gross profit 1,689,219 2,012,350 2,488,975
Selling, general and administrative expenses(2) 1,430,695 1,787,457 2,117,010
Crystal Galleria(3)
Sales $2,503,075 $2,794,361 $3,727,285
Gross profit 1,315,177 1,461,184 1,942,369
Selling, general and administrative expenses(2) 730,906 875,180 1,564,229
North Pole City
Sales $2,562,024 $2,865,249 $3,726,332
Gross profit 1,190,985 1,373,610 1,993,701
Selling, general and administrative expenses(2) 989,561 1,077,684 1,521,669
Little Elegance(3)
Sales $3,113,114 $2,707,793 $2,598,270
Gross profit 1,362,429 1,238,268 1,251,609
Selling, general and administrative expenses(2) 1,260,761 1,179,842 1,229,978
Reef Hallmark(3)
Sales $1,419,294 $1,838,788 $2,492,809
Gross profit 633,618 737,030 1,191,341
Selling, general and administrative expenses(2) 484,960 628,543 934,764
Animation USA(3)
Sales $1,212,497 $1,731,856 $1,716,410
Gross profit 600,536 833,341 876,127
Selling, general and administrative expenses(2) 626,514 773,523 845,100
Filmart(3)
Sales $ 760,653 $1,053,089 $1,445,848
Gross profit 503,716 541,720 947,928
Selling, general and administrative expenses(2) 452,189 492,577 539,178
Crystal Palace(3)
Sales $1,103,714 $1,129,960 $1,132,782
Gross profit 415,965 467,809 595,517
Selling, general and administrative expenses(2) 466,737 478,785 455,299
</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, 1996 and 1997; and Crystal
Galleria, Little Elegance, Reef Hallmark, Animation USA, Filmart and
Crystal Palace -- the years ended December 31, 1994, 1995 and 1996.
(2) Selling, general and administrative expenses have not been adjusted for
aggregate reductions in salary and benefits of approximately $950,000 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.
9
<PAGE>
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 OPERATING HISTORY
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. Although the management of each Founding Company
has substantial experience in the retail sales of collectibles or marketing of
animation art, none of the Company's officers or senior management group have
had experience managing a company in the collectibles or animation art
industries. 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 ACQUISITIONS
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. 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
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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 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
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, could
have a material adverse effect on the Company's financial condition and results
of operations. See "Business -- 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 consent to the Acquisitions. Although the
Company will seek 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. 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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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
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 financial,
marketing and other resources than the Company. In addition, although the
primary points of
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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 product introductions depends on various
factors, including product selection and quality, sales and marketing
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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 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 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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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
former stockholders of the Founding Companies, and entities affiliated with
them, will beneficially own 52.7% of the outstanding shares of Common Stock
(49.4% if the Underwriters' over-allotment option is exercised in full). These
holders of Common Stock will control in the aggregate 47.5% 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 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 June 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 the
principal amount outstanding under the CEFC Notes (as defined hereinafter) upon
consummation of the Offering, 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. The stockholders who will receive these
shares 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 Common
Stock stockholders of the Company as of the date hereof hold, in
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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 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, the owners of the Founding
Companies and certain stockholders of the Company designated by the
Representatives who beneficially own an aggregate of 1,016,602 shares of Common
Stock 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 will issue in connection with the Offering under the Plan and
the Directors' Plan options to purchase up to an aggregate of shares of Common
Stock. None of such options are exercisable until after the expiration of the
Lockup Period. The Company intends to register the shares issuable upon exercise
of options granted under the Plan and the Directors' Plan 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 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
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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 $7.87 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."
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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 Fiscal 1997, 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 mallbased 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 Fiscal 1997, 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 Fiscal 1997, 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,
in Fiscal 1997, generated sales of $3.7 million. 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 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
18
<PAGE>
approximately 4,000 square feet in size and, in Fiscal 1997, generated sales of
$2.5 million. In Fiscal 1997, 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 Fiscal 1997, generated
sales of $5.0 million. In Fiscal 1997, 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 Fiscal 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 the President of the
Company's Animation Division and as a director 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 Fiscal 1997,
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 Fiscal 1997, 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 June 1, 1997), which
indebtedness will be repaid with a portion of the net proceeds of the Offering.
In addition, prior to the Acquisitions certain of the Founding Companies will
make S Corporation Distributions of
19
<PAGE>
$1.7 million. 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."
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) $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 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 to effect any
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. The Founding Companies will incur
indebtedness of approximately $1.7 million to fund these distributions.
20
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization and current maturities of
long-term obligations and notes payable to stockholders at January 31, 1997: (i)
of the Founding Companies combined; (ii) on a pro forma basis to give effect to
the Acquisitions; and (iii) 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>
JANUARY 31, 1997
---------------------------------------------
PRO FORMA
COMBINED COMBINED AS ADJUSTED
---------- ----------------- ------------
(UNAUDITED, IN THOUSANDS)
<S> <C> <C> <C>
Current maturities of long-term obligations and notes payable
to stockholders(1) $ 3,048 $ 3,411 $ -
======= ========== =======
Long-term obligations and notes payable to stockholders, less
current maturities(1) $ 1,193 $ 2,929 (2) $ -
------- ---------- -------
Stockholders' equity:
Preferred Stock: $.01 par value, 5,000,000 shares authorized;
no shares issued and outstanding combined; 20,000 shares
issued and outstanding, pro forma combined; and no shares
issued and outstanding, as adjusted - - -
Common Stock: $.01 par value, 31,200,000 shares authorized;
3,438,178(3) shares issued and outstanding, pro forma
combined; and 6,198,784 shares issued and outstanding, as
adjusted(3)(4) 288 34 62
Treasury stock (145) - -
Additional paid-in capital 1,567 12,851 37,699
Retained earnings 2,832 (504) (504)
------- ---------- --------
Total stockholders' equity $ 4,542 $ 12,381 $ 37,257
------- ---------- --------
Total capitalization $ 5,735 $ 15,310 $ 37,257
======= ========== ========
</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 60,606 shares to be issued to holders of Series A Convertible
Preferred Stock upon consummation of the Offering. Excludes options to
purchase shares which will be granted in connection with the Offering
pursuant to the Plan and the Directors' Plan at an exercise price equal to
the initial public offering price 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."
21
<PAGE>
DILUTION
The deficit in pro forma net tangible book value of the Company as of
January 31, 1997 was approximately $5.5 million, or $1.57 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 January 31, 1997 would have been approximately $19.4
million, or $3.13 per share. This represents an immediate increase in pro forma
net tangible book value of $4.70 per share as of January 31, 1997 to
stockholders and an immediate dilution in pro forma net tangible book value of
$7.87 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
January 31, 1997 before the Offering $(1.57)
Increase per share attributable to sale of Common Stock
in the Offering 4.70
--------
Pro forma net tangible book value per share
after the Offering 3.13
-------
Dilution per share to new investors $7.87
=======
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) 3,498,784 56.4% $ (6,500,829) (28.0)% $ (1.86)
New investors 2,700,000 43.6 29,700,000 128.0 11.00
---------- ------- ------------- ---------
Total 6,198,784 100.0% 23,199,171 100.0%
========== ======= ============= =========
</TABLE>
- ----------
(1) Total consideration paid by existing stockholders represents the combined
stockholders' equity of the Founding Companies 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
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."
22
<PAGE>
SELECTED FINANCIAL 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 for the years ended October 31, 1992 and 1993 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>
FISCAL YEAR ENDED OCTOBER 31, YEAR ENDED
----------------------------------------- JANUARY 31,
1992 1993 1994 1995 1997
-------- -------- -------- -------- ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
AMERICAN ROYAL ARTS:
Net sales $2,002 $2,840 $3,898 $4,051 $4,289
Gross profit 1,167 1,721 2,183 2,491 2,783
Selling, general and administrative
expenses 1,044 1,288 1,588 1,760 1,778
Income from operations 123 433 595 731 1,005
Interest income (expense), net 5 6 7 18 24
Net income $ 128 $ 439 $ 602 $ 749 $1,029
======= ======= ======= ======= =======
PRO FORMA COMBINED(1):
<S> <C>
Net sales $ 25,532
Cost of sales 11,754
Gross profit 13,778
Selling, general and administrative expenses(2) 11,028
Goodwill amortization(3) 447
Operating income 2,304
Interest and other income (expense), net(4)(5) 182
Net income before taxes 2,486
Net income $ 687
==========
Income per share ............................................................. $ .13
==========
Shares used in computing pro forma net income per share(6) ................... 5,288,100
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31, 1997
------------------------------------- --------------------------------------------
PROFORMA(7) AS
1992 1993 1994 1995 1996 ACTUAL COMBINED ADJUSTED(8)
------ ------ ------ ------- ------- -------- -------------------- ------------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
AMERICAN ROYAL ARTS:
Working capital(5) $117 $384 $297 $ 703 $ 567 $ 686 $ (4,732) (9) $18,109
Total assets 516 860 875 1,430 1,439 1,482 34,742 43,121
Long-term obligations
net of current maturities
and long-term notes
payable to stockholders(5) - - 100 - - - 2,929 -
Stockholders' equity(5) 151 416 475 867 696 807 12,381 37,257
</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 pro forma combined statement of operations reflect an aggregate of
approximately $950,000 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. 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 expense attributed to the repayment of
debt with a portion of the net proceeds of the Offering.
(5) 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.
(6) Includes (i) 2,246,996 shares to be issued to the owners of the Founding
Companies, (ii) 60,606 shares to be issued to holders of the Series A
Convertible Preferred Stock and (iii) 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 and pay expenses of the Offering. Excludes options to
purchase shares which will be granted in connection with the Offering
pursuant to the Plan and the Directors' Plan at an exercise price equal to
the initial public offering price 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 January 31, 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.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company's net sales are derived primarily from the sale of collectibles
and animation art. Costs of sales consist primarily of the cost of merchandise
sold. Selling, general and administrative expenses 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. See the Unaudited Pro Forma Combined Financial Statements and
the notes thereto included elsewhere in this Prospectus.
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.
Combined Founding Companies
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.
25
<PAGE>
The following table sets forth certain unaudited combined statements of
operations 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>
FISCAL 1995 FISCAL 1996 FISCAL 1997
-------------------- -------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Combined Founding Companies
Statements of Operations Data (Unaudited):
Net sales $20,061 100.0% $22,453 100.0% $26,114 100.0%
Gross profit 9,894 49.3% 11,156 49.7% 14,070 53.9%
Selling, general and administrative expenses. 8,030 40.0% 9,053 40.3% 10,985 42.1%
</TABLE>
FISCAL 1997 COMPARED TO FISCAL 1996
Net Sales. Net sales were $26.1 million for Fiscal 1997 as compared to
$22.5 million for Fiscal 1996. The increase in sales of $3.7 million, or 14.0%,
was primarily due to (i) an increase in contemporary collectibles sales as a
result of a remodeling and expansion of one store, a full year of operation of
one new store and a partial year of operation of another new 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 $12.0 million, or 46.1%, of net
sales in Fiscal 1997 from $11.3 million, or 50.3% of net sales, in Fiscal 1996.
The overall increase in this cost of $746,000, or 6.6%, was primarily due to the
higher level of merchandise sales. Gross profit as a percentage of net sales
increased to 53.9% in Fiscal 1997 from 49.7% in Fiscal 1996 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.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in Fiscal 1997 were $11.0 million, or 42.1% of net
sales, as compared to $9.1 million, or 40.3% of net sales, in Fiscal 1996, an
increase of $1.9 million, or 21.3%. The increase was primarily due to a full
year of expense for a new collectibles store and a partial year of expense for a
new collectibles store that opened in August 1996 and to the fact that new
stores incur expenses that are disproportionate to the net sales generated
compared to an established store. The increase was also attributable to
increased salaries for management and additional personnel. Management of the
Founding Companies have agreed to certain reductions in salaries and benefits in
connection with the acquisition of their businesses by the Company.
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 store in November 1995, the remodeling and expansion of an
existing store and a full year operation of a new store that opened in November
1995.
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. The overall increase in this cost of $1.1 million, or 9.0%, was primarily
due to the higher level of merchandise sales. The increase in gross profit as a
percentage of net sales was due to sales of collectibles and animation art with
higher profit margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in Fiscal 1996 were $9.1 million, or 40.3% of net sales,
as compared to $8.0 million, or 40.0% of net sales, in Fiscal 1995, an increase
of $1.0 million, or 12.7%, primarily due to an increase in expenses resulting
from the opening of a new collectibles store in November 1995 and remodeling and
expansion of an existing collectibles store.
26
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES - COMBINED
On a combined basis, the Founding Companies generated $1.1 million and $1.5
million of net cash from operating activities during Fiscal 1997 and Fiscal
1996, respectively. Net cash used in investing activities by the Founding
Companies on a combined basis was $626,000 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 $731,000
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 of the Founding Companies decreased by $236,000
from $1.4 million in Fiscal 1996 to $1.2 million in Fiscal 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 $696,000 and
$802,000 in Fiscal 1997 and Fiscal 1996, respectively. The Company 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 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 Fiscal 1999. 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 liquidity and capital resources
could 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 and 1995. Therefore, the statement of operations data presented
herein excludes the period from November 1, 1995 to January 31, 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 statements of operations data and as
a percentage of net sales for the periods indicated (dollars in thousands) :
<TABLE>
<CAPTION>
FISCAL YEAR ENDED OCTOBER 31, FISCAL YEAR ENDED
------------------------------------------- JANUARY 31,
1994 1995 1997
------------------- --------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $3,898 100.0% $ 4,051 100.0% $4,289 100.0%
Cost of sales 1,715 44.0 1,560 38.5 1,506 35.1
------- ------- ------- ------- ------- -------
Gross profit 2,183 56.0 2,491 61.5 2,783 64.9
Selling, general and administrative expenses 1,588 40.7 1,760 43.4 1,778 41.5
------- ------- ------- ------- ------- -------
Income from operations 595 15.3 731 18.1 1,005 23.4
Other income (expense):
Interest expense - - (5) (0.1) - -
Interest income 7 0.2 23 0.5 24 0.6
------- ------- ------- ------- ------- -------
Net income $ 602 15.5% $ 749 18.5% $1,029 24.0%
======= ======= ======= ======= ======= =======
</TABLE>
27
<PAGE>
FISCAL 1997 COMPARED TO FISCAL 1996
Net Sales. Net sales were $4.3 million for Fiscal 1997 as compared to $4.1
million for Fiscal 1996, 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 Fiscal 1997 from $1.6 million, or 38.5% of net sales, in Fiscal 1996.
Gross profit as a percentage of net sales increased to 64.9% for Fiscal 1997
from 61.5% in Fiscal 1996, 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 Fiscal 1997 from 43.4% in Fiscal 1996,
primarily due to economies of scale associated with increased sales.
FISCAL 1996 COMPARED TO FISCAL 1995
Net Sales. Net sales were $4.1 million in Fiscal 1996 as compared to $3.9
million in Fiscal 1995, 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 Fiscal 1995 for animation art featuring Garfield.
Cost of Sales. Cost of sales decreased to $1.6 million, or 38.5% of net
sales, in Fiscal 1996 from $1.7 million, or 44.0% of net sales, in Fiscal 1995.
Gross profit as a percentage of net sales increased to 61.5% in Fiscal 1996 from
56.0% in Fiscal 1995, 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 Fiscal 1996 were $1.8 million, or 43.4% of net sales,
as compared to $1.6 million, or 40.7% of net sales, in Fiscal 1995, 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 $686,000 and $703,000 at January
31, 1997 and October 31, 1995, respectively. The primary source of this working
capital was cash flow from operations, which was $1.3 million, $893,000 and
$433,000 for Fiscal 1997, Fiscal 1996 and Fiscal 1995, 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, $8,000 and $20,000 for
Fiscal 1997, Fiscal 1996 and Fiscal 1995, respectively. These activities
represent 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 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.
28
<PAGE>
RESULTS OF OPERATIONS -- STONE'S HALLMARK
The following table sets forth certain statements of operations data and as
a percentage of net sales for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NOVEMBER 30, THREE MONTHS ENDED
------------------------------------------------------------ --------------------------------
FEBRUARY 29, FEBRUARY 28,
1994 1995 1996 1996 1997
------------------- ------------------- -------------------- ----------------- --------------
(UNAUDITED)
<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% $ 1,675 100.0% $ 1,845 100.0%
Cost of sales 1,800 51.6 2,269 53.0 2,497 50.1 909 54.3 947 51.3
------- ------- ------- ------- ------- ------- ------ ------ ------ -------
Gross profit 1,689 48.4 2,012 47.0 2,489 49.9 766 45.7 898 48.7
Selling, general and administrative
expenses 1,431 41.0 1,787 41.7 2,117 42.4 519 31.0 442 23.9
------- ------- ------- ------- ------- ------- ------ ------ ------ -------
Income from operations 258 7.4 225 5.3 372 7.5 247 14.7 456 24.8
Other income (expense):
Interest expense (4) (0.1) (11) (0.3) (3) (0.1) (.5) - (0.4) -
------- ------- ------- ------- ------- ------- ------ ------ ------ -------
Income before income taxes 254 7.3 214 5.0 369 7.4 246 14.7 456 24.8
Provision for income taxes 146 4.2 128 3.0 194 3.9 129 7.7 170 9.2
------- ------- ------- ------- ------- ------- ------ ------ ------ -------
Net income $ 108 3.1% $ 86 2.0% $ 175 3.5% $ 117 7.0% $ 286 15.6%
======= ======= ======= ======= ======= ======= ====== ====== ====== =======
</TABLE>
UNAUDITED INTERIM RESULTS
Net Sales. Net sales were $1.8 million for the three months ended February
28, 1997 as compared to $1.7 million for the three months ended February 29,
1996. The increase in sales of $171,000, or 10.2%, was largely due to an
increased demand for certain contemporary collectible products in the three
months ended February 28, 1997.
Cost of Sales. Cost of sales increased to $947,000, or 51.3% of net sales,
in the three months ended February 28, 1997 from $909,000, or 54.3% of net
sales, in the three months ended February 29, 1996. The increase in cost of
sales of $38,000, or 4.2%, was due to a higher level of merchandise sales. Gross
profit as a percentage of net sales increased due to an increase in contemporary
collectibles sales that have higher profit margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $442,000, or 23.9% of net sales, in the three
months ended February 28, 1997 as compared to $519,000, or 31.0% of net sales,
in the three months ended February 29, 1996, a decrease of $77,000, or 14.9%,
primarily attributable to a decrease in management salaries.
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. The overall increase in
cost of sales of $228,000, or 10.0%, was due to the higher level of merchandise
sales. Gross profit as a percentage of net sales increased due to an increase in
contemporary collectibles sales that have higher profit margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $2.1 million, or 42.5% of net sales, in the fiscal
year ended November 30, 1996 as compared to $1.8 million, or 41.8% 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.
29
<PAGE>
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. The overall increase in
this cost of $469,000, or 26.1%, was due to the higher level of merchandise
sales. The decrease in gross profit as a percentage of net sales was 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 41.8% 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.
Interest Expense. Interest expense increased to $10,000 in the fiscal year
ended November 30, 1995 from $4,000 in the fiscal year ended November 30, 1994.
The increase was attributable to additional funding required to finance the new
store and the store expansion.
LIQUIDITY AND CAPITAL RESOURCES -- STONE'S HALLMARK
Stone's Hallmark had working capital of $1.6 million, $1.3 million,
$946,000 and $765,000 at February 28, 1997 and November 30, 1996, 1995 and 1994,
respectively. The primary source of this working capital was cash flows from
operations and debt and equity financing.
Cash provided by operating activities was $169,000, $89,000, $152,000 and
$43,000 in the three months ended February 28, 1997 and the fiscal years ended
November 30, 1996, 1995 and 1994, 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 $29,000, $86,000, $113,000 and
$93,000 for the three months ended February 28, 1997 and the fiscal years ended
November 30, 1996, 1995 and 1994, respectively, and were 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.
30
<PAGE>
RESULTS OF OPERATIONS -- CRYSTAL GALLERIA
The following table sets forth certain statements of operations data 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
------------------- ------------------- -------------------- ----------------- --------------
(UNAUDITED)
<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 42.4
------- ------- ------- ------- ------- ------- ---- ------- ---- -----
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>
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. The overall increase in this cost of
$88,000, or 23.2%, was due to the higher level of merchandise sales. Gross
profit as a percentage of net sales increased 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 42.4% 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. The overall increase in
this cost of $452,000, or 33.9%, was due to the higher level of merchandise
sales.
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.
Interest Expense. Interest expense increased to $111,000 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.
31
<PAGE>
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. The overall increase in
this cost of $145,000, or 12.2%, was due to the higher level of merchandise
sales.
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.
Interest Expense. Interest expense increased to $58,000 in the fiscal year
ended December 31, 1995 from $39,000 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, and working capital of
$69,000 at December 31, 1995. 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 primary source of the working capital at
December 31, 1995 was cash flow from operations, which was $663,000 and $353,000
in the fiscal years ended December 31, 1995 and 1994, respectively. 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. The increase in operating
cash flows for the fiscal year ended December 31, 1995 was primarily due to a
significant increase in year-end accounts payable and accrued liabilities, which
was partially offset by an increase in year-end merchandise inventories.
Cash used for investing activities was $315,000, $282,000 and $9,000 for
the fiscal years ended December 31, 1996, 1995 and 1994, respectively. These
activities represent purchases of property and equipment.
North Pole City
North Pole City is a retailer of Christmas merchandise and contemporary
collectibles.
32
<PAGE>
RESULTS OF OPERATIONS -- NORTH POLE CITY
The following table sets forth certain statements of operations data 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) (58) (2.0) (82) (2.2)
Other, net 8 0.3 10 0.4 38 1.0
------- ------- ------- ------- ------- -------
Income before income taxes 168 6.6 248 8.7 427 11.5
Provision for income taxes 66 2.6 96 3.4 168 4.5
------- ------- ------- ------- ------- -------
Net income $ 102 4.0% $ 152 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. Gross profit as a
percentage of net sales increased 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 40.1% 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.
Interest Expense. Interest expense increased to $82,000 in the fiscal year
ended March 31, 1997 from $58,000 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. The overall increase in this
cost of $121,000, or 8.8%, was due to the higher level of merchandise sales.
Gross profit as a percentage of net sales increased due to the change in product
mix to collectibles with higher margins.
33
<PAGE>
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 $58,000 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 and $950,000 at March
31, 1997 and 1996, respectively. The primary source of this working capital in
the fiscal year ended March 31, 1997 was cash flow from operations, which was
$167,000. The primary source of working capital in the fiscal year ended March
31, 1996 was cash borrowed on the line of credit. Cash used in operating
activities was $234,000 and $92,000 in the fiscal years ended March 31, 1996 and
1995, respectively. 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, $67,000 and $79,000 for
the fiscal years ended March 31, 1997, 1996 and 1995, respectively. These
activities represent 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 statements of operations data 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
------------------- ------------------- ----------------- -------------------
(UNAUDITED)
<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 52.2 284 51.0 323 55.5
------- ------- ------- ------- ---- ------- ------ ---------
Gross profit 737 40.1 1,192 47.8 274 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 70 12.4 (4) (.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% $ 58 10.3% $ (15) (2.5)%
======= ======= ======= ======= ==== ======= ====== =========
</TABLE>
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 $23,000, 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 $284,000, or 51.0% of net sales,
in the three months ended March 31, 1996. The overall increase in this cost of
$38,000, or 13.5%, was due to the higher level of merchandise sales. Gross
profit as a percentage of net sales decreased due to a change in product mix to
collectibles with lower margins.
34
<PAGE>
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. The overall increase in
this cost of $199,000, or 18.1%, was due to the higher level of merchandise
sales. Gross profit as a percentage of net sales increased due to the change in
product mix of 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, $171,000 and $94,000 at March
31, 1997 and December 31, 1996 and 1995, respectively. The primary source of
this working capital was cash flow from operations, which was $135,000 and
$102,000 for the fiscal years ended December 31, 1996 and 1995, respectively.
The decrease in working capital at March 31, 1997 was due to cash used in
operating activities, which was $37,000 for the three months ended March 31,
1997. The increases in cash in each period was 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 and $105,000 for the fiscal
years ended December 31, 1996 and 1995, respectively. These activities represent
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
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RESULTS OF OPERATIONS -- FILMART
The following table sets forth certain statements of operations data 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
------------------ ------------------ ---------------- -------------------
(UNAUDITED)
<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 48.5 498 34.4 102 38.8 114 49.1
------ ------- ------ ------- ----- ------- ---- -------
Gross profit 542 51.5 948 65.6 161 61.2 118 50.9
Selling, general and administrative expenses 493 46.8 539 37.3 104 39.5 163 70.7
------ ------- ------ ------- ----- ------- ---- -------
Income from operations 49 4.7 409 28.3 57 21.7 (45) (19.8)
Other income (expense):
Interest expense (4) (0.4) (1) (0.1) - - - -
Other, net 74 7.0 279 19.3 56 21.3 56 24.3
------ ------- ------ ------- ----- ------- ---- -------
Net income $ 119 11.3% $ 687 47.5% $113 43.0% $ 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 sales
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. Filmart recognized $56,000 of sales through
such barter companies in each of the three months ended March 31, 1997 and 1996,
respectively.
Costs of Sales. Costs 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. The overall decrease in gross
profit as a percentage of net sales was primarily due to increased 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 $164,000,
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 $60,000, or 57.7%, 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 48.5% of net sales,
in the fiscal year ended December 31, 1995. The overall increase in gross profit
as a percentage of net sales was primarily a result of increased 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 $46,000, 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.
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<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 $63,000 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 selected financial data and data as a
percentage of net sales for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------------
1996 1997
------------------- --------------------
(UNAUDITED)
<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 9.4 17 4.9
Other income (expense):
Interest expense (2) (0.4) (3) (0.8)
Other, net - - - -
----- ------- ----- -------
Income before taxes 40 9.0 14 4.1
Income tax expense (benefit) (1) (.2) 5 1.5
----- ------- ----- -------
Net income $ 41 9.2% $ 9 2.6%
===== ======= ===== =======
</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. The decrease in cost of sales of $69,000,
or 33.5%, was primarily attributable to the decrease in sales for the three
months ended March 31, 1997. The decrease in cost of sales as a percentage of
net sales was due to a management decision to place more emphasis on sales in
the first quarter of 1997 which carry a higher gross margin.
37
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the three months ended March 31, 1997 were $188,000,
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.
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.
SEASONALITY AND QUARTERLY FLUCTUATIONS
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 factors
may cause significant fluctuations in the Company's quarterly net sales,
including the timing of new product introductions, the amount and timing of
sales contributed by new stores, the timing of in-store artist signing events
held at the store locations, 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.
INFLATION
Due to the relatively low levels of inflation experienced in 1995, 1996 and
1997, inflation did not have a significant effect on the operating results of
the combined Founding Companies in those fiscal years.
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, Laliqu-, Swarovski, Disney and Enesco (manufacturer of the Precious
Moments and Cherished Teddies product lines). 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 1995, the
collectibles industry grew approximately 13% in 1995, generating over $8 billion
in primary sales (i.e., sales of new merchandise), of which approximately 76%
were generated by retail sales (including TV shopping) and approximately 24%
were generated by direct response marketing. The contemporary collectibles
industry is serviced by approximately 9,500 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 22 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 common in the industry,
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<PAGE>
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 9,500 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 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 intends to acquire profitable,
well-managed collectibles retailers and animation art marketers that have
good reputations with vendors and customers and, where possible, 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 of
other retailers and marketers due to its strategy of retaining owners and
management of acquired companies, its access to capital and its ability to
offer sellers cash for their business as well as an ongoing equity stake in
the Company. The Company has built an extensive database of businesses 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.
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.
40
<PAGE>
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.
Open New Stores. 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. Other than the anticipated opening of one or
two prototype locations, the Company currently 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. 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 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
41
<PAGE>
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 sells 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 Laliqu-. 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
reports 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 are
42
<PAGE>
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.
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.
Several of the Founding Companies 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 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. 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.
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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 7 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, Cherished Teddies Adoption Center (2), Department 56 Gold Key
Dealer (4), Fenton Glass Showcase Dealer, Giuseppe Armani Art Headquarter Store,
Giuseppe Armani Preferred Dealer, Hallmark Gold Crown (2), Lladro Millennium
Dealer, Lladr- Vanguard Dealer, Roman Premiere Dealer, Swarovski Preferred
Dealer and Disney Preferred Gallery. Three of the Founding Companies 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, 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. 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), Sidney Harris
and David Orielo (Felix the Cat\R) pursuant to oral understandings with such
individuals. 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
consents to the Acquisitions. Although the Company will seek 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.
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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, 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. 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 has an agreement with a third party to
provide consulting services in exchange for advertising and, pursuant to such
agreement, had prepaid advertising expenses of $285,000 at December 31, 1996.
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
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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 Operating History," and "-- Management of
Growth."
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 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.
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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 consent to the Acquisitions. Although the
Company will seek 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 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 AND OFFICERS
The following table sets forth information concerning the Company's
directors and executive officer and those persons who will become directors and
officers upon consummation of the Offering:
NAME AGE POSITION
- ----------------------- --- --------------------------------------------------
Ronald P. Rafaloff 49 Chairman of the Board; President and Chief
Executive Officer
Michael A. Baker(1)(2) 51 Director(3)
Vincent J. Browne 60 Executive Vice President - Mall Operations;
President - Crystal Galleria and Crystal Palace;
Director(3)
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)
Paul T. Shirley(1)(2) 56 Director(3)
Susan M. Spiegel 41 President - Filmart; Director(3)
David J. Stone 64 President - Stone's Hallmark; Director(3)
- ----------
(1) Member of audit committee.
(2) Member of compensation 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
and as President and Chief Executive Officer since June 1997. 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.
Michael A. Baker will become a director of the Company upon consummation
of the Offering. 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. ("AMR"), a
Boston based company engaged in the provision of a national ambulance service
network 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.
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.
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.
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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.
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. ("AMR") 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.
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.
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." The Company
anticipates hiring a chief financial officer prior to consummation of the
Offering.
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 Fiscal 1997.
EMPLOYMENT AGREEMENTS
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. The initial term of each agreement commences on
the date of the consummation of the Offering and ends on either the third or
fifth anniversary thereof. With respect to each such agreement, in the event
that either party does
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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, 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 (as defined
each such employment agreement), 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 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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Ronald P. Rafaloff, the Company's Chairman of the Board, President and
Chief Executive Officer, participated in deliberations concerning the Company's
executive compensation policy during Fiscal 1997.
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
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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.
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.
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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.
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.
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
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<PAGE>
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.
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). Ronald P. Rafaloff, Chairman of the Board of Directors,
President and Chief Executive Officer of the Company, is a partner and a
principal owner of RGR.
In August 1996, Collectibles USA issued a $300,000 5% note due December 31,
1997 (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 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, Collectibles USA issued 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.
The proceeds of the CEFC Notes were used by Collectibles USA 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 $1.0 million in cash and 60,606
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. 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 $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 June
1, 1997 of the Founding Companies at the closing of the Offering, which has been
either personally guaranteed by, or is owed directly to, certain stockholders of
the
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<PAGE>
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 $1,616 277,272
Crystal Palace 175 362 62,000
Little Elegance 400 843 85,000
North Pole City 1,800 785 359,090
Reef Hallmark 1,000 649 168,181
Stone's Hallmark 1,350 66 350,000
Animation Art Galleries
- -----------------------
American Royal Arts 2,814 - 563,636
Animation USA 600 126 145,454
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 and the performance by each of the parties
of their respective covenants.
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.
Four of the Founding Companies have incurred indebtedness which has been
personally guaranteed by its stockholders. At June 1, 1997, the aggregate amount
of indebtedness of these Founding Companies that was subject to personal
guarantees 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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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
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. RGR is a stockholder of the Company and will, after
the Offering, beneficially own 11.5% 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.
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.
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 June 12, 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 & ADDRESS NUMBER PERCENT NUMBER PERCENT
- ----------------------------------------- --------- --------- --------------- --------
<S> <C> <C> <C> <C>
Michael A. Baker 152,490 12.8% 152,490 2.5%
3322 Albans
Houston, TX 77005
Vincent J. Browne - - 131,318 2.1%
7878 Sea Horn Court
Las Vegas, NV 89117
Capstone Partners LLC 152,490 12.8% 152,490 2.5%
9 East 53rd Street, 3rd Floor
New York, NY 10019
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
Ronald P. Rafaloff(1) 711,622 59.7% 641,624 11.5%
One Battery Park Plaza, 24th Floor
New York, NY 10004-1405
RGR Financial Group LLC 711,622 59.7% 641,624 11.5%
One Battery Park Plaza, 24th Floor
New York, NY 10004-1405
Paul T. Shirley - - 7,575(2) 0.1%
2821 S. Parker Road
Aurora, CO 80014
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
David L. Yankey 174,580 14.7% 174,580 2.8%
13500 Country Way
Los Altos Hills, CA 94022
All officers and directors and director 864,112 72.5% 2,492,096 40.2%
nominees as a group (9 persons)
</TABLE>
- ----------
(1) Represents 711,622 shares owned by RGR. Mr. Rafaloff is a partner and a
principal owner of RGR.
(2) To be received upon conversion of subordinated debt issued by an affiliate
of the Company that is convertible into previously issued Common Stock.
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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 one person, 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
5,182,182 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 four-tenths of a vote for
each share held on all other matters on which stockholders are entitled to vote.
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 $1.0 million in cash and 60,606
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 outstanding
voting stock at an annual or special meeting, excluding shares owned by the
interested stockholder. Under Section 203,
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<PAGE>
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.
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<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, 6,198,784 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 3,498,784 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 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 terms. In addition the owners of the Founding Companies
and certain stockholders of the Company designated by the Representatives who
beneficially own an aggregate of 1,016,602 shares of Common Stock 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 shares will be granted under
the Plan and the Directors' Plan in connection with the Offering. 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 shares generally will be freely
tradeable after their issuance by persons not affiliated with the Company unless
the Company contractually restricts their resale.
61
<PAGE>
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.
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."
62
<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. 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
63
<PAGE>
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 the owners of the Founding
Companies and certain stockholders of the Company designated by the
Representatives who beneficially own an aggregate of 1,016,602 shares of Common
Stock 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 to
be considered in such negotiations are 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.
64
<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.
65
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
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-6
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-19
Balance Sheets ......................................................... F-20
Statements of Operations ............................................. F-21
Statements of Stockholders' Equity .................................... F-22
Statements of Cash Flows ............................................. F-23
Notes to Financial Statements .......................................... F-24
Stone's Shops, Inc.
Report of Independent Public Accountants .............................. F-28
Balance Sheet ......................................................... F-29
Statement of Operations ................................................ F-30
Statement of Stockholders' Equity .................................... F-31
Statement of Cash Flows ................................................ F-32
Notes to Financial Statements .......................................... F-33
Crystal Galleria, Inc. and Base, Inc.
Report of Independent Public Accountants .............................. F-38
Combined Balance Sheets ................................................ F-39
Combined Statements of Operations .................................... F-40
Combined Statements of Stockholders' Equity ........................... F-41
Combined Statements of Cash Flows .................................... F-42
Notes to Consolidated Financial Statements ........................... F-43
DKG Enterprises, Inc.
Report of Independent Public Accountants .............................. F-47
Balance Sheets ......................................................... F-48
Statements of Operations ............................................. F-49
Statements of Shareholders' Equity .................................... F-50
Statements of Cash Flows ............................................. F-51
Notes to Financial Statements .......................................... F-52
F-1
<PAGE>
PAGE
-----
Elwell Stores, Inc.
Report of Independent Public Accountants............................... F-57
Balance Sheets ....................................................... F-58
Statements of Operations .............................................. F-59
Statements of Shareholders' (Deficit) Equity ......................... F-60
Statements of Cash Flows .............................................. F-61
Notes to Financial Statements ........................................ F-62
Animation USA, Inc.
Report of Independent Public Accountants............................... F-66
Balance Sheet ....................................................... F-67
Statement of Operations .............................................. F-68
Statement of Stockholders' Equity ..................................... F-69
Statement of Cash Flows .............................................. F-70
Notes to Financial Statements ........................................ F-71
Filmart Productions, Inc.
Report of Independent Public Accountants ............................ F-75
Balance Sheets ....................................................... F-76
Statements of Operations .............................................. F-77
Statements of Stockholders' Equity .................................. F-78
Statements of Cash Flows .............................................. F-79
Notes to Financial Statements ........................................ F-80
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 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 identified as the accounting acquiror for
financial statement presentation 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 January 31, 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 - JANUARY 31, 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 $ 425,681 $ 609,523 $ 82,610 $ 165,745 $ 31,789
Accounts receivable 100,000 33,712 - 33,204 14,467
Merchandise inventories - 611,943 2,673,712 1,195,904 2,033,217
Prepaid expenses and other current assets 7,500 105,914 86,681 121,710 59,436
----------- ----------- ----------- ----------- -----------
Total current assets 533,181 1,361,092 2,843,003 1,516,563 2,138,909
Property and equipment, net - 38,173 286,837 655,857 220,990
Other assets, net 894,096 82,885 - - 3,225
Goodwill, net - - - - -
----------- ----------- ----------- ----------- -----------
Total assets $ 1,427,277 $ 1,482,150 $3,129,840 $2,172,420 $2,363,124
=========== =========== =========== =========== ===========
LIABILITIES AND
STOCKHOLDERS' (DEFICIT) EQUITY
Accounts payable and accrued liabilities $ 586,198 $ 341,254 $1,499,985 $ 431,186 $ 348,276
Customer deposits - 334,131 25,946 11,645 126,661
Federal income taxes payable - - - - 279,724
Pro forma cash consideration
due to Founding Companies - - - - -
Line of credit - - - - 231,000
Notes payable to related party 855,000 - 30,000 983,168 -
Current maturities of long-term obligations - - 14,400 473,101 34,665
----------- ----------- ----------- ----------- -----------
Total current liabilities 1,441,198 675,385 1,570,331 1,899,100 1,020,326
Deferred income taxes - - 500,455 - 11,987
Long-term obligations, net of current maturities - - 28,800 117,190 353,939
Notes payable to stockholders - - - - -
----------- ----------- ----------- ----------- -----------
Total liabilities 1,441,198 675,385 2,099,586 2,016,290 1,386,252
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 (1,454,306) 950,181 990,254 148,130 976,372
----------- ----------- ----------- ----------- -----------
Total stockholders' (deficit) equity (13,921) 806,765 1,030,254 156,130 976,872
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders' equity $ 1,427,277 $ 1,482,150 $3,129,840 $2,172,420 $2,363,124
=========== =========== =========== =========== ===========
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
LITTLE REEF ANIMATION CRYSTAL
ELEGANCE HALLMARK USA FILMART PALACE
----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 45,121 $ 113,084 $ 4,824 $ 76,758 $ 33,709
Accounts receivable 30,069 - - 389,768 20,003
Merchandise inventories 1,311,610 853,733 321,653 375,258 415,283
Prepaid expenses and other current assets 30,809 2,064 32,313 322,153 -
----------- ----------- --------- ----------- ---------
Total current assets 1,417,609 968,881 358,790 1,163,937 468,995
Property and equipment, net 229,987 122,756 72,176 36,521 30,458
Other assets, net 109,000 5,375 - 7,172 -
Goodwill, net - - - -
----------- ----------- --------- ----------- ---------
Total assets $1,756,596 $ 1,097,012 $ 430,966 $1,207,630 $ 499,453
=========== =========== ========= =========== =========
LIABILITIES AND
STOCKHOLDERS' (DEFICIT) EQUITY
Accounts payable and accrued liabilities $ 696,039 $ 634,367 $ 231,714 $ 129,747 $ 154,542
Customer deposits 6,000 10,021 13,775 32,778
Federal income taxes payable - - 32,835 - -
Pro forma cash consideration
due to Founding Companies - - - - -
Line of credit - - 72,494 - 40,000
Notes payable to related party 439,646 - - 25,444 -
Current maturities of long-term obligations 1,171 153,303 38,454 - -
----------- ----------- --------- ----------- ---------
Total current liabilities 1,142,856 797,691 389,272 187,969 194,542
Deferred income taxes - - - - -
Long-term obligations, net of current maturities 3,000 368,333 - - -
Notes payable to stockholders - - - - 321,696
----------- ----------- --------- ----------- ---------
Total liabilities 1,145,856 1,166,024 389,272 187,969 516,238
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 583,740 (168,787) (151,006) 1,019,661 (61,785)
----------- ----------- --------- ----------- ---------
Total stockholders' (deficit) equity 610,740 (69,012) 41,694 1,019,661 (16,785)
----------- ----------- --------- ----------- ---------
Total liabilities and stockholders' equity $1,756,596 $ 1,097,012 $ 430,966 $1,207,630 $ 499,453
=========== =========== ========= =========== =========
</TABLE>
F-4
(continued)
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA POST ACQUISITIONS
TOTAL ADJUSTMENTS COMBINED ADJUSTMENTS
------------ ----------- ------------ ------------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 1,588,844 $ 1,400,000 $ 2,988,844 $ 9,273,655
Accounts receivable 621,223 - 621,223 -
Merchandise inventories 9,792,313 - 9,792,313 -
Prepaid expenses and other current assets 768,580 17,172 785,752 -
------------ ----------- ------------ -------------
Total current assets 12,770,960 1,417,172 14,188,132 9,273,655
Property and equipment, net 1,693,755 (106,074) 1,587,681 -
Other assets, net 1,101,753 - 1,101,753 (894,096)
Goodwill, net - 17,864,221 17,864,221 -
------------ ----------- ------------ -------------
Total assets $ 15,566,468 $ 19,175,319 $ 34,741,787 $ 8,379,559
============ =========== ============ =============
LIABILITIES AND
STOCKHOLDERS' (DEFICIT) EQUITY
Accounts payable and accrued liabilities $ 5,053,308 $ - $ 5,053,308 $ (574,484)
Customer deposits 560,957 - 560,957 -
Federal income taxes payable 312,559 - 312,559 -
Pro forma cash consideration
due to Founding Companies - 9,238,920 9,238,920 (9,238,920)
Line of credit 343,494 - 343,494 (343,494)
Notes payable to related party 2,333,258 - 2,333,258 (2,333,258)
Current maturities of long-term obligations 715,094 362,153 1,077,247 (1,077,247)
------------ ----------- ------------ -------------
Total current liabilities 9,318,670 9,601,073 18,919,743 (13,567,403)
Deferred income taxes 512,442 - 512,442 -
Long-term obligations, net of current maturities 871,262 1,736,080 2,607,342 (2,607,342)
Notes payable to stockholders 321,696 - 321,696 (321,696)
------------ ----------- ------------ -------------
Total liabilities 11,024,070 11,337,153 22,361,223 (16,496,441)
Stockholders' (deficit) equity:
Preferred stock - 200 200 (200)
Common stock 288,196 (253,814) 34,382 27,606
Treasury stock (145,000) 145,000 - -
Additional paid-in capital 1,566,748 11,283,359 12,850,107 24,848,594
Retained (deficit) earnings 2,832,454 (3,336,579) (504,125) -
------------ ----------- ------------ -------------
Total stockholders' (deficit) equity 4,542,398 7,838,166 12,380,564 24,876,000
------------ ----------- ------------ -------------
Total liabilities and stockholders' equity $ 15,566,468 $ 19,175,319 $ 34,741,787 $ 8,379,559
============ =========== ============ =============
</TABLE>
F-4
(continued)
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA
AS
ADJUSTED
-----------------
<S> <C>
ASSETS
Cash and cash equivalents $ 12,262,499
Accounts receivable 621,223
Merchandise inventories 9,792,313
Prepaid expenses and other current assets 785,752
------------
Total current assets 23,461,787
Property and equipment, net 1,587,681
Other assets, net 207,657
Goodwill, net 17,864,221
------------
Total assets $ 43,121,346
============
LIABILITIES AND
STOCKHOLDERS' (DEFICIT) EQUITY
Accounts payable and accrued liabilities $ 4,478,824
Customer deposits 560,957
Federal income taxes payable 312,559
Pro forma cash consideration
due to Founding Companies -
Line of credit -
Notes payable to related party -
Current maturities of long-term obligations -
------------
Total current liabilities 5,352,340
Deferred income taxes 512,442
Long-term obligations, net of current maturities -
Notes payable to stockholders -
------------
Total liabilities 5,864,782
Stockholders' (deficit) equity:
Preferred stock -
Common stock 61,988
Treasury stock -
Additional paid-in capital 37,698,701
Retained (deficit) earnings (504,125)
------------
Total stockholders' (deficit) equity 37,256,564
------------
Total liabilities and stockholders' equity $ 43,121,346
============
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-4
(continued)
<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 $ 3,144,908 $ 2,598,270
Cost of sales ........................... - 1,505,784 2,496,574 1,784,916 1,443,314 1,346,661
------------- ---------- ----------- ----------- ----------- -----------
Gross profit ........................... - 2,782,828 2,488,975 1,942,369 1,701,594 1,251,609
Selling, general and administrative
expenses .............................. 1,442,492 1,778,138 2,117,010 1,564,229 1,074,470 1,229,978
Goodwill amortization .................. - - - - - -
Income from operations .................. (1,442,492) 1,004,690 371,965 378,140 627,124 21,631
Other (income) expense:
Interest expense ........................ 11,814 (24,027) 2,891 111,389 63,424 76,371
Other, net .............................. - - - 12,284 (36,962) (400)
------------- ---------- ----------- ----------- ----------- -----------
Income (loss) before income taxes ...... $ (1,454,306) 1,028,717 369,074 254,467 600,662 (54,340)
Provision for income taxes ............ - - 193,941 - 233,083 150
------------- ---------- ----------- ----------- ----------- -----------
Net income (loss) ..................... $ (1,454,306) $ 1,028,717 $ 175,133 $ 254,467 $ 367,579 $ (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 $ 25,532,473 - 25,532,473
Cost of sales ........................... 1,301,468 840,283 497,920 537,265 11,754,185 - 11,754,185
----------- ----------- ---------- ----------- ------------ ----------- -----------
Gross profit ........................... 1,191,341 876,127 947,928 595,517 13,778,288 - 13,778,288
Selling, general and administrative
expenses .............................. 934,764 845,100 539,178 455,299 11,980,658 (952,785) 11,027,873
Goodwill amortization .................. - - - - - 446,606 446,606
Income from operations .................. 256,577 31,027 408,750 140,218 1,797,630 506,179 2,303,809
Other (income) expense:
Interest expense ........................ 48,826 9,349 1,056 29,500 330,593 (220,322) 110,271
Other, net .............................. 11,520 - (278,866) - (292,424) - (292,424)
----------- ----------- ---------- ----------- ------------ ----------- -----------
Income (loss) before income taxes ...... 196,231 21,678 686,560 110,718 1,759,461 726,501 2,485,962
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 $ 1,323,343 $ (636,794) $ 686,549
=========== =========== ========== =========== ============ ========== ===========
Net income per share .................. $ .13
Shares used in computing net income per ===========
share (1) ..............................
5,288,100
===========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
- ----------
(1) Includes (i) 2,246,996 shares to be issued to the owners of the Founding
Companies, (ii) 60,606 shares to be issued to holders of the Series A
Convertible Preferred Stock and (iii) 1,956,876 of the 2,700,000 shares to
be sold in the Offering to pay the cash portion of the Acquisition
consideration, the S Corporation Distributions and expenses of the
Offering.
F-5
<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 of the Founding Companies and were derived from the
respective Founding Companies' financial statements where indicated. All
Founding Companies have a December 31 year-end or have been converted to a
December 31 year-end with the exception of American Royal Arts, which has a
January 31, 1997, year-end and Stone's Hallmark, which has a November 30, 1996
year-end. 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-6
<PAGE>
COLLECTIBLES USA, INC., AND FOUNDING COMPANIES NOTES TO
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS - (Continued)
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
(a) Records the S Corporation Distributions.
(b) Records the distribution of certain assets and related obligations to
certain stockholders of the Founding Companies.
(c) Records the purchase of the Founding Companies, including the cash
consideration due to the Founding Companies and Common Stock portions and
the related deferred income tax assets.
(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 $894,000
incurred through January 31, 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.
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 - - 17,864,221 - 17,864,221
------------ ----------- ------------ ----------- ------------
Total assets - (106,074) 17,881,393 1,400,000 19,175,319
============ =========== ============ =========== ============
LIABILITIES AND STOCKHOLDERS'
(DEFICIT) EQUITY
Current maturities of long-term obligations - (37,847) - 400,000 362,153
Pro forma cash consideration due to Found-
ing Companies - - 9,238,920 - 9,238,920
Long-term obligations, net of current matu-
rities 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 - - - 200 200
Common stock - - (253,814) - (253,814)
Additional paid-in capital (1,736,080) - 12,019,639 999,800 11,283,359
Retained (deficit) earnings - (68,227) (3,268,352) - (3,336,579)
Treasury stock - - 145,000 - 145,000
------------ ----------- ------------ ----------- ------------
Total stockholders' (deficit) equity (1,736,080) (68,227) 8,642,473 1,000,000 7,838,166
------------ ----------- ------------ ----------- ------------
Total liabilities and stockholders' (deficit)
equity $ - $ (106,074) $ 17,881,393 $1,400,000 $19,175,319
============ =========== ============ =========== ============
</TABLE>
F-7
<PAGE>
COLLECTIBLES USA, INC., AND FOUNDING COMPANIES NOTES TO
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS - (Continued)
<TABLE>
<CAPTION>
ACQUISITION
(e) (f) (g) ADJUSTMENTS
------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $23,940,612 $ (5,428,037) $ (9,238,920) $ 9,273,655
Other current assets (894,096) - - (894,096)
------------ ------------- ------------- -------------
Total assets 23,046,516 (5,428,037) (9,238,920) 8,379,559
============ ============= ============= =============
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
EQUITY
Accounts payable and accrued liabilities (574,484) - - (574,484)
Pro forma cash consideration due to founding companies - - (9,238,920) (9,238,920)
Line of credit - (343,494) - (343,494)
Payment to related parties - (1,478,258) - (1,478,258)
Current maturities of long-term debt (1,255,000) (677,247) - (1,932,247)
------------ ------------- ------------- -------------
Total current liabilities (1,829,484) (2,498,999) (9,238,920) (13,567,403)
Long-term debt, net of current maturities - (2,607,342) - (2,607,342)
Payable to stockholders - (321,696) - (321,696)
Total liabilities (1,829,484) (5,428,037) (9,238,920) (16,496,441)
Stockholders' (deficit) equity:
Series A preferred stock (200) - - (200)
Common stock 27,606 - - 27,606
Additional paid-in capital 24,848,594 - - 24,848,594
------------ ------------- ------------- -------------
Total stockholders' (deficit) equity 24,876,000 - - 24,876,000
------------ ------------- ------------- -------------
Total liabilities and stockholders' (deficit) equity $23,046,516 $ (5,428,037) $ (9,238,920) $ 8,379,559
============ ============= ============= =============
</TABLE>
F-8
<PAGE>
COLLECTIBLES USA, INC., AND FOUNDING COMPANIES NOTES TO
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS - (Continued)
4. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
ADJUSTMENTS:
(a)Reflects the amortization of goodwill to be recorded as a result of the
Acquisitions over a 40 year period.
(b)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 affect of revisions to certain lease
agreements between certain owners of the Founding Companies.
(c)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.
(d)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.
The following table summarizes unaudited pro forma combined statements of
operations adjustments:
<TABLE>
<CAPTION>
PRO FORMA
(a) (b) (c) (d) ADJUSTMENTS
------------- -------------- ---------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Selling, general and administrative $ - ($ 952,785) $ - $ - $ (952,785)
Goodwill amortization 446,606 - - - 446,606
----------- ----------- ------------- ----------- -----------
Income from operations 446,606 952,785 - - 506,179
Other income expense :
Interest expense - - - 220,322 220,322
----------- ----------- ------------- ----------- -----------
Income before income taxes 446,606 952,785 - 220,322 726,501
Provision for income taxes - - 1,363,295 - 1,363,295
----------- ----------- ------------- ----------- -----------
Net income $ 446,606 $ 952,785 $ 1,363,295 $ 220,322 $ (636,794)
=========== =========== ============= =========== ===========
</TABLE>
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 the related statements of
operations, stockholders' deficit and cash flows for the period from inception
(January 18, 1996) through January 26, 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 the results of its operations and its cash flows for the
period from inception (January 18, 1996) through January 26, 1997, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 12, 1997 (except with respect to the matters
discussed in Notes 4 and 6, as to which the date is June 13, 1997)
F-10
<PAGE>
COLLECTIBLES USA, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
JANUARY 26,
1997
---------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash $ 425,681
Accounts receivable 100,000
Prepaid expenses and other current assets 7,500
------------
Total current assets 533,181
Deferred offering costs 894,096
------------
Total assets $ 1,427,277
============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accrued liabilities $ 586,198
Notes payable-related party 855,000
------------
Total current liabilities 1,441,198
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
Additional paid-in capital 1,428,473
Deficit (1,454,306)
------------
Total stockholders' deficit (13,921)
------------
Total liabilities and stockholders' deficit $ 1,427,277
============
</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,
1996)
THROUGH
JANUARY 26,
1997
--------------
<S> <C>
Net sales $ -
Cost of sales -
-------------
Gross profit -
Selling, general and administrative expenses 1,442,492
-------------
Operating loss (1,442,492)
Other expense:
Interest expense 11,814
-------------
Net loss $ (1,454,306)
=============
</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)
========== ======== =========== ============= ============
</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
JANUARY 26,
1997
--------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,454,306)
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 prepaid expenses and other current assets (7,500)
Increase in accounts receivable (100,000)
Increase in deferred offering costs (894,096)
Increase in accrued expenses 586,198
-------------
Net cash used in operating activities (429,419)
-------------
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 425,681
CASH, beginning of period -
-------------
CASH, end of period $ 425,681
=============
</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.
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 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.
F-15
<PAGE>
COLLECTIBLES USA, INC.
NOTES TO FINANCIAL STATEMENTS- (Continued)
3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following as of January 26,
1997:
Accrued professional expenses $556,992
Other Accrued Liabilities 29,206
---------
$586,198
=========
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 sold 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.
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
F-16
<PAGE>
COLLECTIBLES USA, INC.
NOTES TO FINANCIAL STATEMENTS- (Continued)
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 60,606 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 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 Nonemployee 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
F-17
<PAGE>
COLLECTIBLES USA, INC.
NOTES TO FINANCIAL STATEMENTS- (Continued)
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. SUBSEQUENT EVENT (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.
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.
F-18
<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-19
<PAGE>
AMERICAN ROYAL ARTS CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31,
------------------------------- JANUARY 31,
1995 1996 1997
-------------- -------------- -------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 547,990 $ 442,364 $ 609,523
Accounts receivable 61,347 50,609 33,712
Merchandise inventories 599,713 707,161 611,943
Prepaid expenses and other current assets 56,789 109,221 105,914
----------- ----------- -----------
Total current assets 1,265,839 1,309,355 1,361,092
PROPERTY AND EQUIPMENT, net 27,060 40,283 38,173
OTHER ASSETS, net 136,635 89,135 82,885
----------- ----------- -----------
Total assets $ 1,429,534 $ 1,438,773 $ 1,482,150
=========== =========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Customer deposits $ 115,804 $ 355,617 $ 334,131
Accounts payable and accrued liabilities 439,842 386,960 341,254
Current maturities of long-term obligations 7,268 - -
----------- ----------- -----------
Total current liabilities 562,914 742,577 675,385
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 outstand-
ing 1,584 1,584 1,584
Less- Treasury stock, at cost (79,166.668 shares) (145,000) (145,000) (145,000)
Retained earnings 1,010,036 839,612 950,181
----------- ----------- -----------
Total stockholder's equity 866,620 696,196 806,765
----------- ----------- -----------
Total liabilities and stockholder's equity $ 1,429,534 $ 1,438,773 $ 1,482,150
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
AMERICAN ROYAL ARTS CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR
YEAR ENDED OCTOBER 31, ENDED
---------------------------------------- JANUARY 31,
1994 1995 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $3,897,785 $ 4,051,072 $4,121,181 $4,288,612
COST OF SALES 1,715,025 1,559,918 1,571,068 1,505,784
----------- ----------- ----------- -----------
Gross profit 2,182,760 2,491,154 2,550,113 2,782,828
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 1,587,875 1,759,886 1,763,860 1,778,138
----------- ----------- ----------- -----------
Income from operations 594,885 731,268 786,253 1,004,690
OTHER INCOME (EXPENSE):
Interest expense - (4,602) - -
Interest income 7,442 22,802 24,184 24,027
----------- ----------- ----------- -----------
NET INCOME $ 602,327 $ 749,468 $ 810,437 $1,028,717
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
AMERICAN ROYAL ARTS CORP.
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------- TREASURY RETAINED STOCKHOLDER'S
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
======== ======== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
AMERICAN ROYAL ARTS CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR
YEAR ENDED OCTOBER 31, ENDED
-------------------------------------------- JANUARY 31,
1994 1995 1996 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 602,327 $ 749,468 $ 810,437 $ 1,028,717
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization 9,583 11,393 58,470 39,346
Changes in operating assets and liabilities-
Accounts receivable (49,826) 76,105 10,738 34,150
Merchandise inventories 126,103 (164,940) (107,448) 19,409
Prepaid expenses and other current assets (21,416) (10,109) (52,432) (47,213)
Customer deposits 50,231 62,097 239,813 178,569
Accounts payable and accrued liabilities (134,282) 143,610 (52,882) 13,852
Other assets (150,000) 25,350 2,500 2,500
---------- ---------- ---------- ------------
Net cash provided by operating activities 432,720 892,974 909,196 1,269,330
---------- ---------- ---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (20,367) (8,930) (26,693) (22,403)
Proceeds from sale of property and equipment - 1,195 - -
---------- ---------- ---------- ------------
Net cash used in investing activities (20,367) (7,735) (26,693) (22,403)
---------- ---------- ---------- ------------
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) (1,249,986)
---------- ---------- ---------- ------------
Net cash used in financing activities (456,333) (542,361) (988,129) (1,249,986)
---------- ---------- ---------- ------------
NET INCREASE (DECREASE) IN CASH (43,980) 342,878 (105,626) (3,059)
CASH, beginning of period 249,092 205,112 547,990 612,582
---------- ---------- ---------- ------------
CASH, end of period $ 205,112 $ 547,990 $ 442,364 $ 609,523
========== ========== ========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest $ - $ 4,602 $ - $ -
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<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 and $139,000 for the years ended
October 31, 1994, 1995 and 1996, and for the year ended January 31, 1997,
respectively.
F-24
<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.
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>
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>
F-25
<PAGE>
AMERICAN ROYAL ARTS CORP.
NOTES TO FINANCIAL STATEMENTS - (Continued)
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
------------------------- JANUARY 31,
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
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
========== ========== ==========
</TABLE>
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. 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.
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.
F-26
<PAGE>
AMERICAN ROYAL ARTS CORP.
NOTES TO FINANCIAL STATEMENTS - (Continued)
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 prior to the acquisition 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-27
<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-28
<PAGE>
STONE'S SHOPS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30,
--------------------------- FEBRUARY 28,
1995 1996 1997
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 74,915 $ 82,610 $ 219,660
Merchandise inventories 2,190,405 2,673,712 2,881,423
Prepaid expenses and other current assets 42,738 86,681 51,728
------------ ------------ -----------
Total current assets 2,308,058 2,843,003 3,152,811
PROPERTY AND EQUIPMENT, net 273,828 286,837 299,683
------------ ------------ -----------
Total assets $ 2,581,886 $ 3,129,840 $3,452,494
============ ============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Customer deposits $ 18,518 $ 25,946 $ -
Accounts payable and accrued liabilities 1,317,726 1,499,985 1,483,707
Current maturities of long-term obligations 14,400 14,400 14,400
Payable to shareholder 11,000 30,000 29,833
------------ ------------ -----------
Total current liabilities 1,361,644 1,570,331 1,527,940
LONG-TERM OBLIGATIONS, net of current maturities 43,200 28,800 25,200
DEFERRED INCOME TAXES 321,921 500,455 582,992
------------ ------------ -----------
Total liabilities 1,726,765 2,099,586 2,136,132
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 1,276,362
------------ ------------ -----------
Total shareholders' equity 855,121 1,030,254 1,316,362
------------ ------------ -----------
Total liabilities and shareholders' equity $ 2,581,886 $ 3,129,840 $3,452,494
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
STONE'S SHOPS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30, THREE MONTHS ENDED
----------------------------------------- ----------------------------
FEBRUARY 29, FEBRUARY 28,
1994 1995 1996 1996 1997
------------- ------------- ------------- -------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES $ 3,488,838 $ 4,281,040 $ 4,985,549 $1,674,978 $1,845,501
COST OF SALES 1,799,619 2,268,690 2,496,574 909,348 947,401
------------ ------------ ------------ ----------- -----------
Gross profit 1,689,219 2,012,350 2,488,975 765,630 898,100
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,430,695 1,787,457 2,117,010 519,332 441,996
------------ ------------ ------------ ----------- -----------
Income from operations 258,524 224,893 371,965 246,298 456,104
OTHER EXPENSE:
Interest expense 3,681 10,438 2,891 487 354
------------ ------------ ------------ ----------- -----------
INCOME BEFORE INCOME TAXES 254,843 214,455 369,074 245,811 455,750
PROVISION FOR INCOME TAXES 146,367 128,101 193,941 129,174 169,642
------------ ------------ ------------ ----------- -----------
NET INCOME $ 108,476 $ 86,354 $ 175,133 $ 116,637 $ 286,108
============ ============ ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<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 - - - 286,108 286,108
------ -------- --------- ----------- -----------
BALANCE AT FEBRUARY 28, 1997
(unaudited) 1,000 $ 1,000 $ 39,000 $1,276,362 $1,316,362
====== ======== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
STONE'S SHOPS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
NOVEMBER 30, -----------------------------
----------------------------------------- FEBRUARY 29, FEBRUARY 28,
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 $ 116,637 $ 286,108
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization 40,032 55,800 63,467 14,154 15,749
Loss on sale of assets - - 9,765 - -
Changes in operating assets and liabilities-
Merchandise inventories (383,742) (540,902) (483,307) (655,300) (207,711)
Prepaid expenses and other current assets 31,812 (7,726) (43,943) 6,800 34,953
Customer deposits 3,779 5,291 7,428 (18,518) (25,946)
Accounts payable and accrued liabilities 116,900 443,413 182,259 354,246 (16,278)
Deferred income taxes 126,208 109,366 178,534 178,534 82,537
---------- ---------- ---------- --------- ----------
Net cash provided by operating activities 43,465 151,596 89,336 (3,447) 169,412
---------- ---------- ---------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (93,030) (113,260) (98,816) (89,098) (28,595)
Proceeds from sales of property and equipment - - 12,575 7,030 -
---------- ---------- ---------- --------- ----------
Net cash used in investing activities (93,030) (113,260) (86,241) (82,068) (28,595)
---------- ---------- ---------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term obligations - - (25,400) - (3,767)
Proceeds from issuance of long-term obligations and
loan payable to shareholder - 68,600 30,000 10,600 -
---------- ---------- ---------- --------- ----------
Net cash provided by financing activities - 68,600 4,600 10,600 (3,767)
---------- ---------- ---------- --------- ----------
NET (DECREASE) INCREASE IN CASH (49,565) 106,936 7,695 (74,915) 137,050
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 $ - $ 219,660
========== ========== ========== ========= ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for-
Interest $ 3,681 $ 10,438 $ 2,891 $ 487 $ 354
Income taxes 11,474 - (1,238) - -
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<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 $61,642 during the years ended November 30
1994, 1995 and 1996 and the three months ended February 28, 1997, respectively.
F-33
<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 February 28, 1997, and for the three
months ended February 29, 1996 and February 28, 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-34
<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-35
<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:
<TABLE>
<CAPTION>
NOVEMBER 30,
-----------------------------------------------
1994 1995 1996
------------- -------------- --------------
<S> <C> <C> <C>
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)
=========== =========== ===========
</TABLE>
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
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-36
<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-37
<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-38
<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-39
<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-40
<PAGE>
CRYSTAL GALLERIA, INC. AND BASE, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------- TOTAL
SHARES AMOUNT RETAINED STOCKHOLDERS'
-------- -------- EARNINGS EQUITY
------------- --------------
<S> <C> <C> <C> <C>
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
==== ======= ========== ==========
</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 CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, 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-42
<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-43
<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:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES -----------------------------
(YEARS) 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
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
========== ==========
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
---------- ---------
<S> <C> <C>
Accounts payable, trade $286,056 $204,276
Other 280,604 226,910
--------- ---------
$566,660 $431,186
========= =========
</TABLE>
F-44
<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-45
<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.
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 company anticipates funding this distribution through
additional borrowings.
F-46
<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-47
<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-48
<PAGE>
DKG ENTERPRISES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------
1995 1996 1997
------------- ------------- ------------
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-49
<PAGE>
DKG ENTERPRISES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
-------- -------- ----------- --------------
<S> <C> <C> <C> <C>
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
==== ===== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-50
<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-51
<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-52
<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:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL MARCH 31,
LIVES -----------------------------
(YEARS) 1996 1997
----------- ------------- -------------
<S> <C> <C> <C>
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
========== ==========
</TABLE>
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-53
<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:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------------
1995 1996 1997
--------- --------- ----------
<S> <C> <C> <C>
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%
======= ======= =======
</TABLE>
F-54
<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:
<TABLE>
<CAPTION>
MARCH 31,
------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
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)
=========== ========== ===========
</TABLE>
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-55
<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-56
<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-57
<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-58
<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-59
<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-60
<PAGE>
ELWELL STORES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------- ---------------------------
1995 1996 1996 1997
------------- ------------- ------------ -------------
(UNAUDITED)
<S> <C> <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-61
<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-62
<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:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
(YEARS) 1995 1996
------------- ------------ -------------
<S> <C> <C> <C>
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
========= ==========
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
1995 1996
---------- ---------
<S> <C> <C>
Accounts payable, trade ...... $332,130 $512,982
Accrued liabilities ......... 66,000 99,000
Other ........................ 18,733 22,385
--------- ---------
$416,863 $634,367
========= =========
</TABLE>
F-63
<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 Septem-
ber 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-64
<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-65
<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-66
<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-67
<PAGE>
ANIMATION U.S.A., INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, -----------------------
1996 1996 1997
------------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C>
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
=========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-68
<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-69
<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 ob-
ligations .................................................................. (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-70
<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-71
<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:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES DECEMBER 31,
(YEARS) 1996
-------------- -------------
<S> <C> <C>
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
=========
</TABLE>
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-72
<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-73
<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-74
<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-75
<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-76
<PAGE>
FILMART PRODUCTIONS INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 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-77
<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-78
<PAGE>
FILMART PRODUCTIONS INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 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-79
<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.
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. 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-80
<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-81
<PAGE>
FILMART PRODUCTIONS INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
(YEARS) 1995 1996
------------- ------------ ------------
<S> <C> <C> <C>
Furniture, fixtures and equipment ...... 5-7 $ 93,102 $ 92,951
Less- Accumulated depreciation ......... (40,205) (56,430)
--------- ---------
$ 52,897 $ 36,521
========= =========
</TABLE>
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-82
<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-83
<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 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 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.
------------------
TABLE OF CONTENTS
PAGE
-----
Prospectus Summary ........................... 3
Risk Factors ................................. 10
The Company .................................... 18
Use of Proceeds .............................. 20
Dividend Policy .............................. 20
Capitalization ................................. 21
Dilution ....................................... 22
Selected Financial Data ........................ 23
Management's Discussion and Analysis of
Financial Condition and Results of Operations. 25
Business ....................................... 39
Management .................................... 48
Certain Transactions ........................... 54
Principal Stockholders ........................ 57
Description of Capital Stock .................. 58
Shares Eligible for Future Sale ............... 61
Underwriting ................................. 63
Legal Matters ................................. 65
Experts ....................................... 65
Additional Information ........................ 65
Index to Financial Statements .................. F-1
------------------
UNTIL [_______], 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
================================================================================
<PAGE>
================================================================================
2,700,000 SHARES
COLLECTIBLES USA, INC.
COMMON STOCK
------------------------------------------
P R O S P E C T U S
------------------------------------------
LADENBURG THALMANN & CO. INC.
, 1997
================================================================================
<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 ............................................. $
========
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 $1.0 million in cash and 60,606
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 between the Company and Jerry Gladstone dated
as of May 9, 1997 (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 the Company and RGR dated as of May 3,
1997
10.5* Form of Representatives' Warrant
21 List of Subsidiaries (including state of incorporation and trade
name(s)) of the Company
23.1 Consent of Arthur Andersen LLP
II-3
<PAGE>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- --------------------------------------------------------------------
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
- ----------
* To be filed by amendment.
(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.
(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-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this 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 13th day of June, 1997.
COLLECTIBLES USA, INC.
BY: /s/ Ronald P. Rafaloff
--------------------------------------
RONALD P. RAFALOFF
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
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 June 13, 1997
--------------------------- (Principal Executive, Financial and Accounting
Ronald P. Rafaloff Officer) and Chairman of the Board
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER EXHIBIT DESCRIPTION NUMBER
- ----------- ------------------------------------------------------------------- ----------
<S> <C> <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 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
10.5* Form of Representatives' Warrant
21 List of Subsidiaries (including state of incorporation and trade
names) 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
</TABLE>
- ----------
* To be filed by amendment
FORM OF AGREEMENT AND PLAN OF ORGANIZATION
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AGREEMENT AND PLAN OF ORGANIZATION
dated as of May 9, 1997
by and among
COLLECTIBLES USA, INC.
[COMPANY] ACQUISITION CORP.
(a subsidiary of Collectibles USA, Inc.)
[COMPANY]
and
the STOCKHOLDERS named herein
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TABLE OF CONTENTS
Page
1. THE MERGER 5
1.1 Delivery and Filing of Articles of Merger 5
1.2 Effective Time of the Merger 5
1.3 Certificate of Incorporation, Bylaws and
Board of Directors of Surviving
Corporation 5
1.4 Certain Information With Respect to the
Capital Stock of the COMPANY, CEI and
NEWCO 6
1.5 Effect of Merger 7
2. CONVERSION OF STOCK 8
2.1 Manner of Conversion 8
3. DELIVERY OF MERGER CONSIDERATION 9
4. CLOSING 10
5. REPRESENTATIONS AND WARRANTIES OF COMPANY AND STOCKHOLDERS 11
5.1 Due Organization 11
5.2 Authorization 12
5.3 Capital Stock of the COMPANY 12
5.4 Transactions in Capital Stock;
Organization Accounting 12
5.5 No Bonus Shares 13
5.6 Subsidiaries 13
5.7 Predecessor Status; etc 13
5.8 Spinoff by the COMPANY 14
5.9 Financial Statements 14
5.10 Liabilities and Obligations 14
5.11 Accounts and Notes Receivable 15
5.12 Intellectual Property; Permits and
Intangibles 16
5.13 Environmental Matters 17
5.14 Personal Property 18
5.15 Significant Customers; Material
Contracts and Commitments 18
5.16 Real Property 19
5.17 Insurance 20
5.18 Compensation; Employment Agreements;
Organized Labor Matters 20
5.19 Employee Plans 21
5.20 Compliance with ERISA 22
5.21 Conformity with Law; Litigation 23
5.22 Taxes 23
5.23 No Violations 27
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5.24 Government Contracts 28
5.25 Absence of Changes 28
5.26 Deposit Accounts; Powers of Attorney 29
5.27 Validity of Obligations 30
5.28 Relations with Governments 30
5.29 Disclosure 30
5.30 Prohibited Activities 31
5.31 Authority; Ownership 32
5.32 Preemptive Rights 32
5.33 No Intention to Dispose of CEI Stock 32
5.34 Transactions with Directors, Officers
and Affiliates. 32
6. REPRESENTATIONS OF CEI and NEWCO 33
6.1 Due Organization 33
6.2 Authorization 34
6.3 Capital Stock of the COMPANY 34
6.4 Transactions in Capital Stock,
Organization Accounting 34
6.5 Subsidiaries 34
6.6 Financial Statements 35
6.7 Liabilities and Obligations 35
6.8 Conformity with Law; Litigation 36
6.9 No Violations 36
6.10 Validity of Obligations 37
6.11 CEI Stock 37
6.12 No Side Agreements 37
6.13 Business; Real Property; Material
Agreements 37
6.14 Taxes 37
7. COVENANTS PRIOR TO CLOSING 40
7.2 Conduct of Business Pending Closing 42
7.3 Prohibited Activities 42
7.4 No Shop 44
7.5 Notice to Bargaining Agents 44
7.6 Agreements 44
7.7 Notification of Certain Matters 44
7.8 Amendment of Schedules 45
7.9 Cooperation in Preparation of
Registration Statement 47
7.10 Final Financial Statements 48
7.11 Further Assurances 48
7.12 Authorized Capital 48
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8. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY 49
8.1 Representations and Warranties 49
8.2 Performance of Obligations 49
8.3 No Litigation 50
8.4 Opinion of Counsel 50
8.5 Registration Statement 50
8.6 Consents and Approvals 50
8.7 Good Standing Certificates 50
8.8 No Material Adverse Change 50
8.9 Closing of IPO 50
8.10 Secretary's Certificate 51
8.11 Employment Agreements 51
8.12 Release 51
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF CEI AND NEWCO 51
9.1 Representations and Warranties 52
9.2 Performance of Obligation 52
9.3 No Litigation 52
9.4 Secretary's Certificate 52
9.5 No Material Adverse Change 52
9.6 STOCKHOLDERS' Release 53
9.7 Termination of Related Party Agreements 53
9.8 Opinion of Counsel 53
9.9 Consents and Approvals 53
9.10 Good Standing Certificates 53
9.11 Registration Statement 54
9.12 Employment Agreements 54
9.13 Closing of IPO 54
9.14 FIRPTA Certificate 54
10. COVENANTS OF CEI AND THE STOCKHOLDERS AFTER CLOSING 54
10.1 Release From Guarantees; Repayment of
Certain Obligations 54
10.2 Preservation of Tax and Accounting Treatment 54
10.3 Preparation and Filing of Tax Returns 54
10.4 Directors and Officers. 55
10.5 Preservation of Employee Benefit Plans 55
11. INDEMNIFICATION 56
11.1 General Indemnification by the STOCKHOLDERS 56
11.2 Indemnification by CEI 57
11.3 Third Person Claims 58
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11.4 Exclusive Remedy 60
11.5 Limitations on Indemnification 60
12. TERMINATION OF AGREEMENT 61
12.1 Termination 61
12.2 Liabilities in Event of Terminatio 62
13. NONCOMPETITION 62
13.1 Prohibited Activities 62
13.2 Damages 63
13.3 Reasonable Restraint 63
13.4 Severability; Reformation 63
13.5 Independent Covenant 64
13.6 Materiality 64
14. NONDISCLOSURE OF CONFIDENTIAL INFORMATION 64
14.1 STOCKHOLDERS 64
14.2 CEI AND NEWCO 65
14.3 Damages 66
14.4 Survival 66
15. TRANSFER RESTRICTIONS 66
15.1 Transfer Restrictions 66
16. FEDERAL AND STATE SECURITIES ACT REPRESENTATIONS 67
16.1 Compliance with Law 68
16.2 Economic Risk; Sophistication 68
17. REGISTRATION RIGHTS 69
17.1 Piggyback Registration Rights 69
17.2 Demand Registration Rights 69
17.3 Registration Procedures 70
17.4 Underwriting Agreement 71
17.5 Availability of Rule 144 71
18. GENERAL 71
18.1 Cooperation 71
18.2 Successors and Assigns 72
18.3 Entire Agreement 72
18.4 Counterparts 72
18.5 Brokers and Agents 72
18.6 Expenses 72
18.7 Notices 73
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18.8 Governing Law 74
18.9 Exercise of Rights and Remedies 74
18.10 Time 74
18.11 Reformation and Severability 74
18.12 Remedies Cumulative 75
18.13 Captions 75
18.14 Amendments and Waivers 75
18.15 Survival of Representations and Warranties 75
ANNEX I FORM OF ARTICLES OF MERGER
ANNEX II CERTIFICATE OF INCORPORATION AND BYLAWS OF CEI AND NEWCO
ANNEX III CONSIDERATION TO BE PAID TO STOCKHOLDERS
ANNEX IV STOCKHOLDERS AND STOCK OWNERSHIP OF THE COMPANY
ANNEX V STOCKHOLDERS AND STOCK OWNERSHIP OF CEI
ANNEX VI FORM OF OPINION OF COUNSEL TO CEI
ANNEX VII FORM OF OPINION OF COUNSEL TO COMPANY AND STOCKHOLDERS
ANNEX VIII FORM OF EMPLOYMENT AGREEMENT
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AGREEMENT AND PLAN OF ORGANIZATION
THIS AGREEMENT AND PLAN OF ORGANIZATION (the "Agreement") is made as of
May 9, 1997, by and among COLLECTIBLES USA, INC., a Delaware corporation
("CEI"), [COMPANY] ACQUISITION CORP., a Delaware corporation ("NEWCO"),
[COMPANY], a ___________ corporation (the "COMPANY"), and each of [name
stockholders of COMPANY] (the "STOCKHOLDERS"). The STOCKHOLDERS are all the
Stockholders of the COMPANY.
WHEREAS, NEWCO is a corporation duly organized and existing under the
laws of the State of Delaware, having been incorporated on May 5, 1997, solely
for the purpose of completing the transactions set forth herein, and is a
wholly-owned subsidiary of CEI;
WHEREAS, the respective Boards of Directors of NEWCO and the COMPANY
(which together are hereinafter collectively referred to as "Constituent
Corporations") deem it advisable and in the best interests of the Constituent
Corporations and their respective stockholders that NEWCO merge with and into
the COMPANY pursuant to this Agreement and the applicable provisions of the laws
of the State[s] of Delaware [and ____________];
WHEREAS, CEI is entering into other separate agreements substantially
similar to this Agreement (the "Other Agreements"), each of which is entitled
"Agreement and Plan of Organization," with each of [name Founding Companies
other than COMPANY (collectively, the "Other Founding Companies")], and their
respective stockholders in order to acquire additional collectibles retailers
(the COMPANY, together with each of the Other Founding Companies, are
collectively referred to herein as the "Founding Companies");
WHEREAS, this Agreement, the Other Agreements and the IPO (as
hereinafter defined) of CEI Stock (as hereinafter defined) constitute the "CEI
Plan of Organization;"
WHEREAS, the Boards of Directors of CEI, NEWCO and each of the Founding
Companies have approved and adopted the CEI Plan of Organization as an
integrated plan to transfer the capital stock of the Founding Companies to CEI
and the cash raised in the IPO of CEI Stock to CEI as a transfer of property
under Section 351 of the Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, in consideration of the agreements of the Other Founding
Companies pursuant to the Other Agreements, the STOCKHOLDERS and the Board of
Directors of the COMPANY and the stockholders and the boards of directors of
each of CEI and NEWCO have approved this Agreement and the transactions
contemplated hereby;
WHEREAS, unless the context otherwise requires, capitalized terms used
in this Agreement or in any schedule attached hereto and not otherwise defined
herein shall have the following meanings for all purposes of this Agreement:
"Acquired Party" has the meaning set forth in Section 5.22.
"Acquisition Companies" means NEWCO and each of the other
Delaware companies wholly-owned by CEI prior to the Funding and
Consummation Date.
"Affiliates" has the meaning set forth in Section 5.8.
"Agreement" has the meaning set forth in the first paragraph
of this Agreement.
"A/R Aging Reports" has the meaning set forth in Section 5.11.
"Articles of Merger" means those Articles or Certificates of
Merger with respect to the Merger substantially in the form[s] attached
as Annex I hereto or with such changes therein as may be required by
applicable state laws.
"Balance Sheet Date" has the meaning set forth in Section 5.9.
"CEI" has the meaning set forth in the first paragraph of this
Agreement.
"CEI Charter Documents" has the meaning set forth in Section
6.1.
"CEI Documents" has the meaning set forth in Section 6.9.
"CEI Financial Statements" has the meaning set forth in
Section 6.6.
"CEI Plan of Organization" has the meaning set forth in the
fourth recital of this Agreement.
"CEI Relevant Group" has the meaning set forth in Section
6.14.
"CEI Stock" means the common stock, par value $.01 per share,
of CEI.
"Charter Documents" has the meaning set forth in Section 5.1.
"Closing" has the meaning set forth in Section 4.
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"Closing Date" has the meaning set forth in Section 4.
"Code" has the meaning set forth in the fifth recital of this
Agreement.
"COMPANY" has the meaning set forth in the first paragraph of
this Agreement.
"COMPANY Financial Statements" has the meaning set forth in
Section 5.9.
"COMPANY Stock" has the meaning set forth in Section 2.1.
"Constituent Corporations" has the meaning set forth in the
second recital of this Agreement.
"Demand Registration" has the meaning set forth in Section
17.2.
"Effective Time of the Merger" means the time as of which the
Merger becomes effective, which the parties hereto contemplate to occur
on the Funding and Consummation Date.
"Environmental Laws" has the meaning set forth in Section
5.13.
"ERISA" has the meaning set forth in Section 5.19.
"Expiration Date" has the meaning set forth in Section 5(A).
"Founding Companies" has the meaning set forth in the third
recital of this Agreement.
"Founding Stockholders" has the meaning set forth in Section
17.1.
"Funding and Consummation Date" has the meaning set forth in
Section 4.
"Indemnification Threshold" has the meaning set forth in
Section 11.5.
"Indemnified Party" has the meaning set forth in Section 11.3.
"Indemnifying Party" has the meaning set forth in Section
11.3.
"Intellectual Property" means all trademarks, service marks,
trade dress, trade names, patents and copyrights and any registration
or application for any of the foregoing, and any trade secret,
invention, process, know-how, computer software, technology systems,
product design or product packaging.
"IPO" means the initial public offering of CEI Stock pursuant
to the Registration Statement.
"Material Adverse Effect" has the meaning set forth in Section
5.1.
"Material Documents" has the meaning set forth in Section
5.23.
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"Merger" means the merger of NEWCO with and into the COMPANY
pursuant to this Agreement and the applicable provisions of the laws of
the State of Delaware [and other applicable state laws].
"NEWCO" has the meaning set forth in the first paragraph of
this Agreement.
"NEWCO Stock" means the common stock, par value $.01 per
share, of NEWCO.
"1934 Act" means the Securities Exchange Act of 1934, as
amended.
"1933 Act" means the Securities Act of 1933, as amended.
"Other Agreements" has the meaning set forth in the third
recital of this Agreement.
"Other Founding Companies" has the meaning set forth in the
third recital of this Agreement.
"Plans" has the meaning set forth in Section 5.19.
"Pricing" means the date of determination by CEI and the
Underwriters of the public offering price of the shares of CEI Stock in
the IPO; the parties hereto contemplate that the Pricing shall take
place on or immediately prior to the Closing Date.
"Qualified Plans" has the meaning set forth in Section 5.20.
"Registration Statement" means that certain registration
statement of CEI to be filed on Form S-1 covering the shares of CEI
Stock to be issued in the IPO.
"Relevant Group" has the meaning set forth in Section 5.22(i).
"Restricted Voting Stock" means the Restricted Voting Stock,
par value $0.01 per share, of CEI.
"Returns" has the meaning set forth at the end of Section
5.22.
"Schedule" means each Schedule attached hereto, which shall
reference the relevant sections of this Agreement, on which parties
hereto disclose information as part of their respective
representations, warranties and covenants.
"SEC" means the United States Securities and Exchange
Commission.
"Statutory Liens" has the meaning set forth in Section 7.3.
"STOCKHOLDERS" has the meaning set forth in the first
paragraph of this Agreement.
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"Surviving Corporation" shall mean the COMPANY as the
surviving party in the Merger.
"Tax" or "Taxes" has the meaning set forth at the end of
Section 5.22.
"Tax Losses" has the meaning set forth in Section 5.22 (xvi).
"Taxing Authority" has the meaning set forth at the end of
Section 5.22.
"Territory" has the meaning set forth in Section 13.1.
"Third Person" has the meaning set forth in Section 11.3.
"Transfer Taxes" has the meaning set forth in Section 18.6.
"Underwriters" means the prospective underwriters in the IPO,
as identified in the Registration Statement.
"Underwriting Agreement" means the Underwriting Agreement to
be dated the Closing Date between the Underwriters and the Company in
respect of the IPO.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements, representations, warranties, provisions and covenants herein
contained, the parties hereto hereby agree as follows:
1. THE MERGER
1.1 DELIVERY AND FILING OF ARTICLES OF MERGER. The Constituent
Corporations will cause the Articles of Merger to be signed, verified and filed
with the Secretary of State of the State of Delaware [and the Secretary of State
of the State of __________] and stamped receipt copies of each such filing to be
delivered to CEI on or before the Funding and Consummation Date.
1.2 EFFECTIVE TIME OF THE MERGER. At the Effective Time of the Merger,
NEWCO shall be merged with and into the COMPANY in accordance with the Articles
of Merger, the separate existence of NEWCO shall cease and the COMPANY shall be
the surviving party in the Merger. The COMPANY is sometimes hereinafter referred
to as the Surviving Corporation. The Merger will be effected in a single
transaction.
1.3 CERTIFICATE OF INCORPORATION, BY-LAWS AND BOARD OF DIRECTORS OF
SURVIVING CORPORATION. At the Effective Time of the Merger:
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(i) the Certificate or Articles of Incorporation of
the COMPANY then in effect shall be the Certificate or Articles of
Incorporation of the Surviving Corporation until changed as provided by
law; (ii) the By-laws of [NEWCO] [the COMPANY] then in effect shall be
the By-laws of the Surviving Corporation until amended as provided by
law.
(ii) the By-laws of [NEWCO] [the COMPANY] then in
effect shall be the By-laws of the Surviving Corporation until amended
as provided by law.
(iii) the Board of Directors of the Surviving
Corporation shall consist of the persons who are on the Board of
Directors of the COMPANY immediately prior to the Effective Time of the
Merger, provided that _______________ shall be elected as a director of
the Surviving Corporation effective as of the Effective Time of the
Merger; the Board of Directors of the Surviving Corporation shall hold
office subject to the provisions of the laws of the State of __________
and of the Certificate of Incorporation and By-laws of the Surviving
Corporation; and
(iv) the officers of the COMPANY immediately prior to
the Effective Time of the Merger shall continue as the officers of the
Surviving Corporation in the same capacity or capacities, and effective
upon the Effective Time of the Merger _________________ shall be
appointed as a vice president of the Surviving Corporation and David L.
Yankey shall be appointed as an assistant secretary of the Surviving
Corporation, each of such officers to serve, subject to the provisions
of the Certificate or Articles of Incorporation and By-laws of the
Surviving Corporation, until his or her successor is duly elected and
qualified.
1.4 CERTAIN INFORMATION WITH RESPECT TO THE CAPITAL STOCK OF THE
COMPANY, CEI AND NEWCO. The respective designations and numbers of outstanding
shares and voting rights of each class of outstanding capital stock of the
COMPANY, CEI and NEWCO as of the date of this Agreement are as follows:
(i) as of the date of this Agreement, the authorized
and outstanding capital stock of the COMPANY is as set forth on
Schedule 1.4 hereto;
(ii) immediately prior to the Funding and
Consummation Date, the authorized capital stock of CEI will consist of
30,000,000 shares of CEI Stock, of which the number of issued and
outstanding shares will be set forth in the Registration Statement,
_____
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shares of Restricted Voting Stock, of which the number of issued and
outstanding shares will be set forth in the Registration Statement, and
500,000 shares of preferred stock, $.01 par value, of which no shares
will be issued and outstanding; and
(iii) as of the date of this Agreement, the authorized capital
stock of NEWCO consists of 3,000 shares of NEWCO Stock, of which ten
(10) shares are issued and outstanding.
1.5 EFFECT OF MERGER. At the Effective Time of the Merger, the effect
of the Merger shall be as provided in the applicable provisions of the General
Corporation Law of the State of Delaware (the "Delaware GCL") [and the law of
the State of __________]. Except as herein specifically set forth, the identity,
existence, purposes, powers, objects, franchises, privileges, rights and
immunities of the COMPANY shall continue unaffected and unimpaired by the Merger
and the corporate franchises, existence and rights of NEWCO shall be merged with
and into the COMPANY, and the COMPANY, as the Surviving Corporation, shall be
fully vested therewith. At the Effective Time of the Merger, the separate
existence of NEWCO shall cease and, in accordance with the terms of this
Agreement, the Surviving Corporation shall possess all the rights, privileges,
immunities and franchises, of a public as well as of a private nature, and all
property, real, personal and mixed, and all debts due on whatever account,
including subscriptions to shares, and all Taxes, including those due and owing
and those accrued, and all other choses in action, and all and every other
interest of or belonging to or due to the COMPANY and NEWCO shall be taken and
deemed to be transferred to, and vested in, the Surviving Corporation without
further act or deed; and all property, rights and privileges, powers and
franchises and all and every other interest shall be thereafter as effectually
the property of the Surviving Corporation as they were of the COMPANY and NEWCO;
and the title to any real estate, or interest therein, whether by deed or
otherwise, vested in the COMPANY and NEWCO under the laws of the state of
incorporation of each thereof, shall not revert or be in any way impaired by
reason of the Merger. Except as otherwise provided herein, the Surviving
Corporation shall thenceforth be responsible and liable for all the liabilities
and obligations of the COMPANY and NEWCO and any claim existing, or action or
proceeding pending, by or against the COMPANY or NEWCO may be prosecuted as if
the Merger had not taken place, or the
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Surviving Corporation may be substituted in its place. Neither the rights of
creditors nor any liens upon the property of the COMPANY or NEWCO shall be
impaired by the Merger, and all debts, liabilities and duties of the COMPANY and
NEWCO shall attach to the Surviving Corporation, and may be enforced against
such Surviving Corporation to the same extent as if said debts, liabilities and
duties had been incurred or contracted by the Surviving Corporation.
2. CONVERSION OF STOCK
2.1 MANNER OF CONVERSION. The manner of converting the shares of (i)
outstanding capital stock of the COMPANY ("COMPANY Stock") and (ii) NEWCO Stock,
issued and outstanding immediately prior to the Effective Time of the Merger,
respectively, into shares of (x) CEI Stock and (y) common stock of the Surviving
Corporation, respectively, shall be as follows:
As of the Effective Time of the Merger:
(i) all of the shares of COMPANY Stock issued and
outstanding immediately prior to the Effective Time of the Merger, by
virtue of the Merger and without any action on the part of the holder
thereof, automatically shall be deemed to represent, with respect to
each STOCKHOLDER, (1) the right to receive the number of shares of CEI
Stock set forth on Annex III hereto with respect to such STOCKHOLDER
and (2) the right to receive the amount of cash set forth on Annex III
hereto with respect to such STOCKHOLDER;
(ii) all shares of COMPANY Stock that are held by the
COMPANY as treasury stock shall be cancelled and retired and no shares
of CEI Stock or other consideration shall be delivered or paid in
exchange therefor; and
(iii) each share of NEWCO Stock issued and
outstanding immediately prior to the Effective Time of the Merger,
shall, by virtue of the Merger and without any action on the part of
CEI, automatically be converted into one fully paid and non-assessable
share of common stock of the Surviving Corporation which shall
constitute all of the issued and outstanding shares of common stock of
the Surviving Corporation immediately after the Effective Time of the
Merger.
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All CEI Stock received by the STOCKHOLDERS pursuant to this Agreement
shall, except for restrictions on resale or transfer described in Sections 15
and 16 hereof, have the same rights as all the other shares of outstanding CEI
Stock by reason of the provisions of the Certificate of Incorporation of CEI or
as otherwise provided by the Delaware GCL. All voting rights of such CEI Stock
received by the STOCKHOLDERS shall be fully exercisable by the STOCKHOLDERS and
the STOCKHOLDERS shall not be deprived nor restricted in exercising those
rights. At the Funding and Consummation Date, CEI shall have no class of capital
stock issued and outstanding other than the CEI Stock and the Restricted Voting
Stock.
3. DELIVERY OF MERGER CONSIDERATION
3.1 On the Funding and Consummation Date the STOCKHOLDERS, who are the
holders of all outstanding certificates representing shares of COMPANY Stock,
shall, upon surrender of such certificates, receive (i) the respective number of
shares of CEI Stock and (ii) the amount of cash set forth on Annex III hereto
with respect to such STOCKHOLDER. The cash payable pursuant to clause (ii) shall
be paid by wire transfer to an account designated by each STOCKHOLDER.
3.2 The STOCKHOLDERS shall deliver in trust to Morgan, Lewis & Bockius
LLP, counsel to CEI, at the Closing the certificates representing COMPANY Stock,
duly endorsed in blank by the STOCKHOLDERS, or accompanied by stock powers duly
endorsed in blank, with signatures guaranteed by a national or state chartered
bank or other financial institution, and with all necessary Transfer Tax and
other revenue stamps, acquired at the STOCKHOLDERS' expense, affixed and
cancelled. The STOCKHOLDERS agree promptly to cure any deficiencies with respect
to the endorsement of the stock certificates or other documents of conveyance
with respect to such COMPANY Stock or with respect to the stock powers
accompanying any COMPANY Stock. Upon consummation of the IPO and the
transactions contemplated to occur on the Funding and Consummation Date, all of
such certificates shall be deemed released by such counsel to CEI without any
further action on the part of such counsel.
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4. CLOSING
At or prior to the Pricing, the parties shall take all actions
necessary to prepare to (i) effect the Merger (including, if permitted by
applicable state law, the advance filing with the appropriate state authorities
of the Articles of Merger, which shall become effective at the Effective Time of
the Merger) and (ii) effect the conversion and delivery of shares referred to in
Section 3 hereof; provided, that such actions shall not include the actual
completion of the Merger for purposes of this Agreement or the conversion and
delivery of the shares and transmission of funds by wire referred to in Section
3 hereof, each of which actions shall only be taken upon the Funding and
Consummation Date as herein provided. In the event that there is no Funding and
Consummation Date and this Agreement terminates, CEI hereby covenants and agrees
to do all things required by Delaware law [and all things which counsel for the
COMPANY advise CEI are required by applicable laws of the State of _________] in
order to rescind any merger or other actions effected by the advance filing of
the Articles of Merger as described in this Section. The taking of the actions
described in clauses (i) and (ii) above (the "Closing") shall take place on the
closing date (the "Closing Date") at the offices of Morgan, Lewis & Bockius LLP,
101 Park Avenue, New York, New York 10178. On the Funding and Consummation Date
(x) the Articles of Merger shall be or shall have been filed with the
appropriate state authorities so that they shall be or, as of 8:00 a.m. New York
City time on the Funding and Consummation Date, shall become effective and the
Merger shall thereby be effected, (y) all transactions contemplated by this
Agreement, including the conversion and delivery of shares, the transmission of
funds by wire in an amount equal to the cash portion of the consideration which
the STOCKHOLDERS shall be entitled to receive pursuant to the Merger referred to
in Section 3 hereof shall occur and (z) the closing with respect to the IPO
shall occur and be deemed to be completed. The date on which the actions
described in the preceding clauses (x), (y) and (z) occurs shall be referred to
as the "Funding and Consummation Date." During the period from the Closing Date
to the Funding and Consummation Date, this Agreement may only be terminated by
the parties if the underwriting agreement in respect of the IPO is terminated
pursuant to the terms of such underwriting agreement. This Agreement shall
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in any event terminate if the Funding and Consummation Date has not occurred
within 15 business days of the Closing Date. Time is of the essence.
5. REPRESENTATIONS AND WARRANTIES OF COMPANY AND STOCKHOLDERS
(A) Representations and Warranties of COMPANY and STOCKHOLDERS.
Each of the COMPANY and the STOCKHOLDERS jointly and severally
represent and warrant that all of the following representations and warranties
in this Section 5(A) are true at the date of this Agreement and, subject to
Section 7.8 hereof, shall be true at the time of the Closing and the Funding and
Consummation Date, and that such representations and warranties shall survive
the Funding and Consummation Date for a period of two years (the last day of
such period being the "Expiration Date"), except that (i) the representations
and warranties set forth in Section 5.22 hereof shall survive until such time as
the statute of limitations period has run for all tax periods ended on or prior
to the Funding and Consummation Date, which shall be deemed to be the Expiration
Date for Section 5.22, and (ii) solely for purposes of Section 11.1(iii) hereof
and solely to the extent that, in connection with the IPO, CEI actually incurs
liability under the 1933 Act, the 1934 Act or any other Federal or state
securities laws, the representations and warranties set forth herein shall
survive until the expiration of any applicable statute of limitations period,
which shall be deemed to be the Expiration Date for such purposes. For purposes
of this Section 5, the term "COMPANY" shall mean and refer to the COMPANY and
all of its subsidiaries, if any.
5.1 DUE ORGANIZATION. The COMPANY is a corporation duly incorporated,
validly existing and in good standing under the laws of the state of its
incorporation, and is duly authorized and qualified to do business under all
applicable laws, regulations, ordinances and orders of public authorities to
carry on its business in the places and in the manner as now conducted except
(i) as set forth on Schedule 5.1 or (ii) where the failure to be so authorized
or qualified would not have a material adverse effect on the business,
operations, affairs, prospects, properties, assets or condition (financial or
otherwise), of the COMPANY taken as a whole (as used herein with respect to the
COMPANY, or with respect to any other person, a "Material
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Adverse Effect"). Schedule 5.1 sets forth the jurisdiction in which the COMPANY
is incorporated and contains a list of all jurisdictions in which the COMPANY is
authorized or qualified to do business. True, complete and correct copies of the
Certificate or Articles of Incorporation and By-laws, each as amended, of the
COMPANY (the "Charter Documents") are all attached to Schedule 5.1. The minute
books and stock records of the COMPANY, as heretofore made available to CEI, are
correct and complete in all material respects. The most recent minutes of the
COMPANY, which are dated no earlier than ten business days prior to the date
hereof, affirm and ratify all prior acts of the COMPANY and of its officers and
directors on behalf of the COMPANY.
5.2 AUTHORIZATION. (i) The representatives of the COMPANY executing
this Agreement have the authority to enter into and bind the COMPANY to the
terms of this Agreement and (ii) the COMPANY has the full corporate right, power
and authority to enter into this Agreement and the Merger, subject to any
required approval of the shareholders and the Board of Directors of the COMPANY
described on Schedule 5.2, certified copies of which are attached thereto.
5.3 CAPITAL STOCK OF THE COMPANY. The authorized capital stock of the
COMPANY is as set forth in Section 1.4(i). All of the issued and outstanding
shares of capital stock of the COMPANY are owned by the STOCKHOLDERS in the
amounts set forth in Annex IV and further, except as set forth on Schedule 5.3,
are owned free and clear of all liens, security interests, pledges, charges,
voting trusts, restrictions, encumbrances and claims of every kind. All of the
issued and outstanding shares of capital stock of the COMPANY have been duly
authorized and validly issued, are fully paid and nonassessable, are owned of
record and beneficially by the STOCKHOLDERS and were offered, issued, sold and
delivered by the COMPANY in compliance with all applicable state and Federal
laws concerning the issuance of securities. Further, none of such shares were
issued in violation of the preemptive rights of any past or present stockholder.
5.4 TRANSACTIONS IN CAPITAL STOCK: ORGANIZATION ACCOUNTING. Except as
set forth on Schedule 5.4, the COMPANY has not acquired any COMPANY Stock since
January 1, 1994. Except as set forth on Schedule 5.4, (i) no option, warrant,
call, conversion right or commitment
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of any kind exists which obligates the COMPANY to issue any of its authorized
but unissued capital stock or its treasury stock; (ii) the COMPANY has no
obligation (contingent or otherwise) to purchase, redeem or otherwise acquire
any of its equity securities or any interests therein or to pay any dividend or
make any distribution in respect thereof; and (iii) neither the voting stock
structure of the COMPANY nor the relative ownership of shares among any of its
respective stockholders has been altered or changed in contemplation of the
Merger and/or the CEI Plan of Organization. Schedule 5.4 also includes complete
and accurate copies of all stock option or stock purchase plans, including a
list of all outstanding options, warrants or other rights to acquire shares of
the COMPANY's stock and a description of the material terms of such outstanding
options, warrants or other rights.
5.5 NO BONUS SHARES . Except as set forth on Schedule 5.5, none of the
shares of COMPANY Stock was issued pursuant to awards, grants or bonuses.
5.6 SUBSIDIARIES. Schedule 5.6 attached hereto lists the name of each
of the COMPANY's subsidiaries and sets forth the number and class of the
authorized capital stock of each of the COMPANY's subsidiaries and the number of
shares of each of the COMPANY's subsidiaries which are issued and outstanding,
all of which shares (except as set forth on Schedule 5.6) are owned beneficially
and of record by the COMPANY, free and clear of all liens, security interests,
pledges, charges, voting trusts, equities, restrictions, encumbrances and claims
of every kind. Except as set forth in Schedule 5.6, the COMPANY does not
presently own, of record or beneficially, or control, directly or indirectly,
any capital stock, securities convertible into capital stock or any other equity
interest in any corporation, association or business entity nor is the COMPANY,
directly or indirectly, a participant in any joint venture, partnership or other
non-corporate entity.
5.7 PREDECESSOR STATUS: ETC. Set forth on Schedule 5.7 is a list of all
names of all predecessor companies of the COMPANY, including the names of any
entities acquired by the COMPANY (by stock purchase, merger or otherwise) or
owned by the COMPANY or from whom the COMPANY previously acquired material
assets. Except as disclosed on Schedule 5.7, the COMPANY has not been a
subsidiary or division of another corporation or a part of an acquisition which
was later rescinded.
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5.8 SPIN-OFF BY THE COMPANY. Except as set forth on Schedule 5.8, there
has not been any sale, spin-off or split-up of material assets of either the
COMPANY or any other person or entity that directly, or indirectly through one
or more intermediaries, controls, or is controlled by, or is under common
control with, the COMPANY ("Affiliates") since January 1, 1994.
5.9 FINANCIAL STATEMENTS. Attached to Schedule 5.9 are copies of the
following financial statements of the COMPANY (the "COMPANY Financial
Statements"): the COMPANY's audited Consolidated Balance Sheet as of each of
December 31, 1996, 1995 and 1994 and Consolidated Statements of Income, Cash
Flows and Retained Earnings for each of the years in the three-year period ended
December 31, 1996 (December 31, 1996 being hereinafter referred to as the
"Balance Sheet Date"). Such Financial Statements have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods indicated (except as noted thereon or on Schedule
5.9). Except as set forth on Schedule 5.9, such Consolidated Balance Sheets as
of December 31, 1996, 1995 and 1994 present fairly the financial position of the
COMPANY as of the dates indicated thereon, and such Consolidated Statements of
Income, Cash Flows and Retained Earnings present fairly the results of
operations and cash flows for the periods indicated thereon.
5.10 LIABILITIES AND OBLIGATIONS. (a) The COMPANY has delivered to CEI
an accurate list (which is set forth on Schedule 5.10) as of the Balance Sheet
Date of (i) all liabilities of the COMPANY which are not reflected on the
balance sheet of the COMPANY at the Balance Sheet Date or otherwise reflected in
the COMPANY Financial Statements at the Balance Sheet Date, (ii) any material
liabilities of the COMPANY (including but not limited to all liabilities in
excess of $10,000) and (iii) all loan agreements, indemnity or guaranty
agreements, bonds, mortgages, liens, pledges or other security agreements to
which the COMPANY is a party. Except as set forth on Schedule 5.10, since the
Balance Sheet Date, the COMPANY has not incurred any material liabilities of any
kind, character and description, whether accrued, absolute, secured or
unsecured, contingent or otherwise, other than liabilities incurred in the
ordinary course of business.
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(b) The COMPANY has also set forth on Schedule 5.10, in the case of
those contingent liabilities related to pending or threatened litigation, or
other liabilities which are not fixed or are being contested, the following
information:
(i) a summary description of the liability together with the
following:
(a) copies of all relevant documentation relating thereto;
(b) amounts claimed and any other action or relief sought;
and
(c) name of claimant and all other parties to the claim,
suit or proceeding;
(ii) the name of each court or agency before which such claim,
suit or proceeding is pending;
(iii) the date such claim, suit or proceeding was instituted; and
(iv) a good faith and reasonable estimate of the maximum amount,
if any, which is likely to become payable with respect to
each such liability. If no estimate is provided, the
estimate shall for purposes of this Agreement be deemed to
be zero.
5.11 ACCOUNTS AND NOTES RECIEVABLE. The COMPANY has delivered to CEI an
accurate list (which is set forth on Schedule 5.11) of the accounts and notes
receivable of the COMPANY, as of the Balance Sheet Date, including any such
amounts which are not reflected in the balance sheet as of the Balance Sheet
Date, and including receivables from and advances to employees and the
STOCKHOLDERS. Within ten (10) days prior to Closing, the COMPANY shall provide
CEI (x) an accurate list of all outstanding receivables obtained subsequent to
the Balance Sheet Date and (y) an aging of all such accounts and notes
receivable showing amounts due in 30 day aging categories (the "A/R Aging
Reports"). Except to the extent reflected on Schedule 5.11 or as disclosed by
the COMPANY to CEI in a writing accompanying the A/R Aging Reports, as the case
may be, the accounts, notes and other receivables shown on Schedule 5.11 and on
the A/R Aging Reports are and shall be, and the COMPANY has no reason to believe
that any such account receivable is not or shall not be, collectible in the
amounts shown (in the case of the accounts and notes receivable set forth on
Schedule 5.11, net of reserves reflected in the Balance Sheet or in the A/R
Aging Reports).
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5.12 INTELLECTUAL PROPERTY; PERMITS AND INTANGIBLES. (a) The COMPANY
owns or has a valid license to use all Intellectual Property used in connection
with its business, the absence of any of which is reasonably likely to have a
Material Adverse Effect, and the COMPANY has delivered to CEI an accurate list
(which is set forth on Schedule 5.12(a)) of all Intellectual Property owned or
used by the COMPANY. Except as set forth on Schedule 5.12(a), each item of
Intellectual Property owned by the COMPANY is owned free and clear of all Liens
and each other item of Intellectual Property used by the Company is licensed to
the Company pursuant to a license agreement that is valid and in full force and
effect. Except as set forth on Schedule 5.12(a), all right, title and interest
in and to each item of Intellectual Property is owned by the COMPANY and is not
subject to any license, royalty arrangement or pending or threatened claim or
dispute. None of the Intellectual Property owned or, to the COMPANY's knowledge,
none of the Intellectual Property used by the COMPANY nor any product sold by
the COMPANY, infringes any Intellectual Property right of any other entity and,
to the COMPANY's knowledge, no Intellectual Property owned by the COMPANY is
infringed upon by any other entity.
(b) The COMPANY holds all licenses, franchises, permits and other
governmental authorizations the absence of any of which could have a Material
Adverse Effect and the COMPANY has delivered to CEI an accurate list and summary
description (which is set forth on Schedule 5.12(b)) of all such licenses,
franchises, permits and other governmental authorizations, including permits,
titles, licenses, franchises and certificates (it being understood and agreed
that a list of all environmental permits and other environmental approvals is
set forth on Schedule 5.13). To the knowledge of the COMPANY, the licenses,
franchises, permits and other governmental authorizations listed on Schedules
5.12(b) and 5.13 are valid, and the COMPANY has not received any notice that any
governmental authority intends to cancel, terminate or not renew any such
license, franchise, permit or other governmental authorization. The COMPANY has
conducted and is conducting its business in compliance with the requirements,
standards, criteria and conditions set forth in the licenses, franchises,
permits and other governmental authorizations listed on Schedules 5.12(b) and
5.13 and is not in violation of any of the foregoing except where such
non-compliance or violation would not have a Material Adverse Effect.
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Except as specifically provided in Schedule 5.12(a) or 5.12(b), the
transactions contemplated by this Agreement will not result in the infringement
by the COMPANY of any Intellectual Property right of any other entity or the
infringement of any Intellectual Property listed on Schedule 5.12(a), or result
in a default under or a breach or violation of, or adversely affect the rights
and benefits afforded to the COMPANY by, any licenses, franchises, permits or
government authorizations listed on Schedule 5.12(b) or Schedule 5.13.
5.13 ENVIRONMENTAL MATTERS. Except as set forth on Schedule 5.13, (i)
the COMPANY has complied with and is in compliance with all Federal, state,
local and foreign statutes (civil and criminal), laws, ordinances, regulations,
rules, notices, permits, judgments, orders and decrees applicable to it or any
of its properties, assets, operations and businesses relating to environmental
protection (collectively "Environmental Laws") including, without limitation,
Environmental Laws relating to air, water, land and the generation, storage,
use, handling, transportation, treatment or disposal of Hazardous Wastes and
Hazardous Substances including petroleum and petroleum products (as such terms
are defined in any applicable Environmental Law); (ii) the COMPANY has obtained
and adhered to all necessary permits and other approvals necessary to treat,
transport, store, dispose of and otherwise handle Hazardous Wastes and Hazardous
Substances, a list of all of which permits and approvals is set forth on
Schedule 5.13, and has reported to the appropriate authorities, to the extent
required by all Environmental Laws, all past and present sites owned and
operated by the COMPANY where Hazardous Wastes or Hazardous Substances have been
treated, stored, disposed of or otherwise handled; (iii) there have been no
releases or threats of releases (as defined in Environmental Laws) at, from, in
or on any property owned or operated by the COMPANY except as permitted by
Environmental Laws; (iv) the COMPANY knows of no on-site or off-site location to
which the COMPANY has transported or disposed of Hazardous Wastes and Hazardous
Substances or arranged for the transportation of Hazardous Wastes and Hazardous
Substances, which site is the subject of any Federal, state, local or foreign
enforcement action or any other investigation which could lead to any claim
against the COMPANY, CEI or NEWCO for any clean-up cost, remedial work, damage
to natural resources, property damage or personal injury, including, but not
limited to, any claim under the Comprehensive Environmental Response,
Compensation and Liability
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Act of 1980, as amended; and (v) the COMPANY has no contingent liability in
connection with any release of any Hazardous Waste or Hazardous Substance into
the environment.
5.14 PERSONAL PROPERTY. The COMPANY has delivered to CEI an accurate
list (which is set forth on Schedule 5.14) of (x) all personal property included
in "depreciable plant, property and equipment" (or similarly named line item) on
the balance sheet of the COMPANY as of the Balance Sheet Date or that will be
included on any balance sheet of the COMPANY prepared after the Balance Sheet
Date, (y) all other personal property owned by the COMPANY with a value
individually in excess of $10,000 (i) as of the Balance Sheet Date and (ii)
acquired since the Balance Sheet Date and (z) all leases and agreements in
respect of personal property, including, in the case of clause (z), a schedule
of the capital costs of all such assets which are subject to capital leases and
true, complete and correct copies of all such leases and agreements and, in the
case of clauses (x) and (y), an indication as to which of those assets are
currently owned, or were formerly owned, by STOCKHOLDERS or Affiliates of the
COMPANY or STOCKHOLDERS. Except as set forth on Schedule 5.14, (i) all personal
property used by the COMPANY in its business is either owned by the COMPANY or
leased by the COMPANY pursuant to a lease included on Schedule 5.14, (ii) all of
the personal property listed on Schedule 5.14 is in good working order and
condition, ordinary wear and tear excepted, and (iii) all leases and agreements
included on Schedule 5.14 are in full force and effect and constitute valid and
binding agreements of the COMPANY, and, to the COMPANY'S knowledge, of the
parties (and their successors) thereto in accordance with their respective
terms.
5.15 SIGNIFICANT CUSTOMER; MATERIAL CONTRACTS AND COMMITMENTS. The
COMPANY has delivered to CEI an accurate list (which is set forth on Schedule
5.15) of (i) all significant customers, it being understood and agreed that a
"significant customer," for purposes of this Section 5.15, means a customer (or
person or entity) representing 5% or more of the COMPANY's revenues for the year
ending on the Balance Sheet Date. Except to the extent set forth on Schedule
5.15, none of the COMPANY's significant customers have cancelled or
substantially reduced or, to the knowledge of the COMPANY, are currently
attempting or threatening to cancel a contract or substantially reduce
utilization of the services provided by the COMPANY.
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The COMPANY has listed on Schedule 5.15 all material contracts,
commitments and similar agreements to which the COMPANY is a party or by which
it or any of its properties are bound (including, but not limited to, contracts
with significant customers, joint venture or partnership agreements, contracts
with any labor organizations, strategic alliances and options to purchase land),
other than contracts, commitments and agreements otherwise listed on Schedule
5.10, 5.14, 5.16, 5.18 or 5.19 (a) in existence as of the Balance Sheet Date and
(b) entered into since the Balance Sheet Date, and in each case has delivered
true, complete and correct copies of such agreements to CEI. The COMPANY has
complied with all material commitments and obligations pertaining to it, and is
not in default under any contracts or agreements listed on Schedule 5.15, and no
notice of default under any such contract or agreement has been received. The
COMPANY has also indicated on Schedule 5.15 a summary description of all plans
or projects involving the opening of new operations, expansion of existing
operations or the acquisition of any personal property, business or assets
requiring, in any event, the payment of more than $25,000 by the COMPANY.
5.16 REAL PROPERTY. Schedule 5.16(a) includes a list of all real
property owned by the COMPANY (i) as of the Balance Sheet Date and (ii) acquired
since the Balance Sheet Date, and all other real property, if any, used by the
COMPANY in the conduct of its business. The COMPANY has good and insurable title
to the real property owned by it, including that reflected on Schedules 5.14 and
5.16, subject to no mortgage, pledge, lien, conditional sale agreement,
encumbrance or charge, except for:
(i) liens reflected on Schedule 5.10 or 5.15 as securing
specified liabilities (with respect to which no default by the
COMPANY exists);
(ii) liens for current taxes not yet due and payable and
assessments not in default;
(iii) easements for utilities serving the property only; and
(iv) easements, covenants and restrictions and other
exceptions to title shown of
record in the office of the County Clerks in which the
properties, assets and leasehold estates are located which do not
adversely affect the current use of the property.
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Attached to Schedule 5.16(a) are true, complete and correct copies of all title
reports and title insurance policies currently in possession of the COMPANY with
respect to real property owned by the COMPANY.
Schedule 5.16(b) includes an accurate list of real property leased by
the COMPANY and an indication as to which such properties, if any, are currently
owned, or were formerly owned, by STOCKHOLDERS or Affiliates of the COMPANY or
STOCKHOLDERS, and attached to Schedule 5.16(b) are true, complete and correct
copies of all leases and agreements in respect of such real property leased by
the COMPANY. Except as set forth on Schedule 5.16(b), all of such leases
included on Schedule 5.16(b) are in full force and effect and constitute valid
and binding agreements of the COMPANY and, to the COMPANY'S knowledge, of the
parties (and their successors) thereto in accordance with their respective
terms.
5.17 INSURANCE. Set forth on and attached to Schedule 5.17 are (i) an
accurate list as of the Balance Sheet Date of all insurance policies carried by
the COMPANY, (ii) an accurate list of all insurance loss runs and workers'
compensation claims received for the past three (3) policy years and (iii) true,
complete and correct copies of all insurance policies currently in effect. Such
insurance policies evidence all of the insurance that the COMPANY is required to
carry pursuant to all of its contracts and other agreements and pursuant to all
applicable laws. All of such insurance policies are currently in full force and
effect and shall remain in full force and effect through the Funding and
Consummation Date. No insurance carried by the COMPANY has ever been cancelled
by the insurer and the COMPANY has never been denied coverage.
5.18 COMPENSATION; EMPLOYMENT AGREEMENTS; ORGANIZED LABOR MATTERS. The
COMPANY has delivered to CEI an accurate list (which is set forth on Schedule
5.18) showing all officers, directors and key employees of the COMPANY, listing
all employment agreements with such officers, directors and key employees and
the annual rate of compensation (and the portions thereof attributable to
salary, bonus and other compensation, respectively) of each of such persons (i)
for the year ended on the Balance Sheet Date and (ii) for 1997. The COMPANY has
provided to CEI true, complete and correct copies of any employment agreements
for persons listed on Schedule 5.18. Since the Balance Sheet Date, there have
been no increases in the
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compensation payable or any special bonuses to any officer, director, key
employee or other employee, except ordinary salary increases implemented on a
basis consistent with past practices.
Except as set forth on Schedule 5.18, (i) the COMPANY is not bound by
or subject to (and none of its respective assets or properties is bound by or
subject to) any arrangement with any labor union, (ii) no employees of the
COMPANY are represented by any labor union or covered by any collective
bargaining agreement, (iii) no campaign to establish such representation is in
progress and (iv) there is no pending or, to the COMPANY's knowledge, threatened
labor dispute involving the COMPANY and any group of its employees nor has the
COMPANY experienced any labor interruptions over the past three years. The
COMPANY believes its relationship with employees to be good.
5.19 EMPLOYEE PLANS. The STOCKHOLDERS have delivered to CEI an accurate
schedule (which is set forth on Schedule 5.19) showing all employee benefit
plans of COMPANY, including all employment agreements and other agreements or
arrangements containing "golden parachute" or other similar provisions, and
deferred compensation agreements, together with true, complete and correct
copies of such plans, agreements and any trusts related thereto, and
classifications of employees covered thereby as of the Balance Sheet Date.
Except for the employee benefit plans, if any, described on Schedule 5.19,
COMPANY does not sponsor, maintain or contribute to any plan program, fund or
arrangement that constitutes an "employee pension benefit plan," nor has COMPANY
any obligation to contribute to or accrue or pay any benefits under any deferred
compensation or retirement funding arrangement on behalf of any employee or
employees (such as, for example, and without limitation, any individual
retirement account or annuity, any "excess benefit plan" (within the meaning of
Section 3(36) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")) or any non-qualified deferred compensation arrangement). For the
purposes of this Agreement, the term "employee pension benefit plan" shall have
the same meaning as is given that term in Section 3(2) of ERISA. The COMPANY has
not sponsored, maintained or contributed to any employee pension benefit plan
other than the plans set forth on Schedule 5.19, nor is the COMPANY required to
contribute to any retirement plan pursuant to the provisions of
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any collective bargaining agreement establishing the terms and conditions or
employment of any of COMPANY's employees.
The COMPANY is not now, nor can it as a result of its past activities
become, liable to the Pension Benefit Guaranty Corporation or to any
multiemployer employee pension benefit plan under the provisions of Title IV of
ERISA.
All employee benefit plans listed on Schedule 5.19 and the
administration thereof are in substantial compliance with their terms and all
applicable provisions of ERISA and the regulations issued thereunder, as well as
with all other applicable federal, state and local statutes, ordinances and
regulations.
All accrued contribution obligations of COMPANY with respect to any
plan listed on Schedule 5.19 have either been fulfilled in their entirety or are
fully reflected on the balance sheet of the COMPANY as of the Balance Sheet
Date.
5.20 COMPLIANCE WITH ERISA. All such plans listed on Schedule 5.19 that
are intended to qualify (the "Qualified Plans") under Section 401(a) of the Code
are, and have been so qualified and have been determined by the Internal Revenue
Service to be so qualified, and copies of such determination letters are
included as part of Schedule 5.19 hereof. Except as disclosed on Schedule 5.19,
all reports and other documents required to be filed with any governmental
agency or distributed to plan participants or beneficiaries (including, but not
limited to, actuarial reports, audits or tax returns) have been timely filed or
distributed, and copies thereof are included as part of Schedule 5.19 hereof.
Neither STOCKHOLDERS, nor any plan listed in Schedule 5.19, nor COMPANY has
engaged in any transaction prohibited under the provisions of Section 4975 of
the Code or Section 406 of ERISA. No such Plan listed in Schedule 5.19 has
incurred an accumulated funding deficiency, as defined in Section 412(a) of the
Code and Section 302(1) of ERISA; and COMPANY has not incurred any liability for
excise tax or penalty due to the Internal Revenue Service nor any liability to
the Pension Benefit Guaranty Corporation. The STOCKHOLDERS further represent
that:
(i) there have been no terminations, partial terminations or
discontinuance of contributions to any such Qualified Plan intended to
qualify under Section 401(a) of the Code without notice to and
approval by the Internal Revenue Service;
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(ii) no such plan listed in Schedule 5.19 subject to the
provisions of Title IV of ERISA has been terminated;
(iii) there have been no "reportable events" (as that phrase
is defined in Section 4043 of ERISA) with respect to any such plan
listed in Schedule 5.19;
(iv) COMPANY has not incurred liability under Section 4062 of
ERISA; and
(v) No circumstances exist pursuant to which the COMPANY could
have any direct or indirect liability whatsoever (including, but not
limited to, any liability to any multiemployer plan or the PBGC under
Title IV of ERISA or to the Internal Revenue Service for any excise
tax or penalty, or being subject to any statutory lien to secure
payment of any such liability) with respect to any plan now or
heretofore maintained or contributed to by any entity other than the
COMPANY that is, or at any time was, a member of a "controlled group"
(as defined in Section 412(n)(6)(B) of the Code) that includes the
COMPANY;
5.21 CONFORMITY WITH LAW; LITIGATION. Except to the extent set forth on
Schedule 5.21 or 5.13, the COMPANY is not in violation of any law or regulation
which violation would have a Material Adverse Effect, or of any order of any
court or Federal, state, municipal or other governmental department, commission,
board, bureau, agency or instrumentality having jurisdiction over any of them;
and except to the extent set forth on Schedule 5.21, 5.10 or 5.13, there are no
claims, actions, suits or proceedings, pending or, to the knowledge of the
COMPANY, threatened, against or affecting the COMPANY, at law or in equity, or
before or by any Federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality having jurisdiction over it
and no notice of any claim, action, suit or proceeding, whether pending or
threatened, has been received. The COMPANY has conducted and is conducting its
business in compliance with the requirements, standards, criteria and conditions
set forth in applicable Federal, state and local statutes, ordinances, permits,
licenses, orders, approvals, variances, rules and regulations, including all
such permits, licenses, orders and other governmental approvals set forth on
Schedules 5.12 and 5.13, and is not in violation of any of the foregoing.
5.22 TAXES. Except as set forth on Schedule 5.22:
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(i) All Returns required to have been filed by or with respect to
the COMPANY and any affiliated, combined, consolidated, unitary or
similar group of which the COMPANY is or was a member (a "Relevant
Group") with any Taxing Authority have been duly filed, and each such
Return correctly and completely reflects the Tax liability and all
other information required to be reported thereon. All Taxes (whether
or not shown on any Return) owed by the COMPANY, any subsidiary and
any member of a Relevant Group (individually, the "Acquired Party" and
collectively, the "Acquired Parties") have been paid.
(ii) To the knowledge of the COMPANY and the STOCKHOLDERS, the
provisions for Taxes to be paid by the COMPANY and any subsidiaries
(as opposed to any reserve for deferred Taxes established to reflect
timing differences between book and Tax income) in the COMPANY
Financial Statements are sufficient for all unpaid Taxes, being
current taxes not yet due and payable, of such Acquired Party.
(iii) No Acquired Party is a party to any agreement extending the
time within which to file any Return. No claim has ever been made by
any Taxing Authority in a jurisdiction in which an Acquired Party does
not file Returns that it is or may be subject to taxation by that
jurisdiction.
(iv) Each Acquired Party has withheld and paid all applicable
Taxes required to have been withheld and paid in connection with
amounts paid or owing to any employee, creditor, independent
contractor or other third party.
(v) No Acquired Party expects any Taxing Authority to assess any
additional Taxes against or in respect of it for any past period.
There is no dispute or claim concerning any Tax liability of any
Acquired Party either (i) claimed or raised by any Taxing Authority or
(ii) otherwise known to any Acquired Party. No issues have been raised
in any examination by any Taxing Authority with respect to any
Acquired Party which, by application of similar principles, reasonably
could be expected to result in a proposed deficiency for any other
period not so examined. Schedule 5.22(v) attached hereto lists all
federal, state, local and foreign income Tax Returns filed by or with
respect to any Acquired Party for all taxable periods ended on or
after January 1, 1991, indicates those Returns, if any, that have been
audited, and indicates those Returns that currently are the subject of
audit. Each Acquired Party has delivered to CEI complete and correct
copies of all federal, state, local and foreign income Tax Returns
filed by, and all Tax examination reports and statements of
deficiencies assessed against or agreed to by, such Acquired Party
since January 1, 1991.
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(vi) No Acquired Party has waived any statute of limitations in
respect of Taxes or agreed to any extension of time with respect to
any Tax assessment or deficiency.
(vii) No Acquired Party has made any payments, is obligated to
make any payments, or is a party to any agreement that under certain
circumstances could require it to make any payments, that are not
deductible under Section 280G of the Code.
(viii) No Acquired Party is a party to any Tax allocation or
sharing agreement.
(ix) None of the assets of any Acquired Party constitutes
tax-exempt bond financed property or tax-exempt use property, within
the meaning of Section 168 of the Code. No Acquired Party is a party
to any "safe harbor lease" that is subject to the provisions of
Section 168(f)(8) of the Internal Revenue Code as in effect prior to
the Tax Reform Act of 1986, or to any "long-term contract" within the
meaning of Section 460 of the Code.
(x) No Acquired Party is a "consenting corporation" within the
meaning of Section 341(f)(1) of the Code, or comparable provisions of
any state statutes, and none of the assets of any Acquired Party is
subject to an election under Section 341(f) of the Code or comparable
provisions of any state statutes.
(xi) No Acquired Party is a party to any joint venture,
partnership or other arrangement that is treated as a partnership for
federal income Tax purposes.
(xii) There are no accounting method changes or proposed or
threatened accounting method changes, of any Acquired Party that could
give rise to an adjustment under Section 481 of the Code for periods
after the Funding and Consummation Date.
(xiii) No Acquired Party has received any written ruling of a
Taxing Authority related to Taxes or entered into any written and
legally binding agreement with a Taxing Authority relating to Taxes.
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(xiv) Each Acquired Party has disclosed (in accordance with
Section 6662(d)(2)(B)(ii) of the Code) on its federal income Tax
Returns all positions taken therein that could give rise to a
substantial understatement of federal income Tax within the meaning of
Section 6662(d) of the Code.
(xv) No Acquired Party has any liability for Taxes of any person
other than such Acquired Party (i) under Section 1.1502-6 of the
Treasury regulations (or any similar provision of state, local or
foreign law), (ii) as a transferee or successor, (iii) by contract or
(iv) otherwise.
(xvi) There currently are no limitations on the utilization of
the net operating losses, built-in losses, capital losses, Tax credits
or other similar items of any Acquired Party (collectively, the "Tax
Losses") under (i) Section 382 of the Code, (ii) Section 383 of the
Code, (iii) Section 384 of the Code, (iv) Section 269 of the Code, (v)
Section 1.1502-15 and Section 1.1502-15A of the Treasury regulations,
(vi) Section 1.1502-21 and Section 1.1502-21A of the Treasury
regulations or (vii) Sections 1.1502-91 through 1.1502-99 of the
Treasury regulations, in each case as in effect both prior to and
following the Tax Reform Act of 1986.
(xvii) At the Balance Sheet Date, the Acquired Parties had
aggregate Tax Losses for federal income Tax purposes as described on
Schedule 5.22(xvii) attached hereto.
(xviii) The COMPANY is not an investment company as defined in
Section 351(e)(1) of the Code.
(xix) The fair market value of the assets of the COMPANY exceeds
the sum of its liabilities, plus the amount of liabilities, if any, to
which the assets are subject.
(xx) The COMPANY is not under the jurisdiction of a court in a
Title 11 or similar case within the meaning of Section 351(e)(2) of
the Code.
For purposes of this Section 5.22, the following definitions
shall apply:
"Returns" means any returns, reports or statements (including
any information returns) required to be filed for purposes of a particular Tax
with any Taxing Authority or governmental agency.
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"Tax" or "Taxes" means all Federal, state, local or foreign
net or gross income, gross receipts, net proceeds, sales, use, ad valorem, value
added, franchise, bank shares, withholding, payroll, employment, excise,
property, deed, stamp, alternative or add-on minimum, environmental or other
taxes, assessments, duties, fees, levies or other governmental charges of any
nature whatsoever, whether disputed or not, together with any interest,
penalties, additions to tax or additional amounts with respect thereto.
"Taxing Authority" means any governmental agency, board,
bureau, body, department or authority of any United States federal, state or
local jurisdiction or any foreign jurisdiction, having jurisdiction with respect
to any Tax.
5.23 NO VIOLATIONS. The COMPANY is not in violation of any Charter
Document. Except as set forth on Schedule 5.23, neither the COMPANY nor, to the
knowledge of the COMPANY or the STOCKHOLDERS, any other party thereto, is in
default under any lease, instrument, agreement, license, or permit set forth on
Schedule 5.12, 5.13, 5.14, 5.15, 5.16, 5.18 or 5.19 or any other material
agreement to which it is a party or by which its properties are bound (the
"Material Documents"); and, except as set forth on Schedule 5.23, (a) the rights
and benefits of the COMPANY under the Material Documents will not be adversely
affected by the transactions contemplated hereby and (b) the execution of this
Agreement and the performance by the COMPANY and the STOCKHOLDERS of their
obligations hereunder and the consummation by the COMPANY and the STOCKHOLDERS
of the transactions contemplated hereby will not result in any violation or
breach of, or constitute a default under, any of the terms or provisions of the
Material Documents or the Charter Documents. Except as set forth on Schedule
5.23, none of the Material Documents requires notice to, or the consent or
approval of, any governmental agency or other third party with respect to any of
the transactions contemplated hereby in order to remain in full force and effect
and consummation of the transactions contemplated hereby will not give rise to
any right to termination, cancellation or acceleration or loss of any right or
benefit. Except as set forth on Schedule 5.23, none of the Material Documents
prohibits the use or publication by the COMPANY, CEI or NEWCO of the name of any
other party to such Material Document, and none of the Material Documents
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prohibits or restricts the COMPANY from freely providing services to any other
customer or potential customer of the COMPANY, CEI, NEWCO or any Other Founding
Company.
5.24 GOVERNMENT CONTRACTS. Except as set forth on Schedule 5.24, the
COMPANY is not a party to any governmental contract subject to price
redetermination or renegotiation.
5.25 ABSENCE OF CHANGES. Since the Balance Sheet Date, except as set
forth on Schedule 5.25, there has not been:
(i) any material adverse change in the financial condition,
assets, liabilities (contingent or otherwise), income or business of
the COMPANY;
(ii) any damage, destruction or loss (whether or not covered by
insurance) materially adversely affecting the properties or business
of the COMPANY;
(iii) any change in the authorized capital of the COMPANY or the
outstanding securities issued by the Company or any change in the
classes, preferences or other rights defining the ownership interests
in the Company or any grant or issuance of any options, warrants,
calls, conversion rights or commitments;
(iv) any declaration or payment of any dividend or distribution
in respect of the capital stock or any direct or indirect redemption,
purchase or other acquisition of any of the capital stock of the
COMPANY;
(v) any increase in the compensation, bonus, sales commissions or
fees payable or to become payable by the COMPANY to any of its
officers, directors, STOCKHOLDERS, employees, consultants or agents,
except for ordinary and customary bonuses and salary increases for
employees in accordance with past practice;
(vi) any work interruptions, labor grievances or claims filed, or
any event or condition of any character, materially adversely
affecting the business of the COMPANY;
(vii) any sale or transfer, or any agreement to sell or transfer,
any material assets, property or rights of the COMPANY to any person,
including, without limitation, the STOCKHOLDERS and their affiliates;
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(viii) any cancellation, or agreement to cancel, any indebtedness
or other obligation owing to the COMPANY, including, without
limitation, any indebtedness or obligation of any STOCKHOLDERS or any
affiliate thereof;
(ix) any plan, agreement or arrangement granting any preferential
right to purchase or acquire any interest in any of the assets,
property or rights of the COMPANY or requiring consent of any party to
the transfer and assignment of any such assets, property or rights;
(x) any purchase or acquisition of, or agreement, plan or
arrangement to purchase or acquire, any property, rights or assets
outside of the ordinary course of the COMPANY's business;
(xi) any waiver of any material rights or claims of the COMPANY,
provided that the COMPANY may negotiate and adjust bills in the course
of good faith disputes with customers in a manner consistent with past
practice, provided, further, that such adjustments shall not be deemed
to be included on Schedule 5.11 unless specifically listed thereon;
(xii) any material breach, amendment or termination of any
contract, agreement, license, permit or other right to which the
COMPANY is a party or as to which it is a beneficiary;
(xiii) any transaction by the COMPANY outside the ordinary course
of its respective businesses;
(xiv) any cancellation or termination of a material contract with
a customer or client prior to the scheduled termination date;
(xv) any other distribution of property or assets by the COMPANY;
or
(xvi) any other activity prohibited by Section 7.3 that is not
specifically included in this Section 5.25.
5.26 DEPOSIT ACCOUNTS; POWERS OF ATTORNEY. The COMPANY has delivered to
CEI an accurate schedule (which is set forth on Schedule 5.26) as of the date of
this Agreement of:
(i) the name of each financial institution in which the COMPANY
has accounts or safe deposit boxes;
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(ii) the names in which the accounts or boxes are held;
(iii) the type of account and account number; and
(iv) the name of each person authorized to draw thereon or have
access thereto.
Schedule 5.26 also sets forth the name of each person, corporation, firm or
other entity holding a general or special power of attorney from the COMPANY and
a description of the terms of such power of attorney.
5.27 VALIDITY OF OBLIGATIONS. The execution and delivery of this
Agreement by the COMPANY and the performance of the transactions contemplated
herein have been duly and validly authorized by the Board of Directors of the
COMPANY and this Agreement has been duly and validly authorized by all necessary
corporate action and is a legal, valid and binding obligation of the COMPANY.
5.28 RELATIONS WITH GOVERNMENTS. The COMPANY has not made, offered or
agreed to offer anything of value to any governmental official, political party
or candidate for government office nor has it otherwise taken any action which
would cause the COMPANY to be in violation of the Foreign Corrupt Practices Act
of 1977, as amended, or any law of similar effect.
5.29 DISCLOSURE. (a) This Agreement, including the schedules hereto,
together with the completed Directors and Officers Questionnaires and
Registration Statement Questionnaires attached hereto as Schedule 5.29 and all
other documents and information made available to CEI and its representatives in
writing pursuant hereto or thereto, fairly present the business and operations
of the COMPANY for the time periods with respect to which such information was
requested. The COMPANY'S rights under the documents delivered pursuant hereto
would not be materially adversely affected by, and no statement made herein
would be rendered untrue in any material respect by, any other document to which
the COMPANY is a party, or to which its properties are subject, or by any other
fact or circumstance regarding the COMPANY (which fact or circumstance was, or
should reasonably, after due inquiry, have been known to the COMPANY) that is
not disclosed pursuant hereto or thereto. If, prior to the 25th day after the
date of the final prospectus of CEI utilized in connection with the IPO, the
COMPANY or the STOCKHOLDERS become aware of any fact or circumstance which would
change (or, if after
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the Funding and Consummation Date, would have changed) a representation or
warranty of COMPANY or STOCKHOLDERS in this Agreement or would affect any
document delivered pursuant hereto in any material respect, the COMPANY and the
STOCKHOLDERS shall immediately give notice of such fact or circumstance to CEI.
However, subject to the provisions of Section 7.8, such notification shall not
relieve either the COMPANY or the STOCKHOLDERS of their respective obligations
under this Agreement, and, subject to the provisions of Section 7.8, at the sole
option of CEI, the truth and accuracy of any and all warranties and
representations of the COMPANY, or on behalf of the COMPANY and of the
STOCKHOLDERS at the date of this Agreement and on the Closing Date and on the
Funding and Consummation Date, shall be a precondition to the consummation of
this transaction.
(b) The COMPANY and the STOCKHOLDERS acknowledge and
agree (i) that there exists no firm commitment, binding agreement, or promise or
other assurance of any kind, whether express or implied, oral or written, that a
Registration Statement will become effective or that the IPO pursuant thereto
will occur at a particular price or within a particular range of prices or occur
at all; (ii) that neither CEI or any of its officers, directors, agents or
representatives nor any Underwriter shall have any liability to the COMPANY, the
STOCKHOLDERS or any other person affiliated or associated with the COMPANY for
any failure of the Registration Statement to become effective, the IPO to occur
at a particular price or within a particular range of prices or to occur at all;
and (iii) that the decision of the STOCKHOLDERS to enter into this Agreement, or
to vote in favor of or consent to the proposed Merger, has been or will be made
independent of, and without reliance upon, any statements, opinions or other
communications, or due diligence investigations which have been or will be made
or performed by any prospective Underwriter, relative to CEI or the prospective
IPO.
5.30 PROHIBITED ACTIVITES. Except as set forth on Schedule 5.30, the
COMPANY has not, between the Balance Sheet Date and the date hereof, taken any
of the actions (Prohibited Activities) set forth in Section 7.3.
(B) REPRESENTATIONS AND WARRANTIES OF STOCKHOLDERS
Each STOCKHOLDER severally represents and warrants that the
representations and warranties set forth below are true as of the date of this
Agreement and, subject to Section
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7.8 hereof, shall be true at the time of the Closing and on the Funding and
Consummation Date, and that the representations and warranties set forth in
Sections 5.31, 5.32 and 5.33 shall survive until the second anniversary of the
Funding and Consummation Date, which shall be deemed to be the Expiration Date
for purposes of those Sections.
5.31 AUTHORITY; OWNERSHIP. Such STOCKHOLDER has the full legal right,
power and authority to enter into this Agreement. Such STOCKHOLDER owns
beneficially and of record all of the shares of the COMPANY stock identified on
Annex IV as being owned by such STOCKHOLDER, and, except as set forth on
Schedule 5.31, such COMPANY Stock is owned free and clear of all liens, security
interests, pledges, charges, voting trusts, restrictions, encumbrances and
claims of every kind.
5.32 PREEMPTIVE RIGHTS. Such STOCKHOLDER does not have, or hereby
waives, any preemptive or other right to acquire shares of COMPANY Stock or CEI
Stock that such STOCKHOLDER has or may have had other than rights of any
STOCKHOLDER to acquire CEI Stock pursuant to (i) this Agreement or (ii) any
option granted by CEI.
5.33 NO INTENTION TO DISPOSE OF CEI STOCK. No STOCKHOLDER has any
current plan or intention, or is under any binding commitment or contract, to
sell, exchange or otherwise dispose of shares of CEI Stock received pursuant to
Section 3.1.
5.34 TRANSACTIONS WITH DIRECTORS OFFICERS AND AFFILIATES. Except as
listed on Schedule 5.34 annexed hereto, there have been no transactions since
January 1, 1992 between the COMPANY and any of its directors, officers,
stockholders or affiliates or any of their Family Members (as defined below)
involving $60,000 or more. Each transaction set forth on Schedule 5.34 has been
on reasonable commercial terms which could have been obtained at the time from
bona fide third parties. To the best knowledge of the COMPANY, since January 1,
1992, none of the officers or directors of the COMPANY or any spouse or Family
Member (as defined below) of any of such persons, has been a director, officer
or consultant of, or owns directly or indirectly any interest in, any firm,
corporation, association or business enterprise which during such period has
been a significant supplier, customer or sales agent of the COMPANY or has
competed with or been engaged in any business of the kind being conducted by the
COMPANY except as disclosed on Schedule 5.34 annexed hereto. Except as disclosed
on Schedule 5.34, no
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Family Member (as defined below) of any STOCKHOLDER, officer or director of the
COMPANY is currently an employee or consultant receiving payments from the
COMPANY or otherwise on the payroll of the COMPANY or has any material claim
whatsoever against or owes any amount to the COMPANY, except for claims in the
ordinary course of business such as for accrued vacation pay and accrued
benefits under employee benefit plans. "Family Member" shall mean all relatives
and their spouses in a relationship of first cousins or closer.
6. REPRESENTATIONS OF CEI AND NEWCO
CEI and NEWCO jointly and severally represent and warrant that all of
the following representations and warranties in this Section 6 are true at the
date of this Agreement and, subject to Section 7.8 hereof, shall be true at the
time of the Closing and the Funding and Consummation Date, and that such
representations and warranties shall survive the Funding and Consummation Date
for a period of two years (the last day of such period being the "Expiration
Date"), except that (i) the warranties and representations set forth in Section
6.14 hereof shall survive until such time as the limitations period has run for
all tax periods ended on or prior to the Funding and Consummation Date, which
shall be deemed to be the Expiration Date for Section 6.14 and (ii) solely for
purposes of Section 11.2(iv) hereof, and solely to the extent that in connection
with the IPO, CEI actually incurs liability under the 1933 Act, the 1934 Act or
any other Federal or state securities laws, the representations and warranties
set forth herein shall survive until the expiration of any applicable
limitations period, which shall be deemed to be the Expiration Date for such
purposes.
6.1 DUE ORGANIZATION. CEI and NEWCO are each corporations duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and are duly authorized and qualified to do business under all
applicable laws, regulations, ordinances and orders of public authorities to
carry on their respective business in the places and in the manner as now
conducted except where the failure to be so authorized or qualified would not
have a Material Adverse Effect. True, complete and correct copies of the
Certificate of Incorporation and By-laws, each as amended, of CEI and NEWCO (the
"CEI Charter Documents") are all attached hereto as Annex II.
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6.2 AUTHORIZATION. (i) The respective representatives of CEI and NEWCO
executing this Agreement have the authority to enter into and bind CEI and NEWCO
to the terms of this Agreement and (ii) CEI and NEWCO have the full corporate
right, power and authority to enter into this Agreement and the Merger.
6.3 CAPITAL STOCK OF THE COMPANY. The authorized capital stock of CEI
and NEWCO is as set forth in Sections 1.4(ii) and (iii), respectively. All of
the issued and outstanding shares of the capital stock of NEWCO are owned by CEI
and all of the issued and outstanding shares of the capital stock of CEI are
owned by the persons set forth on Annex V hereof, in each case, free and clear
of all liens, security interests, pledges, charges, voting trusts, restrictions,
encumbrances and claims of every kind. All of the issued and outstanding shares
of the capital stock of CEI and NEWCO have been duly authorized and validly
issued, are fully paid and nonassessable, are owned of record and beneficially
by CEI and the persons set forth on Annex V, respectively, and further, such
shares were offered, issued, sold and delivered by CEI and NEWCO in compliance
with all applicable state and Federal laws concerning the issuance of
securities. Further, none of such shares were issued in violation of the
preemptive rights of any past or present stockholder of CEI or NEWCO.
6.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING. Except as
set forth on Schedule 6.4 of this Agreement, and as set forth in the
Registration Statement, (i) no option, warrant, call, conversion right or
commitment of any kind exists which obligates CEI or NEWCO to issue any of its
authorized but unissued capital stock or its treasury stock; and (ii) neither
CEI nor NEWCO has any obligation (contingent or otherwise) to purchase, redeem
or otherwise acquire any of its equity securities or any interests therein or to
pay any dividend or make any distribution in respect thereof. Schedule 6.4 also
includes complete and accurate copies of all stock option or stock purchase
plans of CEI and NEWCO, including a list, accurate as of the date hereof, of all
outstanding options, warrants or other rights to acquire shares of their
respective capital stock.
6.5 SUBSIDIARIES. NEWCO has no subsidiaries. CEI has no subsidiaries
except for NEWCO and each of the companies identified as "NEWCO" in each of the
Other Agreements. Except as set forth in the preceding sentence, neither CEI nor
NEWCO owns, of record or
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beneficially, or controls, directly or indirectly, any capital stock, securities
convertible into capital stock or any other equity interest in any corporation,
association or business entity nor is CEI or NEWCO, directly or indirectly, a
participant in any joint venture, partnership or other non-corporate entity.
6.6 FINANCIAL STATEMENTS. (a) Attached hereto as Schedule 6.6(a) are
copies of the following financial statements of CEI (the "CEI Financial
Statements"), which reflect the results of its operations from inception: CEI's
audited Balance Sheet as of December 31, 1996 and Statements of Income, Cash
Flows and Retained Earnings for the period from inception through December 31,
1996. Such CEI Financial Statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods indicated (except as noted thereon or on Schedule
6.6(a)). Except as set forth on Schedule 6.6(a), such Balance Sheets as of
December 31, 1996 present fairly the financial position of CEI as of such date,
and such Statements of Income, Cash Flows and Retained Earnings present fairly
the results of operations for the period indicated.
(b) Attached hereto as Schedule 6.6(b) are copies of the following
unaudited pro forma combined financial statements for CEI and the Founding
Companies (the "Pro Forma Financial Statements"): combined Balance Sheets as of
December 31, 1995 and December 31, 1996 and Statements of Income, Cash Flows and
Retained Earnings for the years ended December 31, 1994, 1995 and 1996. Such Pro
Forma Financial Statements have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis throughout the
period indicated (except as noted thereon or on Schedule 6.6(b)). Except as set
forth on Schedule 6.6(b), such Balance Sheets, as of the dates thereof, present
fairly the financial position of CEI and the Founding Companies, and such
Statements of Income, Cash Flows and Retained Earnings present fairly the
results of operations for the periods indicated.
6.7 LIABILITIES AND OBLIGATIONS. Except as set forth on Schedule 6.7,
CEI and NEWCO have no material liabilities, contingent or otherwise, except as
set forth in or contemplated by this Agreement and the Other Agreements and
except for fees and expenses incurred in connection with the transactions
contemplated hereby and thereby.
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6.8 CONFORMITY WITH LAW; LITIGATION. Except to the extent set forth on
Schedule 6.8, neither CEI nor NEWCO is in violation of any law or regulation
which violation would have a Material Adverse Effect, or of any order of any
court or Federal, state, municipal or other governmental department, commission,
board, bureau, agency or instrumentality having jurisdiction over either of
them; and except to the extent set forth in Schedule 6.8, there are no material
claims, actions, suits or proceedings, pending or, to the knowledge of CEI or
NEWCO, threatened, against or affecting CEI or NEWCO, at law or in equity, or
before or by any Federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality having jurisdiction over
either of them and no notice of any claim, action, suit or proceeding, whether
pending or threatened, has been received. CEI and NEWCO have conducted and are
conducting their respective businesses in compliance with the requirements,
standards, criteria and conditions set forth in applicable Federal, state and
local statutes, ordinances, permits, licenses, orders, approvals, variances,
rules and regulations and are not in violation of any of the foregoing.
6.9 NO VIOLATION. Neither CEI nor NEWCO is in violation of any CEI
Charter Document. None of CEI, NEWCO, or, to the knowledge of CEI and NEWCO, any
other party thereto, is in default under any lease, instrument, agreement,
license, or permit to which CEI or NEWCO is a party, or by which CEI or NEWCO,
or any of their respective properties, are bound (collectively, the "CEI
Documents"); and (a) the rights and benefits of CEI and NEWCO under the CEI
Documents will not be adversely affected by the transactions contemplated hereby
and (b) the execution of this Agreement and the performance of CEI's and NEWCO's
obligations hereunder and the consummation by them of the transactions
contemplated hereby will not result in any violation or breach or constitute a
default under, any of the terms or provisions of the CEI Documents or the CEI
Charter Documents. Except as set forth on Schedule 6.9, none of the CEI
Documents requires notice to, or the consent or approval of, any governmental
agency or other third party with respect to any of the transactions contemplated
hereby in order to remain in full force and effect and the consummation of the
transactions contemplated hereby will not give rise to any right to termination,
cancellation or acceleration or loss of any right or benefit of CEI or NEWCO.
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6.10 VALIDITY OF OBLIGATIONS. The execution and delivery of this
Agreement by CEI and NEWCO and the performance by them of the transactions
contemplated hereby have been duly and validly authorized by the respective
Boards of Directors of CEI and NEWCO and this Agreement has been duly and
validly authorized by all necessary corporate action and is a legal, valid and
binding obligation of CEI and NEWCO.
6.11 CEI STOCK. At the time of issuance thereof, the CEI Stock to be
delivered to the STOCKHOLDERS pursuant to this Agreement will constitute valid
and legally issued shares of CEI, fully paid and nonassessable, and with the
exception of restrictions upon resale set forth in Sections 15 and 16 hereof,
will be identical in all material and substantive respects to the CEI Stock
issued and outstanding as of the date hereof by reason of the provisions of the
Delaware GCL. The shares of CEI Stock to be issued to the STOCKHOLDERS pursuant
to this Agreement will not be registered under the 1933 Act, except as provided
in Section 17 hereof.
6.12 NO SIDE AGREEMENTS. Except with respect to the Schedules and the
merger consideration payable at the Effective Time of the Merger, the Other
Agreements are substantially identical to this Agreement in all material
respects. Neither CEI nor NEWCO has entered or will enter into any agreement
with any of the Founding Companies or any of the stockholders of the Founding
Companies or CEI other than the Other Agreements and the agreements contemplated
by each of the Other Agreements, including the employment agreements referred to
therein.
6.13 BUSINESS; REAL PROPERTY; MATERIAL AGREEMENTS. Neither CEI nor
NEWCO has conducted any operations or business since inception other than
activities related to the CEI Plan of Organization. Neither CEI nor NEWCO owns
or has at any time owned any real property or any material personal property or
is a party to any other agreement, except as listed on Schedule 6.13 and except
that CEI is a party to the Other Agreements and the agreements contemplated
thereby and to certain agreements which will be filed as Exhibits to the
Registration Statement.
6.14 TAXES. NEWCO is a newly formed entity which has no tax or
operational history. Except as set forth on Schedule 6.14:
(i) All Returns required to have been filed by or with respect to
CEI and any affiliated, combined, consolidated, unitary or similar
group of which CEI is or was a
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member (a "CEI Relevant Group") with any Taxing Authority have been
duly filed, and each such Return correctly and completely reflects the
Tax liability and all other information required to be reported
thereon. All Taxes (whether or not shown on any Return) owed by the
CEI Relevant Group have been paid.
(ii) The provisions for Taxes due by CEI and any subsidiaries (as
opposed to any reserve for deferred Taxes established to reflect
timing differences between book and Tax income) in the CEI Financial
Statements are sufficient for all unpaid Taxes, being current taxes
not yet due and payable, of the CEI Relevant Group.
(iii) No corporation in the CEI Relevant Group is a party to any
agreement extending the time within which to file any Return. No claim
has ever been made by any Taxing Authority in a jurisdiction in which
a corporation in the CEI Relevant Group does not file Returns that it
is or may be subject to taxation by that jurisdiction.
(iv) Each corporation in the CEI Relevant Group has withheld and
paid all Taxes required to have been withheld and paid in connection
with amounts paid or owing to any employee, creditor, independent
contractor or other third party.
(v) No corporation in the CEI Relevant Group expects any Taxing
Authority to assess any additional Taxes against or in respect of it
for any past period. There is no dispute or claim concerning any Tax
liability of any corporation in the CEI Relevant Group either (i)
Claimed or raised by any Taxing Authority or (ii) otherwise known to
any corporation in the CEI Relevant Group. No issues have been raised
in any examination by any Taxing Authority with respect to any
corporation in the CEI Relevant Group which, by application of similar
principles, reasonably could be expected to result in a proposed
deficiency for any other period not so examined. Schedule 6.14(v)
attached hereto lists all federal, state, local and foreign income Tax
Returns filed by or with respect to any corporation in the CEI
Relevant Group for all taxable periods, indicates those Returns, if
any, that have been audited, and indicates those Returns that
currently are the subject of audit. Each corporation in the CEI
Relevant Group will make available to the STOCKHOLDERS, at their
request, complete and correct copies of all federal,
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state, local and foreign income Tax Returns filed by, and all Tax
examination reports and statements of deficiencies assessed against or
agreed to by, CEI.
(vi) No corporation in the CEI Relevant Group has waived any
statute of limitations in respect of Taxes or agreed to any extension
of time with respect to any Tax assessment or deficiency.
(vii) No corporation in the CEI Relevant Group has made any
payments, is obligated to make any payments, or is a party to any
agreement that under certain circumstances could require it to make
any payments, that are not deductible under Section 280G the Code.
(viii) No corporation in the CEI Relevant Group is a party to any
Tax allocation or sharing agreement.
(ix) None of the assets of any corporation in the CEI Relevant
Group constitutes tax-exempt bond financed property or tax-exempt use
property, within the meaning of Section 168 of the Code. No
corporation in the CEI Relevant Group is a party to any "safe harbor
lease" that is subject to the provisions of Section 168(f)(8) of the
Internal Revenue Code as in effect prior to the Tax Reform Act of
1986, or to any "long-term contract" within the meaning of Section 460
of the Code.
(x) No corporation in the CEI Relevant Group is a "consenting
corporation" within the meaning of Section 341(f)(1) of the Code, or
comparable provisions of any state statutes, and none of the assets of
any corporation in the CEI Relevant Group is subject to an election
under Section 341(f) of the Code or comparable provisions of any state
statutes.
(xi) No corporation in the CEI Relevant Group is a party to any
joint venture, partnership or other arrangement that is treated as a
partnership for federal income Tax purposes.
(xii) There are no accounting method changes or proposed or
threatened accounting method changes, of any corporation in the CEI
Relevant Group that could give rise to an adjustment under Section 481
of the Code for periods after the Funding and Consummation Date.
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(xiii) No corporation in the CEI Relevant Group has received any
written ruling of a Taxing Authority related to Taxes or entered into
any written and legally binding agreement with a Taxing Authority
relating to Taxes.
(xiv) Each corporation in the CEI Relevant Group has disclosed
(in accordance with Section 6662(d)(2)(B)(ii) of the Code) on its
federal income Tax Returns all positions taken therein that could give
rise to a substantial understatement of federal income Tax within the
meaning of Section 6662(d) of the Code.
(xv) No corporation in the CEI Relevant Group has any liability
for Taxes of any person other than such corporation in the CEI
Relevant Group (i) under Section 1.1502-6 of the Treasury regulations
(or any similar provision of state, local or foreign law), (ii) as a
transferee or successor, (iii) by contract or (iv) otherwise.
(xvi) There currently are no limitations on the utilization of
the net operating losses, built-in losses, capital losses, Tax credits
or other similar items of any corporation in the CEI Relevant Group
under (i) Section 382 of the Code, (ii) Section 383 of the Code, (iii)
Section 384 of the Code, (iv) Section 269 of the Code, (v) Section
1.1502-15 and Section 1.1502-15A of the Treasury regulations, (vi)
Section 1.1502-21 and Section 1.1502-21A of the Treasury regulations
or (vii) sections 1.1502-91 through 1.1502-99 of the Treasury
regulations, in each case as in effect both prior to and following the
Tax Reform Act of 1986.
(xvii) Neither CEI nor NEWCO is an investment company as defined
in Section 351(e)(1) of the Code.
(xviii) Neither CEI nor NEWCO is under the jurisdiction of a
court in a Title 11 or similar case within the meaning of Section
351(e)(2) of the Code.
After giving effect to the Merger, the fair saleable value of the
business and assets of CEI and its subsidiaries will be in excess of the amount
that will be required to pay its principal liabilities on existing debts as they
become due and payable in accordance with their terms.
7. COVENANTS PRIOR TO CLOSING
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7.1 ACCESS AND COOPERATION; DUE DILIGENCE.(a) Between the date of this
Agreement and the Funding and Consummation Date, the COMPANY will afford to the
officers and authorized representatives of CEI and the Other Founding Companies
reasonable access, during normal business hours, to all of the COMPANY's sites,
properties, books and records and will furnish CEI with such additional
financial and operating data and other information as to the business and
properties of the COMPANY as CEI or the Other Founding Companies may from time
to time reasonably request. The COMPANY will cooperate with CEI and the Other
Founding Companies and their respective representatives, including CEI's
auditors and counsel, in the preparation of any documents or other material
(including the Registration Statement) which may be required in connection with
the transactions contemplated by this Agreement. CEI, NEWCO, the STOCKHOLDERS
and the COMPANY will treat all information obtained in connection with the
negotiation and performance of this Agreement or the due diligence
investigations conducted with respect to the Other Founding Companies as
confidential in accordance with the provisions of Section 14 hereof. In
addition, CEI will cause each of the Other Agreements, binding each of the Other
Founding Companies, to contain a provision similar to this Section 7.1 and a
provision similar to Section 14 requiring each such Other Founding Company, its
stockholders, directors, officers, representatives, employees and agents to keep
confidential any information obtained by such Other Founding Company and to
provide the COMPANY with reasonable access and information as will be provided
by the COMPANY pursuant to this Section 7.1(a).
(b) Between the date of this Agreement and the Funding and Consummation
Date, CEI will afford to the officers and authorized representatives of the
COMPANY access to all of CEI's and NEWCO's sites, properties, books and records
and will furnish the COMPANY with such additional financial and operating data
and other information as to the business and properties of CEI and NEWCO as the
COMPANY may from time to time reasonably request. CEI and NEWCO will cooperate
with the COMPANY, its representatives, auditors and counsel in the preparation
of any documents or other material which may be required in connection with the
transactions contemplated by this Agreement. The COMPANY will cause all
information
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obtained in connection with the negotiation and performance of this Agreement to
be treated as confidential in accordance with the provisions of Section 14
hereof.
7.2 CONDUCT OF BUSINESS PENDING CLOSING. Between the date of this
Agreement and the Funding and Consummation Date, the COMPANY will, except as set
forth on Schedule 7.2:
(i) carry on its business in the ordinary course substantially as
conducted heretofore and not introduce any new method of management,
operation or accounting;
(ii) maintain its properties and facilities, including those held
under leases, in as good working order and condition as at present,
ordinary wear and tear excepted;
(iii) perform in all material respects its obligations under
agreements relating to or affecting its assets, properties or rights;
(iv) keep in full force and effect present insurance policies or
other comparable insurance coverage;
(v) maintain and preserve its business organization intact and
use its best efforts to retain its present key employees and
relationships with suppliers, customers and others having business
relations with the COMPANY;
(vi) maintain compliance with all permits, laws, rules and
regulations, consent orders, and all other orders of applicable
courts, regulatory agencies and similar governmental authorities;
(vii) maintain present debt and lease instruments in accordance
with their respective terms and not enter into new or amended debt or
lease instruments, provided that debt and/or lease instruments may be
replaced if such replacement instruments are on terms at least as
favorable to the COMPANY as the instruments being replaced; and
(viii) maintain or reduce present salaries and commission levels
for all officers, directors, employees and agents, except for ordinary
and customary bonus and salary increases for employees in accordance
with past practices.
7.3 PROHIBITED ACTIVITIES. Except as disclosed on Schedule 7.3, between
the date hereof and the Funding and Consummation Date, the COMPANY will not,
without prior written consent of CEI:
(i) make any change in its Articles or Certificate of
Incorporation or By-laws;
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(ii) grant or issue any securities, options, warrants, calls,
conversion rights or commitments of any kind relating to its
securities of any kind other than in connection with the exercise of
options or warrants listed on Schedule 5.4;
(iii) declare or pay any dividend, or make any distribution in
respect of its stock whether now or hereafter outstanding, or
purchase, redeem or otherwise acquire or retire for value any shares
of its stock;
(iv) enter into any contract or commitment or incur or agree to
incur any liability or make any capital expenditure, except if it is
in the ordinary course of business (consistent with past practice) and
involves an amount not in excess of $10,000;
(v) create, assume or permit to exist any mortgage, pledge or
other lien or encumbrance upon any assets or properties whether now
owned or hereafter acquired, except (1) with respect to purchase money
liens incurred in connection with the acquisition of equipment with an
aggregate cost not in excess of $10,000 necessary or desirable for the
conduct of the business of the COMPANY, (2) (A) liens for taxes either
not yet due or being contested in good faith and by appropriate
proceedings (and for which adequate reserves have been established and
are being maintained) or (B) materialmen's, mechanics', workers',
repairmen's, employees' or other like liens arising in the ordinary
course of business (the liens set forth in clause (2) being referred
to herein as "Statutory Liens"), or (3) liens set forth on Schedule
5.10 or 5.15 hereto;
(vi) sell, assign, lease or otherwise transfer or dispose of any
property or equipment except in the ordinary course of business;
(vii) negotiate for the acquisition of any business or the
start-up of any new business;
(viii) merge or consolidate or agree to merge or consolidate with
or into any other corporation;
(ix) waive any material right or claim of the COMPANY, provided
that the COMPANY may negotiate and adjust bills in the course of good
faith disputes with customers in a manner consistent with past
practice, provided, further, that such
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adjustments shall not be deemed to be included on Schedule 5.11 unless
specifically listed thereon;
(x) commit a material breach or amend or terminate any material
contract, agreement, permit, license or other right to which the
COMPANY is a party or as to which it is a beneficiary; or
(xi) enter into any other transaction outside the ordinary course
of its business or prohibited hereunder.
7.4 NO SHOP . None of the STOCKHOLDERS or the COMPANY, nor any agent,
officer, director, trustee or any representative of any of the foregoing will,
during the period commencing on the date of this Agreement and ending with the
earlier to occur of the Funding and Consummation Date or the termination of this
Agreement in accordance with its terms, directly or indirectly: solicit or
initiate the submission of proposals or offers from any person for, participate
in any discussion pertaining to, or furnish any information to any person other
than CEI or its authorized agents relating to, any acquisition or purchase of
all or a material amount of the assets of, or any equity interest in, the
COMPANY or a merger, consolidation or business combination of the COMPANY.
7.5 NOTICE TO BARGAINING AGENTS. Prior to the Closing Date, the COMPANY
shall satisfy any requirement for notice of the transactions contemplated by
this Agreement under applicable collective bargaining agreements. Set forth on
Schedule 7.5 is a copy of such required notice, as sent.
7.6 AGREEMENTS. The STOCKHOLDERS and the COMPANY shall terminate (i)
any stockholders' agreements, voting agreements, voting trusts, options,
warrants and employment agreements between the COMPANY and any employee listed
on Schedule 9.12 hereto (other than the new employment agreements contemplated
by Section 9.12) and (ii) any existing agreement between the COMPANY and any
STOCKHOLDER, on or prior to the Funding and Consummation Date. A list of such
termination agreements is set forth on Schedule 7.6 and copies of each such
agreement are attached thereto.
7.7 NOTIFICATION OF CERTAIN MATTERS. The STOCKHOLDERS and the COMPANY
shall give prompt notice to CEI of (i) the occurrence or non-occurrence of any
event the
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occurrence or non-occurrence of which would be likely to cause any
representation or warranty of the COMPANY or the STOCKHOLDERS contained herein
to be untrue or inaccurate in any material respect at or prior to the Closing
and (ii) any material failure of any STOCKHOLDER or the COMPANY to comply with
or satisfy any covenant, condition or agreement to be complied with or satisfied
by such person hereunder. CEI and NEWCO shall give prompt notice to the COMPANY
of (i) the occurrence or non-occurrence of any event the occurrence or
non-occurrence of which would be likely to cause any representation or warranty
of CEI or NEWCO contained herein to be untrue or inaccurate in any material
respect at or prior to the Closing and (ii) any material failure of CEI or NEWCO
to comply with or satisfy any covenant, condition or agreement to be complied
with or satisfied by it hereunder. The delivery of any notice pursuant to this
Section 7.7 shall not be deemed to (i) modify the representations or warranties
hereunder of the party delivering such notice, which modification may only be
made pursuant to Section 7.8, (ii) modify the conditions set forth in Sections 8
and 9, or (iii) limit or otherwise affect the remedies available hereunder to
the party receiving such notice.
7.8 AMENDMENT OF SCHEDULES. (a) Each party hereto agrees that, with
respect to the representations and warranties of such party contained in this
Agreement, such party shall have the continuing obligation until the Funding and
Consummation Date to supplement or amend promptly the Schedules hereto with
respect to any matter hereafter arising or discovered which, if existing or
known at the date of this Agreement, would have been required to be set forth or
described in the Schedules, provided however, that supplements and amendments to
Schedules 5.10, 5.11, 5.14 and 5.15 shall only have to be delivered at the
Closing Date, unless such Schedule is to be amended to reflect an event
occurring other than in the ordinary course of business.
(b) Until 24 hours prior to the anticipated effectiveness of the
Registration Statement, and notwithstanding the foregoing clause (a), the
provisions of this clause (b) shall apply: no amendment or supplement to a
Schedule prepared by the COMPANY or the STOCKHOLDERS that constitutes or
reflects an event or occurrence that would have a Material Adverse Effect may be
made unless CEI and a majority of the Founding Companies other than the COMPANY
consent to such amendment or supplement; and provided further, that no
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amendment or supplement to a Schedule prepared by CEI or NEWCO that constitutes
or reflects an event or occurrence that would have a Material Adverse Effect may
be made unless a majority of the Founding Companies consent to such amendment or
supplement. In the event that one of the Other Founding Companies seeks to amend
or supplement a Schedule pursuant to Section 7.8 of one of the Other Agreements,
and such amendment or supplement constitutes or reflects an event or occurrence
that would have a Material Adverse Effect on such Other Founding Company, CEI
shall give the COMPANY notice promptly after it has knowledge thereof. If CEI
and a majority of the Founding Companies consent to such amendment or
supplement, which consent shall have been deemed given by CEI or any Founding
Company if no response is received from CEI or any such Founding Company within
24 hours following receipt of notice of such amendment or supplement (or sooner
if required by the circumstances under which such consent is requested), but the
COMPANY does not give its consent, the COMPANY may terminate this Agreement
pursuant to Section 12.1(iv) hereof. In the event that the COMPANY seeks to
amend or supplement a Schedule pursuant to this Section 7.8 and CEI and a
majority of the Other Founding Companies do not consent to such amendment or
supplement, this Agreement shall be deemed terminated by mutual consent as set
forth in Section 12.1(i) hereof. In the event that CEI or NEWCO seeks to amend
or supplement a Schedule pursuant to this Section 7.8 and a majority of the
Founding Companies do not consent to such amendment or supplement, this
Agreement shall be deemed terminated by mutual consent as set forth in Section
12.1(i) hereof.
(c) Between 24 hours prior to the anticipated effectiveness of the
Registration Statement and the Funding and Consummation Date, the provisions of
this clause (c) shall apply. No amendment or supplement to a Schedule prepared
by the COMPANY or the STOCKHOLDERS that constitutes or reflects an event or
occurrence that would have a Material Adverse Effect may be made unless CEI
consents to such amendment or supplement after consultation with the
Underwriters. CEI and NEWCO hereby covenant that neither CEI nor NEWCO will
amend or supplement any Schedule prepared by CEI or NEWCO that constitutes or
reflects an event or occurrence that would have a Material Adverse Effect on CEI
or NEWCO, as the case may be,
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without consulting with the Underwriters, and CEI shall provide immediate notice
of such amendment or supplement to the Founding Companies.
(d) For all purposes of this Agreement, including without limitation
for purposes of determining whether the conditions set forth in Sections 8.1 and
9.1 have been fulfilled, the Schedules hereto shall be deemed to be the
Schedules as amended or supplemented pursuant to this Section 7.8. No party to
this Agreement shall be liable to any other party if this Agreement shall be
terminated pursuant to the provisions of this Section 7.8, except that,
notwithstanding anything to the contrary contained in this Agreement, if the
COMPANY or the STOCKHOLDERS on the one hand, or CEI or NEWCO on the other hand,
amends or supplements a Schedule which results in a termination of this
Agreement and such amendment or supplement arises out of or reflects facts or
circumstances which such party knew about at the time of execution of this
Agreement and knew would result in a termination of this Agreement or if such
amendment or supplement otherwise is proposed in bad faith, such party shall pay
or reimburse CEI or the COMPANY and the STOCKHOLDERS, as the case may be, for
all of the legal, accounting and other out of pocket costs reasonably incurred
in connection with this Agreement and the IPO as it relates to CEI, the COMPANY
and the STOCKHOLDERS.
7.9 COOPERATION IN PREPARATION OF REGISTRATION STATEMENT. The COMPANY
and STOCKHOLDERS shall furnish or cause to be furnished to CEI and the
Underwriters all of the information concerning the COMPANY and the STOCKHOLDERS
requested by CEI or the Underwriters for inclusion in, and will cooperate with
CEI and the Underwriters in the preparation of, the Registration Statement and
the prospectus included therein (including audited and unaudited financial
statements, prepared in accordance with generally accepted accounting
principles, in form suitable for inclusion in the Registration Statement). The
COMPANY and the STOCKHOLDERS agree promptly to advise CEI if at any time during
the period in which a prospectus relating to the offering is required to be
delivered under the Securities Act, any information contained in the prospectus
concerning the COMPANY or the STOCKHOLDERS contains any untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and to provide the
information needed to correct such inaccuracy. Insofar as the information
relates solely to the
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COMPANY or the STOCKHOLDERS, the COMPANY represents and warrants as to such
information with respect to itself, and each STOCKHOLDER represents and
warrants, as to such information with respect to the COMPANY and himself or
herself, that the Registration Statement at its effective date, at the date of
the Final Prospectus (as defined in the Underwriting Agreement), the Preliminary
Prospectus (as defined in the Underwriting Agreement), and each amendment to the
Registration Statement, and at each closing date with respect to the IPO under
the Underwriting Agreement (including with respect to any over-allotment option)
will not include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not misleading.
7.10 FINAL FINANCIAL STATMENTS. The COMPANY shall provide prior to the
Funding and Consummation Date, and CEI shall have had sufficient time prior
thereto to review, the unaudited consolidated balance sheets of the COMPANY as
of the end of each fiscal quarter following the Balance Sheet Date that ends at
least 45 days prior to the Funding and Consummation Date, and the unaudited
consolidated statements of income, cash flows and retained earnings of the
COMPANY for all fiscal quarters ended after the Balance Sheet Date, disclosing
no material adverse change in the financial condition of the COMPANY or the
results of its operations from the financial statements as of the Balance Sheet
Date. Such financial statements shall have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods indicated (except as noted therein). Except as noted in
such financial statements, all of such financial statements will present fairly
the results of operations of the COMPANY for the periods indicated thereon.
7.11 FURTHER ASSURANCES. The parties hereto agree to execute and
deliver, or cause to be executed and delivered, such further instruments or
documents or take such other action as may be reasonably necessary or convenient
to carry out the transactions contemplated hereby.
7.12 AUTHORIZED CAPITAL. CEI shall maintain its authorized capital
stock as set forth in the Registration Statement filed with the SEC except for
such changes in authorized capital stock as are made to respond to comments made
by the SEC or requirements of any exchange or automated trading system for which
application is made to register the CEI Stock.
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8. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY
The obligations of the STOCKHOLDERS and the COMPANY with respect to
actions to be taken on the Closing Date and, to the extent specified in this
Section 8, on the Funding and Consummation Date, are subject to the satisfaction
or waiver on or prior to the Closing Date and/or the Funding and Consummation
Date, as the case may be, of all of the conditions set forth in this Section 8.
As of the Closing Date or the Funding and Consummation Date, as the case may be,
all conditions not satisfied shall be deemed to have been waived by the COMPANY
and the STOCKHOLDERS unless such parties have objected by notifying CEI in
writing of such objection on or before the closing on the Closing Date or
consummation of the transactions on the Funding and Consummation Date,
respectively, except that no such waiver shall be deemed to affect the survival
of the representations and warranties of CEI and NEWCO contained in Section 6
hereof.
8.1 REPRESENTATIONS AND WARRANTIES. All representations and warranties
of CEI and NEWCO contained in Section 6 (as amended by any amendment or
supplement to a Schedule that has received their requisite consents contemplated
by Section 7.8) shall be true and correct in all material respects as of the
Closing Date as though such representations and warranties had been made as of
that time; and a certificate to the foregoing effect dated the Closing Date and
signed by the President or any Vice President of CEI shall have been delivered
to the STOCKHOLDERS.
8.2 PERFORMANCE OF OBLIGATIONS. All of the terms, covenants and
conditions of this Agreement to be complied with and performed by CEI and NEWCO
on or before each of the Closing Date and the Funding and Consummation Date
shall have been duly complied with and performed in all material respects on or
before each of the Closing Date and the Funding and Consummation Date, as the
case may be; and certificates to the foregoing effect dated each of the Closing
Date and the Funding and Consummation Date and signed by the President or any
Vice President of CEI shall have been delivered to the STOCKHOLDERS.
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8.3 NO LITIGATION. No action or proceeding before a court or any other
governmental agency or body shall have been instituted or threatened to restrain
or prohibit the Merger or the IPO and no governmental agency or body shall have
taken any other action or made any request of the COMPANY as a result of which
the management of the COMPANY deems it inadvisable to proceed with the
transactions hereunder.
8.4 OPINION OF COUNSEL. The COMPANY shall have received an opinion from
counsel for CEI, dated the Closing Date, in the form annexed hereto as Annex VI.
8.5 REGISTRATION STATEMENT. The Registration Statement shall have been
declared effective by the SEC and no stop order suspending the effectiveness of
the Registration Statement shall be in effect and no proceeding therefor shall
have been instituted or shall be pending or contemplated under the 1933 Act and
the Underwriters shall have agreed to acquire on a firm commitment basis,
subject to the conditions set forth in the Underwriting Agreement, on terms such
that the aggregate value of the cash and the number of shares of CEI Stock to be
received by the STOCKHOLDERS is not less than the Minimum Value set forth on
Annex III.
8.6 CONSENTS AND APPROVALS. All necessary consents of and filings with
any governmental authority or agency relating to the consummation of the
transactions contemplated herein shall have been obtained and made.
8.7 GOOD STANDING CERTIFICATES. CEI and NEWCO each shall have delivered
to the COMPANY a certificate, dated as of a date no earlier than five days prior
to the Closing Date, duly issued by the Delaware Secretary of State and in each
state in which CEI or NEWCO is authorized to do business, showing that each of
CEI and NEWCO is in good standing and authorized to do business and that all
state franchise and/or income tax returns and taxes for CEI and NEWCO,
respectively, for all periods prior to the Closing have been filed and paid.
8.8 NO MATERIAL ADVERSE CHANGE. No event or circumstance shall have
occurred with respect to CEI or NEWCO which would constitute a Material Adverse
Effect.
8.9 CLOSING OF IPO. The closing of the sale of the CEI Stock to the
Underwriters in the IPO shall have occurred simultaneously with the Funding and
Consummation Date hereunder.
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8.10 SECRETARY'S CERTIFICATE. The COMPANY shall have received a
certificate or certificates, dated the Closing Date and the Funding and
Consummation Date and signed by the secretary of CEI and of NEWCO, certifying
the truth and correctness of attached copies of the CEI's and NEWCO's respective
Certificates of Incorporation (including amendments thereto), By-Laws (including
amendments thereto), and resolutions of the boards of directors and, if
required, the stockholders of CEI and NEWCO approving CEI's and NEWCO's entering
into this Agreement and the consummation of the transactions contemplated
hereby.
8.11 EMPLOYMENT AGREEMENTS. Each of the persons listed on Schedule 9.12
shall have been afforded the opportunity to enter into an employment agreement
substantially in the form of Annex VIII hereto.
8.12 RELEASE . The stockholders of CEI shall have delivered to CEI an
instrument, dated the Closing Date, releasing CEI from any and all (i) claims of
such stockholders against CEI and (ii) obligations of CEI to such stockholders,
except for (x) items specifically identified on Schedule 8.12, (y) continuing
obligations to such stockholders relating to their employment by CEI and (z)
obligations arising under this Agreement or the transactions contemplated
hereby.
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF CEI AND NEWCO
The obligations of CEI and NEWCO with respect to actions to be taken on
the Closing Date and, to the extent specified in this Section 9, on the Funding
and Consummation Date, are subject to the satisfaction or waiver on or prior to
the Closing Date and/or the Funding and Consummation Date, as the case may be,
of all of the conditions set forth in this Section 9. As of the Closing Date or
the Funding and Consummation Date, as the case may be, all conditions not
satisfied shall be deemed to have been waived by CEI and NEWCO unless such
parties have objected by notifying the COMPANY and the STOCKHOLDERS in writing
of such objection on or before the closing on the Closing Date or consummation
of the transactions on the Funding and Consummation Date, respectively, except
that no such waiver shall be deemed to affect the survival of the
representations and warranties of the COMPANY and the STOCKHOLDERS contained in
Section 5 hereof.
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9.1 REPRESENTATIONS AND WARRANTIES. All the representations and
warranties of the STOCKHOLDERS and the COMPANY contained in this Agreement (as
amended by any amendment or supplement to a Schedule that has received the
requisite consents contemplated by Section 7.8) shall be true and correct in all
material respects as of the Closing Date and the Funding and Consummation Date
with the same effect as though such representations and warranties had been made
on and as of such date; and the STOCKHOLDERS shall have delivered to CEI
certificates dated the Closing Date and signed by them to such effect.
9.2 PERFORMANCE OF OBLIGATIONS. All of the terms, covenants and
conditions of this Agreement to be complied with or performed by the
STOCKHOLDERS and the COMPANY on or before each of the Closing Date and the
Funding and Consummation Date shall have been duly performed or complied with in
all material respects on or before each of the Closing Date and the Funding and
Consummation Date, as the case may be; and the STOCKHOLDERS shall have delivered
to CEI certificates dated the Closing Date and the Funding and Consummation
Date, respectively, and signed by them to such effect.
9.3 NO LITIGATION. No action or proceeding before a court or any other
governmental agency or body shall have been instituted or threatened to restrain
or prohibit the Merger or the IPO and no governmental agency or body shall have
taken any other action or made any request of CEI as a result of which the
management of CEI deems it inadvisable to proceed with the transactions
hereunder.
9.4 SECRETARY'S CERTIFICATE. CEI shall have received a certificate or
certificates, dated each of the Closing Date and the Funding and Consummation
Date and signed by the secretary of the COMPANY, certifying the truth and
correctness of attached copies of the COMPANY's Certificate or Articles of
Incorporation (including amendments thereto), By-Laws (including amendments
thereto), and resolutions of the board of directors and the STOCKHOLDERS
approving the COMPANY's entering into this Agreement and the consummation of the
transactions contemplated hereby.
9.5 NO MATERIAL ADVERSE CHANGE. As of the Closing Date and as of the
Funding and Consummation Date, no event or circumstance shall have occurred with
respect to the COMPANY which would constitute a Material Adverse Effect, and the
COMPANY shall not
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have suffered any material loss or damages to any of its properties or assets,
whether or not covered by insurance, which change, loss or damage materially
affects or impairs the ability of the COMPANY to conduct its business.
9.6 STOCKHOLDERS' RELEASE. The STOCKHOLDERS shall have delivered to CEI
an instrument dated the Closing Date releasing the COMPANY from any and all (i)
claims of the STOCKHOLDERS against the COMPANY and CEI and (ii) obligations of
the COMPANY and CEI to the STOCKHOLDERS, except for (x) items specifically
identified on Schedules 5.10 and 5.15 as being claims of or obligations to the
STOCKHOLDERS, (y) continuing obligations to the STOCKHOLDERS relating to their
employment by the COMPANY and (z) obligations arising under this Agreement or
the transactions contemplated hereby.
9.7 TERMINATION OF RELATED PARTY AGREEMENTS. Except as set forth on
Schedule 9.7, or as contemplated by Section 9.12, all existing agreements
between the COMPANY and the STOCKHOLDERS shall have been cancelled effective
prior to or as of the Funding and Consummation Date.
9.8 OPINION OF COUNSEL. CEI shall have received an opinion from Counsel
to the COMPANY and the STOCKHOLDERS, dated the Closing Date and including a
statement to the effect that it may be relied upon as of the Funding and
Consummation Date, substantially in the form annexed hereto as Annex VII, and
the Underwriters shall have received a copy of the same opinion addressed to
them.
9.9 CONSENTS AND APPROVALS. All necessary consents of and filings with
any governmental authority or agency relating to the consummation of the
transactions contemplated herein shall have been obtained and made and all
consents and approvals of third parties listed on Schedule 5.23 shall have been
obtained.
9.10 GOOD STANDING CERTIFICATES. The COMPANY shall have delivered to
CEI a certificate, dated as of a date no earlier than five days prior to the
Closing Date, duly issued by the appropriate governmental authority in the
COMPANY's state of incorporation and, unless waived by CEI, in each state in
which the COMPANY is authorized to do business, showing the COMPANY is in good
standing and authorized to do business and that all state franchise and/or
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income tax returns and taxes for the COMPANY for all periods prior to the
Closing have been filed and paid.
9.11 REGISTRATION STATEMENT. The Registration Statement shall have been
declared effective by the SEC.
9.12 EMPLOYMENT AGREEMENT. Each of the persons listed on Schedule 9.12
shall have entered into an employment agreement substantially in the form of
Annex VIII hereto.
9.13 CLOSING OF IPO. The closing of the sale of the CEI Stock to the
Underwriters in the IPO shall have occurred simultaneously with the Funding and
Consummation Date hereunder.
9.14 FIRPTA CERTIFICATE. Each STOCKHOLDER shall have delivered to CEI a
certificate to the effect that he or she is not a foreign person pursuant to
Section 1.1445-2(b) of the Treasury regulations.
10. COVENANTS OF CEI AND THE STOCKHOLDERS AFTER CLOSING
10.1 RELEASE FROM GUARANTEES; REPAYMENT OF CERTAIN OBLIGATIONS. CEI
shall use its best efforts to have the STOCKHOLDERS released from any and all
guarantees on any indebtedness that they personally guaranteed and from any and
all pledges of assets that they pledged to secure such indebtedness for the
benefit of the COMPANY, with all such guarantees on indebtedness being assumed
by CEI. In the event that CEI cannot obtain such releases from the lenders of
any such guaranteed indebtedness on or prior to 180 days subsequent to the
Funding and Consummation Date, CEI shall pay off or otherwise refinance or
retire such indebtedness.
10.2 PRESERVATION OF TAX AND ACCOUNTING TREATMENT. Except as
contemplated by this Agreement or the Registration Statement, after the Funding
and Consummation Date, CEI shall not and shall not permit any of its
subsidiaries to undertake any act that would jeopardize the tax-free status of
the organization, including liquidate or merge the COMPANY into CEI.
10.3 PREPARATION AND FILING OF TAX RETURNS.
(i) The COMPANY shall, if possible, file or cause to be filed all
separate Returns of any Acquired Party for all taxable periods that
end on or before the Funding and
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Consummation Date. Each STOCKHOLDER shall pay or cause to be paid all
Tax liabilities (in excess of all amounts already paid with respect
thereto or properly accrued or reserved with respect thereto on the
COMPANY Financial Statements) shown by such Returns to be due.
(ii) CEI shall file or cause to be filed all separate Returns of,
or that include, any Acquired Party for all taxable periods ending
after the Funding and Consummation Date.
(iii) Each party hereto shall, and shall cause its subsidiaries
and affiliates to, provide to each of the other parties hereto such
cooperation and information as any of them reasonably may request in
filing any Return, amended Return or claim for refund, determining a
liability for Taxes or a right to refund of Taxes or in conducting any
audit or other proceeding in respect of Taxes. Such cooperation and
information shall include providing copies of all relevant portions of
relevant Returns, together with relevant accompanying schedules and
relevant work papers, relevant documents relating to rulings or other
determinations by Taxing Authorities and relevant records concerning
the ownership and Tax basis of property, which such party may possess.
Each party shall make its employees reasonably available on a mutually
convenient basis at its cost to provide explanation of any documents
or information so provided. Subject to the preceding sentence, each
party required to file Returns pursuant to this Agreement shall bear
all costs of filing such Returns.
(iv) Each of the COMPANY, NEWCO, CEI and each STOCKHOLDER shall
comply with the tax reporting requirements of Section 1.351-3 of the
Treasury Regulations promulgated under the Code, and treat the
transaction as a transfer of property under Section 351(a) of the
Code.
10.4 DIRECTORS AND OFFICERS. The persons named in the registration
statement shall be appointed as directors and elected as officers of CEI, as and
to the extent set forth in the registration statement, promptly following the
Funding and Consummation Date.
10.5 PRESERVATION OF EMPLOYEE BENEFIT PLANS. Following the Funding and
Consummation Date, CEI shall not terminate any health insurance, life insurance
or 401(k) plan in effect at the COMPANY until such time as CEI is able to
replace such plan with a plan that is
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applicable to CEI and all of its then existing subsidiaries. CEI shall have no
obligation to provide replacement plans that have the same terms and provisions
as the existing plans, provided, that any new health insurance plan shall
provide for coverage for preexisting conditions.
11. INDEMNIFICATION
The STOCKHOLDERS, CEI and NEWCO each make the following covenants that
are applicable to them, respectively:
11.1 GENERAL INDEMNIFICATION BY THE STOCKHOLDERS. The STOCKHOLDERS
covenant and agree that they, jointly and severally, will indemnify, defend,
protect and hold harmless CEI, NEWCO, the COMPANY and the Surviving Corporation
at all times, from and after the date of this Agreement until the Expiration
Date, from and against all claims, damages, actions, suits, proceedings,
demands, assessments, adjustments, costs and expenses (including specifically,
but without limitation, reasonable attorneys' fees and reasonable expenses of
investigation) incurred by CEI, NEWCO, the COMPANY or the Surviving Corporation
as a result of or arising from (i) any breach of the representations and
warranties of the STOCKHOLDERS or the COMPANY set forth herein (as amended by
any amendment or supplement to a Schedule that has received the requisite
consents contemplated by Section 7.8) or on the schedules or certificates
delivered in connection herewith as of the date made and as of the date any such
representations and warranties are re-confirmed, (ii) any breach on the part of
the STOCKHOLDERS or the COMPANY of any agreement under this Agreement, (iii) any
liability under the 1933 Act, the 1934 Act or other Federal or state law or
regulation, at common law or otherwise, either (1) arising out of or based upon
any untrue statement of a material fact relating to the COMPANY or the
STOCKHOLDERS, and provided to CEI or its counsel by the COMPANY or the
STOCKHOLDERS for inclusion in the Registration Statement or any prospectus
forming a part thereof, or any amendment thereof or supplement thereto, or (2)
arising out of or based upon any omission to state therein a material fact
relating to the COMPANY or the STOCKHOLDERS required to be stated therein or
necessary to make the statements therein not misleading, (iv) the matters
described on Schedule 11.1(iv) or (v) any Tax imposed upon or
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relating to any third party for a pre-Funding and Consummation Date period,
including, in each case, any such Tax for which an Acquired Party may be liable
under Section 1.1502-6 of the Treasury Regulations (or any similar provisions of
state, local of foreign law), as a transferee or successor, by contract or
otherwise, provided, however, (A) that in the case of any indemnity arising
pursuant to clause (iii), such indemnity shall not inure to the benefit of CEI,
NEWCO, the COMPANY or the Surviving Corporation to the extent that such untrue
statement was made in, or omission occurred in, any preliminary prospectus and
the STOCKHOLDERS provided, in writing, corrected information to CEI counsel and
to CEI for inclusion in the final prospectus, and such information was not so
included or properly delivered, and (B) that no STOCKHOLDER shall be liable for
any indemnification obligation pursuant to this Section 11.1 to the extent
attributable to a breach of any representation, warranty or agreement made
herein individually by any other STOCKHOLDER.
11.2 INDEMNIFICATION BY CEI. CEI covenants and agrees that it will
indemnify, defend, protect and hold harmless the STOCKHOLDERS at all times from
and after the date of this Agreement until the Expiration Date, from and against
all claims, damages, actions, suits, proceedings, demands, assessments,
adjustments, costs and expenses (including specifically, but without limitation,
reasonable attorneys' fees and expenses of investigation) incurred by the
STOCKHOLDERS as a result of or arising from (i) any breach by CEI or NEWCO of
its representations and warranties set forth herein (as amended by any amendment
or supplement to a Schedule that has received the requisite consents
contemplated by Section 7.8) or on the schedules or certificates delivered in
connection herewith as of the date made and as of the date any such
representations and warranties are re-confirmed, (ii) any breach on the part of
CEI or NEWCO of any agreement under this Agreement, (iii) any liability which
the STOCKHOLDERS may incur due to CEI's or NEWCO's failure to be responsible for
the liabilities and obligations of the COMPANY as provided in Section 1 hereof
(except to the extent that CEI or NEWCO has claims against the STOCKHOLDERS by
reason of such liabilities); (iv) any liability under the 1933 Act, the 1934 Act
or other Federal or state law or regulation, at common law or otherwise, either
(1) arising out of or based upon any untrue statement of a material fact
relating to CEI, NEWCO or any of the Other Founding Companies for inclusion in
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any preliminary prospectus, the Registration Statement or any prospectus forming
a part thereof, or any amendment thereof or supplement thereto, or (2) arising
out of or based upon any omission to state therein a material fact relating to
CEI or NEWCO or any of the Other Founding Companies required to be stated
therein or necessary to make the statements therein not misleading (v) the
matters described on Schedule 11.2(v) or (vi) any liability under the 1933 Act,
the 1934 Act or other Federal or state law regulation, at common law or
otherwise as a result of CEI's failure to include in the Registration Statement
any information provided at least ten days prior to the Funding and Consummation
Date by the COMPANY or the STOCKHOLDERS in writing to CEI or its counsel
specifically for inclusion in the Registration Statement.
11.3 THIRD PERSON CLAIMS. Promptly after any party hereto (hereinafter
the "Indemnified Party") has received notice of or has knowledge of any claim by
a person not a party to this Agreement ("Third Person"), or the commencement of
any action or proceeding by a Third Person, the Indemnified Party shall, as a
condition precedent to a claim with respect thereto being made against any party
obligated to provide indemnification pursuant to Section 11.1 or 11.2 hereof
(hereinafter the "Indemnifying Party"), give the Indemnifying Party written
notice of such claim or the commencement of such action or proceeding. Such
notice shall state the nature and the basis of such claim and a reasonable
estimate of the amount thereof. The Indemnifying Party shall have the right to
defend and settle, at its own expense and by its own counsel, any such matter so
long as the Indemnifying Party pursues the same in good faith and diligently,
provided that the Indemnifying Party shall not settle any criminal proceeding
without the written consent of the Indemnified Party unless the Indemnified
Party is fully released and exonerated. If the Indemnifying Party undertakes to
defend or settle, it shall promptly notify the Indemnified Party of its
intention to do so, and the Indemnified Party shall cooperate with the
Indemnifying Party and its counsel in the defense thereof and in any settlement
thereof. Such cooperation shall include, but shall not be limited to, furnishing
the Indemnifying Party with any books, records or information reasonably
requested by the Indemnifying Party that are in the Indemnified Party's
possession or control. All Indemnified Parties shall endeavor to use the same
counsel, which shall be the counsel selected by Indemnifying Party, provided
that if counsel to the Indemnifying Party shall have a conflict of interest in
the opinion of such counsel
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that prevents counsel for the Indemnifying Party from representing the
Indemnified Party, the Indemnified Party shall have the right to participate in
such matter through counsel of its own choosing and Indemnifying Party will
reimburse the Indemnified Party for the reasonable expenses of its counsel and
experts. After the Indemnifying Party has notified the Indemnified Party of its
intention to undertake to defend or settle any such asserted liability, and for
so long as the Indemnifying Party diligently pursues such defense, the
Indemnifying Party shall not be liable for any additional legal expenses
incurred by the Indemnified Party in connection with any defense or settlement
of such asserted liability, except (i) as set forth in the preceding sentence
and (ii) to the extent such participation is requested by the Indemnifying
Party, in which event the Indemnified Party shall be reimbursed by the
Indemnifying Party for reasonable additional legal expenses and out-of-pocket
expenses. If the Indemnifying Party desires to accept a final and complete
settlement of any such Third Person claim and the Indemnified Party refuses to
consent to such settlement, then the Indemnifying Party's liability under this
Section with respect to such Third Person claim shall be limited to the amount
so offered in settlement to said Third Person, and the Indemnifying Party, upon
payment of such settlement amount to such Third Person, shall be deemed released
from any and all obligation or liability with respect thereto. If the
Indemnifying Party does not undertake to defend such matter to which the
Indemnified Party is entitled to indemnification hereunder, or fails diligently
to pursue such defense, the Indemnified Party may undertake such defense through
counsel of its choice, at the cost and expense of the Indemnifying Party, and
the Indemnified Party may settle such matter, and the Indemnifying Party shall
reimburse the Indemnified Party for the amount paid in such settlement and any
other liabilities or expenses incurred by the Indemnified Party in connection
therewith, provided, however, that under no circumstances shall the Indemnified
Party settle any Third Person claim without the written consent of the
Indemnifying Party, which consent shall not be unreasonably withheld or delayed.
All settlements hereunder shall effect a complete release of the Indemnified
Party, unless the Indemnified Party otherwise agrees in writing. The parties
hereto will make appropriate adjustments for insurance proceeds in determining
the amount of any indemnification obligation under this Section.
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11.4 EXCLUSIVE REMEDY. The indemnification provided for in this Section
11 shall (except as prohibited by ERISA) be the exclusive remedy in any action
seeking damages or any other form of monetary relief brought by any party to
this Agreement against another party, provided that nothing herein shall be
construed to limit the right of a party, in a proper case, to seek injunctive
relief for a breach of this Agreement.
11.5 LIMITATIONS ON INDEMNIFICATION. CEI, NEWCO, the Surviving
Corporation and the other persons or entities indemnified pursuant to Section
11.1 or 11.2 shall not assert any claim other than a Third Person claim for
indemnification hereunder against the STOCKHOLDERS until such time as, and
solely to the extent that, the aggregate of all claims which such persons may
have against such the STOCKHOLDERS shall exceed 1.0% of the sum of (i) the cash
paid to STOCKHOLDERS plus (ii) the value (determined in accordance with the last
paragraph of Section 11.5) of the CEI Stock delivered to STOCKHOLDERS (the
"Indemnification Threshold"), provided, however, that CEI, NEWCO, the Surviving
Corporation and the other persons or entities indemnified pursuant to Section
11.1 may assert and shall be indemnified for any claim under Section 11.1(iv) or
11.1(v) at any time, regardless of whether the aggregate of all claims which
such persons may have against any STOCKHOLDER or all STOCKHOLDERS exceeds the
Indemnification Threshold, it being understood that the amount of any such claim
under Section 11.1(iv) or 11.1(v) shall not be counted towards the
Indemnification Threshold. STOCKHOLDERS shall not assert any claim for
indemnification hereunder against CEI or NEWCO until such time as, and solely to
the extent that, the aggregate of all claims which STOCKHOLDERS may have against
CEI or NEWCO shall exceed $50,000, provided, however, that STOCKHOLDERS and the
other persons or entities indemnified pursuant to Section 11.2 may assert and
shall be indemnified for any claim under Section 11.2(v) at any time, regardless
of whether the aggregate of all claims which such persons may have against any
of CEI, or NEWCO exceeds $50,000, it being understood that the amount of any
such claim under Section 11.2(v) shall not be counted towards such $50,000
amount. No person shall be entitled to indemnification under this Section 11 if
and to the extent that such person's claim for indemnification is directly or
indirectly related to a breach by such person of any representation, warranty,
covenant or other agreement set forth in this Agreement.
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Notwithstanding any other term of this Agreement (except the proviso to
this sentence), no STOCKHOLDER shall be liable under this Section 11 for an
amount which exceeds the amount of proceeds received by such STOCKHOLDER in
connection with the Merger, provided that a STOCKHOLDER's indemnification
obligations pursuant to Section 11.1(iv) or 11.1(v) shall not be limited.
Indemnity obligations hereunder may satisfied through the payment of cash or the
delivery of CEI Stock, or a combination thereof. For purposes of calculating the
value of the CEI Stock received or delivered by a STOCKHOLDER (for purposes of
determining the Indemnification Threshold, the limitation on indemnity set forth
in the second preceding sentence and the amount of any indemnity paid), CEI
Stock shall be valued at its initial public offering price as set forth in the
Registration Statement.
12. TERMINATION OF AGREEMENT
12.1 Termination. This Agreement may be terminated at any time prior
to the Closing Date solely:
(i) by mutual consent of the boards of directors of CEI and the COMPANY;
(ii) by the STOCKHOLDERS or the COMPANY (acting through its board of
directors), on the one hand, or by CEI (acting through its board of directors),
on the other hand, if the transactions contemplated by this Agreement to take
place at the Closing shall not have been consummated by October 31, 1997, unless
the failure of such transactions to be consummated is due to the willful failure
of the party seeking to terminate this Agreement to perform any of its
obligations under this Agreement to the extent required to be performed by it
prior to or on the Funding and Consummation Date;
(iii) by the STOCKHOLDERS or COMPANY, on the one hand, or by CEI, on the
other hand, if a material breach or default shall be made by the other party in
the observance or in the due and timely performance of any of the covenants,
agreements or conditions contained herein, and the curing of such default shall
not have been made on or before the Funding and Consummation Date;
(iv) pursuant to Section 7.8 hereof; or
(v) pursuant to Section 4 hereof.
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12.2 LIABILITIES IN EVENT OF TERMINATION. Except as provided in Section
7.8 hereof, the termination of this Agreement will in no way limit any
obligation or liability of any party based on or arising from a breach or
default by such party with respect to any of its representations, warranties,
covenants or agreements contained in this Agreement including, but not limited
to, legal and audit costs and out of pocket expenses.
13. NONCOMPETITION
13.1 PROHIBITED ACTIVITIES. The STOCKHOLDERS will not, for a period of
three (3) years following the Funding and Consummation Date, for any reason
whatsoever, directly or indirectly, for themselves or on behalf of or in
conjunction with any other person, 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 retailing and animation art marketing businesses in direct
competition with CEI or any of the subsidiaries thereof, within the United
States of America or within 100 miles of where the COMPANY or any of its
subsidiaries or any of the Other Founding Companies conducted business prior to
the effectiveness of the Merger (the "Territory") ;
(ii) call upon any person who is, at that time, within the Territory,
an employee of CEI (including the subsidiaries thereof) in a sales
representative or managerial capacity for the purpose or with the intent of
enticing such employee away from or out of the employ of CEI (including the
subsidiaries thereof), provided that each STOCKHOLDER shall be permitted to call
upon and hire any member of his or her immediate family;
(iii) call upon any person or entity which is, at that time, or which
has been, within one (1) year prior to the Funding and Consummation Date, a
customer of CEI (including the subsidiaries thereof), of the COMPANY or of any
of the Other Founding Companies within the Territory for the purpose of
soliciting or selling products or services in direct competition with CEI within
the Territory;
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(iv) call upon any prospective acquisition candidate, on any
STOCKHOLDER's own behalf or on behalf of any competitor in the collectibles
retailing and animation art marketing businesses, which candidate, to the actual
knowledge of such STOCKHOLDER after due inquiry, was called upon by CEI
(including the subsidiaries thereof) or for which, to the actual knowledge of
such STOCKHOLDER after due inquiry, CEI (or any subsidiary thereof) made an
acquisition analysis, for the purpose of acquiring such entity; or
(v) disclose customers, whether in existence or proposed, of the
COMPANY to any person, firm, partnership, corporation or business for any reason
or purpose whatsoever except to the extent that the COMPANY has in the past
disclosed such information to the public for valid business reasons.
Notwithstanding the above, the foregoing covenant shall not be deemed
to prohibit any STOCKHOLDER from acquiring as an investment not more than two
percent (2%) of the capital stock of a competing business whose stock is traded
on a national securities exchange or over-the-counter.
13.2 DAMAGES. Because of the difficulty of measuring economic losses to
CEI as a result of a breach of the foregoing covenant, and because of the
immediate and irreparable damage that could be caused to CEI for which it would
have no other adequate remedy, each STOCKHOLDER agrees that, in the event of
breach by such STOCKHOLDER, the foregoing covenant may be enforced by CEI by
injunctions and restraining orders.
13.3 REASONABLE RESTRAINT. It is agreed by the parties hereto that the
foregoing covenants in this Section 13 impose a reasonable restraint on the
STOCKHOLDERS in light of the activities and business of CEI (including the
subsidiaries thereof) on the date of the execution of this Agreement and the
current plans of CEI.
13.4 SEVERABILITY; REFORMATION. The covenants in this Section 13 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 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 this Agreement shall thereby be reformed.
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13.5 INDEPENDENT COVENANT. All of the covenants in this Section 13
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 any STOCKHOLDER
against CEI (including the subsidiaries thereof), whether predicated on this
Agreement or otherwise, shall not constitute a defense to the enforcement by CEI
of such covenants. It is specifically agreed that the period of three (3) years
stated at the beginning of this Section 13, during which the agreements and
covenants of each STOCKHOLDER made in this Section 13 shall be effective, shall
be computed by excluding from such computation any time during which such
STOCKHOLDER is in violation of any provision of this Section 13. The covenants
contained in Section 13 shall not be affected by any breach of any other
provision hereof by any party hereto and shall have no effect if the
transactions contemplated by this Agreement are not consummated.
13.6 MATERIALITY. The COMPANY and the STOCKHOLDERS hereby agree that
this covenant is a material and substantial part of this transaction.
14. NONDISCLOSURE OF CONFIDENTIAL INFORMATION
14.1 STOCKHOLDERS. The STOCKHOLDERS recognize and acknowledge that they
had in the past, currently have, and in the future may have, access to certain
confidential information of the COMPANY, the Other Founding Companies, and/or
CEI, such as operational policies, and pricing and cost policies that are
valuable, special and unique assets of the COMPANY's, the Other Founding
Companies' and/or CEI's respective businesses. The STOCKHOLDERS agree that they
will not disclose such confidential information to any person, firm,
corporation, association or other entity for any purpose or reason whatsoever,
except (a) to authorized representatives of CEI, (b) following the Closing, such
information may be disclosed by the STOCKHOLDERS as is required in the course of
performing their duties for CEI or the Surviving Corporation and (c) to counsel
and other advisers, provided that such advisers (other than counsel) agree to
the confidentiality provisions of this Section 14.1, unless (i) such information
becomes known to the public generally through no fault of any such STOCKHOLDERS,
(ii) disclosure is required by law or the order of any governmental authority
under color of law, provided, that prior to disclosing any information pursuant
to this clause (ii),
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the STOCKHOLDERS shall give prior written notice thereof to CEI and provide CEI
with the opportunity to contest such disclosure, or (iii) the disclosing party
reasonably believes that such disclosure is required in connection with the
defense of a lawsuit against the disclosing party. In the event of a breach or
threatened breach by any of the STOCKHOLDERS of the provisions of this Section
14, CEI shall be entitled to an injunction restraining such STOCKHOLDERS from
disclosing, in whole or in part, such confidential information. Nothing herein
shall be construed as prohibiting CEI from pursuing any other available remedy
for such breach or threatened breach, including the recovery of damages. In the
event the transactions contemplated by this Agreement are not consummated, the
STOCKHOLDERS shall have none of the above-mentioned restrictions on their
ability to disseminate confidential information with respect to the COMPANY.
14.2 CEI AND NEWCO. CEI and NEWCO recognize and acknowledge that they
had in the past and currently have access to certain confidential information of
the COMPANY, such as operational policies, and pricing and cost policies that
are valuable, special and unique assets of the COMPANY's business. CEI and NEWCO
agree that, prior to the Closing, or if the Transactions contemplated by this
Agreement are not consummated, they will not use or disclose such confidential
information to any person, firm, corporation, association or other entity for
any purpose or reason whatsoever, except (a) to authorized representatives of
the COMPANY, (b) to counsel and other advisers, provided that such advisors
(other than counsel) agree to the confidentiality provisions of this Section
14.1 and (c) to the Other Founding Companies and their representatives who have
agreed to maintain confidentiality pursuant to Section 7.1(a), unless (i) such
information becomes known to the public generally through no fault of CEI or
NEWCO, (ii) disclosure is required by law or the order of any governmental
authority under color of law, provided, that prior to disclosing any information
pursuant to this clause (ii), CEI and NEWCO shall, if possible, give prior
written notice thereof to the COMPANY and the STOCKHOLDERS and provide the
COMPANY and the STOCKHOLDERS with the opportunity to contest such disclosure, or
(iii) the disclosing party reasonably believes that such disclosure is required
in connection with the defense of a lawsuit against the disclosing party. In the
event of a breach or threatened breach by CEI or NEWCO of the provisions of this
Section, the COMPANY and the
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STOCKHOLDERS shall be entitled to an injunction restraining CEI and NEWCO from
disclosing, in whole or in part, such confidential information. Nothing herein
shall be construed as prohibiting the COMPANY and the STOCKHOLDERS from pursuing
any other available remedy for such breach or threatened breach, including the
recovery of damages. Upon any termination of this Agreement, CEI and NEWCO shall
return all confidential information of the Company then in their possession and
shall use commercially reasonable efforts to cause the Other Founding Companies
to return all confidential information of the Company then in their possession.
14.3 DAMAGES. Because of the difficulty of measuring economic losses as
a result of the breach of the foregoing covenants in Sections 14.1 and 14.2, and
because of the immediate and irreparable damage that would be caused for which
they would have no other adequate remedy, the parties hereto agree that, in the
event of a breach by any of them of the foregoing covenants, the covenant may be
enforced against the other parties by injunctions and restraining orders.
14.4 SURVIVAL. The obligations of the parties under this Article 14
shall survive the termination of this Agreement for a period of five years from
the Funding and Consummation Date, or in the event this Agreement in terminated,
for a period of five years from the date of termination.
15. TRANSFER RESTRICTIONS
15.1 TRANSFER RESTRICTIONS. Except for transfers (i) to immediate
family members who agree to be bound by the restrictions set forth in this
Section 15.1 (or trusts for the benefit of the STOCKHOLDERS or family members,
the trustees of which so agree), (ii) pursuant to Rule 144 (as it may be
amended) under the 1933 Act, (iii) pursuant to Section 17 hereof or (iv)
following the first anniversary of the Funding and Consummation Date, pursuant
to an exemption from registration under the Act and applicable state securities
laws, none of the STOCKHOLDERS shall (i) sell, assign, exchange, transfer,
encumber, pledge, distribute, appoint or otherwise dispose of (a) any shares of
CEI Stock received by the STOCKHOLDERS in the Merger or (b) any interest
(including, without limitation, an option to buy or sell) in any
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such shares of CEI Stock, in whole or in part, and no such attempted transfer
shall be treated as effective for any purpose; or (ii) engage in any
transaction, whether or not with respect to any shares of CEI Stock or any
interest therein, the intent or effect of which is to reduce the risk of owning
the shares of CEI Stock acquired pursuant to Section 2 hereof (including, by way
of example and not limitation, engaging in put, call, short-sale, straddle or
similar market transactions). Notwithstanding the foregoing, the STOCKHOLDERS
may encumber or pledge any of such shares of CEI Stock provided the pledgee or
other beneficiary of such encumbrance or pledge agrees to be bound by the
provisions of this Section as if a STOCKHOLDER and party hereto. The
certificates evidencing the CEI Stock delivered to the STOCKHOLDERS pursuant to
Section 3 of this Agreement will bear a legend substantially in the form set
forth below and containing such other information as CEI may deem necessary or
appropriate:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED, EXCHANGED,
TRANSFERRED, ENCUMBERED, PLEDGED, DISTRIBUTED, APPOINTED OR OTHERWISE DISPOSED
OF, AND THE ISSUER SHALL NOT BE REQUIRED TO GIVE EFFECT TO ANY ATTEMPTED SALE,
ASSIGNMENT, EXCHANGE, TRANSFER, ENCUMBRANCE, PLEDGE, DISTRIBUTION, APPOINTMENT
OR OTHER DISPOSITION PRIOR TO [anniversary of Funding and Consummation Date
corresponding to end of Rule 144 holding period][(PROVIDED, HOWEVER, THAT SUCH
SHARES MAY BE ENCUMBERED OR PLEDGED PROVIDED THE PLEDGEE OR OTHER BENEFICIARY OF
SUCH ENCUMBRANCE OR PLEDGE AGREES TO BE BOUND BY THE PROVISIONS OF THESE
RESTRICTIONS TO THE SAME EXTENT AS THE HOLDER THEREOF)]. UPON THE WRITTEN
REQUEST OF THE HOLDER OF THIS CERTIFICATE, THE ISSUER AGREES TO REMOVE THIS
RESTRICTIVE LEGEND (AND ANY STOP ORDER PLACED WITH THE TRANSFER AGENT) AFTER THE
DATE SPECIFIED ABOVE (AS IT MAY BE REDUCED AS PROVIDED HEREIN).
16. FEDERAL AND STATE SECURITIES ACT REPRESENTATIONS
The STOCKHOLDERS acknowledge that the shares of CEI Stock to be delivered to the
STOCKHOLDERS pursuant to this Agreement have not been and will not be registered
under the Act or any state securities laws and therefore may not be resold
without compliance with the Act and any applicable state securities laws. The
CEI Stock to be acquired by the STOCKHOLDERS pursuant to this Agreement is being
acquired solely for their own respective
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accounts, for investment purposes only, and with no present intention of
distributing, selling or otherwise disposing of it in connection with a
distribution.
16.1 COMPLIANCE WITH LAW. The STOCKHOLDERS covenant, warrant and
represent that none of the shares of CEI Stock issued to the STOCKHOLDERS will
be offered, sold, assigned, pledged, hypothecated, transferred or otherwise
disposed of except after full compliance with all of the applicable provisions
of the 1933 Act and the rules and regulations of the SEC or any applicable
exemption therefrom. All the CEI Stock shall bear the following legend in
addition to the legend required under Section 15 of this Agreement:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THE SHARES HAVE BEEN ACQUIRED
FOR INVESTMENT AND MAY NOT BE SOLD, ASSIGNED, EXCHANGED, TRANSFERRED,
ENCUMBERED, PLEDGED, DISTRIBUTED, APPOINTED OR OTHERWISE DISPOSED OF EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FOR THE SHARES UNDER THE ACT OR
AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT AND ANY APPLICABLE
STATE SECURITIES LAWS AND, IF REQUIRED BY COLLECTIBLES ENTERPRISES, INC., AN
OPINION OF COUNSEL TO COLLECTIBLES ENTERPRISES, INC. STATING THAT REGISTRATION
IS NOT REQUIRED UNDER THE ACT.
16.2 ECONOMIC RISK; SOPHISTICATION. The STOCKHOLDERS represent and
warrant that they are able to bear the economic risk of an investment in the CEI
Stock acquired pursuant to this Agreement, can afford to sustain a total loss of
such investment and have such knowledge and experience in financial and business
matters that they are capable of evaluating the merits and risks of the proposed
investment in the CEI Stock. The STOCKHOLDERS represent and warrant that they
have had an adequate opportunity to ask questions and receive answers from the
officers of CEI concerning any and all matters relating to the transactions
described herein including, without limitation, the background and experience of
the current and proposed officers and directors of CEI, the plans for the
operations of the business of CEI, the business, operations and financial
condition of the Other Founding Companies, and any plans for additional
acquisitions and the like. The STOCKHOLDERS have asked any and all questions in
the nature described in the preceding sentence and all questions have been
answered to their satisfaction.
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17. REGISTRATION RIGHTS
17.1 PIGGYBACK REGISTRATION RIGHTS. At any time following the Funding
and Consummation Date, whenever CEI proposes to register any CEI Stock for its
own or others' account under the 1933 Act for a public offering, other than (i)
any shelf registration of shares to be used as consideration for acquisitions of
additional businesses by CEI and (ii) registrations relating to employee benefit
plans, CEI shall give each of the STOCKHOLDERS prompt written notice of its
intent to do so. Upon the written request of any of the STOCKHOLDERS given
within 30 days after receipt of such notice, CEI shall cause to be included in
such registration all of the CEI Stock issued to the STOCKHOLDERS pursuant to
this Agreement which any such STOCKHOLDER requests, provided that CEI shall have
the right to reduce the number of shares to be included by the STOCKHOLDER in
such registration to the extent that inclusion of such shares could, in the
opinion of tax counsel to CEI or its independent auditors, jeopardize the status
of the transactions contemplated hereby and by the Registration Statement as a
tax-free organization. In addition, if CEI is advised in writing in good faith
by any managing underwriter of an underwritten offering of the securities being
offered pursuant to any registration statement under this Section 17.1 that the
number of shares to be sold by persons other than CEI is greater than the number
of such shares which can be offered without adversely affecting the offering,
CEI may reduce pro rata the number of shares offered for the accounts of such
persons (based upon the number of shares proposed to be sold by each such
person) to a number deemed satisfactory by such managing underwriter, provided,
that, for each such offering made by CEI after the IPO, such reduction shall be
made first by reducing the number of shares to be sold by persons other than
CEI, the STOCKHOLDERS and the stockholders of the Other Founding Companies
(collectively, the STOCKHOLDERS and the stockholders of the other Founding
Companies being referred to herein as the "Founding Stockholders"), and
thereafter, if a further reduction is required, by reducing the number of shares
to be sold by the Founding Stockholders.
17.2 DEMAND REGISTRATION RIGHTS. At any time after the date one year
after the Funding and Consummation Date, the holders of a majority of the shares
of CEI Stock issued to the stockholders of the Founding Companies pursuant to
this Agreement and the Other
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Agreements that have not been previously registered or sold and that are not
entitled to be sold under Rule 144(k) (or any successor provision) promulgated
under the 1933 Act may request in writing that CEI file a registration statement
under the 1933 Act covering the registration of shares of CEI Stock issued to
such stockholders (including any stock issued as (or issuable upon the
conversion or exchange of any convertible security, warrant, right or other
security that is issued by CEI as) a dividend or other distribution with respect
to, or in exchange for, or in replacement of such CEI Stock) then held by such
stockholders (a "Demand Registration"). Within ten (10) days of the receipt of
such request, CEI shall give written notice of such request to all other
stockholders of the Founding Companies and shall, as soon as practicable but in
no event later than 45 days after notice from any such stockholder, file and
thereafter use its best efforts to cause to become effective a registration
statement covering all such shares. CEI shall be obligated to effect only one
Demand Registration for all stockholders of the Founding Companies.
Notwithstanding the foregoing paragraph, following such a demand a
majority of CEI's disinterested directors (i.e. directors who have not demanded
or elected to sell shares in any such public offering) may defer the filing of
the registration statement for a 60 day period.
If at the time of any request by the stockholders of the Founding
Companies for a Demand Registration CEI has fixed plans to file within 60 days
after such request a registration statement covering the sale of any of its
securities in a public offering under the 1933 Act, no registration of the CEI
Stock held by the stockholders of the Founding Companies shall be initiated
under this Section 17.2 until 90 days after the effective date of such
registration unless CEI is no longer proceeding diligently to effect such
registration; provided that CEI shall provide the stockholders of the Founding
Companies the right to participate in such public offering pursuant to, and
subject to, Section 17.1 hereof.
17.3 REGISTRATION PROCEDURES. All expenses incurred in connection with
the registrations under this Article 17 (including all registration, filing,
qualification, legal, printer and accounting fees, but excluding underwriting
commissions and discounts), shall be borne by CEI. In connection with
registrations under Sections 17.1 and 17.2, CEI shall (i) use its best efforts
to prepare and file with the SEC as soon as reasonably practicable, a
registration
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statement with respect to the CEI Stock and use its best efforts to cause such
registration to promptly become and remain effective for a period of at least 45
days (or such shorter period during which stockholders of the Founding Companies
shall have sold all CEI Stock which they requested to be registered); (ii) use
its best efforts to register and qualify the CEI Stock covered by such
registration statement under applicable state securities laws as the holders
shall reasonably request for the distribution of the CEI Stock; and (iii) take
such other actions as are reasonable and necessary to comply with the
requirements of the 1933 Act and the regulations thereunder.
17.4 UNDERWRITING AGREEMENT. In connection with each registration
pursuant to Sections 17.1 and 17.2 covering an underwritten registered public
offering, CEI and each participating holder agree to enter into a written
agreement with the managing underwriters in such form and containing such
provisions as are customary in the securities business for such an arrangement
between such managing underwriters and companies of CEI's size and investment
stature, including indemnification provisions.
17.5 AVAILABILITY OF RULE 144. CEI shall not be obligated to register
shares of CEI Stock held by any STOCKHOLDER at any time when the resale
provisions of Rule 144(k) (or any successor provision) promulgated under the
1933 Act are available to such STOCKHOLDER for such shares.
18. GENERAL
18.1 COOPERATION. The COMPANY, the STOCKHOLDERS, CEI and NEWCO shall
each deliver or cause to be delivered to the other on the Funding and
Consummation Date, and at such other times and places as shall be reasonably
agreed to, such additional instruments as the other may reasonably request for
the purpose of carrying out this Agreement. The COMPANY will cooperate and use
its reasonable efforts to have the present officers, directors and employees of
the COMPANY cooperate with CEI on and after the Funding and Consummation Date in
furnishing information, evidence, testimony and other assistance in connection
with any Tax Return filing obligations, actions, proceedings, arrangements or
disputes of any nature with respect to matters pertaining to all periods prior
to the Funding and Consummation Date.
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18.2 SUCCESSORS AND ASSIGNS. This Agreement and the rights of the
parties hereunder may not be assigned (except by operation of law) and shall be
binding upon and shall inure to the benefit of the parties hereto, the
successors of CEI, and the heirs and legal representatives of the STOCKHOLDERS.
18.3 ENTIRE AGREEMENT. This Agreement (including the Schedules,
exhibits and annexes attached hereto) and the documents delivered pursuant
hereto constitute the entire agreement and understanding among the STOCKHOLDERS,
the COMPANY, NEWCO and CEI and supersede any prior agreement and understanding
relating to the subject matter of this Agreement. This Agreement, upon
execution, constitutes a valid and binding agreement of the parties hereto
enforceable in accordance with its terms and may be modified or amended only by
a written instrument executed by the STOCKHOLDERS, the COMPANY, NEWCO and CEI,
acting through their respective officers or trustees, duly authorized by their
respective boards of directors. Any disclosure made on any Schedule delivered
pursuant hereto shall be deemed to have been disclosed for purposes of any other
Schedule required hereby, provided that the COMPANY shall make a good faith
effort to cross reference disclosure, as necessary or advisable, between related
Schedules.
18.4 COUNTERPARTS. This Agreement may be executed simultaneously in two
or more counterparts, each of which shall be deemed an original and all of which
together shall constitute but one and the same instrument.
18.5 BROKERS AND AGENTS. Except as disclosed on Schedule 18.5, each
party represents and warrants that it employed no broker or agent in connection
with this transaction and agrees to indemnify the other parties hereto against
all loss, cost, damages or expense arising out of claims for fees or commissions
of brokers employed or alleged to have been employed by such indemnifying party.
18.6 EXPENSES. Whether or not the transactions herein contemplated
shall be consummated, CEI will pay the fees, expenses and disbursements of CEI
and its agents, representatives, accountants and counsel incurred in connection
with the subject matter of this Agreement and any amendments thereto, including
all costs and expenses incurred in the performance and compliance with all
conditions to be performed by CEI under this Agreement,
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including the fees and expenses of Arthur Andersen, LLP, Morgan, Lewis & Bockius
LLP, and any other person or entity retained by CEI, and the costs of preparing
the Registration Statement. Whether or not the transactions herein contemplated
shall be consummated, the STOCKHOLDERS shall pay the fees, expenses and
disbursements of the STOCKHOLDERS, the COMPANY and their respective agents,
representatives, accountants and counsel incurred in connection with the subject
matter of this Agreement and any amendments thereto, including all costs and
expenses incurred in the performance and compliance with all conditions to be
performed by the COMPANY and the STOCKHOLDERS under this Agreement, including
the fees and expenses of accountants and legal counsel to the COMPANY and the
STOCKHOLDERS. In addition, each STOCKHOLDER shall pay all sales, use, transfer,
real property transfer, recording, gains, stock transfer and other similar taxes
and fees ("Transfer Taxes") imposed in connection with the Merger, other than
Transfer Taxes, if any, imposed by the State of Delaware. Each STOCKHOLDER shall
file all necessary documentation and Returns with respect to such Transfer
Taxes. In addition, each STOCKHOLDER acknowledges that he, and not the COMPANY
or CEI, will pay all Taxes due upon receipt of the consideration payable
pursuant to Section 2 hereof, and will assume all Tax risks and liabilities of
such STOCKHOLDER in connection with the transactions contemplated hereby.
18.7 NOTICES. All notices of communication required or permitted
hereunder shall be in writing and may be given by depositing the same in United
States mail, addressed to the party to be notified, postage prepaid and
registered or certified with return receipt requested, or by delivering the same
in person to an officer or agent of such party.
(a) If to CEI, or NEWCO, addressed to them at:
Collectibles USA, Inc.
2081 Landings Drive
Mountain View, California 94043
with copies to:
Morgan, Lewis & Bockius LLP
101 Park Avenue
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New York, New York 10178
Attn: David W. Pollak, Esq.
(b) If to the STOCKHOLDERS, addressed to them at their
addresses set forth on Annex IV, with copies to such counsel
as is set forth with respect to each STOCKHOLDER on such
Annex IV;
(c) If to the COMPANY, addressed to it at:
[COMPANY]
-----------------------
-----------------------
Attn: _________________
and marked "Personal and Confidential"
or to such other address or counsel as any party hereto shall specify pursuant
to this Section 18.7 from time to time.
18.8 GOVERNING LAW. This Agreement shall be construed in accordance
with the laws of the State of New York without reference to its conflicts of law
provisions.
18.9 EXERCISE OF RIGHTS AND REMEDIES. Except as otherwise provided
herein, no delay of or omission in the exercise of any right, power or remedy
accruing to any party as a result of any breach or default by any other party
under this Agreement shall impair any such right, power or remedy, nor shall it
be construed as a waiver of or acquiescence in any such breach or default, or of
any similar breach or default occurring later; nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or default
occurring before or after that waiver.
18.10 TIME. Time is of the essence with respect to this Agreement.
18.11 REFORMATION AND SEVERABILITY. In case any provision of this
Agreement shall be invalid, illegal or unenforceable, it shall, to the extent
possible, be modified in such manner as to be valid, legal and enforceable but
so as to most nearly retain the intent of the parties, and if such modification
is not possible, such provision shall be severed from this Agreement, and in
either case the validity, legality and enforceability of the remaining
provisions of this Agreement shall not in any way be affected or impaired
thereby.
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18.12 REMEDIES CUMULATIVE. No right, remedy or election given by any
term of this Agreement shall be deemed exclusive but each shall be cumulative
with all other rights, remedies and elections available at law or in equity.
18.13 CAPTIONS. The headings of this Agreement are inserted for
convenience only, shall not constitute a part of this Agreement or be used to
construe or interpret any provision hereof.
18.14 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended
and the observance of any term of this Agreement may be waived only with the
written consent of CEI, NEWCO, the COMPANY and STOCKHOLDERS who will hold or who
hold at least 50% of the CEI Stock issued or to be issued upon consummation of
the Merger. Any amendment or waiver effected in accordance with this Section
18.14 shall be binding upon each of the parties hereto, any other person
receiving CEI Stock in connection with the Merger and each future holder of such
CEI Stock.
18.15 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Unless otherwise
provided herein, the representations, warranties, covenants and agreements of
the parties made herein and at the time of the Closing or in writing delivered
pursuant to the provisions of this Agreement shall survive the consummation of
the transactions contemplated hereby and any examination on behalf of the
parties until the Expiration Date.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
COLLECTIBLES USA, INC.
By:______________________
Name:
Title:
[COMPANY] ACQUISITION CORP.
By:______________________
Name:
Title:
[COMPANY]
By:______________________
Name:
Title:
STOCKHOLDERS:
______________________
[Name]
______________________
[Name]
<PAGE>
ANNEX I
FORM OF ARTICLES OF MERGER
<PAGE>
ANNEX II
CERTIFICATE OF INCORPORATION AND BY-LAWS OF CEI AND NEWCO
<PAGE>
ANNEX III
CONSIDERATION TO BE PAID TO STOCKHOLDERS
Aggregate consideration to be paid to STOCKHOLDERS:
$__________ in cash and __________ shares of Common Stock of
CEI, to be distributed as follows:
Consideration to be paid to each STOCKHOLDER:
Shares of Common
Stockholder Stock of CEI Cash
TOTALS:
MINIMUM VALUE: $____________
<PAGE>
ANNEX IV
STOCKHOLDERS AND STOCK OWNERSHIP OF THE COMPANY
The following is a list of the STOCKHOLDERS, their addresses and the number of
shares of the COMPANY Stock held by each thereof:
STOCKHOLDER SHARES OF STOCK HELD
<PAGE>
ANNEX V
STOCKHOLDERS AND STOCK OWNERSHIP OF CEI
Name of Shareholder Post-Split No. of Shares
of CEI Owned
<PAGE>
ANNEX VI
FORM OF OPINION OF COUNSEL TO CEI
[Date]
[COMPANY]
- ----------------
- ----------------
- ----------------
Ladies and Gentlemen:
We have acted as counsel to Collectibles USA, Inc., a Delaware
corporation ("CEI") and [COMPANY] Acquisition Corp., a Delaware corporation
("NEWCO") in connection with the transactions contemplated by the agreement (the
"Agreement") dated as of May 9, 1997 by and among CEI, NEWCO, [COMPANY] and the
stockholders named therein (the "Stockholders").
This opinion is being delivered to you pursuant to Section 8.4 of the
Agreement. All capitalized terms used herein, unless expressly defined herein,
shall have the meanings ascribed to such terms in the Agreement.
We have examined originals, or copies certified or otherwise identified
to our satisfaction, of such documents and corporate and public records as we
deemed to be necessary as a basis for the opinion hereinafter expressed. With
respect to such examination, we have assumed the genuineness of all signatures
appearing on all documents presented to us as originals, and the conformity to
the originals of all documents presented to us as conformed or reproduced
copies. Where factual matters material to such opinion were not independently
established, we have relied upon certificates of appropriate state and local
officials, upon representations of executive officers and responsible employees
and agents of CEI and NEWCO, and upon such other data as we deemed to be
appropriate under the circumstances. We also wish to advise you that when in the
following opinion we have made statements to our "knowledge" we shall mean (with
respect to matters of fact), that after an examination of documents made
available to us by CEI and NEWCO and after inquiry of officers thereof but
without any judgment or litigation searches or any other independent factual
investigation, we have no reason to believe that such statements are factually
incorrect. Statements made to our
<PAGE>
"knowledge" shall furthermore refer only to then current actual knowledge of
attorneys of our firm who have worked on matters for CEI and NEWCO.
Based upon the foregoing and such consideration of matters of law as we
deemed to be relevant, and subject to the qualifications and assumptions set
forth herein, we are of the following opinion:
(i) CEI and NEWCO have each been duly organized and are validly existing in
good standing under the laws of the State of Delaware;
(ii) the Agreement has been duly authorized, executed and delivered by each
of CEI and NEWCO, constitutes the valid and binding agreement of each thereof
and is enforceable against each thereof in accordance with its terms;
(iii) the authorized and outstanding capital stock of CEI is as set forth
in the CEI prospectus (the "Prospectus"), dated _______________, relating to the
sale to the public of __________ shares of CEI; each share of stock to be issued
to the Stockholders, to the stockholders of the Founding Companies other than
the Company and to the Underwriters has been duly and validly authorized and
issued; upon consummation of the transactions set forth in the Agreement and the
Other Agreements, and upon payment by the Underwriters as set forth in the
Underwriting Agreement dated _______________ between the Underwriters and CEI,
each of such shares will be fully paid and nonassessable; and, to our knowledge,
none of such shares will have been issued in violation of the preemptive rights
of any stockholder of CEI;
(iv) to our knowledge, except as set forth in the Prospectus, CEI does not
have any outstanding options, warrants, calls, conversion rights or other
commitments of any kind to issue or sell any of its capital stock;
(v) assuming the due authorization, execution, delivery and filing of the
Certificate of Merger with the Secretary of State of the State of Delaware, the
Merger shall become effective under the laws of the State of Delaware; upon the
consummation of the Merger, no shareholder of CEI will be entitled to any rights
as a dissenting shareholder;
(vi) to our knowledge, (a) neither CEI nor NEWCO is in violation of any
order with respect thereto issued by any court or agency (wherever located) and
(b) there are no claims, actions, suits or proceedings pending, or threatened
against or affecting either CEI or NEWCO, at law or in equity, or before or by
any federal, state, municipal or other governmental department, commission,
board, bureau, agency or instrumentality wherever located;
(vii) to our knowledge, neither CEI nor NEWCO is in default, or has
received any notice of default, under any contract or agreement to which it is a
party, except where such default would not have a material adverse effect on
CEI;
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(viii) to our knowledge, no notice to, consent, authorization, approval
or order of any court or governmental agency or body or of any other third party
is required in connection with the execution, delivery or consummation of the
Agreement by CEI or NEWCO, except for such notices, consents, authorizations,
approvals or orders as have already been made or obtained; and
(ix) the execution of the Agreement and the performance by CEI and NEWCO of
their respective obligations thereunder will not violate any of the terms or
provisions of their respective Articles of Incorporation or By-laws or result in
any breach of or default under any lease, instrument, license, permit or any
other agreement to which they are a party, except where such violations,
breaches or defaults would not have a material adverse effect on CEI.
The opinion set forth in paragraph (ii) above is subject to the following
qualifications: (i) the enforceability of the respective obligations of CEI and
NEWCO under the Agreement are subject to bankruptcy, insolvency, reorganization,
moratorium and other similar laws now or hereafter in effect relating to
creditors' rights; (ii) the availability of equitable remedies, including
specific performance and injunctive relief, is subject to the discretion of the
court before which any proceeding therefor may be brought; (iii) we have assumed
the due authorization, execution and delivery of the Agreement by each of the
other parties thereto other than CEI and NEWCO and (iv) no opinion is expressed
as to the enforceability of (1) provisions requiring indemnification for
liabilities under the securities law or (2) the non-competition provisions
included therein.
We understand that we have no obligation to update this opinion to reflect
any facts or circumstances occurring after the date hereof, provided however,
that unless we otherwise notify you in or prior to the Funding and Consummation
Date that this opinion may no longer be relied upon, you shall be entitled to
rely on this opinion as of the Funding and Consummation Date if it were dated on
such date.
We render the foregoing opinions as members of the Bar of the State of New
York and express no opinion as to laws other than the laws of the State of New
York, the General Corporation Law of the State of Delaware and the federal laws
of the United States of America (other than federal laws applicable to patents,
copyrights and trademarks).
Very truly yours,
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ANNEX VII
FORM OF OPINION OF COUNSEL TO COMPANY AND STOCKHOLDERS
[Date]
Collectibles Enterprises, Inc.
[address]
[Underwriters]
[address]
Ladies and Gentlemen:
We have acted as counsel to [Company], a [____________] corporation
(the "Company") in connection with the transactions contemplated by the
agreement (the "Agreement") dated as of May 9, 1997 among Collectibles USA, Inc.
("CEI"), [NEWCO], the Company and the stockholders named therein (the
"Stockholders").
This opinion is being delivered to you pursuant to Section 9.8 of the
Agreement. All capitalized terms used herein, unless expressly defined herein,
shall have the meanings ascribed to such terms in the Agreement.
We have examined originals, or copies certified or otherwise identified
to our satisfaction, of such documents and corporate and public records as we
deemed to be necessary as a basis for the opinion hereinafter expressed. With
respect to such examination, we have assumed the genuineness of all signatures
appearing on all documents presented to us as originals, and the conformity to
the originals of all documents presented to us as conformed or reproduced
copies. Where factual matters material to such opinion were not independently
established, we have relied upon certificates of appropriate state and local
officials, upon representations of executive officers and responsible employees
and agents of the Company, and upon such other data as we deemed to be
appropriate under the circumstances. We also wish to advise you that when in the
following opinion we have made statements to our "knowledge" we shall mean (with
respect to matters of fact), that after an examination of documents made
available to us by the Company after inquiry of officers of the Company but
without any judgment or litigation searches or any other independent factual
investigation, we have no reason to believe that such statements are factually
incorrect. Statements made to our "knowledge" shall furthermore refer only to
then current actual knowledge of attorneys of our firm who have worked on
matters for the Company.
<PAGE>
Based upon the foregoing and such consideration of matters of law as we
deemed to be relevant, and subject to the qualifications and assumptions set
forth herein, we are of the following opinion:
(i) the COMPANY has been duly organized and is validly existing
or subsisting in good standing under the laws of the State of
[____________];
(ii) the COMPANY is duly qualified to do business as a foreign
corporation in each of the jurisdictions set forth in Schedule 5.1 of
the Agreement and to our knowledge, the COMPANY has the required
authorities and permits to carry on its business in each of such
jurisdictions, except where the failure to be so qualified or have
such authorities and permits would not have a material adverse effect
on the COMPANY;
(iii) based solely on a review of the stock records and minutes
of the COMPANY, the authorized and outstanding capital stock of the
COMPANY is as represented in the Agreement; each share of such stock
has been duly and validly authorized and issued, and, to our
knowledge, is fully paid and nonassessable and was not issued in
violation of the preemptive rights of any STOCKHOLDER;
(iv) to our knowledge, the COMPANY does not have any outstanding
options, warrants, calls, conversion rights or other commitments of
any kind to issue or sell any of its capital stock;
(v) the Agreement has been duly authorized, executed and
delivered by the COMPANY and the STOCKHOLDERS party thereto and
constitutes a valid and binding agreement of the COMPANY and such
STOCKHOLDERS, enforceable against the COMPANY and such STOCKHOLDERS in
accordance with its terms;
(vi) [for non-Delaware Companies only] upon the filing of the
[relevant certificate] with [relevant filing authority] in the state
of [state of incorporation of COMPANY], the Merger shall become
effective under the laws of the state of [state of incorporation of
COMPANY]. Upon the consummation of the Merger, all of the outstanding
stock of the COMPANY will have been duly authorized and issued, and
will be fully paid and nonassessable, and will be beneficially owned
by CEI, free and clear of any security interest, claim, lien or
encumbrance, and no former shareholder of the COMPANY will be entitled
to any rights as a dissenting shareholder, [except . . . describe
exceptions under relevant state law].
(vii) to our knowledge, except to the extent set forth on
Schedules 5.10, 5.21 and 5.24 to the Agreement, (a) the COMPANY is not
in violation of any order with respect to the COMPANY issued by any
court or agency (wherever located) and (b) there are no claims,
actions, suits or proceedings pending, or threatened against or
affecting the COMPANY, at law or in equity, or before or by any
federal, state, municipal or other
2
<PAGE>
governmental department, commission, board, bureau, agency or
instrumentality wherever located;
(viii) to our knowledge, except to the extent set forth on
Schedule 5.15 to the Agreement, the COMPANY is not in default, and has
not received any notice of default, under any of the contracts or
agreements listed on such Schedule 5.15;
(ix) to our knowledge, no notice to, consent, authorization,
approval or order of any court or governmental agency or body or of
any other third party is required in connection with the execution,
delivery or consummation of the Agreement by any of the STOCKHOLDERS
except for such notices, consents, authorizations, approvals or orders
as have already been made or obtained; and
(x) the execution of the Agreement and the performance by the
COMPANY and the STOCKHOLDERS party thereto of their respective
obligations thereunder will not violate any of the terms or provisions
of COMPANY's Articles of Incorporation or the By-laws of the COMPANY
or result in any breach of or default under any lease, instrument,
license, permit or any other agreement listed on Schedule 5.12 or 5.15
to the Agreement, except to the extent specifically set forth on such
Schedules.
The opinion set forth in paragraph (v) above is subject to the
following qualifications: (i) the enforceability of the obligations of the
Company under the Agreement is subject to bankruptcy, insolvency,
reorganization, moratorium and other similar laws now or hereafter in effect
relating to creditors' rights; (ii) the availability of equitable remedies,
including specific performance and injunctive relief, is subject to the
discretion of the court before which any proceeding therefor may be brought;
(iii) we have assumed the due authorization, execution and delivery of the
Agreement by each of the other parties thereto other than the Company and (iv)
no opinion is expressed as to the enforceability of (1) provisions requiring
indemnification for liabilities under the securities law or (2) the
non-competition provisions included therein.
We understand that we have no obligation to update this opinion to
reflect any facts or circumstances occurring after the date hereof, provided
however, that unless we otherwise notify you in or prior to the Funding and
Consummation Date that this opinion may no longer be relied upon, you shall be
entitled to rely on this opinion as of the Funding and Consummation Date if it
were dated on such date.
We render the foregoing opinions as members of the Bar of the State of
[state of incorporation of COMPANY] and express no opinion as to laws other than
the laws of such state, the General Corporation Law of the State of Delaware and
the federal laws of the United States of America (other than federal laws
applicable to patents, copyrights and trademarks).
Very truly yours,
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ANNEX VIII
FORM OF EMPLOYMENT AGREEMENT
[to come]
<PAGE>
<PAGE>
SCHEDULE to EXHIBIT 2.1
Identification of Substantially Identical Agreements and Plans of Organization
1 AGREEMENT AND PLAN OF ORGANIZATION made as of May 9, 1997, by and among
COLLECTIBLES USA, INC., a Delaware corporation ("CUI"), FILMART ACQUISITION
CORP., a Delaware corporation, FILMART PRODUCTIONS, INC., a New York
corporation, and each of Aron Laikin and Susan Spiegel pursuant to which
$100,000 in cash and 236,363 shares of Common Stock of CUI is to be paid, as
aggregate consideration, to the selling stockholders.*
2 AGREEMENT AND PLAN OF ORGANIZATION made as of May 9, 1997, by and among
COLLECTIBLES USA, INC., a Delaware corporation ("CUI"), ARA ACQUISITION CORP., a
Delaware corporation, AMERICAN ROYAL ARTS CORP., a Delaware corporation, and
Jerry Gladstone pursuant to which $2,814,000 in cash and 563,636 shares of
Common Stock of CUI is to be paid, as aggregate consideration, to the selling
stockholder.*
3 AGREEMENT AND PLAN OF ORGANIZATION made as of May 9, 1997, by and among
COLLECTIBLES USA, INC., a Delaware corporation ("CUI"), STONE'S ACQUISITION
CORP., a Delaware corporation, STONE'S SHOPS, INC., an Illinois corporation, and
each of David Stone and Mary Ella Stone pursuant to which $1,350,000 in cash and
350,000 shares of Common Stock of CUI is to be paid, as aggregate consideration,
to the selling stockholders.*
4 AGREEMENT AND PLAN OF ORGANIZATION made as of May 9, 1997, by and among
COLLECTIBLES USA, INC., a Delaware corporation ("CUI"), ST. GEORGE ACQUISITION
CORP., a Delaware corporation, ST. GEORGE, INC., a New Jersey corporation, and
each of Jean Holt, Robert St. George and Carmella Pugliese pursuant to which
$400,000 in cash and 85,000 shares of Common Stock of CUI is to be paid, as
aggregate consideration, to the selling stockholders.*
5 AGREEMENT AND PLAN OF ORGANIZATION made as of May 9, 1997, by and among
COLLECTIBLES USA, INC., a Delaware corporation ("CUI"), ELWELL ACQUISITION
CORP., a Delaware corporation, ELWELL STORES, INC., a Florida corporation, and
each of Roy C. Elwell and Kim A. Elwell pursuant to which $1,000,000 in cash and
168,181 shares of Common Stock CUI is to be paid, as aggregate consideration, to
the selling stockholders.*
6 AGREEMENT AND PLAN OF ORGANIZATION made as of May 9, 1997, by and among
COLLECTIBLES USA, INC., a Delaware corporation ("CUI"), DKG ACQUISITION CORP., a
Delaware corporation, DKG ENTERPRISES, INC., an Oklahoma corporation, and 4D
Investment Limited Partnership II pursuant to which $1,800,000 in cash and
359,090 shares of Common Stock of CUI is to be paid, as aggregate consideration,
to the selling stockholder.*
7 AGREEMENT AND PLAN OF ORGANIZATION made as of May 9, 1997, by and among
COLLECTIBLES USA, INC., a Delaware corporation ("CUI"), BASE ACQUISITION CORP.,
a Delaware corporation, BASE, INC., a Nevada corporation, and each of Paul
Applegate, Vincent J. Browne, Randolph Ellspermann and Gary Schultz pursuant to
which $236,250 as repayment of indebtedness is to be paid to the selling
stockholders.*
<PAGE>
8 AGREEMENT AND PLAN OF ORGANIZATION made as of May 9, 1997, by and among
COLLECTIBLES USA, INC., a Delaware corporation ("CUI"), CRYSTAL PALACE
ACQUISITION CORP., a Delaware corporation, VINCENT J. BROWNE, INC., a California
corporation, and Vincent J. Browne pursuant to which $175,000 in cash and 62,000
shares of Common Stock of CUI is to be paid, as aggregate consideration, to the
selling stockholder.*
9 AGREEMENT AND PLAN OF ORGANIZATION made as of May 9, 1997, by and among
COLLECTIBLES USA, INC., a Delaware corporation ("CUI"), CRYSTAL GALLERIA
ACQUISITION CORP., a Delaware corporation, CRYSTAL GALLERIA, INC., a Nevada
corporation, and each of Vincent J. Browne, Paul Applegate, Randolph
Ellspermann, Carol Ellspermann and Gary Schultz pursuant to which $1,000,000 in
cash and 277,272 shares of Common Stock of CUI is to be paid, as aggregate
consideration, to the selling stockholders.*
10 AGREEMENT AND PLAN OF ORGANIZATION made as of May 9, 1997, by and among
COLLECTIBLES USA, INC., a Delaware corporation ("CUI"), ANIMATION USA
ACQUISITION CORP., a Delaware corporation, ANIMATION USA, INC., a Washington
corporation, and each of David Vice, Laine Ross, William A. Vice, Ruth Vice,
William A. Vice Revocable Trust, Craig Marria and Debra J. Marria pursuant to
which $600,000 in cash and 145,454 shares of Common Stock of CUI is to be paid,
as aggregate consideration, to the selling stockholders.*
* 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.
AMENDED AND RESTATED
BY-LAWS
OF
COLLECTIBLES USA, INC. (f/k/a/ COLLECTIBLES ENTERPRISES, INC.)
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. - The registered office shall be
established and maintained at c/o United Corporate Services, Inc., 15 East North
Street, Dover, Delaware 19901 and United Corporate Services, Inc. shall be the
registered agent of this corporation in charge thereof.
SECTION 2. OTHER OFFICES. - The corporation may have other offices,
either within or without the State of Delaware, at such place or places as the
Board of Directors may from time to time appoint or the business of the
corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. ANNUAL MEETINGS. - Annual meetings of stockholders for the
election of directors and for such other business as may be stated in the notice
of the meeting, shall be held at such place, either within or without the State
of Delaware, and at such time and date as the Board of Directors, by resolution,
shall determine and as set forth in the notice of meeting. In the event the
Board of Directors fails to so determine the time, date and place of meeting,
the annual meeting of stockholders shall be held at the registered office of the
corporation in Delaware.
If the date of the annual meeting shall fall upon a legal holiday, the
meeting shall he held on the next succeeding business day. At each annual
meeting, the stockholders entitled to vote shall elect a Board of Directors and
they may transact such other corporate business as shall be stated in the notice
of the meeting.
SECTION 2. OTHER MEETINGS. - Meetings of stockholders for any purpose
other than the election of directors may be held at such time and place, within
or without the State of Delaware, as shall be stated in the notice of the
meeting.
SECTION 3. VOTING. - Each stockholder entitled to vote in accordance
with the terms of the Certificate of Incorporation and in accordance with the
provisions of these By-Laws shall be entitled to one vote, in person or by
proxy, for each share of stock entitled to vote held by such stockholder, but no
proxy shall be voted after three years from its date unless such proxy provides
for a longer period. Upon the demand of any stockholder, the vote for directors
and the
<PAGE>
vote upon any question before the meeting, shall be by ballot. All elections for
directors shall be decided by plurality vote; all other questions shall be
decided by majority vote except as otherwise provided by the Certificate of
Incorporation or the laws of the State of Delaware.
A complete list of the stockholders entitled to vote at the ensuing
election, arranged in alphabetical order, with the address of each, and the
number of shares held by each, shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten days prior to the meeting, either at a place
within the city where the meeting is to be held, which place shall be specified
in the notice of the meeting, or, if not so specified, at the place where the
meeting is to be held. The list shall also be produced and kept at the time and
place of the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
SECTION 4. QUORUM. - Except as otherwise required by law, by the
Certificate of Incorporation or by these By-Laws, the presence, in person or by
proxy, of stockholders holding a majority of the stock of the corporation
entitled to vote shall constitute a quorum at all meetings of the stockholders.
In case a quorum shall not be present at any meeting, a majority in interest of
the stockholders entitled to vote thereat, present in person or by proxy, shall
have power to adjourn the meeting from time to time, without notice other than
announcement at the meeting, until the requisite amount of stock entitled to
vote shall be present. At any such adjourned meeting at which the requisite
amount of stock entitled to vote shall be represented, any business may be
transacted which might have been transacted at the meeting as originally
noticed; but only those stockholders entitled to vote at the meeting as
originally noticed shall be entitled to vote at any adjournment or adjournments
thereof. If the adjournment is for more than thirty (30) days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
SECTION 5. SPECIAL MEETINGS. - Special meetings of the stockholders for
any purpose or purposes may be called by the President or Secretary, or by
resolution of the directors.
SECTION 6. NOTICE OF MEETINGS. - Written notice, stating the place,
date and time of the meeting, and the general nature of the business to be
considered, shall be given to each stockholder entitled to vote thereat at his
address as it appears on the records of the corporation, not less than ten nor
more than sixty days before the date of the meeting. No business other than that
stated in the notice shall be transacted at any meeting without the unanimous
consent of all the stockholders entitled to vote thereat.
SECTION 7. ACTION WITHOUT MEETING. - Unless otherwise provided by the
Certificate of Incorporation, any action required to be taken at any annual or
special meeting of stockholders, or any action which may be taken at any annual
or special meeting, may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the
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action so taken, shall be signed by the holders of outstanding stock having not
less than the minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all shares entitled to vote thereon were
present and voted. Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
ARTICLE III
DIRECTORS
SECTION 1. NUMBER AND TERM. - The number of directors shall be nine
(9). The directors shall be elected at the annual meeting of the stockholders
and each director shall be elected to serve until his successor shall be elected
and shall qualify. A director need not be a stockholder.
SECTION 2. RESIGNATIONS. - Any director, member of a committee or other
officer may resign at any time. Such resignation shall be made in writing, and
shall take effect at the time specified therein, and if no time be specified, at
the time of its receipt by the President or Secretary. The acceptance of a
resignation shall not be necessary to make it effective.
SECTION 3. VACANCIES. - If the office of any director, member of a
committee or other officer becomes vacant, the remaining directors in office,
though less than a quorum by a majority vote, may appoint any qualified person
to fill such vacancy, who shall hold office for the unexpired term and until his
successor shall be duly chosen.
SECTION 4. REMOVAL. - Any director or directors may be removed either
for or without cause at any time by the affirmative vote of the holders of a
majority of all the shares of stock outstanding and entitled to vote at a
special meeting of the stockholders called for the purpose, and the vacancies
thus created may be filled, at the meeting held for the purpose of removal, by
the affirmative vote of a majority in interest of the stockholders entitled to
vote.
SECTION 5. INCREASE OF NUMBER. - The number of directors may be
increased by amendment of these By-Laws by the affirmative vote of a majority of
the directors, though less than a quorum, or, by the affirmative vote of a
majority in interest of the stockholders, at the annual meeting or at a special
meeting called for that purpose, and by like vote the additional directors may
be chosen at such meeting to hold office until the next annual election and
until their successors are elected and qualified.
SECTION 6. POWERS. - The Board of Directors shall exercise all of the
powers of the corporation except such as are by law, or by the Certificate of
Incorporation of the corporation or by theseBy-Laws conferred upon or reserved
to the stockholders.
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SECTION 7. COMMITTEES. - The Board of Directors may, by resolution or
resolutions passed by a majority of the whole board, designate one or more
committees, each committee to consist of one or more of the directors of the
corporation. The Board may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of any member or
such committee or committees, the member or members thereof present at any such
meeting and not disqualified from voting, whether or not he or they constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at the meeting in the place of any such absent or disqualified member.
Any such committee, to the extent provided in the resolution of the
Board of Directors, or in these By-Laws, shall have and may exercise all the
powers and authority of the Board of Directors in the management of the business
and affairs of the corporation, and may authorize the seal of the corporation to
be affixed to all papers which may require it; but no such committee shall have
the power of authority in reference to amending the Certificate of
Incorporation, adopting an agreement of merger or consolidation, recommending to
the stockholders the sale, lease or exchange of all or substantially all of the
corporation's property and assets, recommending to the stockholders a
dissolution of the corporation or a revocation of a dissolution, or amending the
By-Laws of the corporation; and unless the resolution, these By-Laws, or the
Certificate of Incorporation expressly so provide, no such committee shall have
the power or authority to declare a dividend or to authorize the issuance of
stock.
SECTION 8. MEETINGS. - The newly elected Board of Directors may hold
their first meeting for the purpose of organization and the transaction of
business, if a quorum be present, immediately after the annual meeting of the
stockholders; or the time and place of such meeting may be fixed by consent, in
writing, of all the directors.
Unless restricted by the incorporation document or elsewhere in these
By-Laws, members of the Board of Directors or any committee designated by such
Board may participate in a meeting of such Board or committee by means of
conference telephone or similar communications equipment allowing all persons
participating in the meeting to hear each other at the same time. Participation
by such means shall constitute presence in person at such meeting.
Regular meetings of the Board of Directors may be scheduled by a
resolution adopted by the Board. The Chairman of the Board or the President or
Secretary may call, and if requested by any two directors, must call a special
meeting of the Board and give five days' notice by mail, or two days' notice
personally or by telegraph or cable to each director. The Board of Directors may
hold an annual meeting, without notice, immediately after the annual meeting of
stockholders.
SECTION 9. QUORUM. - A majority of the directors shall constitute a
quorum for the transaction of business. If at any meeting of the Board there
shall be less than a quorum present, a majority of those present may adjourn the
meeting from time to time until a quorum is
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obtained, and no further notice thereof need be given other than by announcement
at the meeting which shall be so adjourned.
SECTION 10. COMPENSATION. - Directors shall not receive any stated
salary for their services as directors or as members of committees, but by
resolution of the Board a fixed fee and expenses of attendance may be allowed
for attendance at each meeting. Nothing herein contained shall be construed to
preclude any director from serving the corporation in any other capacity as an
officer, agent or otherwise, and receiving compensation therefor.
SECTION 11. ACTION WITHOUT MEETING. - Any action required or permitted
to be taken at any meeting of the Board of Directors, or of any committee
thereof, may be taken without a meeting, if prior to such action a written
consent thereto is signed by all members of the Board, or of such committee as
the case may be, and such written consent is filed with the minutes of
proceedings of the Board or committee.
ARTICLE IV
OFFICERS
SECTION 1. OFFICERS. - The officers of the corporation shall be a
President and a Secretary, all of whom shall be elected by the Board of
Directors and who shall hold office until their successors are elected and
qualified. In addition, the Board of Directors may elect one or more
Vice-Presidents, a Treasurer and such Assistant Secretaries and Assistant
Treasurers as they may deem proper. None of the officers of the corporation need
be directors. The officers shall be elected at the first meeting of the Board of
Directors after each annual meeting. More than two offices may be held by the
same person.
SECTION 2. OTHER OFFICERS AND AGENTS. - The Board of Directors may
appoint such other officers and agents as it may deem advisable, who shall hold
their offices for such terms and shall exercise such powers and perform such
duties as shall be determined from time to time by the Board of Directors.
SECTION 3. PRESIDENT. - The President shall be the chief executive
officer of the corporation and shall have the general powers and duties of
supervision and management usually vested in the office of President of a
corporation. He shall preside at all meetings of the stockholders if present
thereat, and in the absence of the Chairman of the Board of Directors, at all
meetings of the Board of Directors, and shall have general supervision,
direction and control of the business of the corporation. Except as the Board of
Directors shall authorize the execution thereof in some other manner, he shall
execute bonds, mortgages and other contracts on behalf of the corporation, and
shall cause the seal to be affixed to any instrument requiring it and when so
affixed the seal shall be attested by the signature of the Secretary or the
Treasurer or Assistant Secretary or an Assistant Treasurer.
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SECTION 4. VICE-PRESIDENT. - Each Vice-President shall have such powers
shall perform such duties as shall be assigned to him by the directors.
SECTION 5. TREASURER. - The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate account of
receipts and disbursements in books belonging to the corporation. He shall
deposit all moneys and other valuables in the name and to the credit of the
corporation in such depositories as may be designated by the Board of Directors.
The Treasurer shall disburse the funds of the corporation as may be
ordered by the Board of Directors, or the President, taking proper vouchers for
such disbursements. He shall render to the President and Board of Directors at
the regular meetings of the Board of Directors, or whenever they may request it,
an account of all his transactions as Treasurer and of the financial condition
of the corporation. If required by the Board of Directors, he shall give the
corporation a bond for the faithful discharge of his duties in such amount and
with such surety as the Board shall prescribe.
SECTION 6. SECRETARY. - The Secretary shall give, or cause to be given,
notice of all meetings of stockholders and directors, and all other notices
required by the law or by these By-Laws, and in case of his absence or refusal
or neglect so to do, any such notice may be given by any person thereunto
directed by the President, or by the directors, or stockholders, upon whose
requisition the meeting is called as provided in these By-Laws. He shall record
all the proceedings of the meetings of the corporation and of the directors in a
book to be kept for that purpose, and shall perform such other duties as may be
assigned to him by the directors or the President. He shall have the custody of
the seal of the corporation and shall affix the same to all instruments
requiring it, when authorized by the directors or the President, and attest the
same.
SECTION 7. ASSISTANT TREASURERS AND ASSISTANT SECRETARIES. - Assistant
Treasurers and Assistant Secretaries, if any, shall be elected and shall have
such powers and shall perform such duties as shall be assigned to them,
respectively, by the directors.
ARTICLE V
MISCELLANEOUS
SECTION 1. CERTIFICATES OF STOCK. - A certificate of stock, signed by
the President or Vice-President, and the Treasurer or an Assistant Treasurer, or
Secretary or Assistant Secretary, shall be issued to each stockholder certifying
the number of shares owned by him in the corporation. When such certificates are
countersigned (1) by a transfer agent other than the corporation or its
employee, or, (2) by a registrar other than the corporation or its employee, the
signatures of such officers may be facsimiles.
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SECTION 2. LOST CERTIFICATES. - A new certificate of stock may be
issued in place of any certificate theretofore issued by the corporation,
alleged to have been lost or destroyed, and the directors may, in their
discretion, require the owner of the lost or destroyed certificate, or his legal
representatives, to give the corporation a bond, in such sum as they may direct,
not exceeding double the value of the stock, to indemnify the corporation
against any claim that may be made against it on account of the alleged loss of
any such certificate, or the issuance of any such new certificate.
SECTION 3. TRANSFER OF SHARES. - The shares of stock of the corporation
shall be transferable only upon its books by the holders thereof in person or by
their duly authorized attorneys or legal representatives, and upon such transfer
the old certificate shall be surrendered to the corporation by the delivery
thereof to the person in charge of the stock and transfer books and ledgers, or
to such other person as the directors may designate, by whom they shall be
cancelled, and new certificates shall thereupon be issued. A record shall be
made of each transfer and whenever a transfer shall be made for collateral
security, and not absolutely, it shall be so expressed in the entry of the
transfer.
SECTION 4. STOCKHOLDERS RECORD DATE. - In order that the corporation
may determine the stockholders entitled to notice of or to vote at any meeting
of stockholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock,
the Board of Directors may fix a record date, which date shall not be more than
sixty nor less than ten days before the date of such meeting, nor more than
sixty days prior to any other action. A determination of stockholders of record
entitled to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board of Directors may
fix a new record date for the adjourned meeting.
SECTION 5. DIVIDENDS. - Subject to the provisions of the Certificate of
Incorporation, the Board of Directors may, out of funds legally available
therefor at any regular or special meeting, declare dividends upon the capital
stock of the corporation as and when they deem expedient. Before declaring any
dividend there may be set apart out of any funds of the corporation available
for dividends, such sum or sums as the directors from time to time in their
discretion deem proper for working capital or as a reserve fund to meet
contingencies or for equalizing dividends or for such other purposes as the
directors shall deem conducive to the interests of the corporation.
SECTION 6. SEAL. - The corporate seal shall be circular in form and
shall contain the name of the corporation, the year of its creation and the
words "Corporate Seal, Delaware, 1900". Said seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.
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SECTION 7. FISCAL YEAR. - The fiscal year of the corporation shall be
determined by resolution of the Board of Directors.
SECTION 8. CHECKS. - All checks, drafts or other orders for the payment
of money, notes or other evidences of indebtedness issued in the name of the
corporation shall be signed by such officer or officers, agent or agents of the
corporation, and in such manner as shall be determined from time to time by
resolution of the Board of Directors.
SECTION 9. NOTICE AND WAIVER OF NOTICE. - Whenever any notice is
required by these By-Laws to be given, personal notice is not meant unless
expressly so stated, and any notice so required shall be deemed to be sufficient
if given by depositing the same in the United States mail, postage prepaid,
addressed to the person entitled thereto at his address as it appears on the
records of the corporation, and such notice shall be deemed to have been given
on the day of such mailing. Stockholders not entitled to vote shall not be
entitled to receive notice of any meetings except as otherwise provided by
statute.
Whenever any notice whatever is required to be given under the
provisions of any law, or under the provisions of the Certificate of
Incorporation of the corporation or these By-Laws, a waiver thereof in writing,
signed by the person or persons entitled to said notice, whether before or after
the time stated therein, shall be deemed equivalent thereto.
ARTICLE VI
AMENDMENTS
These By-Laws may be altered or repealed and By-Laws may be made at any
annual meeting of the stockholders or at any special meeting thereof if notice
of the proposed alteration or repeal of By-Law or By-Laws to be made be
contained in the notice of such special meeting, by the affirmative vote of a
majority of the stock issued and outstanding and entitled to vote thereat, or by
the affirmative vote of a majority of the Board of Directors, at any regular
meeting of the Board of Directors, or at any special meeting of the Board of
Directors, if notice of the proposed alteration or repeal of By-Law or By-Laws
to be made, be contained in the notice of such special meeting.
ARTICLE VII
INDEMNIFICATION
No director shall be liable to the corporation or any of its
stockholders for monetary damages for breach of fiduciary duty as a director,
except with respect to (1) a breach of the director's duty of loyalty to the
corporation or its stockholders, (2) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (3)
liability which may be specifically defined by law or (4) a transaction from
which the director derived an improper
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personal benefit, it being the intention of the foregoing provision to eliminate
the liability of the corporation's directors to the corporation or its
stockholders to the fullest extent permitted by law. The corporation shall
indemnify to the fullest extent permitted by law each person that such law
grants the corporation the power to indemnify.
9
FORM OF COMMON STOCK CERTIFICATE OF THE COMPANY
Number SPECIMEN Shares
** **
Incorporated under the Laws of the State of Delaware
Collectibles USA, Inc.
Each share has not been registered under the securities laws of the United
States of America or any state thereof. Accordingly, no shares 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 from such.
THIS CERTIFIES THAT __________________________________________________
is the owner of _______________________________________________________________
fully-paid and non-assessable Shares of Common Stock, no par value per share, of
the above Corporation transferrable on the books of the Corporation in person or
by duly authorized Attorney upon surrender of this Certificate properly
endorsed.
IN WITNESS WHEREOF the Corporation has caused this certificate to be executed by
its duly authorized officers. Dated: __________, 199_
___________________________ _______________________________________________
President or Vice-President (Assistant) Treasurer or (Assistant) Secretary
1997 LONG-TERM INCENTIVE PLAN
COLLECTIBLES USA, INC.
1997 LONG-TERM INCENTIVE PLAN
1. Purpose. The purpose of the 1997 Long-Term Incentive Plan (the
"Plan") of Collectibles USA, Inc., a Delaware corporation (the "Company"), is to
advance the interests of the Company and its stockholders by providing a means
to attract, retain and reward executive officers (as well as directors who serve
as executive officers) and other key employees and consultants of and service
providers to the Company and its subsidiaries and to enable such persons to
acquire or increase a proprietary interest in the Company, thereby promoting a
closer identity of interests between such persons and the Company's
stockholders.
2. Definitions. The definitions of awards under the Plan, including
Options, SARs (including Limited SARs), Restricted Stock, Deferred Stock, Stock
granted as a bonus or in lieu of other awards, Dividend Equivalents and Other
Stock-Based Awards are set forth in Section 6 of the Plan. Such awards, together
with any other right or interest granted to a Participant under the Plan, are
termed "Awards." For purposes of the Plan, the following additional terms shall
be defined as set forth below:
(a) "Award Agreement" means any written agreement, contract, notice or
other instrument or document evidencing an Award.
(b) "Beneficiary" shall mean the person, persons, trust or trusts which
have been designated by a Participant in his or her most recent written
beneficiary designation filed with the Committee to receive the benefits
specified under the Plan upon such Participant's death or, if there is no
designated Beneficiary or surviving designated Beneficiary, then the person,
persons, trust or trusts entitled by will or the laws of descent and
distribution to receive such benefits.
(c) "Board" means the Board of Directors of the Company.
(d) A "Change in Control" shall be deemed to have occurred if:
(i) any person, other than the Company or an employee benefit
plan of the Company, acquires directly or indirectly the Beneficial
Ownership (as defined in Section 13(d) of the Exchange Act) 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 percent or more of the total voting power
of all of the then outstanding voting securities of the Company;
(ii) the following individuals no longer constitute a majority of
the members of the Board: (A) the individuals who, as of the closing
date of the Initial Public Offering, constitute the Board (the
"Original Directors"); (B) the individuals who
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thereafter are elected to the Board and whose election, or nomination
for election, to the Board 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 and whose election, or nomination for election, to the Board
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 approve a merger,
consolidation, recapitalization or reorganization of the Company, or 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 percent 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 percent 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 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 percent or more of the total assets of the Company).
(e) "Code" means the Internal Revenue Code of 1986, as amended from
time to time. References to any provision of the Code shall be deemed to include
regulations thereunder and successor provisions and regulations thereto.
(f) "Committee" means the Compensation Committee of the Board, or such
other Board committee as may be designated by the Board to administer the Plan;
provided, however, that the Committee shall consist of two or more directors. In
appointing members of the Committee, the Board will consider whether each member
will qualify as a "Non-Employee Director" within the meaning of Rule 16b-3(b)(3)
and as an "outside director" within the meaning of Treasury Regulation
1.162-27(e)(3) under Code Section 162(m), but such members are not required to
so qualify at the time of appointment or during their term of service on the
Committee.
(g) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time. References to any provision of the Exchange Act shall
be deemed to include rules thereunder and successor provisions and rules
thereto.
(h) "Fair Market Value" means, with respect to Stock, Awards or other
property, the fair market value of such Stock, Awards or other property
determined by such methods or
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procedures as shall be established from time to time by the Committee, provided,
however, that (i) if the Stock is listed on a national securities exchange or
quoted in an interdealer quotation system, the Fair Market Value of such Stock
on a given date shall be based upon the last sales price or, if unavailable, the
average of the closing bid and asked prices per share of the Stock on such date
(or, if there was no trading or quotation in the Stock on such date, on the next
preceding date on which there was trading or quotation) as provided by one of
such organizations, (ii) the "Fair Market Value" of Stock subject to Options
granted effective on the date on which Shares are first issued and sold pursuant
to a registration statement filed with, and declared effective by, the
Securities and Exchange Commission shall be the Initial Public Offering price of
the Shares so issued and sold, as set forth in the first final prospectus used
in such offering (the provisions of clause (i) notwithstanding) and (iii) the
"Fair Market Value" of Stock prior to the date of the Initial Public Offering
shall be as determined by the Board of Directors.
(i) "Initial Public Offering" shall mean an initial public offering of
shares of Stock in a firm commitment underwriting registered with the Securities
and Exchange Commission in compliance with the provisions of the Securities Act
of 1933, as amended.
(j) "ISO" means any Option intended to be and designated as an
incentive stock option within the meaning of Section 422 of the Code.
(k) "NQSO" shall mean an Option granted pursuant to the Plan to
purchase shares of the Stock that is not an ISO.
(l) "Participant" means a person who, at a time when eligible under
Section 5 hereof, has been granted an Award under the Plan.
(m) "Rule 16b-3" means Rule 16b-3, as from time to time in effect and
applicable to the Plan and Participants, promulgated by the Securities and
Exchange Commission under Section 16 of the Exchange Act.
(n) "Stock" means the common stock, $.01 par value, of the Company and
such other securities as may be substituted for Stock or such other securities
pursuant to Section 4.
3. Administration.
(a) Authority of the Committee. The Plan shall be administered by the
Committee. The Committee shall have full and final authority to take the
following actions, in each case subject to and consistent with the provisions of
the Plan:
(i) to select persons to whom Awards may be granted;
(ii) to determine the type or types of Awards to be granted to
each such person;
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(iii) to determine the number of Awards to be granted, the number
of shares of Stock to which an Award will relate, the terms and
conditions of any Award granted under the Plan (including, but not
limited to, any exercise price, grant price or purchase price, any
restriction or condition, any schedule for lapse of restrictions or
conditions relating to transferability or forfeiture, exercisability
or settlement of an Award, and waivers or accelerations thereof,
performance conditions relating to an Award (including performance
conditions relating to Awards not intended to be governed by Section
7(f) and waivers and modifications thereof), based in each case on
such considerations as the Committee shall determine), and all other
matters to be determined in connection with an Award;
(iv) to determine whether, to what extent and under what
circumstances an Award may be settled, or the exercise price of an
Award may be paid, in cash, Stock, other Awards, or other property, or
an Award may be canceled, forfeited, or surrendered;
(v) to determine whether, to what extent and under what
circumstances cash, Stock, other Awards or other property payable with
respect to an Award will be deferred either automatically, at the
election of the Committee or at the election of the Participant;
(vi) to prescribe the form of each Award Agreement, which need
not be identical for each Participant;
(vii) to adopt, amend, suspend, waive and rescind such rules and
regulations and appoint such agents as the Committee may deem
necessary or advisable to administer the Plan;
(viii) to correct any defect or supply any omission or reconcile
any inconsistency in the Plan and to construe and interpret the Plan
and any Award, rules and regulations, Award Agreement or other
instrument hereunder; and
(ix) to make all other decisions and determinations as may be
required under the terms of the Plan or as the Committee may deem
necessary or advisable for the administration of the Plan.
Other provisions of the Plan notwithstanding, the Board may perform any function
of the Committee under the Plan, including without limitation for the purpose of
ensuring that transactions under the Plan by Participants who are then subject
to Section 16 of the Exchange Act in respect of the Company are exempt under
Rule 16b-3. In any case in which the Board is performing a function of the
Committee under the Plan, each reference to the Committee herein shall be deemed
to refer to the Board.
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(b) Manner of Exercise of Committee Authority. Any action of the
Committee with respect to the Plan shall be final, conclusive and binding on all
persons, including the Company, subsidiaries of the Company, Participants, any
person claiming any rights under the Plan from or through any Participant and
stockholders, except to the extent the Committee may subsequently modify, or
take further action not consistent with, its prior action. If not specified in
the Plan, the time at which the Committee must or may make any determination
shall be determined by the Committee, and any such determination may thereafter
by modified by the Committee (subject to Section 8(e)). The express grant of any
specific power to the Committee, and the taking of any action by the Committee,
shall not be construed as limiting any power or authority of the Committee.
Except as provided under Section 7(f), the Committee may delegate to officers or
managers of the Company or any subsidiary of the Company the authority, subject
to such terms as the Committee shall determine, to perform such functions as the
Committee may determine, to the extent permitted under applicable law.
(c) Limitation of Liability. Each member of the Committee shall be
entitled to, in good faith, rely or act upon any report or other information
furnished to him by any officer or other employee of the Company or any
subsidiary, the Company's independent certified public accountants or any
executive compensation consultant, legal counsel or other professional retained
by the Company to assist in the administration of the Plan. No member of the
Committee, nor any officer or employee of the Company acting on behalf of the
Committee, shall be personally liable for any action, determination or
interpretation taken or made in good faith with respect to the Plan, and all
members of the Committee and any officer or employee of the Company acting on
its behalf shall, to the extent permitted by law, be fully indemnified and
protected by the Company with respect to any such action, determination or
interpretation.
4. Stock Subject to Plan.
----------------------
(a) Amount of Stock Reserved. The total amount of Stock that may be
awarded pursuant to the Plan shall not exceed 15% of the total number of shares
of Stock outstanding at the time of determination. Notwithstanding the
foregoing, the number of shares that may be delivered upon the exercise of ISOs
shall not exceed 300,000 (subject to adjustment as provided in Section 4(c));
provided, however, that shares subject to ISOs shall not be deemed delivered if
such Awards are forfeited, expire or otherwise terminate without delivery of
shares to the Participant. If an Award valued by reference to Stock may only be
settled in cash, the number of shares to which such Award relates shall be
deemed to be Stock subject to such Award for purposes of this Section 4(a). Any
shares of Stock delivered pursuant to an Award may consist, in whole or in part,
of authorized and unissued shares, treasury shares or shares acquired in the
market for a Participant's Account.
(b) Annual Per-Participant Limitations. During any calendar year, no
Participant may be granted Awards that may be settled by delivery of more than
150,000 shares of Stock, subject to adjustment as provided in Section 4(c). In
addition, with respect to Awards that may be settled in cash (in whole or in
part), no Participant may be paid during any calendar year cash
5
<PAGE>
amounts relating to such Awards that exceed the greater of the Fair Market Value
of the number of shares of Stock set forth in the preceding sentence at the date
of grant or the date of settlement of Award. This provision sets forth two
separate limitations, so that Awards that may be settled solely by delivery of
Stock will not operate to reduce the amount of cash-only Awards, and vice versa;
nevertheless, Awards that may be settled in Stock or cash must not exceed either
limitation.
(c) Adjustments. In the event that the Committee shall determine that
any recapitalization, forward or reverse split, reorganization, merger,
consolidation, spin-off, combination, repurchase or exchange of Stock or other
securities, Stock dividend or other special, large and non-recurring dividend or
distribution (whether in the form of cash, securities or other property),
liquidation, dissolution, or other similar corporate transaction or event,
affects the Stock such that an adjustment is appropriate in order to prevent
dilution or enlargement of the rights of Participants under the Plan, then the
Committee shall, in such manner as it may deem equitable, adjust any or all of
(i) the number and kind of shares of Stock reserved and available for Awards
under Section 4(a), including shares reserved for the ISOs, (ii) the number and
kind of shares of Stock specified in the Annual Per-Participant Limitations
under Section 4(b), (iii) the number and kind of shares of outstanding
Restricted Stock or other outstanding Award in connection with which shares have
been issued, (iv) the number and kind of shares that may be issued in respect of
other outstanding Awards and (v) the exercise price, grant price or purchase
price relating to any Award (or, if deemed appropriate, the Committee may make
provision for a cash payment with respect to any outstanding Award). In
addition, the Committee is authorized to make adjustments in the terms and
conditions of, and the criteria included in, Awards in recognition of unusual or
nonrecurring events (including, without limitation, cancellation of unexercised
or outstanding Awards, or substitution of Awards using stock of a successor or
other entity) in recognition of unusual or nonrecurring events (including
without limitation events described in the preceding sentence and events
constituting a Change in Control) affecting the Company or any subsidiary or the
financial statements of the Company or any subsidiary, or in response to changes
in applicable laws, regulations, or accounting principles.
5. Eligibility. Executive officers and other key employees of the
Company and its subsidiaries, including any member of the Board who is also such
an employee, and persons who provide consulting or other services to the Company
deemed by the Committee to be of substantial value to the Company, are eligible
to be granted Awards under the Plan. In addition, persons who have been offered
employment by the Company or its subsidiaries, and persons employed by an entity
that the Committee reasonably expects to become a subsidiary of the Company, are
eligible to be granted an Award under the Plan; provided, however, that such
Award shall be canceled if such person fails to commence such employment, or
such entity fails to become a subsidiary and no payment of value may be made in
connection with such Award until such person has commenced such employment or
until such entity becomes a subsidiary.
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6. Specific Terms of Awards.
------------------------
(a) General. Awards may be granted on the terms and conditions set
forth in this Section 6. In addition, the Committee may impose on any Award or
the exercise thereof such additional terms and conditions, not inconsistent with
the provisions of the Plan, as the Committee shall determine, including terms
requiring forfeiture of Awards in the event of termination of employment or
service of the Participant. Except as provided in Section 6(f), 6(h), or 7(a),
or to the extent required to comply with requirements of the applicable law,
only services may be required as consideration for the grant (but not the
exercise) of any Award.
(b) Options. The Committee is authorized to grant options (including
"reload" options automatically granted to offset specified exercises of
options), each of which is either an ISO or an NQSO, on the following terms and
conditions (collectively "Options"):
(i) Exercise Price. The exercise price per share of Stock
purchasable under an Option shall be determined by the Committee.
(ii) Time and Method of Exercise. The Committee shall determine
the time or times at which an Option may be exercised in whole or in
part, the methods by which such exercise price may be paid or deemed
to be paid, the form of such payment, including, without limitation,
cash, Stock, other Awards or awards granted under other Company plans
or other property (including notes or other contractual obligations of
Participants to make payment on a deferred basis, such as through
"cashless exercise" arrangements, to the extent permitted by
applicable law), and the methods by which Stock will be delivered or
deemed to be delivered to Participants.
(iii) ISOs. The terms of any ISO granted under the Plan shall
comply in all respects with the provisions of Section 422 of the Code,
including but not limited to the requirement that no ISO shall be
granted with an exercise price of less than 100% (110% for an
individual described in Section 422(b)(6) of the Code) of the Fair
Market Value of a share of Stock on the date of grant, and granted no
more than ten years after the effective date of the Plan. Anything in
the Plan to the contrary notwithstanding, no term of the Plan relating
to ISOs shall be interpreted, amended, or altered, nor shall any
discretion or authority granted under the Plan be exercised, so as to
disqualify either the Plan or any ISO under Section 422 of the Code,
unless requested by the affected Participant.
(iv) Termination of Employment. Unless otherwise determined by
the Committee, upon termination of a Participant's employment with the
Company and its subsidiaries, such Participant may exercise any
Options during the three-month period following such termination of
employment, but only to the extent such Option was exercisable
immediately prior to such termination of employment. Notwithstanding
the foregoing, if the Committee determines that
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<PAGE>
such termination is for cause, all Options held by the Participant shall
terminate as of the termination of employment.
(c) Stock Appreciation Rights. The Committee is authorized to grant
SARs on the following terms and conditions ("SARs"):
(i) Right to Payment. A SAR shall confer on the Participant to
whom it is granted a right to receive, upon exercise thereof, the
excess of (A) the Fair Market Value of one share of Stock on the date
of exercise (or, if the Committee shall so determine in the case of
any such right other than one related to an ISO, the Fair Market Value
of one share at any time during a specified period before or after the
date of exercise), over (B) the grant price of the SAR as determined
by the Committee as of the date of grant of the SAR, which, except as
provided in Section 7(a), shall be not less than the Fair Market Value
of one share of Stock on the date of grant.
(ii) Other Terms. The Committee shall determine the time or times
at which a SAR may be exercised in whole or in part, the method of
exercise, method of settlement, form of consideration payable in
settlement, method by which Stock will be delivered or deemed to be
delivered to Participants, whether or not a SAR shall be in tandem
with any other Award, and any other terms and conditions of any SAR.
"Limited SARs" that may only be exercised upon the occurrence of a
Change in Control may be granted on such terms, not inconsistent with
this Section 6(c), as the Committee may determine. Limited SARs may be
either freestanding or in tandem with other Awards.
(d) Restricted Stock. The Committee is authorized to grant Restricted
Stock on the following terms and conditions ("Restricted Stock"):
(i) Grant and Restrictions. Restricted Stock shall be subject to
such restrictions on transferability and other restrictions, if any,
as the Committee may impose, which restrictions may lapse separately
or in combination at such times, under such circumstances, in such
installments, or otherwise, as the Committee may determine. Except to
the extent restricted under the terms of the Plan and any Award
Agreement relating to the Restricted Stock, a Participant granted
Restricted Stock shall have all of the rights of a stockholder
including, without limitation, the right to vote Restricted Stock or
the right to receive dividends thereon.
(ii) Forfeiture. Except as otherwise determined by the Committee,
upon termination of employment or service (as determined under
criteria established by the Committee) during the applicable
restriction period, Restricted Stock that is at that time subject to
restrictions shall be forfeited and reacquired by the Company;
provided, however, that the Committee may provide, by rule or
regulation or in any Award Agreement, or may determine in any
individual case, that restrictions or forfeiture
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<PAGE>
conditions relating to Restricted Stock will be waived in whole or in
part in the event of termination resulting from specified causes.
(iii) Certificates for Stock. Restricted Stock granted under the
Plan may be evidenced in such manner as the Committee shall determine.
If certificates representing Restricted Stock are registered in the
name of the Participant, such certificates may bear an appropriate
legend referring to the terms, conditions, and restrictions applicable
to such Restricted Stock, the Company may retain physical possession
of the certificate, and the Participant shall have delivered a stock
power to the Company, endorsed in blank, relating to the Restricted
Stock.
(iv) Dividends. Dividends paid on Restricted Stock shall be
either paid at the dividend payment date in cash or in shares of
unrestricted Stock having a Fair Market Value equal to the amount of
such dividends, or the payment of such dividends shall be deferred
and/or the amount or value thereof automatically reinvested in
additional Restricted Stock, other Awards, or other investment
vehicles, as the Committee shall determine or permit the Participant
to elect. Stock distributed in connection with a Stock split or Stock
dividend, and other property distributed as a dividend, shall be
subject to restrictions and a risk of forfeiture to the same extent as
the Restricted Stock with respect to which such Stock or other
property has been distributed, unless otherwise determined by the
Committee.
(e) Deferred Stock. The Committee is authorized to grant Deferred Stock
subject to the following terms and conditions ("Deferred Stock"):
(i) Award and Restrictions. Delivery of Stock will occur upon
expiration of the deferral period specified for an Award of Deferred
Stock by the Committee (or, if permitted by the Committee, as elected
by the Participant). In addition, Deferred Stock shall be subject to
such restrictions as the Committee may impose, if any, which
restrictions may lapse at the expiration of the deferral period or at
earlier specified times, separately or in combination, in installments
or otherwise, as the Committee may determine.
(ii) Forfeiture. Except as otherwise determined by the Committee,
upon termination of employment or service (as determined under
criteria established by the Committee) during the applicable deferral
period or portion thereof to which forfeiture conditions apply (as
provided in the Award Agreement evidencing the Deferred Stock), all
Deferred Stock that is at that time subject to such forfeiture
conditions shall be forfeited; provided, however, that the Committee
may provide, by rule or regulation or in any Award Agreement, or may
determine in any individual case, that restrictions or forfeiture
conditions relating to Deferred Stock will be waived in whole or in
part in the event of termination resulting from specified causes.
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(f) Bonus Stock and Awards in Lieu of Cash Obligations. The Committee
is authorized to grant Stock as a bonus, or to grant Stock or other Awards in
lieu of Company obligations to pay cash under other plans or compensatory
arrangements.
(g) Dividend Equivalents. The Committee is authorized to grant Dividend
Equivalents entitling the Participant to receive cash, Stock, other Awards or
other property equal in value to dividends paid with respect to a specified
number of shares of Stock ("Dividend Equivalents"). Dividend Equivalents may be
awarded on a free-standing basis or in connection with another Award. The
Committee may provide that Dividend Equivalents shall be paid or distributed
when accrued or shall be deemed to have been reinvested in additional Stock,
Awards or other investment vehicles, and subject to such restrictions on
transferability and risks of forfeiture, as the Committee may specify.
(h) Other Stock-Based Awards. The Committee is authorized, subject to
limitations under applicable law, to grant such other Awards that may be
denominated or payable in, valued in whole or in part by reference to, or
otherwise based on, or related to, Stock and factors that may influence the
value of Stock, as deemed by the Committee to be consistent with the purposes of
the Plan, including, without limitation, convertible or exchangeable debt
securities, other rights convertible or exchangeable into Stock, purchase rights
for Stock, Awards with value and payment contingent upon performance of the
Company or any other factors designated by the Committee and Awards valued by
reference to the book value of Stock or the value of securities of or the
performance of specified subsidiaries ("Other Stock Based Awards"). The
Committee shall determine the terms and conditions of such Awards. Stock issued
pursuant to an Award in the nature of a purchase right granted under this
Section 6(h) shall be purchased for such consideration, paid for at such times,
by such methods, and in such forms, including, without limitation, cash, Stock,
other Awards, or other property, as the Committee shall determine. Cash awards,
as an element of or supplement to any other Award under the Plan, may be granted
pursuant to this Section 6(h).
7. Certain Provisions Applicable to Awards.
----------------------------------------
(a) Stand-Alone, Additional, Tandem, and Substitute Awards. Awards
granted under the Plan may, in the discretion of the Committee, be granted
either alone or in addition to, in tandem with or in substitution for any other
Award granted under the Plan or any award granted under any other plan of the
Company, any subsidiary or any business entity to be acquired by the Company or
a subsidiary, or any other right of a Participant to receive payment from the
Company or any subsidiary. Awards granted in addition to or in tandem with other
Awards or awards may be granted either as of the same time as or a different
time from the grant of such other Awards or awards.
(b) Term of Awards. The term of each Award shall be for such period as
may be determined by the Committee; provided, however, that in no event shall
the term of any ISO or a
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SAR granted in tandem therewith exceed a period of ten years from the date of
its grant (or such shorter period as may be applicable under Section 422 of the
Code).
(c) Form of Payment Under Awards. Subject to the terms of the Plan and
any applicable Award Agreement, payments to be made by the Company or a
subsidiary upon the grant, exercise or settlement of an Award may be made in
such forms as the Committee shall determine, including, without limitation,
cash, Stock, other Awards or other property, and may be made in a single payment
or transfer, in installments or on a deferred basis. Such payments may include,
without limitation, provisions for the payment or crediting of reasonable
interest on installment or deferred payments or the grant or crediting of
Dividend Equivalents in respect of installment or deferred payments denominated
in Stock.
(d) Rule 16b-3 Compliance.
----------------------
(i) Six-Month Holding Period. Unless a Participant could
otherwise dispose of equity securities, including
derivative securities, acquired under the Plan without
incurring liability under Section 16(b) of the Exchange
Act, equity securities acquired under the Plan must be
held for a period of six months following the date of
such acquisition, provided that this condition shall be
satisfied with respect to a derivative security if at
least six months elapse from the date of acquisition of
the derivative security to the date of disposition of
the derivative security (other than upon exercise or
conversion) or its underlying equity security.
(ii) Other Compliance Provisions. With respect to a
Participant who is then subject to Section 16 of the
Exchange Act in respect of the Company, the Committee
shall implement transactions under the Plan and
administer the Plan in a manner that will ensure that
each transaction by such a Participant is exempt from
liability under Rule 16b-3, except that such a
Participant may be permitted to engage in a non-exempt
transaction under the Plan if written notice has been
given to the Participant regarding the non-exempt
nature of such transaction. The Committee may authorize
the Company to repurchase any Award or shares of Stock
resulting from any Award in order to prevent a
Participant who is subject to Section 16 of the
Exchange Act from incurring liability under Section
16(b). Unless otherwise specified by the Participant,
equity securities, including derivative securities,
acquired under the Plan which are disposed of by a
Participant shall be deemed to be disposed of in the
order acquired by the Participant.
(e) Loan Provisions. With the consent of the Committee, and subject at
all times to, and only to the extent, if any, permitted under and in accordance
with, laws and regulations and other binding obligations or provisions
applicable to the Company, the Company may make, guarantee or arrange for a loan
or loans to a Participant with respect to the exercise of any Option
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or other payment in connection with any Award, including the payment by a
Participant of any or all federal, state or local income or other taxes due in
connection with any Award. Subject to such limitations, the Committee shall have
full authority to decide whether to make a loan or loans hereunder and to
determine the amount, terms and provisions of any such loan or loans, including
the interest rate to be charged in respect of any such loan or loans, whether
the loan or loans are to be with or without recourse against the borrower, the
terms on which the loan is to be repaid and conditions, if any, under which the
loan or loans may be forgiven.
(f) Performance-Based Awards. The Committee may, in its discretion,
designate any Award the exercisability or settlement of which is subject to the
achievement of performance conditions as a performance-based Award subject to
this Section 7(f), in order to qualify such Award as "qualified
performance-based compensation" within the meaning of Code Section 162(m) and
regulations thereunder. The performance objectives for an Award subject to this
Section 7(f) shall consist of one or more business criteria and a targeted level
or levels of performance with respect to such criteria, as specified by the
Committee but subject to this Section 7(f). Performance objectives shall be
objective and shall otherwise meet the requirements of Section 162(m)(4)(C) of
the Code. Business criteria used by the Committee in establishing performance
objectives for Awards subject to this Section 7(f) shall be selected from among
the following:
(1) Annual return on capital;
(2) Annual earnings or earnings per share;
(3) Annual cash flow provided by operations;
(4) Changes in annual revenues; and/or
(5) Strategic business criteria, consisting of one or more
objectives based on meeting specified revenue, market penetration,
geographic business expansion goals, cost targets, and goals relating
to acquisitions or divestitures.
The levels of performance required with respect to such business criteria may be
expressed in absolute or relative levels. Achievement of performance objectives
with respect to such Awards shall be measured over a period of not less than one
year nor more than five years, as the Committee may specify. Performance
objectives may differ for such Awards to different Participants. The Committee
shall specify the weighting to be given to each performance objective for
purposes of determining the final amount payable with respect to any such Award.
The Committee may, in its discretion, reduce the amount of a payout otherwise to
be made in connection with an Award subject to this Section 7(f), but may not
exercise discretion to increase such amount, and the Committee may consider
other performance criteria in exercising such discretion. All determinations by
the Committee as to the achievement of performance
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objectives shall be in writing. The Committee may not delegate any
responsibility with respect to an Award subject to this Section 7(f).
(g) Acceleration upon a Change of Control. Notwithstanding anything
contained herein to the contrary, unless otherwise provided by the Committee in
an Award Agreement, all conditions and restrictions relating to an Award,
including limitations on exercisability, risks of forfeiture, deferral periods
and conditions and restrictions requiring the continued performance of services
or the achievement of performance objectives with respect to the exercisability
or settlement of such Award, shall immediately lapse upon a Change in Control.
8. General Provisions.
------------------
(a) Compliance With Laws and Obligations. The Company shall not be
obligated to issue or deliver Stock in connection with any Award or take any
other action under the Plan in a transaction subject to the registration
requirements of the Securities Act of 1933, as amended, or any other federal or
state securities law, any requirement under any listing agreement between the
Company and any national securities exchange or automated quotation system or
any other law, regulation or contractual obligation of the Company until the
Company is satisfied that such laws, regulations, and other obligations of the
Company have been complied with in full. Certificates representing shares of
Stock issued under the Plan will be subject to such stop-transfer orders and
other restrictions as may be applicable under such laws, regulations and other
obligations of the Company, including any requirement that a legend or legends
be placed thereon.
(b) Limitations on Transferability. Awards and other rights under the
Plan will not be transferable by a Participant except by will or the laws of
descent and distribution or to a Beneficiary in the event of the Participant's
death, shall not be pledged, mortgaged, hypothecated or otherwise encumbered, or
otherwise subject to the claims of creditors, and, in the case of ISOs and SARs
in tandem therewith, shall be exercisable during the lifetime of a Participant
only by such Participant or his guardian or legal representative; provided,
however, that such Awards and other rights (other than ISOs and SARs in tandem
therewith) may be transferred to one or more transferees during the lifetime of
the Participant to the extent and on such terms as then may be permitted by the
Committee.
(c) No Right to Continued Employment or Service. Neither the Plan nor
any action taken hereunder shall be construed as giving any employee or other
person the right to be retained in the employ or service of the Company or any
of its subsidiaries, nor shall it interfere in any way with the right of the
Company or any of its subsidiaries to terminate any employee's employment or
other person's service at any time.
(d) Taxes. The Company and any subsidiary is authorized to withhold
from any Award granted or to be settled, any delivery of Stock in connection
with an Award, any other payment relating to an Award or any payroll or other
payment to a Participant amounts of
13
<PAGE>
withholding and other taxes due or potentially payable in connection with any
transaction involving an Award, and to take such other action as the Committee
may deem advisable to enable the Company and Participants to satisfy obligations
for the payment of withholding taxes and other tax obligations relating to any
Award. This authority shall include authority to withhold or receive Stock or
other property and to make cash payments in respect thereof in satisfaction of a
Participant's tax obligations.
(e) Changes to the Plan and Awards. The Board may amend, alter,
suspend, discontinue or terminate the Plan or the Committee's authority to grant
Awards under the Plan without the consent of stockholders or Participants,
except that any such action shall be subject to the approval of the Company's
stockholders at or before the next annual meeting of stockholders for which the
record date is after such Board action if such stockholder approval is required
by any federal or state law or regulation or the rules of any stock exchange or
automated quotation system on which the Stock may then be listed or quoted, and
the Board may otherwise, in its discretion, determine to submit other such
changes to the Plan to stockholders for approval; provided, however, that,
without the consent of an affected Participant, no such action may materially
impair the rights of such Participant under any Award theretofore granted to
him. The Committee may waive any conditions or rights under, or amend, alter,
suspend, discontinue, or terminate, any Award theretofore granted and any Award
Agreement relating thereto; provided, however, that, without the consent of an
affected Participant, no such action may materially impair the rights of such
Participant under such Award.
(f) No Rights to Awards; No Stockholder Rights. No Participant or
employee shall have any claim to be granted any Award under the Plan, and there
is no obligation for uniformity of treatment of Participants and employees. No
Award shall confer on any Participant any of the rights of a stockholder of the
Company unless and until Stock is duly issued or transferred and delivered to
the Participant in accordance with the terms of the Award or, in the case of an
Option, the Option is duly exercised.
(g) Unfunded Status of Awards; Creation of Trusts. The Plan is intended
to constitute an "unfunded" plan for incentive and deferred compensation. With
respect to any payments not yet made to a Participant pursuant to an Award,
nothing contained in the Plan or any Award shall give any such Participant any
rights that are greater than those of a general creditor of the Company;
provided, however, that the Committee may authorize the creation of trusts or
make other arrangements to meet the Company's obligations under the Plan to
deliver cash, Stock, other Awards, or other property pursuant to any Award,
which trusts or other arrangements shall be consistent with the "unfunded"
status of the Plan unless the Committee otherwise determines with the consent of
each affected Participant.
(h) Nonexclusivity of the Plan. Neither the adoption of the Plan by the
Board nor its submission to the stockholders of the Company for approval shall
be construed as creating any limitations on the power of the Board to adopt such
other compensatory arrangements as it may
14
<PAGE>
deem desirable, including, without limitation, the granting of stock options
otherwise than under the Plan, and such arrangements may be either applicable
generally or only in specific cases.
(i) No Fractional Shares. No fractional shares of Stock shall be issued
or delivered pursuant to the Plan or any Award. The Committee shall determine
whether cash, other Awards, or other property shall be issued or paid in lieu of
such fractional shares or whether such fractional shares or any rights thereto
shall be forfeited or otherwise eliminated.
(j) Compliance with Code Section 162(m). It is the intent of the
Company that employee Options, SARs and other Awards designated as Awards
subject to Section 7(f) shall constitute "qualified performance-based
compensation" within the meaning of Code Section 162(m). Accordingly, if any
provision of the Plan or any Award Agreement relating to such an Award does not
comply or is inconsistent with the requirements of Code Section 162(m), such
provision shall be construed or deemed amended to the extent necessary to
conform to such requirements, and no provision shall be deemed to confer upon
the Committee or any other person discretion to increase the amount of
compensation otherwise payable in connection with any such Award upon attainment
of the performance objectives.
(k) Governing Law. The validity, construction and effect of the Plan,
any rules and regulations relating to the Plan and any Award Agreement shall be
determined in accordance with the laws of the State of Delaware, without giving
effect to principles of conflicts of laws, and applicable federal law.
(l) Effective Date; Plan Termination. The Plan shall become effective
as of the date of its adoption by the Board, subject to stockholder approval
prior to the commencement of the Initial Public Offering, and shall continue in
effect until terminated by the Board.
15
COLLECTIBLES USA, INC.
1997 NON-EMPLOYEE DIRECTORS' STOCK PLAN
1. Purpose. The purpose of this 1997 Non-Employee Directors' Stock Plan
(the "Plan") of Collectibles USA, Inc., a Delaware corporation (the "Company"),
is to advance the interests of the Company and its stockholders by providing a
means to attract and retain highly qualified persons to serve as non-employee
directors of the Company and to enable such persons to acquire or increase their
proprietary interest in the Company, thereby promoting a closer identity of
interests between such persons and the Company's stockholders.
2. Definitions. In addition to terms defined elsewhere in the Plan, the
following are defined terms under the Plan:
(a) "Annual Option" means an Option to purchase the number of shares
specified in or under Section 6(a), subject to adjustment as provided in Section
8.
(b) A "Change in Control" shall be deemed to have occurred if:
(i) any person, other than the Company or an employee benefit
plan of the Company, acquires directly or indirectly the Beneficial
Ownership (as defined in Section 13(d) of the Exchange Act) 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 percent or more of the total voting power
of all of the then outstanding voting securities of the Company;
(ii) the following individuals no longer constitute a majority of
the members of the Board: (A) the individuals who, as of the closing
date of the Initial Public Offering, constitute the Board (the
"Original Directors"); (B) the individuals who thereafter are elected
to the Board and whose election, or nomination for election, to the
Board 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 and whose
election, or nomination for election, to the Board 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 approve a merger,
consolidation, recapitalization or reorganization of the Company, or a
reverse stock split of outstanding
<PAGE>
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 percent 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 percent 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 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 percent or more of the total assets of the Company).
(c) "Deferred Share" means a credit to a Participant's deferral account
under Section 7 which represents the right to receive one Share upon settlement
of the deferral account. Deferral accounts, and Deferred Shares credited
thereto, are maintained solely as bookkeeping entries by the Company evidencing
unfunded obligations of the Company.
(d) "Exchange Act" means the Securities Exchange Act of 1934, as
amended. References to any provision of the Exchange Act shall be deemed to
include rules thereunder and successor provisions and rules thereto.
(e) "Fair Market Value" of a Share on a given date means the fair
market value of such Share determined by such methods or procedures as shall be
established by the Board, provided, however, that if the Shares are listed on a
national securities exchange or quoted in an interdealer quotation system, the
Fair Market Value of such Shares on a given date shall be the last sales price
or, if last sales information is generally unavailable, the average of the
closing bid and asked prices per Share on such date (or, if there was no trading
or quotation in the shares on such date, on the next preceding date on which
there was trading or quotation) as provided by one of such organizations; and
provided, further, that the "Fair Market Value" of a Share subject to Options
granted effective on the date on which Shares are first issued and sold pursuant
to a registration statement filed with, and declared effective by, the
Securities and Exchange Commission shall be the Initial Public Offering price of
the Shares so issued and sold, as set forth in the first final prospectus used
in such offering.
(f) "Initial Option" means an Option to purchase the number of shares
specified in or under Section 6(a), subject to adjustment as provided in Section
8.
(g) "Initial Public Offering" means an initial public offering of
shares in a firm commitment underwriting registered with the Securities and
Exchange Commission in compliance with the provisions of the Securities Act of
1933, as amended.
2
<PAGE>
(h) "Option" means the right, granted to a director under Section 6, to
purchase a specified number of Shares at the specified exercise price for a
specified period of time under the Plan. All Options will be non-qualified stock
options.
(i) "Participant" means a person who, as a non-employee director of the
Company, has been granted an Option or Deferred Shares which remain outstanding
or who has elected to be paid fees in the form of Shares or Deferred Shares
under the Plan.
(j) "Rule 16b-3" means Rule 16b-3, as from time to time in effect and
applicable to the Plan and Participants, promulgated by the Securities and
Exchange Commission under Section 16 of the Exchange Act.
(k) "Share" means a share of common stock, $.01 par value, of the
Company and such other securities as may be substituted for such Share or for
such other securities pursuant to Section 8.
3. Shares Available Under the Plan. Subject to adjustment as provided
in Section 8, the total number of Shares reserved and available for issuance
under the Plan is 250,000. Such Shares may be authorized but unissued Shares,
treasury Shares, or Shares acquired in the market for the account of the
Participant. For purposes of the Plan, Shares that may be purchased upon
exercise of an Option or delivered in settlement of Deferred Shares will not be
considered to be available after such Option has been granted or Deferred Share
credited, except for purposes of issuance in connection with such Option or
Deferred Share; provided, however, that, if an Option expires for any reason
without having been exercised in full, the Shares subject to the unexercised
portion of such Option will again be available for issuance under the Plan.
4. Administration of the Plan. The Plan will be administered by the
Board of Directors (the "Board") of the Company; provided, however, that any
action by the Board relating to the Plan will be taken only if, in addition to
any other required vote, such action is approved by the affirmative vote of a
majority of those directors who are not then eligible to participate in the
Plan.
5. Eligibility. Each director of the Company who, at the time an Option
is to be granted under Section 6 or at which fees are to be paid which could be
received in the form of Shares or deferred in the form of Deferred Shares under
Section 7, is not an employee of the Company or any subsidiary of the Company
will be eligible, at such date, to be granted an Option under Section 6 or
receive fees in the form of Shares or defer fees in the form of Deferred Shares
under Section 7. In addition, any person who, at the time the Company commences
an Initial Public Offering, has agreed to become a director upon consummation of
the Initial Public Offering will be eligible to be granted an Initial Option
under Section 6. No person other than those specified in this Section 5 will be
eligible to participate in the Plan.
3
<PAGE>
6. Options. An Initial Option will be automatically granted (i) at the
commencement of the Initial Public Offering, to each person who is eligible
under Section 5 at that time, and thereafter (ii) at the effective date of
initial election to the Board, to each person so elected who is eligible under
Section 5 at that date. In addition, an Annual Option will be automatically
granted, at the close of business of the date of final adjournment of each
annual meeting of stockholders of the Company, to each member of the Board who
is then eligible under Section 5. Notwithstanding the foregoing, (i) any person
who has been automatically granted an Initial Option at the effective date of
initial election to the Board shall not be automatically granted an Annual
Option at the first annual meeting of stockholders following such initial
election if such annual meeting takes place within three months of the effective
date of such person's initial election to the Board, and (ii) any Initial Option
granted at the commencement of the Initial Public Offering shall be canceled and
forfeited if the Initial Public Offering is not consummated or, in the case of
an Initial Option granted to a person who has agreed to become a director, such
person does not commence serving as a non-employee director of the Company
promptly following the consummation of the Initial Public Offering.
(a) Number of Shares Subject to Automatic Option Grants. In the case of
any Initial Option or Annual Option granted on or before the date of the first
annual meeting of stockholders following the Initial Public Offering, the number
of Shares to be subject to each Initial Option shall be 40,000, and the number
of Shares to be subject to each Annual Option shall be 5,000, in each case
subject to adjustment as provided in Section 8. In the case of any Initial
Option or Annual Option granted thereafter, the number of Shares to be subject
to each Initial Option and Annual Option shall be the applicable number
specified in the preceding sentence or, if so determined by the Board, such
other number of Shares specified in the most recent resolution of the Board
adopted on or prior to the date of the annual meeting of stockholders that
coincides with or most recently precedes the date of grant of the Option.
(b) Exercise Price. The exercise price per Share purchasable upon
exercise of an Option will be equal to 100% of the Fair Market Value of a Share
on the date of grant of the Option.
(c) Option Expiration. A Participant's Option will expire at the
earlier of (i) 10 years after the date of grant or (ii) one year after the date
the Participant ceases to serve as a director of the Company for any reason.
(d) Exercisability. Each Option may be exercised, prior to its
expiration, commencing one year after the date of grant, or at such earlier date
as may be specified by the Board; provided, however, that an Option may be
exercised following a Participant's termination of service as a director for
reasons other than death or permanent disability only if the director served for
at least 11 months after the date of grant or the Option was otherwise
exercisable at the date of termination, and provided, further, that unless
otherwise determined by the Board, all Options held by a Participant shall
become immediately exercisable upon (i) a Change in Control
4
<PAGE>
or (ii) the date of the death or permanent disability (as determined by the
Board in its discretion) of such Participant.
(e) Method of Exercise. A Participant may exercise an Option, in whole
or in part, at such time as it is exercisable and prior to its expiration, by
giving written notice of exercise to the Secretary of the Company, specifying
the Option to be exercised and the number of Shares to be purchased, and paying
in full the exercise price in cash (including by check) or by surrender of
Shares already owned by the Participant (except for Shares acquired from the
Company by exercise of an Option less than six months before the date of
surrender) having a Fair Market Value at the time of exercise equal to the
exercise price, or by a combination of cash and Shares.
7. Receipt of Shares or Deferred Shares in Lieu of Fees. Each director
of the Company may elect to be paid fees, in his or her capacity as a director
(including annual retainer fees for service on the Board, fees for service on a
Board committee, fees for service as chairman of a Board committee, and any
other fees paid to directors) in the form of Shares or Deferred Shares in lieu
of cash payment of such fees, if such director is eligible to do so under
Section 5 at the date any such fee is otherwise payable. If so elected, payment
of fees in the form of Shares or Deferred Shares shall be made in accordance
with this Section 7.
(a) Elections. Each director who elects to be paid fees for a given
calendar year in the form of Shares or to defer such payment of fees in the form
of Deferred Shares for such year must file an irrevocable written election with
the Secretary of the Company no later than December 31 of the year preceding
such calendar year or such other date as may be specified by the Secretary;
provided, however, that a director serving at the time the Plan becomes
effective, and any director newly elected or appointed thereafter, may file an
election applicable to compensation payable for any period of service that has
not yet commenced within the year of such effectiveness, election, or
appointment prior to the commencement of such period of service. An election by
a director shall be deemed to be continuing and therefore applicable to
subsequent Plan years unless the director revokes or changes such election by
filing a new election form by the due date for such form specified in this
Section 7(a). The election must specify the following:
(i) A percentage of fees to be received in the form of Shares or
deferred in the form of Deferred Shares under the Plan; and
(ii) In the case of a deferral, the period or periods during
which settlement of Deferred Shares will be deferred (subject to such
limitations as may be specified by the Company's Secretary).
(b) Payment of Fees in the Form of Shares. At any date on which fees
are payable to a Participant who has elected to receive such fees in the form of
Shares, the Company will issue to such Participant, or to a designated third
party for the account of such Participant, a number of Shares having an
aggregate Fair Market Value at that date equal to the fees, or as nearly as
5
<PAGE>
possible equal to the fees (but in no event greater than the fees), that would
have been payable at such date but for the Participant's election to receive
Shares in lieu thereof. If the Shares are to be credited to an account
maintained by the Participant and to the extent reasonably practicable without
requiring the actual issuance of fractional Shares, the Company shall cause
fractional Shares to be credited to the Participant's account. If fractional
Shares are not so credited, any part of the Participant's fees not paid in the
form of whole Shares will be payable in cash to the Participant (either paid
separately or included in a subsequent payment of fees, including a subsequent
payment of fees subject to an election under this Section 7).
(c) Deferral of Fees in the Form of Deferred Shares. The Company will
establish a deferral account for each Participant who elects to defer fees in
the form of Deferred Shares under this Section 7. At any date on which fees are
payable to a Participant who has elected to defer fees in the form of Deferred
Shares, the Company will credit such Participant's deferral account with a
number of Deferred Shares equal to the number of Shares having an aggregate Fair
Market Value at that date equal to the fees that otherwise would have been
payable at such date but for the Participant's election to defer receipt of such
fees in the form of Deferred Shares. The amount of Deferred Shares so credited
shall include fractional Shares calculated to at least three decimal places.
(d) Crediting of Dividend Equivalents. Whenever dividends are paid or
distributions made with respect to Shares, a Participant to whom Deferred Shares
are then credited in a deferral account shall be entitled to receive, as
dividend equivalents, an amount equal in value to the amount of the dividend
paid or property distributed on a single Share multiplied by the number of
Deferred Shares (including any fractional Share) credited to his or her deferral
account as of the record date for such dividend or distribution. Such dividend
equivalents shall be credited to the Participant's deferral account as a number
of Deferred Shares determined by dividing the aggregate value of such dividend
equivalents by the Fair Market Value of a Share at the payment date of the
dividend or distribution.
(e) Settlement of Deferred Shares. The Company will settle the
Participant's deferral account by delivering to the Participant (or his or her
beneficiary) a number of Shares equal to the number of whole Deferred Shares
then credited to his or her deferral account (or a specified portion in the
event of any partial settlement), together with cash in lieu of any fractional
Share remaining at a time that less than one whole Deferred Share is credited to
such deferral account. Such settlement shall be made at the time or times
specified in the Participant's election filed in accordance with Section 7(a);
provided, however, that a Participant may further defer settlement of Deferred
Shares if counsel to the Company determines that such further deferral likely
would be effective under applicable federal income tax laws and regulations.
(f) Nonforfeitability. The interest of each Participant in any fees
paid in the form of Shares or Deferred Shares (and any deferral account relating
thereto) at all times will be nonforfeitable.
6
<PAGE>
8. Adjustment Provisions.
----------------------
(a) Corporate Transactions and Events. In the event of any
recapitalization, forward or reverse split, reorganization, merger,
consolidation, spin-off, combination, repurchase or exchange of Shares or other
securities, Share dividend or other special, large and non-recurring dividend or
distribution (whether in the form of cash, securities or other property),
liquidation, dissolution, or other similar corporate transaction or event
affects the Shares such that an adjustment is appropriate in order to prevent
dilution or enlargement of the rights of Participants under the Plan, then the
Board shall, in such manner as it may deem equitable, adjust any or all of the
(i) number and kind of Shares remaining reserved and available for issuance
under Section 3, (ii) number and kind of Shares to be subject to each automatic
grant of an Option under Section 6, (iii) number and kind of Shares issuable
upon exercise of outstanding Options, and/or exercise price per Share thereof
(provided that no fractional Shares will be issued upon exercise of any Option),
(iv) kind of Shares to be issued in lieu of fees under Section 7, and (v) number
and kind of Shares to be issued upon settlement of Deferred Shares under Section
7. In addition, the Board is authorized to make adjustments in the terms and
conditions of Options (including, without limitation, cancellation of
unexercised or outstanding Options, or substitution of Shares using stock of a
successor or other entity) in recognition of unusual or nonrecurring events
(including, without limitation, events described in the preceding sentence and
events constituting a Change in Control) affecting the Company or any subsidiary
or the financial statements of the Company or any subsidiary, or in response to
changes in applicable laws, regulations, or accounting principles.
(b) Insufficient Number of Shares. If at any date an insufficient
number of Shares are available under the Plan for the automatic grant of Options
or the receipt of fees in the form of Shares or deferral of fees in the form of
Deferred Shares at that date, Options will first be automatically granted
proportionately to each eligible director, to the extent Shares are then
available (provided that no fractional Shares will be issued upon exercise of
any Option) and otherwise as provided under Section 6, and then, if any Shares
remain available, fees shall be paid in the form of Shares or deferred in the
form of Deferred Shares proportionately among directors then eligible to
participate to the extent Shares are then available and otherwise as provided
under Section 7.
9. Changes to the Plan. The Board may amend, alter, suspend,
discontinue, or terminate the Plan or authority to grant Options or pay fees in
the form of Shares or Deferred Shares under the Plan without the consent of
stockholders or Participants, except that any amendment or alteration will be
subject to the approval of the Company's stockholders at or before the next
annual meeting of stockholders for which the record date is after the date of
such Board action if such stockholder approval is required by any federal or
state law or regulation or the rules of any stock exchange or automated
quotation system as then in effect, and the Board may otherwise determine to
submit other such amendments or alterations to stockholders for approval;
provided, however, that, without the consent of an affected Participant, no such
action
7
<PAGE>
may materially impair the rights of such Participant with respect to any
previously granted Option or any previous payment of fees in the form of Shares
or Deferred Shares.
10. General Provisions.
(a) Agreements. Options, Deferred Shares, and any other right or
obligation under the Plan may be evidenced by agreements or other documents
executed by the Company and the Participant incorporating the terms and
conditions set forth in the Plan, together with such other terms and conditions
not inconsistent with the Plan, as the Board may from time to time approve.
(b) Compliance with Laws and Obligations. The Company will not be
obligated to issue or deliver Shares in connection with any Option, in payment
of any directors' fees, or in settlement of Deferred Shares in a transaction
subject to the registration requirements of the Securities Act of 1933, as
amended, or any other federal or state securities law, any requirement under any
listing agreement between the Company and any stock exchange or automated
quotation system, or any other law, regulation, or contractual obligation of the
Company, until the Company is satisfied that such laws, regulations, and other
obligations of the Company have been complied with in full. Certificates
representing Shares issued under the Plan will be subject to such stop-transfer
orders and other restrictions as may be applicable under such laws, regulations,
and other obligations of the Company, including any requirement that a legend or
legends be placed thereon.
(c) Limitations on Transferability. Unless otherwise permitted by the
Board, Options, Deferred Shares, and any other right under the Plan will not be
transferable by a Participant except by will or the laws of descent and
distribution or to a designated beneficiary in the event of a Participant's
death; provided, however, that Options and Deferred Shares (and rights relating
thereto) may be transferred to one or more transferees during the lifetime of
the Participant for purposes of the Participant's estate planning. The Company
may rely upon the beneficiary designation last filed in accordance with this
Section 10(c). Options, Deferred Shares, and other rights under the Plan may not
be pledged, mortgaged, hypothecated, or otherwise encumbered, and shall not be
subject to the claims of creditors of any Participant.
(d) Compliance with Rule 16b-3.
---------------------------
(i) Six-Month Holding Period. Unless a Participant could
otherwise dispose of equity securities, including
derivative securities, acquired under the Plan without
incurring liability under Section 16(b) of the Exchange
Act, equity securities acquired under the Plan must be
held for a period of six months following the date of
such acquisition, provided that this condition shall be
satisfied with respect to a derivative security if at
least six months elapse from the date of acquisition of
the derivative security to the date of disposition of
the derivative security (other than upon exercise or
conversion) or its underlying equity security.
8
<PAGE>
(ii) Other Compliance Provisions. With respect to a
Participant who is then subject to Section 16 of the
Exchange Act in respect of the Company, it is the
intent of the Company that transactions shall be
implemented under the Plan in a manner that will ensure
that each transaction by such a Participant is exempt
from liability under Rule 16b-3, except that such a
Participant may be permitted to engage in a non-exempt
transaction under the Plan if written notice has been
given to the Participant regarding the non-exempt
nature of such transaction. The Board may authorize the
Company to repurchase any Shares acquired in connection
with the Plan in order to prevent a Participant who is
subject to Section 16 of the Exchange Act from
incurring liability under Section 16(b). Unless
otherwise specified by the Participant, equity
securities, including derivative securities, acquired
under the Plan which are disposed of by a Participant
shall be deemed to be disposed of in the order acquired
by the Participant.
(e) No Right To Continue as a Director. Nothing contained in the Plan
or any agreement hereunder will confer upon any Participant any right to
continue to serve as a director of the Company.
(f) No Stockholder Rights Conferred. Nothing contained in the Plan or
any agreement hereunder will confer upon any Participant (or any person or
entity claiming rights by or through a Participant) any rights of a stockholder
of the Company unless and until Shares are in fact issued to such Participant
(or person) or, in the case an Option, such Option is validly exercised in
accordance with Section 6.
(g) Nonexclusivity of the Plan. Neither the adoption of the Plan by the
Board nor its submission to the stockholders of the Company for approval shall
be construed as creating any limitations on the power of the Board to adopt such
other compensatory arrangements for directors as it may deem desirable.
(h) Governing Law. The validity, construction, and effect of the Plan
and any agreement hereunder will be determined in accordance with the laws of
the State of Delaware, without giving effect to principles of conflicts of laws,
and applicable federal law.
11. Stockholder Approval, Effective Date, and Plan Termination. The
Plan will be effective as of the date of its adoption by the Board, subject to
stockholder approval prior to the commencement of the Initial Public Offering,
and, unless earlier terminated by action of the Board shall terminate at such
time as no Shares remain available for issuance under the Plan and the Company
and Participants have no further rights or obligations under the Plan.
9
List of subsidiaries (including state of incorporation and trade names) of the
Company.
<TABLE>
<CAPTION>
The following is a list of the existing subsidiaries of the Company.
<S> <C> <C>
Name of Subsidiary Trade Name State of Incorporation
Base Acquisition Corp. None Delaware
Crystal Palace Acquisition Corp. None Delaware
DKG Acquisition Corp. None Delaware
Elwell Acquisition Corp. None Delaware
St. George Acquisition Corp. None Delaware
Stone's Acquisition Corp. None Delaware
ARA Acquisition Corp. None Delaware
Animation USA Acquisition Corp. None Delaware
Filmart Acquisition Corp. None Delaware
The following is a list of the subsidiaries of the Company as existing upon
consummation of the Acquisitions
Name of Subsidiary Trade Name State of Incorporation
American Royal Arts Corp. None Delaware
Animation U.S.A., Inc. None Washington
BASE, Inc. Crystal Galaxy (in Nevada) Nevada
Crystal Galleria (in Virginia)
Crystal Galleria, Inc. None Nevada
DKG Enterprises, Inc. North Pole City Oklahoma
North Pole City Gifts & Collectibles
Elwell Stores, Inc. The Reef Hallmark Shop Florida
Filmart Productions, Inc. Cartoon World (in New York) New York
Filmart Galleries (in New York)
Animation Art Resources (in Pennsylvania)
St. George, Inc. Little Elegance New Jersey
Stone's Shops, Inc. None Illinois
Vincent J. Browne, Inc. None California
</TABLE>
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
June 13, 1997
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<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JAN-31-1997
<EXCHANGE-RATE> 1
<CASH> $ 609,523
<SECURITIES> 0
<RECEIVABLES> 33,712
<ALLOWANCES> 0
<INVENTORY> 611,943
<CURRENT-ASSETS> 1,361,092
<PP&E> 90,848
<DEPRECIATION> (52,675)
<TOTAL-ASSETS> 1,482,150
<CURRENT-LIABILITIES> 675,385
<BONDS> 0
0
0
<COMMON> 1,584
<OTHER-SE> 805,181
<TOTAL-LIABILITY-AND-EQUITY> 1,482,150
<SALES> 4,288,612
<TOTAL-REVENUES> 4,288,612
<CGS> 1,505,784
<TOTAL-COSTS> 1,778,138
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,028,717
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,028,717
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,028,717
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
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: May 9, 1997
/s/ Michael A. Baker
-------------------------
Name: Michael Baker
<PAGE>
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: May 6, 1997
/s/ Vincent J. Browne
-------------------------
Name: Vincent J. Browne
<PAGE>
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: May 2, 1997
/s/ Roy C. Elwell
-------------------------
Name: Roy C. Elwell
<PAGE>
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: May 8, 1997
/s/ Jerry Gladstone
-------------------------
Name: Jerry Gladstone
<PAGE>
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: May 2, 1997
/s/ David K. Green
-------------------------
Name: David K. Green
<PAGE>
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: May 8, 1997
/s/ Paul Shirley
-------------------------
Name: Paul Shirley
<PAGE>
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: May 2, 1997
/s/ Susan M. Spiegel
-------------------------
Name: Susan M. Spiegel
<PAGE>
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: June 10, 1997
/s/ David Stone
-------------------------
Name: David Stone
