As filed with the Securities and Exchange Commission on October 10, 1997
REGISTRATION NO. 333-29181
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
COLLECTIBLES USA, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 5999 13-3906920
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
ONE BATTERY PARK PLAZA, 24TH FLOOR
NEW YORK, NEW YORK 10004
(212) 344-1271
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
RONALD P. RAFALOFF
CHAIRMAN OF THE BOARD
COLLECTIBLES USA, INC.
ONE BATTERY PARK PLAZA, 24TH FLOOR
NEW YORK, NEW YORK 10004
(212) 344-1271
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
DAVID W. POLLAK, ESQ. PAUL JACOBS, ESQ.
MORGAN, LEWIS & BOCKIUS LLP FULBRIGHT & JAWORSKI L.L.P.
101 PARK AVENUE 666 FIFTH AVENUE
NEW YORK, NEW YORK 10178 NEW YORK, NEW YORK 10103
(212) 309-6058 (212) 318-3000
------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. []
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. []
If this Form is a post-effective amendment filed pursuant to 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. []
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. []
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 10, 1997
PROSPECTUS
2,700,000 SHARES
[LOGO]
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 $9.00 and $11.00 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 "CUSA."
------------
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.
- -----------------------------------------------------
<TABLE>
<CAPTION>
================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Per Share ................... $ $ $
- --------------------------------------------------------------------------------
Total(3) ................... $ $ $
================================================================================
</TABLE>
- -----------------------------------------------------
(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.
EVEREN SECURITIES, INC.
STEPHENS 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>
INSIDE COVER (LEFT)
1) Giuseppe Armani -- figurine
2) Kitty Cantrell -- figurine
3) Goebel -- figurine
4) Knickerbocker Company -- figurine
5) Enesco (Precious Moments and Cherished
Teddies) -- two figurines
6) Swarovski -- crystal figurine
7) Department 56 -- Snowbabies figurine
INSIDE COVER (RIGHT)
1) Warner Brothers -- Looney Line-up lithograph
2) Peanuts -- Aauugghhh lithograph
3) The Simpsons -- Bart-O-Lounger lithograph
4) Warner Brothers -- Bad Ol' Puddy Tat figurine
5) Paws -- The Doctor's Office lithograph
6) Lladro -- Allegory of Liberty figurine
7) Giuseppe Armani -- Baccus and Arianna figurine
8) The Boyds Collection -- Courtney with Phoebe... Over
the River and Through the Woods figurine
9) Department 56 -- The Heritage Village Collection
INSIDE BACK COVER
1) Interior of Crystal Galleria
2) Interior of North Pole City
3) Interior of American Royal Arts
4) Map of USA, indicating number of stores located in each state
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 $10.00 per share, (iv) assume the conversion of
all outstanding shares of the Company's Series A Convertible Preferred Stock,
liquidation value $50 per share (the "Series A Convertible Preferred Stock"),
into approximately $1.0 million in cash and 67,916 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 Vote Common Stock"), of the Company.
The Company has adopted a 52/53 week fiscal year ending on the last Sunday
in January. With respect to the Company, references to "Fiscal 1997" mean the
year ended January 26, 1997. With respect to the financial information of the
Combined Founding Companies, references to "Fiscal 1995," "Fiscal 1996" and
"Fiscal 1997" mean a combination of the fiscal years of each of the Founding
Companies for such year.
THE COMPANY
Collectibles USA was founded to create a national retailer of collectibles
merchandise and marketer of animation art. Collectibles USA has entered into
agreements to acquire six retailers of contemporary collectibles and three
marketers of animation art simultaneously with the closing of the Offering. Upon
the consummation of these Acquisitions, the Company believes that it will be a
leading retailer of contemporary collectibles and a leading marketer of
animation art in the United States. The Company's 16 collectibles stores are
located in California (2), Florida, Illinois (6), Nevada (2), New Jersey (2),
Oklahoma (2) and Virginia. In addition, certain stores sell collectibles through
database direct mail, telemarketing and 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). See "Business -- Collectibles
Stores." The Company's animation art galleries carry a full spectrum of
animation artwork, including original production cels (i.e., a painting of a
character or object on a transparent acetate sheet), limited editions, sericels,
model sheets and original drawings. In addition, the Company has licenses or
rights, some of which are exclusive, to design, produce and market animation art
featuring a wide variety of well known characters, including Garfield\R, The
Simpsons\R and Anastasia\R, and is also an authorized dealer of limited editions
and sericels created by Disney and Warner Brothers.
3
<PAGE>
According to Unity Marketing's The Collectibles Industry Report 1997
("Unity Marketing"), the collectibles industry grew approximately 11.9% in 1996,
generating over $9 billion in primary sales (i.e., sales of new merchandise), of
which approximately 79% were generated by retail sales (including TV shopping)
and approximately 21% were generated by direct response marketing. The
contemporary collectibles industry is serviced by approximately 10,000 specialty
retail collectibles stores nationwide, most of which have less than a 1% market
share. Collectibles are also sold by mid-to-upscale department stores, home
furnishing stores, small specialty import stores, gift stores, card shops, TV
shopping, collectors clubs, and other gallery and print stores. According to
Unity Marketing, an estimated 31 million Americans identify themselves as
collectors.
The Company believes that the typical collector makes more than one
collectibles purchase per year, and the typical collecting household maintains
more than one collection. The Company's target retail customer is between 45 and
64 years old, and encompasses a broad range of income levels. According to the
U.S. Department of Commerce Bureau of the Census, the 45 to 64 year old
population reached approximately 45 million in 1996 and is expected to grow to
approximately 66 million during the next ten years, representing a projected
growth rate of close to three times the rate for the overall population. The
Company believes that collecting will become increasingly popular among
consumers ages 45 to 64 because this generation of collectors has high levels of
discretionary income and has demonstrated nostalgic characteristics.
The Company's goal is to become the leading specialty retailer of
contemporary collectibles and the leading marketer of animation art in the
United States. The Company will seek to achieve this goal by emphasizing growth
through acquisitions and implementing a national operating strategy that
enhances internal revenue growth and profitability.
Key elements of the Company's growth strategy include:
o Grow Through Acquisitions. The Company believes that the collectibles
industry is highly fragmented with significant opportunities for
consolidation. The Company intends to acquire profitable, well-managed
collectibles retailers and animation art marketers that may provide new
categories of merchandise that may be cross-sold to the Company's existing
customer base. The Company believes that it will be an attractive acquiror
due to its (i) strategy of retaining owners and management of acquired
companies, (ii) access to capital and (iii) ability to offer sellers
immediate liquidity for their business as well as an ongoing equity stake
in the Company. The Company has developed an extensive database of
acquisition candidates within the collectibles and animation art
industries and believes it will be well positioned to implement its
acquisition program promptly following the Offering. Although the Company
will consider opportunities to make larger acquisitions, the Company's
target candidate for acquisition is expected to have $2 to $5 million in
annual sales, demonstrated profitability and one to four retail locations.
o Develop Prototype Store Formats. Although the Company intends to focus
initially on acquiring other retailers of collectibles and marketers of
animation art, the Company expects to complement its acquisition growth
with new store openings. Over the next 12 months, the Company plans to
develop two prototype store formats: a "superstore" format of
approximately 18,000 square feet, designed for either free-standing or
strip mall locations, and a mall-based format, of approximately 1,500
square feet. The Company does not intend to open new stores over the next
12 months.
Key elements of the Company's national operating strategy include:
o Strengthen and Expand Vendor Relationships. Vendors in the collectibles
industry often recognize retailers based on certain volume levels and
reputation. At the discretion of vendors, preferred gallery status is
awarded to collectibles stores based on factors such as (i) a proven
ability to market and sell large quantities of merchandise, (ii)
exceptional customer service and (iii) creditworthiness. Many of the
Founding Companies have achieved preferred gallery status with key vendors
which entitles them to volume discounts, co-op advertising funds, shipping
4
<PAGE>
allowances and other benefits. The Company believes that as a leading
retailer of collectibles merchandise and a leading marketer of animation
art in the United States, it will have a competitive advantage in
leveraging its vendor relationships. In addition, the Company believes
that it will be able to establish exclusive relationships with vendors for
certain product lines and items which generally lead to increased sales.
Certain vendors already have expressed a willingness to develop products,
such as porcelain figurines, resin figurines and cels, on an exclusive
basis for the Company.
o Expand and Improve Database Direct Mail, Telemarketing and Internet
Marketing Programs. The Founding Companies have developed databases that
often detail the buying patterns and merchandise preferences of existing
and potential customers and enable the Founding Companies to conduct
targeted database direct mail, telemarketing and Internet marketing
programs. In order to develop a comprehensive marketing program for use on
a Company-wide basis, the Company intends to combine and enhance the
existing customer databases of its Founding Companies and to introduce
database direct mail, telemarketing and Internet marketing programs at
Founding Companies and future companies to be acquired which are not
utilizing such programs.
o Improve Operating Procedures. The Company is currently evaluating several
MIS alternatives designed to centralize and 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 through improved training programs and incentive systems for
experienced managers and corporate-level merchandising to more effectively
manage the Company's merchandising decisions, product displays and product
assortment. Although in the near term the Company expects to incur higher
operating expenses, the Company anticipates that in the future it will
achieve long-term economies of scale and enhanced store-level performance
as a result of these efforts.
o Capitalize on Local Strengths. By maintaining significant operating
autonomy at the local level, the Company intends to capitalize on local
strengths, such as name recognition, customer loyalty and service. In
addition, the Company anticipates that certain of the principals of the
Founding Companies will assist in establishing and refining practices for
Company-wide operations.
The Company's executive offices currently 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. Following the consummation of the Offering, the
Company intends to relocate its executive offices to Las Vegas, Nevada.
THE ACQUISITIONS
Collectibles USA was incorporated in Delaware in January 1996 and was
founded to create a national retailer of collectibles merchandise and marketer
of animation art products. Concurrently with, and as a condition to, the closing
of the Offering, Collectibles USA will acquire by merger all of the issued and
outstanding capital stock of nine Founding Companies, six of which are retailers
of contemporary collectibles and three of which are marketers of animation art.
The aggregate consideration that will be paid by Collectibles USA to acquire the
Founding Companies consists of approximately $9.2 million in cash and 2,246,996
shares of Common Stock. In addition, approximately $6.5 million of the net
proceeds of the Offering will be used to repay indebtedness of the Founding
Companies, including indebtedness incurred to fund S Corporation distributions
to stockholders of certain of the Founding Companies and to repay other
indebtedness. Prior to the Acquisitions, the Company will have conducted no
operations and generated no revenue. The Company's senior management group,
other than the executives of the Founding Companies, was assembled during June
through August of 1997. See "The Company."
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company ......... 2,700,000 shares
Common Stock to be outstanding after the 6,206,094 shares(1)
Offering ....................................
Use of Proceeds .............................. To pay the cash portion of the purchase price of the
Founding Companies; repay certain indebtedness of the
Founding Companies, including indebtedness incurred
to fund S Corporation distributions to stockholders
of certain of the Founding Companies; pay required
cash amounts in connection with the conversion of the
Series A Convertible Preferred Stock upon
consummation of the Offering; repay the principal
amount outstanding under certain subordinated notes
held by an affiliate of the Company; and for general
corporate purposes, which is expected to include
future acquisitions. See "Use of Proceeds" and
"Certain Transactions."
Proposed Nasdaq National Market Symbol ...... CUSA
</TABLE>
- ----------
(1) Includes (i) 2,246,996 shares to be issued to the owners of the Founding
Companies, (ii) 67,916 shares to be issued to holders of the Series A
Convertible Preferred Stock and (iii) 870,436 shares of Restricted Vote
Common Stock to be held by various sponsors of the transactions described
herein. See "Principal Stockholders." Each share of Restricted Vote Common
Stock is entitled to four-tenths of a vote on all matters submitted to
stockholders. Restricted Vote Common Stock is convertible into Common Stock
under certain circumstances. See "Description of Capital Stock -- Common
Stock and Restricted Vote Common Stock." Excludes (i) 1,180,914 shares of
Common Stock reserved for issuance under the Company's stock option plans,
of which options to purchase 185,000 shares have been granted and options to
purchase 370,000 shares will be granted concurrently with the consummation
of the Offering and (ii) 270,000 shares of Common Stock reserved for
issuance upon the exercise of warrants to be issued to the Representatives
of the Underwriters and their designees, exercisable at 120% of the initial
public offering price (the "Representatives' Warrants"). See "Management --
1997 Long-Term Incentive Plan," "-- 1997 Non-Employee Directors' Stock Plan"
and "Underwriting."
RISK FACTORS
Collectibles USA was founded in January 1996 but has conducted no
operations and generated no revenue to date. Collectibles USA has entered into
agreements to acquire the Founding Companies simultaneously with the closing of
the Offering. Approximately $9.2 million of the net proceeds of the Offering
will be paid in cash to the owners of the Founding Companies (some of whom will
become officers, directors or key employees of the Company). The Common Stock
offered hereby involves a high degree of risk and immediate and substantial
dilution. See "Risk Factors."
6
<PAGE>
SUMMARY PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Collectibles USA will acquire the Founding Companies simultaneously with,
and as a condition to, the consummation of the Offering. For financial statement
presentation purposes, however, American Royal Arts Corp., one of the Founding
Companies, has been identified as the "accounting acquiror." The following table
presents the unaudited pro forma combined financial data for the Company, as
adjusted for (i) the effects of the Acquisitions; (ii) the effects of certain
pro forma adjustments to the historical financial statements described below;
and (iii) the consummation of the Offering and the application of the net
proceeds therefrom. This information should be read together with "Selected
Financial Data," the Unaudited Pro Forma Combined Financial Statements and the
notes thereto and the historical financial statements for American Royal Arts
Corp. and certain of the other Founding Companies and the respective notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA(1)
--------------------------------------
YEAR ENDED SIX MONTHS ENDED
JANUARY 31, 1997 JULY 31, 1997
------------------ -----------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA(2):
Net sales ............................................. $ 25,909 $ 12,292
Cost of sales .......................................... 11,931 5,699
----------- -----------
Gross profit .......................................... 13,978 6,593
Selling, general and administrative expenses(3) ...... 9,926 5,433
Goodwill amortization(4) .............................. 581 290
----------- -----------
Operating income ....................................... 3,471 870
Interest and other income (expense), net(5) ............ 308 98
----------- -----------
Income before taxes .................................... 3,779 968
Net income .......................................... $ 1,979 $ 454
=========== ===========
Net income per share ................................. $ .35 $ .08
=========== ===========
Shares used in computing net income per share(6) ...... 5,720,848 5,720,848
</TABLE>
<TABLE>
<CAPTION>
JULY 31, 1997
------------------------------------
PRO FORMA
COMBINED(7) AS ADJUSTED(8)
------------------ ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit) .............................. $ (8,789)(9) $12,623
Total assets ............................................. 41,695 43,287
Long-term obligations, net of current maturities and notes
payable to stockholders(10) ........................... 2,384 --
Stockholders' equity .................................... 17,074 37,184
</TABLE>
- ----------
(1) The year ended January 31, 1997 includes American Royal Arts for the year
ended January 31, 1997, Stone's Hallmark for the year ended November 30,
1996 and Crystal Galleria, North Pole City, Little Elegance, Reef Hallmark,
Animation USA, Filmart and Crystal Palace for the year ended December 31,
1996. The six months ended July 31, 1997 includes American Royal Arts for
the six months ended July 31, 1997, Stone's Hallmark for the six months
ended May 31, 1997 and North Pole City, Crystal Galleria, Little Elegance,
Reef Hallmark, Animation USA, Filmart and Crystal Palace for the six months
ended June 30, 1997.
(2) 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.
(3) The pro forma combined statement of operations data reflect an aggregate of
approximately $930,000 and $209,000 for year ended January 31, 1997 and the
six months ended July 31, 1997, respectively, in pro forma reductions in
salary and benefits to the owners of the Founding Companies to which they
have agreed prospectively and certain other adjustments, including the
effect of revisions of certain lease agreements between certain
stockholders of the Founding Companies and such Founding Companies.
Selling, general and administrative expenses do not include the
non-recurring, non-cash compensation charge of $1.3 million for the year
ended January 31, 1997.
7
<PAGE>
(4) Reflects amortization of the goodwill to be recorded as a result of the
Acquisitions over a 40-year period and computed on the basis described in
the Notes to the Unaudited Pro Forma Combined Financial Statements.
(5) Includes the reduction of pro forma interest expense attributed to the
repayment of debt with a portion of the net proceeds from the Offering.
(6) Includes (i) 1,191,182 shares outstanding prior to the Offering, (ii)
2,246,996 shares to be issued to the owners of the Founding Companies,
(iii) 67,916 shares to be issued to holders of the Series A Convertible
Preferred Stock, (iv) 55,500 shares (determined to be common stock
equivalents for purposes of computing earnings per share) of the 185,000
shares issuable upon the exercise of outstanding options and (v) 2,159,254
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
distributions to stockholders of certain Founding Companies representing
substantially all of their previously taxed undistributed earnings (the "S
Corporation Distributions"), repay indebtedness of the Founding Companies
and pay expenses of the Offering. Excludes options to purchase 370,000
shares to be granted concurrently with the consummation of the Offering and
270,000 shares reserved for issuance upon exercise of the Representatives'
Warrants. See "Management -- 1997 Long-Term Incentive Plan," "-- 1997
Non-Employee Directors' Stock Plan" and "Underwriting."
(7) The pro forma combined balance sheet data assume that the Acquisitions were
closed on July 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.
(10) Several of the Founding Companies are S Corporations. Prior to the
Acquisitions, these Founding Companies will make S Corporation
Distributions totaling $1.3 million. In order to pay the S Corporation
Distributions, the Founding Companies will borrow $1.3 million from
existing sources, which will be repaid from the net proceeds of the
Offering.
8
<PAGE>
SUMMARY INDIVIDUAL FOUNDING COMPANY FINANCIAL DATA
The following table presents certain summary statements of operations data
for the Founding Companies for the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL(1) ENDED JULY 31(1)
-------------------------------------- ------------------------
1995 1996 1997 1996 1997
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
American Royal Arts
Sales ................................................ $3,897,785 $4,051,072 $4,288,612 $2,194,610 $2,080,990
Gross profit .......................................... 2,182,760 2,491,154 2,782,828 1,358,025 1,385,063
Selling, general and administrative expenses(2) ...... 1,587,875 1,759,886 1,778,138 920,218 943,920
Stone's Hallmark
Sales ................................................ $3,488,838 $4,281,040 $4,985,549 $2,772,411 $3,201,997
Gross profit .......................................... 1,689,219 2,012,350 2,488,975 1,318,703 1,542,421
Selling, general and administrative expenses(2) ...... 1,430,695 1,787,457 2,117,010 948,627 968,861
Crystal Galleria(3)
Sales ................................................ $2,503,075 $2,794,361 $3,727,285 $1,604,077 $2,050,079
Gross profit .......................................... 1,315,177 1,461,184 1,942,369 842,741 1,076,705
Selling, general and administrative expenses(2) ...... 730,906 875,180 1,564,229 666,158 867,682
North Pole City
Sales ................................................ $2,562,024 $2,865,249 $3,521,373 $ 860,270 $1,139,105
Gross profit .......................................... 1,190,985 1,373,610 1,900,911 438,454 572,779
Selling, general and administrative expenses(2) ...... 989,561 1,077,684 1,393,205 574,599 820,852
Little Elegance(3)
Sales ................................................ $3,113,114 $2,707,793 $2,598,270 $ 696,609 $ 818,096
Gross profit .......................................... 1,362,429 1,238,268 1,251,609 336,392 381,365
Selling, general and administrative expenses(2) ...... 1,260,761 1,179,842 1,229,978 536,940 577,356
Reef Hallmark(3)
Sales ................................................ $1,419,294 $1,838,788 $2,492,809 $1,178,459 $1,299,180
Gross profit .......................................... 633,618 737,030 1,191,341 568,702 621,241
Selling, general and administrative expenses(2) ...... 484,960 628,543 934,764 442,136 515,539
Animation USA(3)
Sales ................................................ $1,212,497 $1,731,856 $1,716,410 $ 834,654 $ 671,603
Gross profit .......................................... 600,536 833,341 876,127 440,182 416,431
Selling, general and administrative expenses(2) ...... 626,514 773,523 845,100 410,502 371,544
Filmart(3)
Sales ................................................ $ 760,653 $1,053,089 $1,445,848 $ 541,146 $ 514,504
Gross profit .......................................... 503,716 541,720 947,928 337,990 323,271
Selling, general and administrative expenses(2) ...... 452,189 492,577 539,178 220,916 300,036
Crystal Palace(3)
Sales ................................................ $1,103,714 $1,129,960 $1,132,782 $ 485,769 $ 516,011
Gross profit .......................................... 415,965 467,809 595,517 252,599 273,328
Selling, general and administrative expenses(2) ...... 466,737 478,785 455,299 216,474 225,015
</TABLE>
- ----------
(1) The fiscal years presented are as follows: American Royal Arts -- the years
ended October 31, 1994 and 1995 and the year ended January 31, 1997; Stone's
Hallmark -- the years ended November 30, 1994, 1995 and 1996; North Pole
City -- the years ended March 31, 1995 and 1996 and December 31, 1996; and
Crystal Galleria, Little Elegance, Reef Hallmark, Animation USA, Filmart and
Crystal Palace -- the years ended December 31, 1994, 1995 and 1996. The
interim periods presented are as follows: American Royal Arts -- the six
months ended July 31, 1996 and 1997; Stone's Hallmark -- the six months
ended May 31, 1996 and 1997; North Pole City, Crystal Galleria, Little
Elegance, Reef Hallmark, Animation USA, Filmart and Crystal Palace -- the
six months ended June 30, 1996 and 1997.
(2) Selling, general and administrative expenses have not been adjusted for
aggregate reductions in salary and benefits to the owners of the Founding
Companies to which they have agreed prospectively and for revisions to
certain lease agreements between one of the Founding Companies and its
stockholders, or for increased costs associated with the Company's new
corporate management and with being a public company.
(3) The summary statements of operations data is unaudited for the following
companies: Reef Hallmark and Filmart for Fiscal 1995; Animation USA for
Fiscal 1995 and Fiscal 1996; and Little Elegance and Crystal Palace for
Fiscal 1995, Fiscal 1996 and Fiscal 1997 and the six months ended July 31,
1996 and 1997 for all Founding Companies.
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 FINANCIAL AND OPERATING HISTORY; INABILITY TO INTEGRATE
OPERATIONS
Collectibles USA was founded in January 1996 but has conducted no
operations and generated no revenue to date. Collectibles USA has entered into
agreements to acquire the Founding Companies simultaneously with the closing of
the Offering. The Founding Companies have been operating as separate,
independent entities and there can be no assurance that the Company will be able
to integrate these businesses on a cost-effective basis or at all. In addition,
there can be no assurance that the recently assembled senior management group
will be able to oversee the combined entity and effectively implement the
Company's operating or growth strategies. The pro forma combined financial
results of the Founding Companies cover periods when the Founding Companies and
Collectibles USA were not under common control or management and, therefore, may
not be indicative of the Company's future financial or operating results. The
success of the Company will depend on management's ability to centralize and
integrate certain administrative and accounting functions and otherwise
integrate the Founding Companies and businesses acquired in the future into one
organization in a profitable manner. In particular, the Company will need to
consolidate its internal systems for reporting financial and other information,
including inventory levels, deemed significant by management. The internal
systems for accumulating such information at each of the Founding Companies vary
in degree of sophistication, and, in some cases, are not adequate for the
Company's anticipated needs. Failure to successfully develop a consolidated
system for reporting such information could have a material adverse effect on
the Company's financial condition and results of operations. The inability of
the Company to successfully integrate the Founding Companies would have a
material adverse effect on the Company's financial condition and results of
operations and would make it unlikely that the Company's acquisition program
will be successful. See "Business -- Growth Strategy" and "-- Management
Information Systems and Controls." The Company expects to incur additional
management and other administrative expenses after the Acquisitions. There can
be no assurance that these expenses will be offset by savings resulting from the
consolidation of the Founding Companies. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
RELIANCE ON THE IDENTIFICATION AND INTEGRATION OF SATISFACTORY ACQUISITION
CANDIDATES; RELIANCE ON ACQUISITION FINANCING
The Company's future growth depends in large part on its ability to
increase its sales and the markets it serves through the acquisition of
additional collectibles retailers and animation art marketers. The Company's
inability to achieve its acquisition goals could have a material adverse effect
on the Company's financial condition and results of operations. There can be no
assurance that the Company will be able to identify or acquire additional
businesses on acceptable terms, effectively and profitably integrate into the
Company businesses acquired in the future, or achieve sales and profitability
that justify the investment therein. Acquisitions may involve a number of
special risks, including adverse short-term effects on the Company's reported
operating results; diversion of management's attention; dependence on retaining,
hiring and training key personnel; risks associated with unanticipated problems
or legal liabilities; and amortization of acquired intangible assets, some or
all of which could have a material adverse effect on the Company's financial
condition and results of operations. In addition, to the extent that
consolidation becomes more prevalent in the industry, the prices for attractive
acquisition candidates may increase. The Company intends to use shares of Common
Stock for a portion of the consideration for future acquisitions. If the Common
Stock does not maintain a sufficient value or if potential acquisition
candidates are unwilling to accept shares of Common Stock as part of
10
<PAGE>
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 -- Growth Strategy" and
the Unaudited Pro Forma Combined Financial Statements and the notes thereto
included elsewhere in this Prospectus.
MANAGEMENT OF GROWTH; INEXPERIENCE MANAGING A CONSOLIDATED COMPANY
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.
The Company's officers and senior management have had limited 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 -- Growth Strategy."
FLUCTUATION OF QUARTERLY OPERATING RESULTS
The Company's quarterly results of operations have fluctuated in the past
and may continue to fluctuate in the future. Variations as a result of the
amount and timing of sales contributed by special events and artist signings
have significantly affected net sales and gross profits. 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. 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.
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. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
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
11
<PAGE>
Jones. The Company's authorized dealer agreements can generally be terminated by
the other party with or without cause on short notice. Termination of any of the
Company's authorized dealer agreements could have a material adverse effect on
the Company's financial condition and results of operations. Certain of the
authorized dealer agreements require the vendor's consent to the Acquisitions.
Although the Company is seeking consents authorizing the Acquisitions where
required by the terms of such authorized dealer agreements, there can be no
assurance that such consents will be obtained. The failure to obtain any such
consents could have a material adverse effect on the Company's financial
condition and results of operations. See "Business -- Licenses."
NEED FOR ADDITIONAL CAPITAL
The Company expects that it will use significant amounts of capital for
acquisitions of other collectibles retailers and animation art marketers, for
operating purposes (including the acquisition and implementation of a management
information system) and to facilitate internal growth. The Company intends to
use shares of Common Stock for a portion of the consideration for future
acquisitions. If the Common Stock does not maintain a sufficient value or if
potential acquisition candidates are unwilling 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 has received a commitment letter for a $25.0 million
credit facility with a commercial bank to be used for acquisitions, working
capital and other general corporate purposes. The credit facility is subject to
various conditions including receipt of net proceeds from the Offering of at
least $19.0 million. There can be no assurance that the Company will be able to
obtain this credit facility or other financing it may need on terms the Company
deems acceptable, if at all. 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 -- Growth Strategy."
DEPENDENCE ON KEY COLLECTIBLES VENDORS AND RISKS ASSOCIATED WITH DEPENDENCE ON
FOREIGN VENDORS
The Company's performance depends, in large part, on its ability to
purchase contemporary collectibles merchandise in sufficient quantities at
competitive prices. Although the Company purchases collectibles merchandise from
over 100 vendors, one vendor, Hallmark, accounted for approximately 9% of the
Company's pro forma net sales in Fiscal 1997. The loss of Hallmark as a vendor
could have a material adverse effect on the Company's financial condition and
results of operations. 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 -- National Operating Strategy."
12
<PAGE>
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.
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 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
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. 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."
13
<PAGE>
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 efforts,
timely production and delivery and consumer acceptance. The Company may not
always be able to respond quickly and effectively to changes in customer taste
and demand due to the amount of time and financial resources that may be
required to bring new products to market. If the Company were to materially
misjudge the market, certain inventory of the Company may remain unsold. The
inability to respond quickly to market changes could have a material adverse
effect on the Company's financial condition and results of operations. See
"Business -- Marketing."
RISKS ASSOCIATED WITH MARKETING AND TELEMARKETING STRATEGY
One of the Company's significant strategies for improved marketing is the
consolidation of the databases of the various Founding Companies and of any
companies acquired in the future for database direct mail, telemarketing and
Internet marketing efforts. There can be no assurance that the Company will be
able to integrate these databases successfully or that, once integrated, some of
the databases will not be discovered to contain overlapping information. In
addition, the Company has not previously conducted its marketing programs
according to practices common to the database direct mail, telemarketing and
Internet industries, including practices such as the systematic measurement of
the response rates generated from its databases or the categorization of entries
in the databases by past behavior. The costs for a new information technology
system to effect such integration could be substantial, as could the amount of
time needed to acquire and implement such a system. The inability to integrate
the various databases successfully, or in a timely and cost effective manner,
could have a material adverse effect on the Company's financial condition and
results of operations. In addition, while the Founding Companies have
historically charged customers the costs of overnight and ground delivery of
merchandise, they have not charged, and the Company does not intend to charge,
customers for the costs of catalog mailings and paper. Material increases in
paper or catalog delivery costs or the inability to charge customers for the
costs of overnight or ground delivery of merchandise could have a material
adverse effect on the Company's financial condition and results of operations.
See "Business -- Marketing."
SALES TAX CONSIDERATIONS
Various states are increasingly seeking to impose sales or use taxes on
inter-state mail order sales and are aggressively auditing sales tax returns of
mail order businesses. Complex legal issues arise in these areas, relating,
among other things, to the required nexus of a business with a particular state,
which may permit the state to require a business to collect such taxes. Although
the Company believes that each of the Founding Companies has adequately provided
for sales taxes on its mail order sales, there can be no assurance as to the
effect of actions taken by state tax authorities on the Company's financial
condition or results of operations. Furthermore, prior to the Acquisitions, each
Founding Company has collected sales taxes only on sales to customers in states
in which such Founding Company conducts its operations. In the future, the
Company may be required to collect sales tax on sales made to customers in all
of the states in which it conducts its operations. The imposition of sales taxes
on mail order sales generally has a negative effect on mail order sales levels.
All of the factors cited above may negatively affect the Company's financial
condition and results of operations in the future. Any such impact cannot
currently be quantified.
DEPENDENCE ON KEY PERSONNEL
The Company's operations are dependent on the continued efforts of senior
management of Collectibles USA and of the Founding Companies. Furthermore, the
Company will likely be dependent on the senior management of companies that may
be acquired in the future. Although the Company has
14
<PAGE>
entered into employment agreements with senior management of Collectibles USA
and of the Founding Companies, there can be no assurance that any individual
will continue in such capacity for any particular period of time. The loss of
key personnel, or the inability to hire and retain qualified employees, could
have a material adverse effect on the Company's financial condition and results
of operations. The Company does not intend to carry key-person life insurance on
any of its employees. See "Management."
MISREPRESENTATIONS AND BREACHES BY THE SELLERS AND THE FOUNDING COMPANIES IN
THE ACQUISITIONS
In consummating the Acquisitions, the Company is relying upon certain
representations, warranties and indemnities made by the former owners of the
Founding Companies and the Founding Companies themselves with respect to each of
the Acquisitions, as well as its own due diligence investigations. There can be
no assurance that such representations and warranties will be true and correct,
that the Company's due diligence will uncover all material adverse facts
relating to the operations and financial condition of the Founding Companies
that are acquired or that all of the conditions to the Company's obligations to
consummate the Acquisitions will be satisfied. Any material misrepresentations
could have a material adverse effect on the Company's financial condition or
results of operations.
CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS
Following the completion of the Acquisitions and the Offering, the
Company's officers and directors, various sponsors of the transaction, and
stockholders of the Founding Companies, and entities affiliated with them, will
beneficially own approximately 53.4% of the outstanding shares of Common Stock
(50.3% if the Underwriters' over-allotment option is exercised in full). These
holders of Common Stock will control in the aggregate approximately 49.3% of the
votes of all shares of Common Stock and, if acting in concert, generally will be
able to exercise control over the Company's affairs, to elect the entire board
of directors of Collectibles USA (the "Board of Directors") and to control the
disposition of any matter submitted to a vote of stockholders. See "Principal
Stockholders."
PROCEEDS OF OFFERING PAYABLE TO AFFILIATES
Approximately $15.7 million, or approximately 74.4%, 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) and
will be used to repay certain indebtedness of the Founding Companies, including
indebtedness incurred to fund S Corporation Distributions to stockholders of
certain of the Founding Companies. Approximately $2.5 million of the $5.2
million of indebtedness at October 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 approximately $1.3 million to repay, upon
consummation of the Offering, the principal amount outstanding under the
$300,000 5% note due December 31, 1997 (the "CEFC Note-1"), the $555,000 5% note
due December 31, 1997 (the "CEFC Note-2") and the $400,000 5% note due December
31, 1997 (the "CEFC Note-3", and, together with the CEFC Note-1 and the CEFC
Note-2, the "CEFC Notes"), which notes are held by an affiliate of the Company.
The proceeds from the sale of the Series A Convertible Preferred Stock and the
CEFC Notes were used by the Company to pay various expenses incurred in
connection with its efforts to complete the Acquisitions and effect the
Offering. Net proceeds available for acquisitions, working capital and other
uses by the Company will be approximately $5.4 million, or 25.6% of the net
proceeds of the Offering (approximately $9.2 million, or 36.9% 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.
15
<PAGE>
Simultaneously with the closing of the Offering, the stockholders of the
Founding Companies will receive, in the aggregate, 2,246,996 shares of Common
Stock as a portion of the consideration for their businesses. These shares are
not being offered by this Prospectus and have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), and, therefore, may
not be sold unless registered under the Securities Act or sold pursuant to an
exemption from registration, such as the exemption provided by Rule 144
promulgated under the Securities Act. These shares are being offered and sold
pursuant to the private placement exemption from registration provided by
Section 4(2) of the Securities Act. The stockholders who will receive these
shares have agreed with the Company not to sell, transfer or otherwise dispose
of any of these shares for one year following consummation of the Offering. Such
stockholders also have certain piggyback registration rights with respect to
these shares and, upon certain future registrations by the Company, such
restricted shares will be eligible for resale in the public market. In addition,
existing holders of Common Stock of the Company as of the date hereof hold, in
the aggregate, 1,191,182 shares. See "Certain Transactions." None of these
shares have been registered under the Securities Act and, accordingly, may not
be sold unless registered under the Securities Act or sold pursuant to an
exemption from registration, such as the exemption provided by Rule 144.
The Company and its officers and directors have agreed not to, directly or
indirectly, offer, issue, sell, contract to sell or otherwise dispose of any
shares of Common Stock or any securities exercisable for or convertible or
exchangeable into Common Stock (the "Securities") for a period of 180 days after
the date of this Prospectus (the "Lockup Period") without the prior written
consent of Ladenburg Thalmann & Co. Inc., except for the grant of employee stock
options by the Company and except that the Company may issue shares of Common
Stock (i) in connection with acquisitions, (ii) pursuant to the exercise of
options granted under the Company's stock option plans and (iii) upon conversion
of the Series A Convertible Preferred Stock and the Restricted Vote Common Stock
in accordance with their respective terms. In addition, certain stockholders of
the Company designated by the Representatives who beneficially own an aggregate
of 1,121,182 shares of Common Stock and the owners of each of the Founding
Companies have agreed, subject to certain exceptions, not to, directly or
indirectly, offer, sell, contract to sell or otherwise dispose of any Securities
for a period of 180 days after the date of this Prospectus without the prior
written consent of Ladenburg Thalmann & Co. Inc. After such periods, all of such
shares will be eligible for sale in accordance with Rule 144 promulgated under
the Securities Act, subject to the volume, holding period and other limitations
of Rule 144. See "Underwriting."
Pursuant to the Company's stock option plans the Company has issued options
to acquire 185,000 shares of Common Stock, which options are immediately
exercisable, and concurrently with the consummation of the Offering, will issue
options to acquire 370,000 shares of Common Stock, which options will not be
exercisable until after the expiration of the Lockup Period. The Company intends
to register the shares issuable upon exercise of options granted under the
Company's stock option plans and, upon such registration, such shares will be
eligible for resale in the public market. See "Management -- 1997 Long-Term
Incentive Plan," and "-- 1997 Non-Employee Directors' Stock Plan."
Upon completion of the Offering, the Company has agreed to issue to the
Representatives and their designees, for their own accounts, warrants to
purchase an aggregate of 270,000 shares of Common Stock exercisable during the
five-year period commencing on the date of this Prospectus, at an exercise price
equal to 120% of the initial public offering price. The Company has agreed to
grant certain registration rights to the holders of these warrants. The
existence or exercise of these warrants could materially adversely affect the
Company's ability to raise additional financing at a time when it may be
advantageous to do so. See "Underwriting."
The Company plans to register up to an additional 2,500,000 shares of
Common Stock with the Securities and Exchange Commission (the "Commission")
under the Securities Act as soon as practicable after completion of the Offering
for use by the Company as all or a portion of the consideration to be paid in
conjunction with future acquisitions. These shares may be freely tradeable after
their issuance, unless the sale of such shares is contractually restricted. The
piggyback registration rights described above will not apply to the registration
statement to be filed with respect to these additional shares. See "Shares
Eligible for Future Sale."
16
<PAGE>
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 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 its proposed
credit facility and any other 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 $7.75 per
share. In the event the Company issues additional shares of Common Stock in the
future, including shares which may be issued in connection with future
acquisitions, purchasers of the Common Stock in the Offering may experience
further dilution in the net tangible book value per share of Common Stock of the
Company. See "Dilution."
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS
The Board of Directors of the Company is empowered to issue preferred stock
in one or more series without stockholder action. The existence of this
"blank-check" preferred stock provision could render more difficult or
discourage an attempt to obtain control of the Company by means of a tender
offer, merger, proxy contest or otherwise. Certain provisions of the Delaware
General Corporation Law may also discourage takeover attempts that have not been
approved by the Board of Directors. See "Description of Capital Stock."
SIGNIFICANT MATERIALITY OF GOODWILL
The Company believes that the carrying value of the Founding Companies'
tangible assets approximates their fair value and has not identified any
significant intangible assets associated with the Founding Companies.
Accordingly, upon completion of the Acquisitions, the Company anticipates that a
significant portion of its pro forma total assets will consist of goodwill and
will be amortized over a 40 year period. However, the Company will periodically
evaluate whether events and circumstances after the Acquisitions are consummated
indicate that the remaining balance of goodwill may not be recoverable by
comparing estimated undiscounted cash flows from the related operations to the
carrying amount of goodwill. If the carrying amount of goodwill were greater
than the undiscounted future cash flow, an impairment loss would be recognized.
17
<PAGE>
THE COMPANY
Collectibles USA was founded to create a national retailer of collectibles
merchandise and marketer of animation art products. Concurrently with, and as a
condition to, the closing of the Offering, Collectibles USA will acquire the
nine Founding Companies. A brief description of each of the Founding Companies
is set forth below.
COLLECTIBLES STORES
Crystal Galleria, Inc. and Base, Inc. d/b/a Crystal Galleria and d/b/a
Crystal Galaxy ("Crystal Galleria"). Crystal Galleria is a retailer of a wide
range of contemporary collectibles such as crystal, porcelain figurines and art
glass from vendors, including Swarovski, Baccarat, Waterford, Lalique, Lladro
and Giuseppe Armani. Crystal Galleria has been in operation since 1992 and has
three mall-based stores, of which two are located in the Forum Shops at Caesar's
and the Tower Shops at Stratosphere in Las Vegas, Nevada and one is located in
The Tysons Corner Center in McLean, Virginia. Crystal Galleria's stores carry an
average of approximately 3,200 stock keeping units ("SKUs"), average
approximately 1,800 square feet in size and, in the fiscal year ended December
31, 1996, generated sales of $3.7 million. W. Randolph Ellspermann, one of the
owners of Crystal Galleria, is the President and Chief Executive Officer of the
Company and will serve as a director of the Company upon consummation of the
Offering. 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 the Executive Vice President -- Mall Operations and
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, Lladro, Goebel U.S.A. (manufacturer of the Hummel
product line) and the Bradford Exchange. Crystal Palace has been in operation
since 1985 and has two mall-based stores of which one is located in San Diego,
California and one is located in El Cajon, California. Crystal Palace's stores
carry an average of approximately 2,600 SKUs, average approximately 1,050
square feet in size and, in the fiscal year ended December 31, 1996, generated
sales of $1.1 million. Vincent J. Browne, the sole owner of Crystal Palace,
will remain the President of Crystal Palace.
St. George, Inc. d/b/a Little Elegance and d/b/a Under the Mistletoe
("Little Elegance"). Little Elegance is a retailer of contemporary collectibles
such as figurines and lighted houses from vendors, including Enesco
(manufacturer of the Precious Moments and Cherished Teddies product lines),
Department 56 (manufacturer of The Original Snow Village and The Heirloom
Village Collection product lines), Lladro and Swarovski. Little Elegance has
been in operation since 1969 and has two mall-based stores, of which one is
located in Wayne, New Jersey and one is located in Woodbridge, New Jersey.
Little Elegance's stores carry an average of approximately 10,000 SKUs, average
approximately 3,700 square feet in size and, in the fiscal year ended December
31, 1996, generated sales of $2.6 million. Upon consummation of the Offering,
Keith Holt, the general manager of Little Elegance, will become the President of
Little Elegance.
DKG Enterprises, Inc. d/b/a North Pole City Gifts & Collectibles and d/b/a
North Pole City ("North Pole City"). North Pole City is a retailer and marketer
of Christmas and other contemporary collectibles such as ornaments, lighted
houses and figurines from vendors, including Department 56, Enesco, Giuseppe
Armani and Disney. North Pole City has been in operation since 1984. It has one
"superstore" of approximately 15,000 square feet of retail space and a
free-standing retail outlet of approximately 1,500 square feet both located in
Oklahoma City, Oklahoma. North Pole City carries approximately 13,900 SKUs and
generated sales of $3.7 million in the fiscal year ended March 31, 1997. Upon
consummation of the Offering, David K. Green, an owner of North Pole City, will
remain the President of North Pole City and will serve as the Executive Vice
President -- Operations, as the President -- Collectibles Division and as a
director of the Company.
Elwell Stores, Inc. d/b/a The Reef Hallmark Shop ("Reef Hallmark"). Reef
Hallmark is a retailer and marketer of contemporary collectibles, including
ornaments, figurines, lighthouses, lighted houses and crystals from vendors,
including Enesco, Swarovski, Disney, Department 56 and Hallmark. Reef
18
<PAGE>
Hallmark has been in operation since 1959 and has one strip mall-based store
located in West Palm Beach, Florida. Reef Hallmark carries approximately 5,000
SKUs (excluding greetings cards), is approximately 4,000 square feet in size
and, in the fiscal year ended December 31, 1996, generated sales of $2.5
million. In the fiscal year ended December 31, 1996, approximately 20% 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 the Executive Vice President -- Corporate
Development and as a director of the Company. Reef Hallmark will continue to use
the "Hallmark" designation for the immediate future.
Stone's Shops, Inc. ("Stone's Hallmark"). Stone's Hallmark is a retailer of
contemporary collectibles, ornaments, figurines, lighthouses and lighted houses
from vendors, including Enesco, Boyds, Cast Art, Disney, Department 56, Seraphim
Angels and Hallmark. Stone's Hallmark has been in the contemporary collectibles
business since 1979 and has stores located in Rockford (4), Freeport and
Rochelle, Illinois. Stone's Hallmark's stores carry approximately 10,000 SKUs
(excluding greeting cards), range from approximately 3,000 to 18,500 square feet
(15,750 of which is used as retail space) in size and, in the fiscal year ended
November 30, 1996, generated sales of $5.0 million. In the fiscal year ended
November 30, 1996, approximately 36% of Stone's Hallmark's sales were from
Hallmark products. Upon consummation of the Offering, David J. Stone, who
together with his wife is the owner of Stone's Hallmark, will remain the
President of Stone's Hallmark and will serve as a director of the Company.
Stone's Hallmark will continue to use the "Hallmark" designation for the
immediate future.
ANIMATION ART GALLERIES
American Royal Arts Corp. ("American Royal Arts"). American Royal Arts is a
retail and wholesale marketer specializing in the sale of animation art,
including limited editions, production cels, sericels, lithographs and vintage
animation. American Royal Arts produces animation art under various license
arrangements, certain of which are exclusive to it. American Royal Arts has been
in operation since 1987 and has one gallery located in Westbury, New York, which
also houses its telemarketing operations. American Royal Arts' gallery is
approximately 5,500 square feet in size, includes its telemarketing operations
and, in the year ended January 31, 1997, generated sales of $4.3 million. Upon
consummation of the Offering, Jerry Gladstone, sole owner of American Royal
Arts, will remain the President of American Royal Arts and will serve as the
Executive Vice President of Marketing, as the President -- 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 the fiscal
year ended December 31, 1996, generated sales of $1.7 million. Upon consummation
of the Offering, David M. Vice and Laine Ross, the two owners of Animation USA,
will remain the President and Vice President, respectively, of Animation USA.
Filmart Productions Inc. d/b/a Cartoon World, d/b/a Filmart Galleries and
d/b/a Animation Art Resources ("Filmart"). Filmart is a retail marketer of
animation art such as vintage original production cels, limited edition cels and
sericels. Filmart has been in operation since 1991 and has two free-standing
galleries, of which one is located in Philadelphia, Pennsylvania and one is
located in Huntington, New York. Filmart's galleries average approximately 2,225
square feet in size and, in the fiscal year ended December 31, 1996, generated
sales of $1.4 million. In January 1996, Filmart acquired Animation Art
Resources, previously owned by Susan M. Spiegel, for a 50% interest in Filmart.
Upon consummation of the Offering, Aron Laikin and Susan M. Spiegel, the two
owners of Filmart, will remain the Chief Operating Officer and President,
respectively, of Filmart. In addition, upon consummation of the Offering, 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 $5.2 million as of October 1, 1997, which
19
<PAGE>
includes $486,000 of indebtedness incurred to fund a distribution in May 1997 to
the sole stockholder of American Royal Arts, representing S Corporation earnings
previously taxed to such stockholder), which indebtedness will be repaid with a
portion of the net proceeds of the Offering. In addition, prior to the
consummation of the Acquisitions, Crystal Galleria, and Filmart will make
distributions to their stockholders of approximately $250,000, and $1,000,000,
respectively, representing S Corporation earnings previously taxed to their
respective stockholders. The Founding Companies will incur indebtedness of
approximately $1.3 million to fund these distributions. The consideration to be
paid by Collectibles USA for the Founding Companies was determined by
negotiations between Collectibles USA and representatives of the Founding
Companies. See "Certain Transactions."
20
<PAGE>
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 $21.1 million
($24.9 million if the Underwriters' over-allotment option is exercised in full),
based upon an assumed initial public offering price of $10.00 per share, after
deducting the estimated underwriting discount and offering expenses payable by
the Company including (i) approximately $1.0 million to pay required cash
amounts in connection with the conversion of the Series A Convertible Preferred
Stock upon consummation of the Offering and (ii) $1.3 million to repay the
principal amount of indebtedness outstanding under the CEFC Notes. The Company
intends to use approximately $9.2 million of the net proceeds of the Offering to
pay the cash portion of the purchase price for the Founding Companies, all of
which will be paid to former stockholders of the Founding Companies.
Approximately $1.3 million of the net proceeds will be used to repay
indebtedness incurred by two of the Founding Companies to make the S Corporation
Distributions to certain former owners of the Founding Companies, which S
Corporation Distributions represented earnings previously taxed to such holders.
An additional approximately $5.2 million, as of October 1, 1997 (which includes
$486,000 of indebtedness incurred to fund a distribution in May 1997 to the sole
stockholder of American Royal Arts, representing S Corporation earnings
previously taxed to such stockholder), of the net proceeds of the Offering will
be used to repay estimated other outstanding indebtedness of the Founding
Companies. The portion of this $5.2 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 $2.4 million
of the $5.2 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 9.7%
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
8.6% in Fiscal 1997 and matures at various dates from May 2001 through March
2004. See "Certain Transactions."
The approximately $5.4 million of remaining net proceeds will be used for
working capital and for general corporate purposes, which are expected to
include future acquisitions of companies operating in the collectibles or
animation art industries. The Company currently has no agreements, arrangements
or understandings, and is not currently engaged in negotiations, with respect to
other acquisitions. Pending such uses, the Company intends to invest the net
proceeds of the Offering in short-term, investment-grade, interest-bearing
instruments. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources -- Combined."
DIVIDEND POLICY
The Company has never paid cash dividends and anticipates that for the
foreseeable future its earnings will be retained for the operation and expansion
of its business and for general corporate purposes and that it will not pay cash
dividends. In addition, the Company anticipates that the credit facility for
which the Company has signed a commitment letter 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 $1.3 million,
to owners of the Founding Companies.
21
<PAGE>
DILUTION
The deficit in pro forma net tangible book value of the Company at July 31,
1997 was approximately $6.2 million, or $1.75 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 July 31, 1997 would have been approximately $14.0 million, or
$2.25 per share. This represents an immediate increase in pro forma net tangible
book value of $4.00 per share at July 31, 1997 to stockholders and an immediate
dilution in pro forma net tangible book value of $7.75 per share to new
investors purchasing Common Stock in the Offering. The following table
illustrates this dilution per share to new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share ......... $10.00
Pro forma deficit in net tangible book value per share at
July 31, 1997 ....................................... $ (1.75)
Increase per share attributable to sale of Common Stock
in the Offering ....................................... 4.00
-------
Pro forma net tangible book value per share
after the Offering .................................... 2.25
--------
Dilution per share to new investors ..................... $ 7.75
========
</TABLE>
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 $10.00 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) ...... 3,506,094 56.5% $ (6,151,500) (29.5)% $ (1.75)
New investors .................. 2,700,000 43.5 27,000,000 129.5 10.00
--------- ------ ------------ ----------
Total ........................ 6,206,094 100.0% $ 20,848,500 100.0%
========= ====== ============ ==========
</TABLE>
- ----------
(1) Total consideration paid by existing stockholders represents the combined
stockholders' equity of the Company before the Offering, adjusted to
reflect: (i) the payment of $9.2 million in cash to the stockholders of the
Founding Companies as partial consideration for the Acquisitions; (ii)
repayment of indebtedness which has been or will be incurred relating to the
distribution of $1.7 million to the stockholders of the Founding Companies
representing S Corporation earnings previously taxed to such stockholders
prior to the Acquisitions; (iii) the transfer of certain non-operating
assets to the stockholders of the Founding Companies with an approximate
book value of $68,000 in connection with the Acquisitions; and (iv) the
conversion of the Series A Convertible Preferred Stock. See "Certain
Transactions."
The foregoing computations assume no exercise of stock options. Upon
consummation of the Offering, there will be outstanding options to purchase (i)
185,000 shares of Common Stock at $7.00 per share and (ii) 370,000 shares of
Common Stock at the initial public offering price. To the extent the holders of
these options exercise such options, there will be further dilution to new
investors. See "Capitalization."
22
<PAGE>
CAPITALIZATION
The following table sets forth the cash and cash equivalents,
capitalization and line of credit and current maturities of long-term
obligations and notes payable to stockholders at July 31, 1997: (i) on a
historical basis for American Royal Arts (accounting acquiror); (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>
JULY 31, 1997
----------------------------------------
AMERICAN PRO FORMA
ROYAL ARTS COMBINED AS ADJUSTED
------------ ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents .................................... $ 237 $ 1,126 $ 6,404
======= ======== ========
Line of credit, current maturities of long-term obligations and
notes payable to stockholders(1) ........................... $ 486 $ 5,223 $ --
======= ======== ========
Long-term obligations and notes payable to stockholders, less
current maturities(1)(2) .................................... $ -- $ 2,384 $ --
Stockholders' equity:
Preferred Stock: $.01 par value, 5,000,000 shares
authorized; 20,000 shares issued and outstanding, pro
forma combined; and no shares issued and outstanding,
as adjusted ................................................ -- 1,000 --
Common Stock: $.01 par value, 31,200,000 shares
authorized; 3,438,178(3) shares issued and outstanding,
pro forma combined; and 6,206,094(3)(4) shares issued
and outstanding, as adjusted .............................. 2 34 62
Treasury Stock, at cost .................................... (145) -- --
Additional paid-in capital ................................. -- 15,902 36,985
Retained earnings .......................................... 137 137 137
------- -------- --------
Total stockholders' equity ................................. (6) 17,074 37,184
------- -------- --------
Total capitalization ....................................... $ (6) $19,458 $37,184
======= ======== ========
</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 $1.3 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 Vote Common Stock (pro
forma combined); 870,436 shares of Restricted Vote Common Stock (as
adjusted).
(4) Also includes 67,916 shares to be issued to holders of Series A Convertible
Preferred Stock upon consummation of the Offering. Excludes 555,000 shares
of Common Stock issuable upon exercise of outstanding options or options to
be granted concurrently with the consummation of the Offering under the
Company's stock option plans and 270,000 shares reserved for issuance upon
exercise of the Representatives' Warrants. See "Management -- 1997 Long-Term
Incentive Plan," "-- 1997 Non-Employee Directors' Stock Plan" and
"Underwriting."
23
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Collectibles USA will acquire the Founding Companies simultaneously with
and as a condition to the consummation of the Offering. For financial statement
presentation purposes, however, American Royal Arts, one of the Founding
Companies, has been identified as the "accounting acquiror." The following
selected historical financial data for American Royal Arts at October 31, 1995
and 1996, and January 31, 1997, and for the years ended October 31, 1994, 1995
and 1996, and January 31, 1997, have been derived from the audited financial
statements of American Royal Arts included elsewhere in this Prospectus. The
following selected historical financial data for American Royal Arts at October
31, 1992, 1993 and 1994, and July 31, 1997, and for the years ended October 31,
1992 and 1993 and for the six months ended July 31, 1996 and 1997 have been
derived from unaudited financial statements of American Royal Arts, which have
been prepared on the same basis as the audited financial statements and, in the
opinion of American Royal Arts, reflect all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of such data. The
following selected unaudited pro forma financial data present certain data for
the Company, as adjusted for: (i) the effects of the Acquisitions; (ii) the
effects of certain pro forma adjustments to the historical financial statements;
and (iii) the consummation of the Offering. See the Unaudited Pro Forma
Financial Combined Statements and the notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
FISCAL YEAR ENDED OCTOBER 31, JANUARY 31, ENDED JULY 31,
------------------------------------------------ ------------- -----------------
1992 1993 1994 1995 1996 1997 1996 1997
-------- -------- -------- -------- -------- ------------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
AMERICAN ROYAL ARTS:
Net sales ..................... $2,002 $2,840 $3,898 $4,051 $4,121 $4,289 $2,195 $2,081
Cost of sales .................. 835 1,119 1,715 1,560 1,571 1,506 837 696
------- ------- ------- ------- ------- ------- ------- -------
Gross profit .................. 1,167 1,721 2,183 2,491 2,550 2,783 1,358 1,385
Selling, general and
administrative expenses ...... 1,044 1,288 1,588 1,760 1,764 1,778 920 944
------- ------- ------- ------- ------- ------- ------- -------
Income from operations ......... 123 433 595 731 786 1,005 438 441
Interest income (expense), net 5 6 7 18 24 24 7 6
------- ------- ------- ------- ------- ------- ------- -------
Net income ..................... $ 128 $ 439 $ 602 $ 749 $ 810 $1,029 $ 445 $ 447
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<S> <C> <C>
PRO FORMA COMBINED(1):
Net sales ...................................................... $25,909 $12,292
Cost of sales ................................................... 11,931 5,699
----------- -----------
Gross profit ................................................... 13,978 6,593
Selling, general and administrative expenses(2) .................. 9,926 5,433
Goodwill amortization(3) ....................................... 581 290
----------- -----------
Operating income ................................................ 3,471 870
Interest and other income (expense), net(4) ..................... 308 98
----------- -----------
Income before taxes ............................................. 3,779 968
Net income ...................................................... $ 1,979 $ 454
=========== ===========
Net income per share ............................................. $ .35 $ .08
=========== ===========
Shares used in computing pro forma net income per share(5) ...... 5,720,848 5,720,848
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31, JULY 31, 1997
-------------------------------------- ------------- ---------------------------------------------
PRO FORMA AS
1992 1993 1994 1995 1996 1997 ACTUAL COMBINED(6) ADJUSTED(7)
------ ------ ------ -------- -------- ------------- ------------ ------------------ ------------
BALANCE SHEET DATA
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AMERICAN ROYAL ARTS:
Working capital ............ $117 $384 $297 $ 703 $ 567 $ 686 $ (137) $(8,789)(8) $12,623
Total assets ............... 516 860 875 1,430 1,439 1,482 1,104 41,695 43,287
Long-term obligations
net of current maturities
and long-term notes
payable to stockholders(9) -- -- 100 -- -- -- -- 2,384 --
Stockholders' equity ......... 151 416 475 867 696 807 (6) 17,074 37,184
</TABLE>
- ----------
(1) The pro forma combined statement of operations data assume that the
Acquisitions and the Offering were closed on February 1, 1996 and are not
necessarily indicative of the results the Company would have obtained had
these events actually then occurred or of the Company's future results. The
year ended January 31, 1997 includes American Royal Arts for the year ended
January 31, 1997, Stone's Hallmark for the year ended November 30, 1996 and
Crystal Galleria, North Pole City, Little Elegance, Reef Hallmark, Animation
USA, Filmart and Crystal Palace for the year ended December 31, 1996. The
six months ended July 31, 1997 presented includes American Royal Arts for
the six months ended July 31, 1997, Stone's Hallmark for the six months
ended May 31, 1997 and North Pole City, Crystal Galleria, Little Elegance,
Reef Hallmark, Animation USA, Filmart and Crystal Palace for the six months
ended June 30, 1997.
(2) The pro forma combined statement of operations data reflect an aggregate of
approximately $930,000 and $209,000 for the year ended January 31, 1997 and
the six months ended July 31, 1997, respectively, in pro forma reductions in
salary and benefits to the owners of the Founding Companies to which they
have agreed prospectively and certain other adjustments, including the
effect of revisions of certain lease agreements between certain stockholders
of the Founding Companies and such Founding Companies. Selling, general and
administrative expenses do not include the non-recurring, non-cash
compensation charge of $1.3 million for the year ended January 31, 1997.
(3) Reflects amortization of the goodwill to be recorded as a result of the
Acquisitions over a 40-year period and computed on the basis described in
the Notes to the Unaudited Pro Forma Combined Financial Statements.
(4) Includes the reduction of pro forma interest expense attributed to the
repayment of debt with a portion of the net proceeds of the Offering.
(5) Includes (i) 1,191,182 shares outstanding prior to the Offering, (ii)
2,246,996 shares to be issued to the owners of the Founding Companies, (iii)
67,916 shares to be issued to holders of the Series A Convertible Preferred
Stock, (iv) 55,500 shares (determined to be common stock equivalents for
purposes of computing earnings per share) of the 185,000 shares issuable
upon the exercise of outstanding options and (v) 2,159,254 of the 2,700,000
shares to be sold in the Offering to pay the cash portion of the
consideration for the Acquisitions, repay indebtedness relating to the S
Corporation Distributions, repay indebtedness of the Founding Companies and
pay expenses of the Offering. Excludes options to purchase 370,000 shares to
be granted concurrently with the consummation of the Offering and 270,000
shares reserved for issuance upon exercise of the Representatives' Warrants.
See "Management -- 1997 Long-Term Incentive Plan," "-- 1997 Non-Employee
Directors' Stock Plan" and "Underwriting."
(6) The pro forma combined balance sheet data assume that the Acquisitions were
closed on July 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.
(7) Reflects the consummation of the Offering. See "Use of Proceeds."
(8) Includes $9.2 million payable to owners of the Founding Companies,
representing the cash portion of the consideration for the Acquisitions to
be paid with a portion of the net proceeds from the Offering.
(9) Several of the Founding Companies are S Corporations. Prior to the
Acquisitions, these Founding Companies have made or 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 have borrowed or will borrow $1.7 million from existing sources,
which will be repaid from the net proceeds of the Offering.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company was founded to create a national retailer of collectibles
merchandise and marketer of animation art. The Company's collectibles
merchandise includes figurines and sculptures made from porcelain, ceramic and
resin, and a wide selection of crystal items, including functional and
decorative products. The Company also sells collectible cottages and villages,
collectible prints and lithographs, collectible Christmas ornaments and other
holiday collectibles. The Company's animation art galleries carry a full
spectrum of animation artwork, including original production cels, limited
editions, sericels, model sheets and original drawings. In addition, the Company
has licenses or rights, some of which are exclusive, to design, produce and
market animation art.
The Company's net sales will be derived primarily from the sale of
collectibles and animation art. Costs of sales will consist primarily of the
cost of merchandise sold. Selling, general and administrative expenses will
consist primarily of salaries and benefits, advertising, store, office and
warehouse rent and utilities, communications and professional fees.
The Founding Companies have been managed throughout the periods presented
as independent private companies, and their results of operations reflect tax
structures (S corporations and C corporations), which have influenced, among
other things, their historical levels of owners' compensation. Selling, general
and administrative expenses for the periods presented are therefore affected by
the amount of compensation and related benefits that the former owners and
certain key employees received from their respective businesses during these
periods. These former owners and key employees have agreed to certain reductions
in salaries and benefits in connection with the acquisition of their businesses
by the Company (the "Compensation Differential"). The Compensation Differential
for Fiscal 1997 and for the six months ended July 31, 1997 was $866,000 and
$178,000, respectively, and has been reflected as a pro forma adjustment in the
Unaudited Pro Forma Combined Statement of Operations. See "Management --
Employment Agreements."
Collectibles USA, which has conducted no operations to date, intends to
integrate the Founding Companies, their operations and administrative functions
over a period of time. This integration process may present opportunities for
(i) enhanced vendor relationships resulting in collective buying opportunities,
co-op advertising funds, shipping allowances and exclusive merchandise and (ii)
obtaining additional sales through shared customer lists and expansion of direct
mail programs, advertising campaigns, in-store artist signing events and
Internet promotions. This integration may necessitate additional costs and
expenditures for corporate management and administration, corporate expenses
related to being a public company, systems integration and facilities expansion.
These various costs and potential cost savings may make comparison of historical
operating results not comparable to, or indicative of, future performance. The
Company believes that neither the anticipated savings nor the anticipated costs
can be quantified because the Acquisitions have not occurred, and there have
been no combined operating results upon which to base the assumptions. As a
result, they have not been included in the unaudited pro forma financial
information presented herein.
Upon completion of the Acquisitions, a significant portion of the pro forma
total assets of the Company will be goodwill (approximately $23.2 million) and
will be amortized over a 40 year period resulting in an annual amortization
expense of $581,000. However, the Company will periodically evaluate whether
events and circumstances after the Acquisitions are consummated indicate that
the remaining balance of goodwill may not be recoverable by comparing the
estimated undiscounted cash flows from the related operations to the carrying
amount of goodwill. If the carrying amount of goodwill were greater than the
undiscounted future cash flow, an impairment loss would be recognized.
The Company's future success is dependent upon a number of factors which
include, among others, the ability to integrate operations, reliance on the
identification and integration of satisfactory acquisitions candidates, reliance
on acquisition financing, the ability to manage growth and to attract and
26
<PAGE>
retain qualified management, dependence on licenses, the need for additional
capital, dependence on key collectibles vendors and risks associated with
dependence on foreign vendors, competition and seasonality and quarterly
fluctuations. See "Risk Factors."
Historically, the fourth quarter of the Company's fiscal year has accounted
for a greater portion of the Company's operating income than have each of the
first three quarters of the Company's fiscal year. This is primarily due to
increased activity as a result of the holiday season. In the future, the Company
expects that it will experience quarterly variations in operating results,
principally as a result of the seasonal nature of the industry. Numerous other
factors also may cause significant fluctuations in the Company's quarterly
sales, including the timing of new product introductions, the amount and timing
of sales contributed by new stores, the timing of personal appearances of
particular artists at the store locations when a customer may purchase
merchandise to be signed by the artist ("in-store artist signing events"), and
general economic conditions. Additional factors may cause fluctuations in
expenses including the costs associated with the opening of new stores, the
integration of acquired stores into the operations of the Company and corporate
expenses to support the Company's expansion strategy.
Due to the relatively low levels of inflation experienced in Fiscal 1995,
1996 and 1997, inflation did not have a significant effect on the operating
results of the combined Founding Companies in those fiscal years.
COMBINED FOUNDING COMPANIES
With respect to the financial information of the combined Founding
Companies, references to "Fiscal 1995," "Fiscal 1996" and "Fiscal 1997" mean a
combination of the fiscal years of each of the Founding Companies for such year.
References to July 31, 1996 and 1997 mean, respectively, the six months ended
July 31, 1996 and 1997 with respect to American Royal Arts; the six months ended
May 31, 1996 and 1997 with respect to Stone's Hallmark; and the six months ended
June 30, 1996 and 1997 with respect to North Pole City, Crystal Galleria, Little
Elegance, Reef Hallmark, Animation USA, Filmart and Crystal Palace.
RESULTS OF OPERATIONS -- COMBINED
The combined Founding Companies statements of operations data for Fiscal
1995, Fiscal 1996, and Fiscal 1997 do not purport to present the combined
Founding Companies in accordance with generally accepted accounting principles,
but represent merely a summation of the net sales, cost of sales, gross profit
and selling, general and administrative expenses for the applicable fiscal years
of the individual Founding Companies on an historical basis, and exclude the
effects of pro forma adjustments. This data will not be comparable to and may
not be indicative of the Company's post-combination results of operations
because (i) the Founding Companies were not under common control or management
and had different tax structures (S corporations and C corporations) during the
periods presented and (ii) the Company will use the purchase method to establish
a new basis of accounting to record the Acquisitions.
The following table sets forth certain combined selected financial data and
as a percentage of net sales of the Founding Companies on a historical basis and
excludes the effects of pro forma adjustments for the periods indicated (dollars
in thousands):
<TABLE>
<CAPTION>
FISCAL
-----------------------------------------------------------------
1995 1996 1997
--------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Combined Founding Companies
Statements of Operations Data:
Net sales ................. $20,061 100.0% $22,453 100.0% $25,909 100.0%
Cost of sales .............. 10,167 50.7% 11,297 50.3% 11,931 46.1%
------- ------ ------- ------ ------- ------
Gross Profit ............. $ 9,894 49.3% $11,156 49.7% $13,978 53.9%
======== ====== ======= ====== ======== ======
<CAPTION>
SIX MONTHS ENDED
JULY 31,
-------------------------------------------
1996 1997
--------------------- ---------------------
<S> <C> <C> <C> <C>
Combined Founding Companies
Statements of Operations Data:
Net sales ......... $11,168 100.0% $12,292 100.0%
Cost of sales ...... 5,274 47.2% 5,699 46.4%
------- ------ ------- -------
Gross Profit ...... $ 5,894 52.8% $ 6,593 53.6%
======= ====== ======= =======
</TABLE>
27
<PAGE>
UNAUDITED INTERIM RESULTS
Net Sales. Net sales were $12.3 million for the six months ended July 31,
1997 as compared to $11.2 million for the prior comparable period. The increase
in sales of $1.1 million, or 10.1%, was primarily due to an increase in
contemporary collectibles sales as a result of the opening of a Crystal Galleria
store, in August 1996, an increase in in-store sales resulting from a higher
demand for certain contemporary collectibles products and an increase in sales
resulting from the continued focus on telemarketing and direct mail advertising.
Such increases were offset principally by a decrease in animation art sales
resulting from a decrease in the number of in-store artist signing events.
Cost of Sales. Cost of sales increased to $5.7 million or 46.4% of net
sales, in the six months ended July 31, 1997 from $5.3 million, or 47.2% of net
sales, in the six months ended July 31, 1996. Cost of sales as a percentage of
net sales decreased primarily due to an increase in animation art sales with
higher product margins, such as vintage production cels, art sold through
licenses and higher retail sales as compared to wholesale sales.
FISCAL 1997 COMPARED TO FISCAL 1996
Net Sales. Net sales were $25.9 million for Fiscal 1997 as compared to
$22.5 million for Fiscal 1996. The increase in sales of $3.4 million, or 15.4%,
was primarily due to an increase in contemporary collectibles sales as a result
of Stone's Hallmark remodeling and expansion of one store, a full year of
operation of one new Crystal Galleria store that opened in November 1995, and a
partial year of operation of another Crystal Galleria store that opened in
August 1996 and 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 direct mail advertising, telemarketing and Internet
marketing.
Cost of Sales. Cost of sales increased to $11.9 million, or 46.1%, of net
sales in Fiscal 1997 from $11.3 million, or 50.3% of net sales, in Fiscal 1996.
Cost of sales as a percentage of net sales decreased primarily due to an
increase in animation art sales that have higher product margins, such as
vintage production cels, art sold through licenses and higher retail sales as
compared to wholesale sales.
FISCAL 1996 COMPARED TO FISCAL 1995
Net Sales. Net sales were $22.5 million for Fiscal 1996 as compared to
$20.1 million for Fiscal 1995. The increase in sales of $2.4 million, or 11.9%,
was primarily due to an increase in contemporary collectibles sales as a result
of an opening of one Crystal Galleria store in November 1995, the remodeling and
expansion of the Reef Hallmark store and a full year operation of a new Stone's
Hallmark store that opened in November 1994.
Cost of Sales. Cost of sales increased to $11.3 million, or 50.3% of net
sales, in Fiscal 1996, from $10.2 million, or 50.7% of net sales, in Fiscal
1995. Cost of sales as a percentage of net sales decreased primarily due to
sales of collectibles and animation art with higher profit margins.
LIQUIDITY AND CAPITAL RESOURCES -- COMBINED
On a combined basis, the Founding Companies generated $396,000 during the
six months ended July 31, 1997 and $1.5 million of net cash from operating
activities during both Fiscal 1997 and Fiscal 1996. Net cash used in investing
activities by the Founding Companies on a combined basis was $638,000 and
$785,000 during Fiscal 1997 and Fiscal 1996, respectively. Most of the cash used
in investing activities during these periods was used for purchases of property
and equipment. Net cash used in financing activities by the Founding Companies
on a combined basis was $767,000 during the six months ended July 31, 1997 and
$1.1 million during Fiscal 1997, whereas net cash provided by financing
activities was $33,000 in Fiscal 1996. Most of the cash used in financing
activities during these periods was used for net payments on long-term debt and
distributions to stockholders. The combined cash position of the Founding
Companies decreased by $268,000 from $1.4 million in Fiscal 1996 to $1.1 million
in Fiscal 1997 and increased to $1.3 million in the six months ended July 31,
1997.
28
<PAGE>
The Company anticipates that its cash flow from operations will provide
cash in excess of the Company's normal working capital needs, debt service
requirements and planned capital expenditures for property and equipment. On a
combined basis, the Founding Companies made capital expenditures of $708,000 and
$802,000 in Fiscal 1997 and Fiscal 1996, respectively. The Company currently has
no capital commitments although it anticipates making capital expenditures of
approximately $1.0 million in Fiscal 1998 for information systems and leasehold
improvements. 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 has received a commitment letter from NationsBank providing for
a $25.0 million revolving senior bank credit facility. The credit facility will
be guaranteed by the Founding Companies and will be secured by a pledge of the
stock of each of the Founding Companies and a security interest in the Company's
accounts receivable and inventory. Indebtedness under the credit facility will
bear interest at a rate equal to either LIBOR plus 1.50% to 2.25%, or the higher
of NationsBank's prime rate or the Federal Funds rate plus .50%. The credit
facility will have a term of three years and will include a $5.0 million
sublimit for the issuance of letters of credit. The proceeds of the credit
facility will be used for acquisitions, working capital, capital expenditures,
refinancing of existing indebtedness and other corporate purposes. The credit
facility is subject to various conditions, including the successful completion
of the Offering with net proceeds to the Company of at least $19.0 million and
upon the negotiation and execution of definitive documentation with respect to
the credit facility. Assuming that the credit facility is entered into on the
terms set forth in the commitment letter with NationsBank, the Company will be
required to comply with various loan covenants including: (i) maintenance of
certain financial ratios; (ii) restrictions on additional indebtedness; (iii)
restrictions on liens, guarantees, advances and dividends; and (iv) certain
limitations on the opening of new stores within the next 12 months. See "Risk
Factors."
While there can be no assurance, management believes that cash flow from
operations, funds from the credit facility and the net proceeds to the Company
from the Offering will be adequate to meet the Company's capital requirements
for the next 12 months, depending on the methods of financing and size of
potential acquisitions.
AMERICAN ROYAL ARTS
American Royal Arts has been identified as the accounting acquiror for
financial statement presentation purposes. American Royal Arts has an October 31
year end. To coincide with the Company's adoption of a 52/53 week fiscal year
ending on the last Sunday in January, American Royal Arts has been presented on
a fiscal year ended on January 31, 1997 in addition to the fiscal years ended
October 31, 1994, 1995 and 1996. American Royal Arts is a retail and wholesale
marketer of animation art.
29
<PAGE>
RESULTS OF OPERATIONS -- AMERICAN ROYAL ARTS
The following table sets forth certain selected financial data for American
Royal Arts on a historical basis and as a percentage of net sales for the
periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED OCTOBER 31,
----------------------------------------------------------
1994 1995 1996
-------------------- --------------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Net sales ......... $3,898 100.0% $4,051 100.0% $4,121 100.0%
Cost of sales ...... 1,715 44.0 1,560 38.5 1,571 38.1
------ ------- ------ ------ ------- ------
Gross profit ...... 2,183 56.0 2,491 61.5 2,550 61.9
Selling, general and
administrative
expenses ......... 1,588 40.7 1,760 43.4 1,764 42.8
------ ------- ------ ------ ------- ------
Income from
operations ......... 595 15.3 731 18.1 786 19.1
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% $ 810 19.7%
====== ======= ====== ====== ======= =====
<CAPTION>
YEAR ENDED
JANUARY 31, SIX MONTHS ENDED JULY 31,
--------------------- ----------------------------------
1997 1996 1997
--------------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Net sales ......... $ 4,289 100.0% $2,195 100.0% $2,081 100.0%
Cost of sales ...... 1,506 35.1 837 38.1 696 33.4
------- ------- ------- ----- ------ -----
Gross profit ...... 2,783 64.9 1,358 61.9 1,385 66.6
Selling, general and
administrative
expenses ......... 1,778 41.5 920 41.9 944 45.4
------- ------- ------- ----- ------ -----
Income from
operations ......... $ 1,005 23.4% 438 19.9 441 21.2
Other income (expense):
Interest expense ... -- -- -- -- -- --
Interest income ... 24 0.6 7 0.3 6 0.3
------- ------- ------- ----- ------ -----
Net income ......... $ 1,029 24.0% $ 445 20.3% $ 447 21.5%
======= ======= ======= ===== ====== =====
</TABLE>
UNAUDITED INTERIM RESULTS
Net Sales. Net sales were $2.1 million for the six months ended July 31,
1997 as compared to $2.2 million for the six months ended July 31, 1996. The
decrease in sales of $114,000, or 5.2%, was primarily due to a decrease in
telemarketing sales, partially offset by the introduction of a direct mail sales
program.
Cost of Sales. Cost of sales decreased to $696,000 or 33.4% of net sales,
in the six months ended July 31, 1997 from $837,000, or 38.1% of net sales, in
the six months ended July 31, 1996. Cost of sales as a percentage of net sales
decreased primarily due to the increase in sales of art sold through the direct
mail sales program and an increase in the sale of art for which the Company has
licensing arrangements.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $944,000, or 45.4% of net sales, in the six months
ended July 31, 1997 as compared to $920,000, or 41.9% of net sales, in the six
months ended July 31, 1996, an increase of $24,000, or 2.6%, primarily due to an
increase in advertising and postage associated with the new direct mail program
and, to a lesser extent, an increase in trade show expenses.
YEAR ENDED JANUARY 31, 1997 COMPARED TO FISCAL YEAR ENDED OCTOBER 31, 1995
Net Sales. Net sales were $4.3 million for the year ended January 31, 1997
as compared to $4.1 million for the fiscal year ended October 31, 1995, an
increase of $238,000, or 5.9%. The increase was primarily due to an increase in
telemarketing sales as a result of the growth of the customer database and, to a
lesser extent, due to an increase in special event sales, such as in-store
artist signing events. The increase was partially offset by a decrease in
wholesale sales, which was a result of a management decision to place less
emphasis on wholesale sales and more emphasis on retail sales which carry a
higher gross margin.
Cost of Sales. Cost of sales decreased to $1.5 million, or 35.1% of net
sales, for the year ended January 31, 1997 from $1.6 million, or 38.5% of net
sales, in the fiscal year ended October 31, 1995. Cost of sales as a percentage
of net sales decreased primarily due to increased sales of animation art with
higher product margins, such as vintage production cels, art sold through
licenses and higher retail sales as compared to wholesale sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses remained consistent at $1.8 million, but decreased as a
percentage of net sales to 41.5% in the year ended January 31, 1997 from 43.4%
in the fiscal year ended October 31, 1995, primarily due to economies of scale
associated with increased telemarketing sales.
30
<PAGE>
FISCAL YEAR ENDED OCTOBER 31, 1995 COMPARED TO FISCAL YEAR ENDED OCTOBER 31,
1994
Net Sales. Net sales were $4.1 million in the fiscal year ended October 31,
1995 as compared to $3.9 million in the fiscal year ended October 31, 1994, an
increase of $153,000, or 3.9%. This increase was primarily due to an increase in
wholesale sales resulting from the license obtained in the fiscal year ended
October 31, 1994 for animation art featuring Garfield.
Cost of Sales. Cost of sales decreased to $1.6 million, or 38.5% of net
sales, in the fiscal year ended October 31, 1995 from $1.7 million, or 44.0% of
net sales, in the fiscal year ended October 31, 1994. Cost of sales as a
percentage of net sales decreased primarily due to increased sales of animation
art with higher product margins, such as vintage production cels and art sold
through licenses.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the fiscal year ended October 31, 1995 were $1.8
million, or 43.4% of net sales, as compared to $1.6 million, or 40.7% of net
sales, in the fiscal year ended October 31, 1994, an increase of $172,000, or
10.8%, primarily due to an increase in salaries and commissions resulting from
the addition of sales representatives in 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 a working capital deficit of $137,000 at July 31,
1997 and working capital of $686,000 at January 31, 1997. The primary source of
the deficit for the six months ended July 31, 1997 was cash distributions to the
sole stockholder. The primary source of working capital for the year ended
January 31, 1997 was cash flow from operations, which was $1.3 million. 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 the stockholder.
Cash used for investing activities was $2,000 and $22,000 for the six
months ended July 31, 1997 and the year ended January 31, 1997, respectively.
These amounts 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. 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.
31
<PAGE>
RESULTS OF OPERATIONS -- STONE'S HALLMARK
The following table sets forth certain selected financial data for Stone's
Hallmark on a historical basis and as a percentage of net sales for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NOVEMBER 30,
-------------------------------------------------------------
1994 1995 1996
--------------------- ----------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales .................. $3,489 100.0% $4,281 100.0% $4,986 100.0%
Cost of sales ............... 1,800 51.6 2,269 53.0 2,497 50.1
------ ----- ------ ----- ------ -----
Gross profit ............... 1,689 48.4 2,012 47.0 2,489 49.9
Selling, general and
administrative expenses. 1,431 41.0 1,787 41.7 2,117 42.4
------ ----- ----- ----- ------ -----
Income from operations ...... 258 7.4 225 5.3 372 7.5
Other income (expense):
Interest expense ............ (4) (0.1) (11) (0.3) (3) (0.1)
------ ----- ----- ----- ------ -----
Income before income
taxes ..................... 254 7.3 214 5.0 369 7.4
Provision for income taxes. 146 4.2 128 3.0 194 3.9
------ ----- ----- ----- ------ -----
Net income .................. $ 108 3.1% $ 86 2.0% $ 175 3.5%
====== ===== ===== ===== ====== =====
<CAPTION>
NINE MONTHS ENDED AUGUST 31,
---------------------------------------------
1996 1997
--------------------- -----------------------
<S> <C> <C> <C> <C>
Net sales .................. $3,839 100.0% $4,332 100.0%
Cost of sales ............... 1,984 51.7 2,247 51.9
------ ----- ------ ------
Gross profit ............... 1,855 48.3 2,085 48.1
Selling, general and
administrative expenses. 1,455 37.9 1,279 29.5
------ ----- ------ ------
Income from operations ...... 400 10.4 806 18.6
Other income (expense):
Interest expense ............ (3) (0.1) (1) (0.0)
------ ----- ------ ------
Income before income
taxes ..................... 397 10.3 805 18.6
Provision for income taxes. 209 5.4 298 6.9
------ ----- ------ ------
Net income .................. $ 188 4.9% $ 507 11.7%
====== ===== ====== ======
</TABLE>
UNAUDITED INTERIM RESULTS
Net Sales. Net sales were $4.3 million for the nine months ended August 31,
1997 as compared to $3.8 million for the nine months ended August 31, 1996. The
increase in sales of $493,000, or 12.8%, was primarily due to the increased sale
of collectibles items, in-store artist signing events and the expansion of the
direct mail program in the nine months ended August 31, 1997.
Cost of Sales. Cost of sales increased to $2.2 million, or 51.9% of net
sales, in the nine months ended August 31, 1997 from $2.0 million, or 51.7% of
net sales, in the nine months ended August 31, 1996. Cost of sales as a
percentage of net sales remained relatively flat.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $1.3 million, or 29.5% of net sales, in the nine
months ended August 31, 1997 as compared to $1.5 million, or 37.9% of net sales,
in the nine months ended August 31, 1996, a decrease of $176,000, or 4.0%,
partially due to a decrease in owners' compensation and other expenses.
FISCAL YEAR ENDED NOVEMBER 30, 1996 COMPARED TO FISCAL YEAR ENDED NOVEMBER 30,
1995
Net Sales. Net sales were $5.0 million for the fiscal year ended November
30, 1996 as compared to $4.3 million for the fiscal year ended November 30,
1995. The increase in sales of $705,000, or 16.5%, was primarily due to a
remodeling of a store and, to a lesser extent, to an increase in the number of
in-store artist signing events in the fiscal year ended November 30, 1996.
Cost of Sales. Cost of sales increased to $2.5 million, or 50.1% of net
sales, in the fiscal year ended November 30, 1996 from $2.3 million, or 53.0% of
net sales, in the fiscal year ended November 30, 1995. Cost of sales as a
percentage of net sales decreased due to an increase in contemporary
collectibles sales that have higher profit margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $2.1 million, or 42.4% of net sales, in the fiscal
year ended November 30, 1996 as compared to $1.8 million, or 41.7% of net sales,
in the fiscal year ended November 30, 1995, an increase of $330,000, or 18.4%,
primarily due to an increase in owners' compensation.
FISCAL YEAR ENDED NOVEMBER 30, 1995 COMPARED TO FISCAL YEAR ENDED NOVEMBER 30,
1994
Net Sales. Net sales were $4.3 million for the fiscal year ended November
30, 1995 as compared to $3.5 million for the fiscal year ended November 30,
1994. The increase in sales of $792,000, or 22.7%, was primarily due to the
opening of a new store in November 1994 and a full year of operation of another
store which was remodeled and significantly expanded in February 1994.
32
<PAGE>
Cost of Sales. Cost of sales increased to $2.3 million, or 53.0% of net
sales, in the fiscal year ended November 30, 1995 from $1.8 million, or 51.6% of
net sales, in the fiscal year ended November 30, 1994. Cost of sales as a
percentage of net sales increased due to the product mix.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the fiscal year ended November 30, 1995 were $1.8
million, or 41.7% of net sales, as compared to $1.4 million, or 41.0% of net
sales, in the fiscal year ended November 30, 1994, an increase of $356,000, 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, to an increase in retail facilities leased.
LIQUIDITY AND CAPITAL RESOURCES -- STONE'S HALLMARK
Stone's Hallmark had working capital of $1.8 million and $1.3 million at
August 31, 1997 and November 30, 1996, respectively. The primary source of this
working capital was cash flows from operations and debt and equity financing.
Cash provided by operating activities was $491,000 and $89,000 in the nine
months ended August 31, 1997 and the fiscal year ended November 30, 1996,
respectively. The increases in cash each period were due to higher net income
before depreciation and amortization. The working capital increases were
primarily related to the cash from the growth in sales.
Cash used for investing activities was $86,000 for the fiscal year ended
November 30, 1996 and was principally related to purchases of property and
equipment.
CRYSTAL GALLERIA
Crystal Galleria is a retailer of contemporary collectibles operating three
stores, two located in Las Vegas, Nevada and one in McLean, Virginia.
RESULTS OF OPERATIONS -- CRYSTAL GALLERIA
The following table sets forth certain selected financial data for Crystal
Galleria on a historical basis and as a percentage of net sales for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------- -------------------------------------
1994 1995 1996 1996 1997
------------------ ------------------ ------------------ ----------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ..................... $ 2,503 100.0% $ 2,794 100.0% $ 3,727 100.0% $1,604 100.0% $2,050 100.0%
Cost of sales .................. 1,188 47.5 1,333 47.7 1,785 47.9 761 47.5 973 47.5
------- ------ ------- ------ ------- ------ ------ ------ ------ ------
Gross profit .................. 1,315 52.5 1,461 52.3 1,942 52.1 843 52.5 1,077 52.5
Selling, general and
administrative expenses ...... 731 29.2 875 31.3 1,564 42.0 666 41.5 868 42.3
------- ------ ------- ------ ------- ------ ------ ------ ------ ------
Income from operations ......... 584 23.3 586 21.0 378 10.1 177 11.0 209 10.2
Other income (expense):
Interest expense ............ (38) (1.5) (58) (2.1) (112) (3.0) (23) (1.4) (76) (3.7)
Other, net .................. -- -- -- -- (12) (0.3) (12) (0.8) -- --
------- ------ ------- ------ ------- ------ ------ ------ ------ ------
Net income ..................... $ 546 21.8% $ 528 18.9% $ 254 6.8% $ 142 8.8% $ 133 6.5%
======= ====== ======= ====== ======= ====== ====== ====== ====== ======
</TABLE>
UNAUDITED INTERIM RESULTS
Net Sales. Net sales were $2.1 million for the six months ended June 30,
1997 as compared to $1.6 million for the six months ended June 30, 1996. The
increase in sales of $446,000, or 27.8%, 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 $973,000, or 47.5% of net sales,
for the six months ended June 30, 1997 from $761,000, or 47.5% of net sales,
for the six months ended June 30, 1996.
33
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the six months ended June 30, 1997 were $868,000, or
42.3% of net sales, as compared to $666,000, or 41.5% of net sales, in the six
months ended June 30, 1996, an increase of $202,000 or 30.3%. The increase is
primarily due to a new store, which opened in August 1996, partially offest by a
decrease in advertising expense.
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. Cost of sales as a
percentage of net sales remained relatively flat.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the fiscal year ended December 31, 1996 were $1.6
million, or 42.0% of net sales, as compared to $875,000, or 31.3% of net sales,
in the fiscal year ended December 31, 1995, an increase of $689,000, or 78.7%.
This increase was primarily due to a full year of operations of a new store
which opened in November 1995 and, to a lesser extent, to the opening of another
new store in August 1996. The increase in expenses as a percentage of sales was
due to the opening of two new stores.
Interest Expense. Interest expense increased to $112,000 in the fiscal
year ended December 31, 1996 from $58,000 in the fiscal year ended December 31,
1995. The increase was primarily due to increased borrowings to finance the
opening of new stores in November 1995 and August 1996.
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 primarily 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. Cost of sales as a
percentage of net sales remained relatively flat.
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%.
This increase was primarily due to additional expenses associated with the
operation of a new store which opened in November 1995.
Interest Expense. Interest expense increased to $58,000 in the fiscal year
ended December 31, 1995 from $38,000 in the fiscal year ended December 31, 1994.
The increase was attributable to increased borrowings to finance the opening of
the new store in the fiscal year ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES -- CRYSTAL GALLERIA
Crystal Galleria had a working capital deficit of $456,000 and $383,000 at
June 30, 1997 and at December 31, 1996, respectively. The primary reason for the
working capital deficit at June 30, 1997 was $180,000 of borrowings from
stockholders. The primary reason for the working capital deficit at December 31,
1996 was cash used in operating activities, which was $191,000 for the fiscal
year ended December 31, 1996. The decrease in operating cash flows for the
fiscal year ended December 31, 1996 was primarily due to a decrease in net
income before depreciation and amortization, combined with an increase in
year-end merchandise inventories and a decrease in year-end accounts payable and
accrued liabilities.
34
<PAGE>
Cash used for investing activities was $21,000 and $315,000 for the six
months ended June 30, 1997 and the year ended December 31, 1996, respectively.
These amounts primarily represent the purchase of property and equipment.
NORTH POLE CITY
North Pole City is a retailer of Christmas merchandise and contemporary
collectibles.
RESULTS OF OPERATIONS -- NORTH POLE CITY
The following table sets forth certain selected financial data for North
Pole City on a historical basis and as a percentage of net sales for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
-----------------------------------------------------
1995 1996 1997
----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Net sales ..................... $2,562 100.0% $2,865 100.0% $3,726 100.0%
Cost of sales .................. 1,371 53.5 1,492 52.1 1,733 46.5
------ ------ ------ ------ ------ -----
Gross profit .................. 1,191 46.5 1,373 47.9 1,993 53.5
Selling, general and
administrative expenses ...... 990 38.6 1,077 37.6 1,522 40.8
------ ------ ------ ------ ------ -----
Income from operations ......... 201 7.9 296 10.3 471 12.7
Other income (expense):
Interest expense ............... (41) (1.6) (57) (2.0) (82) (2.2)
Other, net ..................... 8 0.3 10 0.4 38 1.0
------ ------ ------ ------ ------ -----
Income before income taxes . 168 6.6 249 8.7 427 11.5
Provision (benefit) for income
taxes ........................ 66 2.6 96 3.4 168 4.5
------ ------ ------ ------ ------ -----
Net income (loss) ............... $ 102 4.0% $ 153 5.3% $ 259 7.0%
====== ====== ====== ====== ====== =====
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-------------------------------------------
1996 1997
---------------------- --------------------
<S> <C> <C> <C> <C>
Net sales ..................... $ 484 100.0% $ 558 100.0%
Cost of sales .................. 245 50.6 277 49.7
----- ------- ------ -------
Gross profit .................. 239 49.4 281 50.3
Selling, general and
administrative expenses ...... 256 52.9 374 67.0
----- ------- ------ -------
Income from operations ......... (17) (3.5) (93) (16.7)
Other income (expense):
Interest expense ............... (24) (5.0) (16) (2.8)
Other, net ..................... 1 0.1 1 0.1
----- ------- ------ -------
Income before income taxes . (40) (8.3) (108) (19.4)
Provision (benefit) for income
taxes ........................ (16) (3.3) (39) (6.9)
----- ------- ------ -------
Net income (loss) ............... $ (24) (5.1)% $ (69) (12.5)%
===== ======= ====== =======
</TABLE>
UNAUDITED INTERIM RESULTS
Net Sales. Net sales were $558,000 for the three months ended June 30, 1997
as compared to $484,000 for the three months ended June 30, 1996. The increase
in sales of $74,000, or 15.3%, was primarily due to increased marketing efforts,
including special promotions, expanded telemarketing and direct mail.
Cost of Sales. Cost of sales increased to $277,000 or 49.7% of net sales,
in the three months ended June 30, 1997 from $245,000, or 50.6% of net sales, in
the three months ended June 30, 1996. Cost of sales as a percentage of net sales
decreased primarily due to the change in product mix to collectibles with higher
margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $374,000, or 67.0% of net sales, in the three
months ended June 30, 1997 as compared to $256,000, or 52.9% of net sales, in
the three months ended June 30, 1996, an increase of $118,000, or 46.1%,
principally due to increased salaries for additional sales personnel,
advertising expense for special promotions and direct mail costs.
FISCAL YEAR ENDED MARCH 31, 1997 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1996
Net Sales. Net sales were $3.7 million for the fiscal year ended March 31,
1997 as compared to $2.9 million for the fiscal year ended March 31, 1996. The
increase in sales of $861,000, or 30.1%, was primarily due to continued
marketing efforts focused on telemarketing, advertising in national publications
and Internet marketing of collectibles merchandise. This increase was also due
to a lesser extent, by the remodeling and expansion of the store.
Cost of Sales. Cost of sales increased to $1.7 million, or 46.5% of net
sales, for the fiscal year ended March 31, 1997 from $1.5 million, or 52.1% of
net sales, for the fiscal year ended March 31, 1996. Cost of sales as a
percentage of net sales decreased due to the change in product mix to
collectibles with higher margins.
35
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the fiscal year ended March 31, 1997 were $1.5
million, or 40.8% of net sales, as compared to $1.1 million, or 37.6% of net
sales, in the fiscal year ended March 31, 1996, an increase of $444,000, or
41.2%, primarily due to increased advertising and salaries for additional
personnel.
Interest Expense. Interest expense increased to $82,000 in the fiscal year
ended March 31, 1997 from $57,000 in the fiscal year ended March 31, 1996. The
increase was the result of borrowings used to finance store expansion and to
purchase inventory.
FISCAL YEAR ENDED MARCH 31, 1996 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1995
Net Sales. Net sales were $2.9 million for the fiscal year ended March 31,
1996 as compared to $2.6 million for the fiscal year ended March 31, 1995. The
increase in sales of $303,000, or 11.8%, was primarily a result of increased
marketing efforts focused on telemarketing, advertisements in national
publications and Internet marketing of collectibles merchandise.
Cost of Sales. Cost of sales increased to $1.5 million, or 52.1% of net
sales, in the fiscal year ended March 31, 1996 from $1.4 million, or 53.5% of
net sales, in the fiscal year ended March 31, 1995. Cost of sales as a
percentage of net sales decreased due to the change in product mix to
collectibles with higher margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the fiscal year ended March 31, 1996 were $1.1
million, or 37.6% of net sales, as compared to $990,000, or 38.6% of net sales,
in the fiscal year ended March 31, 1995, an increase of $88,000, or 8.9%,
primarily due to salaries for additional personnel.
Interest Expense. Interest expense increased to $57,000 in the fiscal year
ended March 31, 1996 from $41,000 in the fiscal year ended March 31, 1995. The
increase was the result of borrowings used to finance remodeling and expansion
of the store.
LIQUIDITY AND CAPITAL RESOURCES -- NORTH POLE CITY
North Pole City had working capital of $945,000 and $1.0 million at June
30, 1997 and March 31, 1997, respectively. The primary source of this working
capital was cash flow from operations, which was $167,000 for the fiscal year
ended March 31, 1997. For the three months ended June 30, 1997, cash used in
operations was $99,000. Cash used in operating activities was primarily related
to the purchase of merchandise inventories.
Cash used for investing activities was $143,000 for the fiscal year ended
March 31, 1997. These activities represent the purchase of property and
equipment. No cash was used for investing activities for the three months ended
June 30, 1997.
REEF HALLMARK
Reef Hallmark is a retailer of contemporary collectibles, Hallmark cards
and gifts, located in West Palm Beach, Florida.
36
<PAGE>
RESULTS OF OPERATIONS -- REEF HALLMARK
The following table sets forth certain selected financial data for Reef
Hallmark on a historical basis and as a percentage of net sales for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------------- -------------------------------------------
1995 1996 1996 1997
------------------- ------------------- ------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ........................ $1,839 100.0% $2,493 100.0% $1,178 100.0% $1,299 100.0%
Cost of sales ..................... 1,102 59.9 1,301 52.2 610 51.7 678 52.2
------ ------ ------ ------ ------ ------ ------ ------
Gross profit ..................... 737 40.1 1,192 47.8 568 48.3 621 47.8
Selling, general and administrative
expenses ........................ 629 34.2 935 37.5 442 37.5 516 39.7
------ ------ ------ ------ ------ ------ ------ ------
Income from operations ............ 108 5.9 257 10.3 126 10.7 105 8.1
Other income (expense):
Interest expense ............... (41) (2.2) (49) (2.0) (20) (1.7) (23) (1.8)
Other, net ..................... -- -- (12) (0.5) 1 0.0 1 0.0
------ ------ ------ ----- ------ ----- ------ ------
Net income ........................ $ 67 3.7% $ 196 7.8% $ 107 9.1% $ 83 6.4%
====== ====== ====== ===== ====== ===== ====== ======
</TABLE>
UNAUDITED INTERIM RESULTS
Net Sales. Net sales were $1.3 million for the six months ended June 30,
1997 as compared to $1.2 million for the six months ended June 30, 1996. The
increase in sales of $121,000, or 10.2%, was primarily a result of increased
demand for certain contemporary collectibles products during the six months
ended June 30, 1997.
Cost of Sales. Cost of sales increased to $678,000, or 52.2% of net sales,
in the six months ended June 30, 1997 from $610,000 or 51.7% of net sales, for
the six months ended June 30, 1996. Cost of sales as a percentage of net sales
remained relatively flat.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the six months ended June 30, 1997 were $516,000, or
39.7% of net sales, as compared to $442,000, or 37.5% of net sales, in the six
months ended June 30, 1996, an increase of $73,000 or 16.6%. The increase was
primarily due to increased advertising expenses.
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, an
increase in in-store artist signing events.
Cost of Sales. Cost of sales increased to $1.3 million, or 52.2% of net
sales, in the fiscal year ended December 31, 1996 from $1.1 million, or 59.9% of
net sales, in the fiscal year ended December 31, 1995. Cost of sales as a
percentage of net sales decreased due to the change in product mix to
collectible items with higher margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the fiscal year ended December 31, 1996 were
$935,000, or 37.5% of net sales, as compared to $629,000, or 34.2% of net sales,
in the fiscal year ended December 31, 1995, an increase of $306,000, or 48.7%,
primarily due to an increase in advertising and lease expense associated 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 $77,000 and $171,000 at June 30, 1997
and December 31, 1996, respectively. The primary source of this working capital
was cash flow from operations, which was $135,000 for the fiscal year ended
December 31, 1996. The decrease in working capital at June 30, 1997 was due to a
decrease in merchandise inventories.
37
<PAGE>
Cash used for investing activities was $1,000 and $29,000 for the six
months ended June 30, 1997 and the year ended December 31, 1996, respectively.
These expenditures represent purchases of property and equipment as well as
expenditures necessary to support the 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.
RESULTS OF OPERATIONS -- FILMART
The following table sets forth certain selected financial data for Filmart
on a historical basis and as a percentage of net sales for the periods indicated
(dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
-------------------------------------------
1995 1996
--------------------- ---------------------
<S> <C> <C> <C> <C>
Net sales ....................................... $1,053 100.0% $1,446 100.0%
Cost of sales .................................... 511 48.6 498 34.4
------ ----- ------ ------
Gross profit .................................... 542 51.4 948 65.6
Selling, general and administrative expenses . 493 46.8 539 37.3
------ ----- ------ ------
Income from operations ........................... 49 4.7 409 28.3
Other income (expense):
Interest expense ................................. (4) (0.4) (1) (0.1)
Other, net ....................................... 74 7.1 279 19.3
------ ----- ------ ------
Net income ....................................... $ 119 11.3% $ 687 47.5%
====== ===== ====== ======
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------
1996 1997
------------------- --------------
<S> <C> <C> <C> <C>
Net sales ....................................... $541 100.0% $514 100.0%
Cost of sales .................................... 203 37.5 191 37.2
---- ------ ---- -----
Gross profit .................................... 338 62.5 323 62.8
Selling, general and administrative expenses . 221 40.8 300 58.3
---- ------ ---- -----
Income from operations ........................... 117 21.6 23 4.5
Other income (expense):
Interest expense ................................. (1) (0.1) 1 0.1
Other, net ....................................... 167 30.8 113 21.9
---- ------ ---- -----
Net income ....................................... $283 52.3% $137 26.5%
==== ====== ==== =====
</TABLE>
UNAUDITED INTERIM RESULTS
Net Sales. Net sales were $514,000 for the six months ended June 30, 1997
as compared to $541,000 for the six months ended June 30, 1996. The decrease in
sales of $27,000, or 4.9%, was primarily the result of fewer in-store signing
events and lower telemarketing sales in the six months ended June 30, 1997.
Filmart is a member of several barter companies, within which Filmart trades
artwork for various goods and services from other barter company members. Barter
transactions involving artwork for various goods and services are valued at the
market value of the goods or services received. Filmart recognized $29,000 of
sales through such barter companies in each of the six months ended June 30,
1997 and 1996, respectively.
Cost of Sales. Cost of sales decreased to $191,000, or 37.2% of net sales,
for the six months ended June 30, 1997 from $203,000, or 37.5% of net sales, for
the six months ended June 30, 1996. Cost of sales as a percentage of net sales
remained relatively flat.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the six months ended June 30, 1997 were $300,000, or
58.3% of net sales, as compared to $221,000, or 40.8% of net sales, in the six
months ended June 30, 1996, an increase of $79,000, or 35.8%. This increase was
primarily due to an increase in advertising and salaries.
Other Income. Other income decreased to $113,000, or 21.9% of net sales, in
the six months ended June 30, 1997 from $167,000, or 30.8% of net sales, in the
six months ended June 30, 1996 due to an insurance settlement received during
the six months ended June 30, 1996. Consulting fees recorded as other income
were $113,000 for the six months ended June 30, 1997 and the six months ended
June 30, 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
38
<PAGE>
of the customer database, increased advertising and, to a lesser extent, to the
addition of sales representatives with enhanced product knowledge. Filmart
recognized $248,000 and $32,000 of sales through barter companies in the fiscal
years ended December 31, 1996 and 1995, respectively.
Cost of Sales. Cost of sales decreased to $498,000, or 34.4% of net sales,
in the fiscal year ended December 31, 1996 from $511,000, or 48.6% of net sales,
in the fiscal year ended December 31, 1995. Cost of sales as a percentage of net
sales decreased primarily due to sales of animation art with higher margins,
primarily vintage production cels.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the fiscal year ended December 31, 1996 were
$539,000, or 37.3% of net sales, as compared to $493,000, or 46.8% of net sales,
in the fiscal year ended December 31, 1995, an increase of $47,000, or 9.5%,
primarily due to an increase in commissions. The decrease in this cost as a
percentage of net sales was primarily due to economies of scale associated with
increased sales.
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 $1.1 million and $976,000 at June 30, 1997
and December 31, 1996, respectively. The primary sources of working capital were
prepayments made for advertising and advances to shareholders.
Cash used for operating activities was $42,000 for the six months ended
June 30, 1997. Cash provided by operating activities was $131,000 for the year
ended December 31, 1996.
ANIMATION USA
Animation USA is a retail marketer of animation art with a gallery located
in Seattle, Washington and a gallery located in San Francisco, California.
RESULTS OF OPERATIONS -- ANIMATION USA
The following table sets forth certain selected financial data for
Animation USA on a historical basis and data as a percentage of net sales for
the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------------------------
1996 1997
------------------------ ------------------------
<S> <C> <C> <C> <C>
Net sales .......................................... $835 100.0% $672 100.0%
Cost of sales .................................... 394 47.3 255 38.0
---- ------- ---- -------
Gross profit ....................................... 441 52.7 417 62.0
Selling, general and administrative expenses ...... 411 49.2 372 55.3
---- ------- ---- -------
Income from operations ........................... 30 3.6 45 6.7
Other income (expense):
Interest expense ................................. (4) 0.4 (5) 0.8
----- ------- ----- -------
Income before taxes .............................. 26 3.2 40 5.9
Provision for income taxes ........................ 11 1.3 15 2.2
---- ------- ---- -------
Net income ....................................... $ 15 1.9% $ 25 3.7%
==== ======= ==== =======
</TABLE>
UNAUDITED INTERIM RESULTS
Net Sales. Net sales were $672,000 for the six months ended June 30, 1997
as compared to $835,000 for the six months ended June 30, 1996. The decrease in
sales of $163,000, or 19.5%, was primarily attributable to a decrease in the
number of in-store artist signing events in the first half of 1997.
Cost of Sales. Cost of sales decreased to $255,000, or 38.0% of net sales,
for the six months ended June 30, 1997 from $394,000, or 47.3% of net sales, for
the six months ended June 30, 1996. Cost of sales as a percentage of net sales
decreased due to higher sales of animation art produced in-house under license
arrangements.
39
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the six months ended June 30, 1997 were $372,000, or
55.3% of net sales, as compared to $411,000, or 49.2% of net sales, in the six
months ended June 30, 1996, a decrease of $39,000, or 9.5%. This decrease was
largely due to a decrease in advertising expense related to the in-store artist
signing events and, to a lesser extent, to a decrease in sales commissions.
LIQUIDITY AND CAPITAL RESOURCES -- ANIMATION USA
Animation USA had a working capital deficit of $31,000 and $30,000, at June
30, 1997 and December 31, 1996, respectively. The primary reason for the working
capital deficit at June 30, 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 six months ended June 30, 1997 was the increase in
accounts receivable and deferred offering costs.
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 six months ended
June 30, 1997.
40
<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, telemarketing and 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). See "-- Collectibles Stores." The
Company's animation art galleries carry a full spectrum of animation artwork,
including original production cels, limited editions, sericels, model sheets and
original drawings. In addition, the Company has licenses or rights, some of
which are exclusive, to design, produce and market animation art featuring a
wide variety of well known characters, including Garfield\R, The Simpsons\R and
Anastasia\R, and is also an authorized dealer of limited editions and sericels
created by Disney and Warner Brothers.
The Company's target retail customer is between 45 and 64 years old, and
encompasses a broad range of income levels. The Company believes that the
typical collector makes more than one collectibles purchase per year, and the
typical collecting household maintains more than one collection. Moreover,
collectibles also are purchased as gifts and as decorative items. The Company's
animation art galleries also target a wide range of customers from entry level
collectors with relatively small collections to high-end, experienced collectors
of vintage pieces.
INDUSTRY OVERVIEW
According to Unity Marketing's The Collectibles Industry Report 1997, the
collectibles industry grew approximately 11.9% in 1996, generating over $9
billion in primary sales (i.e., sales of new merchandise), of which
approximately 79% were generated by retail sales (including TV shopping) and
approximately 21% were generated by direct response marketing. The contemporary
collectibles industry is serviced by approximately 10,000 specialty retail
collectibles stores nationwide. Collectibles are also sold by mid-to-upscale
department stores, home furnishing stores, small specialty import stores, gift
stores, card shops, TV shopping, collectors clubs and other gallery and print
stores. The industry includes sales of a wide variety of manufactured
collectible items, including figurines and sculptures, dolls, crystal, collector
plates, cottages, lighthouses, Christmas ornaments and other holiday
collectibles and art such as lithographs and prints. According to Unity
Marketing, an estimated 31 million Americans identify themselves as collectors.
The animation art industry includes sales of vintage original production
cels, limited editions produced by studios, sericels and original animation
produced by licensees such as the Company bearing the likenesses of popular
animated characters through art galleries, gift shops and auction houses, as
well as database direct mail, telemarketing and the Internet. Although
statistical information on the animation art industry is limited and marketing
tools such as "collectors clubs" are not yet
41
<PAGE>
common in the industry, the Company believes that the industry is growing. In
recognition of the industry's emerging importance and profitability, auction
houses such as Sotheby's and Christie's are active in the secondary market of
animation through their public auctions.
The Company's target consumer base represents a growing part of the United
States population. According to the U.S. Department of Commerce Bureau of the
Census, the 45 to 64 year old population reached approximately 45 million in
1996 and is expected to grow to approximately 66 million during the next ten
years, representing a projected growth rate of close to three times the rate for
the overall population. The Company believes that collecting will become
increasingly popular among consumers ages 45 to 64 because this generation of
collectors has high levels of discretionary income and has demonstrated
nostalgic characteristics.
The Company believes that the highly fragmented nature of the collectibles
and animation art industries creates significant consolidation opportunities.
The retail collectibles market is highly fragmented with over 10,000 retail
stores, most of which have less than a 1% market share. In addition, most of the
participants in these industries lack the capital to expand or a viable exit
strategy. The Company believes that the favorable growth outlook for the
collectibles and animation art industries resulting from the growing demographic
base, coupled with the fragmented nature of these industries, will make it well
positioned to pursue its growth strategies. The Company estimates that there are
over 200 collectibles retailers in the United States with retail sales in excess
of $2 million annually.
BUSINESS STRATEGY
The Company's goal is to become the leading specialty retailer of
contemporary collectibles and the leading marketer of animation art in the
United States. The Company will seek to achieve this goal by emphasizing growth
through acquisitions and implementing a national operating strategy that
enhances internal revenue growth and profitability.
GROWTH STRATEGY
Key elements of the Company's growth strategy include:
Grow Through Acquisitions. The Company believes that the collectibles
industry is highly fragmented with significant opportunities for
consolidation. The Company intends to acquire profitable, well-managed
collectibles retailers and animation art marketers that may provide new
categories of merchandise that may be cross-sold to the Company's existing
customer base. The Company believes that it will be an attractive acquiror
due to its (i) strategy of retaining owners and management of acquired
companies, (ii) access to capital and (iii) ability to offer sellers
immediate liquidity for their business as well as an ongoing equity stake in
the Company. The Company has developed an extensive database of acquisition
candidates within the collectibles and animation art industries and believes
it will be well positioned to implement its acquisition program promptly
following the Offering. Within the past several months, the Company has
contacted the owners of a number of collectibles retailers and animation art
marketers, several of whom have expressed interest in having their businesses
acquired by the Company. The Company currently has no binding agreements to
effect any acquisition and is not now engaged in any negotiations to acquire
any company. The Company, however, expects that its future acquisitions will
be based on criteria such as anticipated return on capital, and the
acquisition candidate's opportunities for growth and ability to meet other
strategic objectives. Although the Company will consider opportunities to
make larger acquisitions, the Company's target candidate for acquisition is
expected to have $2 to $5 million in annual sales, demonstrated
profitability, and one to four retail locations. The Company's research
indicates that there are more collectibles retailers meeting its criteria
than there are animation art marketers. To help it identify prospective
targets, the Company has retained a consultant with knowledge of the
collectibles and animation art industries. See "Certain Transactions --
Transactions Involving Certain Officers, Directors and Stockholders." 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.
42
<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.
Develop Prototype Store Formats. Although the Company intends to focus
initially on acquiring other retailers of collectibles and marketers of
animation art, the Company expects to complement its acquisition growth with
new store openings. Over the next 12 months, the Company plans to develop two
prototype store formats: a "superstore" format of approximately 18,000 square
feet, designed for either free-standing or strip mall locations, and a
mall-based format, of approximately 1,500 square feet. The Company does not
intend to open new stores over the next 12 months.
NATIONAL OPERATING STRATEGY
Key elements of the Company's national operating strategy include:
Strengthen and Expand Vendor Relationships. Vendors in the collectibles
industry often recognize retailers based on certain volume levels and
reputation. At the discretion of vendors, preferred gallery status is awarded
to collectibles stores based on factors such as (i) a proven ability to
market and sell large quantities of merchandise, (ii) exceptional customer
service and (iii) creditworthiness. 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 which generally lead to increased sales. Certain vendors already have
expressed a willingness to develop products, such as porcelain figurines,
resin figurines and cels, on an exclusive basis for the Company. As a result
of the Acquisitions, the Company believes that certain of the Founding
Companies will be able to benefit from the vendor relationships that the
other Founding Companies have established with each of their individual
vendors.
To ensure that the Company maximizes its relationships with vendors, the
Company has hired an executive to oversee and coordinate, among other things,
merchandising and vendor relationships. It is anticipated that this executive
and the other executive officers of the Company will 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 210,000 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. The Company is currently evaluating several
MIS alternatives designed to centralize and monitor the operations of the
Founding Companies by auditing sales receipts, accounts payables, payroll,
purchases and inventory levels and by implementing
43
<PAGE>
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 through improved training programs and incentive systems for
experienced managers and corporate-level merchandising to more effectively
manage the Company's merchandising decisions, product displays and product
assortment. Although in the near term the Company expects to incur higher
operating expenses, the Company anticipates that in the future it will
achieve long-term economies of scale and enhanced store-level performance as
a result of these efforts. The Company also expects to experience benefits of
consolidation with respect to improved training practices, its ability to
attract and retain qualified personnel and customer service.
Capitalize on Local Strengths. Notwithstanding the strengths that a
national organization can provide, the Company believes that an important
factor for success in the collectibles industry is local relationships. By
maintaining significant operating autonomy at the local level, the Company
intends to capitalize on local strengths, such as name recognition, customer
loyalty and service. In addition, the Company anticipates that certain of the
principals of the Founding Companies will assist it in establishing and
refining practices for Company-wide operations.
COLLECTIBLES STORES
The Company will sell collectibles merchandise through two superstores, two
free-standing retail locations, nine mall-based stores and five upscale
strip-mall stores which are located in seven states. The stores range in size
from approximately 1,000 to 15,000 square feet of retail space and carry from
1,500 to 13,800 SKUs. Additionally, the Company utilizes database direct mail,
telemarketing and the Internet to sell its collectibles merchandise. The
Company's porcelain figurines and sculptures are produced by vendors such as
Lladro, Goebel U.S.A. (manufacturer of the Hummel product line) and Giuseppe
Armani. The resin figurines which the Company sells are obtained from vendors
such as Enesco (manufacturer of the Precious Moments and Cherished Teddies
product lines). The Company's collectibles stores also sell crystal figurines
and functional items, such as crystal vases, produced by vendors such as
Swarovski, Waterford, Baccarat, and Lalique. In addition, the Company sells
collectible cottages and villages produced by Department 56 (manufacturer of The
Original Snow Village and The Heirloom Village Collections product lines).
Merchandising. Each of the Company's collectibles stores carries a product
assortment that is merchandised by product line and vendor and that is selected
to provide items that are distinctive and specifically suited to the tastes of
its customers. The stores generally carry different but overlapping lines of
collectibles merchandise because each store selects merchandise which appeals to
the preferences of customers within its area. Although the general categories of
the collectibles merchandise stay the same from store to store, individual items
within each general product group change to respond to the interests and demands
of customers of each store. Consequently, stores such as the Forum Shops at
Caesar's that are frequented by customers with more disposable income tend to
carry products which retail for prices higher than those carried by stores that
serve customers with less disposable income.
While the price of collectibles ranges from $5 to $25,000, Unity Marketing
reported in 1995 that the average collector household spends $500 annually.
Stores that target middle income customers carry collectibles merchandise which
generally ranges in price from $25 to $250, while stores that target higher
income customers carry merchandise which generally ranges in price from $125 to
$4,000.
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 occasionally marketed in connection
with artist signings to generate excitement about their
44
<PAGE>
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 has hired an executive to oversee and coordinate,
among other things, merchandising and vendor relationships.
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 9% of the Company's pro forma net sales in Fiscal 1997.
Certain suppliers of collectibles merchandise to the Founding Companies, such as
Enesco or Department 56, provide in their agreements with such Founding
Companies that the vendor will furnish an ongoing supply of products within the
vendor's particular production limitations and obligate the vendor to develop
point-of-sale material to support the Founding Companies' advertising programs.
Pursuant to such agreements, it is the responsibility of the Founding Company to
operate at least five days a week or throughout the calendar year, to promote
and foster the collectibility status of the vendor's merchandise, to organize
promotional events such as "open houses," to purchase certain levels of
merchandise or display certain pieces in a series, to adhere to a vendor's
pricing schedule and to maintain a satisfactory creditworthiness. A Founding
Company's failure to fulfill its obligations to a vendor may entitle the vendor
to suspend its supply of collectibles merchandise. Several of the Founding
Companies have achieved standards of quality and reputation which qualify them
for the preferred gallery status recognized by their important vendors. Such
status typically confers benefits such as greater co-op advertising
contributions, preferred access to specialized merchandise and increased access
to artists for signings and other in-store and off-site special events. The
Company makes decisions about purchases of inventory well in advance of the time
at which such products are intended to be sold. Significant deviations from
projected demand for collectibles merchandise could have a material adverse
effect on the Company's financial condition and results of operations. Higher
priced collectibles generally are sold on a consignment basis which permits the
Company to expand its array of collectibles merchandise without encumbering
working capital.
In order to attract and retain the loyalty of collectibles customers and to
position its stores as destination retail locations, certain of the Founding
Companies utilize innovative merchandising and display techniques. One of the
stores has built a reputation based on entertaining in-store displays which have
included a model train, a grind organ and unique displays which highlight a
particular vendor's merchandise. Other of the Company's collectibles stores have
gained recognition based on their promotional practices, including producing and
distributing videotapes of the store's business operations and employing games
of chance with prizes corresponding to a vendor's particular collectibles theme.
Marketing. Currently, the Founding Companies advertise independently of
each other, primarily through print advertising and direct mail contacts.
Certain of the Founding Companies, namely North Pole City, Little Elegance, Reef
Hallmark and Stone's Hallmark, advertise their merchandise in catalogs that are
produced by a national collectibles catalog publishing syndicate such as Parade
of Gifts and Gift Creations Concepts. Such catalog consortiums allow members to
use the published catalog for individual sales purposes. Membership in such
catalog consortiums entitles the Company to exclusive pieces produced by Enesco
and Department 56. The Company plans to evaluate its use of catalog consortiums
in the future, including opportunities for preparing such catalogs itself.
The Company also participates in loyalty-based marketing programs such as
"collector clubs" which reward members with privileges such as access to
exclusive member pieces, detailed information about collections and invitations
to special events.
The Company's collectibles stores' databases contain approximately 183,000
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. Customers can contact Little
45
<PAGE>
Elegance at www.little-elegance.com, North Pole City at www.northpolecity.com,
and Stone's Hallmark at virtualbit.com/stones. Sales over the Internet have not
constituted a significant portion of the Company's sales to date.
Following the Offering, the Company intends to increase its print
advertising efforts, including advertising in specialty collectibles magazines
and inserting promotional and seasonal sales circulars in local newspapers, and
increase its efforts in other media, including radio and television. The Company
also intends to initiate programs utilizing its customer database to stimulate
additional sales around birthdays and anniversaries, and holidays such as
Mother's Day. In addition, the Company also plans to expand promotional events
such as artist signings and sponsored charitable activities, which have proven
successful at individual Founding Companies.
Customer Service. The Company's goal is to provide exceptional customer
service. The Company generally ships orders within 24 to 72 hours. In addition,
the Company places special orders on behalf of its customers with manufacturers
for hard-to-find items and notifies its customers of limited edition pieces in
advance of their availability in stores. The Company generally accepts returns
on its merchandise within 14 to 30 days of sale. All of the Company's stores are
open seven days a week. In recognition of the Founding Companies' dedication to
customer service and from their commitment and experience in merchandising a
particular vendor's collectibles merchandise, the Founding Companies have
received numerous titles of distinction such as Boyds Bears Gold Paw (Stone's
Hallmark and North Pole City), Cherished Teddies Adoption Center (North Pole
City and Stone's Hallmark), Department 56 Gold Key Dealer (Little Elegance,
North Pole City, Reef Hallmark and Stone's Hallmark), Fenton Glass Showcase
Dealer (Stone's Hallmark), Giuseppe Armani Art Headquarter Store (North Pole
City), Giuseppe Armani Preferred Dealer (Crystal Galleria), Hallmark Gold Crown
(Reef Hallmark and Stone's Hallmark), Lladro Millennium Dealer (Crystal
Galleria), Lladro Vanguard Dealer (Crystal Palace), Roman Premiere Dealer
(Little Elegance and North Pole City) and Swarovski Preferred Dealer (Crystal
Galleria). Three of the Founding Companies (Little Elegance, Reef Hallmark and
Stone's Hallmark) are among the approximately 40 stores nationwide designated as
Precious Moments Century Circle Dealers by Enesco which entitles them to
exclusive Precious Moments collectibles pieces.
ANIMATION ART GALLERIES
The Company's five animation art galleries are each located in or near
suburbs of metropolitan areas. These galleries are located in California, New
York (2), Pennsylvania and Washington. The Company generates most of its
animation art sales through database direct mail and telemarketing operations.
Merchandising. The Company's animation art galleries carry a wide
assortment of animation artwork, including original production cels, limited
editions, sericels, model sheets and original drawings. A "cel" is a painting of
a character or object on a transparent acetate sheet. An original vintage
production cel, which is created by an original drawing, is hand painted and is
the final result of the artistic process that creates animation used in the
actual film production, whereas limited edition cels although created in the
same manner, generally recreate animation scenes from popular animated films for
which original production cels are no longer available. Sericels are limited
editions that are created by hand painting an image onto a master cel and then
produced in large quantities through a printing process. Model sheets are a
group of original pencil drawings of animated characters in a variety of poses
and expressions. Prices for animation art are typically higher than for
contemporary collectibles, beginning at approximately $100 and ranging up to
$100,000, with an average sale price of approximately $750. Animation art sales
generally are less seasonal than sales of collectibles.
The Company designs and manufactures limited editions and sericels under
license from the owners of popular characters, and purchases original production
cels from the studio that created the art, another dealer or a private collector
for sale to both retail and wholesale customers. The Company sells on
consignment limited edition animation cels created by Virgil Ross, under license
from Warner Brothers, 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
46
<PAGE>
with certain Norman Rockwell images. The Company's designs for art featuring
such licensed characters are generally subject to prior approval by the
licensor. Pursuant to an oral understanding, the Company also distributes
limited edition comic strip art from Jeff MacNelly (Shoe), Johnny Hart (B.C. and
Wizard of Id), Chris Browne (Hagar the Horrible), Bryant Parker (Wizard of Id),
Roger Bollen (Animal Crackers), Myron Woldman (Popeye and Betty Boop) and Sidney
Harris. The Company has a similar oral understanding with Don Oriolo (Felix the
Cat\R). The Company acquires this limited edition comic strip art at discount
wholesale prices and in turn distributes it through wholesale and retail sales.
There are no written agreements governing these distribution arrangements and,
therefore, there can be no assurance that one or more of these distributor
arrangements will not be terminated. One of the Founding Companies has been
granted an exclusive license by HBO\R Animation to manufacture and sell artwork
using material from the first season of Spawn and Spicy City. The Company is an
authorized dealer of art produced by Warner Brothers/Hanna-Barbera, Disney and
artist Chuck Jones. The Company's authorized dealer agreements can generally be
terminated by the other party with or without cause on short notice. Certain of
the authorized dealer agreements require the vendor's consent to the
Acquisitions. Although the Company is seeking consents authorizing the
Acquisitions where required by the terms of such authorized dealer agreements,
there can be no assurance that such consents will be obtained.
The animation art sold by the Company is produced by the Company under
certain licenses or rights with a majority of the art being obtained from the
studios or artists that create the art, including Disney and Warner
Brothers/Hanna-Barbera. The art is either bought from the artist or studio or is
sold by the Company on a consignment basis.
The Company generates its design ideas by closely collaborating with the
studio that licenses the character to be included in the artwork. It generally
takes an average of six weeks to create a new piece of original animation art.
During this period, the Company's artists, or artists working as independent
contractors, generate a prototype design which is thereafter submitted to the
artist or animation studio for its approval.
Marketing. A significant portion of the Company's animation art marketing
efforts is conducted through database direct mail, telemarketing and Internet
marketing programs, which utilize databases aggregating approximately 27,000
customers. These databases detail the buying patterns and merchandise
preferences of current and potential customers and enable the Founding Companies
to conduct targeted database direct mail, telemarketing and Internet marketing
programs. The Company's animation art marketing efforts also include advertising
in newspapers and animation art magazines. While each of the Founding Companies
will continue to advertise locally, the Company will evaluate opportunities to
consolidate its advertising functions on a national basis. Two of the Company's
animation art marketers have home pages on the Internet which they use to
educate customers about their animation art and special events. Customers can
contact American Royal Arts and Animation USA at www.ara-animation.com and
www.animationusa.com, respectively. Sales over the Internet have not constituted
a significant portion of the Company's sales to date.
All of the Founding Companies which market animation art generate a
majority of their sales from database direct mail and telemarketing efforts. One
of the Company's significant strategies for improved marketing is the
consolidation of the databases of the various Founding Companies for
comprehensive database direct mail and telemarketing efforts along lines that
have proved successful at the Founding Companies where these operations generate
significant amounts of sales. The Company believes one of the significant
opportunities presented by the consolidation of the Founding Companies is the
cross-marketing possibilities to the combined customer databases of the Founding
Companies.
One of the Founding Companies, Filmart, has an agreement with Vista Media,
Inc. ("Vista"), a non-affiliated, third party, whereby Filmart receives print,
radio and television advertising services from Vista in exchange for providing
to Vista consulting services consisting of designing animation characters and
business logos, providing art direction for Vista's publications and providing
business advice in the animation industry. The agreement expires on August 31,
1998.
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
47
<PAGE>
artist to personally sign the purchased art. The Company's animation art
galleries generally are open six days a week and by appointment. Outbound
telemarketing efforts and inbound calls generally occur during store hours.
TRAINING PROGRAMS
The Company's goal is to provide exceptional customer service. The owners
of the Founding Companies either serve as store or gallery managers or seek to
hire entrepreneurial managers who are energetic and knowledgeable about the
collectibles and animation art industries. Each of the Founding Companies has
developed varying levels of training programs. Some of the training programs
involve video presentations, utilize material prepared by vendors, consist of
vendor-sponsored training conducted by representatives or consist of one-on-one
training conducted by managers. As part of its emphasis on customer service, the
Company plans to evaluate each Founding Company's training program and develop a
Company-wide training program for new hires.
MANAGEMENT INFORMATION SYSTEMS AND CONTROLS
The Founding Companies currently have a variety of accounting, inventory
and financial reporting systems at varying degrees of sophistication, none of
which have previously operated on a combined basis. The Company intends to
centralize its accounting and financial reporting activities at its
headquarters; however, basic accounting activities will continue to be conducted
at the regional and local level. The Company will need to coordinate and
integrate the information systems hardware and software currently in place at
the Founding Companies to ensure that the Company's financial and other
information reporting functions are conducted satisfactorily. Failure to
successfully develop a consolidated system for reporting such information could
have a material adverse effect on the Company's financial condition and results
of operations.
In order to improve operating procedures, the Company initially will focus
on developing a centralized system to monitor the operations of the Founding
Companies by auditing sales receipts, accounts payables, payroll, purchases and
inventory levels and by implementing centralized cash management operations. The
Company also will evaluate implementing appropriate systems, such as
Company-wide point-of-sale systems, at its stores. The Company further intends
to enhance operations at the store level by implementing improved training
programs and incentive systems for experienced managers and by creating a
corporate-level merchandising function to more effectively manage the Company's
merchandising decisions, product displays and product assortment. See "Risk
Factors -- Absence of Combined Financial and Operating History; Ability to
Integrate Operations," and "-- Management of Growth; Inexperience Managing a
Consolidated Company."
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; however, over time the
Company expects to integrate the Collectibles USA name into 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
48
<PAGE>
Company may enter or expand their operations in the collectibles industry, which
could change the competitive dynamics of the industry. In addition, as the
Company's animation art licenses and rights expire, it will compete with other
marketers of animation art for the right to design, produce and market artistic
creations based on the applicable licensed character. Because retailers of
collectibles and marketers of animation art products generally do not own the
proprietary rights to the products that they sell, the barriers to entry to
these industries are not significant. Therefore, there can be no assurance that
additional participants will not enter the market or that the Company will be
able to compete effectively with such entrants.
In addition, it is possible that there will be competition to acquire
additional businesses if the collectibles or animation art industries undergo
broader consolidation. Such competition could lead to higher prices being paid
for such companies. The Company believes that its decentralized management
strategy and other operating strategies make it an attractive acquiror of other
collectibles retailers and animation art marketers. There can be no assurance,
however, that the Company's acquisition program will be successful.
LICENSES
The Company produces some of its animation art under agreements which
generally permit the Company to market original production animation cels and
original canvas acrylic paintings, and to manufacture and market limited edition
cels, lithographs and sericels featuring characters such as Garfield\R, The
Simpsons\R and Anastasia\R. The Company's designs for art featuring such
licensed characters are generally subject to prior approval by the licensor.
The Company's license arrangements often require the payment of
non-refundable advances and guaranteed minimum royalties. Royalties to the
Company's licensors typically range from 30% to 50% of the price at which the
art is sold. Minimum guaranteed payments under the Company's license agreements
currently aggregate approximately $623,000 through 1999. As a result of
increased competition for licenses, the Company may, in the future, be required
to pay licensors higher royalties and higher minimum guaranteed payments in
order to obtain attractive properties for the development of existing and new
product lines.
The Company's licensing arrangements are limited in scope and duration,
authorizing the sale of specified licensed products for a defined period of
time, generally two to four years. In connection with the Acquisitions, the
Company has extended the term of certain of its licenses such that they expire
between March 1998 and September 1999. Pursuant to most of the license
agreements, the licensor has agreed to negotiate renewal of the license 90 days
before expiration, provided the Company is in compliance with the terms of the
license. The license agreements provide that they may be terminated prior to
their expiration date under certain circumstances, including the Company's
failure to comply with the product approval provisions. The termination,
cancellation or inability to renew any existing licensing arrangement, coupled
with the inability to develop and enter into new licensing arrangements, could
have a material adverse effect on the Company's financial condition and results
of operations. The Company believes that it maintains excellent relationships
with its licensors.
The Company's authorized dealer agreements can generally be terminated by
the other party with or without cause or on short notice. Termination of any of
the Company's authorized dealer agreements could have a material adverse effect
on the Company's financial condition and results of operations. Certain of the
authorized dealer agreements require the vendor's consent to the Acquisitions.
Although the Company is seeking consents authorizing the Acquisitions where
required by the terms of its authorized dealer agreements, there can be no
assurance that such consents will be obtained. The Company believes it maintains
excellent relations with the companies with which it has authorized dealer
agreements.
FACILITIES
The Company maintains 27 facilities consisting of 21 retail locations
(which in some cases also contain offices) and six warehouse or distribution
facilities (which in some cases also contain offices). All of the Company's
facilities are leased. The facilities range in size from approximately 400
square feet
49
<PAGE>
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 currently are located in approximately 1,000
square feet of a leased office space in New York City, New York. Following the
consummation of the Offering, the Company intends to relocate its executive
offices to Las Vegas, Nevada.
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 July 31, 1997, the Company employed 254 persons, of which three were
full-time employees at the Company's headquarters, 114 were part-time employees
in its retail stores and distribution centers, and 137 were full-time employees
in the stores, offices and distribution centers. Of the Company's employees, 30
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.
50
<PAGE>
MANAGEMENT
DIRECTORS, OFFICERS AND CONSULTANT
The following table sets forth information concerning the Company's
directors, executive officers and consultants and those persons who will become
directors upon consummation of the Offering:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------- ----- -------------------------------------------------------
<S> <C> <C>
Ronald P. Rafaloff(1) ......... 49 Chairman of the Board
W. Randolph Ellspermann ...... 50 President and Chief Executive Officer; Director(3)
Shonnie D. Bilin ............... 43 Executive Vice President -- Planning and Development
Vincent J. Browne ............ 60 Executive Vice President -- Mall Operations; President
-- Crystal Galleria and Crystal Palace; Director(3)
Neil J. DePascal, Jr. ......... 48 Executive Vice President and Chief Financial Officer
Roy C. Elwell .................. 41 Executive Vice President -- Corporate Development;
President -- Reef Hallmark; Director(3)
Jerry Gladstone ............... 37 Executive Vice President -- Marketing; President --
Animation Division; President -- American Royal Arts;
Director(3)
David K. Green ............... 39 Executive Vice President -- Operations; President --
Collectibles Division; President -- North Pole City;
Director(3)
Susan M. Spiegel ............... 42 President -- Filmart; Director(3)
David J. Stone ............... 64 President -- Stone's Hallmark; Director(3)
Paul T. Shirley(1)(2) ......... 56 Director(3)
Michael A. Baker ............... 51 Consultant
</TABLE>
- ----------
(1) Member of compensation committee.
(2) Member of audit committee.
(3) Director nominees will become directors of the Company upon consummation of
the Offering.
Ronald P. Rafaloff has served as the Chairman of the Board since June 1996.
Ronald P. Rafaloff has been the Chief Executive Officer and a principal owner of
RGR Financial Corp., a securities broker-dealer providing investment services to
retail, corporate and pension plan clients, since its inception in March 1996.
Prior to forming RGR Financial Corp., Ronald P. Rafaloff was a senior vice
president at Smith Barney, Inc., a leading investment bank, from October 1992 to
June 1996.
W. Randolph Ellspermann has served as President and Chief Executive Officer
since August 1997 and will become a director of the Company upon consummation of
the Offering. From January 1997 to August 1997, Mr. Ellspermann was a Senior
Vice President of Auto-By-Tel Corporation ("Auto-By-Tel"), an Internet commerce
company that markets automotive and auxiliary services in North America. From
July 1996 to August 1997, he was the Chief Operating Officer of Auto-By-Tel
Acceptance Corporation, a subsidiary of Auto-By-Tel. From November 1993 to June
1996, Mr. Ellspermann was employed by Mark III Industries, a van conversion
company, where he last served as Chief Operating Officer and Chief Financial
Officer. From June 1986 to June 1993, Mr. Ellspermann was employed by
subsidiaries of Securities Pacific Corporation, including five years as Chief
Executive Officer of Security Pacific Information Services Corp. and two years
as Chief Financial Officer of Security Pacific Auto Finance. Mr. Ellspermann's
background also includes 13 years with Ford Motor Company and Ford Motor Credit
Company in a variety of finance and management positions. He has been a director
and officer of Crystal Galleria since its founding in 1992.
51
<PAGE>
Shonnie D. Bilin has served as Executive Vice President -- Planning and
Development since September 1997. From November 1981 until July 1997, she was
employed by Enesco Corporation and has served as Collector's Club Coordinator,
Club Executive Director and most recently as Vice President of Collectibles. As
Vice President of Collectibles at Enesco, she was responsible for the marketing
and promotions of collectibles product lines from November 1981 to July 1997.
Ms. Bilin served as a board member of "International Collectibles Expositions"
which holds exhibits to introduce new collectibles products."
Vincent J. Browne will become the Executive Vice President -- Mall
Operations and a director of the Company upon consummation of the Offering. He
is the President and a director of Crystal Galleria and has served in such
capacities since its incorporation in 1992. He is the President and a director
of Crystal Palace and has served in such capacities since its incorporation in
1988.
Neil J. DePascal, Jr. has served as Executive Vice President and Chief
Financial Officer of the Company since August 1997. From 1992 to 1997, he served
as Treasurer of Owen Healthcare, Inc., a Houston based provider of hospital
pharmacy management services. From March 1992 until September 1992, he provided
financial consulting services to American Medical Response, Inc. ("AMR"), a
Boston based company engaged in the provision of a national ambulance service
network, during and immediately following such company's initial public
offering. Mr. DePascal is a Certified Public Accountant and is a member of the
American Institute of Certified Public Accountants and the Texas Society of
Certified Public Accountants.
Roy C. Elwell will become the Executive Vice President -- Corporate
Development and a director of the Company upon consummation of the Offering. He
is the President and a director of Reef Hallmark and has served in such
capacities since its incorporation in 1984. He currently serves on the Florida
District Advisory Board for Hallmark Cards Incorporated. Mr. Elwell served as a
member of the Enesco Corporation Retail Advisory Board from January 1990 to
December 1990.
Jerry Gladstone will become the Executive Vice President -- Marketing, the
President -- Animation Division and a director of the Company upon consummation
of the Offering. He has served in the capacity of President of American Royal
Arts since 1984 and is currently a director of American Royal Arts. He recently
has been selected by Disney to be a member of its first Preferred Gallery
Advisory Board.
David K. Green will become the Executive Vice President -- Operations,
President -- Collectibles Division and a director of the Company upon
consummation of the Offering. He is the President and a director of North Pole
City and has served in such capacities since its incorporation in 1984. He was a
member of the advisory board of Gift Creations Concepts, a collectibles catalog
publisher, in 1995.
Susan M. Spiegel will become a director of the Company upon consummation
of the Offering. She is the President and a director of Filmart and has served
in such capacities since 1996. Ms. Spiegel founded Animation Art Resources, a
private gallery dealing in high-end vintage animation artworks. She served as a
member of the Board of Directors of The Philadelphia Art Alliance from 1989 to
1995. Ms. Spiegel served on Disney's Preferred Gallery Council for the Art
Editions Division during 1995.
David J. Stone will become a director of the Company upon consummation of
the Offering. He is the President and a director of Stone's Hallmark and has
served in that capacity since its incorporation in 1981.
Paul T. Shirley will become a director of the Company upon consummation of
the Offering. He has served as Chief Executive Officer and President of American
Medical Response, Inc. since August 1995 and has been a director of AMR since
August 1992. From May 1993 to August 1995, he served as Chief Operating Officer
of AMR. He also served as Executive Vice President of AMR from August 1992 to
August 1995 and as Chief Executive Officer of American Medical Response West
from March 1989 until August 1992. From June 1963 until March 1989, he was
President of Santa Cruz Ambulance Service.
Michael A. Baker has served as a consultant to the Company since the
Company's inception. In such capacity, he consults with officers and directors
of the Company, attends meetings of the Board of Directors and provides guidance
concerning management and operation of the Company's business,
52
<PAGE>
including potential acquisitions. Mr. Baker was a founder of Allwaste, Inc., a
Houston based industrial services company and has served as director since
November 1984. Mr. Baker was a founder and director of American Medical
Response, Inc. from February 1992 until February 1997. He served from June 1989
to October 1991 as an officer and director of Sanifill, Inc., a Houston based
landfill development company founded by Mr. Baker and others. Mr. Baker
currently serves as an outside consultant to various private companies.
The Company intends to appoint an additional independent director within 90
days following consummation of the Offering and it is anticipated that such
director will serve on the Company's audit committee. Directors are elected at
each annual meeting of stockholders. All officers serve at the discretion of the
Board of Directors, subject to terms of their employment agreements, if any. See
"-- Employment Agreements."
DIRECTORS' COMPENSATION
Directors who are employees of the Company do not receive additional
compensation for serving as directors. Each director who is not an employee of
the Company receives a fee of $2,000 for attendance at each Board of Directors
meeting and $1,000 for each committee meeting (unless held on the same day as a
Board of Directors meeting). Directors of the Company are reimbursed for
out-of-pocket expenses incurred in attending meetings of the Board of Directors
or committees thereof, and for other expenses incurred in their capacity as
directors of the Company. Each non-employee director receives an option to
purchase 40,000 shares of Common Stock upon election to the Board of Directors
and an annual grant of an option to purchase 5,000 shares of Common Stock. See
"Management -- 1997 Non-Employee Directors' Stock Plan."
EXECUTIVE COMPENSATION
Collectibles USA was incorporated in January 1996 and, prior to the
Offering, did not conduct any operations other than activities related to the
Acquisitions and the Offering. Collectibles USA did not pay any compensation
prior to January 1997. Collectibles USA's officers received compensation in an
aggregate amount of $2,903 in the fiscal year ended January 26, 1997.
EMPLOYMENT AGREEMENTS
W. Randolph Ellspermann, Shonnie D. Bilin and Neil J. DePascal, Jr.
In August 1997, Collectibles USA entered into an employment agreement with
each of W. Randolph Ellspermann, Shonnie D. Bilin and Neil J. DePascal, Jr.
(each individually, an "Executive"), pursuant to which Mr. Ellspermann will
serve as President and Chief Executive Officer, Shonnie D. Bilin will serve as
Executive Vice President -- Planning and Development and Mr. DePascal will serve
as Executive Vice President and Chief Financial Officer of the Company. The
initial term of each agreement is for three years. With respect to each such
agreement, in the event that either party does not notify the other of his, her
or its intention not to renew the employment agreement at least one year prior
to the expiration of the initial term, each agreement will automatically be
extended thereafter for successive one-year periods. In addition to providing
for an annual base salary of $150,000 and a one-time $50,000 bonus for Mr.
Ellspermann, an annual base salary of $150,000 and a one-time $17,500 bonus to
Ms. Bilin and an annual base salary of $140,000 for Mr. DePascal, each
employment agreement provides that it is the intention of the Company to allow
participation by the Executive in a to-be-established incentive bonus plan,
pursuant to which it is contemplated that officers and key employees will be
eligible to receive year-end bonus awards. Pursuant to their respective
employment agreements, Mr. Ellspermann, Ms. Bilin and Mr. DePascal (i) have been
granted stock options (the "$7 Options") to acquire, respectively, 125,000,
20,000 and 40,000 shares of Common Stock at a $7 exercise price per share and
(ii) concurrently with the consummation of the Offering will be granted
additional options (the "Additional Options") to acquire, respectively, 125,000,
40,000 and 100,000 shares of Common Stock at the initial public offering price.
The $7 Options are fully vested. The Additional Options vest over a three year
period in one-third increments annually.
53
<PAGE>
Each employment agreement provides that the Executive is generally
prohibited, during the term of employment with the Company and for a period of
two years thereafter (subject to decrease under certain circumstances), from (i)
engaging in activities which are competitive with the Company or its
subsidiaries, (ii) soliciting employees of the Company or its subsidiaries away
from their employment, (iii) soliciting sales to customers of the Company or its
subsidiaries, (iv) soliciting acquisition candidates of the Company on behalf of
himself or herself or any competitor for the purpose of acquiring such entity
and (v) disclosing information regarding customers of the Company.
Each employment agreement may be terminated by the Company by reason of the
Executive's death or permanent disability, for "cause" with ten days' notice, or
without "cause" with 30 days' notice. "Cause" is generally defined as the
Executive's (i) willful, material and irreparable breach of the employment
agreement, (ii) gross negligence in the performance of material duties, (iii)
willful dishonesty or fraud, (iv) conviction of a felony, or (v) chronic alcohol
or illegal drug abuse. In the event of a termination for cause or in the event
of the Executive's voluntary resignation (except resignations due to a Change of
Control as described below) without cause, no severance will be payable, and all
of the Executive's unvested stock options will be forfeited to the Company. If
the Executive is terminated without cause, (i) the Executive will receive for
the remainder of the initial term (which remainder shall not exceed two years)
or for one year, whichever is greater, such Executive's base salary (which for
Mr. Ellspermann shall be deemed not less than $200,000 per year), and (ii) all
such Executive's granted but unvested stock options will immediately vest.
In the event of a pending "Change in Control" of the Company and either (i)
the Company and the Executive have not received, at least five days prior to the
anticipated Change in Control, notice from the successor that such successor is
willing to assume the Company's obligations under the Executive's employment
agreement, or (ii) the Executive elects to terminate the employment agreement at
least five days prior to the anticipated Change in Control, then the Change in
Control will be deemed to be a termination of the employment agreement by the
Company without cause. Under such circumstances, Mr. Ellspermann's severance
payment will be three times his base salary at the rate then in effect (deemed
not less than $200,000 per year). Each Executive's employment agreement contains
a tax gross-up provision, such that the Executive will be reimbursed by the
Company or its successor in the event that he or she incurs any excise taxes
under Section 4999 of the Internal Revenue Code as a result of the Change in
Control.
A "Change in Control" under the agreements shall be deemed to have occurred
if: (i) any person, other than the Company or an employee benefit plan, acquires
directly or indirectly Beneficial Ownership (as defined in Section 13(d) of the
Securities Exchange Act of 1934, as amended) of any voting securities of the
Company which immediately after such acquisition represents at least 50% of the
total voting power of the then-outstanding voting securities of the Company,
unless the transaction pursuant to which such acquisition is made is approved by
at least two-thirds of the Board of Directors; (ii) certain individuals no
longer constitute a majority of the members of the Board; (iii) the stockholders
of the Company shall approve a merger, consolidation, recapitalization, or
reorganization of the Company, a reverse stock split of outstanding voting
securities, or consummation of any such transaction if stockholder approval is
not obtained, other than any such transaction which has been either (x) approved
by at least 66% of the members of the Board of Directors or (y) which would
result in at least 50% of the total voting power represented by the voting
securities of the surviving entity outstanding immediately after such
transaction being beneficially owned by at least 50% of the holders of
outstanding voting securities of the Company immediately prior to the
transaction, with the voting power of each such continuing holder relative to
other such continuing holders not substantially altered in the transaction; or
(iv) stockholders approve a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all or a substantial
portion of the Company's assets.
Other Key Executives and Employees of the Founding Companies
The Company has entered into employment agreements with 13 key executives
and employees of the Founding Companies which will become effective upon
consummation of the Offering. Each of the agreements with the 13 key executives
are identical differing only with respect to the position of
54
<PAGE>
employment, the compensation level and the term of employment. Set forth below
are the identities of the key executives and their position of employment.
<TABLE>
<CAPTION>
EMPLOYEE POSITION OF EMPLOYMENT
- ------------------------------ -----------------------------------------
<S> <C>
Vincent J. Browne ...... President of Crystal Galleria
Roy C. Elwell ......... President of Reef Hallmark
Kim A. Elwell ......... Secretary and Treasurer of Reef Hallmark
Jerry Gladstone ......... President of American Royal Arts
David K. Green ......... President of North Pole City
Keith N. Holt ......... President of Little Elegance
Aron Laikin ............ Chief Operating Officer of Filmart
Laine Ross ............ Vice President of Animation USA
Susan M. Spiegel ...... President of Filmart
Robert St. George ...... President of Little Elegance
David J. Stone ......... President of Stone's Hallmark
Michael Stone ......... General Manager of Stone's Hallmark
David M. Vice ......... President of Animation USA
</TABLE>
The initial term of each agreement commences on the date of the
consummation of the Offering and ends on the third anniversary except in the
case of Susan M. Spiegel and Aron Laikin, in which case the agreement ends on
the fifth anniversary thereof. With respect to each such agreement, in the event
that either party does not notify the other of his, her or its intention not to
renew such agreement, the agreement will automatically be extended thereafter
for successive one year periods. In addition to the base salaries ranging from
$25,000 to $50,000 per annum, the employment agreements provide that it is the
intention of the Company to allow participation of the executives in a
to-be-established incentive bonus plan, pursuant to which it is contemplated
that officers and key employees will be eligible to receive annual bonus
amounts, in the discretion of the Board of Directors, in amounts up to a maximum
of one hundred percent of the respective employee's base salary.
The 13 key executives have accepted certain reductions in salaries and
benefits such as travel expenses and access to Company cars as a condition of
the consummation of the Acquisitions and of such executives' employment with the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation -- Overview." As consideration for such compensation and
benefit reductions, the owners and key executives of the Founding Companies have
entered into Employment Agreements with the Company and will receive, in the
case of the owners, the acquisition consideration consisting of Common Stock and
cash and have the opportunity to qualify for incentive options pursuant to one
of the Company's stock option plans.
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.
55
<PAGE>
In the event of a pending "Change in Control" of the Company, and either
(i) the Company and the executive have not received written notice at least five
days prior to the anticipated closing date of the transaction giving rise to the
Change in Control from the successor that such successor is willing to assume
the Company's obligations under the employment agreement, or (ii) the employee,
at his or her sole discretion, elects to terminate the employment agreement at
least five days prior to the anticipated closing of such transaction, then the
Change in Control will be deemed to be a termination of the employment agreement
by the Company without cause, except that (x) if such termination has been
effectuated pursuant to clause (i) above, the amount of severance due to the
employee would be three times the amount that otherwise would be calculated
under such circumstances (as described above), and the restrictive covenants in
the employment agreement will not apply, or (y) if such termination has been
effectuated pursuant to clause (ii) above, the amount of the employee's
severance payment would be two times the amount otherwise calculated, and the
restrictive covenants of the employment agreement will all apply for a period of
two years from the effective date of termination. Each employment agreement
contains a tax gross-up provision, such that the employee will be reimbursed by
the Company or its successor in the event that the employee incurs any excise
taxes under Section 4999 of the Internal Revenue Code as a result of the Change
in Control.
Each employment agreement deems a "Change in Control" to have occurred if:
(i) any person, other than the Company or an employee benefit plan, acquires
directly or indirectly Beneficial Ownership (as defined in Section 13(d) of the
Securities Exchange Act of 1934, as amended) of any voting securities of the
Company which immediately after such acquisition represents at least 50% or more
of the total voting power of the then-outstanding voting securities of the
Company, unless the transaction pursuant to which such acquisition is made is
approved by at least two-thirds of the Board of Directors; (ii) certain
designated individuals no longer constitute a majority of the members of the
Board of Directors; (iii) the stockholders of the Company shall approve a
merger, consolidation, recapitalization, or reorganization of the Company, a
reverse stock split of outstanding voting securities, or consummation of any
such transaction if stockholder approval is not obtained, other than any such
transaction which would result in at least 75% of the total voting power
represented by the voting securities of the surviving entity outstanding
immediately after such transaction being Beneficially Owned by at least 75% of
the holders of outstanding voting securities of the Company immediately prior to
the transaction, with the voting power of each such continuing holder relative
to other such continuing holders not substantially altered in the transaction;
or (iv) the stockholders of the Company shall approve a plan of complete
liquidation or an agreement for the sale or disposition of all or a substantial
portion of the Company's assets (i.e., 50% or more of the total assets of the
Company). None of the transactions that occurs in connection with the Offering
constitutes a Change in Control.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Ronald P. Rafaloff, the Company's Chairman of the Board of Directors is
currently the sole member of the Company's compensation committee and, in such
capacity, he participated in deliberations concerning the Company's executive
compensation policy during the fiscal year ended January 26, 1997. After the
Offering, Paul Shirley will become an additional member of the Company's
compensation committee and the Company's executive compensation policy will be
established.
1997 LONG-TERM INCENTIVE PLAN
As of May 1997, the Board of Directors and the Company's stockholders
approved the Company's 1997 Long-Term Incentive Plan (the "Plan"). The maximum
number of shares of Common Stock that may be awarded pursuant to the Plan may
not exceed 15% of the aggregate number of shares of Common Stock outstanding at
the time of determination (which maximum will be 930,914 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.
56
<PAGE>
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.
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
57
<PAGE>
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.
Options to purchase an aggregate of 185,000 shares have been issued under
the Plan at an exercise price of $7.00 per share. Concurrently with the
consummation of the Offering, the Company will grant options to purchase 290,000
shares of Common Stock, under the Plan at an exercise price equal to the initial
public offering price.
1997 NON-EMPLOYEE DIRECTORS' STOCK PLAN
The Company's 1997 Non-Employee Directors' Stock Plan (the "Directors'
Plan"), which was adopted by the Board of Directors and approved by the
Company's stockholders as of May 1997, provides for an automatic grant to each
non-employee director of an initial option to purchase 40,000 shares of Common
Stock upon commencement of the Offering or such person's subsequent initial
election to the Board of Directors. In addition, the Directors' Plan provides
for an automatic annual grant, after each annual meeting of stockholders
following the Offering, to each non-employee director of an option to purchase
5,000 shares of Common Stock; provided, however, that a non-employee director
will not be granted an annual option if he or she was granted an initial option
during the preceding three months.
The number of shares to be subject to initial or annual option grants after
the first annual meeting of stockholders following the Offering may be changed
by the Board of Directors. A total of 250,000 shares of Common Stock are
reserved for issuance under the Directors' Plan. The number of shares reserved,
as well as the number to be subject to automatically granted options, will be
adjusted in the event of stock splits, stock dividends and other extraordinary
corporate events.
Options granted under the Directors' Plan will have an exercise price per
share equal to the fair market value of a share at the date of grant. Options
will expire at the earlier of ten years after the date of grant or one year
after termination of service as a director. Options will become exercisable one
year after the date of grant, subject to acceleration by the Board of Directors,
and will be forfeited upon termination of service as a director for reasons
other than death or disability unless the director served for at least 11 months
after the date of grant or the option was otherwise exercisable at the date of
termination. In addition, the Directors' Plan permits non-employee directors to
elect to receive, in lieu of cash directors' fees, shares or credits
representing "deferred shares" to be settled at future dates, as
58
<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.
59
<PAGE>
CERTAIN TRANSACTIONS
Collectibles USA was initially capitalized in June 1996 by RGR Financial
Group LLC ("RGR"), which subscribed for 711,622 shares, Michael A. Baker, who
subscribed for 152,490 shares, and Capstone Partners LLC ("Capstone"), which
subscribed for 152,490 shares. Each paid consideration of $.10 per share (prior
to the Stock Split) and was issued the shares on June 16, 1996. Ronald P.
Rafaloff, Chairman of the Board of Directors of the Company, is a partner and a
principal owner of RGR.
In August 1996, Collectibles USA issued the CEFC Note-1 to Collectibles
Enterprises Funding Corp., a Delaware corporation ("CEFC"), which is owned by
RGR and Capstone. Upon consummation of the Offering, the principal amount of the
CEFC Note-1 will become due and payable immediately. No interest is payable on
the CEFC Note-1 in the event the Offering is consummated. The Company intends to
repay the CEFC Note-1 with a portion of the proceeds of the Offering.
In August 1996, Collectibles USA also issued the CEFC Note-2 to CEFC. Upon
consummation of the Offering, the principal amount of the CEFC Note-2 will
become due and payable immediately. No interest is payable on the CEFC Note-2 in
the event the Offering is consummated. The Company intends to repay the CEFC
Note-2 with a portion of the proceeds of the Offering.
In June 1997, Collectibles USA issued the CEFC Note-3 to CEFC. Upon
consummation of the Offering, the principal amount of the CEFC Note-3 will
become due and payable immediately. No interest is payable on the CEFC Note-3 in
the event the Offering is consummated. The Company intends to repay the CEFC
Note-3 with a portion of the proceeds of the Offering.
The proceeds of the CEFC Notes, which the Company believes were issued on
terms that were as favorable as those that could have been obtained from a
disinterested or an unaffiliated third party, were used by Collectibles USA to
pay various expenses incurred in connection with its efforts to complete the
Acquisitions and effect the Offering.
On May 12, 1997, Collectibles USA issued to 22 unaffiliated, accredited
investors 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, each share of 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 but one of the holders of the Series
A Convertible Preferred Stock have elected conversion option (ii) in the
preceding sentence. As a result, upon consummation of the Offering, the Series A
Convertible Preferred Stock will convert into approximately $1.0 million in cash
and 67,916 shares of Common Stock. The Company intends to pay the required cash
amounts in connection with the conversion of the Series A Convertible Preferred
Stock with a portion of the proceeds of the Offering. The Series A Convertible
Preferred Stock was issued in reliance on the exemption from registration
afforded a private offering made under Section 4(2) of the Securities Act. See
"Description of Capital Stock -- Series A Convertible Preferred Stock."
On May 12, 1997, the Company issued 711,622 shares, 152,490 shares and
152,490 shares of Restricted Vote Common Stock to RGR, Michael A. Baker and
Capstone, respectively, in exchange for an identical number of shares of Common
Stock issued and sold on June 1996. See "Description of Capital Stock -- Common
Stock and Restricted Vote Common Stock."
Simultaneously with the closing of the Offering, Collectibles USA will
acquire by merger all the issued and outstanding capital stock of the Founding
Companies, at which time each Founding Company will become a wholly owned
subsidiary of the Company. The aggregate consideration that will be paid by
Collectibles USA to acquire the Founding Companies consists of approximately
$9.2 million in cash and 2,246,996 shares of Common Stock. The Company intends
to repay approximately $4.9 million of the estimated outstanding indebtedness as
of October 1, 1997 of the Founding Companies
60
<PAGE>
(which includes $486,000 of indebtedness incurred to fund a distribution in May
1997 to the sole stockholder of American Royal Arts representing S Corporation
earnings previously taxed to such stockholder), which has been either personally
guaranteed by, or is owed directly to, certain stockholders of the Founding
Companies or their affiliates. In addition, prior to the Acquisitions certain of
the Founding Companies will make S Corporation Distributions of $1.3 million. In
order to pay the S Corporation Distributions, the Founding Companies will borrow
$1.3 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 has been or will be
distributed to such stockholders.
<TABLE>
<CAPTION>
CASH DEBT SHARES
-------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Collectibles Stores
- ---------------------------
Crystal Galleria ......... $1,000 $1,745 277,272
Crystal Palace ............ 175 362 62,000
Little Elegance ......... 400 843 85,000
North Pole City ......... 1,800 923 359,090
Reef Hallmark ............ 1,000 662 168,181
Stone's Hallmark ......... 1,350 37 350,000
Animation Art Galleries
- ---------------------------
American Royal Arts ...... 2,814 486 563,636
Animation USA ............ 600 128 145,454
Filmart .................. 100 28 236,363
------ ------ ---------
TOTAL .................. $9,239 $5,214 2,246,996
====== ====== =========
</TABLE>
In addition, prior to consummation of the Acquisitions, Crystal Galleria
and Filmart will make distributions of approximately $250,000 and $1,000,000,
respectively, representing S Corporation earnings previously taxed to their
respective stockholders. The Founding Companies will also distribute
approximately $68,000 in net book value of certain non-operating assets less
related obligations prior to consummation of the Acquisitions.
The consummation of each Acquisition is subject to customary conditions.
These conditions include, among others, the accuracy on the closing date of the
Acquisitions of the representations and warranties of the Founding Companies,
their stockholders and of the Company, the performance by each of the parties of
their respective covenants, the nonexistence of a material adverse change in the
results of operations and the absence of material litigation.
The agreements relating to the Acquisitions may be terminated under certain
circumstances prior to the consummation of the Offering. Specifically, the
agreements may be terminated (i) by the mutual consent of the Board of Directors
of the Company and each Founding Company; (ii) if the Offering and the
Acquisitions are not consummated by October 31, 1997; or (iii) if a material
breach or default under the agreements shall exist and is not cured or waived.
Pursuant to the agreements relating to the Acquisitions, all stockholders
of each of the Founding Companies have agreed not to compete with the Company
for a period of three years commencing on the date of closing of the
Acquisitions.
Five of the Founding Companies have incurred indebtedness which has been
personally guaranteed by its stockholders. At October 1, 1997, the aggregate
amount of indebtedness of these Founding Companies that was personally
guaranteed was approximately $2.4 million. The Company intends to repay all of
such indebtedness upon the consummation of the Offering. See "Use of Proceeds."
61
<PAGE>
<TABLE>
<CAPTION>
COMPANY AMOUNT OF DEBT GUARANTEED GUARANTOR
- ----------------------- --------------------------- ----------------------------
(IN THOUSANDS)
---------------------------
<S> <C> <C>
Crystal Galleria $ 502 Vincent J. Browne
Paul J. Applegate
Gary L. Schultz
W. Randolph Ellspermann
Carol A. Ellspermann (partial guarantee)
Crystal Palace 40 Vincent J. Browne
North Pole City 923 David K. Green
Little Elegance 400 Jean Holt
Keith N. Holt
Carmella Pugliese
Robert St. George
Reef Hallmark 532 Roy C. Elwell
Kim A. Elwell
------
Total $2,397
======
</TABLE>
In connection with the Acquisitions, individuals who will become directors
of the Company together with their spouses, will receive consideration for their
interests in the Founding Companies, subject to adjustments as described above,
as follows:
<TABLE>
<CAPTION>
REPAYMENT OF SHARES OF
CASH DEBT AS OF OCTOBER 1, 1997 COMMON STOCK
-------- ---------------------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Vincent J. Browne ............ $ 425 $569 131,318
Roy C. Elwell ............... 1,000 -- 168,181
David K. Green ............... 1,800 -- 359,090
Jerry Gladstone ............... 2,814 486 563,636
Susan M. Spiegel ............ 50 -- 118,182
David J. Stone ............... 1,350 6 350,000
W. Randolph Ellspermann ...... 125 299 34,659
</TABLE>
TRANSACTIONS INVOLVING CERTAIN OFFICERS, DIRECTORS AND STOCKHOLDERS
Consulting Arrangements. The Company has entered into a consulting
agreement with RGR whereby, upon the consummation of the Offering, RGR will act
as a merger and acquisition advisory consultant to assist the Company in
implementing its strategy to acquire additional retailers of collectibles and
marketers of animation art and other related consulting services for a term of
one year. Pursuant to the terms of the Consulting Agreement, which terms the
Company believes are as favorable as could have been obtained from a
disinterested third party, RGR will (i) assist the Company in implementing its
strategy to acquire additional retailers of collectibles and marketers of
animation art, (ii) assist the Company in designing the Company's acquisition
program and identifying and evaluating potential acquisition candidates, their
operations, historical performance and future prospects and (iii) advise the
Company in discussions and negotiations with acquisition candidates. For all
services rendered by RGR to the Company, the Company will compensate RGR based
upon each acquisition candidate with which an acquisition is consummated. The
consideration to be paid to RGR upon consummation of a future acquisition will
be 3.2% of the acquisition candidate's pre-tax net income for its most recent
fiscal year. RGR is a stockholder of the Company and will, after the Offering,
beneficially own 9.8% of the Company's outstanding Common Stock. In addition,
Mr. Ronald P. Rafaloff, who is Chairman of the Board of the Company, is a
partner and a principal owner of RGR.
62
<PAGE>
Michael A. Baker has served as consultant to the Company since the
Company's inception. In such capacity, he consults with officers and directors
of the Company, attends meetings of the Board of Directors and provides guidance
concerning management and operation of the Company's business, including
potential acquisitions. Upon consummation of the Offering, Mr. Baker will be
granted options to acquire 25,000 shares of Common Stock at the initial public
offering price.
Real Property Leases. In connection with the Acquisitions, four of the
Founding Companies will renegotiate leases currently in place with former
stockholders of the Founding Companies and/or their affiliates. North Pole City
leases both of its facilities from David K. Green, the current owner of North
Pole City. The combined current monthly rent under such leases is approximately
$13,500. Prior to consummation of the Offering, the Company anticipates entering
into new leases covering these facilities at a combined monthly rent of $8,300
for a term of five years. Three other facilities of the Company will be leased
from former stockholders of the Founding Companies and/or their affiliates at
monthly rates ranging from $500 to $1,200. The Company believes that the monthly
rental amounts represent the fair market value of the leases.
Agreement and Release. The Company has entered into an Agreement and
Release, dated as of August 8, 1997, with David L. Yankey, a former director and
executive officer (the "Officer"), whose employment terminated in June 1997,
pursuant to which the Officer (i) will receive within three days of the
consummation of the Offering $350,000 as severance payment, (ii) has agreed to
transfer 70,000 shares of the 174,580 shares of Common Stock previously owned by
him, (iii) has agreed to enter into a 180-day lock-up arrangement with the
Underwriters and (iv) has agreed to release the Company (including its current
and former officers, directors, shareholders and representatives) and its
successors and assigns from any and all claims and demands. The Company also has
agreed to release the Officer from any and all claims (other than acts
constituting material fraud, theft or a felony) relating to such Officer's
employment. To permit the Officer to resell promptly his shares of Common Stock
after expiration of the 180-day lock-up period, the Company has agreed to
prepare and file, at its cost, a registration statement to effect the
registration of such shares.
COMPANY POLICY
In the future, any transactions with directors, officers, employees or
affiliates of the Company are anticipated to be minimal and will, in any case,
be approved by a majority of the Board of Directors, including a majority of
disinterested members of the Board of Directors.
63
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of the Common Stock as of October 10, 1997, and after giving effect to
the Acquisitions and the Offering, by (i) all persons known to the Company to be
the beneficial owner of 5% or more thereof, (ii) each director and nominee for
director, (iii) each executive officer and (iv) all officers, directors and
director nominees as a group. All persons listed have sole voting and investment
power with respect to their shares unless otherwise indicated.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
BEFORE OFFERING AFTER OFFERING
--------------------------- ---------------------------
NAME AND ADDRESS NUMBER PERCENT NUMBER PERCENT
- ----------------------------------------------------- --------------- --------- ---------------- --------
<S> <C> <C> <C> <C>
Ronald P. Rafaloff(1) 711,622 51.7% 609,306(2) 9.8%
One Battery Park Plaza, 24th Floor
New York, NY 10004-1405
W. Randolph Ellspermann 165,000(3) 12.0% 199,659(3) 3.2%
7878 Sea Horn Court
Las Vegas, NV 89117
Shonnie D. Bilin 20,000(4) 1.5% 20,000(4) 0.3%
744 Clover Hill Court
Elk Grove Village, IL 60007
Vincent J. Browne -- -- 131,318 2.1%
7878 Sea Horn Court
Las Vegas, NV 89117
Neil J. DePascal, Jr. 70,000(5) 5.1% 70,000(5) 1.1%
6402 Rippling Hollow Drive
Spring, TX 77379
Roy C. Elwell -- -- 168,181 2.7%
1694 South Congress Avenue
Palm Springs, FL 33461
Jerry Gladstone -- -- 563,636 9.1%
473 Old Country Road
Westbury, NY 11590
David K. Green -- -- 359,090 5.8%
4201 South I-44
Oklahoma City, OK 73119
Susan M. Spiegel -- -- 118,182 1.9%
118 North Third Street
Philadelphia, PA 19106
David J. Stone -- -- 350,000 5.6%
2508 South Alpine Road
Rockford, IL 61108
Michael A. Baker 152,490 11.1% 130,565(2) 2.1%
3322 Albans
Houston, TX 77005
Paul T. Shirley -- -- 8,333(6) 0.1%
2821 S. Parker Road
Aurora, CO 80014
Capstone Partners LLC 152,490 11.1% 130,565(2) 2.1%
9 East 53rd Street, 3rd Floor
New York, NY 10019
RGR Financial Group LLC 711,622 51.7% 609,306(2) 9.8%
One Battery Park Plaza, 24th Floor
New York, NY 10004-1405
David L. Yankey 104,580 7.6% 104,580 1.7%
13500 Country Way
Los Altos Hills, CA 94022
All officers and directors and director nominees as 966,622 70.2% 2,597,705 40.6%
a group (11 persons)
</TABLE>
- ----------
(1) Represents 711,622 shares owned by RGR. Mr. Rafaloff is a partner and a
principal owner of RGR.
(2) Reflects shares transferred upon consummation of the Offering to certain
holders of notes issued by CEFC.
(3) Includes 125,000 shares issuable upon the exercise of the $7 Options.
(4) Consists of 20,000 shares issuable upon the exercise of the $7 Options.
(5) Includes 40,000 shares issuable upon the exercise of the $7 Options.
(6) To be received upon conversion of subordinated debt issued by an affiliate
of the Company that is convertible into previously issued Common Stock.
These shares will be restricted stock within the meaning of the Securities
Act.
64
<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 Vote Common Stock, par value $.01 per share, and 5,000,000 shares
of preferred stock, par value $.01 per share (the "Preferred Stock"). As of the
date of this Prospectus, 174,580 shares of Common Stock are outstanding and held
of record by three persons, 1,016,602 shares of Restricted Vote 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
5,335,658 shares of Common Stock and 870,436 shares of Restricted Vote 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 VOTE 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 Vote Common Stock are entitled to elect one member of the
Company's Board of Directors and to four-tenths of a vote for each share held on
all other matters on which stockholders are entitled to vote. Holders of
Restricted Vote Common Stock are not entitled to vote on the election of any
other directors. Any director, or the entire Board of Directors, may be removed
at any time, with cause, by a majority of the aggregate number of votes which
may be cast by the holders of outstanding shares of Common Stock and Restricted
Vote 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 Vote 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 Vote 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 Vote Common Stock have no
preemptive rights to purchase shares of capital stock of the Company. Shares of
Common Stock and Restricted Vote 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 Vote 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 Vote 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 Vote Common Stock. After July 1, 1998, the Board of Directors may
elect to convert any outstanding shares of Restricted Vote Common Stock into
shares of Common Stock in the event 80% or more of the originally outstanding
shares of Restricted Vote Common Stock have been previously converted into
shares of Common Stock. All outstanding shares of Common Stock and Restricted
Vote 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 "CUSA." The Restricted Vote Common Stock will
not be quoted on the Nasdaq National Market.
65
<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, each share of 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 but one of the holders of
the Series A Convertible Preferred Stock have elected conversion option (ii) in
the preceding sentence. As a result, upon consummation of the Offering, the
Series A Convertible Preferred Stock will convert into approximately $1.0
million in cash and 67,916 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
66
<PAGE>
outstanding voting stock at an annual or special meeting, excluding shares owned
by the interested stockholder. Under Section 203, an "interested stockholder" is
defined as any person who is (i) the owner of 15% or more of the outstanding
voting stock of the corporation or (ii) an affiliate or associate of the
corporation and who was the owner of 15% or more of the outstanding voting stock
of the corporation at any time within the three-year period immediately prior to
the date on which it is sought to be determined whether such person is an
interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by including in its certificate of incorporation or by-laws by
action of its stockholders to exempt itself from coverage. The Company has not
adopted such an amendment to the Charter or By-laws.
LIMITATION ON DIRECTORS' LIABILITIES
Pursuant to the Charter and under Delaware law, directors of the Company
are not liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty, except for liability in connection with a breach of
the duty of loyalty, for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, for dividend payments or
stock repurchases illegal under Delaware law or any transaction in which a
director has derived an improper personal benefit. The Company intends to obtain
directors' and officers' liability insurance prior to consummation of the
Offering.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is The Bank of New
York.
67
<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, 6,206,094 shares of Common Stock and Restricted
Vote 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 3,506,094 shares were issued in
a transaction registered under the Securities Act, and, accordingly, such shares
may not be sold except in transactions registered under the Securities Act or
pursuant to an exemption from registration, including the exemption contained in
Rule 144 under the Securities Act.
In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of the acquisition of restricted shares of Common
Stock from the Company or from any affiliate of the Company, the acquiror or
subsequent holder thereof may sell, within any three-month period commencing as
of the date of this Prospectus, a number of shares that does not exceed the
greater of 1% of the then outstanding shares of Common Stock, or the average
weekly trading volume of Common Stock on the Nasdaq National Market during the
four calendar weeks preceding the date on which notice of the proposed sale is
sent to the Commission. Sales under Rule 144 are also subject to certain manner
of sale provisions, notice requirements and the availability of current public
information about the Company. If two years have elapsed since the later of the
date of the acquisition of restricted shares of Common Stock from the Company or
any affiliate of the Company, a person who is not deemed to have been an
affiliate of the Company at any time for 90 days preceding a sale would be
entitled to sell such shares under Rule 144 without regard to the volume
limitations, manner of sale provisions or notice requirements.
The Company and its officers and directors have agreed not to, directly or
indirectly, offer, issue, sell, contract to sell or otherwise dispose of any
shares of Common Stock or any securities exercisable for or convertible or
exchangeable into Common Stock (the "Securities") for a period of 180 days after
the date of this Prospectus (the "Lockup Period") without the prior written
consent of Ladenburg Thalmann & Co. Inc., except for the grant of employee stock
options by the Company and except that the Company may issue shares of Common
Stock (i) in connection with acquisitions, (ii) pursuant to the exercise of
options granted under the Company's stock option plans and (iii) upon conversion
of the Series A Convertible Preferred Stock and the Restricted Vote Common Stock
in accordance with their terms. In addition certain stockholders of the Company
designated by the Representatives who beneficially own an aggregate of 1,121,182
shares of Common Stock and the owners of each of the Founding Companies have
agreed, subject to certain exceptions, not to, directly or indirectly, offer,
sell, contract to sell or otherwise dispose of any Securities for a period of
180 days after the date of this Prospectus without the prior written consent of
Ladenburg Thalmann & Co. Inc. After such periods, all of such shares will be
eligible for sale in accordance with Rule 144 promulgated under the Securities
Act, subject to the volume, holding period and other limitations of Rule 144."
See "Underwriting."
The Company has authorized the issuance of shares of Common Stock in
accordance with the terms of the Plan and the Directors' Plan. The maximum
number of shares of Common Stock that may be awarded pursuant to the Plan may
not exceed 15% of the aggregate number of shares of Common Stock outstanding at
the time of determination (which maximum will be 930,914 shares upon
consummation of the Offering). Options to purchase an aggregate of 555,000
shares of Common Stock have been granted or will be granted upon consummation of
the Offering under the Company's stock option plans. The Company intends to file
a registration statement on Form S-8 under the Securities Act registering the
issuance of shares upon exercise of options granted under the Plan and the
Directors' Plan. As a result, such shares will be eligible for resale in the
public market.
The Company has reserved 270,000 shares of Common Stock for issuance upon
exercise of the Representatives' Warrants. The holders of the Representatives'
Warrants have certain registration rights. See "Underwriting."
The Company currently intends to file a registration statement covering
2,500,000 additional shares of Common Stock under the Securities Act for its
use in connection with future acquisitions. These
68
<PAGE>
shares generally will be freely tradeable after their issuance by persons not
affiliated with the Company unless the Company contractually restricts their
resale.
The former stockholders of the Founding Companies who will hold in the
aggregate 2,246,996 shares of Common Stock upon consummation of the Offering are
entitled to certain rights with respect to the registration of their shares of
Common Stock under the Securities Act. None of such persons has rights to
include shares of Common Stock for sale in the Offering. If the Company proposes
to register any of its securities under the Securities Act, such stockholders
are entitled to notice of such registration and are entitled to include, at the
Company's expense, all or a portion of their shares therein, subject to certain
conditions and subject to the right of any managing underwriter of any such
offering to include some or all of the shares for marketing reasons. In
addition, certain of such stockholders have certain limited demand registration
rights to require the Company to register shares held by them following the
second anniversary of the Offering. The Company is also obligated, at its cost,
to effect the registration of 104,580 shares of Common Stock held by a former
officer of the Company immediately upon expiration of the Lockup Period. See
"Certain Transactions -- Transactions Involving Certain Officers, Directors and
Stockholders."
Prior to the Offering, there has been no established trading market for
Common Stock, and no predictions can be made as to the effect that sales of
Common Stock under Rule 144, pursuant to a registration statement, or otherwise,
or the availability of shares of Common Stock for sale, will have on the market
price prevailing from time to time. Sales of substantial amounts of Common Stock
in the public market, or the perception that such sales could occur, could
depress the prevailing market price. Such sales may also make it more difficult
for the Company to issue or sell equity securities or equity-related securities
in the future at a time and price that it deems appropriate. See "Risk Factors
- -- Potential Effect of Shares Eligible for Future Sale on the Price of the
Common Stock."
69
<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.,
EVEREN Securities, Inc. and Stephens Inc., 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:
<TABLE>
<CAPTION>
NUMBER
NAME OF UNDERWRITERS OF SHARES
-------------------- ---------
<S> <C>
Ladenburg Thalmann & Co. Inc. ......
EVEREN Securities, Inc. ............
Stephens Inc. .....................
---------
Total ........................... 2,700,000
=========
</TABLE>
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
70
<PAGE>
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 Vote Common Stock in
accordance with their respective terms. In addition certain stockholders of the
Company designated by the Representatives who beneficially own an aggregate of
1,121,182 shares of Common Stock and the owners of each of the Founding
Companies have agreed, subject to certain exceptions, not to, directly or
indirectly, offer, sell, contract to sell or otherwise dispose of any Securities
for a period of 180 days after the date of this Prospectus without the prior
written consent of Ladenburg Thalmann & Co. Inc. After such periods, all of such
shares will be eligible for sale in accordance with Rule 144 promulgated under
the Securities Act, subject to the volume, holding period and other limitations
of Rule 144.
Prior to the Offering, there has been no public market for the Common
Stock. The proposed initial public offering price has been determined by
negotiations between the Company and the Representatives. Among the factors
considered in such negotiations were the Company's results of operations and
financial condition, prospects for the Company and for the industry in which the
Company operates, the Company's capital structure and the general condition of
the securities market. The estimated offering price set forth on the cover of
this Prospectus is subject to change as a result of market conditions and other
factors. See "Risk Factors -- No Prior Public Market; Possible Volatility of
Stock Price."
The Company has granted Ladenburg Thalmann & Co. Inc. a right of first
refusal, expiring on the second anniversary of the date of this Prospectus, to
act as a manager in any future public offering of the Company's equity
securities.
The Representatives have informed the Company that the Underwriters do not
expect sales to discretionary accounts to exceed 5% of the total number of
shares offered hereby and that the Underwriters do not intend to confirm sales
of shares to any account over which they exercise discretionary authority.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934. Over-allotment involves syndicate
sales of Common Stock in excess of the offering size, which creates a syndicate
short position. Stabilizing transactions permit bids to purchase the Common
Stock so long as the stabilizing bids do not exceed a specified maximum.
Syndicate covering transactions involve purchases of Common Stock in the open
market after the distribution has been completed in order to cover syndicate
short positions. Penalty bids permit the Underwriters to reclaim a selling
concession from a syndicate member when the Common Stock originally sold by such
syndicate member are purchased in a syndicate covering transaction to cover
syndicate short positions. Such stabilizing transactions, syndicate covering
transactions and penalty bids may cause the price of the Common Stock to be
higher than it would otherwise be in the absence of such transactions. None of
the transactions described in this paragraph is required, and, if they are
undertaken, they may be discontinued at any time.
71
<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.
72
<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-7
Collectibles USA, Inc.
Report of Independent Public Accountants ........................... F-11
Balance Sheets ...................................................... F-12
Statements of Operations .......................................... F-13
Statements of Stockholders' Deficit ................................. F-14
Statements of Cash Flows .......................................... F-15
Notes to Financial Statements ....................................... F-16
Founding Companies
American Royal Arts Corp.
Report of Independent Public Accountants ........................... F-21
Balance Sheets ...................................................... F-22
Statements of Operations .......................................... F-23
Statements of Stockholder's Equity ................................. F-24
Statements of Cash Flows .......................................... F-25
Notes to Financial Statements ....................................... F-26
Stone's Shops, Inc.
Report of Independent Public Accountants ........................... F-30
Balance Sheets ...................................................... F-31
Statements of Operations .......................................... F-32
Statements of Shareholders' Equity ................................. F-33
Statements of Cash Flows .......................................... F-34
Notes to Financial Statements ....................................... F-35
Crystal Galleria, Inc. and Base, Inc.
Report of Independent Public Accountants ........................... F-40
Combined Balance Sheets ............................................. F-41
Combined Statements of Operations ................................. F-42
Combined Statements of Stockholders' Equity ........................ F-43
Combined Statements of Cash Flows ................................. F-44
Notes to Consolidated Financial Statements ........................ F-45
DKG Enterprises, Inc.
Report of Independent Public Accountants ........................... F-50
Balance Sheets ...................................................... F-51
Statements of Operations .......................................... F-52
Statements of Shareholders' Equity ................................. F-53
Statements of Cash Flows .......................................... F-54
Notes to Financial Statements ....................................... F-55
F-1
<PAGE>
PAGE
-----
Elwell Stores, Inc.
Report of Independent Public Accountants ......... F-60
Balance Sheets .................................... F-61
Statements of Operations ........................... F-62
Statements of Shareholders' (Deficit) Equity ...... F-63
Statements of Cash Flows ........................... F-64
Notes to Financial Statements ..................... F-65
Animation U.S.A, Inc.
Report of Independent Public Accountants ......... F-69
Balance Sheets .................................... F-70
Statements of Operations ........................... F-71
Statements of Shareholders' Equity ............... F-72
Statements of Cash Flows ........................... F-73
Notes to Financial Statements ..................... F-74
Filmart Productions, Inc.
Report of Independent Public Accountants ......... F-78
Balance Sheets .................................... F-79
Statements of Operations ........................... F-80
Statements of Shareholders' Equity ............... F-81
Statements of Cash Flows ........................... F-82
Notes to Financial Statements ..................... F-83
F-2
<PAGE>
COLLECTIBLES USA, INC., AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma combined financial statements give effect to
the acquisitions by Collectibles USA, Inc. (Collectibles USA), of the
outstanding capital stock of American Royal Arts Corp. (American Royal Arts),
Stone's Shops, Inc. (Stone's Hallmark), Crystal Galleria, Inc. and Base, Inc.
(Crystal Galleria), DKG Enterprises, Inc. (North Pole City), St. George, Inc.
(Little Elegance), Elwell Stores, Inc. (Reef Hallmark), Animation U.S.A., Inc.
(Animation USA), Filmart Productions, Inc. (Filmart), Vincent J. Browne, Inc.
(Crystal Palace) (together, the Founding Companies). Collectibles USA and the
Founding Companies are hereinafter referred to as the Company. These
acquisitions (the Acquisitions) will occur simultaneously with the closing of
Collectibles USA's initial public offering (the Offering) and will be accounted
for using the purchase method of accounting. American Royal Arts, one of the
Founding Companies, has been designated the accounting acquiror in accordance
with Securities and Exchange Commission Staff Accounting Bulletin No. 97 which
states that the combining company which receives the largest portion of voting
rights in the combined corporation is presumed to be the acquiror for
accounting purposes.
To the extent the owners of the Founding Companies have agreed prospectively to
reductions in salary and benefits, these reductions have been reflected in the
unaudited pro forma combined statements of operations. With respect to other
potential cost savings, Collectibles USA has not and cannot quantify these
savings until completion of the acquisitions of the Founding Companies. It is
anticipated that these savings will be offset by additional costs and
expenditures for corporate management and administration, corporate expenses
related to being a public company, systems integration and facilities expansion.
However because these costs cannot be accurately quantified at this time, they
have not been included in the pro forma financial information of Collectibles
USA.
The unaudited pro forma combined balance sheet gives effect to the Acquisitions
and the Offering as if they had occurred on July 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 -- JULY 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 ........................ $ 182,113 $ 237,454 $ 319,436 $ 164,789 $ 13,098
Accounts receivable .............................. -- 103,450 -- 8,143 18,552
Merchandise inventories ........................... -- 562,598 2,930,987 1,217,276 2,526,844
Prepaid expenses and other current assets ......... -- 70,688 36,106 36,649 23,525
------------- ---------- ----------- ----------- -----------
Total current assets ........................... 182,113 974,190 3,286,529 1,426,857 2,582,019
Property and equipment, net ..................... 7,453 33,616 247,124 631,770 193,302
Other assets, net ................................. 3,685,094 96,617 -- 15,134 6,802
Goodwill, net .................................... -- -- -- -- --
------------- ---------- ----------- ----------- -----------
Total assets .................................... $ 3,874,660 $1,104,423 $3,533,653 $2,073,761 $2,782,123
============= ========== =========== =========== ===========
LIABILITIES AND
STOCKHOLDERS' (DEFICIT) EQUITY
Accounts payable and accrued liabilities ......... $ 1,707,801 $ 286,139 $1,544,136 $ 266,945 $ 613,828
Customer deposits ................................. -- 338,644 33,911 14,495 188,504
Federal income taxes payable ..................... -- -- -- -- 280,983
Pro forma cash consideration
due to Founding Companies ........................ -- -- -- -- --
Line of credit .................................... -- -- -- -- 520,000
Payable to related party ........................ -- 486,000 6,010 1,163,168 --
Current maturities of long-term obligations ...... 1,255,000 -- 14,400 438,655 33,516
------------- ---------- ----------- ----------- -----------
Total current liabilities ........................ 2,962,801 1,110,783 1,598,457 1,883,263 1,636,831
Deferred income taxes ........................... -- -- 530,456 -- 8,103
Long-term obligations, net of current maturities -- -- 28,800 101,782 338,137
Notes payable to stockholders ..................... -- -- -- -- --
------------- ---------- ----------- ----------- -----------
Total liabilities .............................. 2,962,801 1,110,783 2,157,713 1,985,045 1,983,071
Stockholders' (deficit) equity:
Preferred stock ................................. 1,000,000 -- -- -- --
Common stock .................................... 11,912 1,584 1,000 8,000 500
Treasury stock ................................. -- (145,000) -- -- --
Additional paid-in capital ..................... 1,297,538 -- 39,000 -- --
Retained (deficit) earnings ..................... (1,397,591) 137,056 1,335,940 80,716 798,552
------------- ---------- ----------- ----------- -----------
Total stockholders' (deficit) equity ............ 911,859 (6,360) 1,375,940 88,716 799,052
------------- ---------- ----------- ----------- -----------
Total liabilities and stockholders' equity ...... $ 3,874,660 $1,104,423 $ 3,533,653 $2,073,761 $2,782,123
============= ========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
LITTLE REEF ANIMATION CRYSTAL
ELEGANCE HALLMARK USA FILMART PALACE
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents ........................ $ 53,738 $ 90,567 $ 28,774 $ 36,419 $ --
Accounts receivable .............................. 12,146 -- 49,772 219,559 35,931
Merchandise inventories ........................... 1,502,454 829,871 303,910 372,759 507,623
Prepaid expenses and other current assets ......... 20,307 1,873 39,153 624,618 800
---------- ---------- ----------- ----------- ----------
Total current assets ........................... 1,588,645 922,311 421,609 1,253,355 544,354
Property and equipment, net ..................... 212,548 113,695 66,379 29,120 24,368
Other assets, net ................................. 161,320 20,056 26,408 57,727 6,707
Goodwill, net .................................... -- -- -- -- --
---------- ---------- ----------- ----------- ----------
Total assets .................................... $1,962,513 $1,056,062 $ 514,396 $1,340,202 $ 575,429
========== ========== =========== =========== ==========
LIABILITIES AND
STOCKHOLDERS' (DEFICIT) EQUITY
Accounts payable and accrued liabilities ......... $ 710,610 $ 535,049 $ 281,376 $ 150,215 $ 199,154
Customer deposits ................................. 5,700 5,122 20,066 6,101 --
Federal income taxes payable ..................... -- -- 19,863 -- --
Pro forma cash consideration
due to Founding Companies ........................ -- -- -- -- --
Line of credit .................................... -- -- -- -- 40,232
Payable to related party ........................ 439,646 -- -- 27,752 --
Current maturities of long-term obligations ...... 400,104 305,246 131,051 -- --
---------- ---------- ----------- ----------- ----------
Total current liabilities ........................ 1,556,060 845,417 452,356 184,068 239,386
Deferred income taxes ........................... -- -- -- -- --
Long-term obligations, net of current maturities 3,000 340,132 -- -- --
Notes payable to stockholders ..................... -- -- -- -- 321,697
---------- ---------- ----------- ----------- ----------
Total liabilities .............................. 1,559,060 1,185,549 452,356 184,068 561,083
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 ..................... 376,453 (229,262) (130,660) 1,156,134 (30,654)
---------- ---------- ----------- ----------- ----------
Total stockholders' (deficit) equity ............ 403,453 (129,487) 62,040 1,156,134 14,346
---------- ---------- ----------- ----------- ----------
Total liabilities and stockholders' equity ...... $1,962,513 $1,056,062 $ 514,396 $1,340,202 $ 575,429
========== ========== =========== ========== =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA PRO FORMA POST ACQUISITIONS AS
TOTAL ADJUSTMENTS COMBINED ADJUSTMENTS ADJUSTED
------------- --------------- ------------- ------------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents ........................ $ 1,126,388 $ -- $ 1,126,388 $ 5,277,556 $ 6,403,944
Accounts receivable .............................. 447,553 -- 447,553 -- 447,553
Merchandise inventories ........................... 10,754,322 -- 10,754,322 -- 10,754,322
Prepaid expenses and other current assets ......... 853,719 (300,000) 553,719 -- 553,719
---------- ------------ ------------ -------------- -----------
Total current assets ........................... 13,181,982 (300,000) 12,881,982 5,277,556 18,159,538
Property and equipment, net ..................... 1,559,375 (106,074) 1,453,301 -- 1,453,301
Other assets, net ................................. 4,075,865 58,353 4,134,218 (3,685,094) 449,124
Goodwill, net .................................... -- 23,225,416 23,225,416 -- 23,225,416
---------- ------------ ------------ -------------- -----------
Total assets .................................... $18,817,222 $ 22,877,695 $41,694,917 $ 1,592,462 $43,287,379
=========== ============ ============ ============== ===========
LIABILITIES AND
STOCKHOLDERS' (DEFICIT) EQUITY
Accounts payable and accrued liabilities ......... $6,295,253 $ -- $ 6,295,253 $ (1,672,137) $ 4,623,116
Customer deposits ................................. 612,543 -- 612,543 -- 612,543
Federal income taxes payable ..................... 300,846 -- 300,846 -- 300,846
Pro forma cash consideration
due to Founding Companies ........................ -- 9,238,920 9,238,920 (9,238,920) --
Line of credit .................................... 560,232 -- 560,232 (560,232) --
Payable to related party ........................ 2,122,576 -- 2,122,576 (2,122,576) --
Current maturities of long-term obligations ...... 2,577,972 (37,847) 2,540,125 (2,540,125) --
----------- ------------ ------------ -------------- -----------
Total current liabilities ........................ 12,469,422 9,201,073 21,670,495 (16,133,990) 5,536,505
Deferred income taxes ........................... 538,559 28,399 566,958 -- 566,958
Long-term obligations, net of current maturities 811,851 1,250,000 2,061,851 (2,061,851) --
Notes payable to stockholders ..................... 321,697 -- 321,697 (321,697) --
----------- ------------ ------------ -------------- -----------
Total liabilities .............................. 14,141,529 10,479,472 24,621,001 (18,517,538) 6,103,463
Stockholders' (deficit) equity:
Preferred stock ................................. 1,000,000 -- 1,000,000 (1,000,000) --
Common stock .................................... 288,196 (253,814) 34,382 27,679 62,061
Treasury stock ................................. (145,000) 145,000 -- -- --
Additional paid-in capital ..................... 1,435,813 14,466,665 15,902,478 21,082,321 36,984,799
Retained (deficit) earnings ..................... 2,096,684 (1,959,628) 137,056 -- 137,056
----------- ------------ ------------ -------------- -----------
Total stockholders' (deficit) equity ............ 4,675,693 12,398,223 17,073,916 20,110,000 37,183,916
----------- ------------ ------------ -------------- -----------
Total liabilities and stockholders' equity ...... $18,817,222 $ 22,877,695 $41,694,917 $ 1,592,462 $43,287,379
=========== ============ ============ ============== ===========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-4
<PAGE>
COLLECTIBLES USA, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
AMERICAN
COLLECTIBLES ROYAL STONE'S CRYSTAL NORTH LITTLE
USA ARTS HALLMARK GALLERIA POLE CITY ELEGANCE
-------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales .................. $ -- $4,288,612 $4,985,549 $3,727,285 $3,521,373 $2,598,270
Cost of sales ............... -- 1,505,784 2,496,574 1,784,916 1,620,462 1,346,661
----------- ---------- ---------- ---------- ---------- ----------
Gross profit ............... -- 2,782,828 2,488,975 1,942,369 1,900,911 1,251,609
Selling, general and
administrative expenses. 1,311,557 1,778,138 2,117,010 1,564,229 1,393,205 1,229,978
Goodwill amortization ...... -- -- -- -- -- --
----------- ---------- ---------- ---------- ---------- ----------
Income from operations . (1,311,557) 1,004,690 371,965 378,140 507,706 21,631
Other (income) expense:
Interest (income)
expense .................. 11,814 (24,027) 2,891 111,389 79,676 76,371
Other, net ............... -- -- -- 12,284 (40,343) (400)
----------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes ............... (1,323,371) 1,028,717 369,074 254,467 468,373 (54,340)
Provision for income taxes. -- -- 193,941 -- 233,083 150
----------- ---------- ---------- ---------- ---------- ----------
Net income (loss) ......... $(1,323,371) $1,028,717 $ 175,133 $ 254,467 $ 235,290 $ (54,490)
=========== ========== ========== ========== ========== ==========
Net income per share ......
Shares used in computing
net income per share (1).
</TABLE>
<TABLE>
<CAPTION>
REEF ANIMATION CRYSTAL PRO FORMA
HALLMARK USA FILMART PALACE TOTAL ADJUSTMENTS
------------ ------------ ------------ ------------ ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Net sales .................. $2,492,809 $1,716,410 $1,445,848 $1,132,782 $25,908,938 $ --
Cost of sales ............... 1,301,468 840,283 497,920 537,265 11,931,333 --
---------- ---------- ---------- ---------- ----------- ------------
Gross profit ............... 1,191,341 876,127 947,928 595,517 13,977,605 --
Selling, general and
administrative expenses..... 934,764 845,100 539,178 455,299 12,168,458 (2,242,135)(a)
Goodwill amortization ...... -- -- -- -- -- 580,636 (b)
---------- ---------- ---------- ---------- ----------- -----------
Income from operations ..... 256,577 31,027 408,750 140,218 1,809,147 1,661,499
Other (income) expense:
Interest (income)
expense .................. 48,826 9,349 1,056 29,500 346,845 (359,280)(c)
Other, net ............... 11,520 -- (278,866) -- (295,805) --
---------- ---------- ---------- ---------- ----------- -----------
Income (loss) before
income taxes ............... 196,231 21,678 686,560 110,718 1,758,107 2,020,779 (d)
Provision for income taxes. -- 8,944 -- -- 436,118 1,363,295
---------- ---------- ---------- ---------- ----------- -----------
Net income (loss) ......... $ 196,231 $ 12,734 $ 686,560 $ 110,718 $ 1,321,989 $ 657,484
========== ========== ========== ========== =========== ===========
Net income per share ......
Shares used in computing
net income per share (1).
</TABLE>
<PAGE>
PRO FORMA
COMBINED
---------
Net sales .................. $25,908,938
Cost of sales ............... 11,931,333
-----------
Gross profit ............... 13,977,605
Selling, general and
administrative expenses. 9,926,323
Goodwill amortization ...... 580,636
-----------
Income from operations ..... 3,470,646
Other (income) expense:
Interest (income)
expense .................. (12,435)
Other, net ............... (295,805)
-----------
Income (loss) before
income taxes ............... 3,778,886
Provision for income taxes. 1,799,413
-----------
Net income (loss) ......... $ 1,979,473
===========
Net income per share ...... $ .35
===========
Shares used in computing
net income per share (1). 5,720,848
===========
See accompanying notes to unaudited pro forma combined financial statements.
- ----------
(1) Includes (i) 1,191,182 shares outstanding prior to the Offering, (ii)
2,246,996 shares to be issued to the owners of the Founding Companies, (iii)
67,916 shares to be issued to holders of the Series A Convertible Preferred
Stock, (iv) 55,500 shares (determined to be common stock equivalents for
purposes of computing earnings per share) of the 185,000 shares issuable
upon the exercise of outstanding options and (v) 2,159,254 of the 2,700,000
shares to be sold in the Offering to pay the cash portion of the Acquisition
consideration, to pay the S Corporation Distributions, to repay indebtedness
of the Founding Companies and to pay expenses of the Offering.
F-5
<PAGE>
COLLECTIBLES USA, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR SIX MONTHS ENDED JULY 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 .................. $ -- $2,080,990 $3,201,997 $2,050,079 $1,139,105 $ 818,096
Cost of sales ............... -- 695,927 1,659,576 973,374 566,326 436,731
--------- ---------- ---------- ---------- ---------- ----------
Gross profit ............... -- 1,385,063 1,542,421 1,076,705 572,779 381,365
Selling, general and
administrative expenses. 50,525 943,920 968,861 867,682 820,852 577,356
Goodwill amortization ...... -- -- -- -- -- --
--------- ---------- ---------- ---------- ---------- ----------
Income from operations ..... (50,525) 441,143 573,560 209,023 (248,073) (195,991)
Other (income) expense:
Interest (income)
expense .................. 23,695 (5,586) 947 76,437 34,694 32,059
Other, net ............... -- -- -- -- (1,389) (651)
--------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes ............... (74,220) 446,729 572,613 132,586 (281,378) (227,399)
Provision for income taxes... -- -- 226,927 -- (103,558) 200
--------- ---------- ---------- ---------- ---------- ----------
Net income (loss) ......... $ (74,220) $ 446,729 $ 345,686 $ 132,586 $ (177,820) $ (227,599)
========= ========== ========== ========== ========== ==========
Net income per share ......
Shares used in computing
net income per share (1).
</TABLE>
<TABLE>
<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 .................. $1,299,180 $671,603 $ 514,504 $516,011 $12,291,565 $ -- $12,291,565
Cost of sales ............... 677,939 255,172 191,233 242,683 5,698,961 -- 5,698,961
--------- --------- ---------- -------- ----------- ---------- -----------
Gross profit ............... 621,241 416,431 323,271 273,328 6,592,604 -- 6,592,604
Selling, general and
administrative expenses..... 515,539 371,544 300,036 225,015 5,641,330 (208,754) 5,432,576
Goodwill amortization ...... -- -- -- -- -- 290,318 290,318
--------- --------- ---------- -------- ----------- ---------- -----------
Income from operations ..... 105,702 44,887 23,235 48,313 951,274 (81,564) 869,710
Other (income) expense:
Interest (income)
expense .................. 23,469 5,402 (738) 17,251 207,630 (191,152) 16,478
Other, net ............... (338) -- (112,500) (69) (114,947) -- (114,947)
--------- --------- ----------- -------- ---------- ---------- -----------
Income (loss) before
income taxes ............... 82,571 39,485 136,473 31,131 858,591 109,588 968,179
Provision for income taxes... -- 14,969 -- -- 138,537 375,952 514,490
--------- --------- ---------- -------- ---------- ---------- -----------
Net income (loss) ......... $ 82,571 $ 24,516 $ 136,473 $ 31,131 $ 720,054 $ (266,364) $ 453,690
========= ========= ========== ======== ========== ========== ===========
Net income per share ...... $ .08
===========
Shares used in computing
net income per share (1). 5,720,848
===========
</TABLE>
- ----------
(1) Includes (i) 1,191,182 shares outstanding prior to the Offering, (ii)
2,246,996 shares to be issued to the owners of the Founding Companies, (iii)
67,916 shares to be issued to holders of the Series A Convertible Preferred
Stock, (iv) 55,500 shares (determined to be common stock equivalents for
purposes of computing earnings per share) of the 185,000 shares issuable
upon the exercise of outstanding options, and (v) 2,159,254 of the 2,700,000
shares to be sold in the Offering to pay the cash portion of the Acquisition
consideration, to pay the S Corporation Distributions, to repay indebtedness
of the Founding Companies and to pay expenses of the Offering.
See accompanying notes to unaudited pro forma combined financial statements.
F-6
<PAGE>
COLLECTIBLES USA, INC., AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL:
Collectibles USA, Inc. (Collectibles USA) was founded to create a national
retailer of contemporary collectibles and marketer of animation art.
Collectibles USA has conducted no operations to date and will acquire the
Founding Companies concurrently with and as a condition to the closing of this
Offering. The historical financial statements reflect the financial position and
results of operations as follows: Collectibles USA as of July 27, 1997, and for
the period from inception (January 18, 1996) through January 26, 1997 and for
the twenty-five weeks ended July 27, 1997; American Royal Arts as of July 31,
1997 and the year ended January 31, 1997 and for the six months ended July 31,
1996 and 1997; Stone's Hallmark as of May 31, 1997 and for the year ended
November 30, 1996 and for the six months ended May 31, 1996 and 1997; and North
Pole City, Crystal Galleria, Little Elegance, Reef Hallmark, Animation USA,
Filmart and Crystal Palace as of June 30, 1997 and for the year ended December
31, 1996 and for the six months ended June 30, 1996 and 1997. The audited
historical financial statements included elsewhere in this Prospectus have been
included in accordance with Securities and Exchange Commission (SEC) Staff
Accounting Bulletin No. 80.
2. ACQUISITION OF FOUNDING COMPANIES:
Concurrently and as a condition with the closing of the Offering, Collectibles
USA will acquire all of the outstanding capital stock of the Founding Companies.
The Acquisitions will be accounted for using the purchase method of accounting
with American Royal Arts being treated as the accounting acquiror. The following
table sets forth the consideration to be paid (a) in cash and (b) in shares of
Common Stock to the stockholders of each of the Founding Companies. For purposes
of computing the estimated purchase price for accounting purposes, the value of
the shares is determined using an estimated fair value of $7.50 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 made or to be
made totaling $1.7 million constituting substantially all of the Founding
Companies undistributed earnings previously taxed to their stockholders ("S
Corporation Distributions").
SHARES OF
CASH COMMON STOCK
--------------- -------------
(IN THOUSANDS)
American Royal Arts ...... $2,814 563,636
Stone's Hallmark ......... 1,350 350,000
Crystal Galleria ......... 1,000 277,272
North Pole City ......... 1,800 359,090
Little Elegance ......... 400 85,000
Reef Hallmark ............ 1,000 168,181
Animation USA ............ 600 145,454
Filmart .................. 100 236,363
Crystal Palace ............ 175 62,000
------- ---------
Total .................. $9,239 2,246,996
======= ==========
F-7
<PAGE>
COLLECTIBLES USA, INC., AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS - (CONTINUED )
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
The following tables summarize unaudited pro forma combined balance sheet
adjustments:
<TABLE>
<CAPTION>
ADJUSTMENT
-------------------------------------------- PRO FORMA
(A) (B) (C) ADJUSTMENTS
--------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents ................................. $ -- $ -- $ -- $ --
Prepaid and other current assets ........................... -- -- (300,000) (300,000)
Deferred tax asset .......................................... -- -- 58,353 58,353
Property and equipment net ................................. -- (106,074) -- (106,074)
Goodwill, net ............................................. -- -- 23,225,416 23,225,416
------------ ---------- ------------ ------------
Total assets ............................................. -- (106,074) 22,983,769 22,877,695
============ ========== ============ ============
LIABILITIES AND STOCKHOLDERS'
(DEFICIT) EQUITY
Current maturities of long-term obligations ............... -- (37,847) -- (37,847)
Pro forma cash consideration due to Founding Companies ...... -- -- 9,238,920 9,238,920
Deferred income taxes ....................................... -- -- 28,399 28,399
Long-term obligations, net of current maturities ............ 1,250,000 -- -- 1,250,000
------------ ---------- ------------ ------------
Total liabilities .......................................... 1,250,000 (37,847) 9,267,319 10,479,472
Stockholders' (deficit) equity:
Series A preferred stock ................................. -- -- --
Common stock ............................................. -- -- (253,814) (253,814)
Additional paid-in capital ................................. (1,250,000) -- 15,716,665 14,466,665
Retained (deficit) earnings .............................. -- (68,227) (1,891,401) (1,959,628)
Treasury stock ............................................. -- -- 145,000 145,000
------------ ---------- ------------ ------------
Total stockholders' (deficit) equity ..................... (1,250,000) (68,227) 13,716,450 12,398,223
------------ ---------- ------------ ------------
Total liabilities and stockholders' (deficit) equity ...... $ -- $ (106,074) $22,983,769 $22,877,695
============ ========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
ADJUSTMENT
------------------------------------------------ POST ACQUISITION
(D) (E) (F) ADJUSTMENTS
-------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents .................................... $20,867,957 $ (6,351,481) $ (9,238,920) $ 5,277,556
Other current assets ....................................... (3,685,094) -- -- (3,685,094)
------------ ------------ ------------ -------------
Total assets ................................................ 17,182,863 (6,351,481) (9,238,920) 1,592,462
============ ============ ============ =============
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
EQUITY
Accounts payable and accrued liabilities ..................... (1,672,137) -- -- (1,672,137)
Pro forma cash consideration due to founding companies ...... -- -- (9,238,920) (9,238,920)
Line of credit ............................................. -- (560,232) -- (560,232)
Payable to related parties ................................. -- (2,122,576) -- (2,122,576)
Current maturities of long-term obligations .................. (1,255,000) (1,285,125) -- (2,540,125)
------------ ------------ ------------ -------------
Total current liabilities ................................. (2,927,137) (3,967,933) (9,238,920) (16,133,990)
Long-term obligations, net of current maturities ............ -- (2,061,851) -- (2,061,851)
Payable to stockholders .................................... -- (321,697) -- (321,697)
Total liabilities .......................................... (2,927,137) (6,351,481) (9,238,920) (18,517,538)
Stockholders' (deficit) equity:
Series A preferred stock .................................... (1,000,000) -- -- (1,000,000)
Common stock ................................................ 27,679 -- -- 27,679
Additional paid-in capital ................................. 21,082,321 -- -- 21,082,321
------------ ------------ ------------ -------------
Total stockholders' (deficit) equity ..................... 20,110,000 -- -- 20,110,000
------------ ------------ ------------ -------------
Total liabilities and stockholders' (deficit) equity ......... $17,182,863 $ (6,351,481) $ (9,238,920) $ 1,592,462
============ ============ ============ =============
</TABLE>
F-8
<PAGE>
COLLECTIBLES USA, INC., AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS - (CONTINUED )
(a) Records the S Corporation Distributions.
(b) Records the distribution of certain assets, $106,074, and related
obligations, $37,847, to certain stockholders of the Founding Companies,
with the difference accounted for as a dividend.
(c) Reflects the combinations of the Founding Companies including: (i) the
deferred tax asset of $58,353 for S Corporations, as if each had been
treated throughout as a C Corporation; (ii) the reduction of barter
receivables of $300,000 to reflect management's estimated future utilization
of such receivables; (iii) the creation of $23.2 million of goodwill after
allocating the aggregate assets acquired and liabilities assumed as follows:
<TABLE>
<CAPTION>
ASSETS (In thousands)
<S> <C>
Cash and cash equivalents .............................. $ 889
Accounts receivable .................................... 344
Merchandise inventories .............................. 10,192
Prepaid expenses and other current assets ............ 483
--------
Total current assets ................................. 11,908
Property and equipment, net ........................... 1,420
Other assets, net .................................... 4,038
--------
Total assets .......................................... $17,366
========
LIABILITIES
Accounts payable and accrued liabilities ............... $ 6,009
Customer deposits .................................... 274
Federal income taxes payable ........................... 301
Line of credit ....................................... 560
Notes payable to related party ........................ 1,637
Current maturities of long-term obligations ............ 2,540
--------
Total current liabilities ........................... 11,321
Deferred income taxes ................................. 567
Long-term obligations, net of current maturities ...... 812
Notes payable to stockholders ........................ 322
--------
Total liabilities .................................... $13,022
========
</TABLE>
(iv) the liability for cash consideration to be paid of $9.2 million; (v)
approximately $1.3 million representing S Corporation Distributions to
certain stockholders; and (vi) the issuance of 2,246,996 shares of common
stock ($.01 par value) to the stockholders of the Founding Companies at
$7.50 per share ($16.9 million).
(d) Records the cash proceeds of $27.0 million from the issuance of shares of
Collectibles USA Common Stock net of estimated offerings costs of $5.9
million (based upon an assumed initial public offering price of $10.00 per
share and includes the payment of deferred offering costs of $3,685,000
incurred through July 31, 1997). Offering costs consist primarily of
underwriting commissions, accounting fees, legal fees and printing expenses.
(e) Reflects the repayment of debt with proceeds from the Offering.
(f) Records the cash portion of the consideration to be paid to the stockholders
of the Founding Companies in connection with the Acquisitions.
F-9
<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 reductions in salaries and benefits to the owners of the
Founding Companies to which they have agreed prospectively and certain
other adjustments, including the effect of revisions to certain lease
agreements between certain owners of the Founding Companies and the
reduction in compensation expense relating to the non-recurring, non-cash
compensation charge related to Common Stock issued to management.
(b) Reflects the amortization of goodwill to be recorded as a result of the
Acquisitions over a 40 year period.
(c) Reflects the reduction of interest expense attributed to the repayment of
debt with a portion of the net proceeds of the Offering.
(d) Reflects the incremental provision for federal and state income taxes
relating to the statements of operations adjustments and for income taxes
as if each S Corporation had been treated throughout the period as a C
Corporation.
F-10
<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
June 13, 1997
F-11
<PAGE>
COLLECTIBLES USA, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
JANUARY 26, JULY 27,
1997 1997
-------------- ---------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ......................................................... $ 425,681 $ 182,113
Receivable from affiliate .................................... 100,000 --
Prepaid expenses and other current assets ..................... 7,500 --
------------ ------------
Total current assets ....................................... 533,181 182,113
Property and equipment, net .................................... -- 7,453
Deferred offering costs ....................................... 894,096 3,685,094
------------ ------------
Total assets ................................................ $ 1,427,277 $ 3,874,660
============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accrued liabilities .......................................... $ 586,198 $ 1,707,801
Notes payable-related party .................................... 855,000 1,255,000
------------ ------------
Total current liabilities .................................... 1,441,198 2,962,801
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' (DEFICIT) EQUITY:
Preferred Stock, $.01 par, 5,000,000 authorized, none and 20,000
shares of Series A Convertible Preferred Stock issued and
outstanding, respectively. ................................ -- 1,000,000
Common Stock, $.01 par, 31,200,000 shares authorized, 1,191,182
shares issued and outstanding .............................. 11,912 11,912
Additional paid-in capital .................................... 1,297,538 1,297,538
Deficit ...................................................... (1,323,371) (1,397,591)
------------ ------------
Total stockholders' (deficit) equity ........................ (13,921) 911,859
------------ ------------
Total liabilities and stockholders' deficit .................. $ 1,427,277 $ 3,874,660
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE>
COLLECTIBLES USA, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
INCEPTION TWENTY-
(JANUARY 18, FIVE
1996) WEEKS
THROUGH ENDED
JANUARY 26, JULY 27,
1997 1997
-------------- ------------
(UNAUDITED)
<S> <C> <C>
NET SALES .......................................... $ -- $ --
COST OF SALES .................................... -- --
Gross profit .................................... -- --
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ...... 1,311,557 50,525
------------ ---------
Operating loss .................................... (1,311,557) (50,525)
OTHER EXPENSE:
Interest expense ................................. 11,814 23,695
------------ ---------
NET LOSS .......................................... $(1,323,371) $ (74,220)
============ =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-13
<PAGE>
COLLECTIBLES USA, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL TOTAL
--------------------- --------------------- PAID-IN STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT DEFICIT
----------- --------- -------- ------------ ------------ --------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT INCEPTION
(JANUARY 18 , 1996) ............... -- $ -- -- $ -- $ -- $ -- $ --
Initial capitalization ............ 1,016,602 10,166 -- -- (10,066) -- 100
Issuance of management shares ...... 174,580 1,746 -- -- 1,307,604 -- 1,309,350
Net loss ........................... -- -- -- -- -- (1,323,371) (1,323,371)
---------- -------- ------- ----------- ---------- ------------ ------------
BALANCE AT JANUARY 26, 1997 ......... 1,191,182 11,912 -- -- 1,297,538 (1,323,371) (13,921)
Net loss (unaudited) ............... -- -- -- -- -- (74,220) (74,220)
Issuance of convertible preferred
stock (unaudited) .................. -- -- 20,000 1,000,000 -- -- 1,000,000
---------- -------- ------- ----------- ---------- ------------ ------------
BALANCE AT JULY 27, 1997
(unaudited) ........................ 1,191,182 $11,912 20,000 $1,000,000 $1,297,538 $ (1,397,591) $ 911,859
========== ======== ======= =========== ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-14
<PAGE>
COLLECTIBLES USA, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
TWENTY-FIVE
FROM WEEKS
INCEPTION TO ENDED
JANUARY 26, JULY 27,
1997 1997
-------------- ---------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ...................................................... $(1,323,371) $ (74,220)
Non-cash compensation charge on issuance of management shares. 1,309,350 --
Adjustments to reconcile net loss to net cash used in operating
activities-
Changes in operating assets and liabilities-
Change in accounts receivable .............................. (100,000) 100,000
Change in prepaid expenses ................................. (7,500) 7,500
Change in deferred offering costs .......................... (894,096) (2,790,998)
Change in accrued expenses ................................. 586,198 1,121,603
------------ ------------
Net cash used in operating activities .................... (429,419) (1,636,115)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ........................... -- (7,453)
------------ ------------
Net cash used in investing activities .................... -- (7,453)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of loan payable ........................ 855,000 400,000
Proceeds from issuance of common stock ........................ 100 --
Proceeds from issuance of preferred stock ..................... -- 1,000,000
------------ ------------
Net cash provided by financing activities ............... 855,100 1,400,000
------------ ------------
NET INCREASE IN CASH ........................................... 425,681 (243,568)
CASH, beginning of period ...................................... -- 425,681
------------ ------------
CASH, end of period ............................................ $ 425,681 $ 182,113
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-15
<PAGE>
COLLECTIBLES USA, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
COLLECTIBLES USA, INC., A DELAWARE CORPORATION (COLLECTIBLES USA OR THE
COMPANY), WAS FOUNDED IN JANUARY 1996 to form a national retailer of
collectibles merchandise and marketer of animation art. Collectibles USA intends
to enter into definitive agreements to acquire nine businesses (the
Acquisitions), complete an initial public offering (the Offering) of its common
stock and, subsequent to the Offering, continue to acquire, through merger or
purchase, similar companies to expand its national operations.
Collectibles USA has not conducted any operations, and all activities to date
have related to the Offering and the Acquisitions. Collectibles USA did not
commence activities related to the Offering until June 1996. All expenditures to
date have been funded by the issuance of Series A Convertible Preferred Stock
(See Note 6) and promissory notes from Collectibles Enterprises Funding Corp.
(CEFC), an entity under common control founded to obtain and provide financing
for the Offering costs incurred by the Company. Collectibles USA is dependent
upon the Offering to execute the pending Acquisitions and to repay the
promissory notes to CEFC. There is no assurance that the pending Acquisitions
will be completed or that Collectibles USA will be able to generate future
operating revenues.
The Company's future success is dependent upon a number of factors which
include, among others, the ability to integrate operations, reliance on the
identification and integration of satisfactory acquisition candidates, reliance
on acquisition financing, the ability to manage growth and attract and retain
qualified management, dependence on licenses, the need for additional capital,
dependence on key collectibles vendors and risks associated with dependence on
foreign vendors, competition, and seasonality and quarterly fluctuations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The interim financial statements as of July 27, 1997, and for the
twenty-five weeks ended July 27, 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.
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.
F-16
<PAGE>
COLLECTIBLES USA, INC.
NOTES TO FINANCIAL STATEMENTS- (CONTINUED)
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.
3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following:
JANUARY 26, JULY 27,
1997 1997
Accrued professional expenses ...... $556,992 $1,682,984
Other accrued liabilities ......... 29,206 24,817
--------- -----------
$586,198 $1,707,801
========= ===========
4. NOTES PAYABLE-RELATED PARTY:
CEFC, which is owned by RGR Financial Group, LLC (RGR) and Capstone Partners,
LLC (Capstone) was founded to obtain and provide financing for the Offering
costs incurred by the Company. In August 1996, the Company issued 5% notes of
$300,000 and $555,000 to CEFC, due December 31, 1997. Upon consummation of the
Offering, the principal amounts will become due and payable immediately. No
interest is due on such amounts in the event the Offering is consummated.
In June 1997, the Company issued to CEFC a $400,000 5% note due December 31,
1997. Upon consumation of the Offering, the principal amount will become due and
payable immediately. No interest is due on such amount in the event the Offering
is consummated.
5. RELATED-PARTY TRANSACTION:
The Company has entered into a consulting agreement with RGR whereby RGR will
act as a merger and acquisition advisory consultant to assist the Company in
implementing its strategy to acquire additional retailers of collectibles and
marketers of animation art and other related consulting services for a term of
one year. The consideration to be paid to RGR upon consummation of a future
acquisition will be 3.2% of the acquisition candidate's pre-tax net income for
its most recent fiscal year.
6. STOCKHOLDERS' EQUITY:
Common Stock and Restricted Common Stock
In May 1997, Collectibles USA effected a 1,016.604-for-one stock dividend for
each share of common stock (Common Stock) then outstanding and in June 1997,
increased the number of authorized shares of Common Stock to 31,200,000 of which
1,200,000 was designated Restricted Common Stock. The effects of the Common
Stock dividend have been retroactively reflected in the financial statements and
the accompanying notes.
F-17
<PAGE>
COLLECTIBLES USA, INC.
NOTES TO FINANCIAL STATEMENTS- (CONTINUED)
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 $1.3 million 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 a consultant to the Company
exchanged 1,016,602 shares of Common Stock for an equal number of shares of
restricted voting common stock (Restricted Common Stock). The holders of the
Restricted Common Stock are entitled to four-tenths of one vote for each share
held on all other matters on which they are entitled to vote.
Each share of Restricted Common Stock will automatically convert to Common Stock
on a share-for-share basis (i) in the event of a disposition of such share of
Restricted Common Stock by the holder thereof (other than a distribution which
is a distribution by a holder to its partners or beneficial owners, or a
transfer to a related party of such holder (as defined), (ii) in the event any
person acquires beneficial ownership of 15% or more of the outstanding shares of
Common stock of the Company, (iii) in the event any person offers to acquire 15%
or more of the outstanding shares of Common stock of the Company, or (iv)
earlier, upon the affirmative vote of a majority of the aggregate number of
votes which may be cast by the holder of outstanding shares of Common Stock and
Restricted Common Stock.
After July 1, 1998, the Board of Directors may elect to convert any outstanding
shares of Restricted Common Stock into shares of Common Stock in the event 80%
or more of the originally outstanding shares of Restricted Common Stock have
been previously converted into shares of Common Stock.
Preferred Stock
In May 1997, the Company sold 20,000 shares of its Series A Convertible
Preferred Stock, liquidation value $50 per share (the Series A Convertible
Preferred Stock), for an aggregate consideration of $1.0 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, each share of 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 but one 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 approximately $1.0 million in cash and 67,916 shares of Common
Stock (based upon an assumed initial public offering price of $10.00 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
F-18
<PAGE>
COLLECTIBLES USA, INC.
NOTES TO FINANCIAL STATEMENTS- (CONTINUED)
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 930,914 shares upon consummation of the
Offering. Awards may be settled in cash, shares, other awards or other property,
as determined by the compensation committee of the Board of Directors.
1997 Non-employee Directors' Stock Plan
The Company's 1997 Non-Employee Director's Stock Plan (the Directors' Plan),
which was adopted by the Board of Directors and approved by the Company's
stockholders in May 1997, provides for the automatic grant to each non-employee
director of an initial option to purchase 40,000 shares or such person's
subsequent initial election as a director and an automatic annual grant to each
non-employee director of an option to purchase 5,000 shares at each annual
meeting of stockholders thereafter at which such director is re-elected or
remains a director, unless such annual meeting is held within three months of
such person's initial option granted. All options will have an exercise price
per share equal to the fair market value of the Common Stock on the date of
grant and expire on the earlier of ten years from the date of grant or one year
after termination of service as a director. Options will become exercisable one
year after the date of grant, subject to acceleration by the Board of Directors,
and will be forfeited upon termination of service as a director for reasons
other than death or disability unless the director served for at least 11 months
after the date of grant or the option was otherwise exercisable at the date of
termination. The Directors' Plan also permits non-employee directors to elect to
receive, in lieu of cash directors' fees, shares or credits representing
"deferred shares" at future settlement dates, as selected by the director. The
number of shares or deferred shares received will equal the number of shares of
Common Stock which, at the date the fees would otherwise be payable, will have
an aggregate fair market value equal to the amount of such fees.
7. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
Wholly owned subsidiaries of Collectibles USA have signed definitive agreements
to acquire by merger or share exchange nine companies (the Founding Companies)
to be effective with the Offering. The companies to be acquired are Crystal
Galleria, Inc. and Base, Inc.; Vincent J. Browne, Inc.; St. George, Inc.; DKG
Enterprises, Inc.; Elwell Stores, Inc.; Stone's Shops, Inc.; American Royal Arts
Corp.; Animation U.S.A., Inc.; and Filmart Productions Inc. The aggregate
consideration that will be paid by Collectibles USA to acquire the Founding
Companies is approximately $9.2 million in cash and 2,246,996 shares of Common
Stock. In addition, the Company will repay $5.2 million of indebtedness, as of
October 1, 1997 (which includes $486,000 of indebtedness incurred to fund a
distribution in May 1997 to the sole stockholder of American Royal Arts,
representing S Corporation earnings previously taxed to such stockholder), of
the Founding Companies.
On June 13, 1997, Collectibles USA filed a registration statement on Form S-1
for the sale of 2,700,000 shares of its Common Stock. See "Risk Factors"
included elsewhere herein for a discussion of certain factors that should be
considered by prospective purchasers of the Common Stock offered hereby. 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
F-19
<PAGE>
COLLECTIBLES USA, INC.
NOTES TO FINANCIAL STATEMENTS- (CONTINUED)
warrants are exercisable during the five-year period commencing on the date of
the prospectus relating to the Offering at an exercise price equal to 120% of
the initial public offering price. The Company has agreed to grant certain
registration rights to the holders of these warrants.
In August 1997, the Company entered into employment agreements with three
executives that have an initial expiration date of 2000. The agreements are
thereafter automatically renewed for successive twelve-month terms, unless
terminated by the Company or the executive. Such agreements provide that, in the
case of termination without cause, the employees are entitled to payment of
their annual salaries (subject to a minimum amount) for the lesser of the
remainder of the term of the agreement or one year. Pursuant to the employment
agreements, the executives (i) have been granted stock options to acquire an
aggregate of 185,000 shares of Common Stock at an exercise price of $7.00 per
share and (ii) will be granted additional stock options to acquire an aggregate
of 265,000 shares of Common Stock concurrently with the consummation of the
Offering at an exercise price equal to the initial public offering price. In
August, the Company recorded a non recurring, non cash compensation charge of
approximately $93,000 related to the $7.00 options.
In August 1997, the Company entered into an Agreement and Release with a former
director and executive officer (the "Officer"), whose employment terminated in
June 1997, pursuant to which the Officer will receive within three days of the
consummation of the Offering $350,000 as a severance payment.
F-20
<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-21
<PAGE>
AMERICAN ROYAL ARTS CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31,
------------------------- JANUARY 31, JULY 31,
1995 1996 1997 1997
------------ ------------ ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ........................................ $ 547,990 $ 442,364 $ 609,523 $ 237,454
Accounts receivable ......................... 61,347 50,609 33,712 103,450
Merchandise inventories ..................... 599,713 707,161 611,943 562,598
Prepaid expenses and other current assets ... 56,789 109,221 105,914 70,688
---------- ---------- ---------- ----------
Total current assets ...................... 1,265,839 1,309,355 1,361,092 974,190
PROPERTY AND EQUIPMENT, net .................. 27,060 40,283 38,173 33,616
OTHER ASSETS, net ............................ 136,635 89,135 82,885 96,617
---------- ---------- ---------- ----------
Total assets ............................ $1,429,534 $1,438,773 $1,482,150 $1,104,423
========== ========== ========== ==========
LIABILITIES AND STOCKHOLDER'S
(DEFICIT) EQUITY
CURRENT LIABILITIES:
Customer deposits ......................... $ 115,804 $ 355,617 $ 334,131 $ 338,644
Accounts payable and accrued liabilities .... 439,842 386,960 341,254 286,139
Payable to stockholder ...................... 7,268 -- -- 486,000
--------- --------- ---------- ---------
Total current liabilities ................ 562,914 742,577 675,385 1,110,783
COMMITMENTS AND CONTINGENCIES ................
STOCKHOLDER'S (DEFICIT) EQUITY:
Convertible preferred stock, $100 par, 5,000
shares authorized, none outstanding ....... -- -- -- --
Common stock, $.01 par, 1,000,000 shares
authorized, 158,333.336 shares issued,
79,166.668 shares outstanding ............. 1,584 1,584 1,584 1,584
Less- Treasury stock, at cost (79,166.668
shares) ................................... (145,000) (145,000) (145,000) (145,000)
Retained earnings ........................... 1,010,036 839,612 950,181 137,056
---------- ---------- ---------- ----------
Total stockholder's (deficit) equity ...... 866,620 696,196 806,765 (6,360)
---------- ---------- ---------- ----------
Total liabilities and stockholder's equity $1,429,534 $1,438,773 $1,482,150 $1,104,423
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
AMERICAN ROYAL ARTS CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR SIX MONTHS ENDED
YEAR ENDED OCTOBER 31, ENDED JULY 31,
-------------------------------------- JANUARY 31, ------------------------
1994 1995 1996 1997 1996 1997
------------ ------------ ------------ ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
NET SALES ..................... $3,897,785 $4,051,072 $4,121,181 $4,288,612 $2,194,610 $2,080,990
COST OF SALES ................. 1,715,025 1,559,918 1,571,068 1,505,784 836,585 695,927
---------- ---------- ---------- ---------- ---------- ----------
Gross profit ................. 2,182,760 2,491,154 2,550,113 2,782,828 1,358,025 1,385,063
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES ..................... 1,587,875 1,759,886 1,763,860 1,778,138 920,218 943,920
---------- ---------- ---------- ---------- ---------- ----------
Income from operations ....... 594,885 731,268 786,253 1,004,690 437,807 441,143
OTHER INCOME (EXPENSE):
Interest expense ............. -- (4,602) -- -- -- --
Interest income .............. 7,442 22,802 24,184 24,027 6,940 5,586
---------- ---------- ---------- ---------- ---------- ----------
NET INCOME .................... $ 602,327 $ 749,468 $ 810,437 $1,028,717 $ 444,747 $ 446,729
========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
AMERICAN ROYAL ARTS CORP.
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------- TREASURY RETAINED STOCKHOLDERS'
SHARES AMOUNT STOCK EARNINGS EQUITY
--------- --------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE AT OCTOBER 31, 1993 ................ 158,333 $ 1,584 $ -- $ 519,203 $ 520,787
Net income ................................ -- -- -- 602,327 602,327
Distributions ............................. -- -- -- (411,333) (411,333)
Purchase of treasury stock ................ -- -- (145,000) -- (145,000)
------- ------- ---------- ----------- -----------
BALANCE AT OCTOBER 31, 1994 ................ 158,333 1,584 (145,000) 710,197 566,781
Net income ................................ -- -- -- 749,468 749,468
Distributions ............................. -- -- -- (449,629) (449,629)
------- ------- ---------- ----------- -----------
BALANCE AT OCTOBER 31, 1995 ................ 158,333 1,584 (145,000) 1,010,036 866,620
Net income ................................ -- -- -- 810,437 810,437
Distributions ............................. -- -- -- (980,861) (980,861)
------- ------- ---------- ----------- -----------
BALANCE AT OCTOBER 31, 1996 ................ 158,333 1,584 (145,000) 839,612 696,196
Net income ................................ -- -- -- 431,065 431,065
Distributions ............................. -- -- -- (320,496) (320,496)
------- ------- ---------- ----------- -----------
BALANCE AT JANUARY 31, 1997 ................ 158,333 1,584 (145,000) 950,181 806,765
Net income (unaudited) .................... -- -- -- 446,729 446,729
Distributions (unaudited) ................. -- -- -- (1,259,854) (1,259,854)
------- ------- ---------- ----------- -----------
BALANCE AT JULY 31, 1997 (unaudited) ....... 158,333 $ 1,584 $ (145,000) $ 137,056 $ (6,360)
======= ======= ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
AMERICAN ROYAL ARTS CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR SIX MONTHS ENDED
YEAR ENDED OCTOBER 31, ENDED JULY 31,
-------------------------------------- JANUARY 31, -----------------------------
1994 1995 1996 1997 1996 1997
------------ ------------ ------------ --------------- ------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income ........................... $ 602,327 $ 749,468 $ 810,437 $ 1,028,717 $ 444,747 $ 446,729
Adjustments to reconcile net income
to net cash provided by operating
activities-
Depreciation and amortization ...... 9,583 11,393 58,470 39,346 19,410 18,564
Changes in operating assets and
liabilities-
Accounts receivable ................ (49,826) 76,105 10,738 34,150 14,733 (69,738)
Merchandise inventories ............ 126,103 (164,940) (107,448) 19,409 63,029 49,345
Prepaid expenses and other
current assets .................... (21,416) (10,109) (52,432) (47,213) 5,486 8,994
Customer deposits .................. 50,231 62,097 239,813 178,569 192,884 4,513
Accounts payable and accrued
liabilities ....................... (134,282) 143,610 (52,882) 13,852 (79,334) (55,115)
Other assets ....................... (150,000) 25,350 2,500 2,500 -- --
--------- --------- --------- ------------ ---------- ------------
Net cash provided by operating
activities ....................... 432,720 892,974 909,196 1,269,330 660,955 403,292
--------- --------- --------- ------------ ---------- ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and
equipment .......................... (20,367) (8,930) (26,693) (22,403) (15,470) (1,507)
Proceeds from sale of property and
equipment .......................... -- 1,195 -- -- -- --
--------- --------- --------- ------------ ---------- ------------
Net cash used in investing
activities ....................... (20,367) (7,735) (26,693) (22,403) (15,470) (1,507)
--------- --------- --------- ------------ ---------- ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of long-term
obligations ........................ 100,000 -- -- -- -- 486,000
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) (859,361) (1,259,854)
--------- --------- --------- ------------ ---------- ------------
Net cash used in financing
activities ....................... (456,333) (542,361) (988,129) (1,249,986) (859,361) (773,854)
--------- --------- --------- ------------ ---------- ------------
NET INCREASE (DECREASE) IN
CASH ................................. (43,980) 342,878 (105,626) (3,059) (213,876) (372,069)
CASH, beginning of period ............. 249,092 205,112 547,990 612,582 612,582 609,523
--------- --------- --------- ------------ ---------- ------------
CASH, end of period .................. $ 205,112 $ 547,990 $ 442,364 $ 609,523 $ 398,706 $ 237,454
========= ========= ========= ============ ========== ============
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-25
<PAGE>
AMERICAN ROYAL ARTS CORP.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
American Royal Arts Corp. (the Company) is a retail and wholesale marketer
specializing in the sale of animation art, including limited editions,
production cels, sericels, lithographs and vintage animation. American Royal
Arts produces animation art under various license arrangements certain of which
are exclusive to it. American Royal Arts has been in operation since 1987 and
has one gallery located in Westbury, New York, which also houses its
telemarketing operations.
Although the Company's business is not seasonal, sales fluctuations between
quarters do occur and are largely the result of the timing and frequency of
in-store artists signings and other promotional events.
The Company and its stockholder intend to enter into a definitive agreement with
Collectibles USA, Inc. (Collectibles), pursuant to which all outstanding shares
of the Company's common stock will be exchanged for cash and shares of
Collectibles common stock concurrent with the consummation of the initial public
offering of the common stock of Collectibles.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Merchandise Inventories
Merchandise inventories are stated at the lower of cost or market, determined by
the average cost method.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is determined using
the straight-line method based on the estimated useful life of the respective
asset. Leasehold improvements are amortized over the shorter of the estimated
useful life or the remaining lease term. Expenditures for major renewals and
betterments are capitalized while maintenance and repairs are expensed. When
property is retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the accounts and any resulting gain or loss is
reflected in the statements of operations.
Other Assets
On October 31, 1994, the Company purchased the stock of a 50 percent stockholder
for $45,000 in cash and a note of $100,000 to the former stockholder. In
addition, as part of the repurchase of stock, the Company entered into four
noncompete agreements with the former stockholder and related parties of the
stockholder. The total amount paid under the noncompete agreements was $150,000,
which is being amortized over the five-year lives of the agreements.
Revenue Recognition
The Company recognizes revenue from sales upon delivery of the merchandise to
the customer and receipt of payment. Customer deposits consist of collections on
layaway sales. Upon receipt of final payment, the item is delivered to the
customer and the sale is recorded as revenue.
Cost of Sales
Cost of sales includes costs of merchandise sold, framing and shipping costs.
Advertising Expenses
Advertising expenses are expensed in the month incurred. Advertising expenses
were approximately $316,000, $258,000, $141,000, $139,000 and $95,000 for the
years ended October 31, 1994, 1995 and 1996, for the year ended January 31,
1997, and for the six months ended July 31, 1997, respectively.
F-26
<PAGE>
AMERICAN ROYAL ARTS CORP.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED )
Income Taxes
For income tax purposes, the Company and its stockholder have elected to be
treated as an S Corporation under the Internal Revenue Code and a similar
section in the state code. In accordance with the provisions of such elections,
the Company's income and losses were passed through to its stockholder;
accordingly, no provision for income taxes has been recorded.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, accounts receivable,
accounts payable and debt. The carrying amount of these financial instruments
approximates fair value due either to length of maturity or existence of
interest rates that approximate prevailing market rates.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Interim Financial Information
The interim financial statements as of July 31, 1997, and for the six months
ended July 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 OCTOBER 31,
USEFUL LIVES ------------------------- JANUARY 31,
(YEAR) 1995 1996 1997
-------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Furniture, fixtures and equipment ...... 5-7 $ 35,142 $ 61,834 $ 62,332
Leasehold improvements .................. 3-5 28,148 28,148 28,516
-------- -------- ---------
63,290 89,982 90,848
Less- Accumulated depreciation ......... (36,230) (49,699) (52,675)
-------- -------- ---------
$ 27,060 $ 40,283 $ 38,173
======== ======== =========
</TABLE>
F-27
<PAGE>
AMERICAN ROYAL ARTS CORP.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED )
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Other assets consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------- JANUARY 31,
1995 1996 1997
---------- ---------- ------------
<S> <C> <C> <C>
Security deposits .............................. $ 16,635 $ 14,135 $ 14,135
Restrictive covenants, at cost, net of accumulated
amortization of $30,000, $75,000 and $81,250 at
October 31, 1995 and 1996, and January 31, 1997,
respectively ................................... 120,000 75,000 68,750
-------- -------- --------
$136,635 $ 89,135 $ 82,885
======== ======== ========
</TABLE>
Accounts payable and accrued liabilities consist of the following:
<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. PAYABLE TO STOCKHOLDER:
At October 31, 1995, the Company had $7,268 payable to a former stockholder, due
in monthly principal and interest (at 7 percent) installments of $7,310 over the
life of the note. The note was paid in fiscal year 1996.
The loan was collateralized by a security interest in the Company's accounts
receivable and inventory.
6. COMMITMENTS AND CONTINGENCIES:
Lease Obligations
The Company leases its retail facilities under operating leases expiring at
various dates through February 2000. Rent expense for the years ended October
31, 1994, 1995 and 1996, and for the year ended January 31, 1997, was
approximately $143,000, $170,000, $181,000 and $181,000, respectively. Rent
expense for the six months ended July 31, 1997 was $83,000. Future minimum lease
payments under noncancelable operating leases are as follows:
<TABLE>
<S> <C>
Year ending October 31,
1997 .................. $126,996
1998 .................. 34,168
1999 .................. 35,868
2000 .................. 12,148
---------
$209,180
=========
</TABLE>
Litigation
The Company is subject to legal actions arising in the ordinary course of
business. Management does not believe that the outcome of any such legal action
would have a material adverse effect on the Company's financial position or
results of operations.
F-28
<PAGE>
AMERICAN ROYAL ARTS CORP.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED )
Consignments
The Company has various consignment arrangements with certain artists to produce
and sell certain pieces of art. The consigned inventory is insured by the
Company. Under these arrangements, the Company is obligated to pay the artist a
royalty on the art sold.
Distribution Agreements
The Company maintains various distribution agreements with major studio
suppliers to purchase and distribute animation art. Some agreements contain
minimum annual purchase requirements which the Company had fulfilled as of
October 31, 1995 and 1996, and January 31, 1997, respectively. On February 1,
1997, the Company entered into a 15-month distribution agreement to purchase and
distribute animated art products with a major studio supplier.
7. SIGNIFICANT SUPPLIERS:
During the year ended October 31, 1995, three suppliers accounted for 56 percent
of total inventory purchases. During the year ended October 31, 1996, and for
the year ended January 31, 1997, four suppliers accounted for 52 percent of
total inventory purchases.
8. EVENTS 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.
During the six months ended July 31, 1997, the Company made a cash distribution
of approximately $1.3 million which represents the Company's estimated S
Corporation accumulated adjustment account. The Company funded a portion of this
distribution through borrowings from the Company's sole stockholder. The
borrowings bear interest at an annual rate of six percent and is payable upon
the earlier of acquisition of the Company by Collectibles or December 31, 1997.
F-29
<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-30
<PAGE>
STONE'S SHOPS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30, AUGUST 31,
----------------------------- ------------
1995 1996 1997
------------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .......................... $ 74,915 $ 82,610 $ 534,620
Merchandise inventories ........................... 2,190,405 2,673,712 2,871,421
Prepaid expenses and other current assets .......... 42,738 86,681 36,105
----------- ----------- ----------
Total current assets ............................. 2,308,058 2,843,003 3,442,146
PROPERTY AND EQUIPMENT, net ......................... 273,828 286,837 244,793
OTHER ASSETS net .................................... -- -- 55,680
----------- ----------- ----------
Total assets ..................................... $ 2,581,886 $ 3,129,840 $3,742,619
=========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Customer deposits .................................. $ 18,518 $ 25,946 $ 29,850
Accounts payable and accrued liabilities ........... 1,317,726 1,499,985 1,595,775
Current maturities of long-term obligations ........ 14,400 14,400 14,400
Payable to shareholder ............................. 11,000 30,000 6,010
----------- ----------- ----------
Total current liabilities ........................ 1,361,644 1,570,331 1,646,035
LONG-TERM OBLIGATIONS, net of current maturities 43,200 28,800 28,800
DEFERRED INCOME TAXES ............................... 321,921 500,455 530,456
----------- ----------- ----------
Total liabilities ................................ 1,726,765 2,099,586 2,205,291
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 1,497,328
----------- ----------- ----------
Total shareholders' equity ....................... 855,121 1,030,254 1,537,328
----------- ----------- ----------
Total liabilities and shareholders' equity ....... $ 2,581,886 $ 3,129,840 $3,742,619
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
STONE'S SHOPS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED AUGUST
YEAR ENDED NOVEMBER 30, 31,
----------------------------------------- ------------------------
1994 1995 1996 1996 1997
------------- ------------- ------------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES ........................ $ 3,488,838 $ 4,281,040 $ 4,985,549 $3,838,789 $4,332,274
COST OF SALES .................... 1,799,619 2,268,690 2,496,574 1,983,913 2,247,096
----------- ----------- ----------- ---------- ----------
Gross profit .................. 1,689,219 2,012,350 2,488,975 1,854,876 2,085,178
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ......... 1,430,695 1,787,457 2,117,010 1,455,162 1,279,355
----------- ----------- ----------- ---------- ----------
Income from operations ........ 258,524 224,893 371,965 399,714 805,823
OTHER EXPENSE:
Interest expense ................. 3,681 10,438 2,891 2,679 945
----------- ----------- ----------- ---------- ----------
INCOME BEFORE INCOME TAXES ....... 254,843 214,455 369,074 397,035 804,878
PROVISION FOR INCOME TAXES ....... 146,367 128,101 193,941 208,642 297,804
----------- ----------- ----------- ---------- ----------
NET INCOME ....................... $ 108,476 $ 86,354 $ 175,133 $ 188,393 $ 507,074
=========== =========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
STONE'S SHOPS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNTS CAPITAL EARNINGS EARNINGS
-------- --------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
BALANCE AT NOVEMBER 30, 1993 ....... 1,000 $ 1,000 $ 39,000 $ 620,291 $ 660,291
Net income ........................ -- -- -- 108,476 108,476
------ ------- -------- ---------- ----------
BALANCE AT NOVEMBER 30, 1994 ...... 1,000 1,000 39,000 728,767 768,767
Net income ........................ -- -- -- 86,354 86,354
------ ------- -------- ---------- ----------
BALANCE AT NOVEMBER 30, 1995 ...... 1,000 1,000 39,000 815,121 855,121
Net income ........................ -- -- -- 175,133 175,133
------ ------- -------- ---------- ----------
BALANCE AT NOVEMBER 30, 1996 ...... 1,000 1,000 39,000 990,254 1,030,254
Net income (unaudited) ............ -- -- -- 507,074 507,074
------ ------- -------- ---------- ----------
BALANCE AT AUGUST 31, 1997
(unaudited) ..................... 1,000 $ 1,000 $ 39,000 $1,497,328 $1,537,328
====== ======= ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
STONE'S SHOPS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED AUGUST
NOVEMBER 30, 31,
--------------------------------------- ---------------------------
1994 1995 1996 1996 1997
------------ ------------- ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................ $ 108,476 $ 86,354 $ 175,133 $ 188,393 $ 507,074
Adjustments to reconcile net income to net cash
provided by operating activities- ....................
Depreciation and amortization ........................ 40,032 55,800 63,467 29,207 57,220
Loss on sale of assets ............................... -- -- 9,765 -- --
Changes in operating assets and liabilities- .........
Merchandise inventories .............................. (383,742) (540,902) (483,307) (633,524) (197,709)
Prepaid expenses and other current assets ............ 31,812 (7,726) (43,943) 6,800 50,576
Other Assets ......................................... -- -- -- -- (55,680)
Customer deposits .................................... 3,779 5,291 7,428 (8,822) 3,904
Accounts payable and accrued liabilities ............. 116,900 443,413 182,259 162,741 95,790
Deferred income taxes ................................ 126,208 109,366 178,534 208,535 30,001
--------- ---------- --------- ---------- ----------
Net cash provided by operating activities ........... 43,465 151,596 89,336 (46,670) 491,176
--------- ---------- --------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................... (93,030) (113,260) (98,816) (59,228) (15,176)
Proceeds from sales of property and equipment ......... - - 12,575 -- --
--------- ---------- --------- ---------- ----------
Net cash used in investing activities ............... (93,030) (113,260) (86,241) (59,228) (15,176)
--------- ---------- --------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term obligations ......... - - (25,400) -- --
Proceeds from issuance of long-term obligations and
loan payable to shareholder........................... - 68,600 30,000 5,600 (23,990)
---------- ---------- --------- ---------- ----------
Net cash provided (used in) by financing activities - 68,600 4,600 5,600 (23,990)
---------- ---------- --------- ---------- ----------
NET (DECREASE) INCREASE IN CASH ........................ (49,565) 106,936 7,695 (100,298) 452,010
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 $ (25,383) $ 534,620
========== ========== ========= ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for-
Interest ............................................. $ 3,681 $ 10,438 $ 2,891 $ 2,679 $ 945
Income taxes ......................................... 11,474 - (1,238) -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<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 $138,000, $145,000, $205,000 and $196,000 during the years ended November
30, 1994, 1995 and 1996 and the nine months ended August 31, 1997, respectively.
F-35
<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 August 31, 1997, and for the nine months
ended August 31, 1996 and 1997, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED NOVEMBER 31,
USEFUL LIVES ----------------------------
(YEAR) 1995 1996
------------- ------------ -------------
<S> <C> <C> <C>
Furniture, fixtures and equipment ....... 5-7 $ 551,735 $ 635,770
Leasehold improvements .................. 5-7 163,511 165,719
Signs ................................... 5 15,477 15,477
Vehicles ................................ 3-5 94,378 72,073
--------- ----------
825,101 889,039
Less- Accumulated depreciation .......... (551,273) (602,202)
--------- ----------
$ 273,828 $ 286,837
========= ==========
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30,
----------------------------
1995 1996
------------- ------------
<S> <C> <C>
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
=========== ===========
</TABLE>
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-36
<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:
<TABLE>
<S> <C>
Year ending November 30,
1997 ................... $ 14,400
1998 ................... 14,400
1999 ................... 14,400
---------
$ 43,200
=========
</TABLE>
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:
<TABLE>
<CAPTION>
NOVEMBER 30,
-----------------------------------------
1994 1995 1996
-------------- ----------- ----------
<S> <C> <C> <C>
Current ...... $ (38,738) $ 18,734 $ 15,407
Deferred ...... 185,105 109,367 178,534
---------- --------- ---------
$ 146,367 $ 128,101 $ 193,941
========== ========= =========
</TABLE>
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>
NOVEMBER 30,
--------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
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%
===== ===== =====
</TABLE>
F-37
<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:
<TABLE>
<S> <C>
Year ending November 30,
1997 .................. $ 195,280
1998 .................. 223,279
1999 .................. 157,946
2000 .................. 138,946
Thereafter ............ 389,847
----------
$1,105,298
==========
</TABLE>
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-38
<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-39
<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-40
<PAGE>
CRYSTAL GALLERIA, INC. AND BASE, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1995 1996 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ..................................................... $ 371,022 $ 165,745 $ 164,789
Accounts receivable, related party ....................... -- 33,204 8,143
Merchandise inventories .................................. 800,819 1,195,904 1,217,276
Prepaid expenses and other current assets ................ 156,921 121,710 36,649
---------- ---------- ----------
Total current assets ................................... 1,328,762 1,516,563 1,426,857
PROPERTY AND EQUIPMENT, net ............................... 415,492 655,857 631,770
OTHER ASSETS .............................................. -- -- 15,134
---------- ---------- -----------
Total assets ........................................... $1,744,254 $2,172,420 $2,073,761
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Customer deposits ........................................ $ 3,203 $ 11,645 $ 14,495
Accounts payable and accrued liabilities ................. 566,660 431,186 266,945
Current maturities of long-term obligations .............. 287,093 473,101 438,655
Payable to stockholders .................................. 403,000 983,168 1,163,168
---------- ---------- ----------
Total current liabilities .............................. 1,259,956 1,899,100 1,883,263
LONG-TERM OBLIGATIONS, net of current maturities 147,635 117,190 101,782
---------- ---------- ----------
Total liabilities ...................................... 1,407,591 2,016,290 1,985,045
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 80,716
---------- ---------- ----------
Total stockholders' equity ............................. 336,663 156,130 88,716
---------- ---------- ----------
Total liabilities and stockholders' equity ............. $1,744,254 $2,172,420 $2,073,761
========== ========== ==========
</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 OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES ....................... $2,503,075 $2,794,361 $3,727,285 $1,604,077 $2,050,079
COST OF SALES ................... 1,187,898 1,333,177 1,784,916 761,336 973,374
---------- ---------- ---------- ---------- ----------
Gross profit ................. 1,315,177 1,461,184 1,942,369 842,741 1,076,705
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ........ 730,906 875,180 1,564,229 666,158 867,682
---------- ---------- ---------- ---------- ----------
Income from operations ....... 584,271 586,004 378,140 176,583 209,023
OTHER EXPENSE:
Interest expense ............... 38,596 58,337 111,389 22,712 76,437
Other, net ..................... -- -- 12,284 12,284 --
---------- ---------- ---------- ---------- ----------
NET INCOME ...................... $ 545,675 $ 527,667 $ 254,467 $ 141,587 $ 132,586
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-42
<PAGE>
CRYSTAL GALLERIA, INC. AND BASE, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT 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) ............ -- -- 132,586 132,586
Distributions (unaudited) ......... -- -- (200,000) (200,000)
--- ------ ---------- ----------
BALANCE AT JUNE 30, 1997
(unaudited) ....................... 800 $8,000 $ 80,716 $ 88,716
=== ====== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-43
<PAGE>
CRYSTAL GALLERIA, INC. AND BASE, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------- SIX MONTHS ENDED
JUNE 30,
--------------------------
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 $ 141,587 $ 132,586
Adjustments to reconcile net income to net cash
provided by (used in) operating activities- ....
Depreciation and amortization .................. 24,845 28,201 74,818 46,046 44,808
Changes in operating assets and liabilities- ...
Accounts receivable, related parties .......... (8,543) 13,638 (33,204) (7,825) 25,061
Merchandise inventories ....................... (104,774) (218,350) (395,085) (66,356) (21,372)
Prepaid expenses and other current assets ..... (1,737) (110,361) 35,211 63,228 85,061
Other assets .................................. -- -- -- -- (15,134)
Customer deposits ............................. 6,333 (4,356) 8,442 8,550 2,850
Accounts payable and accrued liabilities ...... (109,183) 426,441 (135,474) (397,646) (164,241)
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) operating
activities ................................. 352,616 662,880 (190,825) (212,416) 89,619
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .............. (11,918) (281,936) (315,183) (5,638) (20,721)
Proceeds from sale of property and equipment ..... 2,441 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net cash used in investing activities ........ (9,477) (281,936) (315,183) (5,638) (20,721)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term obligations
and payable to stockholders .................... -- 506,000 830,168 250,000 180,000
Principal payments on payable to stockholders and
long-term obligations .......................... (56,055) (35,367) (94,437) (31,871) (49,854)
Proceeds from issuance of common stock ........... -- 4,000 -- -- --
Distributions to stockholders .................... (288,500) (616,000) (435,000) (255,000) (200,000)
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) financing
activities ................................. (344,555) (141,367) 300,731 (36,871) (69,854)
---------- ---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH ................... (1,416) 239,577 (205,277) (254,925) (956)
CASH, beginning of period ......................... 132,861 131,445 371,022 371,022 165,745
---------- ---------- ---------- ---------- ----------
CASH, end of period ............................... $ 131,445 $ 371,022 $ 165,745 $ 116,097 $ 164,789
========== ========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest ......... $ 67,459 $ 42,703 $ 37,915 $ 16,284 $ 50,234
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-44
<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 $20,108 for the six months ended June
30, 1997.
F-45
<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 June 30, 1997, and for the six months
ended June 30, 1996 and 1997, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results 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-46
<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
$1,163,168 at December 31, 1995 and 1996 and June 30, 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 11.50 percent at June 30, 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:
<TABLE>
<S> <C>
Year ending December 31,
1997 .................. $473,101
1998 .................. 48,660
1999 .................. 48,660
2000 .................. 19,870
--------
$590,291
========
</TABLE>
F-47
<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 $317,000 for the six months ended June 30, 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 $44,000
for the six months ended June 30, 1997. Future minimum lease payments under
noncancelable operating leases are as follows:
<TABLE>
<S> <C>
Year ending December 31,
1997 .................. $ 433,532
1998 .................. 435,192
1999 .................. 459,043
2000 .................. 473,278
Thereafter ............ 2,139,977
-----------
$3,941,022
===========
</TABLE>
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 $7,000 as of June 30, 1997, from a company that is wholly
owned by one of the stockholders of the Companies.
8. SIGNIFICANT SUPPLIERS:
During the years ended December 31, 1994 and 1995, one supplier accounted for 11
percent of total inventory purchases, and during the year ended December 31,
1996, two suppliers accounted for 29 percent of total inventory purchases.
F-48
<PAGE>
CRYSTAL GALLERIA, INC. AND BASE, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED )
9. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
The Companies and their stockholders have entered into a definitive agreement
with Collectibles providing for the acquisition of the Companies by
Collectibles.
In connection with the acquisition, the Companies will distribute certain assets
to the stockholders, consisting of automobiles with a total net carrying value
of approximately $5,653 as of December 31, 1996. Additionally, the Companies
will make a cash distribution of approximately $250,000 prior to the acquisition
which represents the Companies' estimated S Corporation accumulated adjustment
account. Had these transactions been recorded at December 31, 1996, the effect
on the accompanying balance sheet would be a decrease in assets of approximately
$5,653 an increase in liabilities of approximately $250,000, and stockholders'
equity of $255,653. The Companies anticipate funding this distribution through
additional borrowings.
F-49
<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-50
<PAGE>
DKG ENTERPRISES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
--------------------------- JUNE 30,
1996 1997 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash .................................................. $ 3,160 $ 11,274 $ 13,098
Accounts receivable ................................... -- 11,593 18,552
Merchandise inventories ............................... 1,749,476 2,200,281 2,526,844
Receivable from shareholder ........................... -- 21,504 23,104
Prepaid expenses and other current assets ............. 9,133 15,833 421
----------- ----------- -----------
Total current assets ................................ 1,761,769 2,260,485 2,582,019
PROPERTY AND EQUIPMENT, net ............................ 112,512 212,417 193,302
OTHER ASSETS ........................................... 3,225 3,225 6,802
----------- ----------- -----------
Total assets ........................................ $1,877,506 $2,476,127 $2,782,123
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Customer deposits ..................................... $ 14,753 $ 127,800 $ 188,504
Accounts payable and accrued liabilities .............. 340,719 561,634 613,828
Federal income taxes payable .......................... 29,414 119,939 280,983
Line of credit ........................................ 395,000 410,000 520,000
Current maturities of long-term obligations ........... 31,459 32,989 33,516
----------- ----------- -----------
Total current liabilities ........................... 811,345 1,252,362 1,636,831
LONG-TERM OBLIGATIONS, net of current maturities ....... 380,329 346,989 338,137
DEFERRED INCOME TAXES .................................. 76,539 8,103 8,103
----------- ----------- -----------
Total liabilities ................................... 1,268,213 1,607,454 1,983,071
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $1.00 par, 25,000 shares authorized,
500 shares outstanding .............................. 500 500 500
Retained earnings ..................................... 608,793 868,173 798,552
----------- ----------- -----------
Total shareholders' equity .......................... 609,293 868,673 799,052
----------- ----------- -----------
Total liabilities and shareholders' equity .......... $1,877,506 $2,476,127 $2,782,123
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE>
DKG ENTERPRISES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
-------------------------------------- --------------------------
1995 1996 1997 1996 1997
------------ ------------ ------------ ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES ............................ $2,562,024 $2,865,249 $3,726,332 $ 483,795 $ 557,681
COST OF SALES ........................ 1,371,039 1,491,639 1,732,631 244,658 277,009
---------- ---------- ---------- ---------- ----------
Gross profit ..................... 1,190,985 1,373,610 1,993,701 239,137 280,672
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ............................ 989,561 1,077,684 1,521,669 255,864 373,653
---------- ---------- ---------- ---------- ----------
Income from operations ........... 201,424 295,926 472,032 (16,727) (92,981)
OTHER INCOME (EXPENSE):
Interest expense .................... (40,846) (57,511) (82,311) (23,959) (15,807)
Other, net .......................... 7,730 10,367 37,703 407 648
---------- ---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES ........... 168,308 248,782 427,424 (40,279) (108,140)
PROVISION (BENEFIT) FOR INCOME TAXES.. 66,240 96,139 168,044 (15,836) (38,519)
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS) .................... $ 102,068 $ 152,643 $ 259,380 $ (24,443) $ (69,621)
========== ========== ========== =========- ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<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
Net loss (unaudited) ...................... -- -- (69,621) (69,621)
---- ----- --------- ---------
BALANCE AT JUNE 30, 1997 (unaudited) ....... 500 $500 $798,552 $ 799,052
==== ===== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-53
<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 (loss) .......................................... $ 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)
Deferred offering costs .................................. -- -- --
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
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
---------------------------
1996 1997
------------- -------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .......................................... $ (24,443) $ (69,621)
Adjustments to reconcile net income to net cash provided
by (used in) operating activities-
Depreciation ............................................. 15,788 19,115
Gain on sale of assets .................................... -- --
Conversion of interest to debt ........................... -- --
Changes in operating assets and liabilities-
Accounts receivable .................................... (300) (6,959)
Merchandise inventories ................................. (40,873) (326,563)
Prepaid expenses and other current assets ............... (97,176) 13,812
Deferred offering costs ................................. -- (3,577)
Customer deposits ....................................... 15,724 60,704
Accounts payable, accrued liabilities and federal
income taxes payable ................................. 184,642 213,238
Deferred income taxes .................................... (76,539) --
--------- -----------
Net cash provided by (used in) operating activities .... (23,177) (99,851)
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ........................ (74,071) --
Proceeds from sale of property and equipment ............... -- --
--------- -----------
Net cash used in investing activities .................. (74,071) --
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term obligations ............... (7,439) (73,325)
Proceeds from issuance of long-term obligations and
borrowings on line of credit .............................. 130,000 175,000
--------- -----------
Net cash provided by (used in) financing activities .... 122,561 101,675
--------- -----------
NET INCREASE IN CASH ....................................... 25,313 1,824
CASH, beginning of period ................................. 3,160 11,274
--------- -----------
CASH, end of period ....................................... $ 28,473 $ 13,098
========= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for-
Interest ................................................ $ 23,959 $ 15,807
Income taxes ............................................. -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<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. Advertising expense for the three months
ended June 30, 1997 was approximately $48,000.
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-55
<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
LIVES
(YEARS) MARCH 31,
---------- ----------------------------
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:
<TABLE>
<CAPTION>
MARCH 31,
------------------------
1996 1997
----------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
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-56
<PAGE>
DKG ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
At March 31, 1997, future principal payments of long-term obligations are as
follows:
<TABLE>
<S> <C>
Year ending March 31,
1998 ............... $ 32,989
1999 ............... 38,774
2000 ............... 42,728
2001 ............... 47,085
Thereafter ......... 218,402
---------
$379,978
=========
</TABLE>
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:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------------------
1995 1996 1997
---------- ---------- ------------
<S> <C> <C> <C>
Current ..................................... $ 65,519 $ 63,259 $ 236,479
Deferred ..................................... 721 32,880 (68,435)
--------- --------- ---------
$ 66,240 $ 96,139 $ 168,044
========= ========= =========
</TABLE>
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-57
<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:
<TABLE>
<S> <C>
Year ending March 31,
1998 ............... $50,964
1999 ............... 10,220
--------
$61,184
========
</TABLE>
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-58
<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-59
<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-60
<PAGE>
ELWELL STORES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------- ------------
1995 1996 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ........................................................ $ 69,406 $ 113,084 $ 90,567
Merchandise inventories ..................................... 510,354 853,733 829,871
Prepaid expenses and other current assets ................... 3,957 2,064 1,873
---------- ---------- ----------
Total current assets ...................................... 583,717 968,881 922,311
PROPERTY AND EQUIPMENT, net .................................. 144,884 122,756 113,695
OTHER ASSETS ................................................. 7,197 5,375 20,056
---------- ---------- ----------
Total assets .............................................. $ 735,798 $1,097,012 $1,056,062
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Customer deposits ........................................... $ -- $ 10,021 $ 5,122
Accounts payable and accrued liabilities .................... 416,863 634,367 535,049
Current maturities of long-term obligations ................. 72,377 153,303 305,246
---------- ---------- ----------
Total current liabilities ................................. 489,240 797,691 845,417
LONG-TERM OBLIGATIONS, net of current maturities ............. 353,730 368,333 340,132
---------- ---------- ----------
Total liabilities ......................................... 842,970 1,166,024 1,185,549
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) (229,262)
---------- ---------- ----------
Total shareholders' (deficit) equity ...................... (107,172) (69,012) (129,487)
---------- ---------- ----------
Total liabilities and shareholders' (deficit) equity ...... $ 735,798 $1,097,012 $1,056,062
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-61
<PAGE>
ELWELL STORES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ---------------------------
1995 1996 1996 1997
------------ ------------ ------------ --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES ......................... $1,838,788 $2,492,809 $1,178,459 $1,299,180
COST OF SALES ..................... 1,101,758 1,301,468 609,757 677,939
----------- ----------- ---------- ----------
Gross profit ................... 737,030 1,191,341 568,702 621,241
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ......................... 628,543 934,764 442,136 515,539
----------- ----------- ---------- ----------
Income from operations ......... 108,487 256,577 126,566 105,702
OTHER (INCOME) EXPENSE:
Interest expense ................. 41,058 48,826 19,664 23,469
Other, net ....................... 95 11,520 (322) (338)
----------- ----------- ---------- ----------
NET INCOME ........................ $ 67,334 $ 196,231 $ 107,224 $ 82,571
=========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<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 income (unaudited) ............ -- -- -- 82,571 82,571
Distributions (unaudited) ......... -- -- -- (143,046) (143,046)
---- ----- -------- ---------- ----------
BALANCE AT JUNE 30, 1997 (unaudited). 100 $500 $99,275 $ (229,262) $ (129,487)
==== ===== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-63
<PAGE>
ELWELL STORES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------- SIX MONTHS ENDED
JUNE 30,
------------------------
1995 1996 1996 1997
------------- ------------ ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .......................................... $ 67,334 $ 196,231 $ 107,224 $ 82,571
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation and amortization ............................ 31,283 39,168 14,215 9,592
Loss on sale of assets ................................... -- 11,880 -- --
Changes in operating assets and liabilities-..............
Merchandise inventories ................................. (113,546) (343,379) (134,605) 23,862
Prepaid expenses and other current assets ............... (1,541) 1,893 (5,964) 191
Customer deposits ....................................... -- 10,021 -- (4,899)
Accounts payable and accrued liabilities ................ 120,475 217,504 51,342 (99,318)
Other assets ............................................ (1,707) 1,822 (1,144) (14,681)
---------- ---------- ---------- ----------
Net cash provided by operating activities .............. 102,298 135,140 31,068 (2,682)
---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ........................ (120,475) (63,420) (45,232) (531)
Proceeds from sale of property and equipment ............... 15,884 34,500 -- --
---------- ---------- ---------- ----------
Net cash used in investing activities .................. (104,591) (28,920) (45,232) (531)
---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term obligations ............ 453,666 590,009 -- --
Principal payments on long-term obligations ................ (314,834) (494,480) 79,665 123,742
Distributions to shareholders .............................. (99,476) (158,071) (53,925) (143,046)
---------- ---------- ---------- ----------
Net cash provided by (used in) financing activities .... 39,356 (62,542) 25,740 (19,304)
---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH ............................. 37,063 43,678 11,576 (22,517)
CASH, beginning of period ................................... 32,343 69,406 69,406 113,084
---------- ---------- ---------- ----------
CASH, end of period ......................................... $ 69,406 $ 113,084 $ 80,982 $ 90,567
========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest ................... $ 41,058 $ 48,826 $ 19,664 $ 23,469
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-64
<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 $89,000 during the years ended December
31, 1995 and 1996 and the six months ended June 30, 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-65
<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 June 30, 1997, and for the six months
ended June 30, 1996 and 1997, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
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-66
<PAGE>
ELWELL STORES, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED )
5. LONG-TERM OBLIGATIONS:
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
1995 1996
----------- -------------
<S> <C> <C>
Bank term loan due in monthly installments, including interest at prime plus
2% (11.25% at December 31, 1995), repaid in 1996 ........................ $368,269 $ --
Bank term loans due in monthly installments through November 2000,
including interest ranging from 7.5% to 10% .............................. 57,838 39,027
Note payable to bank, interest at 10.15%, principal and interest due
September 1997 ............................................................ -- 99,650
Bank term loan due in monthly installments, including interest at 8.25%,
through April 2004 ...................................................... -- 382,959
--------- ----------
426,107 521,636
Less- Current maturities ................................................... (72,377) (153,303)
--------- ----------
Long-term obligations, net of current maturities ........................ $353,730 $ 368,333
========= ==========
</TABLE>
The bank term loans are collateralized by personal guarantees of the
shareholders as well as the Company's property and equipment, and inventory.
The note payable due September 1997 is unsecured.
The Company maintains a $180,000 line of credit which expires in August 1998.
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 June 30,
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:
<TABLE>
<S> <C>
Year ending December 31,
1997 .................. $153,303
1998 .................. 57,049
1999 .................. 53,909
2000 .................. 54,497
Thereafter ............ 202,878
---------
$521,636
=========
</TABLE>
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.
<TABLE>
<S> <C>
Year ending December 31,
1997 .................. $ 94,134
1998 .................. 96,360
1999 .................. 93,765
2000 .................. 97,515
Thereafter ............ 101,417
---------
$483,191
=========
</TABLE>
F-67
<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-68
<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-69
<PAGE>
ANIMATION U.S.A., INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
-------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash .............................................................. $ 4,824 $ 28,774
Accounts receivable ............................................... -- 49,772
Merchandise inventories ........................................... 321,653 303,910
Prepaid expenses and other current assets ......................... 6,994 8,940
Deferred tax asset ................................................ 25,319 30,213
---------- ----------
Total current assets ............................................ 358,790 421,609
PROPERTY AND EQUIPMENT, net ........................................ 72,176 66,379
OTHER ASSETS ....................................................... -- 26,408
---------- ----------
Total assets .................................................... $ 430,966 $ 514,396
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Customer deposits ................................................. $ 13,775 $ 20,066
Accounts payable and accrued liabilities .......................... 231,714 281,376
Federal income taxes payable ...................................... 32,835 19,863
Line of credit .................................................... 72,494 92,597
Current maturities of long-term obligations ....................... 38,454 38,454
---------- ----------
Total current liabilities ....................................... 389,272 452,356
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) (130,660)
---------- ----------
Total shareholders' equity ...................................... 41,694 62,040
---------- ----------
Total liabilities and shareholders' equity ...................... $ 430,966 $ 514,396
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-70
<PAGE>
ANIMATION U.S.A., INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, ----------------------
1996 1996 1997
------------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C>
NET SALES ......................... $1,716,410 $834,654 $671,603
COST OF SALES ..................... 840,283 394,472 255,172
----------- --------- ---------
Gross profit ..................... 876,127 440,182 416,431
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ......................... 845,100 410,502 371,544
----------- --------- ---------
Income from operations ........... 31,027 29,680 44,887
OTHER EXPENSE:
Interest expense ................. 9,349 3,368 5,402
----------- --------- ---------
INCOME BEFORE INCOME TAXES ........ 21,678 26,312 39,485
PROVISION FOR INCOME TAXES ........ 8,944 10,856 14,969
----------- --------- ---------
NET INCOME ........................ $ 12,734 $ 15,456 $ 24,516
=========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-71
<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) ......... -- -- -- -- 24,516 24,516
Distributions (unaudited) ...... -- -- -- -- (4,170) (4,170)
-------- -------- -------- --------- ---------- --------
BALANCE AT JUNE 30, 1997
(unaudited) ..................... 196,840 $85,200 500,000 $107,500 $ (130,660) $ 62,040
======== ======== ======== ========= ========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-72
<PAGE>
ANIMATION U.S.A., INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -------------------------
1996 1996 1997
------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................................. $ 12,734 $ 15,456 $ 24,516
Adjustments to reconcile net income to net cash used in operating activities-
Depreciation ............................................................... 12,057 6,028 6,028
Changes in operating assets and liabilities-
Accounts receivable ...................................................... -- -- (49,772)
Merchandise inventories ................................................... (19,765) (29,362) 17,743
Prepaid expenses and other current assets ................................. -- -- (1,946)
Deferred tax asset ........................................................ (6,932) (11,173) (4,894)
Other assets .............................................................. -- -- (26,408)
Customer deposits ......................................................... (19,754) (17,642) 6,291
Accounts payable and accrued liabilities .................................. (55,882) (13,000) 49,662
Federal income taxes payable .............................................. 6,691 (7,531) (12,972)
--------- --------- ---------
Net cash (used in) provided by operating activities ...................... (70,851) (57,224) 8,248
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .......................................... (28,862) -- (231)
--------- --------- ---------
Net cash used in investing activities ..................................... (28,862) -- (231)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on line of credit and current maturities of long-term
obligations ................................................................ (18,860) (17,924) --
Proceeds from issuance of line of credit and current obligations ............. 46,454 -- 20,103
Distributions to shareholders ................................................ (8,964) (5,270) (4,170)
--------- --------- ---------
Net cash provided by financing activities ................................. 18,630 (23,194) 15,933
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH ............................................... (81,083) (80,418) 23,950
CASH, beginning of period ..................................................... 85,907 85,907 4,824
--------- --------- ---------
CASH, end of period ........................................................... $ 4,824 $ 5,489 $ 28,774
========= ========= =========
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 3,368 5,402
Income taxes ............................................................... 2,253 -- 17,358
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-73
<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 $15,000 for the six months
ended June 30, 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-74
<PAGE>
ANIMATION U.S.A., INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED )
Interim Financial Information
The interim financial statements as of June 30, 1997, and for the six months
ended June 30, 1996 and 1997, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
3. PROPERTY AND EQUIPMENT:
Property and equipment 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:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
-------------
<S> <C>
Accounts payable, trade ...... $ 69,482
Accrued compensation ......... 150,000
Other ........................ 12,232
---------
$231,714
=========
</TABLE>
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 $72,000 and $91,000 at December 31, 1996, and June 30,
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 $16,000 bearing
interest at 10.75% and 8.49%, respectively, maturing through July 2002.
F-75
<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:
<TABLE>
<S> <C>
Current ........ $8,944
Deferred ....... --
-------
$8,944
=======
</TABLE>
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>
<S> <C>
Statutory federal rate ......................... 34.0%
Expenses not deductible for tax purposes ....... 5.0
State income taxes ............................. 2.3
------
41.3%
======
</TABLE>
The significant components of the deferred tax asset at December 31, 1996, are
as follows:
<TABLE>
<S> <C>
Deferred tax asset-
Accrued liabilities ............ $14,421
Other .......................... 10,898
--------
Total deferred tax asset ....... $25,319
========
</TABLE>
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-76
<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:
<TABLE>
<S> <C>
Year ending December 31,
1997 .................. $127,720
1998 .................. 41,372
1999 .................. 7,161
---------
$176,253
=========
</TABLE>
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-77
<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-78
<PAGE>
FILMART PRODUCTIONS INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1995 1996 1997
----------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash .................................................. $ 29,981 $ 76,758 $ 36,419
Accounts receivable ................................... 17,073 13,116 16,467
Barter receivables .................................... 8,788 199,930 203,092
Merchandise inventories ............................... 396,298 375,258 372,759
Prepaid expenses and other current assets ............. 1,412 37,153 3,912
Prepaid advertising from barter transactions .......... 60,000 285,000 432,500
Advances to shareholder ............................... -- 176,722 188,206
--------- ----------- -----------
Total current assets ................................ 513,552 1,163,937 1,253,355
PROPERTY AND EQUIPMENT, net ............................ 52,897 36,521 29,120
OTHER ASSETS ........................................... 5,750 7,172 57,727
--------- ----------- -----------
Total assets ........................................ $572,199 $1,207,630 $1,340,202
========== ============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Customer deposits ..................................... $ 53,619 $ 32,778 $ 6,101
Accounts payable and accrued liabilities .............. 75,503 129,747 150,215
Payable to shareholder ................................ 109,976 25,444 27,752
--------- ----------- -----------
Total current liabilities ........................... 239,098 187,969 184,068
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par, 200 shares authorized, 100 shares
outstanding ......................................... -- -- --
Retained earnings ..................................... 333,101 1,019,661 1,156,134
--------- ----------- -----------
Total shareholders' equity .......................... 333,101 1,019,661 1,156,134
--------- ----------- -----------
Total liabilities and shareholders' equity .......... $572,199 $1,207,630 $1,340,202
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-79
<PAGE>
FILMART PRODUCTIONS INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- --------------------
1995 1996 1996 1997
------------- ------------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES ........................ $1,053,089 $1,445,848 $541,146 $514,504
COST OF SALES .................... 511,369 497,920 203,156 191,233
---------- ---------- -------- ---------
Gross profit .................. 541,720 947,928 337,990 323,271
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ......... 492,577 539,178 220,916 300,036
---------- ---------- -------- ---------
Income from operations ........ 49,143 408,750 117,074 23,235
OTHER INCOME (EXPENSE):
Interest (expense) income ....... (4,619) (1,056) (528) 738
Other, net ...................... 74,350 278,866 166,687 112,500
---------- ---------- -------- ---------
NET INCOME ....................... $ 118,874 $ 686,560 $283,233 $136,473
========== ========== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-80
<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) ..................... -- -- 136,473 136,473
---- ---- ---------- ----------
BALANCE AT JUNE 30, 1997 (unaudited) ......... 100 $-- $1,156,134 $1,156,134
==== ==== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-81
<PAGE>
FILMART PRODUCTIONS INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------ --------------------------
1995 1996 1996 1997
----------- ------------ ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income ............................................. $ 118,874 $ 686,560 $ 283,233 $ 136,473
Adjustments to reconcile net income to net cash provided
by operating activities- ...........................
Depreciation and amortization ........................ 17,919 16,226 6,750 8,112
Changes in operating assets and liabilities- .........
Accounts receivable ................................. (17,073) 3,957 16,373 (3,351)
Barter receivables ................................. (8,788) (191,142) (6,601) (3,162)
Merchandise inventories ........................... (18,935) 21,040 (17,780) 2,499
Prepaid expenses and other current assets ......... (1,412) (35,741) (175,243) 33,241
Prepaid advertising from barter transactions ...... (60,000) (225,000) 60,000 (147,500)
Other assets ....................................... (5,350) (1,422) (50,555)
Advances to shareholder ........................... -- (176,722) (117,166) (11,484)
Customer deposits ................................. 53,619 (20,841) (3,424) (26,677)
Accounts payable and accrued liabilities ............ (30,947) 54,244 (44,491) 20,468
--------- ---------- ---------- ----------
Net cash provided by (used in) operating activities. 47,907 131,159 1,651 (41,936)
--------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and equipment .................. (15,989) (150) -- (711)
Proceeds from sale of property and equipment ......... -- 300 4,142 --
--------- ---------- ---------- ----------
Net cash provided by (used in) investing activities. (15,989) 150 4,142 (711)
--------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of payable to shareholder ...... 40,625 -- 80,577 2,308
Principal payments on payable to shareholder ......... (20,624) (84,532) (109,976) --
Distributions to shareholders ........................ (50,853) -- -- --
--------- ---------- ---------- ----------
Net cash provided by (used in) financing activities. (30,852) (84,532) (29,399) 2,308
--------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH ........................ 1,066 46,777 (23,606) (40,339)
CASH, beginning of period .............................. 28,915 29,981 29,981 76,758
--------- ---------- ---------- ----------
CASH, end of period .................................... $ 29,981 $ 76,758 $ 6,375 $ 36,419
========= ========== ========== ==========
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 -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-82
<PAGE>
FILMART PRODUCTIONS INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Filmart Productions Inc. (the Company) d/b/a Cartoon World, d/b/a Filmart
Galleries and d/b/a Animation Art Resources is a retail marketer of animation
art such as vintage original production cels, limited edition cels and sericels.
Filmart has been in operation since 1991 and has two free-standing galleries, of
which one is located in Philadelphia, Pennsylvania and one is located in
Huntington, New York.
Effective January 1, 1996, the Company acquired Animation Collection, Inc. d/b/a
Animation Art Resources. The acquisition was accounted for as a pooling of
interests, and the assets, liabilities and results of operations of Animation
Art Resources have been included in the accompanying financial statements for
all years presented.
Although the Company's business is not seasonal, sales fluctuations between
quarters do occur and are largely the result of the timing and frequency of
in-store artists signings and other promotional events.
The Company and its shareholders intend to enter into a definitive agreement
with Collectibles USA, Inc. (Collectibles), pursuant to which all outstanding
shares of the Company's common stock will be exchanged for cash and shares of
Collectibles common stock concurrent with the consummation of the initial public
offering of the common stock of Collectibles.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Merchandise Inventories
Merchandise inventories are stated at the lower of cost or market, determined by
the specific identification method. Additionally, Filmart holds inventory on
consignment. Consigned inventory was valued at approximately $214,000, $364,000
and $486,000 as of December 31, 1995, 1996 and June 30, 1997, respectively.
Inventory held on consignment is excluded from Filmart's inventory.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is determined using
the straight-line method based on the estimated useful life of the respective
asset. Expenditures for major renewals and betterments are capitalized while
maintenance and repairs are expensed. When property is retired or otherwise
disposed of, the related cost and accumulated depreciation are removed from the
accounts and any resulting gain or loss is reflected in the statements of
operations.
Revenue Recognition
The Company recognizes revenue from sales upon delivery of merchandise to the
customer and receipt of payment. Customer deposits consist of collections on
layaway sales. Upon receipt of final payment, the item is delivered to the
customer and the sale is recorded as revenue.
Barter Transactions
The Company is a member of several barter companies. Within each barter company,
the Company trades artwork for various goods and services from other barter
company members. Barter transactions involving artwork for various goods and
services are valued at the market value of the goods or services received. The
Company had approximately $32,000, $248,000 and $29,000 of art sales through the
barter companies and received approximately $28,000, $37,000 and $27,000 of
goods and services through the barter companies during the years ended December
31, 1995 and 1996, and the six months ended June 30, 1997, respectively. As of
December 31, 1995, 1996, and the six months ended June 30, 1997 the Company had
barter receivables of approximately $9,000, $200,000 and $202,000, respectively.
F-83
<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 six months ended June 30, 1997, the Company recognized $75,000, $225,000
and $113,000, respectively, of consulting revenue as other income. At December
31, 1995 and 1996 and June 30, 1997, the Company had prepaid advertising
expenses of $60,000, $285,000 and $398,000, 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 $42,000 during the years ended December
31, 1995 and 1996 and the six months ended June 30, 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 June 30, 1997, and for the six months
ended June 30, 1996 and 1997, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
F-84
<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:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Accounts payable, trade ...... $ 44,279 $ 113,466
Taxes payable ............... 11,251 6,354
Other ........................ 19,973 9,927
--------- ----------
$ 75,503 $ 129,747
========= ==========
</TABLE>
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:
<TABLE>
<S> <C>
Year ending December 31,
1997 .................. $ 47,328
1998 .................. 49,128
1999 .................. 16,576
----------
$ 113,032
==========
</TABLE>
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-85
<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-86
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
======================================================= ====================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY 2,700,000 SHARES
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 [LOGO]
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE COLLECTIBLES USA, INC.
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF
OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE SUCH DATE.
------------------ COMMON STOCK
TABLE OF CONTENTS
PAGE
-----
Prospectus Summary ........................... 3
Risk Factors ................................. 10 -------------
The Company .................................... 18 PROSPECTUS
Use of Proceeds .............................. 21 -------------
Dividend Policy .............................. 21
Dilution ....................................... 22
Capitalization ................................. 23
Selected Financial Data ........................ 24
Management's Discussion and Analysis of
Financial Condition and Results of Operations 26
Business ....................................... 41
Management .................................... 51
Certain Transactions ........................... 60
Principal Stockholders ........................ 64
Description of Capital Stock .................. 65 LADENBURG THALMANN & CO. INC.
Shares Eligible for Future Sale ............... 68 EVEREN SECURITIES, INC.
Underwriting ................................. 70 STEPHENS INC.
Legal Matters ................................. 72
Experts ....................................... 72
Additional Information ........................ 72
Index to Financial Statements .................. F-1 , 1997
------------------
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.
====================================================== ====================================================
</TABLE>
<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.
<TABLE>
<S> <C>
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 ............................................. $ *
=======
</TABLE>
- ----------
* To be completed by amendment.
ITEM 14. Indemnification of Directors and Officers.
The Company's by-laws provide that the Company shall indemnify, to the
fullest extent permitted by Section 145 of the Delaware General Corporation Law,
as amended from time to time, all persons whom it may indemnify pursuant
thereto.
Section 145 of the Delaware General Corporation Law permits a corporation,
under specified circumstances, to indemnify its directors, officers, employees
or agents against expenses (including attorney's fees), judgments, fines and
amounts paid in settlements actually and reasonably incurred by them in
connection with any action (other than an action by or in the right of the
corporation), suit or proceeding brought by third parties by reason of the fact
that they were or are directors, officers, employees or agents of the
corporation, if such directors, officers, employees or agents acted in good
faith and in a manner they reasonably believed to be in or not opposed to the
best interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe their conduct was unlawful. In a
derivative action (i.e., one by or in the right of the corporation),
indemnification may be made only for expenses (including attorney's fees)
actually and reasonably incurred by persons who are or were directors, officers,
employees or agents of the corporation in connection with the defense or
settlement of an action or suit, and only with respect to any matter as to which
they shall have acted in good faith and in a manner they reasonably believed to
be in or not opposed to the best interests of the corporation, except that no
indemnification shall be made if such person shall have been adjudged liable to
the corporation, unless and only to the extent that the Court of Chancery or the
court in which the action or suit was brought shall determine upon application
that the defendant directors, officers, employees or agents are fairly and
reasonably entitled to indemnity for such expenses despite such adjudication of
liability.
Article Seventh of the Company's charter provides that the Company's
directors will not be personally liable to the Company or its stockholders for
monetary damages resulting from breaches of their fiduciary duty as directors
except (a) for any breach of the duty of loyalty to the Company or its
stockholders, (b) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (c) under Section 174 of
the Delaware General Corporation Law, which makes directors liable for unlawful
dividends or unlawful stock repurchases or redemptions or (d) for transactions
from which directors derive improper personal benefit.
II-1
<PAGE>
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"):
On June 16, 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.
On November 20, 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 to accredited
investors 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 to accredited investors $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.
On August 6, 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.
On August 27, 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.
On June 12, 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.
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.
II-2
<PAGE>
In May 1997, Collectibles USA issued to 22 unaffiliated, accredited
investors 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, each share of 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 but one of the holders of the Series
A Convertible Preferred Stock have elected conversion option (ii) in the
preceding sentence. As a result, upon consummation of the Offering, the Series A
Convertible Preferred Stock will convert into approximately $1.0 million in cash
and 67,916 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 1,016,602 shares of Restricted
Vote 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 Sections 3(a)(9) and 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
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement
2.1** Form of Agreement and Plan of Organization (together with Schedule
identifying and distinguishing the substantially identical
documents which have been omitted herein as permitted by Item 601
of Regulation S-K)
3.1** Amended and Restated Certificate of Incorporation of the Company
3.2** Certificate of Designation of Series A Convertible Preferred Stock
3.3** Amended and Restated By-Laws of the Company
4.1** Form of Common Stock certificate of the Company
5.1* Opinion of Morgan, Lewis & Bockius LLP
10.1** Employment Agreement, dated as of May 9, 1997, between the Company
and Jerry Gladstone (together with Schedule identifying and
distinguishing the substantially identical documents which have
been omitted herein as permitted by Item 601 of Regulation S-K)
10.2** 1997 Long-Term Incentive Plan
10.3** 1997 Non-Employee Directors' Stock Plan
10.4** Consulting Agreement, dated as of June 12, 1997, between the
Company and RGR
10.5 Form of Representatives' Warrant
10.6** Employment Agreement, dated as of August 11, 1997, between the
Company and W. Randolph Ellspermann
10.7 Employment Agreement, dated as of August 11, 1997, between the
Company and Neil J. DePascal, Jr.
II-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- -------------------------------------------------------------------------------------------
<S> <C>
10.8** Licensing Agreement, dated March 26, 1996, between The Curtis
Publishing Company, Licensing Division and American Royal Arts
Corporation, together with Addendum No. 1 dated June 6, 1997
10.9** Garfield Exclusive Licensing Agreement, effective as of January 1,
1995, between Mendelson/Paws Productions and American Royal Arts
Corp., together with Amendment No. 1 dated May 7, 1996
10.10** Consignment Agreement, dated September 30, 1994, between Ross
Editions, Inc. and American Royal Arts Corp., together with
Amendment to Consignment Agreement, dated March 31, 1997
10.11 Agreement and Release, dated August 11, 1997, between the Company
and David L. Yankey
10.12 Employment Agreement, dated August 25, 1997, between the Company
and Shonnie Bilin
10.13 Trademark License Agreement dated June 15, 1987, between Hallmark
Cards Incorporated and Reef's Hallmark Shop (together with a
Schedule identifying and distinguishing the substantially
identical documents entered into by Stone's Hallmark which have
been omitted herein as permitted by Item 601 of Regulation S-K)
10.14 Commitment Letter dated as of October 7, 1997 between Collectibles
USA, Inc. and NationsBank of Texas, N.A.
21** List of Subsidiaries (including state of incorporation and trade
name(s)) of the Company
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Morgan, Lewis & Bockius LLP (contained in Exhibit 5.1)
24 Power of Attorney (contained in the signature page)
27 Financial Data Schedule
99.1** Consent of each of Michael A. Baker, Vincent J. Browne, Roy C.
Elwell, Jerry Gladstone, David K. Green, Paul Shirley, Susan M.
Spiegel and David Stone to use their names as director nominees
99.2** Consent of W. Randolph Ellspermann to use his name as a director
nominee
</TABLE>
- ----------
* To be filed by amendment.
** Previously filed.
(B) FINANCIAL STATEMENT SCHEDULES
Not applicable.
ITEM 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in such
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
II-4
<PAGE>
(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-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Amendment No. 2 to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on this 10th day of October, 1997.
COLLECTIBLES USA, INC.
BY: /s/ W. Randolph Ellspermann
--------------------------------------
W. Randolph Ellspermann
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby authorizes and constitutes each of W. Randolph Ellspermann, Neil J.
DePascal, Jr. and Ronald P. Rafaloff as his true and lawful attorney-in-fact
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities (including his capacity as a director
and/or officer of Collectibles USA, Inc. to sign and file any and all amendments
(including post-effective amendments) to the Registration Statement, and any
registration statement filed pursuant to Rule 462(b) of the Securities Act of
1933, with all exhibits thereto, and other documents in connection therewith
with the Securities and Exchange Commission, and he hereby ratifies and confirms
all that said attorney-in-fact or his substitutes, may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirement of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY IN WHICH SIGNED DATE
- ------------------------------ --------------------------------------- -----------------
<S> <C> <C>
/s/ W. Randolph Ellspermann President and Chief Executive Officer October 10, 1997
---------------------------- (Principal Executive Officer)
W. Randolph Ellspermann
/s/ Neil J. DePascal, Jr. Chief Financial Officer October 10, 1997
---------------------------- (Principal Financial and
Neil J. DePascal, Jr. Accounting Officer)
/s/ Ronald P. Rafaloff Chairman of the Board October 10, 1997
----------------------------
Ronald P. Rafaloff
</TABLE>
II-6
<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, dated as of May 9, 1997, between the
Company and Jerry Gladstone (together with Schedule identifying
and distinguishing the substantially identical documents which
have been omitted herein as permitted by Item 601 of Regulation
S-K)
10.2** 1997 Long-Term Incentive Plan
10.3** 1997 Non-Employee Directors' Stock Plan
10.4** Consulting Agreement, dated as of June 12, 1997, between the Company and
RGR
10.5 Form of Representatives' Warrant
10.6** Employment Agreement, dated as of August 11, 1997, between the Company and
W. Randolph Ellspermann
10.7 Employment Agreement, dated as of August 11, 1997, between the
Company and Neil J. DePascal, Jr.
10.8** Licensing Agreement, dated March 26, 1996, between The Curtis
Publishing Company, Licensing Division and American Royal Arts
Corporation, together with Addendum No. 1 dated June 6, 1997
10.9** Garfield Exclusive Licensing Agreement, effective as of January
1, 1995, between Mendelson/Paws Productions and American Royal
Arts Corp., together with Amendment No. 1 dated May 7, 1996
10.10** Consignment Agreement, dated September 30, 1994, between Ross Editions, Inc.
and American Royal Arts Corp., together with Amendment to Consignment
Agreement, dated March 31, 1997
10.11 Agreement and Release, dated August 11, 1997, between the Company and
David L. Yankey
10.12 Employment Agreement, dated August 25, 1997, between the Company and
Shonnie Bilin
10.13 Trademark License Agreement dated June 15, 1987, between Hallmark
Cards Incorporated and Reef's Hallmark Shop (together with a
Schedule identifying and distinguishing the substantially
identical documents entered into by Stone's Hallmark which have
been omitted herein as permitted by Item 601 of Regulation S-K)
10.14 Commitment Letter dated as of October 7, 1997 between Collectibles USA, Inc.
and NationsBank of Texas, N.A.
21** List of Subsidiaries (including state of incorporation and trade name(s)) of the
Company
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Morgan, Lewis & Bockius LLP (contained in Exhibit 5.1)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER EXHIBIT DESCRIPTION NUMBER
- -------- ----------------------------------------------------------------------------- -------
<S> <C> <C>
24 Power of Attorney (contained in the signature page)
27 Financial Data Schedule
99.1** Consent of each of Michael A. Baker, Vincent J. Browne, Roy C. Elwell, Jerry
Gladstone, David K. Green, Paul Shirley, Susan M. Spiegel and David Stone to
use their names as director nominees
99.2** Consent of W. Randolph Ellspermann to use his name as a director nominee
</TABLE>
- ----------
* To be filed by amendment.
** Previously filed.
2,700,000 Shares
COLLECTIBLES USA, INC.
Common Stock, $.01 par value
UNDERWRITING AGREEMENT
, 1997
LADENBURG THALMANN & CO. INC.
EVEREN SECURITIES, INC.
STEPHENS INC.
As Representatives of the several Underwriters
named in Schedule A hereto
c/o Ladenburg Thalmann & Co. Inc.
590 Madison Avenue
New York, New York 10022
Dear Sirs:
1. Introductory. Collectibles USA, Inc., a Delaware corporation (the
"Company"), proposes to sell, pursuant to the terms of this Agreement, to the
several underwriters named in Schedule A hereto (the "Underwriters," or, each,
an "Underwriter"), an aggregate of 2,700,000 shares of common stock, $.01 par
value (the "Common Stock"), of the Company. The aggregate of 2,700,000 shares so
proposed to be sold is hereinafter referred to as the "Firm Stock." The Company
also proposes to sell to the Underwriters, upon the terms and conditions set
forth in Section 3 hereof, up to an additional 405,000 shares of Common Stock
(the "Option Stock"). The Firm Stock and the Option Stock are hereinafter
collectively referred to as the "Stock." Ladenburg Thalmann & Co. Inc.
("Ladenburg"), EVEREN Securities, Inc. and Stephens Inc. are acting as
representatives of the several Underwriters and in such capacity are hereinafter
referred to as the "Representatives."
You have advised us that simultaneously with the closing of the purchase of
the Firm Stock by the Underwriters, the Company will cause each of the Founding
Companies (as hereinafter defined) to be merged (collectively, the "Founding
Company Mergers") with a wholly-owned subsidiary of the Company (each, an
"Acquisition Subsidiary and, together, the "Acquisition Subsidiaries"), in each
case pursuant to an agreement and plan of organization (each, an "Agreement and
Plan of Organization"),
<PAGE>
the consideration for which will be a combination of cash and shares of Common
Stock as described in the Registration Statement (as hereinafter defined).
2. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, the several Underwriters that:
(a) A registration statement on Form S-1 (File No. 333- 29181) in the
form in which it became or becomes effective and also in such form as it
may be when any post-effective amendment thereto shall become effective
with respect to the Stock, including any pre-effective prospectuses
included as part of the registration statement as originally filed or as
part of any amendment or supplement thereto, or filed pursuant to Rule 424
under the Securities Act of 1933, as amended (the "Securities Act"), and
the rules and regulations (the "Rules and Regulations") of the Securities
and Exchange Commission (the "Commission") thereunder, copies of which have
heretofore been delivered to you, has been carefully prepared by the
Company in conformity with the requirements of the Securities Act and has
been filed with the Commission under the Securities Act; one or more
amendments to such registration statement, including in each case an
amended pre-effective prospectus, copies of which amendments have
heretofore been delivered to you, have been so prepared and filed. Such
registration statement is referred to hereinafter as the "Registration
Statement." If it is contemplated, at the time this Agreement is executed,
that a post-effective amendment to the Registration Statement will be filed
and must be declared effective before the offering of the Stock may
commence, the term "Registration Statement" as used in this Agreement means
the Registration Statement as amended by said post-effective amendment. The
term "Registration Statement" as used in this Agreement shall also include
any registration statement relating to the Stock that is filed pursuant to
Rule 462(b) under the Securities Act. The term "Prospectus" as used in this
Agreement means the prospectus in the form included in the Registration
Statement, or, (A) if the prospectus included in the Registration Statement
omits information in reliance on Rule 430A under the Securities Act and
such information is included in a prospectus filed with the Commission
pursuant to Rule 424(b) under the Securities Act, the term "Prospectus" as
used in this Agreement means the prospectus in the form included in the
Registration Statement as supplemented by the addition of the Rule 430A
information contained in the prospectus filed with the Commission pursuant
to Rule 424(b) and (B) if prospectuses that meet the requirements of
Section 10(a) of the Securities Act are delivered pursuant to Rule 434
under the Securities Act, then (i) the term "Prospectus" as used in this
Agreement means the "prospectus subject to completion" (as such term is
defined in Rule 434(g) under the Securities Act) as supplemented by (a) the
addition of Rule 430A information or other information contained in the
form of prospectus delivered pursuant
-2-
<PAGE>
to Rule 434(b)(2) under the Securities Act or (b) the information contained
in the term sheets described in Rule 434(b)(3) under the Securities Act,
and (ii) the date of such prospectuses shall be deemed to be the date of
the term sheets. The term "Pre-effective Prospectus" as used in this
Agreement means the prospectus subject to completion in the form included
in the Registration Statement at the time of the initial filing of the
Registration Statement with the Commission, and as such prospectus shall
have been amended from time to time prior to the date of the Prospectus.
(b) The Commission has not issued or threatened to issue any order
preventing or suspending the use of any Pre-effective Prospectus, and, at
its date of issue, each Pre-effective Prospectus conformed in all material
respects with the requirements of the Securities Act and did not include
any 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 under which they were made, not misleading;
and, when the Registration Statement becomes effective and at all times
subsequent thereto up to and including the Closing Dates (as hereinafter
defined), the Registration Statement and the Prospectus and any amendments
or supplements thereto contained and will contain all material statements
and information required to be included therein by the Securities Act and
conformed and will conform in all material respects to the requirements of
the Securities Act and neither the Registration Statement nor the
Prospectus, nor any amendment or supplement thereto, included or will
include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading; provided, however, that the foregoing
representations, warranties and agreements shall not apply to information
contained in or omitted from any Pre- effective Prospectus or the
Registration Statement or the Prospectus or any such amendment or
supplement thereto in reliance upon, and in conformity with, written
information furnished to the Company by or on behalf of any Underwriter,
directly or through you, specifically for use in the preparation thereof;
and each Pre-effective Prospectus and Prospectus delivered to the
Underwriters for use in connection with the offering of the Stock will, at
the time of such delivery, be identical to the electronically transmitted
copies thereof filed with the Commission pursuant to EDGAR, except to the
extent permitted by Regulation S-T under the Securities Act; there is no
franchise, lease, contract, agreement or document required to be described
in the Registration Statement or Prospectus or to be filed as an exhibit to
the Registration Statement which is not described or filed therein as
required; and all descriptions of any such franchises, leases, contracts,
agreements or documents contained
-3-
<PAGE>
in the Registration Statement are accurate and complete descriptions of
such documents in all material respects.
(c) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, and except as set forth
or contemplated in the Prospectus, the Company and the Founding Companies,
taken as a whole, have not incurred any liabilities or obligations, direct
or contingent, nor entered into any transactions not in the ordinary course
of business, and there has not been any material adverse change in the
condition (financial or otherwise), properties, business, management,
prospects, net worth or results of operations of the Company and the
Founding Companies considered as a whole (a "Material Adverse Effect"), or
any change in the capital stock, short-term or long-term debt of the
Company or any of the Founding Companies.
(d) The financial statements of the Company, the separate financial
statements of American Royal Arts Corp., Animation U.S.A., Inc., Crystal
Galleria, Inc., Base, Inc., DKG Enterprises, Inc., Elwell Stores, Inc.,
Filmart Productions Inc. and Stone's Shops, Inc. (the "Significant Founding
Companies"), and the pro forma combined financial statements of the Company
and the Founding Companies, in each case together with related notes and
schedules, as set forth in the Registration Statement, present fairly the
financial position and the results of operations and cash flows of the
Company, of each of the Significant Founding Companies and of the Company
and the Founding Companies pro forma combined, respectively, at the
indicated dates and for the indicated periods. Such financial statements
and related schedules have been prepared in accordance with generally
accepted principles of accounting, consistently applied throughout the
periods involved, except as disclosed therein, and all adjustments
necessary for a fair presentation of results for such periods have been
made. The summary historical and statistical data included in the
Registration Statement present fairly the information shown therein and
such data have been compiled on a basis consistent with the financial
statements presented therein and the books and records of the Company and
the Founding Companies, as applicable. The pro forma combined financial
statements of the Company and the Founding Companies (including the
supplemental pro forma information shown therein), together with the
related notes, as set forth in the Registration Statement, present fairly
the information shown therein, have been prepared in accordance with the
Commission's rules and guidelines with respect to pro forma financial
statements and have been properly compiled on the pro forma bases described
therein, and in the opinion of the Company, the assumptions used in the
preparation thereof are reasonable and the adjustments used therein are
appropriate to give effect to the transactions or circumstances referred to
therein. The selected
-4-
<PAGE>
financial information included under the captions "Capitalization" and
"Selected Financial Data" in the Prospectus presents fairly the information
shown therein and has been compiled on a basis consistent with that of the
audited financial statements of the Company and the Founding Companies. No
other financial statements or schedules of the Company or the Founding
Companies are required by the Securities Act or the Rules and Regulations
to be included in the Registration Statement or Prospectus. None of the
Company, any of the Acquisition Subsidiaries or any of the Founding
Companies is currently planning any probable acquisition for which
disclosure of pro forma financial information would be required by the
Securities Act.
(e) Arthur Andersen LLP, who have expressed their opinions on the
audited financial statements included in the Registration Statement and the
Prospectus are independent public accountants as required by the Securities
Act and the Rules and Regulations.
(f) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Delaware with
full corporate power and authority to own, lease and operate its properties
and conduct its business as described in the Prospectus. Each of American
Royal Arts Corp., Animation U.S.A., Inc., Base, Inc., Crystal Galleria,
Inc., DKG Enterprises, Inc., Elwell Stores, Inc., Filmart Productions Inc.,
Stone's Shops, Inc., St. George, Inc. and Vincent J. Browne, Inc. (each, a
"Founding Company" and, together, the "Founding Companies") has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, with full
corporate power and authority to own, lease and operate its properties and
conduct its business as described in the Prospectus. Each of the
Acquisition Subsidiaries has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the jurisdiction of its
incorporation with full power and authority (corporate and other) to own,
lease and operate its properties and conduct its business. As of the
Closing Date, after giving effect to the Founding Company Mergers, all of
the outstanding capital stock of each of the Founding Companies will be
owned by the Company, free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest. The Company and each of
the Founding Companies is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction in which the
ownership or leasing of its properties or the conduct of its business
requires such qualification, except where the failure to be so qualified or
be in good standing would not have a Material Adverse Effect, and to the
knowledge of the Company, no proceeding has been instituted in any such
jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit
or curtail, such power and authority or qualification. The Company does not
own or control, directly or
-5-
<PAGE>
indirectly, any corporation, association or other entity other than the
subsidiaries listed on Exhibit 21 to the Registration Statement. None of
the Founding Companies owns or controls, directly or indirectly, any
corporation, association or other entity other than a partnership formed by
American Royal Arts Corp. and Animation U.S.A., Inc. which has these two
entities as its only partners. Except as described in the Registration
Statement and the Prospectus, the Company is not engaged in any discussions
or party to any agreement or understanding, written or oral, regarding the
acquisition of, or of an interest in, any corporation, firm, partnership,
joint venture, association or other entity.
(g) All outstanding shares of capital stock of the Company have been
duly authorized and validly issued and are fully paid and nonassessable,
have been issued in compliance with all federal and state securities laws,
were not issued in violation of or subject to any preemptive rights or
other rights to subscribe for or purchase securities, and the authorized
and outstanding capital stock of the Company is as set forth in the
Prospectus under the caption "Capitalization" and conforms in all material
respects to the statements relating thereto contained in the Registration
Statement and the Prospectus (and such statements correctly state the
substance of the instruments defining the capitalization of the Company);
the Firm Stock and the Option Stock to be purchased from the Company
hereunder have been duly and validly authorized for issuance and sale to
the Underwriters pursuant to this Agreement and, when issued and delivered
by the Company against payment therefor in accordance with the terms of
this Agreement, will be duly and validly issued and fully paid and
nonassessable, and will be sold free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest; and no
preemptive right, co-sale right, registration right, right of first refusal
or other similar right of stockholders exists with respect to any shares of
the Firm Stock or Option Stock to be purchased from the Company hereunder
or the issuance and sale thereof. No further approval or authorization of
any stockholder, the Board of Directors of the Company or others is
required for the issuance and sale of the Stock except as may be required
under the Act, the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or under state or other securities or blue sky laws. Upon
completion of the Founding Company Mergers in the manner described in the
Prospectus, the shares of Common Stock to be issued in such mergers will be
duly authorized, validly issued and fully paid and nonassessable. Upon
conversion of the Company's Series A Preferred Stock, $.01 par value per
share (the "Preferred Stock"), and the Company's Restricted Voting Common
Stock, $.01 par value per share (the "Restricted Stock"), the shares of
Common Stock to be issued in such conversions will be duly authorized,
validly issued and fully paid and nonassessable. Except as disclosed in the
Prospectus and the financial statements of the Company, and the related
notes thereto, included in the
-6-
<PAGE>
Prospectus, the Company does not have outstanding any options to purchase,
or any preemptive rights or other rights to subscribe for or to purchase,
any securities or obligations convertible into, or any contracts or
commitments to issue or sell, shares of its capital stock or any such
options, rights, convertible securities or obligations. The description of
the Company's Long-Term Incentive Plan and 1997 Non-Employee Directors'
Stock Plan (the "Option Plans"), and the options or other rights granted
and exercised thereunder, set forth in the Prospectus accurately and fairly
presents the information required to be shown with respect to the Option
Plans and the options granted thereunder.
(h) All the issued and outstanding capital stock of each of the
Founding Companies and each of the Acquisition Subsidiaries has been duly
authorized and validly issued and is fully paid and nonassessable, and were
not issued in violation of or subject to any preemptive right, or other
rights to subscribe for or purchase shares and is owned of record and
beneficially, as of the date hereof, by the Company in the case of each of
the Acquisition Subsidiaries and, in the case of each of the Founding
Companies, as indicated in Schedule 1.4 of the Agreement and Plan of
Organization relating to such Founding Company, and will be owned of record
and beneficially by the Company at or prior to the closing of the issuance
of the Firm Stock, free and clear of any security interests, liens,
encumbrances, equities or other claims. There are no outstanding rights,
warrants or options to acquire, or instruments convertible into or
exchangeable for, any shares of capital stock or other equity interest in
any of the Acquisition Subsidiaries or any of the Founding Companies.
Except as described in the Registration Statement and the Prospectus or as
may be restricted by relevant state law with respect to the need for
sufficient surplus, none of the Acquisition Subsidiaries or the Founding
Companies is currently prohibited, directly or indirectly, from paying any
dividends to the Company, from making any other distribution on its capital
stock, or from transferring any of the property or assets of any such
Founding Company to the Company.
(i) The shares of Common Stock issuable upon exercise of the Warrants
(as hereinafter defined) have been duly authorized for issuance pursuant to
the Warrants and, when issued and delivered by the Company against payment
therefor in accordance with the terms thereof, will be duly and validly
issued and fully paid and nonassessable, and will be free and clear of any
pledge, lien, security interest, encumbrance, claim or equitable interest.
(j) Except as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of the
Founding Companies is a party or of which any property of the Company or
any Founding Company is subject, which, if determined
-7-
<PAGE>
adversely to the Company or any such Founding Company, might individually
or in the aggregate (i) prevent or adversely affect the transactions
contemplated by this Agreement or by any Agreement and Plan of
Organization, (ii) suspend the effectiveness of the Registration Statement,
(iii) prevent or suspend the use of the Pre-effective Prospectus in any
jurisdiction or (iv) result in a Material Adverse Effect; and to the best
of the Company's knowledge no such proceedings are threatened against the
Company or any Founding Company by governmental authorities or others.
Neither the Company nor any Founding Company is a party or subject to the
provisions of any material injunction, judgment, decree or order of any
court, regulatory body or other governmental agency or body.
(k) The execution, delivery and performance of this Agreement and each
Agreement and Plan of Organization and the consummation of the transactions
herein and therein contemplated will not result in the creation of any lien
or in a breach or violation of any of the terms or provisions of, or
constitute a default under, (i) any material indenture, mortgage, deed of
trust, note agreement or other agreement or instrument to which the Company
or any of the Founding Companies is a party or by which it or any of them
or any of their properties is or may be bound, (ii) the charter, By-laws or
other organizational documents of the Company, any of the Founding
Companies or any of the Acquisition Subsidiaries or (iii) any law, statute,
order, rule or regulation of any court or governmental agency or body
having jurisdiction over the Company or any of the Founding Companies or
any of their properties.
(l) No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation by the
Company, any of the Founding Companies or any of the Acquisition
Subsidiaries, of the transactions contemplated by this Agreement or any
Agreement and Plan of Organization, except such as may be required by the
National Association of Securities Dealers, Inc. (the "odNASD") or under
the Securities Act or the securities or "Blue Sky" laws of any jurisdiction
in connection with the purchase and distribution of the Stock by the
Underwriters.
(m) The Company has the full corporate power and authority to enter
into this Agreement and to perform its obligations hereunder (including to
issue, sell and deliver the Stock), and this Agreement has been duly and
validly authorized, executed and delivered by the Company and is a valid
and binding obligation of the Company, enforceable against the Company in
accordance with its terms, except to the extent that rights to indemnity
and contribution hereunder may be limited by federal or state securities
laws or the public policy underlying such laws or by applicable bankruptcy,
insolvency, reorganization,
-8-
<PAGE>
moratorium or other similar laws relating to or affecting creditors' rights
generally or by general equitable principles. The Company has the full
corporate power and authority to execute and deliver the Warrants on the
terms and conditions set forth in this Agreement and in the Warrants, and
such execution and delivery of the Warrants has been duly and validly
authorized, and when executed and delivered pursuant to this Agreement, the
Warrants will be enforceable against the Company in accordance with their
terms, except as rights to indemnification hereunder may be limited by
applicable law and except as the enforcement hereof and thereof may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally or
by general equitable principles. The Company, each of the Acquisition
Subsidiaries, and each of the Founding Companies has full legal right,
power and authority to enter into the respective Agreement and Plan
Organization to which they are party and to perform the transactions
contemplated thereby. Each Agreement and Plan of Organization with respect
to the Company, each Acquisition Subsidiary and each Founding Company that
is a party thereto, has been duly authorized, executed and delivered by the
Company, such Acquisition Subsidiary and such Founding Company, and each
such agreement is a valid and binding agreement on the part of the Company,
such Acquisition Subsidiary and such Founding Company, enforceable in
accordance with its terms, except as rights to indemnification hereunder
may be limited by applicable law and except as the enforcement hereof and
thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles.
(n) The Company and each of the Founding Companies possesses all
authorizations, approvals, orders, licenses, certificates, franchises and
permits of and from, and have made all declarations and filings with, all
regulatory or governmental officials, bodies and tribunals ("Permits") to
own, lease or operate their respective properties and to conduct their
respective businesses described in the Registration Statement and the
Prospectus, except where the failure to have obtained or made the same
would not have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the
Company and the Founding Companies, taken as a whole, and neither the
Company nor any of the Founding Companies has received any notice of
proceedings relating to the revocation or modification of any such Permits.
(o) The Company and each of the Founding Companies owns, or possesses
adequate rights to use, free and clear of all liens, charges, encumbrances,
pledges, security interests or defects, all patents, trademarks, service
marks, trade names, trade secrets, copyrights,
-9-
<PAGE>
proprietary technology and licenses, and rights with respect to the
foregoing (collectively, "Intellectual Property"), used in the conduct of
their respective businesses as described in the Registration Statement and
the Prospectus, and none of the Intellectual Property presently owned, held
or used by the Company or any of the Founding Companies infringes or
conflicts with any Intellectual Property of any other person or entity or
are in dispute, and neither the Company nor any Founding Company has
received a notice, or knows of any basis, of any infringement of or
conflict with the asserted rights of others in any such respect that might
have a Material Adverse Effect.
(p) The Company and each of the Founding Companies owns and has the
right to use all trade secrets, know-how (including all other unpatented
and/or unpatentable proprietary or confidential information, systems or
procedures), inventions, designs, processes, works of authorship, computer
programs and technical data and information that are material to its
business, properties and operations.
(q) The Company and each of the Founding Companies is in compliance
with, and conducts its business in conformity with, all applicable federal,
state, local and foreign laws, rules and regulations of each court or
governmental agency or body having jurisdiction over the Company or any of
the Founding Companies, except where the failure to be in compliance would
not have a Material Adverse Effect; to the knowledge of the Company,
otherwise than as set forth in the Registration Statement and the
Prospectus, no prospective change in any of such federal or state laws,
rules or regulations has been adopted which, when made effective, would
have a Material Adverse Effect.
(r) The Company and each of the Founding Companies is in compliance
with all federal, state, local or foreign laws or regulations relating to
pollution or protection of human health or the environment ("Environmental
Laws"), except where the failure to be in compliance would not have a
Material Adverse Effect. Neither the Company nor any of the Founding
Companies has authorized, conducted or generated, transported, stored,
used, treated, disposed or released any hazardous substance, hazardous
waste, hazardous material, hazardous constituent, toxic substance,
pollutant, contaminant, petroleum product, natural gas, liquified gas or
synthetic gas, defined or regulated under any Environmental Law on, in or
under any property currently leased or owned or by any means controlled by
the Company or any of the Founding Companies (the "Real Property") in
violation of any applicable law, except for any violation which would not
have a Material Adverse Effect; there is no pending or, to the Company's
knowledge, threatened claim, action, litigation or any administrative
agency proceeding involving the Company, any of the Founding Companies or
their respective
-10-
<PAGE>
properties, nor has the Company or any of the Founding Companies received
any written notice, or any oral notice to any executive officer of the
Company or any other employee responsible for receipt of any such notice,
from any governmental entity or third party, that (A) alleges a violation
of any Environmental Laws by the Company or any of the Founding Companies
or any person or entity whose liability for a violation of an Environmental
Law the Company or any of the Founding Companies has retained or assumed
either contractually or by operation of law, which liability or violation
could be reasonably expected to have a Material Adverse Effect, (B) alleges
the Company or any of the Founding Companies is a liable party under the
Comprehensive Environmental Response, Compensation and Liability Act, 42
U.S.C. ss. 9601 et seq., or any state superfund law, (C) alleges possible
contamination of the environment by the Company or any of the Founding
Companies or (D) alleges possible contamination of the Real Property.
(s) The Company and each of the Founding Companies has filed all
necessary federal, state, local and foreign income, payroll, franchise and
other tax returns and has paid all taxes shown as due thereon or with
respect to any of its properties, and there is no tax deficiency that has
been, or to the knowledge of the Company is likely to be, asserted against
the Company or any of the Founding Companies or any of their respective
properties or assets that might have a Material Adverse Effect, and all tax
liabilities are adequately provided for on the books of the Company and
each of the Founding Companies.
(t) Neither the Company nor any of its officers, directors or
affiliates has taken or will take, directly or indirectly, any action
designed or intended to stabilize or manipulate the price of any security
of the Company, or which caused or resulted in, or which might in the
future reasonably be expected to cause or result in, stabilization or
manipulation of the price of any security of the Company.
(u) The Company has provided you with all financial statements for
each of the Founding Companies since January 1, 1994 to the date hereof.
(v) Neither the Company nor any of the Founding Companies is in
violation of its respective charter or by-laws. The Company and each of the
Founding Companies has performed all material obligations required to be
performed by the Company or any such Founding Company under any material
indenture, mortgage, deed of trust, note agreement or other agreement or
instrument to which it is a party or by which it is or any of its
properties may be bound, and neither the Company nor any of the Founding
Companies nor any other party to
-11-
<PAGE>
such material indenture, mortgage, deed of trust, note agreement or other
agreement or instrument is in default under or in breach of any such
obligations. Neither the Company nor any of the Founding Companies has
received any notice of such default or breach.
(w) Neither the Company nor any of the Founding Companies is involved
in any labor dispute nor, to their knowledge, is any such dispute
threatened. Neither the Company nor any of the Founding Companies is aware
that (A) any executive, key employee or significant group of employees of
the Company or any Founding Company plans to terminate employment with the
Company or any such Founding Company or (B) any such executive or key
employee is subject to any noncompete, nondisclosure, confidentiality,
employment, consulting or similar agreement that would be violated by the
present or proposed business activities of the Company or any of the
Founding Companies. Neither the Company nor any Founding Company has or
expects to have any liability for any prohibited transaction or funding
deficiency or any complete or partial withdrawal liability with respect to
any pension, profit sharing or other plan which is subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), to which the
Company or any Founding Company makes or ever has made a contribution and
in which any employee of the Company or any Founding Company is or has ever
been a participant. With respect to such plans, the Company and each
Founding Company is in compliance in all material respects with all
applicable provisions of ERISA.
(x) The Company has obtained the written agreement described in
Section 8(h) of this Agreement from each of its officers, directors,
director designees and holders of Common Stock listed on Schedule B hereto.
(y) The Company has obtained from each of the stockholders of each of
the Founding Companies their agreement not to sell, assign, exchange,
transfer, encumber, pledge, distribute, appoint or otherwise dispose of any
shares of Common Stock received in the Founding Company Mergers other than
in accordance with the transfer restrictions provided for in Section 15.1
of each Agreement and Plan of Organization.
(z) The Company and each of the Founding Companies have, and as of the
Closing Dates will have, good and marketable title to all real property
free and clear of all liens, encumbrances and defects except such as are
described in the Prospectus or such as would not have a Material Adverse
Effect; and any real property and buildings held under lease by the Company
or any of the Founding Companies or proposed to be held after giving effect
to the transactions described in the Prospectus
-12-
<PAGE>
are, or will be as of the Closing Dates, held by them under valid,
subsisting and enforceable leases with such exceptions as would not have a
Material Adverse Effect, in each case except as described in the
Prospectus. All personal property used by the Company and each of the
Founding Companies in their business is either owned or leased by the
Company or the Founding Companies and is in good working order and
condition, ordinary wear and tear excepted.
(aa) The Company and each Founding Company is insured by insurers of
recognized financial responsibility against such losses and risks and in
such amounts as is customary in the businesses in which it is engaged or
proposes to engage after giving effect to the transactions described in the
Prospectus; and neither the Company nor any Founding Company has any reason
to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage
from similar insurers as may be necessary to continue their business at a
cost that would not have a Material Adverse Effect.
(bb) Other than as contemplated by this Agreement, there is no broker,
finder or other party that is entitled to receive from the Company any
brokerage or finder's fee or other fee or commission as a result of any of
the transactions contemplated by this Agreement.
(cc) The inventory of the Company and the Founding Companies is in
merchantable condition and can be sold in the ordinary course of business
at the carrying value of such inventory, as shown in the Company's or the
Founding Companies' financial statements, subject to pricing reductions in
the ordinary course of business.
(dd) The Company and each of the Founding Companies maintains a system
of internal accounting controls sufficient to provide reasonable assurances
that (i) transactions are executed in accordance with management's general
or specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for assets;
(iii) access to assets is permitted only in accordance with management's
general or specific authorization; and (iv) the recorded accountability for
assets is compared with existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(ee) To the Company's knowledge, neither the Company nor any of the
Founding Companies nor any employee or agent of the Company or any of the
Founding Companies has made any payment of funds of the Company or any of
the Founding Companies or received or
-13-
<PAGE>
retained any funds in violation of any law, rule or regulation, which
payment, receipt or retention of funds is of a character required to be
disclosed in the Prospectus.
(ff) Neither the Company nor any of the Founding Companies is an
"investment company," or an entity "controlled" by an "investment company"
required to be registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), as such terms are defined in the 1940 Act, and
neither the Company nor any of the Founding Companies expects to be treated
as such by reason of the receipt and application of the net proceeds from
the sale of the Stock.
(gg) The Stock has been duly approved for quotation on the Nasdaq
National Market, subject to official notice of issuance.
(hh) No holder of any security of the Company has the right to have
any security owned by such holder included in the Registration Statement
and, except as described in the Registration Statement and the Prospectus,
no holder of any security of the Company has the right to demand
registration of any security owned by such holder during the period ending
12 months after the date of the Prospectus.
(ii) Each certificate signed by any officer of the Company and
delivered to the Underwriters or counsel for the Underwriters pursuant to
this Agreement shall be deemed to be a representation and warranty by the
Company as to the matters covered thereby.
(jj) For all periods from its election under Subchapter S of the
Internal Revenue Code of 1986, as amended (the "Code"), until the Closing
Date, each of the Founding Companies that so elected was qualified as an S
Corporation pursuant to an election validly made under Subchapter S of the
Code (which election has not been and will not be revoked or terminated for
any such period) and the Company has not been and will not be subject to
federal corporate taxes for such periods. Any Subchapter S election was
duly terminated on the Closing Date.
3. Purchase by, and Sale and Delivery to, Underwriters--Closing Dates. The
Company agrees to sell to the Underwriters the Firm Stock, and on the basis of
the representations, warranties, covenants and agreements herein contained, but
subject to the terms and conditions herein set forth, the Underwriters agree,
severally and not jointly, to purchase the Firm Stock from the Company, the
number of shares of Firm Stock to be purchased by each Underwriter being set
opposite its name in Schedule A, subject to adjustment in accordance with
Section 12 hereof.
The purchase price per share to be paid by the Underwriters to the Company
will be $_________ per share (the "Purchase Price").
-14-
<PAGE>
The Company will deliver the Firm Stock to the Representatives for the
respective accounts of the several Underwriters (in the form of definitive
certificates, issued in such names and in such denominations as the
Representatives may direct by notice in writing to the Company given at or prior
to 12:00 Noon, New York City time, on the second full business day preceding the
First Closing Date (as defined below) or, if no such direction is received, in
the names of the respective Underwriters or in such other names as Ladenburg may
designate (solely for the purpose of administrative convenience) and in such
denominations as Ladenburg may determine), against payment of the aggregate
Purchase Price therefor by wire transfer of same-day funds to an account
specified by the Company in writing at least two (2) business days prior to the
First Closing Date, all at the offices of Fulbright & Jaworski L.L.P., 666 Fifth
Avenue, New York, New York 10103. The time and date of the delivery and closing
shall be at 10:00 A.M., New York City time, on ________, 1997, in accordance
with Rule 15c6-1 of the Exchange Act. The time and date of such payment and
delivery are herein referred to as the "First Closing Date." The First Closing
Date and the location of delivery of, and the form of payment for, the Firm
Stock may be varied by agreement between the Company and Ladenburg. The First
Closing Date may be postponed pursuant to the provisions of Section 12.
The Company shall make the certificates for the Stock available to the
Representatives for examination on behalf of the Underwriters not later than
10:00 A.M., New York City time, on the business day preceding the First Closing
Date at the offices of Ladenburg, 590 Madison Avenue, New York, New York 10022.
It is understood that either of the Representatives, individually and not
as a Representative of the several Underwriters, may (but shall not be obligated
to) make payment to the Company on behalf of any Underwriter or Underwriters,
for the Stock to be purchased by such Underwriter or Underwriters. Any such
payment by either of the Representatives shall not relieve such Underwriter or
Underwriters from any of its or their other obligations hereunder.
The several Underwriters agree to make an initial public offering of the
Firm Stock at the initial public offering price as soon after the effectiveness
of the Registration Statement as in their judgment is advisable. The
Representatives shall promptly advise the Company of the making of the initial
public offering.
For the purpose of covering any over-allotments in connection with the
distribution and sale of the Firm Stock as contemplated by the Prospectus, the
Company hereby grants to the Underwriters an option to purchase, severally and
not jointly, an aggregate of up to 405,000 shares of Common Stock. The price per
share to be paid for the Option Stock shall be the Purchase Price. The option
granted hereby may be exercised as to all or any part of the Option Stock at any
time, and from time to time, not more than thirty (30) days subsequent to the
effective date of this Agreement. No Option Stock shall be sold and delivered
unless the Firm Stock previously has been, or simultaneously is, sold and
delivered. The right to purchase the
-15-
<PAGE>
Option Stock or any portion thereof may be surrendered and terminated at any
time upon notice by the Underwriters to the Company.
The option granted hereby may be exercised by the Underwriters by giving
written notice from Ladenburg to the Company setting forth the number of shares
of the Option Stock to be purchased by them and the date and time for delivery
of and payment for the Option Stock. Each date and time for delivery of and
payment for the Option Stock (which may be the First Closing Date, but not
earlier) is herein called the "Option Closing Date" and shall in no event be
earlier than two (2) business days nor later than ten (10) business days after
written notice is given. (The Option Closing Date and the First Closing Date are
herein called the "Closing Dates.") All purchases of Option Stock from the
Company shall be made on a pro rata basis. Option Stock shall be purchased for
the account of each Underwriter in the same proportion as the number of shares
of Firm Stock set forth opposite such Underwriter's name in Schedule A hereto
bears to the total number of shares of Firm Stock (subject to adjustment by the
Underwriters to eliminate odd lots). Upon exercise of the option by the
Underwriters, the Company agrees to sell to the Underwriters the number of
shares of Option Stock set forth in the written notice of exercise and the
Underwriters agree, severally and not jointly and subject to the terms and
conditions herein set forth, to purchase the number of such shares determined as
aforesaid.
The Company will deliver the Option Stock to the Underwriters (in the form
of definitive certificates, issued in such names and in such denominations as
the Representatives may direct by notice in writing to the Company given at or
prior to 12:00 Noon, New York City time, on the second full business day
preceding the Option Closing Date or, if no such direction is received, in the
names of the respective Underwriters or in such other names as Ladenburg may
designate (solely for the purpose of administrative convenience) and in such
denominations as Ladenburg may determine), against payment of the aggregate
Purchase Price therefor by wire transfer of same-day funds to an account
specified by the Company in writing at least two (2) business days prior to the
Option Closing Date, all at the offices of Fulbright & Jaworski L.L.P., 666
Fifth Avenue, New York, New York 10103. The Option Closing Date and the location
of delivery of, and the form of payment for, the Option Stock may be varied by
agreement between the Company and Ladenburg. The Option Closing Date may be
postponed pursuant to the provisions of Section 12.
In order to induce you to enter into this Agreement, the Company, in
consideration of the receipt of an aggregate of $2,700 and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, shall execute and deliver to you, in your individual capacity and
not as Representatives, or your assignees, in compliance with the rules of the
NASD, warrants exercisable during the 5-year period commencing on the effective
date of the Registration Statement (the "Warrants") to purchase an aggregate of
270,000 shares of Common Stock at an exercise price per share equal to 120% of
the initial public offering price per share set forth on the cover page of the
Prospectus. The Warrants shall be in the form of Exhibit 10.5 to the
Registration Statement. Execution and delivery of Warrants, registered in your
-16-
<PAGE>
name or the names of such of your officers or such assignees as you shall notify
the Company in writing, shall be made to you, at your offices at 590 Madison
Avenue, New York, New York 10022, at the First Closing Date. The cost of
original issue tax stamps, if any, in connection with the execution and delivery
of the Warrants shall be borne by the Company.
4. Covenants and Agreements of the Company. The Company covenants and
agrees with the several Underwriters that:
(a) The Company will (i) if the Company and the Representatives have
determined not to proceed pursuant to Rule 430A, use its best efforts to
cause the Registration Statement to become effective, (ii) if the Company
and the Representatives have determined to proceed pursuant to Rule 430A,
use its best efforts to comply with the provisions of and make all
requisite filings with the Commission pursuant to Rule 430A and Rule 424 of
the Rules and Regulations and (iii) if the Company and the Representatives
have determined to deliver Prospectuses pursuant to Rule 434 of the Rules
and Regulations, to use its best efforts to comply with all the applicable
provisions thereof. The Company will advise the Representatives promptly as
to the time at which the Registration Statement becomes effective, will
advise the Representatives promptly of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration Statement
or of the institution of any proceedings for that purpose, and will use its
best efforts to prevent the issuance of any such stop order and to obtain
as soon as possible the lifting thereof, if issued. The Company will advise
the Representatives promptly of the receipt of any comments of the
Commission or any request by the Commission for any amendment of or
supplement to the Registration Statement or the Prospectus or for
additional information and will not at any time file any amendment to the
Registration Statement or supplement to the Prospectus which shall not
previously have been submitted to the Representatives a reasonable time
prior to the proposed filing thereof or to which the Representatives shall
reasonably object in writing or which is not in compliance with the
Securities Act and the Rules and Regulations.
(b) The Company will prepare and file with the Commission, promptly
upon the request of the Representatives, any amendments or supplements to
the Registration Statement or the Prospectus which in the opinion of the
Representatives may be necessary to enable the several Underwriters to
continue the distribution of the Stock and will use its best efforts to
cause the same to become effective as promptly as possible.
(c) If at any time after the effective date of the Registration
Statement when a prospectus relating to the Stock is required to be
delivered under the Securities Act any event relating to or affecting the
-17-
<PAGE>
Company or any of the Founding Companies occurs as a result of which the
Prospectus or any other prospectus as then in effect would include an
untrue statement of a material fact, or omit to state any material fact
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading, or if it is necessary at any
time to amend the Prospectus to comply with the Securities Act, the Company
will promptly notify the Representatives thereof and will prepare an
amended or supplemented prospectus which will correct such statement or
omission; and in case any Underwriter is required to deliver a prospectus
relating to the Stock nine (9) months or more after the effective date of
the Registration Statement, the Company upon the request of the
Representatives and at the expense of such Underwriter will prepare
promptly such prospectus or prospectuses as may be necessary to permit
compliance with the requirements of Section 10(a)(3) of the Securities Act.
(d) The Company will deliver to the Representatives, at or before the
Closing Dates, signed copies of the Registration Statement, as originally
filed with the Commission, and all amendments thereto including all
financial statements and exhibits thereto, and will deliver to the
Representatives such number of copies of the Registration Statement,
including such financial statements but without exhibits, and all
amendments thereto, as the Representatives may reasonably request. The
Company will deliver or mail to or upon the order of the Representatives,
from time to time until the effective date of the Registration Statement,
as many copies of the Pre-effective Prospectus as the Representatives may
reasonably request. The Company will deliver or mail to or upon the order
of the Representatives on the date of the initial public offering, and
thereafter from time to time during the period when delivery of a
prospectus relating to the Stock is required under the Securities Act, as
many copies of the Prospectus, in final form or as thereafter amended or
supplemented as the Representatives may reasonably request; provided,
however, that the expense of the preparation and delivery of any prospectus
required for use nine (9) months or more after the effective date of the
Registration Statement shall be borne by the Underwriters required to
deliver such prospectus.
(e) The Company will make generally available to its shareholders as
soon as practicable, but not later than fifteen (15) months after the
effective date of the Registration Statement, an earning statement which
will be in reasonable detail (but which need not be audited) and which will
comply with Section 11(a) of the Securities Act, covering a period of at
least twelve (12) months beginning after the "effective date" (as defined
in Rule 158 under the Securities Act) of the Registration Statement.
-18-
<PAGE>
(f) The Company will cooperate with the Representatives to enable the
Stock to be registered or qualified for offering and sale by the
Underwriters and by dealers under the securities laws of such jurisdictions
as the Representatives may reasonably designate and at the request of the
Representatives will make such applications and furnish such consents to
service of process or other documents as may be required of it as the
issuer of the Stock for that purpose; provided, however, that the Company
shall not be required to qualify to do business or to file a general
consent (other than that arising out of the offering or sale of the Stock)
to service of process in any such jurisdiction where it is not now so
subject. The Company will, from time to time, prepare and file such
statements and reports as are or may be required of it as the issuer of the
Stock to continue such qualifications in effect for so long a period as the
Representatives may reasonably request for the distribution of the Stock.
The Company will advise the Representatives promptly after the Company
becomes aware of the suspension of the qualifications or registration of
(or any such exception relating to) the Common Stock of the Company for
offering, sale or trading in any jurisdiction or of any initiation or
threat of any proceeding for any such purpose, and in the event of the
issuance of any orders suspending such qualifications, registration or
exception, the Company will, with the cooperation of the Representatives
use its best efforts to obtain the withdrawal thereof.
(g) The Company will furnish to its stockholders annual reports
containing financial statements certified by independent public accountants
and with quarterly summary financial information in reasonable detail which
may be unaudited. During the period of five (5) years from the date hereof,
the Company will deliver to the Representatives, as soon as they are
available, copies of each annual report of the Company containing the
balance sheet of the Company as of the close of such fiscal year and
statements of income, stockholders' equity and cash flows for the year then
ended and the opinion thereon of the Company's independent public
accountants and each other report or communication furnished by the Company
to its stockholders and will deliver to the Representatives, (i) as soon as
they are available, copies of any other reports or communication (financial
or other) which the Company shall publish or otherwise make available to
any of its stockholders as such and (ii) as soon as they are available,
copies of any reports and financial statements furnished to or filed with
the Commission, or the NASD or any national securities exchange. So long as
the Company has active subsidiaries, such financial statements will be on a
consolidated basis to the extent the accounts of the Company and its
subsidiaries are consolidated in reports furnished to its stockholders
generally. Separate financial statements shall be furnished for all
subsidiaries whose accounts are not consolidated but which at the time are
significant subsidiaries as defined in the Rules and Regulations.
-19-
<PAGE>
(h) The Company will use its best efforts to quality for inclusion,
subject to official notice of issuance, on the Nasdaq National Market, the
Stock to be issued and sold by the Company.
(i) The Company will maintain a transfer agent and registrar for its
Common Stock.
(j) The Company will not, without the prior written consent of
Ladenburg, offer, sell, assign, transfer, encumber, contract to sell, grant
an option to purchase or otherwise dispose of any shares of Common Stock or
securities convertible into or exercisable or exchangeable for Common Stock
during the 180 days following the date of the Prospectus, other than: (i)
the Company's sale of Common Stock hereunder, (ii) the issuance of the
Warrants and the Company's issuance of Common Stock upon the exercise of
the Warrants, (iii) in connection with the Founding Company Mergers as
described in the Registration Statement, (iv) upon the exercise of stock
options or upon conversion of the Preferred Stock and the Restricted Common
Stock, granted or issued prior to the date hereof and as described in the
Registration Statement, (v) 2,500,000 shares of Common Stock to be used for
the acquisition of companies in the collectibles, gift or animation art
industries, and (vi) the grant of stock options pursuant to the Option
Plans. The Company will not waive the provisions of Section 15.1 of each
Agreement and Plan of Organization during the 180 days following the date
of the Prospectus without the prior written consent of Ladenburg.
(k) The Company will apply the net proceeds from the sale of the Stock
as set forth in the description under "Use of Proceeds" in the Prospectus,
which description complies in all respects with the requirements of Item
504 of Regulation S-K.
(l) The Company will supply you with copies of all correspondence to
and from, and all documents issued to and by, the Commission in connection
with the registration of the Stock under the Securities Act.
(m) Prior to the Closing Dates the Company will furnish to you, as
soon as they have been prepared, copies of any unaudited interim
consolidated financial statements of the Company and each of the Founding
Companies for any periods subsequent to the periods covered by the
financial statements appearing in the Registration Statement and the
Prospectus.
(n) Prior to the Closing Dates the Company will issue no press release
or other communications directly or indirectly and hold no press conference
with respect to the Company or any of the Founding
-20-
<PAGE>
Companies, the financial condition, results of operation, business,
prospects, assets or liabilities of any of them, or the offering of the
Stock, without your prior written consent.
(o) The Company will not at any time, directly or indirectly, take any
action designed or intended to stabilize or manipulate the price of any
security of the Company, or which caused or resulted in, or which might in
the future reasonably be expected to cause or result in, stabilization or
manipulation of the price of any security of the Company.
(p) The Company will file a Form SR in compliance with the
requirements of the Securities Act and the Rules and Regulations.
(q) The Company will (i) use its best efforts to satisfy all
conditions to the consummation of the Founding Company Mergers as set forth
in the applicable Agreement and Plan of Organization with respect thereto,
and (ii) promptly notify the Representatives of the occurrence of any event
which may result in the non-consummation of any of the Founding Company
Mergers.
(r) Until the expiration of two years from the First Closing Date, in
connection with any public offering of equity securities by the Company,
the Company shall not appoint anyone as manager for such public offering,
unless the Company shall first offer the opportunity to act as a manager to
Ladenburg, upon specified terms and conditions, and if Ladenburg shall fail
to accept such terms and conditions within thirty days, then the Company
shall be free to appoint any other firm or organization as a manager upon
terms and conditions which shall not be more favorable to such firm or
organization than those so offered to Ladenburg.
5. Payment of Expenses. (a) The Company will pay (directly or by
reimbursement) all costs, fees and expenses incurred in connection with expenses
incident to the performance of its obligations of the Company under this
Agreement and in connection with the transactions contemplated hereby, including
but not limited to (i) all expenses and taxes incident to the issuance and
delivery of the Stock to the Representatives; (ii) all expenses incident to the
registration of the Stock under the Securities Act; (iii) the costs of preparing
stock certificates (including printing and engraving costs); (iv) all fees and
expenses of the registrar and transfer agent of the Stock; (v) all necessary
issue, transfer and other stamp taxes in connection with the issuance and sale
of the Stock to the Underwriters; (vi) fees and expenses of the Company's
counsel and the Company's independent accountants; (vii) all costs and expenses
incurred in connection with the preparation, printing, filing, shipping and
distribution of the Registration Statement, each Pre-effective Prospectus and
the Prospectus (including all exhibits and financial statements) and all
amendments and supplements provided for herein, the "Agreement Among
Underwriters" between the
-21-
<PAGE>
Representatives and the Underwriters, the Selling Agreement, the Underwriters'
Questionnaire and the Blue Sky memoranda, if any, and this Agreement; (viii) all
filing fees, attorneys' fees and expenses incurred by the Company or the
Underwriters in connection with exemptions from the qualifying or registering
(or obtaining qualification or registration of) all or any part of the Stock for
offer and sale and determination of its eligibility for investment under the
Blue Sky or other securities laws of such jurisdictions as the Representatives
may designate; (ix) all fees and expenses in connection with qualifying the
Stock for inclusion on the Nasdaq National Market and all fees and expenses,
including attorneys' fees, paid or incurred in connection with filings made with
the NASD; and (x) all other costs and expenses incident to the performance of
its obligations hereunder which are not otherwise specifically provided for in
this Section 5, including any and all costs and expenses associated with the
Founding Company Mergers, except for those costs which shall be borne by the
Founding Companies.
(b) In addition to its other obligations under Section 6(a) hereof, the
Company agrees that, as an interim measure during the pendency of any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
(i) any statement or omission or any alleged statement or omission or (ii) any
breach or inaccuracy in its representations and warranties, it will reimburse
each Underwriter on a quarterly basis for all reasonable legal or other expenses
incurred in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the Company's
obligation to reimburse each Underwriter for such expenses and the possibility
that such payments might later be held to have been improper by a court of
competent jurisdiction. To the extent that any such interim reimbursement
payment is so held to have been improper, each Underwriter shall promptly return
it to the Company together with interest, compounded daily, determined on the
basis of the prime rate (or other commercial lending rate for borrowers of the
highest credit standing) announced from time to time by Citibank, N.A., New
York, New York (the "Prime Rate"). Any such interim reimbursement payments which
are not made to an Underwriter in a timely manner as provided below shall bear
interest at the Prime Rate from the due date for such reimbursement. This
expense reimbursement agreement will be in addition to any other liability which
the Company may otherwise have. The request for reimbursement will be sent to
the Company.
(c) In addition to its other obligations under Section 6(b) hereof, each
Underwriter severally agrees that, as an interim measure during the pendency of
any claim, action, investigation, inquiry or other proceeding arising out of or
based upon any statement or omission, or any alleged statement or omission,
described in Section 6(c) hereof which relates to written information furnished
to the Company by the Representatives on behalf of the Underwriters specifically
for inclusion in the Registration Statement and the Prospectus, it will
reimburse the Company (and, to the extent applicable, each officer, director or
controlling person) on a quarterly basis for all reasonable legal or other
expenses incurred in connection with investigating or
-22-
<PAGE>
defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Underwriters' obligation to reimburse the Company (and, to
the extent applicable, each officer, director or controlling person) for such
expenses and the possibility that such payments might later be held to have been
improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, the Company
(and, to the extent applicable, each officer, director or controlling person)
shall promptly return it to the Underwriters together with interest, compounded
daily, determined on the basis of the Prime Rate. Any such interim reimbursement
payments which are not made to the Company within thirty (30) days of a request
for reimbursement shall bear interest at the Prime Rate from the date of such
request. This indemnity agreement will be in addition to any liability which
such Underwriter may otherwise have.
(d) It is agreed that any controversy arising out of the operation of the
interim reimbursement arrangements set forth in paragraph (b) and/or (c) of this
Section 5, including the amounts of any requested reimbursement payments and the
method of determining such amounts, shall be settled by arbitration conducted
under the provisions of the Constitution and Rules of the Board of Governors of
the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration
Procedure of the NASD. Any such arbitration must be commenced by service of a
written demand for arbitration or written notice of intention to arbitrate,
therein electing the arbitration tribunal. In the event the party demanding
arbitration does not make such designation of an arbitration tribunal in such
demand or notice, then the party responding to said demand or notice is
authorized to do so. Such an arbitration would be limited to the operation of
the interim reimbursement provisions contained in paragraph (b) and/or (c) of
this Section 5 and would not resolve the ultimate propriety or enforceability of
the obligation to reimburse expenses which is created by the provisions of
Section 6.
6. Indemnification and Contribution. (a) The Company agrees to indemnify
and hold harmless each Underwriter and each person, if any, who controls such
Underwriter within the meaning of the Securities Act and the respective
officers, directors, partners, employees, representatives and agents of each of
such Underwriter (collectively, the "Underwriter Indemnified Parties" and, each,
an "Underwriter Indemnified Party"), against any losses, claims, damages,
liabilities or expenses (including the reasonable cost of investigating and
defending against any claims therefor and counsel fees incurred in connection
therewith), joint or several, which may be based upon the Securities Act, or any
other statute or at common law, on the ground that any Pre-effective Prospectus,
the Registration Statement or the Prospectus (or any Pre-effective Prospectus,
the Registration Statement or the Prospectus as from time to time amended or
supplemented) includes or allegedly includes an untrue statement of a material
fact or omits to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading; provided, however, that such
indemnity shall not inure to the benefit of any Underwriter (or any person
controlling such) on account of any losses, claims, damages, liabilities or
expenses arising from the sale of the Stock
-23-
<PAGE>
to any person by such Underwriter (i) if such untrue statement or omission or
alleged untrue statement or omission was made in any Pre-effective Prospectus,
the Registration Statement or the Prospectus, or such amendment or supplement,
in reliance upon and in conformity with information furnished in writing to the
Company by the Representatives on behalf of any Underwriter specifically for use
therein or (ii) as to any Pre-effective Prospectus, with respect to any
Underwriter, to the extent that any such loss, claim, damage, liability or
expense of such Underwriter results from an untrue statement of a material fact
contained in, or the omission of a material fact from, such Pre-effective
Prospectus, which untrue statement or omission was corrected in the Prospectus,
if such Underwriter sold Stock to the person alleging such loss, claim, damage
or liability without sending or giving, at or prior to the written confirmation
of such sale, a copy of the Prospectus, unless such failure resulted from the
failure of the Company to deliver copies of the Prospectus to such Underwriter
on a timely basis to permit such sending or giving. The Company will be entitled
to participate at its own expense in the defense or, if it so elects, to assume
the defense of any suit brought to enforce any such liability, but if the
Company elects to assume the defense, such defense shall be conducted by counsel
chosen by it. In the event the Company elects to assume the defense of any such
suit and retain such counsel, any Underwriter Indemnified Parties, defendant or
defendants in the suit, may retain additional counsel but shall bear the fees
and expenses of such counsel unless (i) the Company shall have specifically
authorized the retaining of such counsel or (ii) the parties to such suit
include any such Underwriter Indemnified Parties, and the Company and such
Underwriter Indemnified Parties at law or in equity have been advised by counsel
to the Underwriters that one or more legal defenses may be available to it or
them which may not be available to the Company, in which case the Company shall
not be entitled to assume the defense of such suit notwithstanding its
obligation to bear the fees and expenses of such counsel. This indemnity
agreement is not exclusive and will be in addition to any liability which the
Company might otherwise have and shall not limit any rights or remedies which
may otherwise be available at law or in equity to each Underwriter Indemnified
Party. The Company agrees that the statements with respect to the price and
underwriting discount set forth on, and the information contained in the last
paragraph of, the cover page of the Prospectus, the stabilization legend on the
inside front cover page of the Prospectus, and the table of Underwriters, the
paragraph regarding price and underwriting discount, the paragraph regarding the
amounts of the selling concession and reallowance, all set forth under the
caption "Underwriting" in the Prospectus, constitute the only information
provided in writing by the Representatives on behalf of any Underwriter
expressly for use in the Registration Statement or the Prospectus.
(b) Each Underwriter severally and not jointly agrees to indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of the Securities Act (collectively, the "Company
Indemnified Parties") against any losses, claims, damages, liabilities or
expenses (including, unless the Underwriter or Underwriters elect to assume the
defense, the reasonable cost of investigating and defending against any claims
therefor and counsel fees incurred in
-24-
<PAGE>
connection therewith), joint or several, which arise out of or are based in
whole or in part upon the Securities Act, the Exchange Act or any other federal,
state, local or foreign statute or regulation, or at common law, on the ground
or alleged ground that any Pre-effective Prospectus, the Registration Statement
or the Prospectus (or any Pre- effective Prospectus, the Registration Statement
or the Prospectus, as from time to time amended and supplemented) includes an
untrue statement of a material fact or omits to state a material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances in which they were made, not misleading, but only
insofar as any such statement or omission was made in reliance upon, and in
conformity with, written information furnished to the Company by such
Underwriter, directly or through the Representatives, specifically for use in
the preparation thereof; provided, however, that in no case is such Underwriter
to be liable with respect to any claims made against any Company Indemnified
Party against whom the action is brought unless such Company Indemnified Party
shall have notified such Underwriter in writing within a reasonable time after
the summons or other first legal process giving information of the nature of the
claim shall have been served upon the Company Indemnified Party, but failure to
notify such Underwriter of such claim shall not relieve it from any liability
which it may have to any Company Indemnified Party otherwise than on account of
its indemnity agreement contained in this paragraph. Such Underwriter shall be
entitled to participate at its own expense in the defense, or, if it so elects,
to assume the defense of any suit brought to enforce any such liability, but, if
such Underwriter elects to assume the defense, such defense shall be conducted
by counsel chosen by it. In the event that any Underwriter elects to assume the
defense of any such suit and retain such counsel, the Company Indemnified
Parties and any other Underwriter or Underwriters or controlling person or
persons, defendant or defendants in the suit, shall bear the fees and expenses
of any additional counsel retained by them, respectively. The Underwriter
against whom indemnity may be sought shall not be liable to indemnify any person
for any settlement of any such claim effected without such Underwriter's
consent. This indemnity agreement is not exclusive and will be in addition to
any liability which such Underwriter might otherwise have and shall not limit
any rights or remedies which may otherwise be available at law or in equity to
any Company Indemnified Party.
(c) If the indemnification provided for in this Section 6 is unavailable or
insufficient to hold harmless an indemnified party under subsection (a) or (b)
above in respect of any losses, claims, damages, liabilities or expenses (or
actions in respect thereof) referred to herein, then each indemnifying party
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and the Underwriters on the
other from the offering of the Stock. If, however, the allocation provided by
the immediately preceding sentence is not permitted by applicable law, then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company on the one hand and
the Underwriters on the other in connection with the statements or omissions
which
-25-
<PAGE>
resulted in such losses, claims, damages, liabilities or expenses (or actions in
respect thereof), as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the Underwriters
on the other shall be deemed to be in the same proportion as the total net
proceeds from the offering (before deducting expenses) received by the Company
bear to the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the Underwriters agree that it would not
be just and equitable if contribution were determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take account of the equitable
considerations referred to above. The amount paid or payable by an indemnified
party as a result of the losses, claims, damages, liabilities or expenses (or
actions in respect thereof) referred to above shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating, defending, settling or compromising any such
claim. Notwithstanding the provisions of this subsection (c), no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the shares of the Stock underwritten by it and distributed
to the public were offered to the public exceeds the amount of any damages which
such Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. The Underwriters'
obligations to contribute are several in proportion to their respective
underwriting obligations and not joint. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
7. Survival of Indemnities, Representations, Warranties, etc. The
respective indemnities, covenants, agreements, representations, warranties and
other statements of the Company and the several Underwriters, as set forth in
this Agreement or made by them respectively, pursuant to this Agreement, shall
remain in full force and effect, regardless of any investigation made by or on
behalf of any Underwriter, the Company or any of its officers or directors or
any controlling person, and shall survive delivery of and payment for the Stock.
8. Conditions of Underwriters' Obligations. The respective obligations of
the several Underwriters hereunder shall be subject to the accuracy, at and
(except as otherwise stated herein) as of the date hereof and at and as of the
Closing Dates, of the representations and warranties made herein by the Company,
to compliance at and as of the Closing Dates by the Company with its covenants
and agreements herein contained and other provisions hereof to be satisfied at
or prior to the Closing Dates, and to the following additional conditions:
-26-
<PAGE>
(a) The Registration Statement shall have become effective and no stop
order suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been initiated or, to the knowledge
of the Company or the Representatives, shall be threatened by the
Commission, and any request for additional information on the part of the
Commission (to be included in the Registration Statement or the Prospectus
or otherwise) shall have been complied with to the reasonable satisfaction
of the Representatives. Any filings of the Prospectus, or any supplement
thereto, required pursuant to Rule 424(b) or Rule 434 of the Rules and
Regulations, shall have been made in the manner and within the time period
required by Rule 424(b) and Rule 434 of the Rules and Regulations, as the
case may be.
(b) The Representatives shall have been satisfied that there shall not
have occurred any change, on a consolidated basis, prior to the Closing
Dates in the condition (financial or otherwise), properties, business,
management, prospects, net worth or results of operations of the Company
and the Founding Companies considered as a whole, or any change in the
capital stock, short-term or long-term debt of the Company and the Founding
Companies considered as a whole, such that (i) the Registration Statement
or the Prospectus, or any amendment or supplement thereto, contains an
untrue statement of fact which is material, or omits to state a fact which
is required to be stated therein or is necessary to make the statements
therein not misleading, or (ii) it is impracticable in the reasonable
judgment of the Representatives to proceed with the public offering or
purchase the Stock as contemplated hereby.
(c) At the time of execution of this Agreement and at each of the
Closing Dates, Arthur Andersen LLP shall have furnished to the Underwriters
a letter or letters, dated, respectively, the date of execution of this
Agreement and each of the Closing Dates, confirming that they are
independent certified public accountants with respect to the Company and
each of the Founding Companies within the meaning of the Securities Act and
the applicable published Rules and Regulations and based upon the
procedures described in such letter delivered to you concurrently with the
execution of this Agreement (herein called the "Comfort Letter"), but
carried out to a date not more than five (5) business days prior to the
First Closing Date or such later date on which the Option Stock is to be
purchased, as the case may be, (i) confirming, to the extent true, that the
statements and conclusions set forth in the Comfort Letter are accurate as
of the First Closing Date or such later date on which Option Stock is to be
purchased, as the case may be, and (ii) setting forth any revisions and
additions to the statements and conclusions set forth in the Comfort Letter
which are necessary to reflect any changes in the facts described in the
Comfort Letter since the date of such letter, or to reflect the
-27-
<PAGE>
availability of more recent financial statements, data or information. The
letter shall not contain any disclosure relating to any change in the
condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and the Founding Companies considered as
a whole from that set forth in the Registration Statement or Prospectus,
which, in your sole judgment, is material and adverse and that makes it, in
your sole judgment, impracticable or inadvisable to proceed with the public
offering of the Stock as contemplated by the Prospectus. The Comfort Letter
shall be addressed to or for the use of the Underwriters in form and
substance satisfactory to the Underwriters and shall (i) represent that
they are independent certified public accountants with respect to the
Company and each of the Founding Companies within the meaning of the Act
and the applicable published Rules and Regulations, (ii) set forth their
opinion with respect to their examination of the balance sheet of the
Company as of January 31, 1997, each of the Significant Founding Companies
as of the end of their respective fiscal year ends, and related
consolidated statements of operations, shareholders' equity, and cash flows
for the twelve (12) months then ended, (iii) state that Arthur Andersen LLP
has performed, with respect to the interim financial statements of the
Company and the Significant Founding Companies included in the Registration
Statement (the "Quarterly Financial Statements"), the procedures set out in
Statement on Auditing Standards No. 71 ("SAS 71") for a review of interim
financial information and providing the report of Arthur Andersen LLP as
described in SAS 71 on the Quarterly Financial Statements, (iv) state that
in the course of such review, nothing came to their attention that leads
them to believe that any material modifications need to be made to any of
the Quarterly Financial Statements in order for them to be in compliance
with generally accepted accounting principles consistently applied across
the periods presented, (v) state that, on the basis of a reading of the pro
forma combined financial statements included in the Registration Statement
and the Prospectus, carrying out certain specified procedures that would
not necessarily reveal matters of significance with respect to the comments
set forth in this clause (v), inquiries of certain officials of the Company
and the Founding Companies who have responsibility for financial and
accounting matters and proving the arithmetic accuracy of the application
of the pro forma combined financial statements, nothing came to their
attention that caused them to believe that the pro forma combined financial
statements do not comply in form in all materials respects with the
applicable accounting requirements of Rule 11-02 of Regulation S-X or that
the pro forma adjustments have not been properly applied to the historical
amounts in the compilation of such statements and (vi) address other
matters agreed upon by Arthur Andersen LLP and you. In addition, you shall
have received from Arthur Andersen LLP a letter addressed to the Company
and made available to you for the use of the Underwriters stating that
-28-
<PAGE>
their review of the Company's system of internal accounting controls, to
the extent they deemed necessary in establishing the scope of their
examination of the above financial statements as of January 31, 1997, did
not disclose any weaknesses in internal controls that they considered to be
material weaknesses.
(d) The Representatives shall have received from Morgan, Lewis &
Bockius LLP, counsel for the Company, an opinion, dated the Closing Dates,
to the effect set forth in Exhibit I hereto. Counsel rendering the
foregoing opinion may rely as to questions of law not involving the laws of
the United States or the State of New York and the General Corporation Law
of the State of Delaware upon opinions of local counsel, and as to
questions of fact upon representations or certificates of officers of the
Company and/or the Founding Companies, and of government officials, in
which case their opinion is to state that they are so relying and that they
have no knowledge of any material misstatement or inaccuracy in any such
opinion, representation or certificate. Counsel rendering the foregoing
opinion may also rely, with respect to matters concerning the Founding
Companies, upon an opinion or opinions, each dated the Closing Date and
addressed to the Underwriters, of counsel to the Founding Companies,
provided Morgan, Lewis & Bockius LLP shall state that they believe, after
due inquiry, that both you and they are justified in relying upon such
opinion or opinions. Copies of any opinion, representation or certificate
so relied upon shall be delivered to you, as Representatives of the
Underwriters, and to Underwriters' Counsel.
(e) The Representatives shall have received from Fulbright & Jaworski
L.L.P., counsel for the Underwriters, their opinion or opinions dated the
Closing Dates with respect to the incorporation of the Company, the
validity of the Stock, the Registration Statement and the Prospectus and
such other related matters as it may reasonably request, and the Company
shall have furnished to such counsel such documents as they may reasonably
request for the purpose of enabling them to pass upon such matters. In
rendering such opinion, Fulbright & Jaworski L.L.P. may rely as to all
matters governed other than by the laws of New York or federal laws on the
opinion of counsel referred to in paragraph (e) of this Section 8.
(f) The Representatives shall have received a certificate, dated the
Closing Dates, of the chief executive officer or the President and the
chief financial officer of the Company to the effect that:
(i) No stop order suspending the effectiveness of the
Registration Statement has been issued, and, to the best of the
knowledge of the signers, no proceedings for that purpose have
-29-
<PAGE>
been instituted or are pending or contemplated under the Securities
Act;
(ii) Neither any Pre-effective Prospectus, as of its date, nor
the Registration Statement nor the Prospectus, nor any amendment or
supplement thereto, as of the time when the Registration Statement
became effective and at all times subsequent thereto up to the
delivery of such certificate, included any untrue statement of a
material fact or omitted to state any material fact required to be
stated therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading;
(iii) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, and except
as set forth or contemplated in the Prospectus, neither the Company
nor any of the Founding Companies has incurred any material
liabilities or obligations, direct or contingent, nor entered into any
material transactions not in the ordinary course of business and there
has not been any material adverse change in the condition (financial
or otherwise), properties, business, management, prospects, net worth
or results of operations of the Company and the Founding Companies
considered as a whole, or any change in the capital stock, short-term
or long-term debt of the Company and the Founding Companies considered
as a whole;
(iv) The representations and warranties of the Company in this
Agreement are true and correct at and as of the Closing Dates, and the
Company has complied with all the agreements and performed or
satisfied all the conditions on its part to be performed or satisfied
at or prior to the Closing Dates; and
(v) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus, and except as
disclosed in or contemplated by the Prospectus, (i) there has not been
any material adverse change or a development involving a material
adverse change in the condition (financial or otherwise), properties,
business, management, prospects, net worth or results of operations of
the Company and the Founding Companies considered as a whole; (ii) the
business and operations conducted by the Company and the Founding
Companies have not sustained a loss by strike, fire, flood, accident
or other calamity (whether or not insured) of such a character as to
interfere materially with the conduct of the business and operations
of the Company and the Founding Companies
-30-
<PAGE>
considered as a whole; (iii) no legal or governmental action, suit or
proceeding is pending or, to the knowledge of the Company, threatened
against the Company or any of the Founding Companies which is material
to the Company and the Founding Companies considered as a whole,
whether or not arising from transactions in the ordinary course of
business, or which may materially and adversely affect the
transactions contemplated by this Agreement; (iv) since such dates and
except as so disclosed, the Company has not incurred any material
liability or obligation, direct, contingent or indirect, made any
change in its capital stock (except pursuant to its stock plans), made
any material change in its short-term or funded debt or repurchased or
otherwise acquired any of the Company's capital stock; and (v) the
Company has not declared or paid any dividend, or made any other
distribution, upon its outstanding capital stock payable to
stockholders of record on a date prior to the Closing Dates.
(g) The Company shall have furnished to the Representatives such
additional certificates as the Representatives may have reasonably
requested as to the accuracy, at and as of the Closing Dates, of the
representations and warranties made herein by it and as to compliance at
and as of the Closing Dates by it with its covenants and agreements herein
contained and other provisions hereof to be satisfied at or prior to the
Closing Dates, and as to satisfaction of the other conditions to the
obligations of the Underwriters hereunder.
(h) Ladenburg shall have received the written agreements of the
officers, directors, director nominees of the Company and the holders of
securities of the Company listed in Schedule B that each will not offer,
sell, assign, transfer, encumber, contract to sell, grant an option to
purchase or otherwise dispose of, any shares of Common Stock (including,
without limitation, Common Stock which may be deemed to be beneficially
owned by such officer, director, director nominee or holder in accordance
with the Rules and Regulations) or securities convertible into or
exercisable or exchangeable for Common Stock during the 180 days following
the date of the Prospectus.
(i) The Nasdaq National Market shall have approved the Stock for
inclusion, subject only to official notice of issuance.
(j) Each of the Founding Company Mergers shall have been consummated
as of the First Closing Date on the terms set forth in the Registration
Statement and in each Agreement and Plan of Organization.
-31-
<PAGE>
All opinions, certificates, letters and other documents will be in
compliance with the provisions hereunder only if they are satisfactory in form
and substance to the Representatives. The Company will furnish to the
Representatives conformed copies of such opinions, certificates, letters and
other documents as the Representatives shall reasonably request. If any of the
conditions hereinabove provided for in this Section 8 shall not have been
satisfied when and as required by this Agreement, this Agreement may be
terminated by the Representatives by notifying the Company of such termination
in writing or by telegram at or prior to the Closing Dates, but Ladenburg shall
be entitled to waive any of such conditions.
9. Effective Date. This Agreement shall become effective immediately as to
Sections 5, 6, 7, 9, 10, 11, 13, 14, 15, 16, 17, 18 and 19 and, as to all other
provisions, at 11:00 A.M. New York City time on the first full business day
following the effectiveness of the Registration Statement or at such earlier
time after the Registration Statement becomes effective as the Representatives
may determine on and by notice to the Company or by release of any of the Stock
for sale to the public. For the purposes of this Section 9, the Stock shall be
deemed to have been so released upon the release for publication of any
newspaper advertisement relating to the Stock or upon the release by you of
telegrams (i) advising Underwriters that the shares of Stock are released for
public offering or (ii) offering the Stock for sale to securities dealers,
whichever may occur first.
10. Termination. This Agreement (except for the provisions of Section 5)
may be terminated by the Company at any time before it becomes effective in
accordance with Section 9 by notice to the Representatives and may be terminated
by the Representatives at any time before it becomes effective in accordance
with Section 9 by notice to the Company. In the event of any termination of this
Agreement under this or any other provision of this Agreement, there shall be no
liability of any party to this Agreement to any other party, other than as
provided in Sections 5, 6 and 11 and other than as provided in Section 12 as to
the liability of defaulting Underwriters.
This Agreement may be terminated after it becomes effective by the
Representatives by notice to the Company (i) if at or prior to the First Closing
Date trading in securities on any of the New York Stock Exchange, American Stock
Exchange or Nasdaq National Market shall have been suspended or minimum or
maximum prices shall have been established and are then currently in effect on
any such exchange or market, or a banking moratorium shall have been declared by
New York or United States authorities; (ii) trading of any securities of the
Company shall have been suspended on any exchange or in any over-the-counter
market; (iii) if at or prior to the First Closing Date there shall have been (A)
an outbreak or escalation of hostilities between the United States and any
foreign power or of any other insurrection or armed conflict involving the
United States or (B) any change in financial markets or any calamity or crisis
which, in the reasonable judgment of the Representatives, makes it impractical
or inadvisable to offer or sell the Firm Stock on the terms contemplated by the
Prospectus; (iv) if there shall have been any
-32-
<PAGE>
development or prospective development involving particularly the business or
properties or securities of the Company or any of the Founding Companies or the
transactions contemplated by this Agreement or any Agreement and Plan of
Organization, which, in the judgment of the Representatives, makes it
impracticable or inadvisable to offer or deliver the Firm Stock on the terms
contemplated by the Prospectus; (v) if there shall be any litigation or
proceeding, pending or threatened, which, in the reasonable judgment of the
Representatives, makes it impracticable or inadvisable to offer or deliver the
Firm Stock on the terms contemplated by the Prospectus; or (vi) if there shall
have occurred any of the events specified in the immediately preceding clauses
(i) - (v) together with any other such event that makes it, in the reasonable
judgment of the Representatives, impractical or inadvisable to offer or deliver
the Firm Stock on the terms contemplated by the Prospectus.
11. Reimbursement of Underwriters. Notwithstanding any other provisions
hereof, if this Agreement shall not become effective by reason of any election
of the Company pursuant to the first paragraph of Section 10 or shall be
terminated by the Representatives under Section 8 or Section 10, the Company
will bear and pay the expenses specified in Section 5 hereof and, in addition to
its obligations pursuant to Section 6 hereof, the Company will reimburse the
reasonable out-of-pocket expenses of the several Underwriters (including
reasonable fees and disbursements of counsel for the Underwriters) incurred in
connection with this Agreement and the proposed purchase of the Stock, up to a
maximum of $100,000, and promptly upon demand the Company will pay such amounts
to you as Representatives.
12. Substitution of Underwriters. If on the First Closing Date or the
Option Closing Date, as the case may be, any Underwriter or Underwriters shall
default in its or their obligations to purchase shares of Stock hereunder
(otherwise than by reason of default on the part of the Company, you, as
Representatives of the Underwriters, shall use your reasonable efforts to
procure within 48 hours thereafter one or more of the other Underwriters, or any
others, to purchase from the Company such amounts as may be agreed upon and upon
the terms set forth herein, the shares of Stock which the defaulting Underwriter
or Underwriters failed to purchase. If during such 48 hours you, as such
Representatives, shall not have procured such other Underwriters, or any others,
to purchase the shares of Stock agreed to be purchased by the defaulting
Underwriter or Underwriters, then (a) if the aggregate number of shares which
such defaulting Underwriter or Underwriters agreed but failed to purchase does
not exceed ten percent (10%) of the total number of shares underwritten, the
other Underwriters shall be obligated severally, in proportion to their
respective commitments hereunder, to purchase the shares of Stock which such
defaulting Underwriter or Underwriters agreed but failed to purchase, or (b) if
the aggregate number of shares of Stock with respect to which such default or
defaults occur is more than ten percent (10%) of the total number of shares
underwritten, the Company or you, as the Representatives of the Underwriters,
will have the right, by written notice given within the next 48-hour period to
the parties to this Agreement, to terminate this Agreement without liability on
the part of the non-defaulting Underwriters or the Company.
-33-
<PAGE>
If the remaining Underwriters or substituted Underwriters are required
hereby or agree to take up all or part of the shares of Stock of a defaulting
Underwriter or Underwriters as provided in this Section 12, (i) the Company
shall have the right to postpone the Closing Dates for a period of not more than
five (5) full business days in order that the Company may effect whatever
changes may thereby be made necessary in the Registration Statement or the
Prospectus, or in any other documents or arrangements, and the Company agrees
promptly to file any amendments to the Registration Statement or supplements to
the Prospectus which may thereby be made necessary, and (ii) the respective
numbers of shares to be purchased by the remaining Underwriters or substituted
Underwriters shall be taken as the basis of their underwriting obligation for
all purposes of this Agreement. Nothing herein contained shall relieve any
defaulting Underwriter of its liability to the Company or the other Underwriters
for damages occasioned by its default hereunder. Any termination of this
Agreement pursuant to this Section 12 shall be without liability on the part of
any non-defaulting Underwriter or the Company, except for expenses to be paid or
reimbursed pursuant to Section 5 and except for the provisions of Section 6.
13. Notices. All communications hereunder shall be in writing and, if sent
to the Underwriters shall be mailed, delivered or telegraphed and confirmed to
you, as their Representatives c/o Ladenburg Thalmann & Co. Inc. at 590 Madison
Avenue, New York, New York 10022, attention:__________, except that notices
given to an Underwriter pursuant to Section 6 hereof shall be sent to such
Underwriter at the address furnished by the Representatives or, if sent to the
Company, shall be mailed, delivered or telegraphed and confirmed c/o
_________________.
14. Successors. This Agreement shall inure to the benefit of and be binding
upon the several Underwriters, the Company and their respective successors and
legal representatives. Nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any person other than the persons
mentioned in the preceding sentence any legal or equitable right, remedy or
claim under or in respect of this Agreement, or any provisions herein contained,
this Agreement and all conditions and provisions hereof being intended to be and
being for the sole and exclusive benefit of such persons and for the benefit of
no other person; except that the representations, warranties, covenants,
agreements and indemnities of the Company contained in this Agreement shall also
be for the benefit of the person or persons, if any, who control any Underwriter
or Underwriters within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act, and the indemnities of the several Underwriters
shall also be for the benefit of each director of the Company, each of its
officers who has signed the Registration Statement and the person or persons, if
any, who control the Company within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act.
15. Applicable Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without giving effect to the
choice of law principles thereof.
-34-
<PAGE>
16. Authority of the Representatives. In connection with this Agreement,
you will act for and on behalf of the several Underwriters, and any action taken
under this Agreement by you, as Representatives, or individually as a
Representative, will be binding on all the Underwriters.
17. Partial Unenforceability. The invalidity or unenforceability of any
section, paragraph or provision of this Agreement shall not affect the validity
or enforceability of any other section, paragraph or provision hereof. If any
section, paragraph or provision of this Agreement is for any reason determined
to be invalid or unenforceable, there shall be deemed to be made such minor
changes (and only such minor changes) as are necessary to make it valid and
enforceable.
18. General. This Agreement constitutes the entire agreement of the parties
to this Agreement and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings and negotiations with respect to
the subject matter hereof.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of this Agreement may be waived,
only by a writing signed by the Company and the Representatives.
19. Counterparts. This Agreement may be signed in two or more counterparts,
each of which shall be an original, with the same effect as if the signatures
thereto and hereto were upon the same instrument.
If the foregoing correctly sets forth our understanding, please indicate
your acceptance thereof in the space provided below for that purpose, whereupon
this letter and your acceptance shall constitute a binding agreement between us.
Very truly yours,
COLLECTIBLES USA, INC.
By:_________________________________
Name:
Accepted and delivered in
___________________ as of
-35-
<PAGE>
the date first above written.
LADENBURG THALMANN & CO. INC.
EVEREN SECURITIES, INC.
STEPHENS INC.
Each acting on its own behalf and
as a Representative of the several
Underwriters referred to in the
foregoing Agreement.
By: Ladenburg Thalmann & Co. Inc.
By:______________________________
Name:
Title:
-36-
<PAGE>
SCHEDULE A
Number of shares of
Name Firm Stock to be Purchased
Ladenburg Thalmann & Co. Inc............
EVEREN Securities, Inc..................
Stephens Inc............................
Total................................... _________
2,700,000
=========
-37-
<PAGE>
SCHEDULE B
-38-
<PAGE>
EXHIBIT I
Matters to be covered in
opinion of Counsel to the Company1
1. The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware; each of
the Acquisition Subsidiaries has been duly organized and is validly existing as
a corporation in good standing under the laws of the State of Delaware; each of
the Founding Companies has been duly organized and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation;
2. The Company has all corporate power and authority necessary to own or
hold its properties and to conduct its business as described in the Prospectus;
each of the Founding Companies has all corporate power and authority necessary
to own or hold its properties and to conduct their respective businesses as
described in the Prospectus;
3. The Company and each of the Founding Companies is duly qualified to do
business and is in good standing as a foreign corporation in each of the
jurisdictions set forth on a Schedule to the opinion; to such counsel's
knowledge, the Company does not own or control, and immediately after the
consummation of the Founding Company Mergers will not own or control, directly
or indirectly, any corporation, association or other entity other than the
Acquisition Subsidiaries, the Founding Companies and a partnership formed by
American Royal Arts Corp. and Animation USA, Inc. which has these two entities
as its only partners;
4. The authorized, issued and outstanding capital stock of the Company is
as set forth in the Prospectus under the caption "Capitalization" as of the
dates stated therein; the issued and outstanding shares of capital stock of the
Company have been duly and validly issued and are fully paid and nonassessable,
and, to such counsel's knowledge, have not been issued in violation of or
subject to any preemptive right, co-sale right, registration right, right of
first refusal or other similar right and, except as set forth in the
Registration Statement, to such counsel's knowledge, there are no outstanding
rights, warrants or options to acquire, or instruments convertible into or
exchangeable for, any shares of capital stock or other equity interest in the
Company; the issued and outstanding shares of capital stock of each of the
Acquisition Subsidiaries have been duly and validly issued and are fully paid
and
- ----------
1 Capitalized terms used herein but not defined shall have the meanings given
such terms in the Underwriting Agreement.
-39-
<PAGE>
nonassessable, and, to such counsel's knowledge, have not been issued in
violation of or subject to any preemptive right, co-sale right, registration
right, right of first refusal or other similar right; all the issued and
outstanding shares of capital stock of each of the Acquisition Subsidiaries are
owned of record and beneficially by the Company, free and clear of any security
interests, liens, encumbrances, equities or other claims;
5. Upon completion of the Founding Company Mergers, all the outstanding
shares of capital stock of each of the Founding Companies will be owned by the
Company, to such counsel knowledge, free and clear of any security interests,
liens, encumbrances, equities or other claims and there are no outstanding
rights, warrants or options to acquire, or instruments convertible into or
exchangeable for, any shares of capital stock or other equity interest in the
Founding Companies;
6. The Stock, the shares of Common Stock to be issued in connection with
the Founding Company Mergers and the shares to be issued in connection with the
conversion of the Preferred Stock and Restricted Common Stock, have been duly
and validly authorized by the Company for issuance, and the Company has full
corporate power and authority to issue, sell and deliver such shares, and, when
such shares are issued and delivered against payment therefor in accordance with
the terms hereof, each Agreement and Plan of Organization, or the Company's
Amended and Restated Certificate of Incorporation (the "Certificate of
Incorporation"), as the case may be, they will be fully paid and nonassessable,
and will not have been issued in violation of or subject to any statutory
preemptive right, or to such counsel's knowledge, any contractual preemptive
right, co-sale right, registration right, right of first refusal or other
similar right; there are no restrictions upon the voting or transfer of, any of
the Stock pursuant to the Certificate of Incorporation or By-laws, or any
agreement or other instrument of the Company known to such counsel.
7. All of the shares of Common Stock to be issued upon exercise of the
Warrants have been duly and validly authorized by the Company for issuance and,
when issued and delivered against payment therefor in accordance with the terms
of the Warrants, will be duly and validly issued, fully paid and nonassessable
and will not have been issued in violation of or subject to any statutory
preemptive right, or to such counsel's knowledge, any contractual preemptive
right, co-sale right, registration right, right of first refusal or other
similar right.
8. To such counsel's knowledge, except as set forth in the Prospectus,
there are no legal or governmental proceedings pending to which the Company or
any of the Founding Companies is a party or of which any property or assets of
the Company or any of the Founding Companies is the subject which, if determined
adversely to the Company or any of the Founding Companies, could have a Material
Adverse Effect or prevent or adversely affect the transactions
-40-
<PAGE>
contemplated by the Underwriting Agreement or any Agreement and Plan of
Organization; and, to such counsel's knowledge, no such proceedings are
threatened by governmental authorities or other third parties.
9. This Agreement and the Warrant with respect to the Company, and each
Agreement and Plan of Organization, with respect to the Company, each of the
Acquisition Subsidiaries and each of the Founding Companies, have been duly
authorized by all necessary corporate action on the part of each of the parties
thereto and have been duly executed and delivered by such parties and, assuming
due authorization, execution and delivery of this Agreement by you, are valid
and binding agreements of such parties; the certificates or articles of merger
referred to in each Agreement and Plan of Organization, assuming the due filing
thereof with the appropriate regulatory authorities, will cause the statutory
merger of each Founding Company with the Acquisition Subsidiary that is party to
such Agreement and Plan of Organization; the Company has full corporate power
and authority to enter into this Agreement and each Agreement and Plan of
Organization and each of the Founding Companies has full corporate power and
authority to enter into the Agreement and Plan of Organization to which it is
party;
10. All offers and sales of the Company's capital stock prior to the date
hereof were at all relevant times, and the capital stock to be issued by the
Company in the Founding Company Mergers will be, exempt from the registration
requirements of the Securities Act;
11. The Company has the full corporate power and authority to execute and
deliver the Warrants on the terms and conditions set forth in the Underwriting
Agreement and in the Warrants, and such execution and delivery of the Warrants
has been duly and validly authorized, and when executed and delivered pursuant
to the Underwriting Agreement, the Warrants will be enforceable against the
Company in accordance with their terms (except to the extent rights to indemnity
thereunder may be limited by federal and state securities laws or public policy
underlying such laws and except to the extent, enforcement may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws relating to
or affecting creditors' rights generally or by general equitable principles).
12. The execution, delivery and performance of the Underwriting Agreement,
the Warrant and each Agreement and Plan of Organization and the consummation of
the transactions therein contemplated will not result in a breach or violation
of any of the terms or provisions of or constitute a default under the charter,
by-laws or other organizational documents of the Company or any of the Founding
Companies, or any material indenture, mortgage, deed of trust, note agreement or
other agreement or instrument known to such counsel to which the Company or any
of the Founding Companies is a party or by which it or any of them or any of
their properties is or may be bound and,
-41-
<PAGE>
with respect to the Underwriting Agreement and the Warrant, will not result in a
breach or violation of any law, statute, order, rule or regulation of any court
or governmental agency or body having jurisdiction over the Company or any of
the Founding Companies or any of their properties or result in the creation of a
lien.
13. To such counsel's knowledge, neither the Company nor any of the
Founding Companies is presently (a) in violation of their respective charter or
by-laws, or (b), to such counsel's knowledge, in breach or default under any
lease, instrument, license, permit or any other agreement to which the Company
or any of the Founding Companies is bound or to which any property or assets of
the Company or any of the Founding Companies is the subject, where the
consequences of such violation, breach or default would have a Material Adverse
Effect;
14. No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation by the Company of
the transactions contemplated by the Underwriting Agreement or pursuant to any
Agreement and Plan of Organization (except such as may be required by the NASD
or as required by the securities or "Blue Sky" laws of any jurisdiction as to
which such counsel need express no opinion) in connection with the purchase and
distribution of the Stock by the Underwriters except such as have been obtained
or made, specifying the same.
15. The Registration Statement has become effective under the Securities
Act and, to the best of such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceeding
for that purpose is pending or threatened by the Commission.
16. The Registration Statement and the Prospectus and any amendments or
supplements thereto (except for the financial statements and notes thereto and
related schedules and other financial information as to which such counsel need
express no opinion) comply as to form in all material respects with the
requirements of the Securities Act and the Rules and Regulations.
17. To such counsel's knowledge, there are no contracts, agreements or
other documents required to be described in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration Statement which is
not described or filed therein as required. All descriptions of any such
contracts, agreements or documents contained in the Registration Statement are
accurate and complete descriptions of such documents in all material respects.
18. The statements in the Prospectus under the captions "Business-
Animation Art Galleries--Merchandising" "Business--Licenses,"
"Management--Employment Agreements," -- "1997 Long-Term Incentive Plan," "--1997
Non-Employee Directors' Stock Plan," "Description of Capital Stock" and
-42-
<PAGE>
"Shares Eligible for Future Sale," to the extent they constitute a summary of
documents referred to therein or matters of law accurately summarize and fairly
present in all material respects the information called for with respect to such
documents and matter and the legal and regulatory matters described therein.
19. Neither the Company nor any of the Founding Companies is an "investment
company," or an entity "controlled" by an "investment company" required to be
registered under the 1940 Act, as such terms are defined in the 1940 Act.
20. To such counsel's knowledge, none of the licenses, trademarks, service
marks or trade names presently owned, held or used by the Company or any of the
Founding Companies infringes or conflicts with any licenses, trademarks, service
marks or trade names of any other person or entity or are in dispute, and such
counsel is not aware of any notice of any infringement of or conflict with the
asserted rights of others in any such respect that might have a Material Adverse
Effect.
21. To such counsel's knowledge, except as set forth in the Registration
Statement and the Prospectus, no holder of any securities of the Company or any
other person has the right, contractual or otherwise, to cause the Company to
sell or otherwise issue to such person, or to permit such person to underwrite
the sale of, any of the Stock or the right to have any Common Stock or other
securities of the Company included in the Registration Statement or the right,
as a result of the filing of the Registration Statement, to require registration
under the Securities Act of any shares of Common Stock or other securities of
the Company that has not been waived or lapsed.
In addition to the matters set forth above, such opinion shall also include a
statement to the effect that nothing has come to the attention of such counsel
which leads them to believe that (i) the Registration Statement or any amendment
thereto, as of the time it became effective under the Securities Act (but after
giving effect to any modifications incorporated therein pursuant to Rule 430A
under the Securities Act), contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein not misleading, or (ii) that the
Prospectus, or any supplement thereto, on the date it was filed pursuant to the
Rules and Regulations and as of the First Closing Date or the Option Closing
Date, as the case may be, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading (except that such counsel need express no view as
to financial statements and notes thereto and schedules or other financial
information therein). With respect to such statement, such counsel may state
that their belief is based upon the procedures set forth therein, but is without
independent check and verification.
-43-
COLLECTIBLES USA, INC.
WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK
No. 1 270,000 Shares
FOR VALUE RECEIVED, Collectibles USA, Inc., a Delaware corporation (the
"COMPANY"), hereby certifies that Ladenburg Thalmann & Co. Inc. or its permitted
assigns, is entitled to purchase from the Company, at any time or from time to
time commencing on [the Effective Date], 1997 and prior to 5:00 P.M., New York
City time, on [5 years from Effective Date], 2002, two hundred seventy thousand
(270,000) fully paid and non-assessable shares of the common stock, $.01 par
value per share, of the Company for an aggregate purchase price of $__________
(computed on the basis of $______1 per share). (Hereinafter, (i) said common
stock, together with any other equity securities which may be issued by the
Company with respect thereto or in substitution therefor, is referred to as the
"COMMON STOCK," (ii) the shares of the Common Stock purchasable hereunder or
under any other Warrant (as hereinafter defined) are referred to individually as
a "WARRANT SHARE" and collectively as the "WARRANT SHARES," (iii) the aggregate
purchase price payable for the Warrant Shares hereunder is referred to as the
"AGGREGATE WARRANT PRICE," (iv) the price payable for each of the Warrant Shares
hereunder is referred to as the "PER SHARE WARRANT PRICE," (v) this Warrant, all
similar Warrants issued on the date hereof and all Warrants hereafter issued in
exchange or substitution for this Warrant or such similar Warrants are referred
to as the "WARRANTS" and (vi) the holder of this Warrant is referred to as the
"HOLDER" and the holder of this Warrant and all other Warrants or Warrant Shares
issued upon the exercise of any Warrant are referred to as the "HOLDERS.") The
Aggregate Warrant Price is not subject to adjustment. The Per Share Warrant
Price is subject to adjustment as hereinafter provided; in the event of any such
adjustment, the number of Warrant Shares shall be adjusted by dividing the
Aggregate Warrant Price by the Per Share Warrant Price in effect immediately
after such adjustment.
1. EXERCISE OF WARRANT. (a) The Holder may exercise this Warrant, in whole
or in part, as follows:
(i) By presentation and surrender of this Warrant to the Company at
the address set forth in Subsection 9(a) hereof, with the Subscription Form
annexed hereto (or a reasonable facsimile thereof) duly executed and
accompanied by payment of the Per Share Warrant Price for each Warrant
Share to be purchased. Payment for Warrant Shares shall
- ----------
1 120% of public offering price.
<PAGE>
be made by certified or official bank check payable to the order of the
Company; or
(ii) By presentation and surrender of this Warrant to the Company at
the address set forth in Subsection 9(a) hereof, with a Cashless Exercise
Form annexed hereto (or a reasonable facsimile thereof) duly executed (a
"CASHLESS EXERCISE"). Such presentation and surrender shall be deemed a
waiver of the Holder's obligation to pay all or any portion of the
Aggregate Warrant Price. In the event of a Cashless Exercise, the Holder
shall exchange its Warrant for that number of shares of Common Stock
determined by multiplying the number of Warrant Shares being exercised by a
fraction, the numerator of which shall be the difference between the then
current market price per share of the Common Stock and the Per Share
Warrant Price, and the denominator of which shall be the then current
market price per share of Common Stock. For purposes of any computation
under this Section 1(a)(ii), the then current market price per share of
Common Stock at any date shall be deemed to be the average for the thirty
consecutive business days immediately prior to the Cashless Exercise of the
daily closing prices of the Common Stock on the principal national
securities exchange on which the Common Stock is admitted to trading or
listed, or if not listed or admitted to trading on any such exchange, the
closing prices as reported by the Nasdaq National Market, or if not then
listed on the Nasdaq National Market, the average of the highest reported
bid and lowest reported asked prices as reported by the National
Association of Securities Dealers, Inc. Automated Quotations System
("NASDAQ") or if not then publicly traded, the fair market price of the
Common Stock as determined by the Board of Directors.
(b) If this Warrant is exercised in part, this Warrant must be exercised
for a number of whole shares of the Common Stock, and the Holder is entitled to
receive a new Warrant covering the Warrant Shares which have not been exercised
and setting forth the proportionate part of the Aggregate Warrant Price
applicable to such Warrant Shares. Upon such surrender of this Warrant, the
Company will (i) issue a certificate or certificates, in such denominations as
are requested for delivery by the Holder, in the name of the Holder for the
largest number of whole shares of the Common Stock to which the Holder shall be
entitled and, if this Warrant is exercised in whole, in lieu of any fractional
share of the Common Stock to which the Holder shall be entitled, pay to the
Holder cash in an amount equal to the fair value of such fractional share
(determined in such reasonable manner as the Board of Directors of the Company
shall determine), and (ii) deliver the other securities and properties
receivable upon the exercise of this Warrant, or the proportionate part thereof
if this Warrant is exercisable in part, pursuant to the provisions of this
Warrant. The Holder shall be deemed to be the holder of record of the shares of
Common Stock issuable upon such exercise, notwithstanding that the stock
transfer
-2-
<PAGE>
books of the Company shall then be closed or that certificates representing such
shares of Common Stock shall not then be actually delivered to the Holder.
2. RESERVATION OF WARRANT SHARES; LISTING. The Company agrees that, prior
to the expiration of this Warrant, the Company will at all times (a) have
authorized and in reserve, and will keep available, solely for issuance or
delivery upon the exercise of this Warrant, the shares of the Common Stock and
other securities and properties as from time to time shall be receivable upon
the exercise of this Warrant, free and clear of all restrictions on sale or
transfer and free and clear of all preemptive rights and rights of first refusal
and (b) if the Company hereafter lists its Common Stock on any national
securities exchange, keep the shares of the Common Stock receivable upon the
exercise of this Warrant authorized for listing on such exchange upon notice of
issuance.
3. PROTECTION AGAINST DILUTION. (a) In case the Company shall hereafter (i)
pay a dividend or make a distribution on its capital stock in shares of Common
Stock, (ii) subdivide its outstanding shares of Common Stock into a greater
number of shares, (iii) combine its outstanding shares of Common Stock into a
smaller number of shares or (iv) issue by reclassification of its Common Stock
any shares of capital stock of the Company, the Per Share Warrant Price shall be
adjusted so that the Holder upon the exercise hereof shall be entitled to
receive the number of shares of Common Stock or other capital stock of the
Company which he would have owned immediately following such action had such
Warrant been exercised immediately prior thereto. An adjustment made pursuant to
this Subsection 3(a) shall become effective immediately after the record date in
the case of a dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision, combination or
reclassification.
(b) If, at any time or from time to time after the date of this Warrant,
the Company shall issue or distribute to the holders of shares of Common Stock
evidences of its indebtedness, any other securities of the Company or any cash,
property or other assets (excluding a subdivision, combination or
reclassification, or dividend or distribution payable in shares of Common Stock,
referred to in Subsection 3(a), and also excluding cash dividends or cash
distributions paid out of net profits legally available therefor if the full
amount thereof, together with the value of other dividends and distributions
made substantially concurrently therewith or pursuant to a plan which includes
payment thereof, is equivalent to not more than 5% of the Company's net worth)
(any such nonexcluded event being herein called a "SPECIAL DIVIDEND"), the Per
Share Warrant Price shall be adjusted by multiplying the Per Share Warrant Price
then in effect by a fraction, the numerator of which shall be the then current
market price of the Common Stock (defined as the average for the thirty
consecutive business days immediately prior to the record date of the daily
closing price of the Common Stock as reported by the national securities
exchange upon which the Common Stock is then listed or if not listed on any such
exchange, the average of the closing prices as reported by Nasdaq National
Market, or if not then listed on the Nasdaq National Market, the average of the
highest reported bid and lowest reported
-3-
<PAGE>
asked prices as reported by NASDAQ, or if not then publicly traded, the fair
market price as determined by the Company's Board of Directors) less the fair
market value (as determined by the Company's Board of Directors) of the
evidences of indebtedness, cash, securities or property, or other assets issued
or distributed in such Special Dividend applicable to one share of Common Stock
and the denominator of which shall be such then current market price per share
of Common Stock. An adjustment made pursuant to this Subsection 3(b) shall
become effective immediately after the record date of any such Special Dividend.
(c) In case of any capital reorganization or reclassification, or any
consolidation or merger to which the Company is a party other than a merger or
consolidation in which the Company is the continuing corporation, or in case of
any sale or conveyance to another entity of the property of the Company as an
entirety or substantially as an entirety, or in the case of any statutory
exchange of securities with another corporation (including any exchange effected
in connection with a merger of a third corporation into the Company), the Holder
of this Warrant shall have the right thereafter to receive on the exercise of
this Warrant the kind and amount of securities, cash or other property which the
Holder would have owned or have been entitled to receive immediately after such
reorganization, reclassification, consolidation, merger, statutory exchange,
sale or conveyance had this Warrant been exercised immediately prior to the
effective date of such reorganization, reclassification, consolidation, merger,
statutory exchange, sale or conveyance and in any such case, if necessary,
appropriate adjustment shall be made in the application of the provisions set
forth in this Section 3 with respect to the rights and interests thereafter of
the Holder of this Warrant to the end that the provisions set forth in this
Section 3 shall thereafter correspondingly be made applicable, as nearly as may
reasonably be, in relation to any shares of stock or other securities or
property thereafter deliverable on the exercise of this Warrant. The above
provisions of this Subsection 3(c) shall similarly apply to successive
reorganizations, reclassifications, consolidations, mergers, statutory
exchanges, sales or conveyances. The issuer of any shares of stock or other
securities or property thereafter deliverable on the exercise of this Warrant
shall be responsible for all of the agreements and obligations of the Company
hereunder. Notice of any such reorganization, reclassification, consolidation,
merger, statutory exchange, sale or conveyance and of said provisions so
proposed to be made, shall be mailed to the Holders of the Warrants not less
than 30 days prior to such event. A sale of all or substantially all of the
assets of the Company for a consideration consisting primarily of securities
shall be deemed a consolidation or merger for the foregoing purposes.
(d) In case any event shall occur as to which the other provisions of this
Section 3 are not strictly applicable but as to which the failure to make any
adjustment would not fairly protect the purchase rights represented by this
Warrant in accordance with the essential intent and principles hereof then, in
each such case, the Holders of Warrants representing the right to purchase a
majority of the Warrant Shares subject to all outstanding Warrants may appoint a
firm of independent public accountants of recognized national standing
reasonably acceptable to the Company, which shall give their opinion as to the
adjustment, if any, on a basis consistent with
-4-
<PAGE>
the essential intent and principles established herein, necessary to preserve
the purchase rights represented by the Warrants. Upon receipt of such opinion,
the Company will promptly mail a copy thereof to the Holder of this Warrant and
shall make the adjustments described therein. The fees and expenses of such
independent public accountants shall be borne by the Company.
(e) No adjustment in the Per Share Warrant Price shall be required unless
such adjustment would require an increase or decrease of at least $0.05 per
share of Common Stock; provided, however, that any adjustments which by reason
of this Subsection 3(e) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment; provided further, however, that
adjustments shall be required and made in accordance with the provisions of this
Section 3 (other than this Subsection 3(e)) not later than such time as may be
required in order to preserve the tax-free nature of a distribution to the
Holder of this Warrant or Common Stock issuable upon exercise hereof. All
calculations under this Section 3 shall be made to the nearest cent or to the
nearest 1/l00th of a share, as the case may be. Anything in this Section 3 to
the contrary notwithstanding, the Company shall be entitled to make such
reductions in the Per Share Warrant Price, in addition to those required by this
Section 3, as it in its discretion shall deem to be advisable in order that any
stock dividend, subdivision of shares or distribution of rights to purchase
stock or securities convertible or exchangeable for stock hereafter made by the
Company to its stockholders shall not be taxable.
(f) Whenever the Per Share Warrant Price is adjusted as provided in this
Section 3 and upon any modification of the rights of a Holder of Warrants in
accordance with this Section 3, the Company shall promptly obtain, at its
expense, a certificate of a firm of independent public accountants of recognized
standing selected by the Board of Directors (who may be the regular auditors of
the Company) setting forth the Per Share Warrant Price and the number of Warrant
Shares after such adjustment or the effect of such modification, a brief
statement of the facts requiring such adjustment or modification and the manner
of computing the same and cause copies of such certificate to be mailed to the
Holders of the Warrants.
(g) If the Board of Directors of the Company shall (i) declare any dividend
or other distribution with respect to the Common Stock, other than a cash
dividend subject to the first parenthetical in Subsection 3(b), (ii) offer to
the holders of shares of Common Stock any additional shares of Common Stock, any
securities convertible into or exercisable for shares of Common Stock or any
rights to subscribe thereto, or (iii) propose a dissolution, liquidation or
winding up of the Company, the Company shall mail notice thereof to the Holders
of the Warrants not less than 15 days prior to the record date fixed for
determining stockholders entitled to participate in such dividend, distribution,
offer or subscription right or to vote on such dissolution, liquidation or
winding up.
(h) If, as a result of an adjustment made pursuant to this Section 3, the
Holder of any Warrant thereafter surrendered for exercise shall become entitled
-5-
<PAGE>
to receive shares of two or more classes of capital stock or shares of Common
Stock and other capital stock of the Company, the Board of Directors (whose
determination shall be conclusive and shall be described in a written notice to
the Holder of any Warrant promptly after such adjustment) shall determine the
allocation of the adjusted Per Share Warrant Price between or among shares or
such classes of capital stock or shares of Common Stock and other capital stock.
4. FULLY PAID STOCK; TAXES. The Company agrees that the shares of the
Common Stock represented by each and every certificate for Warrant Shares
delivered on the exercise of this Warrant shall, at the time of such delivery,
be validly issued and outstanding, fully paid and nonassessable, and not subject
to preemptive rights or rights of first refusal, and the Company will take all
such actions as may be necessary to assure that the par value or stated value,
if any, per share of the Common Stock is at all times equal to or less than the
then Per Share Warrant Price. The Company further covenants and agrees that it
will pay, when due and payable, any and all Federal and state stamp, original
issue or similar taxes which may be payable in respect of the issue of any
Warrant Share or certificate therefor.
5. REGISTRATION UNDER SECURITIES ACT OF 1933.
(a) The Company agrees that if, at any time during the period commencing on
[one year from Effective Date], 1998 and ending on [5 years from Effective
Date], 2002, the Holder and/or the Holders of any other Warrants and/or Warrant
Shares who or which shall hold not less than 30% of the Warrants and/or Warrant
Shares outstanding at such time and not previously sold pursuant to this Section
5 shall request that the Company file, under the Securities Act of 1933 (the
"ACT"), a registration statement under the Act covering not less than 30% of the
Warrant Shares issued or issuable upon the exercise of the Warrants and not so
previously sold, the Company will (i) promptly notify each Holder of the
Warrants and each holder of Warrant Shares not so previously sold that such
registration statement will be filed and that the Warrant Shares which are then
held, and/or may be acquired upon exercise of the Warrants by the Holder and
such Holders, will be included in such registration statement at the Holder's
and such Holders' request, (ii) cause such registration statement to be filed
with the Securities and Exchange Commission within forty-five days of such
request and to cover all Warrant Shares which it has been so requested to
include, (iii) use its best efforts to cause such registration statement to
become effective as soon as practicable and (iv) take all other action necessary
under any Federal or state law or regulation of any governmental authority to
permit all Warrant Shares which it has been so requested to include in such
registration statement to be sold or otherwise disposed of, and will maintain
such compliance with each such Federal and state law and regulation of any
governmental authority for the period necessary for such Holders to effect the
proposed sale or other disposition. The Company shall be required to effect a
registration or qualification pursuant to this Subsection 5(a) on one occasion
only. Notwithstanding the foregoing, if at the time of the request to register
Warrant Shares pursuant to this Subsection 5(a), the Company, in its reasonable
judgment, determines that the filing of the registration statement at
-6-
<PAGE>
the time requested would require disclosure of information not otherwise then
required to be disclosed and that such disclosure would adversely affect any
material business situation, transaction or negotiation then contemplated or
being engaged in by the Company, then the Company may, upon giving written
notice to the Holders, delay such registration for a period not to exceed ninety
(90) days from the date of such request for registration.
(b) The Company agrees that if, at any time and from time to time during
the period commencing on [one year from Effective Date], 1998 and ending on [7
years from Effective Date], 2004, the Board of Directors of the Company shall
authorize the filing of a registration statement (any such registration
statement being hereinafter called a "SUBSEQUENT REGISTRATION STATEMENT") under
the Act (otherwise than pursuant to Subsection 5(a) hereof, or other than a
registration statement on Form S-4 or Form S-8 or other form which does not
include substantially the same information as would be required in a form for
the general registration of securities or other than pursuant to the
registration statement that the Company contemplates filing as soon as
practicable after the date of this Warrant that will register up to a maximum of
2,500,000 shares of Common Stock for use by the Company as all or a portion of
the consideration to be paid in conjunction with future acquisitions) in
connection with the proposed offer of any of its securities by it or any of its
stockholders, the Company will (i) promptly notify the Holder and each of the
Holders, if any, of other Warrants and/or Warrant Shares not previously sold
pursuant to this Section 5 that such Subsequent Registration Statement will be
filed and that the Warrant Shares which are then held, and/or which may be
acquired upon the exercise of the Warrants, by the Holder and such Holders,
will, at the Holder's and such Holders' request, be included in such Subsequent
Registration Statement, (ii) upon the written request of a Holder made within 20
days after the giving of such notice by the Company, include in the securities
covered by such Subsequent Registration Statement all Warrant Shares which it
has been so requested to include, (iii) use its best efforts to cause such
Subsequent Registration Statement to become effective as soon as practicable and
(iv) take all other action necessary under any Federal or state law or
regulation of any governmental authority to permit all Warrant Shares which it
has been so requested to include in such Subsequent Registration Statement to be
sold or otherwise disposed of, and will maintain such compliance with each such
Federal and state law and regulation of any governmental authority for the
period necessary for the Holder and such Holders to effect the proposed sale or
other disposition. Notwithstanding the foregoing, if a Subsequent Registration
Statement involves an underwritten offering and if the managing underwriter
shall advise the Company in writing that, in its opinion, the distribution of
all or a portion of the Warrant Shares requested to be included in the
registration concurrently with the securities being registered by the Company
would materially adversely affect the distribution of such securities by the
Company for its own account, then the Company shall not be required to include
such Warrant Shares in such registration, provided that any such reduction shall
be on a pro rata basis among all persons other than the Company holding
registration rights and the Holders requesting registration; and provided
further, that nothing in this Subsection 5(b) shall be implied to permit the
Company to include in such registration shares of any person
-7-
<PAGE>
other than the persons holding registration rights unless all the Warrant Shares
requested to be included in such registration are so included.
(c) Whenever the Company is required pursuant to the provisions of this
Section 5 to include Warrant Shares in a registration statement, the Company
shall (i) furnish each Holder of any such Warrant Shares and each underwriter of
such Warrant Shares with such copies of the prospectus, including the
preliminary prospectus, conforming to the Act (and such other documents as each
such Holder or each such underwriter may reasonably request) in order to
facilitate the sale or distribution of the Warrant Shares, (ii) use its best
efforts to register or qualify such Warrant Shares under the blue sky laws (to
the extent applicable) of such jurisdiction or laws (to the extent applicable)
of such jurisdiction or jurisdictions as the Holders of any such Warrant Shares
and each underwriter of Warrant Shares being sold by such Holders shall
reasonably request and (iii) take such other actions as may be reasonably
necessary or advisable to enable such Holders and such underwriters to
consummate the sale or distribution in such jurisdiction or jurisdictions in
which such Holders shall have reasonably requested that the Warrant Shares be
sold. Nothing contained in this Warrant shall be construed as requiring a Holder
to exercise its Warrant prior to the closing of an offering pursuant to a
registration statement referred to in Subsection 5(a) or 5(b).
(d) The Company shall furnish to each Holder participating in an offering
pursuant to a registration statement under this Section 5 and to each
underwriter, if any, a signed counterpart, addressed to such Holder or
underwriter, of (i) an opinion of counsel to the Company, dated the effective
date of such registration statement (and, if such registration includes an
underwritten public offering, an opinion dated the date of the closing under the
underwriting agreement), and (ii) a "comfort" letter dated the effective date of
such registration statement (and, if such registration includes an underwritten
public offering, a letter dated the date of the closing under the underwriting
agreement) signed by the independent public accountants who have issued a report
on the Company's financial statements included in such registration statement,
in each case covering substantially the same matters with respect to such
registration statement (and the prospectus included therein) and, in the case of
such accountants' letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in opinions of issuer's counsel
and in accountants' letters delivered to underwriters in underwritten public
offerings of securities.
(e) The Company shall enter into an underwriting agreement with the
managing underwriters selected by Holders holding 50% of the Warrant Shares
requested to be included in a registration statement filed pursuant to Section
5(a). Such managing underwriter shall be acceptable to the Company; it being
hereby agreed by the Company that Ladenburg Thalmann & Co. Inc. shall be an
acceptable managing underwriter. Such underwriting agreement shall be reasonably
satisfactory in form and substance to the Company, each Holder and such managing
underwriters, and shall contain such representations, warranties and covenants
by the Company and
-8-
<PAGE>
such other terms as are customarily contained in agreements of that type used by
the managing underwriter. The Holders shall be parties to any underwriting
agreement relating to an underwritten sale of their Warrant Shares and may, at
their option, require that any or all the representations, warranties and
covenants of the Company to or for the benefit of such underwriters shall also
be made to and for the benefit of such Holders. Such Holders shall not be
required to make any representations or warranties to or agreements with the
Company or the underwriters except as they may relate to such Holders and their
intended methods of distribution.
(f) The Company shall pay all expenses incurred in connection with any
registration statement or other action pursuant to the provisions of this
Section 5, including the reasonable fees and expenses of one counsel
representing the Holders of Warrant Shares included in any such registration
statement, other than underwriting discounts and applicable transfer taxes
relating to the Warrant Shares.
(g) The Company will indemnify, and, if such indemnity is unavailable, will
agree to just and equitable contribution to, the Holders of Warrant Shares which
are included in each registration statement referred to in Subsections 5(a) and
5(b), and the underwriters of such Warrant Shares, substantially to the same
extent as the Company has indemnified, and agreed to just and equitable
contribution to, the underwriters (the "UNDERWRITERS") of its public offering of
Common Stock pursuant to the Underwriting Agreement (the "Underwriting
Agreement"), dated ______, 1997, by and among the Company, Ladenburg Thalmann &
Co. Inc. and the other underwriters named in Schedule A thereto. Each selling
Holder of Warrant Shares, severally and not jointly, will indemnify and hold
harmless the Company, its directors, its officers who shall have signed any such
registration statement and each person, if any, who controls the Company within
the meaning of Section 15 of the Act to the same extent as the foregoing
indemnity from the Company, but in each case to the extent, and only to the
extent, that any statement in or omission from or alleged omission from such
registration statement, any final prospectus, or any amendment or supplement
thereto was made in reliance upon information furnished in writing to the
Company by such selling Holder specifically for use in connection with the
preparation of such registration statement, any final prospectus or any such
amendment or supplement thereto; provided, however, that the obligation of any
Holder of Warrant Shares to indemnify the Company under the provisions of this
Subsection (g) shall be limited to the excess of (1) the product of (A) the
number of Warrant Shares being sold by the selling Holder and (B) the market
price of the Common Stock on the date of the sale to the public of such Warrant
Shares over (2) the aggregate amount, if any, paid to the Company by such Holder
in connection with the issuance of such Warrant Shares.
6. LIMITED TRANSFERABILITY. This Warrant may not be sold, transferred,
assigned or hypothecated by the Holder (a) except in compliance with the
provisions of the Act, and (b) until the first anniversary hereof except (i) to
any successor firm or corporation of Ladenburg Thalmann & Co. Inc., (ii) to any
of the officers of Ladenburg
-9-
<PAGE>
Thalmann & Co. Inc., or of any such successor firm or (iii) in the case of an
individual, pursuant to such individual's last will and testament or the laws of
descent and distribution, and is so transferable only upon the books of the
Company which it shall cause to be maintained for the purpose. The Company may
treat the registered Holder of this Warrant as he or it appears on the Company's
books at any time as the Holder for all purposes. The Company shall permit any
Holder of a Warrant or his duly authorized attorney, upon written request during
ordinary business hours, to inspect and copy or make extracts from its books
showing the registered holders of Warrants. All Warrants issued upon the
transfer or assignment of this Warrant will be dated the same date as this
Warrant, and all rights of the Holder thereof shall be identical to those of the
Holder.
7. LOSS, ETC., OF WARRANT. Upon receipt of evidence satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant, and of
indemnity reasonably satisfactory to the Company, if lost, stolen or destroyed,
and upon surrender and cancellation of this Warrant, if mutilated, the Company
shall execute and deliver to the Holder a new Warrant of like date, tenor and
denomination.
8. WARRANT HOLDER NOT SHAREHOLDER. Except as otherwise provided herein,
this Warrant does not confer upon the Holder any right to vote or to consent to
or receive notice as a stockholder of the Company, as such, in respect of any
matters whatsoever, or any other rights or liabilities as a stockholder, prior
to the exercise hereof.
9. NOTICES. All notices and other communications required or permitted to
be given under this Warrant shall be in writing and shall be deemed to have been
duly given if delivered personally or by facsimile transmission, or sent by
recognized overnight courier or by certified mail, return receipt requested,
postage paid, to the parties hereto as follows:
(a) if to the Company at One Battery Park Plaza, 24th Floor, New York,
New York 10004, Attn.: Ronald P. Rafaloff, facsimile no. (212) 344-1277, or
such other address as the Company has designated in writing to the Holder,
or
(b) if to the Holder at 590 Madison Avenue, New York, New York 10022,
Att.: Timothy Barney, facsimile no. (212) 409-2170, or such other address
or facsimile number as the Holder has designated in writing to the Company.
10. HEADINGS. The headings of this Warrant have been inserted as a matter
of convenience and shall not affect the construction hereof.
11. APPLICABLE LAW. This Warrant shall be governed by and construed in
accordance with the law of the State of New York without giving effect to the
principles of conflicts of law thereof.
-10-
<PAGE>
IN WITNESS WHEREOF, Collectibles USA, Inc. has caused this Warrant to be
signed by its President and its corporate seal to be hereunto affixed and
attested by its Secretary this ____ day of ____________, 1997.
By:____________________________________
Ronald P. Rafaloff
President and Chief Executive Officer
ATTEST:
___________________________________
Secretary
[Corporate Seal]
-11-
<PAGE>
ASSIGNMENT
FOR VALUE RECEIVED ____________________________ hereby sells, assigns and
transfers unto __________________________ the foregoing Warrant and all rights
evidenced thereby, and does irrevocably constitute and appoint
_______________________, attorney, to transfer said Warrant on the books of
_________________________.
Dated:______________________________ Signature:________________________
Address:__________________________
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED __________________________ hereby assigns and transfers
unto ____________________________ the right to purchase ______________ shares of
the Common Stock of _________________________ covered by the foregoing Warrant,
and a proportionate part of said Warrant and the rights evidenced thereby, and
does irrevocably constitute and appoint _____________________, attorney, to
transfer that part of said Warrant on the books of
______________________________.
Dated:______________________________ Signature:________________________
Address:__________________________
-12-
<PAGE>
SUBSCRIPTION FORM
(To be executed upon exercise of Warrant pursuant to Section 1 (a)(i))
The undersigned hereby irrevocably elects to exercise the right of purchase
represented by the within Warrant for, and to purchase thereunder,
______________ shares of Common Stock, as provided for in Section 1(a)(i), and
tenders herewith payment of the purchase price in full in the form of cash or a
certified or official bank check in the amount of $___________.
Please issue a certificate or certificates for such Common Stock in the
name of, and pay any cash for any fractional share to:
Name:______________________________
(Please Print Name, Address and Social
Security No.)
Address:_____________________________
_____________________________________
Social Security Number:______________
Signature:___________________________
NOTE: The above signature should
correspond exactly with the
name on the first page of this
Warrant or with the name of
the assignee appearing in the
assignment form below.
Date:_______________________________
And if said number of shares shall not be all the shares purchasable under
the within Warrant, a new Warrant is to be issued in the name of said
undersigned for the balance remaining of the shares purchasable thereunder.
-13-
<PAGE>
CASHLESS EXERCISE FORM
(To be executed upon exercise of Warrant
pursuant to Section 1(a)(ii))
The undersigned hereby irrevocably elects to surrender _______ shares
purchasable under this Warrant for such shares of Common Stock issuable in
exchange therefor pursuant to the Cashless Exercise provisions of the within
Warrant, as provided for in Section 1(a)(ii) of such Warrant.
Please issue a certificate or certificates for such Common Stock in the
name of, and pay cash for fractional shares to:
Name:______________________________
(Please Print Name, Address and Social
Security No.)
Address:_____________________________
_____________________________________
Social Security Number:______________
Signature:___________________________
NOTE: The above signature should
correspond exactly with the
name on the first page of this
Warrant or with the name of
the assignee appearing in the
assignment form below.
Date:_______________________________
And if said number of shares shall not be all the shares exchangeable or
purchasable under the within Warrant, a new Warrant is to be issued in the name
of the undersigned for the balance remaining of the shares purchasable
thereunder.
-14-
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement"), between Collectibles USA,
Inc., a Delaware corporation (the "Company"), and Neil J. DePascal, Jr. (the
"Executive") entered into as of this 11 day of August, 1997.
WHEREAS, as of the date of the execution of this Agreement, the
Company is engaged primarily in the business of marketing collectible
merchandise and animation art products; and
WHEREAS, the Executive will be employed by the Company in a
confidential relationship wherein the Executive, in the course of his employment
with the Company, will become familiar with and aware of information as to the
Company and its subsidiaries and affiliates and their respective customers, the
specific manner of doing business, including the processes, techniques and trade
secrets utilized by the Company and its subsidiaries and affiliates, and future
plans with respect thereto, all of which has been and will be established and
maintained at great expense to the Company, which information is a trade secret
and constitutes the valuable good will of the Company; and
NOW, THEREFORE, in consideration of the mutual promises, terms,
covenants and conditions set forth herein and the performance of each, it is
hereby agreed as follows:
1. AGREEMENT SUPERSEDES ALL OTHER PRIOR UNDERSTANDINGS UPON EFFECTIVE
DATE; REPRESENTATIONS OF EXECUTIVE. This Agreement shall supersede any and all
other prior employment agreements, letters of intent, term sheets, arrangements,
and/or any other understanding, whether written or oral, between the Executive
and the Company or any subsidiary or affiliate thereof regarding any and all
matters relating to employment, compensation, benefits or similar matters. The
Executive hereby represents and warrants to the Company that the execution of
this Agreement by the Executive and his employment by the Company and the
performance of his duties hereunder will not violate or be a breach of any
agreement with a former employer, client or any other person or entity. Further,
the Executive agrees to indemnify the Company for any claim, including, but not
limited to, attorneys' fees and expenses of investigation and all fees and
expenses incurred by the Company, by any such third party that such third party
may now have or may hereafter come to have against the Company based upon or
arising out of any non-competition agreement, invention or secrecy agreement
between the Executive and such third party.
2. EMPLOYMENT AND DUTIES.
(a) EMPLOYMENT. The Company hereby employs the Executive as Executive
Vice President and Chief Financial Officer of the Company. The Executive hereby
accepts this
<PAGE>
employment upon the terms and conditions herein contained and, subject to
Section 2(b), agrees to devote his working time, attention and efforts to
promote and further the business of the Company.
(b) EXCLUSIVITY OF SERVICES. The Executive shall not, during the Term,
be engaged in any other business activity pursued for gain, profit or other
pecuniary advantage except to the extent that such activity does not interfere
with the Executive's duties and responsibilities hereunder. The foregoing
limitations shall not be construed as prohibiting the Executive from making
personal investments in such form or manner as will neither require his services
in the operation or affairs of the companies or enterprises in which such
investments are made nor violate the terms of Section 5 of this Agreement.
(c) LOCATION FOR SERVICES. The Executive shall perform his services
hereafter at the Company's corporate headquarters. In the event that the
Executive must relocate his personal residence to a new geographical area, the
Company will pay all relocation costs to move Executive, his immediate family
and their personal property and effects. Such costs may include, by way of
example, but are not limited to, pre-move visits to search for a new residence,
investigate schools or for other purposes; temporary lodging and living costs
prior to moving into a new permanent residence; duplicate home carrying costs;
all closing costs on the sale of Executive's present residence and on the
purchase of a comparable residence in the new location; and added income taxes
that Executive may incur if any relocation costs are not deductible for tax
purposes. The general intent of the foregoing is that Executive shall not
personally bear any out-of-pocket cost as a result of the relocation, with an
understanding that Executive will use his best efforts to incur only those costs
which are reasonable and necessary to effect a smooth, efficient and orderly
relocation with minimal disruption to the business affairs of the Company and
the personal life of Executive and his family.
3. TERM. The term of this Agreement shall commence on the date hereof
(the "Effective Date") and shall end on the date which is the third anniversary
of the Effective Date (the "Initial Term"); provided, however, that in the event
that the Company or the Executive does not notify the other party on or prior to
the date which is one year prior to the expiration of the Initial Term (such
date, the "Notification Date") that it or he (as the case may be) desires that
the Initial Term not be extended beyond the termination of the Initial Term, the
term of this Agreement shall automatically be extended beyond the Initial Term
for successive one year periods on each anniversary of the Notification Date,
until either party gives notice to the other of its desire not to extend further
the term of this Agreement beyond the end of the then-extended term (the term of
this Agreement, whether during the Initial Term or any extension thereof, the
"Term").
4. COMPENSATION. For all services rendered by the Executive, the
Company shall compensate the Executive as follows:
(a) BASE SALARY. The base salary payable to the Executive during the
Term shall be at the rate of $140,000 per year, payable on a regular basis in
accordance with the Company's standard payroll procedures, but not less
frequently than on a monthly basis (the "Base Salary"). On
-2-
<PAGE>
at least an annual basis, the Board shall review the Executive's performance and
may make increases to the Base Salary if, in its discretion, any such increase
is warranted. Such recommended increase shall require approval by the Board or a
duly constituted committee thereof.
(b) INCENTIVE BONUS. It is the Company's intent to develop a written
Incentive Bonus Plan setting forth the criteria under which the Executive and
other key employees of the Company will be eligible to receive year-end bonus
awards.
(c) EXECUTIVE PERQUISITES. Benefits And Other Compensation. The
Executive shall be entitled to receive additional benefits and compensation from
the Company in such form and to such extent as specified below:
(i) Payment of all premiums for coverage for the Executive and his
dependent family members under health, hospitalization, disability, dental,
life and other insurance plans that the Company may have in effect from
time to time, which benefits provided to the Executive under this clause
(i) shall be at least equal to such benefits provided to Company
executives.
(ii) Reimbursement for all business travel and other out-of-pocket
expenses reasonably incurred by the Executive in the performance of his
services pursuant to this Agreement. All reimbursable expenses shall be
appropriately documented in reasonable detail by the Executive upon
submission of any request for reimbursement, and in a format and manner
consistent with the Company's expense reporting policy.
(iii)Four (4) weeks paid vacation for each year during the period of
employment or such greater amount as may be afforded officers and key
employees generally under the Company's policies in effect from time to
time (pro-rated for any year in which the Executive is employed for less
than the full year).
(iv) The Company shall provide the Executive with other executive
perquisites as may be available to or deemed appropriate for the Executive
by the Board and participation in all other Company-wide employee benefits
as available from time to time, which may include participation in the
Company's Long-Term Incentive Plan.
(d) $7 OPTIONS. Promptly after the date hereof, the Executive shall be
granted stock options to purchase 40,000 shares of the Company's Common Stock,
at an exercise price of $7.00 per share (the "$7 Options"). Such options shall
vest immediately and the terms and conditions of such options shall be set forth
in an option grant between the parties hereto. In the event that (i) the
Executive's employment is terminated under the circumstances set forth in
Section 6(c), 6(d) or 6(f) of this Agreement prior to the consummation of the
IPO (unless the IPO is not consummated within 60 days of the date hereof) or
(ii) the Executive's employment is terminated under the circumstances set forth
in Section 6(c) or 6(f) of this Agreement prior to the date six months after the
consummation of the IPO, then the Executive shall have five business days in
which
-3-
<PAGE>
to exercise the $7 Options and thereafter such options shall terminate and be of
no further force or effect. In the event that the Executive's employment is
terminated under any other circumstances, the Executive shall have five years in
which to exercise the $7 Options.
(e) IPO STOCK OPTIONS. The Executive shall be granted additional stock
options (the "Additional Options") to purchase 100,000 shares of Common Stock
following the IPO, at the price per share offered to the public at the
commencement of the IPO, the terms and conditions of which shall be set forth in
an option agreement between the parties hereto. The Additional Options shall
vest over a three year period, with one-third of the options vesting on the
first anniversary of the Effective Date, one-third on the second anniversary of
the Effective Date and the remainder on the third anniversary of the Effective
Date. Such options may be exercised by the Executive any time prior to the later
of (i) one year after the end of the Initial Term or (ii) one year after the end
of the termination of the Executive's employment hereunder.
5. NON-COMPETITION AGREEMENT.
(a) GENERAL. Subject to Section 5(c), the Executive shall not, during
the period of his employment by or with the Company, and for a period of two (2)
years immediately following the termination of his employment under this
Agreement (such period, the "Restricted Period"), for any reason whatsoever,
directly or indirectly, for himself or on behalf of or in conjunction with any
other person, persons, company, partnership, corporation, entity or business of
whatever nature:
(i) engage, as an officer, director, shareholder, owner, partner,
joint venturer, or in any other capacity, whether as an agent, employee,
independent contractor, consultant or advisor, or as a sales
representative, in any collectibles or animation art business in
competition with the Company or its subsidiaries or affiliates, within 100
miles of (i) the principal executive offices of the Company or (ii) any
place to which the Company or its subsidiaries or affiliates provides
products or services or in which the Company is in the process of
initiating business operations during the Restricted Period (the
"Territory");
(ii) call upon or interview any person who is, at that time, within
the Territory, an employee of the Company (including the subsidiaries or
affiliates thereof) in a managerial capacity for the purpose or with the
intent of enticing such employee away from or out of the employ of the
Company (including the subsidiaries or affiliates thereof), provided that
the Executive shall be permitted to call upon and hire any member of his
immediate family;
(iii) call upon any person or entity which is, at that time, or which
has been, within one (1) year prior to that time, a customer of the Company
(including the subsidiaries or affiliates thereof) within the Territory for
the purpose of soliciting or selling products similar in nature to those
which are or were provided by the Company to such customer within the
Territory; or
-4-
<PAGE>
(iv) call upon any prospective acquisition candidate, on the
Executive's own behalf or on behalf of any competitor, which candidate was,
to the Executive's actual knowledge after due inquiry, either called upon
by the Company (including the subsidiaries or affiliates thereof) or for
which the Company made an acquisition analysis, for the purpose of
acquiring such entity, provided that the Executive shall not be charged
with violating this section unless and until the Executive shall have
knowledge or notice that such prospective acquisition candidate was called
upon, or that an acquisition analysis was made for the purpose of acquiring
such entity; or
(v) disclose any information regarding customers, whether in existence
or proposed, of the Company (or the respective subsidiaries or affiliates
thereof) to any person, firm, partnership, corporation or business for any
reason or purpose whatever .
Notwithstanding the above, the foregoing covenant shall not be deemed to
prohibit the Executive from acquiring as an investment not more than one percent
(1%) of the capital stock of a competing business, whose stock is traded on a
national securities exchange or over-the-counter.
(b) EQUITABLE REMEDIES. Because of the difficulty of measuring
economic losses to the Company as a result of a breach of the foregoing
covenants, and because of the immediate and irreparable damage that could be
caused to the Company for which they would have no other adequate remedy, the
Executive agrees that the foregoing covenants may be enforced by the Company in
the event of breach by the Executive, by injunctions and restraining orders.
(c) REASONABLE RESTRAINT. It is agreed by the parties that the
foregoing covenants in this Section 5 impose a reasonable restraint on the
Executive in light of the activities and business of the Company (including the
Company's subsidiaries and affiliates) on the date of the execution of this
Agreement and the current plans of the Company (including the Company's
subsidiaries and affiliates); but it is also the intent of the Company and the
Executive that such covenants be construed and enforced in accordance with the
changing activities, business and locations of the Company (including the
Company's subsidiaries and affiliates) throughout the term of these covenants,
whether before or after the date of termination of the employment of the
Executive. For example, if, during the term of this Agreement, the Company
(including the Company's subsidiaries or affiliates) engages in new and
different activities, enters a new business or establishes new locations for its
current activities or business in addition to or other than the activities or
business enumerated under the whereas clauses above or the locations currently
established therefor, then the Executive will be precluded from soliciting the
customers or employees of such new activities or business or from such new
location and from directly competing with such new business within the Territory
through the Restricted Period.
It is further agreed by the parties hereto that, in the event that the
Executive shall cease to be employed hereunder, and shall enter into a business
or pursue other activities not in competition with the Company (including the
Company's subsidiaries or affiliates), or similar activities or business in
locations the operation of which, under such circumstances, does not violate
clause (a)(i) of this
-5-
<PAGE>
Section 5, and in any event such new business, activities or location are not in
violation of this Section 5 or of employee's obligations under this Section 5,
if any, the Executive shall not be chargeable with a violation of this Section 5
if the Company (including the Company's subsidiaries or affiliates) shall
thereafter enter the same, similar or a competitive (i) business, (ii) course of
activities or (iii) location, as applicable.
(d) SEVERABILITY. The covenants in this Section 5 are severable and
separate, and the unenforceability of any specific covenant shall not affect the
provisions of any other covenant. Moreover, in the event any court of competent
jurisdiction shall determine that the scope, time or territorial restrictions of
any specific covenant as set forth are unreasonable, then it is the intention of
the parties that such restrictions be enforced to the fullest extent which the
court deems reasonable, and the Agreement shall thereby be reformed.
(e) INDEPENDENT PROVISIONS. All of the covenants in this Section 5
shall be construed as an agreement independent of any other provision in this
Agreement, and the existence of any claim or cause of action of the Executive
against the Company, whether predicated on this Agreement or otherwise, shall
not constitute a defense to the enforcement by the Company of any of such
covenants. It is specifically agreed that the period of two (2) years following
termination of employment stated at the beginning of this Section 5, during
which the agreements and covenants of the Executive made in this Section 5 shall
be effective, shall be computed by excluding from such computation any time
during which the Executive is in violation of any provision of this Section 5.
6. TERMINATION; RIGHTS ON TERMINATION. This Agreement and the
Executive's employment may be terminated in any one of the followings ways:
(a) DEATH. The death of the Executive shall immediately terminate this
Agreement, with no severance compensation due to the Executive's estate.
(b) DISABILITY. If, as a result of incapacity due to physical or
mental illness or injury, the Executive shall have been absent from his
full-time duties hereunder for four (4) consecutive months, then thirty (30)
days after receiving written notice (which notice may occur before or after the
end of such four (4) month period, but which shall not be effective earlier than
the last day of such four (4) month period), the Company may terminate the
Executive's employment hereunder provided the Executive is unable to resume his
full-time duties at the conclusion of such notice period. In addition, the
Executive may terminate his employment hereunder if his health should become
impaired to an extent that makes the continued performance of his duties
hereunder hazardous to his physical or mental health or his life, provided that
the Executive shall have furnished the Company with a written statement from a
qualified doctor to such effect and provided, further, that, at the Company's
request made within thirty (30) days of the date of such written statement, the
Executive shall submit to an examination by a doctor selected by the Company who
is reasonably acceptable to the Executive and such doctor shall have concurred
in the conclusion of the Executive's doctor. In the event this Agreement is
terminated as a result of the Executive's disability, the Executive shall
receive from the Company, in a lump-sum payment due within ten
-6-
<PAGE>
(10) days of the effective date of termination, the Base Salary at the rate then
in effect for whatever time period is remaining under the Term of this Agreement
or for one (1) year, whichever amount is greater.
(c) CAUSE. The Company may terminate the Agreement ten (10) days after
written notice to the Executive for "Cause," which shall be: (1) the Executive's
willful, material and irreparable breach of this Agreement; (2) the Executive's
gross negligence in the performance or intentional nonperformance continuing for
ten (10) days after receipt of written notice of need to cure of any of the
Executive's material duties and responsibilities hereunder; (3) the Executive's
willful dishonesty, fraud or misconduct with respect to the business or affairs
of the Company or its subsidiaries or affiliates which materially and adversely
affects the operations or reputation of the Company or its subsidiaries or
affiliates; (4) the Executive's conviction of a felony crime; or (5) chronic
alcohol abuse or illegal drug abuse by the Executive. In the event of a
termination for Cause, as enumerated above, the Executive shall receive no
severance compensation.
(d) WITHOUT CAUSE. At any time after his commencement of employment,
the Company may, without Cause, terminate this Agreement and the Executive's
employment, effective thirty (30) days after written notice is provided to the
Executive. In the event that the Executive is terminated by the Company without
Cause, the Executive shall receive from the Company the Base Salary at the rate
then in effect for whatever time period is remaining under the Term of this
Agreement (not to exceed two years) or for one (1) year, whichever amount is
greater. Any termination without Cause by the Company shall operate to
immediately vest the Executive in his unvested stock options granted pursuant to
Section 4(e) hereof. Further, any termination without Cause by the Company shall
operate to shorten the Restricted Period set forth in Section 5(a) and during
which the terms of Section 5 apply to one (1) year from the date of termination
of employment.
(e) CHANGE IN CONTROL OF THE COMPANY. In the event of a "Change in
Control" of the Company (as defined in Section 11 of this Agreement) during the
Term, refer to Section 11 of this Agreement.
(f) RESIGNATION BY EXECUTIVE. If the Executive resigns or otherwise
terminates his employment hereunder (i) the Executive shall receive no severance
compensation, (ii) all unvested stock options granted pursuant to Section 4(e)
shall be forfeited to the Company and (iii) the Restricted Period shall remain
as set forth in Section 5 hereof.
(g) SURVIVAL AND CONTINUING OBLIGATIONS. Upon termination of this
Agreement for any reason provided above, the Executive shall be entitled to
receive all compensation earned and all benefits and reimbursements due through
the effective date of termination. Additional compensation subsequent to
termination, if any, will be due and payable to the Executive only to the extent
and in the manner expressly provided in this Section 6 or in Section 11. All
other rights and obligations of the Company and the Executive under this
Agreement shall cease as of the effective date of termination, except that the
Company's obligations under Section 6 herein and the
-7-
<PAGE>
Executive's obligations and other matters under Sections 5, 7, 8 and 9 herein
shall survive such termination in accordance with their terms.
7. RETURN OF COMPANY PROPERTY. All records, designs, patents, business
plans, financial statements, manuals, memoranda, lists and other property
delivered to or compiled by the Executive by or on behalf of the Company or its
representatives, vendors or customers which pertain to the business of the
Company shall be and remain the property of the Company, as the case may be, and
be subject at all times to their discretion and control. Likewise, all
correspondence, reports, records, charts, advertising materials and other
similar data pertaining to the business, activities or future plans of the
Company which is collected by the Executive shall be delivered promptly to the
Company without request by it upon termination of the Executive's employment for
any reason.
8. INVENTIONS. The Executive shall disclose promptly to the Company
any and all significant conceptions and ideas for inventions, improvements and
valuable discoveries, whether patentable or not, which are conceived or made by
the Executive, solely or jointly with another, during the period of employment
or within one (1) year thereafter, and which are related to the business or
activities of the Company or its subsidiaries or affiliates and which the
Executive conceives as a result of his employment by the Company. The Executive
hereby assigns and agrees to assign all his interests therein to the Company or
its nominee. Whenever requested to do so by the Company, the Executive shall
execute any and all applications, assignments or other instruments that the
Company shall deem necessary to apply for and obtain Letters Patent of the
United States or any foreign country or to otherwise protect the Company's or
its subsidiaries or affiliates interest therein.
9. TRADE SECRETS. Executive agrees that during the course of
performing services for the Company, he has had and will have substantial access
to and contact with information or documents, including but not limited to trade
secrets, patents, copyrighted materials, proprietary computer software, systems
analyses, lists of actual or prospective customers, contracts, Company books and
records, financial data and other Confidential and Proprietary Information and
Materials (as that term is defined below) of the Company, the disclosure of
which to competitors of the Company or others would cause the Company to suffer
substantial and irreparable damage. Executive recognizes, therefore, that it is
in the Company's legitimate business interest to restrict his disclosure or use
of Confidential and Proprietary Information and Materials for any purposes other
than the services provided by him to the Company under this Agreement, and to
limit any potential appropriation of such Confidential and Proprietary
Information and Materials by him for the benefit of the Company's competitors
and to the detriment of the Company. Therefore, it is agreed that unless
Executive shall first secure the Company's written consent, Executive shall not
publish, disclose or use, or authorize any other person or entity to publish,
disclose or use, at any time before, during or subsequent to the Term of this
Agreement, any secret or confidential information, whether patentable or not, of
or about the Company, including any Confidential and Proprietary Information and
Materials (as that term is defined below) and any other secret or confidential
information of which Executive becomes aware of or informed during the Term of
this
-8-
<PAGE>
Agreement, whether or not developed by Executive, except as required in
Executive's duties to the Company. For purposes of this Agreement, "Confidential
and Proprietary Information and Materials" shall include, without limitation,
formulas, patterns, compilations, studies, strategies, programs, devices,
methods, techniques, and processes of or about or its business, customers or
suppliers, which derive independent economic value, actual or potential, from
not being generally known to, and not being readily ascertainable by proper
means by, other persons who can obtain economic value from their disclosure or
use and which are the subject of efforts to maintain their secrecy that are
reasonable under the circumstances.
All Confidential and Proprietary Information and Materials and all
copies of such information and materials relating to the Company's business,
whether prepared by Executive or otherwise coming into his possession, shall
remain the exclusive property of the Company and shall be returned to the
Company upon the Company's request or the termination of Executive's employment.
10. ASSIGNMENT; BINDING EFFECT. The Executive understands that he has
been selected for employment by the Company on the basis of his personal
qualifications, experience and skills. The Executive agrees, therefore, that he
cannot assign all or any portion of his performance under this Agreement.
11. CHANGE IN CONTROL.
(a) GENERAL. Unless he elects to terminate this Agreement pursuant to
(c) below, the Executive understands and acknowledges that the Company may be
merged or consolidated with or into another entity and that such entity shall
automatically succeed to the rights and obligations of the Company hereunder.
(b) SEVERANCE PAYMENTS. In the event of a pending Change in Control
wherein the Company and the Executive have not received written notice at least
five (5) business days prior to the anticipated closing date of the transaction
giving rise to the Change in Control from the successor to all or a substantial
portion of the Company's business and/or assets that such successor is willing
as of the closing to assume and agree to perform the Company's obligations under
this Agreement in the same manner and to the same extent that the Company is
hereby required to perform, then such Change in Control shall be deemed to be a
termination of this Agreement by the Company without Cause during the Term and
the applicable portions of Section 6(d) will apply.
(c) VOLUNTARY RESIGNATION. In any Change in Control situation, the
Executive may, at his sole discretion, elect to terminate this Agreement by
providing written notice to the Company at least five (5) business days prior to
the anticipated closing of the transaction giving rise to the Change in Control.
In such case, the applicable provisions of Section 6(d) will apply as though the
Company had terminated the Agreement without Cause during the Term.
-9-
<PAGE>
(d) APPLICATION OF TERMINATION PROVISIONS. For purposes of applying
Section 6 under the circumstances described in Sections (b) and (c) above, the
effective date of termination will be the closing date of the transaction giving
rise to the Change in Control and all compensation, reimbursements and lump-sum
payments due the Executive must be paid in full by the Company at or prior to
such closing. Further, the Executive will be given sufficient time and
opportunity to elect whether to exercise all or any of his vested options to
purchase the Company's Common Stock, including any options with accelerated
vesting under the provisions of the Company's Long-Term Incentive Compensation
Plan, such that he may convert the options to shares of Company Common Stock at
or prior to the closing of the transaction giving rise to the Change in Control,
if he so desires.
(e) DEFINITION. A "Change in Control" shall be deemed to have occurred
if:
(i) any person, other than the Company or any employee benefit plan of
the Company, acquires directly or indirectly Beneficial Ownership (as
defined in Section 13(d) of the Securities Exchange Act of 1934, as
amended) of any voting security of the Company and immediately after such
acquisition such person is, directly or indirectly, the Beneficial Owner of
voting securities representing 50% or more of the total voting power of all
of the then-outstanding voting securities of the Company, unless the
transaction pursuant to which such acquisition is made is approved by at
least two-thirds (2/3) of the Board;
(ii) the following individuals no longer constitute a majority of the
members of the Board of Directors of the Company: (A) the individuals who,
as of the closing date of the Company's initial public offering, constitute
the Board of Directors of the Company (the "Original Directors"); (B) the
individuals who thereafter are elected to the Board of Directors of the
Company and whose election, or nomination for election, to the Board of
Directors of the Company was approved by a vote of at least two-thirds
(2/3) of the Original Directors then still in office (such directors
becoming "Additional Original Directors" immediately following their
election); and (C) the individuals who are elected to the Board of
Directors of the Company and whose election, or nomination for election, to
the Board of Directors of the Company was approved by a vote of at least
two-thirds (2/3) of the Original Directors and Additional Original
Directors then still in office (such directors also becoming "Additional
Original Directors" immediately following their election).
(iii) the stockholders of the Company shall approve a merger,
consolidation, recapitalization, or reorganization of the Company, a
reverse stock split of outstanding voting securities, or consummation of
any such transaction if stockholder approval is not obtained, other than
any such transaction which has been either (x) approved by at least 66% of
the members of the Board or (y) which would result in at least 50% of the
total voting power represented by the voting securities of the surviving
entity outstanding immediately after such transaction being Beneficially
Owned by at least 50% of the holders of outstanding voting securities of
the Company immediately prior to the transaction, with the voting power
-10-
<PAGE>
of each such continuing holder relative to other such continuing holders
not substantially altered in the transaction; or
(iv) the stockholders of the Company shall approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by
the Company of all or a substantial portion of the Company's assets (i.e.,
50% or more of the total assets of the Company).
(f) The Executive must be notified in writing by the Company at any
time that the Company anticipates that Change in Control may take place.
(g) The Executive shall be reimbursed by the Company or its successor
for any excise taxes that the Executive incurs under Section 4999 of the
Internal Revenue Code of 1986, as a result of any Change in Control. Such
amount will be due and payable by the Company or its successor within ten
(10) days after the Executive delivers a written request for reimbursement
accompanied by a copy of his tax return(s) showing the excise tax actually
incurred by the Executive.
12. COMPLETE AGREEMENT. This written Agreement is the final, complete
and exclusive statement and expression of the agreement between the Company and
the Executive and of all the terms of this Agreement, and it cannot be varied,
contradicted or supplemented by evidence of any prior oral or written
agreements. This written Agreement may not be later modified except by a further
writing signed by a duly authorized officer of the Company and the Executive,
and no term of this Agreement may be waived except by writing signed by the
party waiving the benefit of such term.
13. NOTICE. Whenever any notice is required hereunder, it shall be
given in writing addressed as follows:
To the Company: Collectibles USA, Inc.
c/o RGR Financial Group
One Battery Park Plaza
New York, NY 10004
With a copy to: Morgan, Lewis & Bockius LLP
101 Park Avenue
New York, NY 10178
Attn: David W. Pollak, Esq.
To the Executive: Mr. Neil J. DePascal, Jr.
6402 Rippling Hollow Drive
Spring, Texas 77379
-11-
<PAGE>
Notice shall be deemed given and effective three (3) days after the deposit in
the U.S. mail of a writing addressed as above and sent first class mail,
certified, return receipt requested, or if sooner, when actually received.
Either party may change the address for notice by notifying the other party of
such change.
14. SEVERABILITY; HEADINGS. If any portion of this Agreement is held
invalid or inoperative, the other portions of this Agreement shall be deemed
valid and operative and, so far as is reasonable and possible, effect shall be
given to the intent manifested by the portion held invalid or inoperative. The
Section headings herein are for reference purposes only and are not intended in
any way to describe, interpret, define or limit the extent or intent of the
Agreement or of any part hereof.
15. ARBITRATION. Any unresolved dispute or controversy arising under
or in connection with this Agreement shall be settled exclusively by
arbitration, conducted before a panel of three (3) arbitrators in New York, NY,
in accordance with the rules of the American Arbitration Association then in
effect. The arbitrators shall not have the authority to add to, detract from, or
modify any provision hereof nor to award punitive damages to any injured party.
The arbitrators shall have the authority to order back-pay, severance
compensation, vesting of options (or cash compensation in lieu of vesting of
options), and reimbursement of costs, including those incurred to enforce this
Agreement. A decision by the arbitration panel shall be final and binding.
Judgment may be entered on the arbitrators' award in any court having
jurisdiction. The direct expense of the arbitrators shall be borne by the
Company.
16. GOVERNING LAW. This Agreement shall in all respects be construed
according to the laws of the State of New York.
17. COUNTERPARTS. This Agreement may be executed simultaneously in two
(2) or more counterparts, each of which shall be deemed an original and all of
which together shall constitute but one and the same instrument.
-12-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
COLLECTIBLES USA, INC.
By:/s/ Ronald P. Rafaloff
-------------------------------------
Name: Ronald P. Rafaloff
-----------------------------------
Title: Chairman of the Board
----------------------------------
NEIL J. DEPASCAL, JR.
/s/ Neil J. Depascal, Jr.
----------------------------------------
-13-
COLLECTIBLES USA, INC.
August 8, 1997
Mr. David L. Yankey
13500 Country Way Road
Los Altos Hills, California 94022
Dear David:
This letter (the "Agreement and Release") confirms the termination of
your employment with Collectibles USA, Inc. (the "Company") effective June 11,
1997. Our understanding and agreement with respect to the termination of your
employment is as follows:
1. You hereby confirm your termination of employment and all
directorships with the Company effective June 11, 1997, provided that the
Company confirms that you were paid your salary through June 30, 1997. You
further confirm that, except as provided in paragraph 11 hereof, the Employment
Agreement between you and the Company, dated as of May, 1997, shall not become
effective, and all provisions thereof shall be null and void ab initio provided,
however, that you shall be entitled to retain all salary, bonuses, compensation
and other payments made to you by the Company.
2. Subject to paragraph 20 hereof, upon your execution and delivery of
this Agreement and Release, you shall be entitled to receive a payment of
$350,000, in consideration for cancellation of the Employment Agreement and as
full and final resolution of all actual and potential claims for back pay,
severance or other form of compensation, or otherwise relating to the
termination of your employment, compensation and benefits with the Company. Such
payment shall be made to you within three days of the consummation of the
Company's initial public offering (the "IPO") of its Common Stock, par value
$.01 per share (the "Common Stock").
3. Of the 174,580 shares of Common Stock purchased by you on November
15, 1996, you shall be entitled to retain 104,580 shares and you shall forfeit
the remaining shares of Common Stock. On the effective date of this Agreement
and Release, you shall surrender any rights in the stock certificate for the
174,580 shares of Common Stock, whereupon the Company will deliver to you a new
stock certificate (the "New Stock Certificates") for 104,580 shares (the
"Shares") of Common Stock. You acknowledge and agree that any ownership interest
that you may have in any other shares of Common Stock of the Company, or any
right to be awarded or acquire such shares of Common Stock, shall be forfeited.
Provided that all of the other persons holding 100,000 shares or more of Common
Stock are required to do so, you agree to enter into a lock-up arrangement with
the Underwriters of the IPO whereby you will agree not to, directly or
indirectly,
<PAGE>
David L. Yankey
August 8, 1997
Page 2
sell or otherwise transfer or dispose of any shares of
Common Stock that you retain hereunder for a period of 180 days after the date
of the Prospectus (the "Lock-up Period") relating to the IPO without the prior
written consent of such Underwriters. You shall deliver the New Stock
Certificates to be held by Morgan, Lewis & Bockius LLP, the Company's counsel,
or another suitable escrow agent acceptable to you and the Company, until the
expiration of the Lock-Up Period. Upon the earlier of (i) the expiration of the
Lock-Up Period and (ii) the abandonment by the Company of the IPO, the New Stock
Certificates shall be promptly redelivered to you.
4. Other than as set forth herein, you will not receive compensation,
payments or benefits of any kind from the Company or Releasees (as that term is
defined in paragraph 6(c) below) and you expressly acknowledge and agree that
you are not entitled to any additional compensation, payment or benefits.
5. You understand and agree that the compensation, payments and
benefits provided for in this Agreement and Release are being provided to you in
consideration for your acceptance and execution of, and in reliance upon your
representations in, this Agreement and Release. The releases provided by you in
this Agreement and Release are subject to and conditioned upon the Company's
compliance with the terms hereof.
6. a. You agree to accept the compensation, payments and benefits
provided for in paragraph 2 hereof in full resolution and satisfaction of, and
hereby IRREVOCABLY AND UNCONDITIONALLY RELEASE, REMISE AND FOREVER DISCHARGE the
Company and Releasees from, any and all agreements, promises, liabilities,
claims and demands of any kind whatsoever, in law or equity, whether known or
unknown, suspected or unsuspected, fixed or contingent, apparent or concealed,
which you, your heirs, executors, administrators, successors or assigns ever
had, now have or in the future may have against the Company and Releasees,
including, without limitation, any and all claims arising out of or relating to
your employment, the Employment Agreement, your compensation and benefits with
the Company and/or the termination thereof, and any and all present contract,
tort or fraud claims, present claims for defamation or other personal injury,
present claims under any federal, state or municipal wage payment,
discrimination or fair employment practices law, statute or regulation and
present claims for costs, expenses and attorneys' fees with respect thereto, but
excluding liabilities, claims and demands relating to matters in connection with
your employment with the Company in which the Company has: (i) committed any
material act of fraud or theft, or (ii) engaged in conduct in connection with
your employment that constitutes a felony. THIS RELEASE AND WAIVER INCLUDES,
WITHOUT LIMITATION, ANY AND ALL CLAIMS UNDER THE AGE DISCRIMINATION IN
EMPLOYMENT ACT, 29 U.S.C. SS.SS. 621-634. However, it is agreed that you do not
waive your rights for coverage or indemnification under any directors & officers
policy, or bylaws of the Company for acts or omissions occurring during your
employment.
<PAGE>
David L. Yankey
August 8, 1997
Page 3
b. By signing this Agreement and Release and by acceptance of the
compensation, payments and benefits provided for in paragraph 2 above, you
WAIVE, RELEASE AND COVENANT NOT TO SUE the Company and Releasees with respect to
any matter relating to or arising out of your employment, compensation and
benefits with the Company and/or the termination thereof, including without
limitation any and all claims described in subparagraph (a) of this paragraph,
and you agree that neither you nor any person, organization or entity acting on
your behalf will (i) file, participate in or assist, facilitate or permit the
bringing or maintenance of any claim against the Company or Releasees, whether
in the form of a federal, state or municipal court lawsuit or administrative
agency action, an arbitration proceeding or otherwise, arising out of or
relating to your employment, compensation and benefits with the Company and/or
the termination thereof, including without limitation any and all claims
described in subparagraph (a) of this paragraph, or (ii) seek reinstatement or
any other monetary or equitable relief from the Company and Releasees, however
that relief might be called, on the basis of any such claim, except for claims
for breach of this Agreement and Release or relating to liabilities specifically
excluded from release under paragraph 6(a). You warrant and represent (A) that
you have not filed any claim or demand for relief against the Company or
Releasees, (B) that there are no outstanding claims or demands for relief within
the meaning of this paragraph 6(b) and (C) that in the event any such claim or
demand is or has been filed by someone other than you without your consent, you
will immediately upon becoming aware of such matters and without further notice
take all actions necessary to withdraw or dismiss such claim or demand as it
relates to you with prejudice, if possible.
c. For purposes of this Agreement and Release, the term "Company"
when used in conjunction with "Releasees" includes the Company and its past,
present and future direct and indirect parents, subsidiaries, affiliates,
divisions, predecessors, successors, and assigns, and their respective current
and former officers, directors, shareholders, representatives, agents, attorneys
and employees, in their official and individual capacities, jointly and
individually.
7. a. The Company hereby IRREVOCABLY AND UNCONDITIONALLY RELEASES,
REMISES AND FOREVER DISCHARGES you from any and all agreements, promises,
liabilities, claims and demands of any kind whatsoever, in law or equity,
whether known or unknown, suspected or unsuspected, fixed or contingent,
apparent or concealed, which the Company, its successors or assigns ever had,
now have or in the future may have against you, including, without limitation,
any and all claims arising out of or relating to your employment, the Employment
Agreement, your compensation and benefits with the Company and/or the
termination thereof, and any and all present contract, tort or fraud claims,
present claims for defamation or other personal injury, present claims under any
federal, state or municipal wage payment, discrimination or fair employment
practices law, statute or regulation and present claims for costs, expenses and
attorneys' fees with respect thereto, but excluding liabilities, claims and
demands relating to matters
<PAGE>
David L. Yankey
August 8, 1997
Page 4
in connection with your employment with the Company in which you have:(i)
committed any material act of fraud or theft or (ii) engaged in conduct in
connection with your employment that constitutes a felony.
b. By signing this Agreement and Release, the Company WAIVES,
RELEASES AND COVENANTS NOT TO SUE you with respect to any matter relating to or
arising out of your employment, compensation and benefits with the Company
and/or the termination thereof, including without limitation any and all claims
described in subparagraph (a) of this paragraph, and the Company agrees that
neither it nor any person, organization or entity acting on its behalf will (i)
file, participate in or assist, facilitate or permit the bringing or maintenance
of any claim against you, whether in the form of a federal, state or municipal
court lawsuit or administrative agency action, an arbitration proceeding or
otherwise, arising out of or relating to your employment, compensation and
benefits with the Company and/or the termination thereof, including without
limitation any and all claims described in subparagraph (a) of this paragraph,
or (ii) seek reinstatement or any other monetary or equitable relief from you,
however that relief might be called on the basis of any such claim, except for
claims for breach of this Agreement and Release or relating to liabilities
specifically excluded from release under paragraph 6(a). The Company warrants
and represents (A) that the Company has not filed any claim or demand for relief
within the meaning of this paragraph 7(b) and (B) that in the event any such
claim or demand is or has been filed by someone other than the Company without
its consent, the Company will immediately upon becoming aware of such matters
and without further notice take all actions necessary to withdraw or dismiss
such claim or demand with prejudice.
8. a. The Company shall prepare and file a registration statement to
effect the registration under the Securities Act of 1933, as amended (the
"Securities Act"), of the Shares, all to the extent requisite to permit the
public resale of the Shares. The Company shall initiate such registration
statement at least 60 days prior to the end of the Lock-Up Period and shall use
best efforts to cause the Registration Statement which is the subject of this
Section 8 to be declared effective by the Securities and Exchange Commission
(the "Commission") immediately upon the expiration of the Lock-Up Period.
b. The Company will pay all registration expenses (including all
registration, filing, qualification, legal and accounting fees), in connection
with any registration pursuant to this Section 8.
c. A registration pursuant to this Section 8 shall not be deemed to
have been effected (i) unless a registration statement with respect thereto has
become effective within the time period specified herein, provided that a
registration which does not be come effective after the Company has filed a
registration statement with respect thereto solely by reason of your refusal to
proceed shall be deemed to have been effected by the Company, (ii) if, after it
has become effective,
<PAGE>
David L. Yankey
August 8, 1997
Page 5
such registration becomes subject to any stop order, injunction or other order
or extraordinary requirement of the Commission or other governmental agency or
court for any reason, (iii) if, after it has become effective, such registration
ceases to be effective for more than an aggregate of ninety (90) days. The
Company covenants with you that it shall take such action as is necessary to
keep such registration statement current and effective through at least November
30, 1998.
d. If the Company has fixed plans to file a registration statement
within 60 days after the expiration of the Lock-Up Period covering the sale of
any of its securities in a public offering under the Securities Act, no
registration of the Shares shall be initiated under this Section 8 until 90 days
after the effective date of such registration unless the Company is no longer
proceeding diligently to effect such registration; provided that (i) the Company
shall provide you with the right to participate in such public offering and (ii)
notwithstanding the foregoing, in no event shall the Company's obligation to
file and use its best efforts to have the registration statement under Section
8a be declared effective, be delayed for more than 60 days from the end of the
Lock-Up.
e. If at the time of expiration of the Lock-Up Period, or such
earlier time as the Shares are to be delivered to you, the holding period
required under Rule 144 promulgated pursuant to the Securities Act has been met,
then the New Stock Certificates shall be delivered without any restrictive
legends and the transfer agent will be so instructed by the Company.
f. You agree that you shall not sell more than 25,000 Shares in any
calendar week under such registration statement and you further agree that you
shall give the managing underwriter of the Company's IPO the first opportunity
to handle the sale of such Shares, provided, however, that if such underwriter
is not willing to make such sales on your behalf, or will not be able to obtain
a price that is as desirable as those attainable by another broker-dealer, then
you may sell such Shares through another broker-dealer. The Company shall
deliver to you, within 30 days of the date hereof, notice of the appropriate
person at such underwriter to contact with respect to any such sale of shares.
9. a. Nothing contained in this Agreement and Release shall be deemed
to constitute an admission or evidence of any wrongdoing or liability on the
part of you or the Company or Releasees.
10. a. You have returned and/or agree to immediately return, freight
collect, to the Company any and all original and duplicate copies of all files,
calendars, books, records, notes, manuals, computer disks, diskettes and any
other magnetic and other media materials you have in your possession or under
your control belonging to the Company or Releasees or containing confidential or
proprietary information concerning the Company or Releasees or their customers
or operations. You have also returned your Company keys, credit cards, etc. to
the Company and you
<PAGE>
David L. Yankey
August 8, 1997
Page 6
will return the Company's cellular telephone. By signing this Agreement and
Release, you confirm that you have not retained in your possession or under your
control any of the documents or materials described in this paragraph.
b. The Company acknowledges that you have no legal responsibility
for the Company's offices, or bank accounts, at 2081 Landings Drive, Mountain
View, CA 94043.
11. You agree that the provisions of Sections 5 and 9 of the Employment
Agreement (and only such provisions) shall be incorporated by reference herein,
shall become effective upon your execution and delivery of this Agreement and
Release and shall remain in full force and effect as provided therein.
12. You agree that upon the Company's instructions you will assist and
cooperate with the Company and Releasees in connection with the defense or
prosecution of any claim that may be made against or by the Company or
Releasees, or in connection with any ongoing or future investigation or dispute
or claim of any kind involving the Company or Releasees, including any
proceeding before any arbitral, administrative, regulatory, self-regulatory,
judicial, legislative, or other body or agency, to the extent such claims,
investigations or proceedings relate to services performed or required to be
performed by you, pertinent knowledge possessed by you, or any act or omission
by you, such assistance and cooperation to be reasonable in scope and duration
and consistent with your employment with the Company and shall not unreasonably
interfere with your business or job responsibilities. The Company shall
reimburse you for reasonable expenses incurred by you for your time in providing
such assistance and cooperation, and, if more than nominal efforts are required
of you, the Company shall compensate you in an amount mutually agreed upon.
13. This Agreement and Release may not be changed orally, and no
modification, amendment or waiver of any of the provisions contained in this
Agreement and Release, nor any future representation, promise or condition in
connection with the subject matter of this Agreement and Release, shall be
binding upon any party hereto unless made in writing and signed by such party.
14. This Agreement and Release shall be subject to and governed by and
interpreted in accordance with the laws of the State of New York, without regard
to conflicts of law principles.
15. This Agreement shall inure to the benefit of and shall be binding
upon (i) the Company and Releasees, its successors and assigns, and any company
with which the Company may merge or consolidate or to which the Company may sell
substantially all its assets and (ii) you and your executors, administrators,
heirs and legal representatives. You may not sell or otherwise assign your
rights, obligations or benefits under this Agreement.
<PAGE>
David L. Yankey
August 8, 1997
Page 7
16. This Agreement and Release contains the entire agreement between us
and supersedes and, except as specifically provided herein, terminates any and
all previous agreements between us, whether written or oral. All prior and
contemporaneous discussions and negotiations have been and are merged and
integrated into, and are superseded by, this Agreement and Release. No waiver by
either party of any provision or condition of this Agreement and Release at any
time shall be deemed a waiver of such provision or condition at any prior or
subsequent time or of any other provision or condition at the same or any prior
or subsequent time.
17. In the event of breach of any provision of this Agreement and
Release by either party, the aggrieved party shall be entitled to recover such
damages sustained as a consequence of such breach.
18. In the event any provision of this Agreement and Release shall be
held to be void, voidable, unlawful or, for any reason, unenforceable, the
remaining portions shall remain in full force and effect.
19. If this Agreement and Release conforms to our understanding and is
acceptable to you, please indicate your agreement by signing and dating the
enclosed copy of this Agreement and Release and returning it to the Company. YOU
WILL THEN BE PERMITTED TO REVOKE THIS AGREEMENT AND RELEASE AT ANY TIME DURING
THE PERIOD OF SEVEN DAYS FOLLOWING THE EXECUTION THEREOF, AND THIS AGREEMENT AND
RELEASE WILL NOT BE EFFECTIVE OR ENFORCEABLE AND NO PAYMENTS WILL BE MADE
HEREUNDER UNTIL THE SEVEN-DAY REVOCATION PERIOD HAS EXPIRED. IN THE EVENT YOU
FAIL TO EXECUTE AND RETURN THIS AGREEMENT AND RELEASE ON A TIMELY BASIS, OR YOU
EXECUTE AND THEN ELECT TO REVOKE THIS AGREEMENT AND RELEASE, THIS AGREEMENT AND
RELEASE WILL BE OF NO FURTHER FORCE AND EFFECT, AND NEITHER YOU NOR THE COMPANY
WILL HAVE ANY FURTHER RIGHTS OR OBLIGATIONS HEREUNDER.
20. Any unresolved dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration,
conducted before a panel of three (3) arbitrators in New York, NY, in accordance
with the rules of the American Arbitration Association then in effect. The
arbitrators shall not have the authority to add to, detract from, or modify any
provision hereof nor to award punitive damages to any injured party. A decision
by the arbitration panel shall be final and binding. Judgment may be entered on
the arbitrators' award in any court having jurisdiction.
21. You agree that you will not, either directly or indirectly,
disparage (whether in writing or orally) the Company or the Releasees in any
manner whatsoever to the public, the
<PAGE>
David L. Yankey
August 8, 1997
Page 8
media, customers, suppliers or other persons or entities who transact business
with the Company, or current or former employees of the Company, at any time.
The Company agrees that its officers and directors will not, directly, or
indirectly, disparage (whether in writing or orally) you in any manner
whatsoever to the public, the media, customers, suppliers or other persons or
entities who transact business with the Company, or current or former employees
of the Company, at any time, provided, however, that you hereby acknowledge and
agree that no statement or other disclosure directly or indirectly relating to
you set forth in any filing (including but not limited to any registration
statements filed) in connection with the IPO shall be deemed to cause the
Company to be in breach of its obligations pursuant to this Section 21.
22. All notices in connection with or provided for under this Agreement
and Release shall be validly given or made only if made in writing and delivered
personally or mailed by registered or certified mail, return receipt requested,
postage prepaid, to the party entitled or required to receive the same, as
follows:
If to David L. Yankey, addressed to:
Mr. David L. Yankey
13500 Country Way Road
Los Altos Hills, CA 94022
If to the Company and Releasees, addressed to:
Mr. Ronald P. Rafaloff
RGR Financial Group
1 Battery Park Plaza
24th Floor
New York, NY 10004-1405
with a copy to:
David W. Pollak, Esq.
Morgan, Lewis & Bockius LLP
101 Park Avenue
New York, New York 10178-0060
23. The Company represents and warrants that this Agreement and Release
is within its corporate powers, the execution and delivery hereof has been duly
authorized, and that its provisions do not conflict with any other agreements,
laws or regulations by which it is bound.
<PAGE>
David L. Yankey
August 8, 1997
Page 9
24. Execution of this Agreement and Release with signatures transmitted
via facsimile shall be considered valid.
Sincerely yours,
COLLECTIBLES USA, INC.
By: /s/ Ronald P. Rafaloff
-----------------------------
Ronald P. Rafaloff, President
THIS AGREEMENT AND RELEASE ARE LEGAL DOCUMENTS. YOU SHOULD CONSULT WITH AN
ATTORNEY PRIOR TO SIGNING THIS AGREEMENT AND RELEASE.
BY SIGNING THIS AGREEMENT AND RELEASE YOU ACKNOWLEDGE THAT YOU ARE COMPETENT,
THAT YOU WERE AFFORDED A TIME PERIOD OF AT LEAST 21 DAYS TO REVIEW AND CONSIDER
THIS AGREEMENT AND RELEASE WITH AN ATTORNEY OF YOUR CHOICE, THAT YOU HAVE IN
FACT RETAINED COUNSEL IN THIS MATTER WHO HAS ASSISTED YOU IN THE NEGOTIATION AND
DRAFTING OF THE TERMS OF THIS AGREEMENT, THAT YOU HAVE READ AND UNDERSTAND AND
ACCEPT THESE DOCUMENTS AS FULLY AND FINALLY RESOLVING, WAIVING AND RELEASING ANY
AND ALL CLAIMS WHICH YOU MAY HAVE AGAINST THE COMPANY AND RELEASEES (AS DEFINED
ABOVE), INCLUDING ANY AND ALL CLAIMS UNDER THE AGE DISCRIMINATION IN EMPLOYMENT
ACT, THAT NO PROMISES OR INDUCEMENTS HAVE BEEN MADE TO YOU EXCEPT AS SET FORTH
IN THIS AGREEMENT AND RELEASE AND THE ATTACHMENTS, AND THAT YOU HAVE SIGNED THIS
AGREEMENT AND RELEASE KNOWINGLY, FREELY AND VOLUNTARILY, INTENDING TO BE LEGALLY
BOUND BY ITS TERMS. THE FOREGOING PARAGRAPH IS A SUMMARY DESCRIPTION OF THE
GENERAL IMPORT OF THIS INSTRUMENT AND
<PAGE>
David L. Yankey
August 8, 1997
Page 10
DOES NOT ALTER OR IN ANY WAY AMEND THE DETAILED PROVISIONS CONTAINED IN THE BODY
HEREOF.
ACCEPTED AND AGREED:
/s/ David L. Yankey Date: August 8, 1997
- ---------------------------------- ------------------
David L. Yankey
WITNESSED BY:
/s/ Dawn Marsden
- ----------------------------------
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement"), between Collectibles USA,
Inc., a Delaware corporation (the "Company"), and Shonnie Bilin (the
"Executive") entered into as of this 25th day of August, 1997.
WHEREAS, as of the date of the execution of this Agreement, the
Company is engaged primarily in the business of marketing collectible
merchandise and animation art products; and
WHEREAS, the Executive will be employed by the Company in a
confidential relationship wherein the Executive, in the course of her employment
with the Company, will become familiar with and aware of information as to the
Company and its subsidiaries and affiliates and their respective customers, the
specific manner of doing business, including the processes, techniques and trade
secrets utilized by the Company and its subsidiaries and affiliates, and future
plans with respect thereto, all of which has been and will be established and
maintained at great expense to the Company, which information is a trade secret
and constitutes the valuable good will of the Company; and
NOW, THEREFORE, in consideration of the mutual promises, terms,
covenants and conditions set forth herein and the performance of each, it is
hereby agreed as follows:
1. AGREEMENT SUPERSEDES ALL OTHER PRIOR UNDERSTANDINGS UPON EFFECTIVE
DATE; REPRESENTATIONS OF EXECUTIVE. This Agreement shall supersede any and all
other prior employment agreements, letters of intent, term sheets, arrangements,
and/or any other understanding, whether written or oral, between the Executive
and the Company or any subsidiary or affiliate thereof regarding any and all
matters relating to employment, compensation, benefits or similar matters. The
Executive hereby represents and warrants to the Company that the execution of
this Agreement by the Executive and her employment by the Company and the
performance of her duties hereunder will not violate or be a breach of any
agreement with a former employer, client or any other person or entity. Further,
the Executive agrees to indemnify the Company for any claim, including, but not
limited to, attorneys' fees and expenses of investigation and all fees and
expenses incurred by the Company, by any such third party that such third party
may now have or may hereafter come to have against the Company based upon or
arising out of any non-competition agreement, invention or secrecy agreement
between the Executive and such third party.
2. EMPLOYMENT AND DUTIES.
(a) EMPLOYMENT. The Company hereby employs the Executive as Executive
Vice President -- Planning and Development of the Company. The Executive hereby
accepts this
<PAGE>
employment upon the terms and conditions herein contained and, subject to
Section 2(b), agrees to devote her working time, attention and efforts to
promote and further the business of the Company.
(b) EXCLUSIVITY OF SERVICES. The Executive shall not, during the Term,
be engaged in any other business activity pursued for gain, profit or other
pecuniary advantage except to the extent that such activity does not interfere
with the Executive's duties and responsibilities hereunder. The foregoing
limitations shall not be construed as prohibiting the Executive from making
personal investments in such form or manner as will neither require her services
in the operation or affairs of the companies or enterprises in which such
investments are made nor violate the terms of Section 5 of this Agreement.
(c) LOCATION FOR SERVICES. The Executive shall not be required to
relocate her personal residence to a new geographical area.
3. TERM. The term of this Agreement shall commence on September 22,
1997 (the "Effective Date") and shall end on the date which is the third
anniversary of the Effective Date (the "Initial Term"); provided, however, that
in the event that the Company or the Executive does not notify the other party
on or prior to the date which is one year prior to the expiration of the Initial
Term (such date, the "Notification Date") that it or she (as the case may be)
desires that the Initial Term not be extended beyond the termination of the
Initial Term, the term of this Agreement shall automatically be extended beyond
the Initial Term for successive one year periods on each anniversary of the
Notification Date, until either party gives notice to the other of its desire
not to extend further the term of this Agreement beyond the end of the
then-extended term (the term of this Agreement, whether during the Initial Term
or any extension thereof, the "Term").
4. COMPENSATION. For all services rendered by the Executive, the
Company shall compensate the Executive as follows:
(a) BASE SALARY. The base salary payable to the Executive during the
Term shall be at the rate of $150,000 per year, payable on a regular basis in
accordance with the Company's standard payroll procedures, but not less
frequently than on a monthly basis (the "Base Salary"). On at least an annual
basis, the Board shall review the Executive's performance and may make increases
to the Base Salary if, in its discretion, any such increase is warranted. Such
recommended increase shall require approval by the Board or a duly constituted
committee thereof.
(b) ONE TIME LUMP-SUM PAYMENT. Within five business days after the
date of consummation of the Company's initial public offering (the "IPO") of
Common Stock, par value $.01 per share (the "Common Stock"), the Company shall
pay to the Executive a lump-sum amount equal to $17,500.
(c) INCENTIVE BONUS. It is the Company's intent to develop a written
Incentive Bonus Plan setting forth the criteria under which the Executive and
other key employees of the Company will be eligible to receive year-end bonus
awards.
-2-
<PAGE>
(d) EXECUTIVE PERQUISITES, BENEFITS AND OTHER COMPENSATION. The
Executive shall be entitled to receive additional benefits and compensation from
the Company in such form and to such extent as specified below:
(i) Payment of all premiums for coverage for the Executive and her
dependent family members under health, hospitalization, disability, dental,
life and other insurance plans that the Company may have in effect from
time to time, which benefits provided to the Executive under this clause
(i) shall be at least equal to such benefits provided to Company
executives.
(ii) Reimbursement for all business travel and other out-of-pocket
expenses reasonably incurred by the Executive in the performance of her
services pursuant to this Agreement. All reimbursable expenses shall be
appropriately documented in reasonable detail by the Executive upon
submission of any request for reimbursement, and in a format and manner
consistent with the Company's expense reporting policy.
(iii) Four (4) weeks paid vacation for each year during the period of
employment or such greater amount as may be afforded officers and key
employees generally under the Company's policies in effect from time to
time (pro-rated for any year in which the Executive is employed for less
than the full year).
(iv) The Company shall provide the Executive with other executive
perquisites as may be available to or deemed appropriate for the Executive
by the Board and participation in all other Company-wide employee benefits
as available from time to time, which may include participation in the
Company's Long-Term Incentive Plan.
(e) $7 OPTIONS. Promptly after the date hereof, the Executive shall be
granted stock options to purchase 20,000 shares of the Company's Common Stock,
at an exercise price of $7.00 per share (the "$7 Options"). Such options shall
vest immediately and the terms and conditions of such options shall be set forth
in an option grant between the parties hereto. In the event that (i) the
Executive's employment is terminated under the circumstances set forth in
Section 6(c), 6(d) or 6(f) of this Agreement prior to the consummation of the
IPO (unless the IPO is not consummated within 60 days of the date hereof) or
(ii) the Executive's employment is terminated under the circumstances set forth
in Section 6(c) or 6(f) of this Agreement prior to the date six months after the
consummation of the IPO, then the Executive shall have five business days in
which to exercise the $7 Options and thereafter such options shall terminate and
be of no further force or effect. In the event that the Executive's employment
is terminated under any other circumstances, the Executive shall have five years
in which to exercise the $7 Options.
(f) IPO STOCK OPTIONS. The Executive shall be granted additional stock
options (the "Additional Options") to purchase 40,000 shares of Common Stock
following the IPO, at the price per share offered to the public at the
commencement of the IPO, the terms and conditions of which shall be set forth in
an option agreement between the parties hereto. The Additional Options
-3-
<PAGE>
shall vest over a three year period, with one-third of the options vesting on
the first anniversary of the Effective Date, one-third on the second anniversary
of the Effective Date and the remainder on the third anniversary of the
Effective Date. Such options may be exercised by the Executive any time prior to
the later of (i) one year after the end of the Initial Term or (ii) one year
after the end of the termination of the Executive's employment hereunder.
5. NON-COMPETITION AGREEMENT.
(a) GENERAL. Subject to Section 5(c), the Executive shall not, during
the period of her employment by or with the Company, and for a period of two (2)
years immediately following the termination of her employment under this
Agreement (such period, the "Restricted Period"), for any reason whatsoever,
directly or indirectly, for herself or on behalf of or in conjunction with any
other person, persons, company, partnership, corporation, entity or business of
whatever nature:
(i) engage, as an officer, director, shareholder, owner, partner,
joint venturer, or in any other capacity, whether as an agent, employee,
independent contractor, consultant or advisor, or as a sales
representative, in any collectibles or animation art business in
competition with the Company or its subsidiaries or affiliates, within 100
miles of (i) the principal executive offices of the Company or (ii) any
place to which the Company or its subsidiaries or affiliates provides
products or services or in which the Company is in the process of
initiating business operations during the Restricted Period (the
"Territory");
(ii) call upon or interview any person who is, at that time, within
the Territory, an employee of the Company (including the subsidiaries or
affiliates thereof) in a managerial capacity for the purpose or with the
intent of enticing such employee away from or out of the employ of the
Company (including the subsidiaries or affiliates thereof), provided that
the Executive shall be permitted to call upon and hire any member of 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 that time, a customer of the Company
(including the subsidiaries or affiliates thereof) within the Territory for
the purpose of soliciting or selling products similar in nature to those
which are or were provided by the Company to such customer within the
Territory; or
(iv) call upon any prospective acquisition candidate, on the
Executive's own behalf or on behalf of any competitor, which candidate was,
to the Executive's actual knowledge after due inquiry, either called upon
by the Company (including the subsidiaries or affiliates thereof) or for
which the Company made an acquisition analysis, for the purpose of
acquiring such entity, provided that the Executive shall not be charged
with violating this section unless and until the Executive shall have
knowledge or notice that such prospective acquisition candidate was called
upon, or that an acquisition analysis was made for the purpose of acquiring
such entity; or
-4-
<PAGE>
(v) disclose any information regarding customers, whether in existence
or proposed, of the Company (or the respective subsidiaries or affiliates
thereof) to any person, firm, partnership, corporation or business for any
reason or purpose whatever.
Notwithstanding the above, the foregoing covenant shall not be deemed to
prohibit the Executive from either (i) acquiring as an investment not more than
one percent (1%) of the capital stock of a competing business, whose stock is
traded on a national securities exchange or over-the-counter or (ii) engaging as
an officer, agent, employee, independent contractor, consultant or advisor
(other than a consultant or advisor with respect to financial or acquisition
matters), or as sales representative for any vendor, artist or manufacturer that
supplies the Company (or its subsidiaries or affiliates).
(b) EQUITABLE REMEDIES. Because of the difficulty of measuring
economic losses to the Company as a result of a breach of the foregoing
covenants, and because of the immediate and irreparable damage that could be
caused to the Company for which they would have no other adequate remedy, the
Executive agrees that the foregoing covenants may be enforced by the Company in
the event of breach by the Executive, by injunctions and restraining orders.
(c) REASONABLE RESTRAINT. It is agreed by the parties that the
foregoing covenants in this Section 5 impose a reasonable restraint on the
Executive in light of the activities and business of the Company (including the
Company's subsidiaries and affiliates) on the date of the execution of this
Agreement and the current plans of the Company (including the Company's
subsidiaries and affiliates); but it is also the intent of the Company and the
Executive that such covenants be construed and enforced in accordance with the
changing activities, business and locations of the Company (including the
Company's subsidiaries and affiliates) throughout the term of these covenants,
whether before or after the date of termination of the employment of the
Executive. For example, if, during the term of this Agreement, the Company
(including the Company's subsidiaries or affiliates) engages in new and
different activities, enters a new business or establishes new locations for its
current activities or business in addition to or other than the activities or
business enumerated under the whereas clauses above or the locations currently
established therefor, then the Executive will be precluded from soliciting the
customers or employees of such new activities or business or from such new
location and from directly competing with such new business within the Territory
through the Restricted Period.
It is further agreed by the parties hereto that, in the event that the
Executive shall cease to be employed hereunder, and shall enter into a business
or pursue other activities not in competition with the Company (including the
Company's subsidiaries or affiliates), or similar activities or business in
locations the operation of which, under such circumstances, does not violate
clause (a)(i) of this Section 5, and in any event such new business, activities
or location are not in violation of this Section 5 or of employee's obligations
under this Section 5, if any, the Executive shall not be chargeable with a
violation of this Section 5 if the Company (including the Company's subsidiaries
or affiliates) shall thereafter enter the same, similar or a competitive (i)
business, (ii) course of activities or (iii) location, as applicable.
-5-
<PAGE>
(d) SEVERABILITY. The covenants in this Section 5 are severable and
separate, and the unenforceability of any specific covenant shall not affect the
provisions of any other covenant. Moreover, in the event any court of competent
jurisdiction shall determine that the scope, time or territorial restrictions of
any specific covenant as set forth are unreasonable, then it is the intention of
the parties that such restrictions be enforced to the fullest extent which the
court deems reasonable, and the Agreement shall thereby be reformed.
(e) INDEPENDENT PROVISIONS. All of the covenants in this Section 5
shall be construed as an agreement independent of any other provision in this
Agreement, and the existence of any claim or cause of action of the Executive
against the Company, whether predicated on this Agreement or otherwise, shall
not constitute a defense to the enforcement by the Company of any of such
covenants. It is specifically agreed that the period of two (2) years following
termination of employment stated at the beginning of this Section 5, during
which the agreements and covenants of the Executive made in this Section 5 shall
be effective, shall be computed by excluding from such computation any time
during which the Executive is in violation of any provision of this Section 5.
6. TERMINATION; RIGHTS ON TERMINATION. This Agreement and the
Executive's employment may be terminated in any one of the followings ways:
(a) DEATH. The death of the Executive shall immediately terminate this
Agreement, with no severance compensation due to the Executive's estate.
(b) DISABILITY. If, as a result of incapacity due to physical or
mental illness or injury, the Executive shall have been absent from her
full-time duties hereunder for four (4) consecutive months, then thirty (30)
days after receiving written notice (which notice may occur before or after the
end of such four (4) month period, but which shall not be effective earlier than
the last day of such four (4) month period), the Company may terminate the
Executive's employment hereunder provided the Executive is unable to resume her
full-time duties at the conclusion of such notice period. In addition, the
Executive may terminate her employment hereunder if her health should become
impaired to an extent that makes the continued performance of her duties
hereunder hazardous to her physical or mental health or her life, provided that
the Executive shall have furnished the Company with a written statement from a
qualified doctor to such effect and provided, further, that, at the Company's
request made within thirty (30) days of the date of such written statement, the
Executive shall submit to an examination by a doctor selected by the Company who
is reasonably acceptable to the Executive and such doctor shall have concurred
in the conclusion of the Executive's doctor. In the event this Agreement is
terminated as a result of the Executive's disability, the Executive shall
receive from the Company, in a lump-sum payment due within ten (10) days of the
effective date of termination, the Base Salary at the rate then in effect for
whatever time period is remaining under the Term of this Agreement or for one
(1) year, whichever amount is greater.
(c) CAUSE. The Company may terminate the Agreement ten (10) days after
written notice to the Executive for "Cause," which shall be: (1) the Executive's
willful, material and
-6-
<PAGE>
irreparable breach of this Agreement; (2) the Executive's gross negligence in
the performance or intentional nonperformance continuing for ten (10) days after
receipt of written notice of need to cure of any of the Executive's material
duties and responsibilities hereunder; (3) the Executive's willful dishonesty,
fraud or misconduct with respect to the business or affairs of the Company or
its subsidiaries or affiliates which materially and adversely affects the
operations or reputation of the Company or its subsidiaries or affiliates; (4)
the Executive's conviction of a felony crime; or (5) chronic alcohol abuse or
illegal drug abuse by the Executive. In the event of a termination for Cause, as
enumerated above, the Executive shall receive no severance compensation.
(d) WITHOUT CAUSE. At any time after her commencement of employment,
the Company may, without Cause, terminate this Agreement and the Executive's
employment, effective thirty (30) days after written notice is provided to the
Executive. In the event that the Executive is terminated by the Company without
Cause, the Executive shall receive from the Company the Base Salary at the rate
then in effect for whatever time period is remaining under the Term of this
Agreement (not to exceed two years) or for one (1) year, whichever amount is
greater. Any termination without Cause by the Company shall operate to
immediately vest the Executive in her unvested stock options granted pursuant to
Section 4(f) hereof. Further, any termination without Cause by the Company shall
operate to shorten the Restricted Period set forth in Section 5(a) and during
which the terms of Section 5 apply to one (1) year from the date of termination
of employment.
(e) CHANGE IN CONTROL OF THE COMPANY. In the event of a "Change in
Control" of the Company (as defined in Section 11 of this Agreement) during the
Term, refer to Section 11 of this Agreement.
(f) RESIGNATION BY EXECUTIVE. If the Executive resigns or otherwise
terminates her employment hereunder (i) the Executive shall receive no severance
compensation, (ii) all unvested stock options granted pursuant to Section 4(f)
shall be forfeited to the Company and (iii) the Restricted Period shall remain
as set forth in Section 5 hereof.
(g) SURVIVAL AND CONTINUING OBLIGATIONS. Upon termination of this
Agreement for any reason provided above, the Executive shall be entitled to
receive all compensation earned and all benefits and reimbursements due through
the effective date of termination. Additional compensation subsequent to
termination, if any, will be due and payable to the Executive only to the extent
and in the manner expressly provided in this Section 6 or in Section 11. All
other rights and obligations of the Company and the Executive under this
Agreement shall cease as of the effective date of termination, except that the
Company's obligations under Section 6 herein and the Executive's obligations and
other matters under Sections 5, 7, 8 and 9 herein shall survive such termination
in accordance with their terms.
7. RETURN OF COMPANY PROPERTY. All records, designs, patents, business
plans, financial statements, manuals, memoranda, lists and other property
delivered to or compiled by the Executive by or on behalf of the Company or its
representatives, vendors or
-7-
<PAGE>
customers which pertain to the business of the Company shall be and remain the
property of the Company, as the case may be, and be subject at all times to
their discretion and control. Likewise, all correspondence, reports, records,
charts, advertising materials and other similar data pertaining to the business,
activities or future plans of the Company which is collected by the Executive
shall be delivered promptly to the Company without request by it upon
termination of the Executive's employment for any reason.
8. INVENTIONS. The Executive shall disclose promptly to the Company
any and all significant conceptions and ideas for inventions, improvements and
valuable discoveries, whether patentable or not, which are conceived or made by
the Executive, solely or jointly with another, during the period of employment
or within one (1) year thereafter, and which are related to the business or
activities of the Company or its subsidiaries or affiliates and which the
Executive conceives as a result of her employment by the Company. The Executive
hereby assigns and agrees to assign all her interests therein to the Company or
its nominee. Whenever requested to do so by the Company, the Executive shall
execute any and all applications, assignments or other instruments that the
Company shall deem necessary to apply for and obtain Letters Patent of the
United States or any foreign country or to otherwise protect the Company's or
its subsidiaries or affiliates interest therein.
9. TRADE SECRETS. Executive agrees that during the course of
performing services for the Company, she has had and will have substantial
access to and contact with information or documents, including but not limited
to trade secrets, patents, copyrighted materials, proprietary computer software,
systems analyses, lists of actual or prospective customers, contracts, Company
books and records, financial data and other Confidential and Proprietary
Information and Materials (as that term is defined below) of the Company, the
disclosure of which to competitors of the Company or others would cause the
Company to suffer substantial and irreparable damage. Executive recognizes,
therefore, that it is in the Company's legitimate business interest to restrict
her disclosure or use of Confidential and Proprietary Information and Materials
for any purposes other than the services provided by her to the Company under
this Agreement, and to limit any potential appropriation of such Confidential
and Proprietary Information and Materials by her for the benefit of the
Company's competitors and to the detriment of the Company. Therefore, it is
agreed that unless Executive shall first secure the Company's written consent,
Executive shall not publish, disclose or use, or authorize any other person or
entity to publish, disclose or use, at any time before, during or subsequent to
the Term of this Agreement, any secret or confidential information, whether
patentable or not, of or about the Company, including any Confidential and
Proprietary Information and Materials (as that term is defined below) and any
other secret or confidential information of which Executive becomes aware of or
informed during the Term of this Agreement, whether or not developed by
Executive, except as required in Executive's duties to the Company. For purposes
of this Agreement, "Confidential and Proprietary Information and Materials"
shall include, without limitation, formulas, patterns, compilations, studies,
strategies, programs, devices, methods, techniques, and processes of or about or
its business, customers or suppliers, which derive independent economic value,
actual or potential, from not being generally known to, and not being readily
ascertainable by proper means by, other persons who can obtain
-8-
<PAGE>
economic value from their disclosure or use and which are the subject of efforts
to maintain their secrecy that are reasonable under the circumstances.
All Confidential and Proprietary Information and Materials and all
copies of such information and materials relating to the Company's business,
whether prepared by Executive or otherwise coming into her possession, shall
remain the exclusive property of the Company and shall be returned to the
Company upon the Company's request or the termination of Executive's employment.
10. ASSIGNMENT; BINDING EFFECT. The Executive understands that she has
been selected for employment by the Company on the basis of her personal
qualifications, experience and skills. The Executive agrees, therefore, that she
cannot assign all or any portion of her performance under this Agreement.
11. CHANGE IN CONTROL.
(a) GENERAL. Unless she elects to terminate this Agreement pursuant to
(c) below, the Executive understands and acknowledges that the Company may be
merged or consolidated with or into another entity and that such entity shall
automatically succeed to the rights and obligations of the Company hereunder.
(b) SEVERANCE PAYMENTS. In the event of a pending Change in Control
wherein the Company and the Executive have not received written notice at least
five (5) business days prior to the anticipated closing date of the transaction
giving rise to the Change in Control from the successor to all or a substantial
portion of the Company's business and/or assets that such successor is willing
as of the closing to assume and agree to perform the Company's obligations under
this Agreement in the same manner and to the same extent that the Company is
hereby required to perform, then such Change in Control shall be deemed to be a
termination of this Agreement by the Company without Cause during the Term and
the applicable portions of Section 6(d) will apply.
(c) VOLUNTARY RESIGNATION. In any Change in Control situation, the
Executive may, at her sole discretion, elect to terminate this Agreement by
providing written notice to the Company at least five (5) business days prior to
the anticipated closing of the transaction giving rise to the Change in Control.
In such case, the applicable provisions of Section 6(d) will apply as though the
Company had terminated the Agreement without Cause during the Term.
(d) APPLICATION OF TERMINATION PROVISIONS. For purposes of applying
Section 6 under the circumstances described in Sections (b) and (c) above, the
effective date of termination will be the closing date of the transaction giving
rise to the Change in Control and all compensation, reimbursements and lump-sum
payments due the Executive must be paid in full by the Company at or prior to
such closing. Further, the Executive will be given sufficient time and
opportunity to elect whether to exercise all or any of her vested options to
purchase the Company's Common Stock,
-9-
<PAGE>
including any options with accelerated vesting under the provisions of the
Company's Long-Term Incentive Compensation Plan, such that she may convert the
options to shares of Company Common Stock at or prior to the closing of the
transaction giving rise to the Change in Control, if she so desires.
(e) DEFINITION. A "Change in Control" shall be deemed to have occurred
if:
(i) any person, other than the Company or any employee benefit
plan of the Company, acquires directly or indirectly Beneficial
Ownership (as defined in Section 13(d) of the Securities Exchange Act
of 1934, as amended) of any voting security of the Company and
immediately after such acquisition such person is, directly or
indirectly, the Beneficial Owner of voting securities representing 50%
or more of the total voting power of all of the then-outstanding
voting securities of the Company, unless the transaction pursuant to
which such acquisition is made is approved by at least two-thirds
(2/3) of the Board;
(ii) the following individuals no longer constitute a majority of
the members of the Board of Directors of the Company: (A) the
individuals who, as of the closing date of the Company's initial
public offering, constitute the Board of Directors of the Company (the
"Original Directors"); (B) the individuals who thereafter are elected
to the Board of Directors of the Company and whose election, or
nomination for election, to the Board of Directors of the Company was
approved by a vote of at least two-thirds (2/3) of the Original
Directors then still in office (such directors becoming "Additional
Original Directors" immediately following their election); and (C) the
individuals who are elected to the Board of Directors of the Company
and whose election, or nomination for election, to the Board of
Directors of the Company was approved by a vote of at least two-thirds
(2/3) of the Original Directors and Additional Original Directors then
still in office (such directors also becoming "Additional Original
Directors" immediately following their election).
(iii) the stockholders of the Company shall approve a merger,
consolidation, recapitalization, or reorganization of the Company, a
reverse stock split of outstanding voting securities, or consummation
of any such transaction if stockholder approval is not obtained, other
than any such transaction which has been either (x) approved by at
least 66% of the members of the Board or (y) which would result in at
least 50% of the total voting power represented by the voting
securities of the surviving entity outstanding immediately after such
transaction being Beneficially Owned by at least 50% of the holders of
outstanding voting securities of the Company immediately prior to the
transaction, with the voting power of each such continuing holder
relative to other such continuing holders not substantially altered in
the transaction; or
(iv) the stockholders of the Company shall approve a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or a substantial portion of the
Company's assets (i.e., 50% or more of the total assets of the
Company).
-10-
<PAGE>
(f) The Executive must be notified in writing by the Company at any
time that the Company anticipates that Change in Control may take place.
(g) The Executive shall be reimbursed by the Company or its successor
for any excise taxes that the Executive incurs under Section 4999 of the
Internal Revenue Code of 1986, as a result of any Change in Control. Such amount
will be due and payable by the Company or its successor within ten (10) days
after the Executive delivers a written request for reimbursement accompanied by
a copy of her tax return(s) showing the excise tax actually incurred by the
Executive.
12. COMPLETE AGREEMENT. This written Agreement is the final, complete
and exclusive statement and expression of the agreement between the Company and
the Executive and of all the terms of this Agreement, and it cannot be varied,
contradicted or supplemented by evidence of any prior oral or written
agreements. This written Agreement may not be later modified except by a further
writing signed by a duly authorized officer of the Company and the Executive,
and no term of this Agreement may be waived except by writing signed by the
party waiving the benefit of such term.
13. NOTICE. Whenever any notice is required hereunder, it shall be
given in writing addressed as follows:
To the Company: Collectibles USA, Inc.
c/o RGR Financial Group
One Battery Park Plaza
New York, NY 10004
With a copy to: Morgan, Lewis & Bockius LLP
101 Park Avenue
New York, NY 10178
Attn: David W. Pollak, Esq.
To the Executive: Ms. Shonnie Bilin
744 Clover Hill Court
Elk Grove Village, IL 60007
Notice shall be deemed given and effective three (3) days after the deposit in
the U.S. mail of a writing addressed as above and sent first class mail,
certified, return receipt requested, or if sooner, when actually received.
Either party may change the address for notice by notifying the other party of
such change.
14. SEVERABILITY; HEADINGS. If any portion of this Agreement is held
invalid or inoperative, the other portions of this Agreement shall be deemed
valid and operative and, so far as is reasonable and possible, effect shall be
given to the intent manifested by the portion held
-11-
<PAGE>
invalid or inoperative. The Section headings herein are for reference purposes
only and are not intended in any way to describe, interpret, define or limit the
extent or intent of the Agreement or of any part hereof.
15. ARBITRATION. Any unresolved dispute or controversy arising under
or in connection with this Agreement shall be settled exclusively by
arbitration, conducted before a panel of three (3) arbitrators in New York, NY,
in accordance with the rules of the American Arbitration Association then in
effect. The arbitrators shall not have the authority to add to, detract from, or
modify any provision hereof nor to award punitive damages to any injured party.
The arbitrators shall have the authority to order back-pay, severance
compensation, vesting of options (or cash compensation in lieu of vesting of
options), and reimbursement of costs, including those incurred to enforce this
Agreement. A decision by the arbitration panel shall be final and binding.
Judgment may be entered on the arbitrators' award in any court having
jurisdiction. The direct expense of the arbitrators shall be borne by the
Company.
16. GOVERNING LAW. This Agreement shall in all respects be construed
according to the laws of the State of New York.
17. COUNTERPARTS. This Agreement may be executed simultaneously in two
(2) or more counterparts, each of which shall be deemed an original and all of
which together shall constitute but one and the same instrument.
-12-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
COLLECTIBLES USA, INC.
By: /s/ W. Randolph Ellspermann
-------------------------------------
Name: W. Randolph Ellspermann
---------------------------------------
Title: President and Chief Executive Officer
--------------------------------------
SHONNIE BILIN
/s/ Shonnie Bilin
--------------------------------------------
-13-
TRADEMARK LICENSE AGREEMENT
This Agreement is by and between Hallmark Cards, Incorporated (hereinafter
referred to as "Hallmark") and Reef's Hallmark Shop (hereinafter referred to as
"Licensee").
WHEREAS, Hallmark is the sole and exclusive owner of trademarks and tradenames
including the word HALLMARK alone and in combination with the Coronet design,
recorded on the principal register of the U.S. Patent Office under Registration
nos. 654,790; 787,169; 864,077; and 916,900, among others, and
WHEREAS Licensee desires to use the HALLMARK trademark in conjunction with the
operation of its social expression shop located at 694 So. Congress Ave., Palm
Springs, FL (complete address - street, city, state and zip code) (hereinafter
referred to as the "Shop");
NOW, THEREFORE, in consideration of the promises and mutual covenants herein
contained, the parties hereto agree as follows;
1. Hallmark hereby grants to Licensee a royalty free license to use
the trademark and tradename HALLMARK as part of the Shop's
tradename in the following manner and no other - Reef's 's
Hallmark Shop (or Synonym) - and in addition, to use the HALLMARK
trademark in other appropriate ways for the promotion and sale of
Hallmark products at the Shop.
2. Licensee, for itself, its heirs, administrators, successors and
assigns, does hereby absolutely grant, bargain, convey and assign
unto Hallmark any and all legal and equitable right, title and
interest, both tangible and intangible, which it has or may
hereafter acquire in the HALLMARK trademark, including but not
limited to any goodwill hereinafter generated or created by it or
anyone acting or claiming under it.
3. The license herein granted shall not extend to any use of the
trademark as a part of a corporate name or in connection with any
other business it operates at any other location and further said
license herein granted shall be terminable by Hallmark, at any
time, by the giving to Licensee of 30 days written notice.
4. The license herein granted may not be transferred or assigned and
all rights granted herein shall revert to Hallmark upon
termination of this agreement.
5. In connection with Licensee's operation of the Shop, Licensee
will:
(a) use its best efforts to promote and maintain the goodwill of the
HALLMARK trademark and image;
<PAGE>
(b) maintain a sufficient inventory and display of the range of
HALLMARK products to enable the public the opportunity to
purchase the same, so as not to mislead or deceive the public as
to the availability of HALLMARK products in your store;
(c) maintain its store premises in a neat and orderly fashion;
(d) instruct sales clerks and employees in a manner sufficient to
familiarize them with the HALLMARK product line so as to be able
to respond to customer inquiries;
(e) not directly or indirectly disparage the HALLMARK product line
or use bait and switch selling techniques to a customer who
indicates interest in HALLMARK products or otherwise engage in
deceptive advertising or selling violative of the provisions of
section 5 of the Federal Trade Commission Act;
(f) maintain HALLMARK products as its primary product line,
provided, however, that Licensee is not otherwise restricted
from the inventory and sale of competing product lines.
6. Licensee shall display Hallmark's trademarks in conformity with the
rules for such use as Hallmark may, from time to time, promulgate in
order to protect the quality image and reputation which those
trademarks presently enjoy. Any rules now or hereafter promulgated by
Hallmark shall be considered a part of this agreement and Licensee
hereby agrees to be bound by said rules. Attached as Exhibit A to this
agreement are the current rules regarding the use of the HALLMARK
trademark.
7. Licensee will, from time to time, submit to Hallmark, samples of
advertising material, letterheads, etc. for determination that its use
of the HALLMARK trademark is, in Hallmark's judgment, correct.
8. This agreement supersedes all prior oral or written representations
and constitutes the entire understanding between Licensee and Hallmark
with respect to the use of the HALLMARK trademark; in connection with
Licensee's operation of the shop and may be modified only in writing.
9. This agreement shall be subject to and construed in accordance with
the laws of the state of Missouri and shall become effective upon
execution by Hallmark in Kansas City, Missouri.
10. Licensee acknowledges that Hallmark is not its partner, joint venturer
or franchisor and that the relationship between Licensee and Hallmark
is not a franchise relationship and that no fee is payable for this
license and that Licensee is not required to follow any specific
merchandising plan.
-2-
<PAGE>
11. Licensee shall have the right to terminate this agreement by giving
Hallmark 30 days written notice of its intent to do so. Said written
notice shall be placed in the United States mail, certified
mail-return receipt requested, addressed to Hallmark Cards,
Incorporated, in care of Sales Information Center - 340, P.O. Box
419580, Kansas City, Missouri 64141-6580.
12. This agreement shall automatically terminate on the occurrence of the
following: (1) termination of Licensee's right to occupy the premises
with respect to which the license herein has been granted or (2) the
closing of the Licensee's account with Hallmark.
13. In the event this license is terminated, for any reason by either
party, licensee hereby agrees to immediately cease using the HALLMARK
trademark and all other trademarks owned by Hallmark and to remove,
destroy or otherwise obliterate any sign, placard, poster, stationery,
banner, advertising, merchandise bag or lettering which utilizes the
HALLMARK trademark, or any part thereof, by the date upon which the
termination becomes effective. Licensee further agrees to permit
Hallmark the right to enter premises to ensure that the foregoing has
been completed upon Hallmark's first giving Licensee reasonable
advance notice. Licensee further acknowledges and agrees that its
failure to immediately cease the use of the HALLMARK trademark upon
revocation of the license herein granted will result in irreparable
harm or injury to Hallmark.
14. Licensee agrees that, prior to displaying any sign containing the
"Hallmark" trademark on the interior or exterior of the shop, it shall
obtain Hallmark's approval of same by submitting an appropriate
application in writing to Hallmark.
IN WITNESS WHEREOF, the parties hereof have executed this agreement in
duplicate.
HALLMARK CARDS, INCORPORATED
By /s/ illegible
---------------------------------------------------------------
TO BE SIGNED AT HALLMARK CORPORATE HEADQUARTERS / DATE
<TABLE>
<CAPTION>
SOLE PROPRIETORSHIP PARTNERSHIP CORPORATION
<S> <C> <C> <C>
Ellwell Store's Inc.
DBA Reef's Hallmark Shop
---------------------- -------------------------- ---------------------------
SIGNATURE / DATE SIGNATURE / DATE (NAME OF CORPORATION)
By /s/ Roy C. Ellwell 5-17-87
-------------------------- ------------------------ ------------
SIGNATURE / DATE SIGNATURE / TITLE DATE
By /s/ Kim A. Ellwell, V.P. 5-18-87
-------------------------- ------------------------ ------------
SIGNATURE / DATE SIGNATURE / TITLE DATE
</TABLE>
Agreement is not effective until approved and executed by Hallmark Cards,
Incorporated in Kansas City, Missouri.
-3-
<PAGE>
SCHEDULE TO EXHIBIT 10.13
Identification of Substantially Identical Trademark Assignment and License
Agreements
1. ASSIGNMENT AND LICENSE AGREEMENT made as of April 28, 1982, by and among
HALLMARK CARDS, INC., A Missouri corporation, STONE'S SHOP, INC., an Illinois
corporation.
2. TRADEMARK ASSIGNMENT AND LICENSE AGREEMENT made as of July 18, 1984, by and
among HALLMARK CARDS, INC., a Missouri corporation, STONE'S SHOP, INC., an
Illinois corporation.
3. TRADEMARK ASSIGNMENT AND LICENSE AGREEMENT made as of August 13, 1984 by and
among HALLMARK CARDS, INC., a Missouri corporation, STONE'S SHOP, INC., an
Illinois corporation.
4. TRADEMARK LICENSE AGREEMENT made as of May 14, 1985, by and among HALLMARK
CARDS, INC., a Missouri corporation, STONE'S SHOP, INC., an Illinois
corporation.
5. TRADEMARK SUBLICENSE AGREEMENT made as of September 1, 1992, by and among
HALLMARK MARKETING CORPORATION (the Sublicensor), a Missouri corporation,
STONE'S SHOPS, INC. (the Sublicensee), an Illinois corporation.
6. TRADEMARK SUBLICENSE AGREEMENT by and among HALLMARK MARKETING CORPORATION
(the Sublicensor), a Missouri corporation, STONE'S SHOPS, INC. (the
Sublicensee), an Illinois corporation.
October 7, 1997
Mr. Neil J. DePascal, Jr.
Chief Financial Officer
Collectibles USA, Inc.
One Battery Park Plaza, 24th Floor
New York, NY 10004
Dear Neil:
NationsBank of Texas, N.A. ("NationsBank") is pleased to offer its commitment to
extend a $25 million Senior Credit Facility (the "Senior Credit Facility") to
Collectibles USA, Inc. (the "Borrower") upon and subject to the terms and
conditions of this letter and the Summary of Terms and Conditions attached
hereto as Annex I (the "Term Sheet"). All capitalized terms used and not
otherwise defined herein shall have the meanings set forth in the Term Sheet.
The commitment of NationsBank is subject to the satisfaction of each of the
following conditions precedent in a manner acceptable to NationsBank in sole
discretion:
(a) each of the terms and conditions set forth herein;
(b) each of the terms and conditions set forth in the Term Sheet;
(c) execution of a Fee Letter among the Borrower and Nationsbank prior to
or concurrently with the acceptance of this letter by the Borrower;
(d) the negotiation, execution and delivery of definitive documentation
with respect to the Senior Credit Facility consistent with the Term
Sheet and otherwise satisfactory to NationsBank.
The commitment of NationsBank hereunder is based upon the financial and other
information regarding the Borrower and its subsidiaries previously provided to
NationsBank and is subject to the condition, among others, that there shall not
have occurred after the date of such information, in the opinion of NationsBank,
any material adverse change in the business, assets, liabilities (actual or
contingent), operations, condition (financial or otherwise) or prospects of the
Borrower and its subsidiaries taken as a whole. If the continuing review by
NationsBank of the Borrower discloses information relating to conditions or
events not previously disclosed to NationsBank or relating to new information or
additional developments concerning conditions or events previously disclosed
<PAGE>
to NationsBank which NationsBank in its sole discretion believe may have a
material adverse effect on the condition (financial or otherwise), assets,
properties, business, operations or prospects of the Borrower and its
subsidiaries taken as a whole, NationsBank may, in its sole discretion, suggest
alternative financing amounts or structures that ensure adequate protection for
NationsBank or decline to extend the Senior Credit Facility.
You hereby represent, warrant and covenant that (i) all information, other than
the Projections (as defined below), which has been or is hereafter made
available to NationsBank by you or any of your representatives in connection
with the transaction contemplated hereby ("Information") is and will be complete
and correct in all material respects and does not and will not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements contained therein not misleading and (ii) all financial
projections concerning the Borrower that have been or are hereafter made
available to NationsBank by you or any of your representatives (the
"Projections") have been or will be prepared in good faith based upon reasonable
assumptions. You agree to furnish us with such Information and Projections as we
may reasonably request and to supplement the Information and Projections from
time to time until the closing date for the Senior Credit Facility so that the
representation and warranty in the preceding sentence is correct on such date.
In arranging the Senior Credit Facility, NationsBank will be using and relying
on the Information and the Projections without independent verification thereof.
By acceptance of this offer, the Borrower agrees to pay all reasonable
out-of-pocket fees and expenses (including reasonable attorneys's fees and
expenses and expenses of due diligence) incurred after the date hereof by
NationsBank in connection with the Senior Credit Facility, regardless of whether
or not the Senior Credit Facility closes.
In the event that NationsBank becomes involved in any capacity in any action,
proceeding or investigation in connection with any matter contemplated by this
letter, the Borrower will reimburse NationsBank for is reasonable legal and
other expenses (including the cost of any investigation and preparation) as they
are incurred by NationsBank. The Borrower also agrees to indemnify and hold
harmless NationsBank and its affiliates and its respective directors, officers,
employees and agents (the "Indemnified Parties") from and against any and all
losses, claims, damages and liabilities, joint or several, related to or arising
out of any matters contemplated by this letter (including any arising out of the
negligence of any Indemnified Party), unless and only to the extent that it
shall be finally judicially determined that such losses, claims, damages or
liabilities resulted primarily from the gross negligence or willful misconduct
of NationsBank.
The provisions of the immediately preceding two paragraphs shall remain in full
force and effect regardless of whether definitive financing documentation for
the Senior Credit Facility shall be executed and delivered and notwithstanding
the termination of this letter or the commitments of NationsBank hereunder.
Neither this offer nor the undertaking and commitment contained herein may be
disclosed to or relied upon by any other person or entity other than your
accountants, attorneys and other advisors,
<PAGE>
without the prior written consent of NationsBank, except that following your
acceptance hereof you may make public disclosure hereof as required by law.
This letter (the "Commitment Letter") shall be governed by the laws of the State
of Texas without regard to its principles of conflicts of laws. This letter may
be modified or amended only in writing. This letter is not assignable by the
Borrower without the prior written consent of NationsBank. This letter
supersedes and replaces any and all proposals or commitment letters previously
delivered by NationsBank to the Borrower relating to the Senior Credit Facility.
The offer will expire at 5:00 P.M. central time on October 10, 1997 unless the
Borrower executes this Commitment Letter and the attached Fee Letter and returns
them to the Agent prior to that time (which may be by facsimile transmission),
whereupon this letter shall become a binding agreement. Thereafter, this
undertaking and commitment will expire at 5:00 P.M. central time on November 30,
1997 unless definitive documentation for the Senior Credit Facility is executed
and delivered prior to that time.
This written agreement (which includes the Term Sheet and the Fee Letter)
represents the final agreement between the parties and may not be contradicted
by evidence of prior, contemporaneous or subsequent oral agreements of the
parties. There are no unwritten oral agreements between the parties.
Very truly yours,
NATIONSBANK OF TEXAS, N.A.
By: /s/ William B. Borus
---------------------------
William B. Borus
Vice President
Accepted and Agreed to:
COLLECTIBLES USA, INC.
By: /s/ Neil J. DePascal, Jr.
---------------------------
Neil J. DePascal, Jr.
Chief Financial Officer
<PAGE>
October 7, 1997
Mr. Neil J. DePascal, Jr.
Chief Financial Officer
Collectibles USA, Inc.
One Battery Park Plaza, 24th Floor
New York, NY 10004
Dear Neil:
This letter (the "Fee Letter") is delivered to you in connection with the
Commitment Letter to you dated as of the date hereof (the "Commitment Letter")
from NationsBank of Texas, N.A. ("NationsBank") regarding the Senior Credit
Facility in an aggregate principal amount of up to $25 million (the "Senior
Credit Facility"). A summary of proposed terms relating to the Senior Credit
Facility is attached to the Commitment Letter (the "Term Sheet"). Unless
otherwise defined herein, capitalized terms shall have the meanings set forth in
the Commitment Letter and the Term Sheet. In connection with, and in
consideration of the agreements contained in the Commitment Letter, the Borrower
agrees with NationsBank as follows:
Upfront Fee: The Borrower will pay to NationsBank for its own account, a
fee based upon its commitment to the Senior Credit Facility, equal to 60 basis
points or $150,000.
Of such fee, $25,000 shall be due, payable and earned upon acceptance of the
Commitment Letter and the remaining fee shall be due and payable at the closing
of the Senior Credit Facility. The parties hereto acknowledge that the portion
of such fee that is due and payable upon acceptance of the Commitment Letter has
been earned and is non-refundable.
<PAGE>
Mr. Neil J. DePascal, Jr.
October 7, 1997
Page 2
If the foregoing is in accordance with your understanding, please sign and
return this letter.
Very truly yours,
NATIONSBANK OF TEXAS, N.A.
By: /s/ William B. Borus
---------------------------
William B. Borus
Vice President
Accepted and Agreed to:
COLLECTIBLES USA, INC.
By: /s/ Neil J. DePascal, Jr.
----------------------------
Neil J. DePascal, Jr.
Chief Financial Officer
<PAGE>
ANNEX I
COLLECTIBLES USA, INC.
SUMMARY OF TERMS & CONDITIONS
OCTOBER 7, 1997
- --------------------------------------------------------------------------------
BORROWER: Collectibles USA, Inc. ("Borrower").
GUARANTORS: The Senior Credit Facility shall be guaranteed by all
existing and hereafter acquired subsidiaries of the Borrower
(the "Guarantors"). All guarantees shall be guarantees of
payment and not of collection.
CLOSING: The effective date of the loan documentation, to be no later
than November 30, 1997.
SENIOR CREDIT An aggregate principal amount of up to $25,000,000 will be
FACILITY: available upon the conditions hereinafter set forth:1
Revolving Senior Credit Facility: Up to $25,000,000 revolving
senior credit facility, which will include a $5,000,000
sublimit for the issuance of letters of credit.
The Senior Credit Facility shall be available based upon a
quarterly compliance certificate with advances made in
accordance with the Funded Debt to EBITDA ratio and the
Funded Debt to Inventory ratio.
PURPOSE: The proceeds of the Senior Credit Facility shall be used by
the Borrower for working capital, capital expenditures,
acquisitions, the refinancing of existing indebtedness an
other corporate purposes.
MATURITY: The Senior Credit Facility shall terminate and all amounts
outstanding thereunder shall be due and payable in full three
(3) years from Closing.
SECURITY: NationsBank shall receive a first priority perfected security
interest in all capital stock of each of the subsidiaries
(direct or indirect) of the Borrower, which capital stock
shall not be subject to any other lien or encumbrance.
NationsBank shall also receive a first priority perfected
security interest in all accounts receivable and inventory of
the Borrower and each
<PAGE>
ANNEX I
COLLECTIBLES USA, INC.
SUMMARY OF TERMS & CONDITIONS
OCTOBER 7, 1997
- --------------------------------------------------------------------------------
of its subsidiaries.
OPTIONAL The Borrower may prepay and permanently reduce the commitment
PREPAYMENTS of the Senior Credit Facility in whole or in part at any time
AND COMMITMENT without penalty, subject to reimbursement of the
REDUCTIONS: NationsBank's breakage and redeployment costs in the case of
the prepayment of LIBOR borrowings.
CONDITION The closing and initial funding of the Senior Credit Facility
PRECEDENT TO will be subject to satisfaction of the conditions precedent
CLOSING: deemed appropriate by NationsBank including, but not limited
to, the following:
(i) Successful completion of an IPO with minimum net
proceeds of $19,000,000.
(ii) The completion of due diligence with respect to the
individual executives and directors of the Borrower,
the results of which shall be satisfactory to
NationsBank, in its sole discretion.
(iii) The negotiation, execution and delivery of definitive
documentation with respect to the Senior Credit
Facility satisfactory to NationsBank.
(iv) NationsBank shall have received (a) satisfactory
opinions of counsel to the Borrower and the other
obligors (which shall cover, among other things,
authority, legality, validity, binding effect and
enforceability of the documents for the Senior Credit
Facility) and such corporate resolutions, certificates
and other document as NationsBank shall reasonably
require and (b) evidence satisfactory to NationsBank
that no liens are in effect except for permitted liens.
(v) There shall not have occurred a material adverse change
in the business, assets, operations, condition
(financial or otherwise) or prospects of the Borrower
and its subsidiaries.
<PAGE>
ANNEX I
COLLECTIBLES USA, INC.
SUMMARY OF TERMS & CONDITIONS
OCTOBER 7, 1997
- --------------------------------------------------------------------------------
(vi) The absence of any action, suit, investigation or
proceeding pending or threatened in any court or before
any arbitrator or governmental authority that purports
to affect the Borrower or its subsidiaries or
management or any transaction contemplated hereby or on
the ability of the Borrower and its subsidiaries to
perform their obligations under the documents to be
executed in connection with the Senior Credit Facility.
(vii) Receipt and review, with results satisfactory to
NationsBank and its counsel, of information regarding
litigation, tax, accounting, labor, insurance, pension
liabilities (actual or contingent), real estate leases,
material contracts, debt agreements, property
ownership, and contingent liabilities of the Borrower
and its subsidiaries.
REPRESENTATIONS &
WARRANTIES:
<TABLE>
<S> <C>
<S> <C>
Usual and customary for transactions of this type, Usual and customary for transactions of this type, to
to include without limitation: (i) corporate include without limitation the following:
status; (ii) corporate power and authority/
enforceability; (iii) no violation of law or (i) reporting (a) annually: audited consolidated financial
contracts or organizational documents; (iv) no statements of the Borrower and its subsidiaries to be
material litigation; (v) correctness of specified provided within 90 days after each fiscal year with a
financial statements and no material adverse compliance certificate and the proforma consolidating
change; (vi) no required governmental or third EBITDAR schedule; (b) quarterly: unaudited consolidating and
party approvals; (vii) use of proceeds/ compliance consolidated financial statements of the Borrower and its
with margin regulations; (viii) status under subsidiaries to be provided within 45 days following each
Investment Company Act; (ix) ERISA; (x) fiscal quarter with a compliance certificate and the
environmental proforma consolidating EBITDAR schedule; same-store schedule
of operations, in a form acceptable to NationsBank; (c)
Other: written summary of each acquisition within 80 days of
closing of future acquisitions, in a form acceptable to
NationsBank; (ii) notices of default, material litigation
and
</TABLE>
<PAGE>
ANNEX I
COLLECTIBLES USA, INC.
SUMMARY OF TERMS & CONDITIONS
OCTOBER 7, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
matters; (xi) payment of taxes; (xii) material governmental and environmental proceedings; (iii)
Borrower shall not be in default at time compliance with law: (iv) payment of taxes; (v) maintenance
of Closing and at any time of borrowing, of insurance; (vi) Other debt and liens limited to purchase
and (xiii) full disclosure to money indebtedness and related liens up to a maximum of
NationsBank.COVENANTS: $1,000,000; (vii) Physical counts of inventory quarterly
until MIS inventory system, acceptable to NationsBank, is
fully operations; (viii) limitation on investments; (ix)
limitations on restricted payments e.g., dividends and share
repurchases; (x) limitation on capital expenditures per
fiscal year to a maximum of $2,000,000; (xi) limitations on
transactions with affiliates; (xii) limitation on
acquisitions which will include Bank approval if the
non-equity consideration of any individual acquisition
exceeds $23 million or if the aggregate non-equity
consideration during any fiscal year exceeds $15 million, if
and only if net proceeds exceed $23 million, if however, net
proceeds exceed $19 million but less than $23 million, then
the covenant amounts are $2.0 million and $10.0 million,
respectively; (xiii) limitation on the opening of new stores
(no new stores during the first 12 months of combined
operations; after the first new store is opened, the Bank
will monitor its results for at least 12 months prior to
approving additional stores); (xiv) limitation on sale of
assets; and (xv) ERISA.
Financial covenants measured quarterly to include (but not
be limited to):
o Maximum Funded Debt to Proforma EBITDA, measured on a
rolling four quarters basis of 2.50 to 1.0 (Proforma
EBITDA incudes credit for proforma historic acquired
cash flows, as approved by NationsBank, on a
case-by-case basis, in its sole discretion);
o Maximum Funded Debt to Inventory of 0.75 to 1.0:
o Maintenance at all times of Minimum Net Worth of 90%
of Borrower's Net Worth at IPO closing, with
</TABLE>
<PAGE>
ANNEX I
COLLECTIBLES USA, INC.
SUMMARY OF TERMS & CONDITIONS
OCTOBER 7, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
step-ups equal to 75% of quarterly net income and
100% of the proceeds of any increase in an equity
account resulting from any issuance of equity;
o Minimum Fixed Charge Coverage Ratio - Historical:
defined as (EBITDAR - Cash Taxes) / (Interest +
CMLTD and Capital Lease Obligations + Historical
Rent) measured on a rolling four quarter basis, of
1.75 to 1.0 through 1/31/99, thereafter 2.00 to 1.0
(all variables based on historical results as
reported on Borrower's GAAP basis financial
statements);
o Minimum Fixed Charge Coverage Ratio - Projected:
defined as (Proforma EBITDAR - Cash Taxes) /
(Interest + CMLTD and Capital Lease Obligations +
Projected Rent) measured on a rolling four quarter
basis, of 1.50 to 1.0 through 1/31/99, thereafter
1.75 to 1.0 (proforma EBITDAR includes credit for
proforma historic acquired cash flows, as approved
by NationsBank, on a case-by-case basis, in its sole
discretion; projected rent is based on all stores
opened at the quarterly end);
EVENTS OF DEFAULT: Usual and customary in transactions of this nature, to
include, without limitation, (i) nonpayment of
principal, interest, fees or other amounts, (ii)
violation of covenants, (iii) inaccuracy of
representations and warranties, (iv) cross-default to
other material agreements and indebtedness, (v)
bankruptcy, (vi) material judgments, (vii) ERISA, (viii)
actual or asserted invalidity of any loan documents or
security interests and (ix) Change in Control (to be
roughly defined as one investor acquiring in excess of
25% of the voting stock of the Borrower or a change of a
majority of the Board of Directors of the Borrower).
INDEMNIFICATION: The Borrower shall indemnify NationsBank from and
against all losses, liabilities, claims, damages or
expenses relating to the Loans, the Borrower's use of
the loan proceeds or the
</TABLE>
<PAGE>
ANNEX I
COLLECTIBLES USA, INC.
SUMMARY OF TERMS & CONDITIONS
OCTOBER 7, 1997
- --------------------------------------------------------------------------------
commitments, including but not limited to reasonable
attorneys' fees and settlements costs. This
indemnification shall survive and continue for the
benefit of NationsBank at all times after the Borrower's
acceptance of NationsBank's commitment for the Senior
Credit Facility, notwithstanding any failure of the
Senior Credit Facility to close.
OTHER: This term sheet is intended as an outline only and does
not purport to summarize all the conditions, covenants,
representations, warranties and other provisions which
would be contained in definitive legal documentation for
the Senior Credit Facility contemplated hereby. The
Borrower shall waive its right to a trial by jury.
INTEREST RATES: The Senior Credit Facility shall bear interest at a rate
equal to LIBOR plus the Applicable Margin for LIBOR
Loans or the Alternate Base Rate (defined as the higher
of (i) the NationsBank prime rate and (ii) the Federal
Funds rate plus .50%) plus the Applicable Margin for
Base Rate Loans.The Borrower may select interest periods
of 1,2, 3 or 6 months for LIBOR Loans, subject to
availability.
A penalty rate shall apply on all loans in the event of
default at a rate per annum of 2% above the applicable
interest rate.
UNUSED FEE: Commencing at the Closing, a non-refundable fee (in
percentage per annum specified in the accompanying
performance grid) will accrue on a daily average unused
portion of the Senior Credit Facility, payable quarterly
in arrears and on the Senior Credit Facility commitment
termination date.
PERFORMANCE PRICING: The Applicable Margin and Unused Fee, for any fiscal
quarter, shall be the applicable rate per annum set
forth in the table below opposite the Funded Debt to
EBITDA Ratio determined as of the last day of the
immediately preceding fiscal quarter. For the period
from Closing until the first determination date, pricing
shall be based upon the pricing
<PAGE>
ANNEX I
COLLECTIBLES USA, INC.
SUMMARY OF TERMS & CONDITIONS
OCTOBER 7, 1997
- --------------------------------------------------------------------------------
tier which is less than or equal to 1.5.
Applicable Margin
Applicable Margin for Base Rate
Total Debt to EBITDA Ratio for LIBOR Loans Unused Fee Loans
- -------------------------- ------------------ ---------- ----------------
Less than or equal to 1.0 150 bps 25 bps 0 bps
Less than or equal to 1.5 but 175 bp 25 bps 0 bps
greater than 1.0
Less than or equal to 2.0 but 200 bps 37.5 bps 0 bps
greater than 1.5
Less than or equal to 2.5 but 225 bps 37.5 bps 0 bps
greater than 2.0
<PAGE>
ANNEX I
COLLECTIBLES USA, INC.
SUMMARY OF TERMS & CONDITIONS
OCTOBER 7, 1997
- --------------------------------------------------------------------------------
LETTER OF CREDIT FEES: Letter of credit fees are due quarterly in arrears.
Fees will be equal to the Applicable Margin for LIBOR
Loans on a per annum basis with a minimum of $400.
Fees will be calculated on the aggregate stated amount
for each letter of credit for the stated duration
thereof.
COST AND YIELD The usual for transactions of this type, including,
PROTECTION: without limitation, in respect of prepayments, changes
in capital adequacy and capital requirements or their
interpretation, illegality, unavailability, and
reserves without proration or offset.
EXPENSES: The Borrower agrees to reimburse NationsBank for all
reasonable out of pocket legal fees and expenses
incurred in the preparation and execution of the
Senior Credit Facility. The Borrower will reimburse
NationsBank for all reasonable out of pocket legal
fees and expenses incurred in connection with the
enforcement of the Senior Credit Facility.
EXHIBIT 23.1
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.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
October 9, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1997
<PERIOD-END> JUL-31-1997
<EXCHANGE-RATE> 1
<CASH> 237,454
<SECURITIES> 0
<RECEIVABLES> 103,450
<ALLOWANCES> 0
<INVENTORY> 562,598
<CURRENT-ASSETS> 974,190
<PP&E> 96,225
<DEPRECIATION> (62,607)
<TOTAL-ASSETS> 1,104,423
<CURRENT-LIABILITIES> 1,110,783
<BONDS> 0
0
0
<COMMON> 1,584
<OTHER-SE> (7,944)
<TOTAL-LIABILITY-AND-EQUITY> 1,104,423
<SALES> 2,080,990
<TOTAL-REVENUES> 2,080,990
<CGS> 695,927
<TOTAL-COSTS> 943,920
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 446,729
<INCOME-TAX> 0
<INCOME-CONTINUING> 446,729
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 446,729
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
