AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 5, 1998
REGISTRATION NO. 333-29181
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 3
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 JUNE 5, 1998
PROSPECTUS
2,700,000 SHARES
[GRAPHIC OMITTED]
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. It is currently
anticipated that the initial public offering price will be between $8.00 and
$9.00 per share. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. The Company 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 IN CONNECTION WITH AN INVESTMENT IN 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) Excludes (i) the value of warrants to be issued to Cruttenden Roth
Incorporated, as the representative of the several Underwriters (the
"Representative"), to purchase up to 270,000 shares of Common Stock (the
"Representative's Warrants") and (ii) a financial advisory fee payable by
the Company to the Representative in the amount of $450,000. The Company has
agreed to indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1993, as amended. See
"Underwriting."
(2) Before deducting expenses of this offering payable by Collectibles USA
estimated at $_________, including the Representative's financial advisory
fee.
(3) Collectibles USA has granted to the Underwriters an option, exercisable
within 45 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 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 share certificates will be made against payment
therefor at the offices of Cruttenden Roth Incorporated, in Irvine, California
or through the facilities of The Depository Trust Company on or about ,
1998.
------------------
CRUTTENDEN ROTH
INCORPORATED
The date of this Prospectus is , 1998
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) [photograph -- to come]
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(Reg. TM) is a registered trademark of Paws, Incorporated and Bugs
Bunny(Reg. TM), Elmer Fudd(Reg. TM), Yosemite Sam(Reg. TM), and Tweety and
Sylvester(Reg. TM) 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"), four 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 $8.50 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 79,902 shares of Common Stock of
which 67,916 shares will be issued by the Company, (v) assume the conversion of
all of the Company's $1,550,000 12% notes due February 28, 1999 (the "CUSA
Notes") into 364,705 shares of Common Stock, of which 285,642 shares will be
issued by the Company and (vi) 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 1998" mean the
year ended January 25, 1998. With respect to the financial information of the
combined Founding Companies, references to "Fiscal 1996," "Fiscal 1997" and
"Fiscal 1998" 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 four 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 11 collectibles stores are
located in Florida, Illinois (6), New Jersey (2) and Oklahoma (2). 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 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), 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(Reg. TM), and is also an authorized dealer of
limited editions and sericels created by Disney and Warner Brothers.
According to Unity Marketing's The Collectibles Industry Report 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
3
<PAGE>
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
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.
4
<PAGE>
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 at Founding Companies and future companies to be acquired which
are not already utilizing such 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 an Internet ordering site at Founding Companies and
future companies to be acquired which are not utilizing such programs.
o Improve Operating Procedures. The Company intends to implement a
centralized financial management system that will enable consolidated
financial reporting and cash management. The Company is currently
negotiating with and intends to partner with an integrated provider of
outsourcing services in the supplier management, procurement, order
processing and payment settlement processes. The Company has entered into
a partnering relationship with a leading professional employer
organization to serve as an off-site human resources department. 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.
MANAGEMENT
Upon consummation of the Offering, the management group of the Company will
consist of two senior management members and four current owners of certain of
the Founding Companies. The two senior management members, the President and
Chief Executive Officer of the Company and the Executive Vice President and
Chief Financial Officer of the Company, will be responsible for the day-to-day
operations of the Company and will work primarily from the Company's corporate
headquarters. The other four managers will not be required to relocate to the
corporate headquarters. Each of these four managers has organized a management
team at their respective Founding Company that functions independently. The
employment agreement of each member of the management group provides that each
such member will devote his or her full-time and efforts to the affairs of
Collectibles USA. The Company's senior management group, other than the
executives of the Founding Companies, was assembled during June through August
of 1997.
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. Prior to the Acquisitions, the Company will have
conducted no operations and generated no revenue. 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 seven Founding
Companies, four 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 $7.8 million in cash and 1,761,354 shares of Common Stock. In
addition, approximately $3.5 million of the net proceeds of the Offering will be
used to repay indebtedness of the Founding Companies as of May 31, 1998,
including indebtedness incurred to fund S corporation distributions to a
stockholder of a Founding Company. See "The Company."
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 Houston, Texas.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company .............. 2,700,000 shares
Common Stock to be outstanding after the Offering. 6,006,094 shares(1)
Use of Proceeds .................................. To pay the cash portion of
the purchase price of the
Founding Companies; repay
certain indebtedness of
the Founding Companies,
including indebtedness
incurred to fund S
corporation distributions
to a stockholder of a
Founding Company; 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) 1,191,182 shares issued to the sponsors and management which
are outstanding prior to the Offering, of which 638,847 shares are
Restricted Vote Common Stock held by sponsors of the transactions described
herein, (ii) 1,761,354 shares to be issued to the owners of the Founding
Companies, (iii) 79,902 shares to be issued to the holders of the Series A
Convertible Preferred Stock, of which 11,986 shares will be transferred
from the sponsor shares listed in (i) above, 364,705 shares to be issued to
the holders of the CUSA Notes, of which 79,063 shares will be transferred
from the sponsor shares listed in (i) and 241,706 shares to be issued to
the holders of the CEFC Notes, all of which will be transferred from the
sponsor shares listed in (i) above, excludes (i) 1,150,914 shares of Common
Stock reserved for issuance under the Company's stock option plans, of
which options to purchase 90,000 shares exercisable at $4 have been granted
and options to purchase 495,000 shares exercisable at the initial public
offering price 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 the Representative's Warrants to be issued to the
Representative and its designees, exercisable at 120% of the initial public
offering price. See "Management -- 1997 Long-Term Incentive Plan,"
"Management -- 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 $7.8 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 THREE MONTHS ENDED
JANUARY 31, 1998 APRIL 30, 1998
------------------ -------------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA(2):
Net sales ................................................ $ 22,449 $ 4,972
Cost of sales ............................................ 10,664 2,384
---------- ----------
Gross profit ............................................. 11,785 2,588
Selling, general and administrative expenses(3) .......... 9,014 2,062
Goodwill amortization(4) ................................. 363 91
---------- ----------
Operating income ......................................... 2,408 435
Interest and other income (expense), net(5) .............. 147 42
---------- ----------
Income before taxes ...................................... 2,555 477
Income taxes ............................................. 1,167 227
Net income ............................................... $ 1,388 $ 250
========== ==========
Net income per share ..................................... $ 0.26 $ 0.05
========== ==========
Shares used in computing net income per share(6) ......... 5,370,100 5,370,100
</TABLE>
<TABLE>
<CAPTION>
APRIL 30, 1998
--------------------------------------
PRO FORMA
COMBINED(7) AS ADJUSTED(8)
-------------------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ................................ $ 707 $ 6,114
Working capital (deficit) ................................ (8,377) (2) 12,622
Total assets ............................................. 32,822 32,465
Long-term obligations, net of current maturities and notes
payable to stockholders ................................ 321 --
Stockholders' equity ..................................... 12,072 27,629
</TABLE>
- ----------
(1) The year ended January 31, 1998 includes American Royal Arts for the year
ended January 31, 1998, Stone's Hallmark for the year ended November 30,
1997 and North Pole City, Little Elegance, Reef Hallmark, Animation USA and
Filmart for the year ended December 31, 1997. The three months ended April
30, 1998 includes American Royal Arts for the three months ended April 30,
1998, Stone's Hallmark for the three months ended February 28, 1998 and
North Pole City, Little Elegance, Reef Hallmark, Animation USA and Filmart
for the three months ended March 31, 1998.
(2) The pro forma combined statement of operations data assume that the
Acquisitions and the Offering were closed on February 1, 1997 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 $334,000 and $120,000 for the year ended January 31, 1998 and
the three months ended April 30, 1998, 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 a lease agreement between one of the
Founding Companies and its stockholder and the reduction in compensation
expense of approximately $673,000 relating to a non-recurring, non-cash
compensation charge for the year ended January 31, 1998.
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 issued to the sponsors and management which
are outstanding prior to the Offering, (ii) 1,761,354 shares to be issued
to the owners of the Founding Companies, (iii) 79,902 shares to be issued
to the holders of the Series A Convertible Preferred Stock, of which 11,986
shares will be transferred from the sponsor shares listed in (i) above, and
364,705 shares to be issued to the holders of the CUSA Notes, of which
79,063 shares will be transferred from the sponsor shares listed in (i) and
241,706 shares to be issued to the holders of the CEFC Notes, all of which
will be transferred from the sponsor shares listed in (i) above, and (iv)
2,076,794 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
of the Founding Companies and pay expenses of the Offering.
(7) The pro forma combined balance sheet data assume that the Acquisitions were
closed on April 30, 1998. 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 $7.8 million payable to owners of the Founding Companies,
representing the cash portion of the consideration for the Acquisitions to
be paid with a portion of the net proceeds from the Offering.
8
<PAGE>
SUMMARY INDIVIDUAL FOUNDING COMPANY FINANCIAL DATA
The following table presents certain summary statements of operations data
for the Founding Companies for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL(1)(2) ENDED APRIL 30(1)(2)
----------------------------------------- --------------------------
1996 1997 1998 1997 1998
------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
American Royal Arts
Sales ................................................ $ 4,051,072 $ 4,288,612 $ 4,133,318 $1,100,477 $ 806,489
Gross profit ......................................... 2,491,154 2,782,828 2,616,802 754,035 514,573
Selling, general and administrative expenses ......... 1,759,886 1,778,138 1,957,708 482,519 400,530
Stone's Hallmark
Sales ................................................ $ 4,281,040 $ 4,985,549 $ 5,744,826 $1,845,501 $1,868,674
Gross profit ......................................... 2,012,350 2,488,975 2,982,197 898,100 927,633
Selling, general and administrative expenses ......... 1,787,457 2,117,010 1,818,203 441,996 411,124
North Pole City
Sales ................................................ $ 2,865,249 $ 3,726,332 $ 4,752,176 $ 581,424 $ 640,496
Gross profit ......................................... 1,373,610 1,993,701 2,129,949 292,107 290,430
Selling, general and administrative expenses ......... 1,077,684 1,521,669 2,044,521 447,199 498,818
Little Elegance(3)
Sales ................................................ $ 2,707,793 $ 2,598,270 $ 2,509,667 $ 376,818 $ 480,081
Gross profit ......................................... 1,238,268 1,251,609 1,179,673 181,965 227,269
Selling, general and administrative expenses ......... 1,179,842 1,229,978 1,097,089 303,703 264,689
Reef Hallmark
Sales ................................................ $ 1,838,788 $ 2,492,809 $ 2,725,129 $ 581,159 $ 623,011
Gross profit ......................................... 737,030 1,191,341 1,260,549 258,379 282,777
Selling, general and administrative expenses ......... 628,543 934,764 943,686 262,120 237,695
Animation USA(3)
Sales ................................................ $ 1,731,856 $ 1,716,410 $ 1,319,162 $ 340,760 $ 344,236
Gross profit ......................................... 833,341 876,127 723,188 204,138 215,682
Selling, general and administrative expenses ......... 773,523 845,100 762,330 187,556 149,792
Filmart
Sales ................................................ $ 1,053,089 $ 1,445,848 $ 1,323,867 $ 231,456 $ 209,059
Gross profit ......................................... 541,720 947,928 891,464 117,725 129,180
Selling, general and administrative expenses ......... 492,577 539,178 541,459 163,604 118,074
Total
Sales ................................................ $18,528,887 $21,253,830 $22,508,145 $5,057,595 $4,972,046
Gross profit ......................................... 9,227,473 11,532,509 11,783,822 2,706,449 2,587,544
Selling, general and administrative expenses ......... 7,699,512 8,965,837 9,164,996 2,288,697 2,080,722
</TABLE>
- ----------
(1) The fiscal years presented are as follows: American Royal Arts -- the years
ended October 31, 1995 and the years ended January 31, 1997 and 1998;
Stone's Hallmark -- the years ended November 30, 1995, 1996 and 1997; North
Pole City -- the years ended March 31, 1996, 1997 and 1998; and Little
Elegance, Reef Hallmark, Animation USA and Filmart -- the years ended
December 31, 1995, 1996 and 1997. The interim periods presented are as
follows: American Royal Arts -- the three months ended April 30, 1997 and
1998; Stone's Halllmark -- the three months ended February 28, 1997 and
1998; North Pole City, Little Elegance, Reef Hallmark, Animation USA and
Filmart -- the three months ended March 31, 1997 and 1998.
(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 a
lease agreement between one of the Founding Companies and its stockholder,
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: Animation USA for Fiscal 1996; and Little Elegance for Fiscal
1996, 1997 and 1998.
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 Company's 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 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.
10
<PAGE>
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(Reg. TM). These arrangements
are limited in scope, expire at various times through March 2000, and authorize
the sale of specified licensed products for a defined period of time, generally
two to four years. The agreements may be terminated prior to their expiration
date under certain circumstances, including the Company's failure to comply with
the product approval provisions. The success of licensing arrangements depends
on many factors, including the reasonableness of license fees in relation to
revenue generated by sales of licensed products and the continued popularity of
the licensed products. The termination, cancellation or inability to renew any
existing licensing arrangements, coupled with the inability to develop and enter
into new licensing arrangements, could have a material adverse effect on the
Company's financial condition and results of operations. In addition, certain of
the Founding Companies are authorized dealers of limited editions and sericels
manufactured by Disney and Warner Brothers, which are sold through retail
channels. There can be no assurance that such status will not be revoked or that
any such revocation would not have a material adverse effect on the Company's
financial condition and results of operations. In addition, the Company is an
authorized dealer of art produced by Warner Brothers/Hanna-Barbera, Disney and
artist Chuck Jones. The Company's authorized dealer agreements can generally be
terminated by the other party with or without cause on short notice. Termination
of any of the Company's authorized dealer agreements could have a material
adverse effect on the Company's financial condition and results of operations.
Certain of the authorized dealer agreements require the vendor's consent to the
Acquisitions. 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
11
<PAGE>
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 entered into negotiations for a $15.0 million credit
facility with a commercial bank to be used for acquisitions, working capital and
other general corporate purposes. It is anticipated that such credit facility,
if obtained, will be subject to various conditions including receipt of net
proceeds from the Offering of a certain amount. Additionally, as is customary
for such credit facilities, the Company expects that it will be required to
adhere to certain restrictive covenants. 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 11% of the
Company's pro forma net sales in Fiscal 1998. 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."
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.
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
12
<PAGE>
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 and results of operations.
SIGNIFICANT MATERIALITY OF GOODWILL
The Company's balance sheet immediately following the Offering and
consummation of the acquisition of the Founding Companies will include an amount
designated as "goodwill" that represents 44.7% of the pro forma total assets and
52.6% of stockholders' equity. Goodwill arises when an acquiror pays more for a
business than the fair value of the tangible and separately measurable
intangible net assets. Generally accepted accounting principles require that
this and all other intangible assets be amortized over the period benefited.
Management has determined that the period benefited by the goodwill will be no
less than 40 years. If management were not to separately recognize a material
intangible asset having a benefit period less than 40 years, or were not to give
effect to shorter benefit periods of factors giving rise to a material portion
of the goodwill, earnings reported in periods immediately following the
acquisition would be overstated. In later years, the Company would be burdened
by a continuing charge against earnings without the associated benefit to income
valued by management in arriving at the consideration paid for the businesses.
Earnings in later years also could be significantly affected if management
determined then that the remaining balance of goodwill was impaired. Management
has reviewed with its independent accountants all of the factors and related
future cash flows which it considered in arriving at the amount incurred to
acquire each of the Founding Companies. Management concluded that the
anticipated future cash flows associated with intangible assets recognized in
the acquisitions will continue indefinitely, and there is no persuasive evidence
that any material portion will dissipate over a period shorter than 40 years.
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."
13
<PAGE>
EFFECT OF FLUCTUATIONS IN THE GENERAL ECONOMY
Demand for collectibles merchandise and animation art is affected by the
general economic conditions in the United States. When economic conditions are
favorable and discretionary income increases, purchases of non-essential items
like collectibles merchandise and animation art generally increase. When
economic conditions are less favorable, sales of collectibles merchandise and
animation art are generally lower. In addition, the Company may experience more
competitive pricing pressure during economic downturns. Therefore, any
significant economic downturn or any future changes in consumer spending habits
could have a material adverse effect on the Company's financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
CHANGES IN CUSTOMER TASTE
The markets for the Company's products are subject to changing customer
tastes and the need to create and market new products. Demand for collectibles
and animation art products is influenced by the popularity of certain themes,
cultural and demographic trends, marketing and advertising expenditures and
general economic conditions. Because these factors can change rapidly, customer
demand also can shift quickly. Some collectibles appeal to customers for only a
limited time. The success of new product introductions depends on various
factors, including product selection and quality, sales and marketing 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."
RISK OF YEAR 2000 NONCOMPLIANCE
As the year 2000 approaches, many date sensitive computer applications will
fail because they are unable to process dates properly beyond December 31, 1999.
Businesses will thus be required to devote significant resources to converting
their information systems over the next several years. Certain of the Founding
Companies' computer programs are currently partially Year 2000 noncompliant. The
costs of updating such programs are not expected to be material, but there can
be no assurance that such conversion programs will be successful at the expected
cost. The Company relies on a number of computer software programs, including
programs used to manage the Company's financial, accounting, sales and marketing
activities. The inability of such programs to interpret properly data relating
to the year 2000 and beyond could have a material adverse effect on the
Company's, financial condition and results of operations.
14
<PAGE>
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 the
management group of Collectibles USA, which is comprised of two senior managers
and four managers who are current owners of certain of the Founding Companies.
Furthermore, the Company will likely be dependent on the senior management of
companies that may be acquired in the future. Although the Company has entered
into employment agreements with senior management of Collectibles USA and of the
Founding Companies, there can be no assurance that any individual will continue
in such capacity for any particular period of time. The loss of key personnel,
or the inability to hire and retain qualified employees, could have a material
adverse effect on the Company's financial condition and results of operations.
The Company does not intend to carry key-person life insurance on any of its
employees. See "Management."
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 45.8% of the outstanding shares of Common Stock
(42.9% if the Underwriters' over-allotment option is exercised in full). These
holders of Common Stock will control in the aggregate approximately 40.1% 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 $11.3 million, or approximately 77.5%, 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 a stockholder of
one of the Founding Companies. Approximately $1.0 million of the $3.5 million of
indebtedness at May 31, 1998 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, 1998 (the "CEFC Note-1"), the $555,000 5% note due December 31,
1998 (the "CEFC Note-2"), the $400,000 5% note due December 31, 1998 (the "CEFC
Note-3") and the $279,000 5% note due December 31, 1998 (the "CEFC Note-4" and,
together with the CEFC Note-1, the CEFC Note-2 and the CEFC Note-3, the "CEFC
Notes"), which notes are held by an affiliate of the Company. Concurrent with
the Offering, the CEFC Note-3 will be converted to Common Stock. No proceeds
from the Offering will be used to redeem the CEFC Note-3. In February 1998 and
May 1998 the Company issued the CUSA Notes in an aggregate principal amount of
$1,550,000, of which $700,000 aggregate principal amount was issued to two
entities affiliated with Michael A. Baker and Paul T. Shirley, both of whom will
become directors of the Company
15
<PAGE>
upon consummation of the Offering. Concurrent with the Offering, the CUSA Notes
will be converted to shares of Common Stock. No proceeds from the Offering will
be used to redeem the CUSA Notes. The proceeds from the sale of the Series A
Convertible Preferred Stock, the CEFC Notes and the CUSA 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 $5.2 million, or 34.7% of the net proceeds of the Offering
(approximately $8.4 million, or 46.2% of the net proceeds of the Offering, if
the Underwriters' over-allotment option is exercised in full). See "Use of
Proceeds" and "Certain Transactions."
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON THE PRICE OF THE COMMON
STOCK
The 2,700,000 shares being sold in the Offering will be freely tradeable
unless acquired by affiliates of the Company. The market price of the Common
Stock of the Company could be adversely affected by the sale of substantial
amounts of shares of Common Stock of the Company in the public market following
the Offering.
Simultaneously with the closing of the Offering, the stockholders of the
Founding Companies will receive, in the aggregate, 1,761,354 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, 1,464,838 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 Cruttenden Roth Incorporated, 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 Representative who beneficially own an aggregate
of 917,935 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 Cruttenden Roth Incorporated. 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 90,000 shares of Common Stock, which options are immediately
exercisable, and concurrently with the consummation of the Offering, will issue
options to acquire 495,000 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 "Management -- 1997 Non-Employee Directors' Stock Plan."
Upon completion of the Offering, the Company has agreed to issue to the
Representative and its 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
16
<PAGE>
offering price. The Company has agreed to grant certain registration rights to
the holders of these warrants. The existence or exercise of these warrants could
materially adversely affect the Company's ability to raise additional financing
at a time when it may be advantageous to do so. See "Underwriting."
The Company plans to register up to an additional 2,500,000 shares of
Common Stock with the Securities and Exchange Commission (the "Commission")
under the Securities Act as soon as practicable after completion of the Offering
for use by the Company as all or a portion of the consideration to be paid in
conjunction with future acquisitions. These shares may be freely tradeable after
their issuance, unless the sale of such shares is contractually restricted. The
piggyback registration rights described above will not apply to the registration
statement to be filed with respect to these additional shares. See "Shares
Eligible for Future Sale."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common
Stock. Application has been made for quotation of the Common Stock on the Nasdaq
National Market. However, there can be no assurance that, following the
Offering, a regular trading market for the Common Stock will develop or be
sustained. The initial public offering price will be determined by negotiations
among the Company and the Representative of the Underwriters and may bear no
relationship to the market price of the Common Stock after the Offering. See
"Underwriting." The market price of the Common Stock could be subject to
significant fluctuations in response to variations in quarterly operating
results and other factors. In addition, the stock market in recent years has
experienced extreme price and volume fluctuations that often have been unrelated
or disproportionate to the operating performance of companies. Factors such as
actual or anticipated operating results, growth rates, changes in estimates by
analysts, market conditions in the industry, announcements by competitors,
regulatory actions and general economic conditions will vary from period to
period. As a result of the foregoing, the Company's operating results and
prospects from time to time may be below the expectations of public market
analysts and investors. Any such event would likely result in a material adverse
effect on the price of the Common Stock.
DIVIDEND POLICY; RESTRICTIONS ON PAYMENT
The Company has never paid cash dividends and anticipates that for the
foreseeable future, its earnings will be retained for the operation and
expansion of its business and for general corporate purposes and that it will
not pay cash dividends. In addition, the Company anticipates that any credit
facility to which it becomes a party will limit the payment of cash dividends
without the lender's consent. See "Dividend Policy."
IMMEDIATE AND SUBSTANTIAL DILUTION
The purchasers of the shares of Common Stock offered hereby will experience
immediate dilution in the net tangible book value of their shares of $6.32 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."
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
seven Founding Companies. A brief description of each of the Founding Companies
is set forth below.
COLLECTIBLES STORES
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 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), 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 $4.8 million in the fiscal year
ended March 31, 1998. 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 -- Corporate Development, 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 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, 1997, generated sales of $2.7 million. In the
fiscal year ended December 31, 1997, approximately 17% 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 Chief Operating Officer and Executive Vice President --
Operations and as a director of the Company. Reef Hallmark will continue to use
the "Hallmark" designation for the immediate future.
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, Department
56, Lladro and Swarovski. Little Elegance has been in operation since 1969 and
has two mall-based stores, one of which is located in Wayne, New Jersey and one
of which 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, 1997, generated sales of $2.5
million. Upon consummation of the Offering, Keith Holt, the general manager of
Little Elegance, will become the President of Little Elegance.
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, 1997, generated sales of $5.7 million. In the fiscal year ended
November 30, 1997, approximately 33% 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 the Executive Vice President --
Retail Store Development 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
18
<PAGE>
York, which also houses its telemarketing operations. American Royal Arts'
gallery is approximately 11,000 square feet in size, includes its telemarketing
operations and, in the year ended January 31, 1998, generated sales of $4.1
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, 1997, generated sales of $1.3 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, 1997, generated
sales of $1.3 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.
ACQUISITIONS CONSIDERATION
The aggregate consideration to be paid by Collectibles USA in the
Acquisitions consists of approximately $7.8 million in cash and 1,761,354 shares
of Common Stock. The Company will also assume all of the indebtedness of the
Founding Companies (approximately $3.5 million as of May 31, 1998, which
includes $625,000 of indebtedness incurred to fund distributions in May 1997,
November 1997 and May 1998 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.
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."
19
<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 $____ million
($____ million if the Underwriters' over-allotment option is exercised in full),
based upon an assumed initial public offering price of $8.50 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. As
approximately $1.5 million of notes payable are being converted to Common Stock,
no proceeds from the Offering will be used to redeem these notes. The Company
intends to use approximately $7.8 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. An
additional approximately $3.5 million, as of May 31, 1998 (which includes
$625,000 of indebtedness incurred to fund distributions in May 1997, November
1997 and May 1998 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 $3.5 million debt
that was incurred during the last twelve months was $2.0 million and the use of
proceeds for such debt was to provide working capital. Approximately $2.4
million of the $3.5 million has been personally guaranteed by stockholders of
the Founding Companies who will become officers, directors or beneficial owners
of 5% or more of the Common Stock upon consummation of the Offering. Such
guaranteed indebtedness bore interest at a weighted average per annum interest
rate of 9.4% for the period ending April 30, 1998 and matures at varying dates
between August 1998 and May 2003. The remaining indebtedness bore interest at a
weighted average per annum interest rate of 7.7% at April 30, 1998 and matures
at various dates from May 1998 through June 2002. See "Certain Transactions."
The approximately $___ million of remaining net proceeds will be used for
working capital and for general corporate purposes, which are expected to
include future acquisitions of companies operating in the collectibles or
animation art industries. The Company currently has no agreements, arrangements
or understandings, and is not currently engaged in negotiations, with respect to
other acquisitions. Pending such uses, the Company intends to invest the net
proceeds of the Offering in short-term, investment-grade, interest-bearing
instruments. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources -- Combined."
DIVIDEND POLICY
The Company has never paid cash dividends and anticipates that for the
foreseeable future its earnings will be retained for the operation and expansion
of its business and for general corporate purposes and that it will not pay cash
dividends. In addition, the Company anticipates that any credit facility to
which the Company may become a party will include restrictions on the ability of
the Company to pay dividends without the lender's consent.
20
<PAGE>
DILUTION
The deficit in pro forma net tangible book value of the Company at April
30, 1998 was approximately $2.5 million, or $0.74 per share of Common Stock,
after giving effect to the Acquisitions. The deficit in net tangible book value
per share represents the amount of total tangible assets of the Company reduced
by the amount of total liabilities and divided by the number of shares of Common
Stock issued and outstanding after giving effect to the Acquisitions and the
conversion of the Series A Convertible Preferred Stock. Net tangible book value
dilution per share represents the difference between the amount per share paid
by purchasers of shares of Common Stock in the Offering and the pro forma net
tangible book value per share of Common Stock immediately after completion of
the Offering. After giving effect to the sale of 2,700,000 shares of Common
Stock by the Company and the application of the estimated net proceeds therefrom
as described under "Use of Proceeds," the pro forma net tangible book value of
the Company as of April 30, 1998 would have been approximately $13.1 million, or
$2.18 per share. This represents an immediate increase in pro forma net tangible
book value of $2.92 per share at April 30, 1998 to stockholders and an immediate
dilution in pro forma net tangible book value of $6.32 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 ......... $ 8.50
Pro forma deficit in net tangible book value per share
before the Offering .................................... $(0.74)
Increase per share attributable to sale of Common Stock
in the Offering ........................................ 2.92
------
Pro forma net tangible book value per share
after the Offering ..................................... 2.18
------
Dilution per share to new investors ..................... $ 6.32
======
</TABLE>
The following table sets forth, on a pro forma basis to give effect to the
Acquisitions, 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 $8.50
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) ......... 3,306,094 55.0% $ (2,454,388) (12.0)% $(0.74)
New investors .................... 2,700,000 45.0 22,950,000 112.0 8.50
--------- ----- ------------ -----
Total ........................... 6,006,094 100.0% $ 20,495,612 100.0%
========= ===== ============ =====
</TABLE>
- ----------
(1) Total consideration paid by existing stockholders represents the pro forma
net tangible book value of the Company after giving effect to the
Acquisitions.
The foregoing computations assume no exercise of stock options. Upon
consummation of the Offering, there will be outstanding options to purchase (i)
90,000 shares of Common Stock at $4.00 per share and (ii) 495,000 shares of
Common Stock at the initial public offering price. To the extent the holders of
these options exercise such options, there will be further dilution to new
investors. See "Capitalization."
21
<PAGE>
CAPITALIZATION
The following table sets forth the cash and cash equivalents,
capitalization and line of credit and current maturities of long-term
obligations and notes payable to stockholders at April 30, 1998: (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>
APRIL 30, 1998
----------------------------------------
AMERICAN PRO FORMA
ROYAL ARTS COMBINED AS ADJUSTED
------------ ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Line of credit, current maturities of long-term obligations and notes
payable to stockholders(1) .............................................. $ 586 $ 5,733 $ --
====== ======= =======
Long-term obligations and notes payable to stockholders, less current
maturities(1) ........................................................... $ -- $ 321 $ --
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;
2,951,536(2) shares issued and outstanding, pro forma combined;
and 6,006,094(2)(3) shares issued and outstanding, as adjusted ........ 2 30 60
Treasury Stock, at cost ................................................. (145) -- --
Additional paid-in capital .............................................. -- 11,042 27,569
Retained earnings ....................................................... 47 -- --
------ ------- -------
Total stockholders' equity .............................................. (96) 12,072 27,629
------ ------- -------
Total capitalization .................................................. $ (96) $12,393 $27,629
====== ======= =======
</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 (i) 1,761,354 shares to be issued to the owners of the Founding
Companies and (ii) 971,602 shares of Restricted Vote Common Stock (pro forma
combined); 638,847 shares of Restricted Vote Common Stock (as adjusted).
(3) Also includes 79,902 shares to be issued to holders of Series A Convertible
Preferred Stock and 364,705 shares to be issued to the holders of the CUSA
Notes upon consummation of the Offering. Excludes 495,000 shares of Common
Stock issuable upon exercise of outstanding options or options to be granted
concurrently with the consummation of the Offering under the Company's stock
option plans and 270,000 shares reserved for issuance upon exercise of the
Representative's Warrants. See "Management -- 1997 Long-Term Incentive
Plan," "Management -- 1997 Non-Employee Directors' Stock Plan" and
"Underwriting."
22
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Collectibles USA will acquire the Founding Companies simultaneously with
and as a condition to the consummation of the Offering. For financial statement
presentation purposes, however, American Royal Arts, one of the Founding
Companies, has been identified as the "accounting acquiror." The following
selected historical financial data for American Royal Arts at October 31, 1995
and 1996, and January 31, 1997 and 1998, and for the years ended October 31,
1995 and 1996, and January 31, 1997 and 1998, 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, 1993 and 1994, and April 30, 1997 and 1998, and for the
years ended October 31, 1993 and for the three months ended April 30, 1997 and
1998 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 JANUARY THREE MONTHS
FISCAL YEAR ENDED OCTOBER 31, 31, ENDED APRIL 30,
------------------------------------------ ------------------- ------------------
1993 1994 1995 1996 1997 1998 1997 1998
--------- --------- --------- --------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
AMERICAN ROYAL ARTS:
Net sales ........................ $2,840 $3,898 $4,051 $4,121 $4,289 $4,133 $1,100 $806
Cost of sales .................... 1,119 1,715 1,560 1,571 1,506 1,516 346 292
------ ------ ------ ------ ------ ------ ------ ----
Gross profit ..................... 1,721 2,183 2,491 2,550 2,783 2,617 754 514
Selling, general and
administrative expenses ......... 1,288 1,588 1,760 1,764 1,778 1,958 483 400
------ ------ ------ ------ ------ ------ ------ ----
Income from operations ........... 433 595 731 786 1,005 659 271 114
Interest income (expense), net ... 6 7 18 24 24 (14) 6 1
------ ------ ------ ------ ------ ------ ------ ----
Net income ....................... $ 439 $ 602 $ 749 $ 810 $1,029 $ 645 $ 277 $115
====== ====== ====== ====== ====== ====== ====== ====
</TABLE>
<TABLE>
<S> <C> <C>
PRO FORMA COMBINED(1)(2)
Net sales .......................................................... $ 22,449 $ 4,972
Cost of sales ...................................................... 10,664 2,384
---------- ----------
Gross profit ....................................................... 11,785 2,588
Selling, general and administrative expenses(3) .................... 9,014 2,062
Goodwill amortization(4) ........................................... 363 91
---------- ----------
Operating income ................................................... 2,408 435
Interest and other income (expense), net(5) ........................ 147 42
---------- ----------
Income before taxes ................................................ 2,555 477
Income taxes ....................................................... 1,167 227
---------- ----------
Net income ......................................................... $ 1,388 $ 250
========== ==========
Net income per share ............................................... $ 0.26 $ 0.05
========== ==========
Shares used in computing pro forma net income per share(6) ......... 5,370,100 5,370,100
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
--------------------------------- --------------------
1993 1994 1995 1996 1997 1998
------ ------ --------- --------- --------- ----------
BALANCE SHEET DATA
<S> <C> <C> <C> <C> <C> <C>
AMERICAN ROYAL ARTS:
Working capital ....................... $384 $297 $ 703 $ 567 $ 686 $ (278)
Total assets .......................... 860 875 1,430 1,439 1,482 1,125
Long-term obligations
net of current maturities
and long-term notes
payable to stockholders .............. -- 100 -- -- -- --
Stockholders' equity (deficit) ........ 416 475 867 696 807 (105)
<CAPTION>
APRIL 30, 1998
------------------------------------------
PRO FORMA AS
ACTUAL COMBINED(7) ADJUSTED(8)
---------- ------------------ ------------
BALANCE SHEET DATA
<S> <C> <C> <C>
AMERICAN ROYAL ARTS:
Working capital ....................... $ (251) $ (8,377)(9) $12,622
Total assets .......................... 1,147 32,822 32,465
Long-term obligations
net of current maturities
and long-term notes
payable to stockholders .............. -- 321 --
Stockholders' equity (deficit) ........ (96) 12,072 27,629
</TABLE>
- ----------
(1) The pro forma combined statement of operations data assume that the
Acquisitions and the Offering were closed on February 1, 1997 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, 1998 includes American Royal Arts for the year ended
January 31, 1998, Stone's Hallmark for the year ended November 30, 1997 and
North Pole City, Little Elegance, Reef Hallmark, Animation USA and Filmart
for the year ended December 31, 1997. The three months ended April 30, 1998
presented includes American Royal Arts for the three months ended April 30,
1998, Stone's Hallmark for the three months ended February 28, 1998 and
North Pole City, Little Elegance, Reef Hallmark, Animation USA and Filmart
for the three months ended March 31, 1998.
(2) The pro forma combined statement of operations data assume that the
Acquisitions and the Offering were closed on February 1, 1997 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 $334,000 and $120,000 for the year ended January 31, 1998 and
the three months ended April 30, 1998, 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 a lease agreement between one of the Founding
Companies and its stockholder and the reduction in compensation expense of
approximately $673,000 relating to a non-recurring, non-cash compensation
charge for the year ended January 31, 1998.
(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 of the Offering.
(6) Includes (i) 1,191,182 shares issued to the sponsors and management which
are outstanding prior to the Offering, (ii) 1,761,354 shares to be issued to
the owners of the Founding Companies, (iii) 79,902 shares to be issued to
the holders of the Series A Convertible Preferred Stock, of which 11,986
will be transferred from the sponsor shares listed in (i) above, 364,705
shares to be issued to the holders of the CUSA Notes, of which 79,063 shares
will be transferred from the sponsor shares listed in (i) above, and 241,706
shares to be issued to the holders of the CEFC Notes, all of which will be
transferred from the sponsor shares listed in (i) above, and (iv) 2,076,794
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 S
corporation distributions, repay other indebtedness of the Founding
Companies and pay expenses of the Offering.
(7) The pro forma combined balance sheet data assume that the Acquisitions were
closed on April 30, 1998. 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 $7.8 million payable to owners of the Founding Companies,
representing the cash portion of the consideration for the Acquisitions to
be paid with a portion of the net proceeds from the Offering.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company 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, 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 and certain other adjustments, including the effect of revision
of a lease agreement between one of the Founding Companies and its stockholder,
of approximately $334,000 and $120,000 for the year ended January 31, 1998 and
the three months ended April 30, 1998 respectively .
Collectibles USA, which has conducted no operations to date, intends to
integrate the Founding Companies, their operations and administrative functions
over a period of time. This integration process may present opportunities for
(i) enhanced vendor relationships resulting in collective buying opportunities,
co-op advertising funds, shipping allowances and exclusive merchandise and (ii)
obtaining additional sales through shared customer lists and expansion of direct
mail programs, advertising campaigns, in-store artist signing events and
Internet promotions. This integration may necessitate additional costs and
expenditures for corporate management and administration, corporate expenses
related to being a public company, systems integration and facilities expansion.
These various costs and potential cost savings may make comparison of historical
operating results not comparable to, or indicative of, future performance. The
Company believes that neither the anticipated savings nor the anticipated costs
can be quantified because the Acquisitions have not occurred, and there have
been no combined operating results upon which to base the assumptions. As a
result, they have not been included in the unaudited pro forma financial
information presented herein.
Upon completion of the Acquisitions, the Company anticipates that
approximately 44.7% of the pro forma total assets of the Company will be
goodwill (approximately $14.5 million) and will be amortized over a 40-year
period resulting in an annual amortization expense of approximately $363,000.
The amortization of the goodwill over a 40-year period is based upon the
following factors: (i) the Company's collectibles merchandise has an indefinite
life and generally becomes more valuable with the passage of time, (ii) the
collectibles industry is well established, as evidenced by the collectibles
industry having generated over $9 billion in primary sales (i.e., sales of new
merchandise) in 1996 and by the estimate that 31 million Americans identify
themselves as collectors, according to Unity Marketing, and (iii) many
collectibles companies, including certain of the Founding Companies, have been
in business several decades. However, the Company will periodically evaluate
whether events and circumstances arising 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
25
<PAGE>
on acquisition financing, the ability to manage growth and to attract and retain
qualified management, dependence on licenses, the need for additional capital,
dependence on key collectibles vendors and risks associated with dependence on
foreign vendors, competition and seasonality and quarterly fluctuations. See
"Risk Factors."
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, 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 1996,
1997 and 1998, 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 1996," "Fiscal 1997" and "Fiscal 1998" mean a
combination of the fiscal years of each of the Founding Companies for such year.
References to April 30, 1997 and 1998 mean, respectively, the three months ended
April 30, 1997 and 1998 with respect to American Royal Arts; the three months
ended February 28, 1997 and 1998 with respect to Stone's Hallmark; and the three
months ended March 31, 1997 and 1998 with respect to North Pole, Little
Elegance, Reef Hallmark, Animation USA and Filmart.
RESULTS OF OPERATIONS -- COMBINED
The combined Founding Companies statements of operations data for Fiscal
1996, Fiscal 1997, and Fiscal 1998 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
--------------------------------------------------------------------
1996 1997 1998
---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Combined Founding Companies
Statements of Operations Data:
Net sales ............. $18,529 100.0% $21,254 100.0% $22,449 100.0%
Cost of sales ......... 9,302 50.2% 9,721 45.7% 10,664 47.5%
------- ----- ------- ----- ------- -----
Gross profit .......... $ 9,227 49.8% $11,533 54.3% $11,785 52.4%
======= ===== ======= ===== ======= =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 30,
-------------------------------------------
1997 1998
--------------------- ---------------------
<S> <C> <C> <C> <C>
Combined Founding Companies
Statements of Operations Data:
Net sales ............. $5,058 100.0% $4,972 100.0%
Cost of sales ......... 2,352 46.5% 2,385 48.0%
------ ----- ------ -----
Gross profit .......... $2,706 53.5% $2,587 52.0%
====== ===== ====== =====
</TABLE>
UNAUDITED INTERIM RESULTS
Net Sales. Net sales were $5.0 million for the three months ended April 30,
1998 as compared to $5.1 million for the prior comparable period. The decrease
in sales of $0.1 million, or 2%, was primarily due to a decrease in animation
art sales resulting from the postponement until the fall of a major in-store
artist signing event and the relocation of a gallery, offset by an increase in
demand for certain contemporary collectibles.
26
<PAGE>
Cost of Sales. Cost of sales was relatively constant during both three
month periods at $2.4 million. As a percentage of net sales, cost of sales
increased from 46.5% of net sales in the three months ended April 30, 1997 to
48.0% of net sales in the three months ended April 30, 1998. Cost of sales as a
percentage of net sales increased primarily due to certain inventory adjustments
for contemporary collectibles items, which were partially offset by the sale of
animation art produced in-house under license arrangements and vintage
production cels with higher margins.
FISCAL 1998 COMPARED TO FISCAL 1997
Net Sales. Net sales were $22.5 million for Fiscal 1998 as compared to
$21.3 million for Fiscal 1997. The increase in sales of $1.2 million, or 5.6%,
was primarily due to an increased demand for contemporary collectibles items,
expanded telemarketing and direct mail advertising programs. Such increases were
offset principally by decreases resulting from the timing of an animation art
trade-show for a Founding Company, lower revenues generated from in-store artist
signing events and lower gallery sales.
Cost of Sales. Cost of sales increased to $10.7 million, or 47.5% of net
sales, in Fiscal 1998 from $9.7 million, or 45.7% of net sales, in Fiscal 1997.
Cost of sales as a percentage of net sales increased primarily due to changes in
the product mix of contemporary collectibles and inventory adjustments,
partially offset by animation art sales that have higher product margins, such
as vintage production cels, and art sold through licenses.
FISCAL 1997 COMPARED TO FISCAL 1996
Net Sales. Net sales were $21.3 million for Fiscal 1997 as compared to
$18.5 million for Fiscal 1996. The increase in sales of $2.8 million, or 15.1%,
was primarily due to an increase in contemporary collectibles sales as a result
of Stone's Hallmark remodeling and expansion of one store, 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 $9.7 million, or 45.7% of net
sales, in Fiscal 1997 from $9.3 million, or 50.2% 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.
LIQUIDITY AND CAPITAL RESOURCES -- COMBINED
On a combined basis, the Founding Companies used $523,000 during the three
months ended April 30, 1998 and generated $1.1 million of net cash from
operating activities during Fiscal 1998 and $1.5 million during Fiscal 1997. Net
cash used in investing activities by the Founding Companies on a combined basis
was $0.2 million and $0.8 million during Fiscal 1998 and Fiscal 1997,
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 $140,000 during the
three months ended April 30, 1998 and $1.9 million during Fiscal 1998, whereas
net cash provided by financing activities was $1.1 million in Fiscal 1997. 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 $497,000 from $1.4 million in
Fiscal 1997 to $892,000 in Fiscal 1998 and decreased to $737,000 in the three
months ended April 30, 1998.
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 $224,000 and
$708,000 in Fiscal 1998 and Fiscal 1997, respectively. The Company currently has
no capital commitments although it anticipates making capital expenditures of
approximately $1.0 million in Fiscal 1999 primarily 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 is negotiating a $15.0 million credit facility to be used for
acquisitions, working capital and other corporate purposes. See "Risk Factors."
27
<PAGE>
Assuming the Company obtains the $15.0 million credit facility it is
seeking, the Company believes that funds generated from operations, together
with the net proceeds from the Offering, will be sufficient to finance its
current operations, planned acquisitions and planned capital expenditures at
least through the second quarter of Fiscal 2000. In the event the Company does
not obtain a credit facility or does not otherwise obtain an acceptable line of
credit or additional financing, the Company's current acquisition strategy could
be affected because the ratio of cash to stock consideration offered by the
Company to acquisition candidates would need to be adjusted.
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 years ended on January 31, 1997 and 1998 in addition to the fiscal
years ended October 31, 1995 and 1996. 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 art.
RESULTS OF OPERATIONS -- AMERICAN ROYAL ARTS
The following table sets forth certain selected financial data for American
Royal Arts on a historical basis and as a percentage of net sales for the
periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED OCTOBER 31, YEAR ENDED JANUARY 31,
------------------------------------------- ---------------------------------------
1995 1996 1997 1998
------------------ --------------------- ------------------ -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales .............. $4,051 100.0% $4,121 100.0% $ 4,289 100.0% $4,133 100.0%
Cost of sales .......... 1,560 38.5 1,571 38.1 1,506 35.1 1,516 36.7
------ ----- ------ ----- ------- ----- ------ -----
Gross profit ........... 2,491 61.5 2,550 61.9 2,783 64.9 2,617 63.3
Selling, general and
administrative
expenses .............. 1,760 43.4 1,764 42.8 1,778 41.5 1,958 47.4
------ ----- ------ ----- ------- ----- ------ -----
Income from
operations ............ 731 18.1 786 19.1 $ 1,005 23.4 659 15.9
Interest income
(expense), net ........ 18 0.4 24 0.6 24 0.6 (14) ( 0.3)
------ ----- ------ ----- ------- ----- ------ -----
Net income ............. $ 749 18.5% $ 810 19.7% $ 1,029 24.0% $ 645 15.6%
====== ===== ====== ===== ======= ===== ====== =====
<CAPTION>
THREE MONTHS ENDED APRIL 30,
------------------------------------------
1997 1998
--------------------- -------------------
<S> <C> <C> <C> <C>
Net sales .............. $1,100 100.0% $806 100.0%
Cost of sales .......... 346 31.5 292 36.2
------ ----- ---- -----
Gross profit ........... 754 68.5 514 63.8
Selling, general and
administrative
expenses .............. 483 43.9 400 49.6
------ ----- ---- -----
Income from
operations ............ 271 24.6 114 14.2
Interest income
(expense), net ........ 6 0.5 1 0.1
------ ----- ---- -----
Net income ............. $ 277 25.1% $115 14.3%
====== ===== ==== =====
</TABLE>
UNAUDITED INTERIM RESULTS
Net Sales. Net sales were $806,000 for the three months ended April 30,
1998 as compared to $1.1 million for the three months ended April 30, 1997. The
decrease in sales of $294,000, or 26.7%, was primarily due to the postponement
until the fall of a major artist signing event and the relocation of the gallery
to a new, larger location.
Cost of Sales. Cost of sales decreased to $292,000, or 36.2% of net sales,
in the three months ended April 30, 1998 from $346,000, or 31.5% of net sales,
in the three months ended April 30, 1997. Cost of sales as a percentage of net
sales increased primarily due to an increase in the sale of art with lower gross
profit margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $400,000, or 49.6% of net sales, in the three
months ended April 30, 1998 as compared to $483,000, or 43.9% of net sales, in
the three months ended April 30, 1997, a decrease of $83,000, or 17.2%,
primarily due to a decrease in advertising expense and postage and labor costs
associated with the direct mail program.
YEAR ENDED JANUARY 31, 1998 COMPARED TO JANUARY 31, 1997
Net Sales. Net sales were $4.1 million for the year ended January 31, 1998
as compared to $4.3 million for the year ended January 31, 1997, a decrease of
$156,000, or 3.6%. The decrease was primarily due to lower revenues generated by
in-store artist signing events and lower gallery sales resulting from the loss
of the gallery director. The decrease was partially offset by an increase in
wholesale sales resulting from the development of several new product lines.
28
<PAGE>
Cost of Sales. Cost of sales remained relatively constant at $1.5 million.
As a percentage of sales, cost of sales increased from 35.1% in 1997 to 36.7% in
1998. Cost of sales as a percentage of net sales increased primarily due to an
increase in 1998 in wholesale sales which generally have lower gross profit
margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $180,000 to $2.0 million, or 47.4% of net
sales, for the year ended January 31, 1998 from $1.8 million or, 41.5% of net
sales, for the year ended January 31, 1997. The increase as a percentage of net
sales was primarily due to an increase in advertising expenses and the costs
associated with the 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 5.8%. 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 offset in part 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 profit margins.
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, for 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 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% for the year ended January 31, 1997 from 43.4%
for the fiscal year ended October 31, 1995, primarily due to economies of scale
associated with increased telemarketing sales
LIQUIDITY AND CAPITAL RESOURCES -- AMERICAN ROYAL ARTS
American Royal Arts had a working capital deficit of $251,000 at April 30,
1998 and a working capital deficit of $278,000 at January 31, 1998. The primary
source of the deficit for the three months ended April 30, 1998 and for the year
ended January 31, 1998 was cash distributions to the sole stockholder of an
aggregate of $105,804 and $1,557,090, respectively. Cash provided by operating
activities was used primarily to finance the purchase of merchandise
inventories, reduce accounts payable and accrued liabilities and fund
distributions to the stockholder. Cash used for investing activities was $74,000
for the year ended January 31, 1998, representing purchases of property and
equipment.
INDIVIDUAL FOUNDING COMPANIES
The selected historical financial information presented in the tables below
for the fiscal years of the individual Founding Companies (excluding American
Royal Arts, which is presented above) is derived from the respective audited
financial statements of the individual Founding Companies. 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, ornaments,
figurines, lighthouses and lighted houses from vendors, including Enesco, Boyds,
Cast Art, Disney, Department 56, Seraphim Angels and Hallmark.
29
<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,
--------------------------------------------------------------------
1995 1996 1997
--------------------- ------------------------ ---------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales ......................... $4,281 100.0% $4,986 100.0% $5,745 100.0%
Cost of sales ..................... 2,269 53.0 2,497 50.1 2,763 48.1
------ ----- ------ ----- ------ -----
Gross profit ...................... 2,012 47.0 2,489 49.9 2,982 51.9
Selling, general and
administrative expenses .......... 1,787 41.7 2,117 42.4 1,818 31.6
------ ----- ------ ----- ------ -----
Income from operations ............ 225 5.3 372 7.5 1,164 20.3
Interest income (expense), net (11) ( 0.3) (3) ( 0.1) 3 0.1
------ ----- -------- ----- ------ -----
Income before income
taxes ............................ 214 5.0 369 7.4 1,167 20.4
Provision for income taxes ........ 128 3.0 194 3.9 465 8.1
------ ----- ------- ----- ------ -----
Net income ........................ $ 86 2.0% $ 175 3.5% $ 702 12.3%
====== ===== ======= ===== ====== =====
<CAPTION>
THREE MONTHS ENDED FEBRUARY 28,
-------------------------------------------
1997 1998
--------------------- ---------------------
<S> <C> <C> <C> <C>
Net sales ......................... $1,845 100.0% $1,869 100.0%
Cost of sales ..................... 947 51.3 941 50.3
------ ----- ------ -----
Gross profit ...................... 898 48.7 928 49.7
Selling, general and
administrative expenses .......... 442 24.0 411 22.0
------ ----- ------ -----
Income from operations ............ 456 24.7 517 27.7
Interest income (expense), net -- 0.0 2 0.1
------ ----- ------ -----
Income before income
taxes ............................ 456 24.7 519 27.8
Provision for income taxes ........ 170 9.2 193 10.3
------ ----- ------ -----
Net income ........................ $ 286 15.5% $ 326 17.5%
====== ===== ====== =====
</TABLE>
UNAUDITED INTERIM RESULTS
Net Sales. Net sales were $1.9 million for the three months ended February
28, 1998 as compared to $1.8 million for the three months ended February 28,
1997.
Cost of Sales. Costs of sales were $941,000, or 50.3% of net sales, in the
three months ended February 28, 1998 as compared to $947,000, or 51.3% of net
sales, in the three months ended February 28, 1997. Cost of sales as a
percentage of net sales decreased 1.0% due to continued demand for certain
collectibles product lines with higher gross profit margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $411,000, or 22.0% of net sales, in the three
months ended February 28, 1998 as compared to $442,000, or 24.0% of net sales,
in the three months ended February 28, 1997, a decrease of $31,000, or 7.0%,
primarily due to a decrease in owners' compensation and other expenses.
FISCAL YEAR ENDED NOVEMBER 30, 1997 COMPARED TO FISCAL YEAR ENDED NOVEMBER 30,
1996
Net Sales. Net sales were $5.7 million for the fiscal year ended November
30, 1997 as compared to $5.0 million for the fiscal year ended November 30,
1996. The increase in sales of $759,000, or 15.2%, was primarily due to
continued demand for certain collectibles product lines, in-store artist signing
events and the expansion of the direct mail program during the current year.
Cost of Sales. Cost of sales increased to $2.8 million, or 48.1% of net
sales, in the fiscal year ended November 30, 1997 from $2.5 million, or 50.1% of
net sales, in the fiscal year ended November 30, 1996. Cost of sales as a
percentage of net sales decreased due to an increase in sales of several product
lines that have higher profit margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $1.8 million, or 31.6% of net sales, in the fiscal
year ended November 30, 1997 as compared to $2.1 million, or 42.4% of net sales,
in the fiscal year ended November 30, 1996, a decrease of $299,000, or 14.1%,
primarily due to a reduction in owners' compensation.
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.
30
<PAGE>
Cost of Sales. Cost of sales decreased to 50.1% of net sales, or $2.5
million, in the fiscal year ended November 30, 1996 from 53.0% of net sales, or
$2.3 million 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 18.5%,
primarily due to an increase in owners' compensation.
LIQUIDITY AND CAPITAL RESOURCES -- STONE'S HALLMARK
Stone's Hallmark had working capital of $2.3 million and $1.9 million at
February 28, 1998 and November 30, 1997, respectively. The primary source of
this working capital was cash flows from operations.
Cash provided by operating activities was $50,000 and $355,900 in the three
months ended February 28, 1998 and the fiscal year ended November 30, 1997,
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 $16,800 for the fiscal year ended
November 30, 1997, and was principally related to purchases of property and
equipment.
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.
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,
------------------------------------------------------------------------------
1996 1997 1998
----------------------- ----------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales .......................... $2,865 100.0% $3,726 100.0% $4,752 100.0%
Cost of sales ...................... 1,492 52.1 1,733 46.5 2,622 55.2
------ ----- ------ ----- ----- -----
Gross profit ....................... 1,373 47.9 1,993 53.5 2,130 44.8
Selling, general and
administrative expenses ........... 1,077 37.6 1,522 40.8 2,045 43.0
------ ----- ------ ----- ----- -----
Income from operations ............. 296 10.3 471 12.7 85 1.8
Other income (expense):
Interest expense .................. (57) ( 2.0) (82) ( 2.2) (99) (2.1)
Other, net ........................ 10 .4 38 1.0 7 0.1
------ ----- ------ ----- ----- -----
Income before income taxes ......... 249 8.7 427 11.5 (7) (0.2)
Provision (benefit) for income
taxes ............................. 96 3.4 168 4.5 -- --
------ ----- ------ ----- ----- -----
Net income (loss) .................. $ 153 5.3% $ 259 7.0% $ (7) (0.2)%
====== ===== ====== ===== ===== =====
</TABLE>
<PAGE>
FISCAL YEAR ENDED MARCH 31, 1998 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1997
Net Sales. Net sales were $4.8 million for the fiscal year ended March 31,
1998 as compared to $3.7 million for the fiscal year ended March 31, 1997. The
increase in sales of $1.1 million, or 27.5%, was primarily due to increased
marketing efforts, including special promotions, expanded telemarketing and
direct mail.
Cost of Sales. Cost of sales increased to $2.6 million, or 55.2% of net
sales, for the fiscal year ended March 31, 1998 from $1.7 million, or 46.5% of
net sales, for the fiscal year ended March 31, 1997. Cost of sales as a
percentage of net sales increased due to an increase of sales of items with
lower gross profit margins and certain adjustments to inventory.
31
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the fiscal year ended March 31, 1998 were $2.0
million, or 43% of net sales, as compared to $1.5 million, or 40.8% of net
sales, in the fiscal year ended March 31, 1997, an increase of $523,000, or
34.4% primarily due to increased salaries for additional sales personnel,
advertising expense related to special promotions and costs associated with the
direct mail program.
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. To a lesser extent, this
increase was also due to the remodeling and expansion of the store.
Cost of Sales. Cost of sales increased to $1.7 million, or 46.5% of net
sales, for the fiscal year ended March 31, 1997 from $1.5 million, or 52.1% of
net sales, for the fiscal year ended March 31, 1996. Cost of sales as a
percentage of net sales decreased due to the change in product mix to
collectibles with higher margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the fiscal year ended March 31, 1997 were $1.5
million, or 40.8% of net sales, as compared to $1.1 million, or 37.6% of net
sales, in the fiscal year ended March 31, 1996, an increase of $445,000, or
41.3%, 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.
LIQUIDITY AND CAPITAL RESOURCES -- NORTH POLE CITY
The primary source of working capital for the fiscal year ended March 31,
1998 was net cash provided by financing activities of $294,000. For the fiscal
year ended March 31, 1997, the primary source of working capital was net cash
provided by operating activities of $167,000. Cash used in operating activities
was primarily related to the purchase of merchandise inventory.
Cash used for investing activities was $72,300 and $142,500 for the fiscal
year ended March 31, 1998 and 1997, respectively, representing the purchase of
property and equipment.
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.
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,
-----------------------------------------------------------------
1995 1996 1997
--------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales ......................... $1,839 100.0% $2,493 100.0% $2,725 100.0%
Cost of sales ..................... 1,102 59.9 1,301 52.2 1,464 53.7
------ ----- ------ ----- ------ -----
Gross profit ...................... 737 40.1 1,192 47.8 1,261 46.3
Selling, general and administrative
expenses ......................... 629 34.2 935 37.5 944 34.7
------ ----- ------ ----- ------ -----
Income from operations ............ 108 5.9 257 10.3 317 11.6
Other income (expense):
Interest expense ................. (41) (2.2) (49) (2.0) (52) (1.9)
Other, net ....................... -- -- (12) (0.5)
------ ----- ------ ----- ------ -----
Net income ........................ $ 67 3.7% $ 196 7.8% $ 265 9.7%
====== ===== ====== ===== ====== =====
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------------
1997 1998
------------------------ -------------------
<S> <C> <C> <C> <C>
Net sales ......................... $ 581 100.0% $ 623 100.0%
Cost of sales ..................... 323 55.6 340 54.6
----- ----- ----- -----
Gross profit ...................... 258 44.4 283 45.4
Selling, general and administrative
expenses ......................... 262 45.1 238 38.2
----- ----- ----- -----
Income from operations ............ (4) (0.7) 45 7.2
Other income (expense):
Interest expense ................. (11) (1.9) (15) (2.4)
Other, net .......................
Net income ........................ $ (15) (2.6)% $ 30 4.8%
===== ===== ===== =====
</TABLE>
32
<PAGE>
UNAUDITED INTERIM RESULTS
Net Sales. Net sales were $623,000 for the three months ended March 31,
1998 as compared to $581,000 for the three months ended March 31, 1997. The
increase in sales of $42,000, or 7.2%, was primarily a result of increased
demand for certain contemporary collectibles products during the three months
ended March 31, 1998.
Cost of Sales. Cost of sales increased to $340,000, or 54.6% of net sales,
in the three months ended March 31, 1998 from $323,000, or 55.6% of net sales,
for the three months ended March 31, 1997. Cost of sales as a percentage of net
sales decreased due to the change in product mix to collectibles with higher
gross profit margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the three months ended March 31, 1998 were $238,000,
or 38.2% of net sales, as compared to $262,000, or 45.1% of net sales, in the
three months ended March 31, 1997, a decrease of $24,000, or 9.2%, primarily due
to reduced advertising costs and professional fees.
FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1996
Net Sales. Net sales were $2.7 million for the fiscal year ended December
31, 1997 as compared to $2.5 million for the fiscal year ended December 31,
1996. The increase in sales of $232,000, or 9.3%, 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 $1.5 million, or 53.7% of net
sales, in the fiscal year ended December 31, 1997 from $1.3 million, or 52.2% of
net sales, in the fiscal year ended December 31, 1996. Cost of sales as a
percentage of net sales increased due to the change in product mix to
collectible items with lower gross profit margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the fiscal year ended December 31, 1997 were
$944,000, or 34.7% of net sales, as compared to $935,000, or 37.5% of net sales,
in the fiscal year ended December 31, 1996, an increase of $9,000, or 1.0%
primarily due to increases in advertising expenses, salaries for additional
sales personnel and costs related to its direct mail program, partially offset
by reduced professional fees.
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 48.6%,
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 $37,000 and $83,000 at March 31, 1998
and December 31, 1997, respectively. The primary source of this working capital
was net cash provided by operations, which was $160,000 for the fiscal year
ended December 31, 1997. The primary source of working capital for the three
months ended March 31, 1998 was net cash provided by financing activities of
$99,000.
Cash used for investing activities was $15,000 for the year ended December
31, 1997. These expenditures represent purchases of property and equipment.
There were no capital expenditures during the three months ended March 31, 1998.
33
<PAGE>
FILMART
Filmart is a retail marketer of animation art such as vintage original
production cels, limited edition cels and sericels.
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 1997
------------------------ ------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales ........................ $1,053 100.0% $1,446 100.0% $1,323 100.0%
Cost of sales .................... 511 48.5 498 34.4 432 32.7
------ ----- ------ ----- ------ -----
Gross profit ..................... 542 51.5 948 65.6 891 67.3
Selling, general and
administrative expenses ......... 493 46.8 539 37.3 541 40.9
------ ----- ------ ----- ------ -----
Income from operations ........... 49 4.7 409 28.3 350 26.4
Other income (expense):
Interest expense ................ (4) (0.4) (1) (0.1) (5) (0.4)
Other, net ...................... 74 7.0 279 19.3 115 8.7
------- ----- ------- ----- ------- -----
Net income ....................... $ 119 11.3% $ 687 47.5% $ 460 34.7%
======= ===== ======= ===== ======= =====
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------------
1997 1998
------------------- ----------------------
<S> <C> <C> <C> <C>
Net sales ........................ $ 232 100.0% $209 100.0%
Cost of sales .................... 114 49.1 80 38.3
----- ----- ---- -----
Gross profit ..................... 118 50.9 129 61.7
Selling, general and
administrative expenses ......... 164 70.7 118 56.5
----- ----- ---- -----
Income from operations ........... (46) (19.8) 11 5.2
Other income (expense):
Interest expense ................ -- 0.0 (1) (0.5)
Other, net ...................... 57 24.6 31 14.8
----- ----- ---- -----
Net income ....................... $ 11 4.8% $41 19.5%
===== ===== ==== =====
</TABLE>
UNAUDITED INTERIM RESULTS
Net Sales. Net sales were $209,000 for the three months ended March 31,
1998 as compared to $232,000 for the three months ended March 31, 1997. The
decrease in sales of $23,000, or 9.9%, was primarily the result of fewer
in-store artist signing events, lower telemarketing sales and a decrease in
gallery sales, partially offset by sales of certain pieces of vintage art during
the three months ended March 31, 1998. 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 $57,000 and $86,000 of sales through such
barter companies in each of the three months ended March 31, 1998 and 1997,
respectively.
Cost of Sales. Cost of sales decreased to $80,000, or 38.3% of net sales,
for the three months ended March 31, 1998 from $114,000, or 49.1% of net sales,
for the three months ended March 31, 1997. Cost of sales as a percentage of net
sales decreased primarily due to the sale of animation art with higher margins,
primarily vintage production cels.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the three months ended March 31, 1998 were $118,000,
or 56.5% of net sales, as compared to $164,000, or 70.7% of net sales, in the
three months ended March 31, 1997, a decrease of $46,000, or 28.0%. This
decrease was primarily due to a decrease in advertising expense and salaries.
Other Income. Other income decreased to $31,000, or 14.8% of net sales, in
the three months ended March 31, 1998 from $57,000, or 24.6% of net sales, in
the three months ended March 31, 1997. Certain barter assets earned from
providing consulting services will begin to expire in the year 2000, if unused.
Other income was partially reduced by $25,000 in the three months ended March
31, 1998 to reduce the amount of barter assets to their estimated net realizable
value.
FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1996
Net Sales. Net sales were $1.3 million for the fiscal year ended December
31, 1997 as compared to $1.4 million for the fiscal year ended December 31,
1996. The decrease in sales of $123,000, or 8.5%, was primarily a result of
lower sales of certain animation art and fewer in-store artist signing events,
partially offset by increased sales of animation art such as vintage production
cels. Filmart recognized $250,000 and $248,000 of sales through barter companies
in the fiscal years ended December 31, 1997 and 1996, respectively.
Cost of Sales. Cost of sales decreased to $432,000, or 32.7% of net sales,
in the fiscal year ended December 31, 1997 from $498,000, or 34.4% of net sales,
in the fiscal year ended December 31, 1996. Cost of sales as a percentage of net
sales decreased primarily due to sales of animation art with higher margins,
primarily vintage production cels.
34
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the fiscal year ended December 31, 1997 were
$541,000, or 40.9% of net sales, as compared to $539,000, or 37.3% of net sales,
in the fiscal year ended December 31, 1996. The increase was primarily the
result of higher salaries and advertising costs, partially offset by reduced
professional fees.
Other income. Other income decreased to $115,000 for the fiscal year ended
December 31, 1997 from $279,000 for the fiscal year ended December 31, 1996.
Certain barter assets earned from providing consulting services will begin to
expire in the year 2000, if unused. Other income was partially reduced by
$125,000 in the fiscal year ended December 31, 1997 to reduce the amount of
barter assets to their estimated net realizable value.
FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1995
Net Sales. Net sales were $1.4 million for the fiscal year ended December
31, 1996 as compared to $1.1 million for the fiscal year ended December 31,
1995. The increase in sales of $393,000, or 37.3%, was primarily a result of
increased special events such as in-store artist signing events, growth of the
customer database, increased advertising and, to a lesser extent, to the
addition of sales representatives with enhanced product knowledge. Filmart
recognized $248,000 and $32,000 of sales through barter companies in the fiscal
years ended December 31, 1996 and 1995, respectively.
Cost of Sales. Cost of sales decreased to $498,000, or 34.4% of net sales,
in the fiscal year ended December 31, 1996 from $511,000, or 48.5% of net sales,
in the fiscal year ended December 31, 1995. 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 $46,000, or 9.3%,
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 $1.2 million at March 31, 1998 and December
31, 1997, respectively. The primary sources of working capital was net cash
provided by operations during the fiscal year ended December 31, 1997.
35
<PAGE>
ANIMATION USA
Animation USA is a retail and wholesale marketer of animation art such as
vintage original production cels, limited edition cels and sericels.
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>
FISCAL YEAR ENDED DECEMBER 31,
----------------------------------------------
1996 1997
------------------------ ---------------------
<S> <C> <C> <C> <C>
Net sales ............................. $1,716 100.0% $1,319 100.0%
Cost of sales ......................... 840 49.0 596 45.2
------ ----- ------ -----
Gross profit .......................... 876 51.0 723 54.8
Selling, general and administra-
tive expenses ........................ 845 49.2 762 57.8
------ ----- ------ -----
Income (loss) from operations ......... 31 1.8 (39) (3.0)
Other income (expense) ................ (9) (0.5) (14) (1.1)
------ ----- ------ -----
Income (loss) before income taxes ..... 22 1.3 (53) (4.1)
Provision (benefit) for income taxes... 9 0.5 (18) (1.4)
------ ---- ------ -----
Net income (loss) ..................... $ 13 0.8% $ (35) (2.7)%
====== ==== ====== =====
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------------------
1997 1998
---------------------- ----------------------
<S> <C> <C> <C> <C>
Net sales ............................. $341 100.0% $344 100.0%
Cost of sales ......................... 137 40.2 129 37.5
---- ----- ---- -----
Gross profit .......................... 204 59.8 215 62.5
Selling, general and administra-
tive expenses ........................ 187 54.8 149 43.3
---- ----- ---- -----
Income (loss) from operations ......... 17 5.0 66 19.2
Other income (expense) ................ (3) (0.9) (3) (0.9)
---- ----- ---- -----
Income (loss) before income taxes ..... 14 4.1 63 18.3
Provision (benefit) for income taxes... 5 1.5 24 7.0
---- ----- ---- -----
Net income (loss) ..................... $ 9 2.6% $ 39 11.3%
==== ===== ==== =====
</TABLE>
UNAUDITED INTERIM RESULTS
Net Sales. Net sales were $344,000 for the three months ended March 31,
1998 as compared to $341,000 for the three months ended March 31, 1997.
Cost of Sales. Cost of sales decreased to $129,000, or 37.5% of net sales,
for the three months ended March 31, 1998 from $137,000, or 40.2% of net sales,
for the three months ended March 31, 1997. Cost of sales as a percentage of net
sales decreased 2.7% due to higher sales of animation art produced in-house
under license arrangements, which generally has higher gross margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $149,000, or 43.3% of net sales, for the three
months ended March 31, 1998 as compared to $187,000, or 54.8% of net sales, for
the three months ended March 31, 1997, a decrease of $38,000 or 20.3%. This
decrease was primarily due to a decrease in salaries and professional fees.
FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1996
Net Sales. Net sales were $1.3 million for the fiscal year ended December
31, 1997 as compared to $1.7 million for the fiscal year ended December 31,
1996. The decrease in sales of $397,000, or 23.1%, was primarily due to a
decrease in the number of in-store artist signing events, the timing of the
Company's trade show and lower gallery sales at one location.
Cost of Sales. Cost of sales decreased to $596,000, or 45.2% of net sales,
in the fiscal year ended December 31, 1997 from $840,000, or 49.0% of net sales,
in the fiscal year ended December 31, 1996. Cost of sales as a percentage of net
sales decreased due to higher sales of animation art produced in-house under
license arrangements which generally has higher gross margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $762,000, or 57.8% of net sales, in the fiscal year
ended December 31, 1997 as compared to $845,000, or 49.2% of net sales, in the
fiscal year ended December 31, 1996, a decrease of $83,000, or 9.8%. The
decrease in such expenses was primarily due to a decrease in salaries.
36
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES -- ANIMATION USA
Animation USA had a working capital deficit of $27,000 at March 31, 1998
and $66,000 at December 31, 1997. Cash used in operating activities was $59,000
for the three months ended March 31, 1998 and cash provided by operating
activities was $82,000 in the fiscal year ended December 31, 1997.
No cash was used for investing activities for the three months ended March
31, 1998 and in the fiscal year ended December 31, 1997.
37
<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 four 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, five mall-based
stores and three upscale strip-mall stores. The Company's 11 collectibles stores
are located in Florida, Illinois (6), New Jersey (2) and Oklahoma (2). 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 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), 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(Reg. TM), 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 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
38
<PAGE>
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 year, 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's Chief Executive
Officer, Shonnie D. Bilin, has over 17 years experience in the industry
with extensive relationships with wholesalers, retailers, importers and
collectibles manufacturers. 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 consultants 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.
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.
39
<PAGE>
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 appointed one of the current owners of a Founding Company
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 225,000 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 it will consolidate the receiving of telephone
orders from its direct mail marketing efforts. The central call center is
expected to be equipped with technology to place orders for shipment with
the Founding Companies and release inventory. The Company intends to create
an Internet electronic ordering site through which customers can purchase
collectibles items and animation art. The site is expected to be integrated
with the point of sale and inventory management system. The Company
anticipates that such programs will be implemented by mid-1999. 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 negotiating an agreement
with SourceNet, Inc. ("SourceNet"), a leading developer of integrated
business processes and systems, pursuant to which SourceNet will assist the
Company in designing and implementing operating systems that will enable
the Company to enhance its infrastructure in order to centralize
operations. Through its relationship with SourceNet the Company intends to
(i) implement a centralized financial management system, (ii) develop a
Company-wide communications network and Internet merchandising
capabilities, (iii) centralize purchasing, accounts payable processing, and
inventory management and (iv) centralize the database information
maintained by each Founding Company. The Company's inventory management
system will be complimented by the common point of sale system which will
be developed by SourceNet.
The Company has entered into a partnering relationship with
Administaff, Inc. ("Administaff") a leading professional employer
organization. Pursuant to the terms of the agreement, Administaff will
serve as an off-site human resources department and will be responsible for
providing benefits and payroll administration,
40
<PAGE>
medical and workers' insurance programs, personnel records management,
liability management, employee recruiting and selection, performance
management, and training and development. 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, one
free-standing retail location, five mall-based stores and three 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. 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.
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 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 50 vendors, including Hallmark, sales of which accounted
for approximately 11% of the Company's pro forma net sales in Fiscal 1998.
Certain suppliers of collectibles merchandise to the Founding Companies, such as
Enesco or Department 56, provide in their agreements with such Founding
41
<PAGE>
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, Gift Creations Concepts and Park West (NALED). 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 200,000
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 Elegance at www.little-elegance.com,
North Pole City at www.northpolecity.com, and Stone's Hallmark at
www.stoneshallmark.com. 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
42
<PAGE>
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), Hallmark Gold Crown (Reef
Hallmark and Stone's Hallmark), and Roman Premiere Dealer (Little Elegance and
North Pole City). 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, Elmer Fudd, Yosemite Sam, and Tweety and Sylvester in classic scenes. The
Company also holds licenses or rights to design, produce and distribute
animation art bearing the likeness of Garfield, both alone and with certain
Norman Rockwell images. The Company's designs for art featuring such licensed
characters are generally subject to prior approval by the licensor. Pursuant to
an oral understanding, the Company also distributes limited edition comic strip
art from Jeff MacNelly (Shoe), Johnny Hart (B.C. and Wizard of Id), Chris Browne
(Hagar the Horrible), Bryant Parker (Wizard of Id), Roger Bollen (Animal
Crackers), Myron Woldman (Popeye and Betty Boop) and Sidney Harris. The Company
has a similar oral understanding with Don Oriolo (Felix the Cat(Reg. TM)). 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(Reg. TM) 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.
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.
43
<PAGE>
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 26,000
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 resulting from Internet marketing 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 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. The Company has entered into a business
relationship with Administaff to serve as an off-site human resources
department. Employees will be offered professional training courses to meet
employee needs and enhance industry specific skills.
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. In order to improve
operating procedures, the Company initially will focus on developing common
policies and procedures related to its financial and operating practices. The
Company intends to develop common reporting of daily sales and cash receipts,
inventory purchases receipts and on-hand quantities, physical inventory taking,
inventory product line analysis, capital expenditures and payroll administration
data. The Company expects to implement an integrated, financial management
system that will enable consolidated financial reporting and cash management.
The Company also intends to implement a consolidated inventory management system
which will be a common point of sale system.
The Company further intends to enhance operations at the store level by
implementing improved training programs and incentive systems for experienced
managers. It is anticipated that the appointment of a manager to oversee the
Company's merchandising will enable the Company to more effectively manage its
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."
44
<PAGE>
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 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. 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. Current minimum guaranteed payments required under the Company's
license agreements aggregate approximately $300,000 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
at various times through March 2000. 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.
The Company believes it maintains excellent relations with the companies with
which it has authorized dealer agreements.
45
<PAGE>
FACILITIES
The Company maintains 22 facilities consisting of 16 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 850
square feet to 23,000 square feet and are located in eight 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 Houston, Texas.
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 13,500 square feet. As the Company's
sales reach certain levels, it may consider combining its off-site storage
facilities into a single facility.
EMPLOYEES
At April 30, 1998, the Company employed 207 persons, of which two were
full-time employees at the Company's headquarters, 83 were part-time employees
in its retail stores and distribution centers, and 122 were full-time employees
in the stores, offices and distribution centers. Of the Company's employees,
approximately 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.
46
<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
Shonnie D. Bilin ................ 43 President and Chief Executive Officer
Neil J. DePascal, Jr. ........... 48 Executive Vice President and Chief Financial Officer
Roy C. Elwell ................... 42 Executive Vice President -- Operations and Chief Operating
Officer; President -- Reef Hallmark; Director(3)
Jerry Gladstone ................. 38 Executive Vice President -- Marketing; President --
Animation Division; President -- American Royal Arts;
Director(3)
David K. Green .................. 40 Executive Vice President -- Corporate Development; President
-- Collectibles Division; President -- North Pole City;
Director(3)
David J. Stone .................. 65 Executive Vice President -- Retail Store Development;
President -- Stone's Hallmark; Director(3)
Paul T. Shirley(1)(2) ........... 58 Director(3)
Michael A. Baker(1)(2) .......... 51 Director(3)
</TABLE>
- ----------
(1) Member of compensation committee.
(2) Member of audit committee.
(3) Director nominees will become directors of the Company upon consummation of
the Offering.
Ronald P. Rafaloff has served as the Chairman of the Board since June 1996.
Ronald P. Rafaloff has been the Chief Executive Officer and a principal owner of
RGR Financial Corp., a securities broker-dealer providing investment services to
retail, corporate and pension plan clients, since its inception in March 1996.
Prior to forming RGR Financial Corp., Ronald P. Rafaloff was a senior vice
president at Smith Barney, Inc., a leading investment bank, from October 1992 to
June 1996.
Shonnie D. Bilin has served as President and Chief Executive Officer since
February 1998 and as Executive Vice President -- Planning and Development from
August 1997 until February 1998. From November 1981 until July 1997, she was
employed by Enesco Corporation ("Enesco") and has served as Collector's Club
Coordinator, as Club Executive Director, from January 1990 to December 1996 as
Vice President of Collectibles, and from January 1997 to July 1997 as Senior
Vice President of Marketing. While Vice President of Collectibles at Enesco, she
was responsible for all the marketing, budgeting and promotion of Enesco's
collectibles lines which generated revenues of over $200 million. During her
employment with Enesco, Ms. Bilin was instrumental in establishing and managing
the Precious Moments Collectors Club which is recognized as a large and
successful collectors club. Ms. Bilin served on the advisory committee of
International Collectibles Expositions which holds exhibits to introduce new
collectibles products. Ms. Bilin has been awarded numerous industry awards such
as the John Cornell Award and the Leader of the Year Award from Stanhome, Inc.,
and has been a three time recipient of the Enesco Outstanding Sales Support
Award. She has been featured in publications such as Gift and Decorative
Accessories and Gift and Stationary Business.
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
47
<PAGE>
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 -- Operations and
Chief Operations Officer 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 -- Corporate
Development, 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.
David J. Stone will become the Executive Vice President -- Retail
Development and 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 served as Chief Executive Officer and President of American
Medical Response, Inc. from August 1995 to September 1997 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 will become a director of the Company upon consummation of
the Offering. He 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, including
potential acquisitions. Mr. Baker was a founder of Allwaste, Inc., a Houston
based industrial services company, and has served as director from November 1984
until July 1997. 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 and as a
director of Innovative Valve Technologies, Inc. Mr. Baker has been involved in a
number of successful acquisition programs such as Browning Ferris Industries,
Inc., Sanifill, Inc. and American Medical Response, Inc.
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
48
<PAGE>
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 did not pay any compensation prior to January 1997, and in
Fiscal 1997 its officers received compensation in an aggregate amount of
$2,903.The individual who served as the Company's chief executive officer during
Fiscal 1998 received compensation of $51,500 during such fiscal year. Shonnie D.
Bilin was promoted to the position of Chief Executive Officer in February 1998.
EMPLOYMENT AGREEMENTS
Shonnie D. Bilin and Neil J. DePascal, Jr.
In August 1997, Collectibles USA entered into an employment agreement, as
amended in May 1998, with each of Shonnie D. Bilin and Neil J. DePascal, Jr.
(each individually, an "Executive"), pursuant to which Shonnie D. Bilin serves
as President and Chief Executive Officer and Mr. DePascal serves 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 $175,000 and a one-time $17,500 bonus for Ms. Bilin and an annual base
salary of $150,000 and a one-time bonus of $25,000 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, Ms. Bilin and Mr. DePascal (i) have been granted stock
options (the "$4 Options") to acquire, respectively 50,000 and 40,000 shares of
Common Stock at a $4.00 exercise price per share and (ii) concurrently with the
consummation of the Offering will be granted additional options (the "Additional
Options") to acquire, respectively 125,000 and 100,000 shares of Common Stock at
the initial public offering price. The $4 Options are fully vested. The
Additional Options vest over a three year period in one-third increments
annually.
Each employment agreement provides that the Executive is generally
prohibited, during the term of 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, 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
49
<PAGE>
without cause. 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 12 key executives
and employees of the Founding Companies which will become effective upon
consummation of the Offering. Each of the agreements with the 12 key executives
are identical differing only with respect to the position of employment, the
compensation level and the term of employment. Set forth below are the
identities of the key executives and their position of employment.
<TABLE>
<CAPTION>
EMPLOYEE POSITION OF EMPLOYMENT
-------- ----------------------
<S> <C>
Roy C. Elwell .............. President of Reef Hallmark; Executive Vice President--Operations and Chief
Operating Officer of the Company
Kim A. Elwell .............. Secretary and Treasurer of Reef Hallmark
Jerry Gladstone ............ President of American Royal Arts; Executive Vice President--Marketing and
President--Animation Division of the Company
David K. Green ............. President of North Pole City; Executive Vice President--Corporate Development
and President--Collectibles Division of the Company
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; Executive Vice President--Retail Store
Development
Michael Stone .............. General Manager of Stone's Hallmark
David M. Vice .............. President of Animation USA
</TABLE>
<PAGE>
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 12 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
50
<PAGE>
- -- 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.
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.
51
<PAGE>
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 25, 1998. After the
Offering, Paul Shirley and Michael Baker will become additional members 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 900,914 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.
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
52
<PAGE>
of shares acquired by exercise of an ISO and held for the applicable ISO holding
periods). Generally, there will be no tax consequences to the Company in
connection with a disposition of shares acquired under an option or other award,
except that the Company will be entitled to a deduction (and the participant
will recognize ordinary taxable income) if shares acquired upon exercise of an
ISO are disposed of before the applicable ISO holding periods have been
satisfied.
With respect to awards granted under the Plan that may be settled either in
cash or in stock or other property that is either not restricted as to
transferability or not subject to a substantial risk of forfeiture, the
participant must generally recognize ordinary income equal to the cash or the
fair market value of stock or other property received. The Company will be
entitled to a deduction for the same amount. With respect to awards involving
stock or other property that is restricted as to transferability and subject to
a substantial risk of forfeiture, the participant must generally recognize
ordinary income equal to the fair market value of the shares or other property
received at the first time the shares or other property become transferable or
not subject to a substantial risk of forfeiture. The Company will be entitled to
a deduction in an amount equal to the ordinary income recognized by the
participant. A participant may elect under section 83(b) of the Internal Revenue
Code to be taxed at the time of receipt of shares or other property rather than
upon lapse of restrictions on transferability or the substantial risk of
forfeiture, but if the participant subsequently forfeits such shares or property
he would not be entitled to any tax deduction, including a capital loss, for the
value of the shares or property on which he previously paid tax.
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 90,000 shares have been issued under
the Plan at an exercise price of $4.00 per share. Concurrently with the
consummation of the Offering, the Company will grant options to purchase 495,000
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
53
<PAGE>
acceleration by the Board of Directors, and will be forfeited upon termination
of service as a director for reasons other than death or disability unless the
director served for at least 11 months after the date of grant or the option was
otherwise exercisable at the date of termination. In addition, the Directors'
Plan permits non-employee directors to elect to receive, in lieu of cash
directors' fees, shares or credits representing "deferred shares" to be settled
at future dates, as elected by the director. The number of shares or deferred
shares received will be equal to the number of shares which, at the date the
fees would otherwise be payable, will have an aggregate fair market value equal
to the amount of such fees. Each "deferred share" will be settled by delivery of
a share of Common Stock at such time may have been elected by the director prior
to the deferral. In addition, unless otherwise provided by the Board, all
restrictions relating to the continued performance of services of the directors
will immediately lapse upon a (i) "change in control" of the Company (as defined
in the Plan), or (ii) with respect to any particular director, the death or
permanent disability of such director.
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.
54
<PAGE>
CERTAIN TRANSACTIONS
Collectibles USA was initially capitalized on June 16, 1996 by the issuance
of 1,016,602 shares, of which 711,622 were issued to RGR Financial Group LLC
("RGR") and 152,490 shares were issued to Michael A. Baker and 152,490 to
another entity. Each paid consideration of $.10 per share (prior to the Stock
Split) and was issued the shares on June 16, 1996. On November 20, 1997, the
Company repurchased 127,490 shares, at par value of $0.01 per share, from
Michael A. Baker and reissued such shares to RGR. 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. 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.
In December 1997, Collectibles USA issued the CEFC Note-4 to CEFC. Upon
consummation of the Offering, the principal amount of the CEFC Note-4 will
become due and payable immediately. No interest is payable on the CEFC Note-4 in
the event the Offering is consummated. The Company intends to repay the CEFC
Note-4 with a portion of the proceeds of the Offering.
Effective December 31, 1997, the CEFC Note-1, CEFC Note-2 and the CEFC
Note-3 were amended to extend the maturity date of such notes from December 31,
1997 to December 31, 1998.
In February 1998, Collectibles USA issued the CUSA Notes. The CUSA Notes
become due and payable on February 28, 1999. In the event the Offering is
consummated, the CUSA Notes automatically will convert into a number of shares
of Common Stock, which number shall be determined by dividing the aggregate
amount of the CUSA Notes by an amount equal to 50% of the initial public
offering price. $700,000 of the CUSA Notes were issued to entities affiliated
with Michael A. Baker and Paul T. Shirley, both of whom will become directors of
the Company upon consummation of the Offering.
The proceeds of the CEFC Notes and the CUSA 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 dividing (X) 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 dividing (X) 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 79,902 shares of Common Stock. The Company intends to pay the required cash
amounts in
55
<PAGE>
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 June 11, 1997, the Company issued 711,622 shares and 152,490 shares of
Restricted Vote Common Stock to RGR and Michael A. Baker, 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."
The Company has entered into an agreement with RGR pursuant to which RGR
shall transfer, for the benefit of the Company, 79,063 and 11,986 shares of
Common Stock (assuming an $8.50 initial public offering price per share),
respectively, to holders of certain CUSA Notes and Preferred Stock as designated
by the Company upon the consummation of the Offering. The number of shares to be
transferred by RGR shall be appropriately adjusted based upon the actual initial
public offering price.
Simultaneously with the consummation 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
$7.8 million in cash and 1,761,354 shares of Common Stock. The consideration to
be paid for each Founding Company was determined through arm's-length
negotiations between the Company and representatives of each Founding Company.
The factors considered by the parties in determining the consideration to be
paid include, among others, the historical operating results, the net worth, the
levels and types of indebtedness and the future prospects of the Founding
Company. Each Founding Company was represented by independent counsel in the
negotiation of the terms and conditions of the Acquisitions. The Company intends
to repay approximately $3.5 million of the outstanding indebtedness as of May
31, 1998 of the Founding Companies (which includes $625,000 of indebtedness
incurred to fund distributions in May 1997, November 1997 and May 1998, 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.
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:
<TABLE>
<CAPTION>
CASH DEBT SHARES
-------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Collectibles Stores
- -------------------
Little Elegance ............. $ 400 $ 738 50,397
North Pole City ............. 1,730 1,098 385,845
Reef Hallmark ............... 850 902 186,346
Stone's Hallmark ............ 1,148 22 373,766
Animation Art Galleries
- -----------------------
American Royal Arts ......... 2,592 625 540,000
Animation USA ............... 350 104 75,000
Filmart ..................... 700 -- 150,000
------ ------ -------
TOTAL ..................... $7,770 $3,489 1,761,354
====== ====== =========
</TABLE>
The Founding Companies will also distribute approximately $31,000 in net
book value of certain non-operating assets less related obligations of
approximately $23,000 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.
56
<PAGE>
The agreements, as amended, relating to the Acquisitions may be terminated
under certain circumstances prior to the consummation of the Offering.
Specifically, the agreements, as amended, 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 July 28, 1998; 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.
Three of the Founding Companies have incurred indebtedness which has been
personally guaranteed by its stockholders. At May 31, 1998, 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."
<TABLE>
<CAPTION>
COMPANY AMOUNT OF DEBT GUARANTEED GUARANTOR
------- ------------------------- ---------
(DOLLARS IN THOUSANDS)
---------------------
<S> <C> <C>
North Pole City $1,098 David K. Green
Little Elegance 300 Jean Holt
Keith N. Holt
Carmella Pugliese
Robert St. George
Reef Hallmark 881 Roy C. Elwell
Kim A. Elwell
Animation USA 104 David M. Vice
Laine Ross
------
Total $2,383
======
</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
CASH DEBT AS OF MAY 31, 1998 SHARES
-------- ------------------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Roy C. Elwell ........... $ 850 $ -- 186,346
David K. Green .......... 1,730 -- 385,845
Jerry Gladstone ......... 2,592 625 540,000
David J. Stone .......... 1,148 -- 373,766
</TABLE>
TRANSACTIONS INVOLVING CERTAIN OFFICERS, DIRECTORS AND STOCKHOLDERS
Consulting Arrangements. The Company has entered into a consulting
agreement with each of RGR and Wasatch Capital Corporation ("Wasatch"), of which
Michael A. Baker is the Chairman of the Board, pursuant to which, upon the
consummation of the Offering, RGR and Wasatch will act as merger and acquisition
advisory consultants 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 an initial term of one year and three
years, respectively. Pursuant to the terms of each consulting agreement, which
terms the Company believes are as favorable as could have been obtained from a
disinterested third party, RGR and Wasatch 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
57
<PAGE>
candidates, their operations, historical performance and future prospects and
(iii) advise the Company in discussions and negotiations with acquisition
candidates. Additionally, pursuant to its consulting agreement, Wasatch will
provide the Company with advice regarding management and business operations.
For all services rendered by RGR and Wasatch to the Company, the Company will
compensate RGR or Wasatch, as the case may be, based upon each acquisition
candidate with which an acquisition is consummated. The consideration to be paid
to RGR or Wasatch, as the case may be, upon consummation of a future acquisition
will be 3.2% of the acquisition candidate's pre-tax net income for its most
recent fiscal year. RGR is a stockholder of the Company and will, after the
Offering, beneficially own 10.1% 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. Michael A. Baker will become a
director of the Company upon consummation of the Offering. Mr. Baker is a
stockholder of the Company and will, after the Offering, beneficially own 2.8%
of the Company's outstanding Common Stock.
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.
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 $10,300
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.
Prior to the consummation of the Offering, the agreement will be amended to
provide that the Officer (i) will receive within three days of the consummation
of the Offering $250,000 and a six-month convertible note for the principal
amount of $100,000 (convertible at the initial public offering price) as
severance payment, (ii) will transfer 95,000 shares of the 174,580 shares of
Common Stock previously owned by him, (iii) will enter into a 180-day lock-up
arrangement with the Underwriters and (iv) will agree 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.
58
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of the Common Stock as of June 1, 1998, 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) 946,602 73.9% 613,847(2) 10.1%
One Battery Park Plaza, 24th Floor
New York, NY 10004-1405
Shonnie D. Bilin 100,000(3) 7.8% 100,000(3) 1.6%
744 Clover Hill Court
Elk Grove Village, IL 60007
Neil J. DePascal, Jr. 90,000(4) 7.0% 90,000(4) 1.5%
6402 Rippling Hollow Drive
Spring, TX 77379
Roy C. Elwell -- -- 186,346 3.1%
1694 South Congress Avenue
Palm Springs, FL 33461
Jerry Gladstone -- -- 540,000 8.9%
473 Old Country Road
Westbury, NY 11590
David K. Green -- -- 385,845 6.3%
4201 South I-44
Oklahoma City, OK 73119
David J. Stone -- -- 373,766 6.1%
2508 South Alpine Road
Rockford, IL 61108
Michael A. Baker 25,000 2.0% 167,647(5) 2.8%
3322 Albans
Houston, TX 77005
Paul T. Shirley -- -- 56,861(6) 0.9%
875 Lakeshore Boulevard
Incline Village, NV 89451
RGR Financial Group LLC 946,602 73.9% 613,847(2) 10.1%
One Battery Park Plaza, 24th Floor
New York, NY 10004-1405
David L. Yankey 79,580 6.2% 79,580 1.3%
13500 Country Way
Los Altos Hills, CA 94022
All officers and directors and director nominees as a 1,161,602 90.7% 2,514,312 41.3%
group (9 persons)
</TABLE>
- ----------
(1) Represents all the 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 and certain holders of convertible Preferred
Stock.
(3) Includes 50,000 shares issuable upon the exercise of the $4 Options.
(4) Includes 40,000 shares issuable upon the exercise of the $4 Options.
(5) Includes an aggregate of 142,647 shares to be issued to an affiliate that
holds a convertible note issued by CEFC and an affiliate that holds a
convertible note issued by Collectibles USA.
(6) Reflects shares to be issued to an affiliate that holds a convertible note
issued by CEFC and an affiliate that holds a convertible note issued by
Collectibles USA.
59
<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, 219,580 shares of Common Stock are outstanding and held
of record by four persons, 971,602 shares of Restricted Vote Common Stock are
outstanding and held of record by two 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
6,006,094 shares of Common Stock outstanding, of which 638,847 shares will be
Restricted Vote Common Stock. 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 one-tenth 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, 1999, 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.
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
60
<PAGE>
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 dividing (X) 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 dividing (X) 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 79,902 shares of Common Stock. The Company intends to pay
the required cash amounts in connection with the conversion of the Series A
Convertible Preferred Stock with a portion of the proceeds of the Offering.
STATUTORY BUSINESS COMBINATION PROVISION
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Section 203 provides, with certain
exceptions, that a Delaware corporation may not engage in any of a broad range
of business combinations with a person or an affiliate, or associate of such
person, who is an "interested stockholder" for a period of three years from the
date that such person became an interested stockholder unless: (i) the
transaction resulting in a person becoming an interested stockholder, or the
business combination, is approved by the Board of Directors of the corporation
before the person becomes an interested stockholder, (ii) the interested
stockholder acquired 85% or more of the outstanding voting stock of the
corporation in the same transaction that makes such person an interested
stockholder (excluding shares owned by persons who are both officers and
directors of the corporation, and shares held by certain employee stock
ownership plans), or (iii) on or after the date the person becomes an interested
stockholder, the business combination is approved by the corporation's Board of
Directors and by the holders of at least 66% of the corporation's outstanding
voting stock at an annual or special meeting, excluding shares owned by the
interested stockholder. Under Section 203, 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.
61
<PAGE>
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.
62
<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, 6,006,094 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 3,306,094 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 Cruttenden Roth Incorporated, 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 Representative who upon consummation of the Offering will
beneficially own an aggregate of 917,935 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 Cruttenden Roth Incorporated.
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 900,914 shares upon
consummation of the Offering). Options to purchase an aggregate of 495,000
shares of Common Stock 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 Representative's Warrants. The holders of the Representative's
Warrants have certain registration rights. See "Underwriting."
The Company currently intends to file a registration statement covering
2,500,000 additional shares of Common Stock under the Securities Act for its use
in connection with future acquisitions. These shares generally will be freely
tradeable after their issuance by persons not affiliated with the Company unless
the Company contractually restricts their resale.
The former stockholders of the Founding Companies who will hold in the
aggregate 1,761,354 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
63
<PAGE>
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 79,580 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."
64
<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 Cruttenden Roth Incorporated,
the Representative of the Underwriters (the "Representative"), 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>
Cruttenden Roth Incorporated .........................
---------
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
45 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 Representative and its 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 Representative's Warrants contain certain
registration rights relating to the shares issuable thereunder. For the life of
the Representative's Warrants, the Representative will have the opportunity to
profit from a rise in the market price for the Common Stock.
The Company has agreed to pay the Representative a financial advisory fee
of $450,000, of which $225,000 will be paid by the Company upon consummation of
the Offering and $225,000 will be paid by the Company 90 days after consummation
of the Offering.
The Company and its officers and directors have agreed not to, directly or
indirectly, offer, issue, sell, contract to sell or otherwise dispose of any
shares of Common Stock or any securities exercisable for or convertible into or
exchangeable into Common Stock (the "Securities"), for a period of 180 days
after the date of this Prospectus (the "Lockup Period") without the prior
written consent of Cruttenden Roth Incorporated, except for the grant of
employee stock options by the
65
<PAGE>
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 Representative who upon consummation of the Offering will
beneficially own an aggregate of 917,935 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 Cruttenden Roth Incorporated.
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."
RGR Financial Corp., which may be deemed to be affiliated with the Company,
may be participating as a member of the selling group in the Offering. Under the
Conduct Rules of the National Association of Securities Dealers, Inc. (the
"NASD"), the participation as members of the selling group by entities which are
affiliated with the Company requires that the public offering price can be no
higher than the price recommended by a "qualified independent underwriter"
meeting certain standards. In accordance with this requirement, Cruttenden Roth
Incorporated is serving in such role and will recommend a price in compliance
with the requirements of the NASD's Conduct Rules. Cruttenden Roth Incorporated,
in its role as qualified independent underwriter, has performed a due diligence
investigation and has reviewed and participated in the preparation of this
Prospectus and the registration statement of which this Prospectus forms a part
and, for its services as qualified independent underwriter, will receive a fee
of $25,000 from the Company.
The Representative has 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 Representative 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.
66
<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.
67
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Collectibles USA, Inc., and Founding Companies Unaudited Pro Forma
Combined Financial Statements
Basis of Presentation ................................................ F-3
Pro Forma Combined Balance Sheet -- April 30, 1998 (unaudited) ....... F-4
Pro Forma Combined Statement of Operations for the Year Ended
January 31, 1998 (unaudited) ........................................ F-5
Pro Form Combined Statement of Operations for the Three Months Ended
April 30, 1998 (unaudited) .......................................... F-6
Notes to Unaudited Pro Forma Combined Financial Statements ........... F-7
Collectibles USA, Inc.
Report of Independent Public Accountants ............................. F-12
Balance Sheets ....................................................... F-13
Statements of Operations ............................................. F-14
Statements of Stockholders' (Deficit) Equity.......................... F-15
Statements of Cash Flows ............................................. F-16
Notes to Financial Statements ........................................ F-17
Founding Companies
American Royal Arts Corp.
Report of Independent Public Accountants ............................. F-22
Balance Sheets ....................................................... F-23
Statements of Operations ............................................. F-24
Statements of Stockholder's Equity (Deficit).......................... F-25
Statements of Cash Flows ............................................. F-26
Notes to Financial Statements ........................................ F-27
Stone's Shops, Inc.
Report of Independent Public Accountants ............................. F-31
Balance Sheets ....................................................... F-32
Statements of Operations ............................................. F-33
Statements of Shareholders' Equity ................................... F-34
Statements of Cash Flows ............................................. F-35
Notes to Financial Statements ........................................ F-36
DKG Enterprises, Inc.
Report of Independent Public Accountants ............................. F-41
Balance Sheets ....................................................... F-42
Statements of Operations ............................................. F-43
Statements of Shareholders' Equity ................................... F-44
Statements of Cash Flows ............................................. F-45
Notes to Financial Statements ........................................ F-46
Elwell Stores, Inc.
Report of Independent Public Accountants ............................. F-50
Balance Sheets ....................................................... F-51
Statements of Operations ............................................. F-52
Statements of Shareholders' (Deficit) ................................ F-53
Statements of Cash Flows ............................................. F-54
Notes to Financial Statements ........................................ F-55
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Animation U.S.A., Inc.
Report of Independent Public Accountants ............................. F-59
Balance Sheets ....................................................... F-60
Statements of Operations ............................................. F-61
Statements of Shareholders' Equity ................................... F-62
Statements of Cash Flows ............................................. F-63
Notes to Financial Statements ........................................ F-64
Filmart Productions, Inc.
Report of Independent Public Accountants ............................. F-68
Balance Sheets ....................................................... F-69
Statements of Operations ............................................. F-70
Statements of Shareholders' Equity ................................... F-71
Statements of Cash Flows ............................................. F-72
Notes to Financial Statements ........................................ F-73
</TABLE>
F-2
<PAGE>
COLLECTIBLES USA, INC., AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma combined financial statements give effect to
the acquisitions by Collectibles USA, Inc. (Collectibles USA or Collectibles),
of the outstanding capital stock of American Royal Arts Corp. (American Royal
Arts or ARA), Stone's Shops, Inc. (Stone's Hallmark), DKG Enterprises, Inc.
(North Pole City), St. George, Inc. (Little Elegance), Elwell Stores, Inc. (Reef
Hallmark), Animation U.S.A., Inc. (Animation USA), and Filmart Productions, Inc.
(Filmart) (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, and lease rental expense, these reductions
have been reflected in the unaudited pro forma combined statements of
operations. With respect to other potential cost savings, Collectibles 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.
The unaudited pro forma combined balance sheet gives effect to the Acquisitions
and the Offering as if they had occurred on April 30, 1998. The unaudited pro
forma combined statements of operations gives effect to these transactions as if
they had occurred on February 1, 1997.
The pro forma adjustments are based on preliminary estimates, available
information and certain assumptions and may be revised as additional information
becomes available. The pro forma financial data do not purport to represent what
the Company's financial position or results of operations would actually have
been if such transactions in fact had occurred on those dates and are not
necessarily representative of the Company's financial position or results of
operations for any future period. Since the Founding Companies were not under
common control or management, historical combined results may not be comparable
to, or indicative of, future performance. The unaudited pro forma combined
financial statements should be read in conjunction with the other financial
statements and notes thereto included elsewhere in this Prospectus.
See "Risk Factors" included elsewhere herein.
F-3
<PAGE>
COLLECTIBLES USA, INC.
PRO FORMA COMBINED BALANCE SHEET -- APRIL 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
STONE'S NORTH
COLLECTIBLES ARA HALLMARK POLE CITY
--------------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents ......................... $ 21,573 $ 146,543 $ 426,284 $ 8,136
Accounts receivable ............................... -- 84,241 -- 8,711
Merchandise inventories ........................... -- 636,936 3,264,608 2,390,654
Prepaid expenses and other current assets ......... 9,700 124,773 36,387 34,763
------------- ---------- ---------- ----------
Total current assets ............................. 31,273 992,493 3,727,279 2,442,264
Property and equipment, net ....................... 5,960 87,186 207,121 226,923
Other assets, net ................................. 5,375,168 67,434 81,288 3,225
Goodwill, net ..................................... -- -- -- --
------------- ---------- ---------- ----------
Total assets ..................................... $ 5,412,401 $1,147,113 $4,015,688 $2,672,412
============= ========== ========== ==========
LIABILITIES AND
STOCKHOLDERS' (DEFICIT) EQUITY
Accounts payable and accrued liabilities .......... $ 2,090,415 $ 346,102 $1,302,488 $ 537,849
Customer deposits ................................. -- 311,330 122,575 173,392
Federal income taxes payable ...................... -- -- -- --
Pro forma cash consideration
due to Founding Companies ........................ -- -- -- --
Line of credit .................................... -- -- -- 1,084,414
Payable to related party .......................... 2,784,000 586,000 6,000 --
Current maturities of long-term obligations ....... -- -- 14,400 --
------------- ---------- ---------- ----------
Total current liabilities ........................ 4,874,415 1,243,432 1,445,463 1,795,655
Deferred income taxes ............................. -- -- 501,941 14,746
Long-term obligations, net of current maturities .. -- -- 10,800 --
------------- ---------- ---------- ----------
Total liabilities ................................ 4,874,415 1,243,432 1,958,204 1,810,401
Stockholders' (deficit) equity:
Preferred stock .................................. 1,000,000 -- -- --
Common stock ..................................... 11,912 1,584 1,000 500
Treasury stock ................................... -- (145,000) -- --
Additional paid-in capital ....................... 1,996,475 -- 39,000 --
Retained (deficit) earnings ...................... (2,470,401) 47,097 2,017,484 861,511
------------- ---------- ---------- ----------
Total stockholders' (deficit) equity ............. 537,986 (96,319) 2,057,484 862,011
------------- ---------- ---------- ----------
Total liabilities and stockholders' equity ....... $ 5,412,401 $1,147,113 $4,015,688 $2,672,412
============= ========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LITTLE REEF ANIMATION
ELEGANCE HALLMARK USA FILMART TOTAL
------------ -------------- ------------- ------------ ---------------
ASSETS
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents ......................... $ 42,472 $ 47,510 $ 12,696 $ 2,096 $ 707,310
Accounts receivable ............................... 54 -- -- 538,860 631,866
Merchandise inventories ........................... 1,276,144 1,111,117 299,612 441,821 9,420,892
Prepaid expenses and other current assets ......... 6,252 12,835 104,753 446,677 776,140
---------- ---------- ----------- ---------- -----------
Total current assets ............................. 1,324,922 1,171,462 417,061 1,429,454 11,536,208
Property and equipment, net ....................... 192,275 101,428 62,129 17,900 900,922
Other assets, net ................................. 92,949 81,200 -- 135,608 5,836,872
Goodwill, net ..................................... -- -- -- -- --
---------- ---------- ----------- ---------- -----------
Total assets ..................................... $1,610,146 $1,354,090 $ 479,190 $1,582,962 $18,274,002
========== ========== =========== ========== ===========
LIABILITIES AND
STOCKHOLDERS' (DEFICIT) EQUITY
Accounts payable and accrued liabilities .......... $ 295,024 $ 687,344 $ 264,211 $ 186,211 $ 5,709,644
Customer deposits ................................. 6,000 9,819 59,994 3,513 686,623
Federal income taxes payable ...................... -- -- 13,948 -- 13,948
Pro forma cash consideration
due to Founding Companies ........................ -- -- -- -- --
Line of credit .................................... -- 350,724 105,624 -- 1,540,762
Payable to related party .......................... 438,038 -- -- -- 3,814,038
Current maturities of long-term obligations ....... 300,000 86,445 -- -- 400,845
---------- ---------- ----------- ---------- -----------
Total current liabilities ........................ 1,039,062 1,134,332 443,777 189,724 12,165,860
Deferred income taxes ............................. -- -- -- -- 516,687
Long-term obligations, net of current maturities .. -- 310,052 -- -- 320,852
---------- ---------- ----------- ---------- -----------
Total liabilities ................................ 1,039,062 1,444,384 443,777 189,724 13,003,399
Stockholders' (deficit) equity:
Preferred stock .................................. -- -- -- -- 1,000,000
Common stock ..................................... 27,000 500 192,700 -- 235,196
Treasury stock ................................... -- -- -- -- (145,000)
Additional paid-in capital ....................... -- 99,275 -- -- 2,134,750
Retained (deficit) earnings ...................... 544,084 (190,069) (157,287) 1,393,238 2,045,657
---------- ---------- ----------- ---------- -----------
Total stockholders' (deficit) equity ............. 571,084 (90,294) 35,413 1,393,238 5,270,603
---------- ---------- ----------- ---------- -----------
Total liabilities and stockholders' equity ....... $1,610,146 $1,354,090 $ 479,190 $1,582,962 $18,274,002
========== ========== =========== ========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA PRO FORMA POST ACQUISITIONS AS
ADJUSTMENTS COMBINED ADJUSTMENTS ADJUSTED
--------------- ------------- ------------------- -------------
ASSETS
<S> <C> <C> <C> <C>
Cash and cash equivalents ......................... $ -- $ 707,310 $ 5,405,953 $ 6,113,623
Accounts receivable ............................... -- 631,866 -- 631,866
Merchandise inventories ........................... -- 9,420,892 -- 9,420,892
Prepaid expenses and other current assets ......... -- 776,140 -- 776,140
------------ ----------- ------------- -----------
Total current assets ............................. -- 11,536,208 5,405,953 16,942,161
Property and equipment, net ....................... (31,183) 869,739 -- 869,739
Other assets, net ................................. 53,577 5,890,449 (5,763,130) 127,319
Goodwill, net ..................................... 14,526,025 14,526,025 -- 14,526,025
------------ ----------- ------------- -----------
Total assets ..................................... $ 14,548,419 $32,822,421 $ (357,177) $32,465,244
============ =========== ============= ===========
LIABILITIES AND
STOCKHOLDERS' (DEFICIT) EQUITY
Accounts payable and accrued liabilities .......... $ -- $ 5,709,644 $ (2,090,415) $ 3,619,229
Customer deposits ................................. -- 686,623 -- 686,623
Federal income taxes payable ...................... -- 13,948 -- 13,948
Pro forma cash consideration
due to Founding Companies ........................ 7,770,000 7,770,000 (7,770,000) --
Line of credit .................................... -- 1,540,762 (1,540,762) --
Payable to related party .......................... -- 3,814,038 (3,814,038) --
Current maturities of long-term obligations ....... (22,615) 378,230 (378,230) --
------------ ----------- ------------- -----------
Total current liabilities ........................ 7,747,385 19,913,245 (15,593,445) 4,319,800
Deferred income taxes ............................. -- 516,687 -- 516,687
Long-term obligations, net of current maturities .. -- 320,852 (320,852) --
------------ ----------- ------------- -----------
Total liabilities ................................ 7,747,385 20,750,784 (15,914,297) 4,836,487
Stockholders' (deficit) equity:
Preferred stock .................................. -- 1,000,000 (1,000,000) --
Common stock ..................................... (205,671) 29,525 30,536 60,061
Treasury stock ................................... 145,000 -- -- --
Additional paid-in capital ....................... 8,907,362 11,042,112 16,526,584 27,568,696
Retained (deficit) earnings ...................... (2,045,657) -- -- --
------------ ----------- ------------- -----------
Total stockholders' (deficit) equity ............. 6,801,034 12,071,637 15,557,120 27,628,757
------------ ----------- ------------- -----------
Total liabilities and stockholders' equity ....... $ 14,548,419 $32,822,421 $ (357,177) $32,465,244
============ =========== ============= ===========
</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, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
AMERICAN STONE'S NORTH LITTLE
COLLECTIBLES ROYAL ARTS HALLMARK POLE CITY ELEGANCE
-------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales ...................... $ -- $4,133,318 $5,744,826 $4,693,104 $2,509,667
Cost of sales .................. -- 1,516,516 2,762,629 2,561,478 1,329,994
---------- ---------- ---------- ---------- ----------
Gross profit .................. -- 2,616,802 2,982,197 2,131,626 1,179,673
Selling, general and
administrative expenses ....... 907,451 1,957,708 1,818,203 1,992,902 1,097,089
Goodwill amortization .......... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Income (loss) from
operations .................. (907,451) 659,094 1,163,994 138,724 82,584
Other (income) expense:
Interest (income)
expense ..................... 57,474 14,037 24 76,557 78,859
Other, net .................... -- -- (3,162) (6,352) (651)
---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes .................. (964,925) 645,057 1,167,132 68,519 4,376
Provision for income taxes ..... -- -- 465,555 (65,039) (14,112)
---------- ---------- ---------- ---------- ----------
Net income (loss) .............. $ (964,925) $ 645,057 $ 701,577 $ 133,558 $ 18,488
========== ========== ========== ========== ==========
Net income per share ...........
Shares used in computing net
income per share(1) ...........
<CAPTION>
REEF ANIMATION PRO FORMA PRO FORMA
HALLMARK USA FILMART TOTAL ADJUSTMENTS COMBINED
------------- ------------- ------------- -------------- ------------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Net sales ...................... $2,725,129 $1,319,162 $1,323,867 $22,449,073 $ -- $22,449,073
Cost of sales .................. 1,464,580 595,974 432,403 10,663,574 -- 10,663,574
---------- ---------- ---------- ----------- -------------- -----------
Gross profit .................. 1,260,549 723,188 891,464 11,785,499 -- 11,785,499
Selling, general and
administrative expenses ....... 943,686 762,330 541,459 10,020,828 (1,006,692) 9,014,136
Goodwill amortization .......... -- -- -- -- 363,151 363,151
---------- ---------- ---------- ----------- -------------- -----------
Income (loss) from
operations ................... 316,863 (39,142) 350,005 1,764,671 643,541 2,408,212
Other (income) expense:
Interest (income)
expense ...................... 51,400 13,903 4,638 296,892 (318,487) (21,595)
Other, net .................... -- -- (114,675) (124,840) -- (124,840)
---------- ---------- ---------- ----------- -------------- -----------
Income (loss) before
income taxes .................. 265,463 (53,045) 460,042 1,592,619 962,028 2,554,647
Provision for income taxes ..... -- (18,143) -- 368,261 798,858 1,167,119
---------- ---------- ---------- ----------- -------------- -----------
Net income (loss) .............. $ 265,463 $ (34,902) $ 460,042 $ 1,224,358 $ 163,170 $ 1,387,528
========== ========== ========== =========== ============== ===========
Net income per share ........... $ 0.26
===========
Shares used in computing net
income per share(1) ........... 5,370,100
===========
</TABLE>
- ------
(1) Includes (i) 1,191,182 shares issued to the sponsors and management which
are outstanding prior to the Offering, (ii) 1,761,354 shares to be issued
to the owners of the Founding Companies, (iii) 79,902 shares to be issued
to the holders of the Series A Convertible Preferred Stock, of which 11,986
shares will be transferred from the sponsor shares listed in (i) above,
364,705 shares to be issued to the holders of the CUSA Notes, of which
79,063 shares will be transferred from the sponsor shares listed in (i)
above, and 241,706 shares to be issued to the holders of the CEFC Notes,
all of which will be transferred from the sponsor shares listed in (i)
above, and (iv) 2,076,794 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 of the Founding Companies and pay expenses of the
Offering. Basic and diluted income per share were the same for the three
months ended April 30, 1998.
See accompanying notes to unaudited pro forma combined financial statements.
F-5
<PAGE>
COLLECTIBLES USA, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
AMERICAN STONE'S NORTH LITTLE
COLLECTIBLES ROYALS ARTS HALLMARK POLE CITY ELEGANCE
-------------- ----------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales ...................... $ -- $806,489 $1,868,674 $ 640,496 $ 480,081
Cost of sales .................. -- 291,916 941,041 350,066 252,812
---------- -------- ---------- ---------- ---------
Gross profit .................. -- 514,573 927,633 290,430 227,269
Selling, general and
administrative expenses ....... 101,946 400,530 411,124 498,818 264,689
Goodwill amortization .......... -- -- -- -- --
---------- -------- ---------- ---------- ---------
Income (loss) from
operations .................. (101,946) 114,043 516,509 (208,388) (37,420)
Other (income) expense:
Interest, net.................. 53,972 (710) (1,914) 41,352 20,524
Other, net .................... -- -- -- (809) --
---------- -------- ---------- ---------- ---------
Income (loss) before
income taxes ................. (155,468) 114,753 518,423 (248,931) (57,944)
Provision for income taxes ..... -- -- 192,770 (512) --
---------- -------- ---------- ---------- ---------
Net income (loss) .............. $ (155,468) $114,753 $ 325,653 $ (248,419) $ (57,944)
========== ======== ========== ========== =========
Net income per share ...........
Shares used in computing net
income per share (1) .........
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
REEF ANIMATION PRO FORMA PRO FORMA
HALLMARK USA FILMART TOTAL ADJUSTMENTS COMBINED
---------- ----------- ----------- ------------- ------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net sales ...................... $623,011 $344,236 $ 209,059 $4,972,046 $ -- $4,972,046
Cost of sales .................. 340,234 128,554 79,879 2,384,502 -- 2,384,502
-------- -------- --------- ---------- ------------ ----------
Gross profit .................. 282,777 215,682 129,180 2,587,544 2,587,544
Selling, general and
administrative expenses ....... 237,695 149,792 118,074 2,182,668 (120,036) 2,062,632
Goodwill amortization .......... -- -- -- -- 90,787 90,787
-------- -------- --------- ---------- ------------ ----------
Income (loss) from
operations .................. 45,082 65,890 11,106 404,876 29,249 434,125
Other (income) expense:
Interest, net.................. 15,040 2,913 1,124 132,301 (142,423) (10,122)
Other, net .................... -- -- (31,250) (32,059) -- (32,059)
-------- -------- --------- ---------- ------------ ----------
Income (loss) before
income taxes ................. 30,042 62,977 41,232 304,634 171,672 476,300
Provision for income taxes ..... -- 23,931 -- 216,189 10,648 226,837
-------- -------- --------- ---------- ------------ ----------
Net income (loss) .............. $ 30,042 $ 39,046 $ 41,232 $ 88,445 $ 161,024 $ 249,469
======== ======== ========= ========== ============ ==========
Net income per share ........... $ 0.05
==========
Shares used in computing net
income per share (1) ......... 5,370,100
==========
</TABLE>
------
(1) Includes (i) 1,191,182 shares issued to the sponsors and management which
are outstanding prior to the Offering, (ii) 1,761,354 shares to be issued
to the owners of the Founding Companies, (iii) 79,902 shares to be issued
to the holders of the Series A Convertible Preferred Stock, of which 11,986
shares will be transferred from the sponsor shares listed in (i) above,
364,705 shares to be issued to the holders of the CUSA Notes, of which
79,063 shares will be transferred from the sponsor shares listed in (i)
above, and 241,706 shares to be issued to the holders of the CEFC Notes,
all of which will be transferred from the sponsor shares listed in (i)
above, and (iv) 2,076,794 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 of the Founding Companies and pay expenses of the
Offering. Basic and diluted income per share were the same for the three
months ended April 30, 1998.
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 of the Founding Companies and were derived from the respective
Founding Companies' financial statements. The periods included in these
financial statements for the individual Founding Companies are as follows:
Collectibles USA as of April 30, 1998, and for the fifty-two weeks ended January
25, 1998 and for the thirteen weeks ended April 26, 1998; American Royal Arts as
of April 30, 1998 and for the year ended January 31, 1998 and for the three
months ended April 30, 1998; Stone's Hallmark as of February 28, 1998 and for
the year ended November 30, 1997 and for the three months ended February 28,
1998; and North Pole City, Little Elegance, Reef Hallmark, Animation USA and
Filmart as of March 31, 1998 and for the year ended December 31, 1997 and for
the three months ended March 31, 1998. 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 of Collectibles USA (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 $7.65 per share, which represents a discount of ten
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. In the opinion of
management, the final allocation of the purchase price will not materially
differ from these preliminary estimates. Adjustments to the purchase price will
be based upon the actual Offering Price.
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------
CASH SHARES VALUE
---------------- ------------ ---------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C>
American Royal Arts ......... $2,592 540,000 $ 4,131
Stone's Hallmark ............ 1,148 373,766 2,859
North Pole City ............. 1,730 385,845 2,952
Little Elegance ............. 400 50,397 386
Reef Hallmark ............... 850 186,346 1,426
Animation USA ............... 350 75,000 574
Filmart ..................... 700 150,000 1,148
------ ------- -------
Total ...................... $7,770 1,761,354 $13,476
====== ========= =======
</TABLE>
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) ADJUSTMENTS
------------ --------------- --------------
<S> <C> <C> <C>
ASSETS
Deferred tax asset ............................................. $ 53,577 $ -- $ 53,577
Property and equipment net ..................................... (31,183) -- (31,183)
Goodwill, net .................................................. -- 14,526,025 14,526,025
--------- ------------ ------------
Total assets .................................................. $ 22,394 $ 14,526,025 $ 14,548,419
========= ============ ============
LIABILITIES AND STOCKHOLDERS'
(DEFICIT) EQUITY
Current maturities of long-term obligations .................... $ (22,615) $ -- $ (22,615)
Pro forma cash consideration due to Founding Companies ......... -- 7,770,000 7,770,000
--------- ------------ ------------
Total liabilities ............................................. (22,615) 7,770,000 7,747,385
Stockholders' (deficit) equity:
Common stock ................................................... -- (205,671) (205,671)
Additional paid-in capital ..................................... 8,907,362 8,907,362
Retained (deficit) earnings .................................... 45,009 (2,090,666) (2,045,657)
Treasury stock ................................................. -- 145,000 145,000
--------- ------------ ------------
Total stockholders' (deficit) equity ......................... 45,009 6,756,025 6,801,034
--------- ------------ ------------
Total liabilities and stockholders' (deficit) equity ........... $ 22,394 $ 14,526,025 $ 14,548,419
========= ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ADJUSTMENT
--------------------------------------------------
(C) (D) (E)
---------------- ---------------- ----------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents ...................................... $ 16,445,835 $ (3,269,882) $ (7,770,000)
Other assets, net .............................................. (5,763,130) -- --
------------ ------------ ------------
Total assets .................................................. $ 10,682,705 $ (3,269,882) $ (7,770,000)
============ ============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
EQUITY
Accounts payable and accrued liabilities ....................... $ (2,090,415) $ -- $ --
Pro forma cash consideration due to founding companies ......... -- -- (7,770,000)
Line of credit ................................................. -- (1,540,762) --
Payable to related parties ..................................... -- (1,030,038) --
Current maturities of long-term obligations .................... (2,784,000) (378,230) --
------------ ------------ ------------
Total current liabilities ..................................... (4,784,415) (2,949,030)
Long-term obligations, net of current maturities ............... -- (320,852) --
Total liabilities ............................................. (4,784,415) (3,269,882) (7,770,000)
Stockholders' (deficit) equity:
Series A preferred stock ...................................... (1,000,000) -- --
Common stock .................................................. 30,536 -- --
Additional paid-in capital .................................... 16,526,584 -- --
------------ ------------ ------------
Total stockholders' (deficit) equity ......................... 15,557,120 -- --
------------ ------------ ------------
Total liabilities and stockholders' (deficit) equity ........... $ 10,682,705 $ (3,269,882) $ (7,770,000)
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
POST ACQUISITION
ADJUSTMENTS
-----------------
ASSETS
<S> <C>
Cash and cash equivalents ...................................... $ 5,405,953
Other assets, net .............................................. (5,763,130)
-------------
Total assets .................................................. $ (357,177)
=============
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
EQUITY
Accounts payable and accrued liabilities ....................... $ (2,090,415)
Pro forma cash consideration due to founding companies ......... (7,770,000)
Line of credit ................................................. (1,540,762)
Payable to related parties ..................................... (3,814,038)
Current maturities of long-term obligations .................... (378,230)
-------------
Total current liabilities ..................................... (15,593,445)
Long-term obligations, net of current maturities ............... (320,852)
Total liabilities ............................................. (15,914,297)
Stockholders' (deficit) equity:
Series A preferred stock ...................................... (1,000,000)
Common stock .................................................. 30,536
Additional paid-in capital .................................... 16,526,584
-------------
Total stockholders' (deficit) equity ......................... 15,557,120
-------------
Total liabilities and stockholders' (deficit) equity ........... $ (357,177)
=============
</TABLE>
F-8
<PAGE>
COLLECTIBLES USA, INC., AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS - (CONTINUED)
(a) Records the distribution of certain assets, $31,183, and related
obligations, $22,615, to certain stockholders of the Founding Companies and
to record deferred tax assets on the S Corporations as if these were C
Corporations.
(b) Records the purchase of the Founding Companies for a total purchase price
of $21.2 million, including $6.7 million (cash of $2.6 million and shares
with an aggregate value of $4.1 million determined using an estimated fair
value of $7.65 per share) attributed to ARA as the accounting acquiror. The
entry includes the liability of $7.8 million for the cash portion of the
consideration paid to the stockholders of the Founding Companies in
connection with the Mergers and the issuance of 1.8 million shares of
Common Stock to the Founding Companies resulting in the creation of $9.6
million of goodwill after allocating the purchase price to the aggregate
assets acquired and liabilities assumed, excluding ARA, as shown below.
Based on its initial assessment, management believes that the historical
carrying value of the Founding Companies' assets and liabilities will
approximate fair value and that there are no other identifiable intangible
assets to which any material purchase can be allocated. In addition,
goodwill of $4.9 million, determined using the fair value of $7.65 per
share has been recorded attributable to the 638,847 shares of Common Stock
issued to RGR Financial Group, LLC and a consultant to Collectibles. The
Company will record a non-recurring, non-cash charge upon the consummation
of the initial public offering of $1.7 million for the estimated fair value
of $7.65 per share for the 219,580 shares issued to management of the
Company.
<TABLE>
<CAPTION>
ASSETS (In thousands)
<S> <C>
Cash and cash equivalents ................................. $ 539
Accounts receivable ....................................... 548
Merchandise inventories ................................... 8,784
Prepaid expenses and other current assets ................. 642
-------
Total current assets ..................................... 10,513
Property and equipment, net ............................... 808
Other assets, net ......................................... 394
-------
Total assets ............................................. $11,715
=======
LIABILITIES
Accounts payable and accrued liabilities .................. $ 3,227
Customer deposits ......................................... 375
Federal income taxes payable .............................. 14
Line of credit ............................................ 1,541
Notes payable to related party ............................ 444
Current maturities of long-term obligations ............... 401
-------
Total current liabilities ................................ 6,002
Deferred income taxes ..................................... 517
Long-term obligations, net of current maturities .......... 321
-------
Total liabilities ........................................ $ 6,840
-------
Net book value ........................................... $ 4,875
=======
</TABLE>
F-9
<PAGE>
COLLECTIBLES USA, INC., AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS - (CONTINUED)
The following reconciles the combined historical net assets of the Founding
Companies to the net assets acquired (in thousands):
<TABLE>
<CAPTION>
ACQUIRED
TOTAL LESS: LESS: FOUNDING
COMBINED ARA COLLECTIBLES COMPANIES
------------ ------- -------------- ------------
<S> <C> <C> <C> <C>
Historical net assets ................... $5,271 $96 $ (538) $4,829
Distribution of assets and liabilities to
Founding Companies .................... (8) -- -- (8)
Tax adjustments ......................... 54 -- -- 54
------- --- ------ -------
$5,317 $96 $ (538) $4,875
======= === ====== =======
</TABLE>
(c) Records the cash proceeds from the issuance of 2,700,000 shares of Common
Stock (based on an assumed IPO price of $8.50 per share), net of estimated
offerings costs of $6.2 million, including the conversion Preferred Stock
into Common Stock and payment of $1.0 million cash and the payment of $1.3
million of notes payable. Offering costs consist primarily of underwriting
commissions, accounting fees, legal fees, and printing expenses.
(d) Reflects the repayment of debt with proceeds from the Offering.
(e) Records the cash portion of the consideration to be paid to the
stockholders of the Founding Companies in connection with the Acquisitions.
4. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
ADJUSTMENTS:
Year Ended January 31, 1998
(a) Reflects the debt financing charges in connection with the CEFC and CUSA
notes conversion recorded at the date of the Offering on the books of the
accounting acquiror. The costs are calculated based on the number of shares
to be issued at an estimated fair value of $7.65 per share less the
principal amount of the notes.
(b) Reflects the reductions in salaries and benefits to the owners of the
Founding Companies to which they have agreed prospectively and certain
other adjustments, including the effect of revisions to certain lease
agreements between certain owners of the Founding Companies
(c) Reflects the reduction in compensation expense relating to the
non-recurring, non-cash compensation charge for the year ended January 31,
1998 for the issuance of 219,580 shares of Common Stock and 90,000 options
to management directors of and consultants to the Company.
(d) Reflects the amortization of goodwill to be recorded as a result of the
Acquisitions over a 40 year period.
(e) Reflects the elimination of interest expense attributed to the repayment of
debt with a portion of the net proceeds of the Offering and the elimination
of the non-cash, non-recurring debt financing charges for the excess value
of Common Stock issued in connection with the notes payable conversion.
(f) Reflects the incremental provision for federal and state income taxes
relating to the statements of operations adjustments and to reflect income
taxes on each S Corporation as if these entities had been taxable as a C
Corporation during the periods presented.
F-10
<PAGE>
COLLECTIBLES USA, INC., AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS - (CONTINUED)
The following table summarizes the unaudited pro forma combined statements
of operations adjustments:
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E) (F) ADJUSTMENTS
----------- ---------- ---------- --------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Selling, general and administrative
expenses ................................. $ -- $ (334) $ (673) $ -- $ -- $ -- $ (1,007)
Goodwill amortization ..................... -- -- -- 363 -- -- 363
-------- ------ ------ ------ -------- ------ --------
Income (loss) from operation ............. -- 334 673 (363) -- -- 644
Other (income) expense:
Interest (income) expense, net ........... 2,900 -- -- -- (3,218) -- (318)
Other, net ............................... -- -- -- -- -- -- --
-------- ------ ------ ------ -------- ------ --------
Income (loss) before income taxes ......... (2,900) 334 673 (363) 3,218 -- 962
Provision for income taxes ................ -- -- -- -- -- 799 799
-------- ------ ------ ------ -------- ------ --------
Net income (loss) ......................... $ (2,900) $ 334 $ 673 $ (363) $ 3,218 $ (799) $ 163
======== ====== ====== ====== ======== ====== ========
</TABLE>
5. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS:
Three Months Ended April 30, 1998
(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
(b) Reflects the amortization of goodwill to be recorded as a result of the
Acquisitions over a 40 year period.
(c) Reflects the elimination 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 to reflect income
taxes on each S Corporation as if these entities had been taxable as a C
Corporation during the periods presented.
The following table summarizes the unaudited pro forma combined statements
of operations adjustments:
<TABLE>
<CAPTION>
(A) (B) (C) (D) ADJUSTMENTS
<S> <C> <C> <C> <C> <C>
Selling, general and administrative expenses .......... $ (120) $ -- $ -- $ -- $ (120)
Goodwill amortization ................................. -- 91 -- -- 91
------ ----- ------ ----- ------
Income (loss) from operation ......................... 120 (91) -- -- 29
Other (income) expense:
Interest (income) expense, net ....................... -- -- (143) -- (143)
Other, net ........................................... -- -- -- -- --
------ ----- ------ ----- ------
Income (loss) before income taxes ..................... 120 (91) 143 -- 172
Provision for income taxes ............................ -- -- -- 11 11
------ ----- ------ ----- ------
Net income (loss) ..................................... $ 120 $ (91) $ 143 $ (11) $ 161
====== ===== ====== ===== ======
</TABLE>
F-11
<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 25, 1998 and January 26, 1997 and the
related statements of operations, stockholders' (deficit) equity and cash flows
for the fifty-two week period ended January 25, 1998 and for the period from
inception (January 18, 1996) through January 26, 1997, respectively. 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 25, 1998 and January 26, 1997 and the results of its operations and its
cash flows for the fifty-two week period ended January 25, 1998 and for the
period from inception (January 18, 1996) through January 26, 1997, respectively,
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 19, 1998
F-12
<PAGE>
COLLECTIBLES USA, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 26, JANUARY 25, APRIL 26,
1997 1998 1998
--------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ........................................................... $ 425,681 $ 60,153 $ 21,573
Receivable from affiliate ...................................... 100,000 39,000 --
Prepaid expenses and other current assets ...................... 7,500 9,700 9,700
------------ ------------ ------------
Total current assets ......................................... 533,181 108,853 31,273
Property and equipment, net .................................... -- 6,335 5,960
Deferred offering costs ........................................ 894,096 4,860,699 5,375,168
------------ ------------ ------------
Total assets ................................................. $ 1,427,277 $ 4,975,887 $ 5,412,401
============ ============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
EQUITY
CURRENT LIABILITIES:
Accrued liabilities ............................................ $ 586,198 $ 2,747,983 $ 2,090,415
Notes payable-related party .................................... 855,000 1,534,000 2,784,000
------------ ------------ ------------
Total current liabilities .................................... 1,441,198 4,281,983 4,874,415
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' (DEFICIT) EQUITY:
Series A Convertible Preferred Stock, $.01 par,
5,000,000 authorized, none, 20,000, and 20,000
shares issued and outstanding, respectively. ................. -- 1,000,000 1,000,000
Common Stock, $.01 par, 31,200,000 shares
authorized, 1,191,182 shares issued and outstanding. 11,912 11,912 11,912
Additional paid-in capital ..................................... 1,323,725 1,966,475 1,966,475
Deficit ........................................................ (1,349,558) (2,314,483) (2,470,401)
------------ ------------ ------------
Total stockholders' (deficit) equity ......................... (13,921) 693,904 537,986
------------ ------------ ------------
Total liabilities and stockholders' (deficit) equity ......... $ 1,427,277 $ 4,975,887 $ 5,412,401
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-13
<PAGE>
COLLECTIBLES USA, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
INCEPTION FIFTY-
(JANUARY 18, TWO
1996) WEEKS
THROUGH ENDED THIRTEEN WEEKS ENDED
JANUARY 26, JANUARY 25, APRIL 27, APRIL 26,
1997 1998 1997 1998
---------------- ------------- ---- -----
(UNAUDITED)
<S> <C> <C> <C>
NET SALES ............................................ $ -- $ -- $ -- $ --
COST OF SALES ........................................ -- -- -- --
------------ ---------- -------- ---------
Gross profit ...................................... -- -- -- --
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ......... 1,337,744 907,451 50,236 101,946
------------ ---------- -------- ---------
Operating loss ....................................... (1,337,744) (907,451) (50,236) (101,946)
OTHER EXPENSE:
Interest expense .................................... 11,814 57,474 10,077 53,972
------------ ---------- -------- ---------
NET LOSS ............................................. $ (1,349,558) $ (964,925) $(60,313) $(155,918)
============ ========== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-14
<PAGE>
COLLECTIBLES USA, INC.
STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
----------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
------------ ---------- -------- ------------
<S> <C> <C> <C> <C>
BALANCE AT INCEPTION
(JANUARY 18 , 1996) ................. -- $ -- -- $ --
Initial capitalization .............. 1,016,602 10,166 -- --
Issuance of management shares ....... 174,580 1,746 -- --
Net loss ............................ -- -- -- --
--------- ------- -- ----------
BALANCE AT JANUARY 26, 1997........... 1,191,182 11,912 -- --
Net loss ............................ -- -- -- --
Issuance of convertible preferred
stock ............................... -- -- 20,000 1,000,000
Issuance of stock options ........... -- -- -- --
Purchase of treasury stock .......... -- -- -- --
Distribution of treasury stock ...... -- -- -- --
Sponsor shares transferred to
management shares .................. -- -- -- --
--------- ------- ------ ----------
BALANCE AT JANUARY 25, 1998 .......... 1,191,182 11,912 20,000 1,000,000
--------- ------- ------ ----------
Net loss (unaudited) ................ -- -- -- --
--------- ------- ------ ----------
BALANCE AT APRIL 26, 1998
(unaudited) ......................... 1,191,182 $11,912 20,000 $1,000,000
========= ======= ====== ==========
<CAPTION>
ADDITIONAL TOTAL
PAID-IN TREASURY STOCKHOLDERS'
CAPITAL DEFICIT STOCK (DEFICIT) EQUITY
-------------- --------------- ----------- -----------------
<S> <C> <C> <C> <C>
BALANCE AT INCEPTION
(JANUARY 18 , 1996) ................. $ -- $ -- $ -- $ --
Initial capitalization .............. (10,066) -- -- 100
Issuance of management shares ....... 1,333,791 -- -- 1,335,537
Net loss ............................ -- (1,349,558) -- (1,349,558)
---------- ------------ --------- -------------
BALANCE AT JANUARY 26, 1997........... 1,323,725 (1,349,558) -- (13,921)
Net loss ............................ -- (964,925) -- (964,925)
Issuance of convertible preferred
stock ............................... -- -- -- 1,000,000
Issuance of stock options ........... 328,500 -- -- 328,500
Purchase of treasury stock .......... -- -- (2,800) (2,800)
Distribution of treasury stock ...... -- -- 2,800 2,800
Sponsor shares transferred to
management shares .................. 344,250 -- -- 344,250
---------- ------------ --------- -------------
BALANCE AT JANUARY 25, 1998 .......... 1,996,475 (2,314,483) -- 693,904
Net loss (unaudited) ................ -- (155,918) -- (159,918)
---------- ------------ --------- -------------
BALANCE AT APRIL 26, 1998
(unaudited) ......................... $1,996,475 $ (2,470,401) $ -- $ 537,986
========== ============ ========= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-15
<PAGE>
COLLECTIBLES USA, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FIFTY-TWO
FROM WEEKS THIRTEEN WEEKS ENDED
INCEPTION TO ENDED ----------------------------------
JANUARY 26, JANUARY 25, APRIL 27, APRIL 26,
1997 1998 1997 1998
---------------- -------------- -------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ....................................... $ (1,349,558) $ (964,925) $ (60,313) $ (155,918)
Non-cash compensation charge on issuance of
management shares and options ................ 1,335,537 672,750 -- --
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation ................................... -- 1,118 -- 375
Operating assets and liabilities-
Receivable from affiliate ................... (100,000) 61,000 100,000 39,000
Prepaid expenses and other current assets ... (7,500) (2,200) 7,500 --
Deferred offering costs ..................... (894,096) (3,966,603) (1,557,869) (514,469)
Accrued liabilities ......................... 586,198 2,161,785 1,149,571 (657,568)
------------ ------------ ------------ ------------
Net cash used in operating activities...... (429,419) (2,037,075) (361,111) (1,288,580)
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............ -- (7,453) (7,453) --
------------ ------------ ------------ ------------
Net cash used in investing activities ..... -- (7,453) (7,453) --
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable-
related party ................................. 855,000 679,000 -- 1,250,000
Proceeds from issuance of common stock ......... 100 -- -- --
Proceeds from issuance of preferred stock ...... -- 1,000,000 -- --
Purchase of treasury stock ..................... -- (2,800) -- --
Distribution of treasury stock ................. -- 2,800 -- --
Net cash provided by financing
activities ............................... 855,100 1,679,000 -- 1,250,000
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH ................. 425,681 (365,528) (368,564) (38,580)
CASH, beginning of period ....................... -- 425,681 425,681 60,153
------------ ------------ ------------ ------------
CASH, end of period ............................. $ 425,681 $ 60,153 $ 57,117 $ 21,573
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest .......................... $ -- $ 15,316 $ -- $ 33,779
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-16
<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 has
entered into definitive agreements to acquire seven 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), 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 and promissory notes issued 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 April 26, 1998, and for the thirteen
weeks ended April 26, 1998, 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. 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.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and notes payable.
The carrying amounts of those instruments reported in the balance sheet are
considered to be representative of their respective fair values, due to the
short-term nature of such financial instruments and the current interest rate
environment.
F-17
<PAGE>
COLLECTIBLES USA, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED )
Deferred Offering Costs
Deferred offering costs consist of accounting, legal and consulting fees. These
costs will be treated as a reduction of the Offering proceeds.
Reclassifications and Adjustments
Certain reclassifications and adjustments have been made to the prior-period
amounts to conform to current-period presentations.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
requires that a public business enterprise to report financial and descriptive
information about its reportable operating segments. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997. The
Company will adopt SFAS No. 131 in fiscal 1999.
3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
JANUARY 26, JANUARY 25,
1997 1998
------------- ------------
<S> <C> <C>
Accrued professional expenses ......... $556,992 $1,683,605
Other accrued liabilities ............. 29,206 1,064,378
-------- ----------
$586,198 $2,747,983
======== ==========
</TABLE>
4. NOTES PAYABLE-RELATED PARTY:
CEFC, which is currently owned by RGR Financial Group, LLC (RGR) 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, 1998. Upon consummation of the Offering, a portion of the principal
amounts will become due and payable immediately. Interest is being accrued,
however, 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,
1998. Upon consumation of the Offering, the principal amount will become due and
payable immediately. Interest is being accrued, however, no interest is due on
such amount in the event the Offering is consummated.
In December 1997, the Company issued to CEFC a $279,000 5% note due December 31,
1998. Upon Consummation of the Offering, the principal amount will be converted
into shares of the Company's common stock. Interest is being accrued, however,
no interest is due on such amount in the event the Offering is consummated.
In February 1998, the Company issued $1,250,000 aggregate principal amount of
its 12% note due February 28, 1999. Upon consummation of the Offering, the
aggregate principal amount of the notes will convert into a number of shares of
common stock at a price equal to 50% of the initial public offering price.
5. RELATED-PARTY TRANSACTION:
The Company has entered into a consulting agreement with each of RGR and Wasatch
Capital Corporation ("Wasatch") whereby RGR and Wasatch will act as merger and
acquisition advisory consultants 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 an initial term of one
year and three years, respectively. The Company will
F-18
<PAGE>
COLLECTIBLES USA, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED )
compensate RGR and Wasatch, as the case may be, based upon each acquisition
candidate with which an acquisition is consummated. The consideration to be paid
to RGR and Wasatch, as the case may be, upon consummation of a future
acquisition will be 3.2% of the acquisition candidate's pre-tax net income for
its most recent fiscal year.
6. STOCKHOLDERS' EQUITY:
Common Stock and Restricted Common Stock
In May 1997, Collectibles USA effected a 1,016.604-for-one stock dividend for
each share of common stock (Common Stock) then outstanding and in June 1997,
increased the number of authorized shares of Common Stock to 31,200,000 of which
1,200,000 was designated Restricted Common Stock. The effects of the Common
Stock dividend have been retroactively reflected in the financial statements and
the accompanying notes.
In connection with the organization and initial capitalization of Collectibles
USA in June 1996, the Company issued 1,016,602 shares of Common Stock (at $.10
per share prior to the stock split) to RGR, an individual who is to become a
director upon consummation of the Offering and another entity.
In November 1996, the Company issued a total of 174,580 shares of Common Stock
(at $.01 per share prior to the stock split) to certain officers of the Company.
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 estimated fair value of the shares on the date of sale, as if the
Founding Companies had been combined.
In June 1997, RGR, an individual who is to become a director upon consummation
of the Offering and another entity exchanged 959,616 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 one-tenth 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, 1999, 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.
In November 1997, RGR transferred to management 70,000 shares of Common Stock
and as of June 1998 received from a former management member 25,000 shares as to
which the Company recorded a non-recurring, non-cash compensation charge of
$344,250 representing the estimated fair value of the shares, as if the Founding
Companies had been combined.
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 dividing (X) 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
F-19
<PAGE>
COLLECTIBLES USA, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED )
Preferred Stock, (ii) into that number of shares of Common Stock determined by
dividing (X) 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
$987,500 in cash and 79,902 shares of Common Stock (based upon an assumed
initial public offering price of $8.50 per share). Upon consummation of the
Offering, the Company will record the issuance of the 79,902 shares of Common
Stock as a preferred stock dividend at the estimated fair value of $7.65 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.
Treasury Stock
In November 1997, the Company purchased 279,980 shares at the stated par value
of $0.01 per share and sold the shares to RGR at par value.
Stock Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," allows entities to
choose between fair value-based method of accounting for employee stock options
or similar equity instruments and the current intrinsic, value-based method of
accounting prescribed by Accounting Principles Board (APB) Opinion No. 25.
Companies electing to remain with the accounting in APB Opinion No. 25 must make
pro forma disclosures of net income and earnings per share as if the fair value
method of accounting had been applied. The Company will provide pro forma
disclosure of net income and earnings per share, as applicable, in the notes to
future consolidated financial statements.
1997 Long-Term Incentive Plan
During May 1997, the Board of Directors and the Company's stockholders approved
the Company's 1997 Long-Term Incentive Plan (the Plan). The maximum number of
shares of Common Stock that may be awarded pursuant to the Plan may not exceed
15% of the aggregate number of shares of Common Stock outstanding at the time of
determination which maximum will be 900,914 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.
F-20
<PAGE>
COLLECTIBLES USA, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED )
Employment Contracts
The Company has entered into employment agreements with certain officers of the
Company. If an officer's employment is terminated after the first year without
cause, the officer would be entitled to one year's compensation and the
immediate vesting of all stock 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.
Common Stock Options
In August 1997, pursuant to their employment agreements, certain officers of the
Company were granted stock options (the "$4 Options") to acquire 90,000 shares
of Common Stock at a $4.00 per share exercise price. The $4 Options are fully
vested.
Concurrent with the consummation of the Offering, certain officers and three
directors will be granted additional options to acquire 495,000 shares of Common
Stock at the initial public offering price. The additional options to management
vest over a three year period in one-third increments annually. The additional
options to the three directors become fully vested one year after the Offering.
7. ACQUISITION OF COMPANIES:
Wholly owned subsidiaries of Collectibles USA have signed definitive agreements
to acquire by merger or share exchange seven companies (the Founding Companies)
to be effective with the Offering. The companies to be acquired are 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 $7.8 million in cash and 1,761,354 shares of
Common Stock. In addition, the Company will repay $3.3 million of indebtedness,
as of April 30, 1998, of the Founding Companies.
In June 1998, 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 its designees,
upon completion of the Offering, warrants covering an aggregate of 270,000
shares of Common Stock. Such warrants are exercisable during the five-year
period commencing on the date of the prospectus relating to the Offering at an
exercise price equal to 120% of the initial public offering price. The Company
has agreed to grant certain registration rights to the holders of these
warrants.
8. SUBSEQUENT EVENT (UNAUDITED):
In May 1998, the Company issued $300,000 notes due February 28, 1999. Upon
consummation of the Offering, the aggregate principal amount will convert into a
number of shares of Common Stock at a price equal to 50% of the initial public
offering price.
F-21
<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 January 31, 1997 and 1998, and the related
statements of operations, stockholder's equity (deficit) and cash flows for the
years ended October 31, 1995 and 1996, and for the years ended January 31, 1997
and 1998. 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
January 31, 1997 and 1998, and the results of its operations and its cash flows
for the years ended October 31 1995 and1996, and for the years ended January 31,
1997 and 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 8, 1998
F-22
<PAGE>
AMERICAN ROYAL ARTS CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31,
------------------------------ APRIL 30,
1997 1998 1998
-------------- ------------- --------------
(UNAUDITED)
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash .................................................................. $ 609,523 $ 70,866 $ 146,543
Accounts receivable ................................................... 33,712 63,106 84,241
Merchandise inventories ............................................... 611,943 624,778 636,936
Prepaid expenses and other current assets ............................. 105,914 193,198 124,773
---------- ---------- ----------
Total current assets ................................................ 1,361,092 951,948 992,493
PROPERTY AND EQUIPMENT, net ............................................ 38,173 99,960 87,186
OTHER ASSETS, net ...................................................... 82,885 73,184 67,434
---------- ---------- ----------
Total assets ........................................................ $1,482,150 $1,125,092 $1,147,113
========== ========== ==========
LIABILITIES AND STOCKHOLDER'S (DEFICIT) EQUITY
CURRENT LIABILITIES:
Customer deposits ...................................................... $ 334,131 $ 334,733 $ 311,330
Accounts payable and accrued liabilities ............................... 341,254 309,627 346,102
Payable to stockholder ................................................. -- 586,000 586,000
---------- ---------- ----------
Total current liabilities ........................................... 675,385 1,230,360 1,243,432
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
Less- Treasury stock, at cost (79,166.668 shares) ..................... (145,000) (145,000) (145,000)
Retained earnings ..................................................... 950,181 38,148 47,097
---------- ---------- ----------
Total stockholder's (deficit) equity ................................ 806,765 (105,268) (96,319)
---------- ---------- ----------
Total liabilities and stockholder's (deficit) equity ................ $1,482,150 $1,125,092 $1,147,113
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
AMERICAN ROYAL ARTS CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, YEAR ENDED JANUARY 31, THREE MONTHS ENDED APRIL 30,
----------------------------- ----------------------------- ----------------------------
1995 1996 1997 1998 1997 1998
------------- ------------- ------------- ------------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
NET SALES ....................... $4,051,072 $4,121,181 $4,288,612 $4,133,318 $1,100,477 $806,489
COST OF SALES ................... 1,559,918 1,571,068 1,505,784 1,516,516 346,442 291,916
---------- ---------- ---------- ---------- ---------- --------
Gross profit ................... 2,491,154 2,550,113 2,782,828 2,616,802 754,035 514,573
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES ....................... 1,759,886 1,763,860 1,778,138 1,957,708 482,519 400,530
---------- ---------- ---------- ---------- ---------- --------
Income from operations ......... 731,268 786,253 1,004,690 659,094 271,516 114,043
INTEREST INCOME
(EXPENSE), net ................. 18,200 24,184 24,027 (14,037) 5,858 710
---------- ---------- ---------- ---------- ---------- --------
NET INCOME ...................... $ 749,468 $ 810,437 $1,028,717 $ 645,057 $ 277,374 $114,753
========== ========== ========== ========== ========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
AMERICAN ROYAL ARTS CORP.
STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
-------------------- TREASURY RETAINED STOCKHOLDER'S
SHARES AMOUNT STOCK EARNINGS EQUITY (DEFICIT)
--------- -------- -------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
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 ................................... -- -- -- 645,057 645,057
Distributions ................................ -- -- -- (1,557,090) (1,557,090)
------- ------ --------- ---------- ----------
BALANCE AT JANUARY 31, 1998 ................... 158,333 1,584 (145,000) 38,148 (105,268)
Net income (unaudited) ....................... -- -- -- 114,753 114,753
Distributions (unaudited) .................... -- -- -- (105,804) (105,804)
------- ------ --------- ---------- ----------
BALANCE AT APRIL 30, 1998 (unaudited) ......... 158,333 $1,584 $(145,000) $ 47,097 $ (96,319)
======= ====== ========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
AMERICAN ROYAL ARTS CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 31, JANUARY 31,
-------------------------- -------------------------------
1995 1996 1997 1998
------------- ------------ --------------- ---------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income .................................. $ 749,468 $ 810,437 $ 1,028,717 $ 645,057
Adjustments to reconcile net income to net
cash provided by operating activities--
Depreciation and amortization .............. 36,743 58,470 39,346 36,790
Changes in operating assets and
liabilities--
Accounts receivable ....................... 76,105 10,738 34,150 (29,394)
Merchandise inventories ................... (164,940) (107,448) 19,409 (12,835)
Prepaid expenses and other current
assets .................................. (10,109) (52,432) (47,213) (87,284)
Customer deposits ......................... 62,097 239,813 178,569 602
Accounts payable and accrued
liabilities ............................. 143,610 (52,882) 13,852 (31,627)
Other assets .............................. -- 2,500 2,500 (15,299)
----------- ---------- ------------- -------------
Net cash provided by operating
activities ............................. 892,974 909,196 1,269,330 506,010
----------- ---------- ------------- -------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and
equipment .................................. (8,930) (26,693) (22,403) (73,577)
Proceeds from sale of property and
equipment .................................. 1,195 -- --
----------- ------------- -------------
Net cash used in investing
activities .............................. (7,735) (26,693) (22,403) (73,577)
----------- ---------- ------------- -------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of obligations to
stockholder ............................. -- -- -- 586,000
Principal payments on long-term
obligations ............................. (92,732) (7,268) -- --
Distributions to stockholder .............. (449,629) (980,861) (1,249,986) (1,557,090)
----------- ---------- ------------- -------------
Net cash used in financing activities...... (542,361) (988,129) (1,249,986) (971,090)
----------- ---------- ------------- -------------
NET INCREASE (DECREASE) IN CASH............... 342,878 (105,626) (3,059) (538,657)
CASH, beginning of period .................... 205,112 547,990 612,582 609,523
----------- ---------- ------------- -------------
CASH, end of period .......................... $ 547,990 $ 442,364 $ 609,523 $ 70,866
=========== ========== ============= =============
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the period for interest .... $ 4,602 $ -- $ -- $ 7,289
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 30,
---------------------------
1997 1998
------------- -------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income .................................. $ 277,374 $ 114,753
Adjustments to reconcile net income to net
cash provided by operating activities--
Depreciation and amortization .............. 9,273 12,774
Changes in operating assets and
liabilities--
Accounts receivable ....................... (41,168) (21,135)
Merchandise inventories ................... 14,153 (12,158)
Prepaid expenses and other current
assets .................................. 25,525 68,425
Customer deposits ......................... 13,982 (23,403)
Accounts payable and accrued
liabilities ............................. (22,148) 36,475
Other assets .............................. -- 5,750
----------- -----------
Net cash provided by operating
activities ............................. 276,991 181,481
----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and
equipment .................................. (950) --
Proceeds from sale of property and
equipment .................................. -- --
----------- -----------
Net cash used in investing
activities .............................. (950) --
----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of obligations to
stockholder ................................. -- --
Principal payments on long-term
obligations ................................. -- --
Distributions to stockholder ................. (299,862) (105,804)
----------- -----------
Net cash used in financing activities...... (299,862) (105,804)
----------- -----------
NET INCREASE (DECREASE) IN CASH............... (23,821) 75,677
CASH, beginning of period .................... 609,523 70,866
----------- -----------
CASH, end of period .......................... $ 585,702 $ 146,543
=========== ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the period for interest .... $ -- $ 8,977
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<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 have entered 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:
Fiscal Year End
The Company's fiscal year end is October 31. To coincide with the Company's
potential acquisition by an acquiror with a 52/53 week fiscal year ending on the
last Sunday in January, the Company has been presented on a fiscal year ended on
January 31, 1997 and 1998 in addition to October 31, 1995 and 1996.
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 $258,000, $141,000, $139,000 and $278,000 for the years ended
October 31, 1995 and 1996 and for the years ended January 31, 1997 and 1998,
respectively.
F-27
<PAGE>
AMERICAN ROYAL ARTS CORP.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED )
Income Taxes
For income tax purposes, the Company and its stockholder have elected to be
treated as an S Corporation under the Internal Revenue Code and a similar
section in the state code. In accordance with the provisions of such elections,
the Company's income and losses were passed through to its stockholder;
accordingly, no provision for income taxes has been recorded.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, accounts receivable,
accounts payable and debt. The carrying amount of these financial instruments
approximates fair value due either to length of maturity or existence of
interest rates that approximate prevailing market rates.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Interim Financial Information
The interim financial statements as of April 30, 1998, and for the three months
ended April 30, 1997 and 1998, 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.
Reclassification and Adjustments
Certain reclassifications and adjustments have been made to the prior-period
amounts to conform to current-period presentations.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131"Disclosures About Segments of an Enterprise and Related Information," which
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997. The
Company will adopt SFAS No. 131 in fiscal 1999.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED JANUARY 31,
USEFUL LIVES ----------------------------
(YEAR) 1997 1998
------------- ----------- -----------
<S> <C> <C> <C>
Furniture, fixtures and equipment ......... 5-7 $ 62,332 $ 130,264
Leasehold improvements .................... 3-5 28,516 34,161
---------
90,848 164,425
Less- Accumulated depreciation ............ (52,675) (64,465)
--------- ---------
$ 38,173 $ 99,960
========= =========
</TABLE>
F-28
<PAGE>
AMERICAN ROYAL ARTS CORP.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED )
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
--------------------------
1997 1998
------------ -----------
<S> <C> <C>
Accounts payable, trade .............. $ 137,716 $162,341
Accrued vacation and payroll ......... 22,623 22,051
Accrued royalties .................... 77,618 35,006
Other ................................ 103,297 90,229
--------- --------
$ 341,254 $309,627
========= ========
</TABLE>
5. PAYABLE TO STOCKHOLDER:
During the year ended January 31, 1998, the Company made a cash distribution of
approximately $586,000 which represents the Company's estimated S Corporation
accumulated adjustment account. The Company funded 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, 1998.
6. COMMITMENTS AND CONTINGENCIES:
Lease Obligations
The Company leases its retail facility and other equipment under operating
leases expiring at various dates through December 2004. Rent expense for the
years ended October 31, 1995 and 1996, and for the years ended January 31, 1997
and 1998, was approximately $170,000, $181,000, $181,000, and $156,000,
respectively. Future minimum lease payments under noncancelable operating leases
are as follows:
<TABLE>
<S> <C>
Year ending January 31,
1999 ........................ $ 171,825
2000 ........................ 176,635
2001 ........................ 175,951
2002 and thereafter ......... 743,898
----------
$1,268,309
==========
</TABLE>
Litigation
The Company is subject to various legal actions arising in the ordinary course
of business. Management does not believe that the outcome of any such legal
action would have a material adverse effect on the Company's financial position
or results of operations.
Consignments
The Company has various consignment arrangements with certain artists to produce
and sell certain pieces of art. The consigned inventory is insured by the
Company. Under these arrangements, the Company is obligated to pay the artist a
royalty on the art sold.
Distribution Agreements
The Company maintains various distribution agreements with major studio
suppliers to purchase and distribute animation art. Some agreements contain
minimum annual purchase requirements which the Company had fulfilled as of
October 31, 1995 and 1996, and January 31, 1997 and 1998, 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. The
Company is currently negotiating a renewal of this agreement.
F-29
<PAGE>
AMERICAN ROYAL ARTS CORP.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED )
7. SIGNIFICANT SUPPLIERS:
During the year ended October 31, 1995, three suppliers accounted for 56 percent
of total inventory purchases. For the year ended October 31, 1996, and for the
year ended January 31, 1997, four suppliers accounted for 52 percent of total
inventory purchases. For the year ended January 31, 1998, four suppliers
accounted for 36 percent of total inventory purchases.
8. SUBSEQUENT EVENT (UNAUDITED):
In May 1998, the Company borrowed $39,000 from its sole shareholder to fund an S
corporation distribution of $39,000. The borrowings bear interest at an annual
rate of six percent and is payable upon the earlier of the acquisition of the
Company by Collectibles or December 31, 1998.
F-30
<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, 1996 and 1997, and the related
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended November 30, 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 Stone's Shops, Inc., as of
November 30, 1996 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended November 30, 1997, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
April 24, 1998
F-31
<PAGE>
STONE'S SHOPS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30, FEBRUARY 28,
------------------------------ -------------
1996 1997 1998
-------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................... $ 82,610 $ 383,289 $ 426,284
Merchandise inventories ................................. 2,673,712 3,427,982 3,264,608
Prepaid expenses and other current assets ............... 86,681 36,387 36,387
----------- ---------- ----------
Total current assets .................................. 2,843,003 3,847,658 3,727,279
PROPERTY AND EQUIPMENT, net .............................. 286,837 222,621 207,121
OTHER ASSETS, net ........................................ -- 81,288 81,288
----------- ---------- ----------
Total assets .......................................... $ 3,129,840 $4,151,567 $4,015,688
=========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Customer deposits ....................................... $ 25,946 $ 36,852 $ 122,575
Accounts payable and accrued liabilities ................ 1,499,985 1,846,143 1,302,488
Current maturities of long-term obligations ............. 14,400 14,400 14,400
Payable to shareholder .................................. 30,000 6,000 6,000
----------- ---------- ----------
Total current liabilities ............................. 1,570,331 1,903,395 1,445,463
LONG-TERM OBLIGATIONS, net of current maturities ......... 28,800 14,400 10,800
DEFERRED INCOME TAXES .................................... 500,455 501,941 501,941
----------- ---------- ----------
Total liabilities ..................................... 2,099,586 2,419,736 1,958,204
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 ....................................... 990,254 1,691,831 2,017,484
----------- ---------- ----------
Total shareholders' equity ............................ 1,030,254 1,731,831 2,057,484
----------- ---------- ----------
Total liabilities and shareholders' equity ............ $ 3,129,840 $4,151,567 $4,015,688
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
STONE'S SHOPS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED FEBRUARY
YEAR ENDED NOVEMBER 30, 28,
----------------------------------------------- -----------------------------
1995 1996 1997 1997 1998
-------------- -------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES .......................... $ 4,281,040 $ 4,985,549 $5,744,826 $1,845,501 $1,868,674
COST OF SALES ...................... 2,268,690 2,496,574 2,762,629 947,401 941,041
----------- ----------- ---------- ---------- ----------
Gross profit .................... 2,012,350 2,488,975 2,982,197 898,100 927,633
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ........... 1,787,457 2,117,010 1,818,203 441,996 411,124
----------- ----------- ---------- ---------- ----------
Income from operations .......... 224,893 371,965 1,163,994 456,104 516,509
OTHER INCOME (EXPENSE):
Interest (net) ..................... (10,438) (2,891) (24) (354) 1,914
Other, (net) ....................... -- -- 3,162 -- --
----------- ----------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES ......... 214,455 369,074 1,167,132 455,750 518,423
PROVISION FOR INCOME TAXES ......... 128,101 193,941 465,555 169,642 192,770
----------- ----------- ---------- ---------- ----------
NET INCOME ......................... $ 86,354 $ 175,133 $ 701,577 $ 286,108 $ 325,653
=========== =========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<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, 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 .......................... -- -- -- 701,577 701,577
----- ------ ------- ---------- ----------
BALANCE AT NOVEMBER 30, 1997 ......... 1,000 1,000 39,000 1,691,831 1,731,831
Net income (unaudited) .............. -- -- -- 325,653 325,653
----- ------ ------- ---------- ----------
BALANCE AT FEBRUARY 28, 1998
(unaudited) ......................... 1,000 $1,000 $39,000 $2,017,484 $2,057,484
===== ====== ======= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
STONE'S SHOPS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED FEBRUARY
NOVEMBER 30, 28,
---------------------------------------- ---------------------------
1995 1996 1997 1997 1998
------------- ------------ ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................. $ 86,354 $ 175,133 $ 701,577 $ 286,108 $ 325,653
Adjustments to reconcile net income to net
cash provided by operating activities-- ...............
Depreciation and amortization ......................... 55,800 63,467 81,071 15,749 19,188
Deferred income taxes ................................. 109,366 178,534 1,486 82,537 --
Loss on sale of assets ................................ -- 9,765 -- -- --
Changes in operating assets and liabilities-- .........
Merchandise inventories ............................... (540,902) (483,307) (754,270) (207,711) 163,374
Prepaid expenses and other current assets ............. (7,726) (43,943) 50,294 34,953 --
Other Assets .......................................... -- -- (81,288) -- --
Customer deposits ..................................... 5,291 7,428 10,906 (25,946) 85,723
Accounts payable and accrued liabilities .............. 443,413 182,259 346,158 (16,445) (543,655)
---------- ---------- ---------- ---------- ----------
Net cash provided by operating activities ............ 151,596 89,336 355,934 169,245 50,283
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .................... (113,260) (98,816) (16,855) (28,595) (3,688)
Proceeds from sales of property and equipment .......... - 12,575 -- -- --
---------- ---------- ---------- ---------- ----------
Net cash used in investing activities ................ (113,260) (86,241) (16,855) (28,595) (3,688)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term obligations and note
payable to shareholder ................................ - (25,400) (38,400) (3,600) (3,600)
Proceeds from issuance of long-term obligations and
loan payable to shareholder ........................... 68,600 30,000 -- -- --
---------- ---------- ---------- ---------- ----------
Net cash provided (used in) by financing
activities ......................................... 68,600 4,600 (38,400) (3,600) (3,600)
---------- ---------- ---------- ---------- ----------
NET INCREASE IN CASH ................................... 106,936 7,695 300,679 137,050 42,995
CASH AND CASH EQUIVALENTS, beginning of
period ................................................. (32,021) 74,915 82,610 82,610 383,289
CASH AND CASH EQUIVALENTS, end of period ................ $ 74,915 $ 82,610 $ 383,289 $ 219,660 $ 426,284
========== ========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for-
Interest .............................................. $ 10,438 $ 2,891 $ 3,246 $ 354 $ 761
Income taxes .......................................... - (1,238) 10,225 -- 359,553
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<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 33.3 percent, 29.6 percent and 32.1 percent of the
Company's net sales for years ended November 30, 1995, 1996 and 1997,
respectively.
The Company and its shareholders have entered 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 $145,000, $205,000, and $229,800 during the years ended November 30, 1995,
1996 and 1997, respectively.
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.
F-36
<PAGE>
STONE'S SHOPS, 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.
Interim Financial Information
The interim financial statements as of February 28, 1998, and for the three
months ended February 28, 1997 and 1998, 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.
Reclassifications and Adjustments
Certain reclassifications and adjustments have been made to the prior-period
amounts to conform to current-period presentations.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED NOVEMBER 30,
USEFUL LIVES ----------------------------
(YEAR) 1996 1997
------------- ------------ -------------
<S> <C> <C> <C>
Furniture, fixtures and equipment ......... 5-7 $ 635,770 $ 637,637
Leasehold improvements .................... 5-7 165,719 180,707
Signs ..................................... 5 15,477 15,477
Vehicles .................................. 3-5 72,073 72,073
---------- ----------
889,039 905,894
Less- Accumulated depreciation ............ (602,202) (683,273)
---------- ----------
$ 286,837 $ 222,621
========== ==========
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30,
------------------------------
1996 1997
-------------- -------------
<S> <C> <C>
Accounts payable, trade ......... $ 1,044,519 $ 912,614
Accrued liabilities ............. 419,254 475,581
Taxes payable ................... 36,212 489,948
----------- ----------
$ 1,499,985 $1,878,143
=========== ==========
</TABLE>
F-37
<PAGE>
STONE'S SHOPS, INC.
NOTES TO FINANCIAL STATEMENTS- (CONTINUED )
5. PAYABLE TO SHAREHOLDER AND LONG-TERM OBLIGATIONS:
Payable to Shareholder
The Company had borrowings from a shareholder totaling $30,000 and $6,000 at
November 30, 1996 and 1997, respectively. The borrowings are unsecured, bear no
interest and are payable upon demand.
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,
1998 ............................. $14,400
1999 ............................. 14,400
-------
$28,800
=======
</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 for income taxes for the years ended November 30, 1995, 1996 and
1997, is as follows:
<TABLE>
<CAPTION>
NOVEMBER 30,
---------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current .......... $ 18,735 $ 15,407 $464,069
Deferred ......... 109,366 178,534 1,486
--------- --------- --------
$ 128,101 $ 193,941 $465,555
========= ========= ========
</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:
<PAGE>
<TABLE>
<CAPTION>
NOVEMBER 30,
---------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Statutory federal rate ........................... 34.00% 34.00% 34.00%
Expenses not deductible for tax purposes ......... 22.55 15.38 2.50
State income taxes ............................... 3.18 3.17 3.40
------ ------ ------
59.73% 52.55% 39.90%
====== ====== ======
</TABLE>
F-38
<PAGE>
STONE'S SHOPS, INC.
NOTES TO FINANCIAL STATEMENTS- (CONTINUED )
The significant components of the deferred tax assets and liabilities at
November 30, 1995, 1996 and 1997, are as follows:
<TABLE>
<CAPTION>
NOVEMBER 30,
-----------------------------------------------
1995 1996 1997
-------------- -------------- -------------
<S> <C> <C> <C>
Deferred tax assets-
Property and equipment .................... $ (12,868) $ (16,369) $ (17,194)
State taxes ............................... 14,135 21,974 25,754
---------- ---------- ----------
Total deferred tax asset ............... 1,267 5,605 8,560
========== ========== ==========
Deferred tax liabilities-
Inventory ................................ (296,703) (468,284) (468,284)
Accruals ................................. (26,485) (37,776) (42,217)
---------- ---------- ----------
Total deferred tax liabilities ......... (323,188) (506,060) (510,501)
---------- ---------- ----------
Net deferred tax liabilities ................ $ (321,921) $ (500,455) $ (501,941)
========== ========== ==========
</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 non-cancelable 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,
1998 ............................. $ 299,946
1999 ............................. 246,696
2000 ............................. 228,946
2001 ............................. 232,696
Thereafter ....................... 369,650
----------
$1,377,934
==========
</TABLE>
Concurrent with the acquisition discussed in Note 1, 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.
Litigation
The Company is subject to various 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-39
<PAGE>
STONE'S SHOPS, INC.
NOTES TO FINANCIAL STATEMENTS- (CONTINUED )
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 the
fair market value of the lease.
9. SIGNIFICANT SUPPLIERS:
During the years ended November 30, 1995, 1996 and 1997, three suppliers
accounted for 61% percent of total inventory purchases.
F-40
<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, 1997 and 1998, and the related statements
of operations, shareholders' equity and cash flows for each of the three years
in the period ended March 31, 1998. 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, 1997 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended March 31, 1998, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 1, 1998
F-41
<PAGE>
DKG ENTERPRISES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
----------------------------
1997 1998
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash .................................................................... $ 11,274 $ 8,136
Accounts receivable ..................................................... 11,593 8,711
Merchandise inventories ................................................. 2,200,281 2,390,654
Receivable from shareholder ............................................. 21,504 29,933
Prepaid expenses and other current assets ............................... 15,833 4,830
---------- ----------
Total current assets .................................................. 2,260,485 2,442,264
---------- ----------
PROPERTY AND EQUIPMENT, net .............................................. 212,417 226,923
OTHER ASSETS ............................................................. 3,225 3,225
---------- ----------
Total assets .......................................................... $2,476,127 $2,672,412
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Customer deposits ....................................................... $ 127,800 $ 173,392
Accounts payable and accrued liabilities ................................ 561,634 537,849
Federal income taxes payable ............................................ 119,939 --
Line of credit .......................................................... 410,000 1,084,414
Current maturities of long-term obligations ............................. 32,989 --
Deferred income taxes ................................................... 8,103 14,746
---------- ----------
Total current liabilities ............................................. 1,260,465 1,810,401
LONG-TERM OBLIGATIONS, net of current maturities ......................... 346,989 --
---------- ----------
Total liabilities ..................................................... 1,607,454 1,810,401
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $1.00 par, 25,000 shares authorized, 500 shares outstanding 500 500
Retained earnings ....................................................... 868,173 861,511
---------- ----------
Total shareholders' equity ............................................ 868,673 862,011
---------- ----------
Total liabilities and shareholders' equity ............................ $2,476,127 $2,672,412
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE>
DKG ENTERPRISES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
NET SALES .................................... $2,865,249 $3,726,332 $4,752,176
COST OF SALES ................................ 1,491,639 1,732,631 2,622,227
---------- ---------- ----------
Gross profit ............................. 1,373,610 1,993,701 2,129,949
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES .................................... 1,077,684 1,521,669 2,044,521
---------- ---------- ----------
Income from operations ................... 295,926 472,032 85,428
OTHER INCOME (EXPENSE):
Interest expense ............................ (57,511) (82,311) (99,022)
Other, net .................................. 10,367 37,703 6,420
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES ............ 248,782 427,424 (7,174)
PROVISION (BENEFIT) FOR INCOME TAXES ......... 96,139 168,044 (512)
---------- ---------- ----------
NET INCOME (LOSS) ............................ $ 152,643 $ 259,380 $ (6,662)
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<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, 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 ......................... -- -- (6,662) (6,662)
--- ---- -------- --------
BALANCE AT MARCH 31, 1998 ......... 500 $500 $861,511 $862,011
=== ==== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE>
DKG ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------
1996 1997
------------ ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................................................... $ 152,643 $ 259,380
Adjustments to reconcile net income to net cash provided by (used in) operating
activities-
Depreciation ........................................................................ 41,330 48,284
Gain on sale of assets .............................................................. -- (5,684)
Changes in operating assets and liabilities-
Accounts receivable ................................................................ -- (33,097)
Merchandise inventories ............................................................ (326,323) (450,805)
Prepaid expenses and other current assets .......................................... (6,632) (6,700)
Customer deposits .................................................................. (40,103) 113,047
Accounts payable and accrued liabilities ........................................... (88,133) 311,440
Deferred income taxes .............................................................. 32,880 (68,436)
---------- -------------
Net cash provided by (used in) operating activities .............................. (234,338) 167,429
---------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .................................................. (67,012) (164,438)
Proceeds from sale of property and equipment ......................................... -- 21,933
---------- -------------
Net cash used in investing activities ............................................ (67,012) (142,505)
---------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term obligations .......................................... (507,450) (1,447,810)
Proceeds from issuance of long-term obligations and borrowings on line of credit. 809,000 1,431,000
---------- -------------
Net cash provided by (used in) financing activities .............................. 301,550 (16,810)
---------- -------------
NET INCREASE/DECREASE IN CASH ......................................................... 200 8,114
CASH, beginning of period ............................................................. 2,960 3,160
---------- -------------
CASH, end of period ................................................................... $ 3,160 $ 11,274
========== =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for-
Interest ........................................................................... $ 51,511 $ 82,311
Income taxes ....................................................................... 50,084 47,325
Non cash transactions:
Transfer of long-term obligations into line of credit .............................. $ -- $ --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
--------------
1998
--------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................................................... $ (6,662)
Adjustments to reconcile net income to net cash provided by (used in) operating
activities-
Depreciation ........................................................................ 57,822
Gain on sale of assets .............................................................. --
Changes in operating assets and liabilities-
Accounts receivable ................................................................ (5,547)
Merchandise inventories ............................................................ (190,373)
Prepaid expenses and other current assets .......................................... 11,003
Customer deposits .................................................................. 45,592
Accounts payable and accrued liabilities ........................................... (143,724)
Deferred income taxes .............................................................. 6,643
----------
Net cash provided by (used in) operating activities .............................. (225,246)
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .................................................. (72,328)
Proceeds from sale of property and equipment ......................................... --
----------
Net cash used in investing activities ............................................ (72,328)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term obligations .......................................... (735,564)
Proceeds from issuance of long-term obligations and borrowings on line of credit. 1,030,000
----------
Net cash provided by (used in) financing activities .............................. 294,436
----------
NET INCREASE/DECREASE IN CASH ......................................................... (3,138)
CASH, beginning of period ............................................................. 11,274
----------
CASH, end of period ................................................................... $ 8,136
==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for-
Interest ........................................................................... $ 99,022
Income taxes ....................................................................... 112,784
Non cash transactions:
Transfer of long-term obligations into line of credit .............................. $1,114,246
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-45
<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 63 percent, 49 percent and 55 percent of the
Company's net sales for years ended March 31, 1996, 1997 and 1998, respectively.
The Company and its shareholders have entered 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 $112,000, $180,000 and $307,000 during the years ended March
31, 1996, 1997 and 1998, respectively.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, accounts receivable,
accounts payable and debt. The carrying amount of these financial instruments
approximates fair value due either to length of maturity or existence of
interest rates that approximate prevailing market rates unless otherwise
disclosed in these financial statements.
F-46
<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.
Reclassifications and Adjustments
Certain reclassifications and adjustments have been made to the prior-period
amounts to conform to current-period presentations.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIVES
(YEARS) MARCH 31,
---------- ----------------------------
1997 1998
------------ -------------
<S> <C> <C> <C>
Furniture, fixtures and equipment ......... 5 $ 348,001 $ 414,726
Leasehold improvements .................... 5 150,222 155,825
Vehicles .................................. 5 24,290 24,290
----------
522,513 594,841
Less- Accumulated depreciation ............ (310,096) (367,918)
---------- ----------
$ 212,417 $ 226,923
========== ==========
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1997 1998
------------ -----------
<S> <C> <C>
Accounts payable, trade ................ $ 248,502 $192,776
Accrued liabilities .................... 132,000 201,750
Sales taxes and other payables ......... 181,132 143,323
--------- --------
$ 561,634 $537,849
========= ========
</TABLE>
5. LINE OF CREDIT:
Line of Credit
In February 1998 the Company refinanced existing borrowings under a bank line of
credit and long-term note of $1,114,246 into a revolving line of credit facility
with a bank. The revolving line of credit facility allows borrowings up to
$1,250,000 and bears interest at the prime rate plus 1 percent (9 percent at
March 31, 1998). The revolving line of credit is secured by the Company's assets
and the personal guarantee of a shareholder and matures on July 1, 1998.
Borrowings under the revolving line of credit were $1,084,414 at March 31, 1998.
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
F-47
<PAGE>
DKG ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS- (CONTINUED )
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 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------
1996 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
Current .......... $ 63,259 $ 236,480 $ (7,155)
Deferred ......... 32,880 (68,436) 6,643
-------- --------- --------
$ 96,139 $ 168,044 $ (512)
======== ========= ========
</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>
YEAR ENDED MARCH 31,
---------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Statutory federal rate ........................... 34.00% 34.00% 34.00%
Expenses not deductible for tax purposes ......... .61 1.21 (27.61)
State income taxes ............................... 4.03 4.10 .75
------ ------ -------
38.64% 39.31% 7.14%
====== ====== =======
</TABLE>
The significant components of the deferred tax assets and liabilities at March
31, 1996, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Deferred tax assets-
Accruals ................................ $ 16,206 $ 32,157 $ 31,999
State taxes ............................. 4,113 435 333
--------- --------- ---------
Total deferred tax assets ............ 20,319 32,592 32,332
--------- --------- ---------
Deferred tax liabilities-
Inventory ............................... (87,198) (22,814) (22,554)
Property and equipment .................. (9,660) (17,881) (24,524)
--------- --------- ---------
Total deferred tax liabilities ......... (96,858) (40,695) (47,078)
--------- --------- ---------
Net deferred tax liabilities .............. $ (76,539) $ (8,103) $ (14,746)
========= ========= =========
</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.
F-48
<PAGE>
DKG ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS- (CONTINUED )
7. COMMITMENTS AND CONTINGENCIES:
Lease Obligation
The Company leases its rental space and warehouse from a shareholder and leased
an automobile under operating leases that expire in December 1998, and January
1999, respectively. Rental expense for the years ended March 31, 1996, 1997 and
1998 was approximately $125,000, $134,000, and $173,000, respectively. The
following represents future minimum rental payments under noncancelable
operating leases:
<TABLE>
<S> <C>
Year ending March 31,
1999 .......................... $121,000
========
</TABLE>
Concurrent with the acquisition discussed in Note 1, 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.
Litigation
The Company is subject to various 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 $13,500, which approximates the fair market value of the
lease.
9. SIGNIFICANT SUPPLIERS:
During the years ended March 31, 1996, 1997 and 1998 one supplier accounted for
26 percent and two suppliers accounted for 32 percent and 35 percent,
respectively, of total inventory purchases.
F-49
<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, 1996 and 1997, and the related
statements of operations, shareholders' deficit and cash flows for each of the
three years in the period ended December 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 Elwell Stores, Inc., as of
December 31, 1996 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 7, 1998
F-50
<PAGE>
ELWELL STORES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------- --------------
1996 1997 1998
-------------- -------------- --------------
(UNAUDITED)
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash ............................................................... $ 113,084 $ 66,942 $ 47,510
Merchandise inventories ............................................ 853,733 1,094,557 1,111,117
Prepaid expenses and other current assets .......................... 2,064 14,742 12,835
---------- ---------- ----------
Total current assets ............................................. 968,881 1,176,241 1,171,462
PROPERTY AND EQUIPMENT, net ......................................... 122,756 107,260 101,428
OTHER ASSETS ........................................................ 5,375 62,902 81,200
---------- ---------- ----------
Total assets ..................................................... $1,097,012 $1,346,403 $1,354,090
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Customer deposits .................................................. $ 10,021 $ 5,719 $ 9,819
Accounts payable and accrued liabilities ........................... 634,367 813,019 687,344
Line of credit ..................................................... -- 180,000 350,724
Current maturities of long-term obligations ........................ 153,303 94,749 86,445
---------- ---------- ----------
Total current liabilities ........................................ 797,691 1,093,487 1,134,332
LONG-TERM OBLIGATIONS, net of current maturities .................... 368,333 307,749 310,052
---------- ---------- ----------
Total liabilities ................................................ 1,166,024 1,401,236 1,444,384
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT:
Common stock, $5 par, 100 shares authorized and outstanding......... 500 500 500
Additional paid-in capital ......................................... 99,275 99,275 99,275
Deficit ............................................................ (168,787) (154,608) (190,069)
---------- ---------- ----------
Total shareholders' deficit ...................................... (69,012) (54,833) (90,294)
---------- ---------- ----------
Total liabilities and shareholders' deficit ...................... $1,097,012 $1,346,403 $1,354,090
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE>
ELWELL STORES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------- -------------------------
1995 1996 1997 1997 1998
------------- ------------- ------------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES ................................ $1,838,788 $2,492,809 $2,725,129 $ 581,159 $ 623,011
COST OF SALES ............................ 1,101,758 1,301,468 1,464,580 322,780 340,234
---------- ---------- ---------- --------- ---------
Gross profit .......................... 737,030 1,191,341 1,260,549 258,379 282,777
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ................................ 628,543 934,764 943,686 262,120 237,695
---------- ---------- ---------- --------- ---------
Income (loss) from operations ......... 108,487 256,577 316,863 (3,741) 45,082
OTHER INCOME (EXPENSE):
Interest expense ........................ (41,058) (48,826) (51,574) (10,921) (15,040)
Other, net .............................. (95) (11,520) 174 90 --
---------- ---------- ---------- --------- ---------
NET INCOME (LOSS) ........................ $ 67,334 $ 196,231 $ 265,463 $ (14,572) $ 30,042
========== ========== ========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE>
ELWELL STORES, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------------- PAID-IN SHAREHOLDERS'
SHARES AMOUNTS CAPITAL DEFICIT DEFICIT
-------- --------- ------------ -------------- --------------
<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 ................................... -- -- -- 265,463 265,463
Distributions ................................ -- -- -- (251,284) (251,284)
--- ---- ------- ---------- ----------
BALANCE AT DECEMBER 31, 1997 .................. 100 500 99,275 (154,608) (54,833)
Net income (unaudited) ....................... -- -- -- 30,042 30,042
Distributions (unaudited) .................... -- -- -- (65,503) (65,503)
--- ---- ------- ---------- ----------
BALANCE AT MARCH 31, 1998 (unaudited) ......... 100 $500 $99,275 $ (190,069) $ (90,294)
=== ==== ======= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE>
ELWELL STORES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
------------- ------------ -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................... $ 67,334 $ 196,231 $ 265,463
Adjustments to reconcile net income to net cash provided
by operating activities-
Depreciation and amortization ................................. 31,283 39,168 30,823
Loss on sale of assets ........................................ -- 11,880 --
Changes in operating assets and liabilities- ..................
Merchandise inventories ...................................... (113,546) (343,379) (240,824)
Prepaid expenses and other current assets .................... (1,541) 1,893 (12,678)
Customer deposits ............................................ -- 10,021 (4,302)
Accounts payable and accrued liabilities ..................... 120,475 217,504 178,652
Other assets ................................................. (1,707) 1,822 (57,527)
----------- ---------- -----------
Net cash provided by (used in) operating activities. 102,298 135,140 159,607
----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............................. (120,475) (63,420) (15,327)
Proceeds from sale of property and equipment .................... 15,884 34,500 --
----------- ---------- -----------
Net cash used in investing activities ....................... (104,591) (28,920) (15,327)
----------- ---------- -----------
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) (119,138)
Borrowings (payments on line-of-credit), net .................... -- -- 180,000
Distributions to shareholders ................................... (99,476) (158,071) (251,284)
----------- ---------- -----------
Net cash provided by (used in) financing activities. 39,356 (62,542) (190,422)
----------- ---------- -----------
NET INCREASE (DECREASE) IN CASH .................................. 37,063 43,678 (46,142)
CASH, beginning of period ........................................ 32,343 69,406 113,084
----------- ---------- -----------
CASH, end of period .............................................. $ 69,406 $ 113,084 $ 66,942
=========== ========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest ........................ $ 41,058 $ 48,826 $ 53,830
Non cash transactions:
Transfer of long-term obligations into line of credit ......... $ -- $ -- $ 180,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1997 1998
------------- -------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................... $ (14,572) $ 30,042
Adjustments to reconcile net income to net cash provided
by operating activities-
Depreciation and amortization ................................. 5,403 5,832
Loss on sale of assets ........................................ -- --
Changes in operating assets and liabilities- ..................
Merchandise inventories ...................................... (17,414) (16,560)
Prepaid expenses and other current assets .................... 552 1,907
Customer deposits ............................................ 2,471 4,100
Accounts payable and accrued liabilities ..................... (46,760) (125,675)
Other assets ................................................. (2,967) (18,298)
--------- -----------
Net cash provided by (used in) operating activities. (73,287) (118,652)
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............................. -- --
Proceeds from sale of property and equipment .................... -- --
--------- -----------
Net cash used in investing activities ....................... -- --
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term obligations ................. 150,000 --
Principal payments on long-term obligations ..................... (13,899) (6,001)
Borrowings (payments on line-of-credit), net .................... -- 170,724
Distributions to shareholders ................................... (69,599) (65,503)
--------- -----------
Net cash provided by (used in) financing activities. 66,502 99,220
--------- -----------
NET INCREASE (DECREASE) IN CASH .................................. (6,785) (19,432)
CASH, beginning of period ........................................ 113,084 66,942
--------- -----------
CASH, end of period .............................................. $ 106,299 $ 47,510
========= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest ........................ $ 10,921 $ 12,483
Non cash transactions:
Transfer of long-term obligations into line of credit ......... $ -- $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<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, 31 percent and 32 percent of the
Company's net sales for the years ended December 31, 1995, 1996 and 1997,
respectively.
The Company and its shareholders have entered 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.
Prior to the acquisition, the Company will distribute certain assets to the
shareholders, consisting of automobiles with a total net carrying value of
approximately $19,100 as of December 31, 1997. Had these transactions been
recorded at December 31, 1997, the effect on the accompanying balance sheet
would be a decrease in assets of approximately $19,100, liabilities of $12,900
and shareholders' equity of $6,200.
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 $179,000 during the years ended
December 31, 1995, 1996 and 1997, respectively.
F-55
<PAGE>
ELWELL STORES, INC.
NOTES TO FINANCIAL STATEMENTS- (CONTINUED )
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 payable and debt.
The carrying amount of these financial instruments approximates fair value due
either to length of maturity or existence of interest rates that approximate
prevailing market rates.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Interim Financial Information
The interim financial statements as of March 31, 1998, and for the three months
ended March 31, 1997 and 1998, 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.
Reclassifications and Adjustments
Certain reclassifications and adjustments have been made to the prior-period
amounts to conform to current-period presentations.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
(YEARS) 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Furniture, fixtures and equipment ......... 7 $ 116,046 $ 128,244
Leasehold improvements .................... 14 60,442 63,572
Vehicles .................................. 5 47,832 47,831
---------- ----------
224,320 239,647
Less- Accumulated depreciation ............ (101,564) (132,387)
---------- ----------
$ 122,756 $ 107,260
========== ==========
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Accounts payable, trade .......... $512,982 $687,547
Accrued liabilities .............. 99,000 125,472
Other ............................ 22,385 --
-------- --------
$634,367 $813,019
========= =========
</TABLE>
F-56
<PAGE>
ELWELL STORES, INC.
NOTES TO FINANCIAL STATEMENTS- (CONTINUED )
5. LONG-TERM OBLIGATIONS:
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Bank term loans due in monthly installments through November 2000, including
interest ranging from 7.5% to 10% ............................................. $ 39,027 $ 22,545
Note payable to bank, interest at 10.5%, principal and interest due May 1998 ... 99,650 37,700
Bank term loan due in monthly installments, including interest at 8.25%, through
April 2004 .................................................................... 382,959 342,253
-------- --------
521,636 402,498
Less- Current maturities ....................................................... 153,303 94,749
Long-term obligations, net of current maturities ............................ $368,333 $307,749
======== ========
</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 May 1998 is unsecured.
The Company maintained a $180,000 line of credit expiring in August 1998. There
were no borrowings on the line of credit as of December 31, 1996 and $180,000 of
borrowings as of December 31, 1997. In February 1998, the Company paid off the
existing line and established a $500,000 line of credit with the same bank. The
Company had borrowings of $351,000 as of March 31, 1998 (unaudited). The
borrowings are collateralized by the personal guarantees of the Company's
shareholders.
Scheduled principal maturities of long-term obligations as of December 31, 1997,
are as follows:
<TABLE>
<S> <C>
Year ending December 31,
1998 ............................. $ 94,749
1999 ............................. 53,188
2000 ............................. 52,760
2001 ............................. 55,061
Thereafter ....................... 146,740
--------
$402,498
========
</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, 1996 and 1997, was approximately $72,000, $94,000
and $108,000, respectively. Future minimum lease payments under noncancelable
operating leases are as follows.
<TABLE>
<S> <C>
Year ending December 31,
1998 ............................. $109,183
1999 ............................. 109,926
2000 ............................. 80,010
2001 ............................. 79,803
Thereafter ....................... 82,995
--------
$461,917
========
</TABLE>
Concurrent with the acquisition discussed in Note 1, 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.
Litigation
The Company is subject to various 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-57
<PAGE>
ELWELL STORES, INC.
NOTES TO FINANCIAL STATEMENTS- (CONTINUED )
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, 1996 and 1997, three suppliers
accounted for 68, 68 and 49 percent respectively of total inventory purchases.
F-58
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Animation U.S.A., Inc.:
We have audited the accompanying balance sheets of Animation U.S.A., Inc. (a
Washington corporation), as of December 31, 1996 and 1997 and the related
statements of operations, shareholders' equity (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 audit.
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 Animation U.S.A., Inc., as of
December 31, 1996 and 1997, and the results of its operations and its cash flows
for the two years then ended, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 1, 1998
F-59
<PAGE>
ANIMATION U.S.A., INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- MARCH 31,
1996 1997 1998
------------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ........................................................... $ 4,824 $ 76,510 $ 12,696
Merchandise inventories ........................................ 321,653 312,899 299,612
Prepaid expenses and other current assets ...................... 6,994 97,438 90,812
Deferred tax asset ............................................. 25,319 13,941 13,941
---------- ---------- ----------
Total current assets ......................................... 358,790 500,788 417,061
PROPERTY AND EQUIPMENT, net ..................................... 72,176 63,954 62,129
---------- ---------- ----------
Total assets ................................................. $ 430,966 $ 564,742 $ 479,190
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Customer deposits .............................................. $ 13,775 $ 170,869 $ 59,994
Accounts payable and accrued liabilities ....................... 231,714 272,942 264,211
Federal income taxes payable ................................... 32,835 13,948 13,948
Line of credit ................................................. 72,494 109,226 105,624
Current maturities of long-term obligations .................... 38,454 -- --
---------- ---------- ----------
Total current liabilities .................................... 389,272 566,985 443,777
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
Class A common stock, no par, 1,000,000 shares authorized,
196,840 shares outstanding ................................... 85,200 192,700 192,700
Class B common stock, no par, 500,000 shares authorized
and outstanding .............................................. 107,500 -- --
Deficit ........................................................ (151,006) (194,943) (157,287)
---------- ---------- ----------
Total shareholders' equity (deficit) ......................... 41,694 (2,243) 35,413
---------- ---------- ----------
Total liabilities and shareholders' equity (deficit) ......... $ 430,966 $ 564,742 $ 479,190
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE>
ANIMATION U.S.A., INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
--------------------------- -----------------------
1996 1997 1997 1998
------------- ------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES .................................... $1,716,410 $1,319,162 $340,760 $344,236
COST OF SALES ................................ 840,283 595,974 136,622 128,554
---------- ---------- -------- --------
Gross profit ................................ 876,127 723,188 204,138 215,682
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES .................................... 845,100 762,330 187,556 149,792
---------- ---------- -------- --------
Income (loss) from operations ............... 31,027 (39,142) 16,582 65,890
INTEREST EXPENSE ............................. 9,349 13,903 2,685 2,913
---------- ---------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES ............ 21,678 (53,045) 13,897 62,977
PROVISION (BENEFIT) FOR INCOME TAXES ......... 8,944 (18,143) 5,268 23,931
---------- ---------- -------- --------
NET INCOME (LOSS) ............................ $ 12,734 $ (34,902) $ 8,629 $ 39,046
========== ========== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-61
<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
Conversion of Class B common stock to
Class A common stock .................. 107,500 (500,000) (107,500) -- --
Net loss ................................ -- -- -- -- (34,902) (34,902)
Distributions ........................... -- -- -- -- (9,035) (9,035)
------- -------- -------- ---------- ---------- ---------
BALANCE AT DECEMBER 31, 1997 ............. 196,840 192,700 -- -- (194,943) (2,243)
------- -------- -------- ---------- ---------- ---------
Net income (unaudited ................... -- -- -- -- 39,046 39,046
Distributions (unaudited) ............... -- -- -- -- (1,390) (1,390)
------- -------- -------- ---------- ---------- ---------
BALANCE AT MARCH 31, 1998
(unaudited) ............................. 196,840 $192,700 -- $ -- $ (157,287) $ 35,413
======= ======== ======== ========== ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE>
ANIMATION U.S.A., INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
---------------------------- ----------------------------
1996 1997 1997 1998
------------ ------------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ......................................... $ 12,734 $ (34,902) $ 8,629 $ 39,046
Adjustments to reconcile net income (loss) to net cash
used in operating activities-
Depreciation ............................................ 12,057 8,222 3,014 1,825
Changes in operating assets and liabilities-
Accounts receivable .................................... -- -- (16,360) --
Merchandise inventories ................................ (19,765) 8,754 38,772 13,287
Prepaid expenses and other current assets .............. -- (90,444) -- 6,626
Deferred tax asset ..................................... (6,932) 11,378 (4,894) --
Customer deposits ...................................... (19,754) 157,094 8,609 (110,875)
Accounts payable and accrued liabilities ............... (55,882) 41,228 (188) (8,731)
Federal income taxes payable ........................... 6,691 (18,887) 1,887 --
--------- --------- --------- ----------
Net cash (used in) provided by operating activities. (70,851) 82,443 39,469 (58,822)
--------- --------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ....................... (28,862) -- -- --
--------- --------- --------- ----------
Net cash used in investing activities .................. (28,862) -- -- --
--------- --------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term obligations ............... (18,860) (38,454) -- --
Borrowings (repayments) on line of credit, net ............ 46,454 36,732 14,520 (3,602)
Distributions to shareholders ............................. (8,964) (9,035) (2,086) (1,390)
--------- --------- --------- ----------
Net cash provided by (used in) financing activities..... 18,630 (10,757) 12,434 (4,992)
--------- --------- --------- ----------
NET (DECREASE) INCREASE IN CASH ............................ (81,083) 71,686 51,903 (63,814)
CASH, beginning of period .................................. 85,907 4,824 4,824 76,510
--------- --------- --------- ----------
CASH, end of period ........................................ $ 4,824 76,510 56,727 $ 12,696
========= ========= ========= ==========
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 13,909 1,888 2,913
---------
Income taxes ............................................ 2,253 6,900 -- --
--------- --------- --------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-63
<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 have entered 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.
Prior to 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 $17,000 as of December 31, 1997. Had
these transactions been recorded at December 31, 1997, the effect on the
accompanying balance sheet would be a decrease in liabilities of $13,000 and
shareholders' equity of $4,000.
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 and $13,000 for the years ended December 31, 1996 and 1997,
respectively.
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.
F-64
<PAGE>
ANIMATION U.S.A., 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.
Interim Financial Information
The Interim financial statements as of March 31, 1998, and for the three months
ended March 31, 1997 and 1998, 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.
Reclassifications and Adjustments
Certain reclassifications and adjustments have been made to the prior-period
amounts to conform to current-period presentations.
3. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 1996 and 1997, consist of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES --------------------------
(YEARS) 1996 1997
------------- ------------ ------------
<S> <C> <C> <C>
Vehicle ............................... 7 $ 25,707 $ 25,707
Furniture, fixtures and equipment ..... 5-10 74,158 74,158
Leasehold improvements ................ 10 18,935 18,935
--------- ---------
118,800 118,800
Less-Accumulated depreciation ......... (46,624) (54,846)
--------- ---------
$ 72,176 $ 63,954
========= =========
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts payable and accrued liabilities at December 31, 1996 and 1997, consist
of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
---------- ----------
<S> <C> <C>
Accounts payable, trade ......... $ 69,482 $ 85,633
Accrued compensation ............ 150,000 165,105
Other ........................... 12,232 22,204
-------- --------
$231,714 $272,942
======== ========
</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 $109,000 at December 31, 1996 and 1997,
respectively. The line of credit is secured by the Company's inventory.
F-65
<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 (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
--------- ------------
<S> <C> <C>
Current .................. $8,944 $ (6,765)
Deferred ................. -- (11,378)
------ ---------
$8,944 $ (18,143)
====== =========
</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>
DECEMBER 31,
-----------------------
1996 1997
---------- ----------
<S> <C> <C>
Statutory federal rate ........................... 34.0% 34.0%
Expenses not deductible for tax purposes ......... 5.0 (1.7)
State income taxes ............................... 2.3 1.8
---- ----
41.3% 34.1%
==== ====
</TABLE>
The significant components of the deferred tax asset are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ---------
<S> <C> <C>
Deferred tax asset--
Accrued liabilities .............. $14,421 $ 3,043
Other ............................ 10,898 10,898
------- -------
Total deferred tax asset ......... $25,319 $13,941
======= =======
</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-66
<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 for the years ended
December 31, 1996 and 1997 was approximately $133,000 and $154,000,
respectively. Future minimum lease payments under noncancelable operating leases
are as follows:
<TABLE>
<S> <C>
Year ending December 31,
1998 ..................... $46,000
1999 ..................... 7,000
-------
$53,000
=======
</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
which expired May 1, 1998.
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, 1997, 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 years ended December 31, 1996 and 1997, four suppliers accounted for
58 percent of total inventory purchases.
F-67
<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, 1996 and 1997, and the related
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 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 Filmart Productions Inc. as of
December 31, 1996 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 15, 1998
F-68
<PAGE>
FILMART PRODUCTIONS INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- MARCH 31,
1996 1997 1998
-------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ............................................................... $ 76,758 $ 27,408 $ 2,096
Accounts receivable ................................................ 13,116 26,224 76,223
Barter receivables ................................................. 199,930 363,590 347,260
Merchandise inventories ............................................ 375,258 451,967 441,821
Prepaid expenses and other current assets .......................... 37,153 250 927
Prepaid advertising from barter transactions ....................... 285,000 420,000 445,750
Advances to shareholder ............................................ 176,722 123,881 115,377
----------- ---------- ----------
Total current assets ............................................. 1,163,937 1,413,320 1,429,454
PROPERTY AND EQUIPMENT, net ......................................... 36,521 21,607 17,900
OTHER ASSETS ........................................................ 7,172 135,608 135,608
----------- ---------- ----------
Total assets ..................................................... $ 1,207,630 $1,570,535 $1,582,962
=========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Customer deposits .................................................. $ 32,778 $ 1,345 $ 3,513
Accounts payable and accrued liabilities ........................... 129,747 194,168 186,211
Payable to shareholder ............................................. 25,444 -- --
----------- ---------- ----------
Total current liabilities ........................................ 187,969 195,513 189,724
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par, 200 shares authorized, 100 shares outstanding. -- -- --
Retained earnings .................................................. 1,019,661 1,375,022 1,393,238
----------- ---------- ----------
Total shareholders' equity ....................................... 1,019,661 1,375,022 1,393,238
----------- ---------- ----------
Total liabilities and shareholders' equity ....................... $ 1,207,630 $1,570,535 $1,582,962
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-69
<PAGE>
FILMART PRODUCTIONS INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
----------------------------------------------- ---------------------------
1995 1996 1997 1997 1998
-------------- -------------- ------------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES ......................... $ 1,053,089 $ 1,445,848 $1,323,867 $231,456 $209,059
COST OF SALES ..................... 511,369 497,920 432,403 113,731 79,879
----------- ----------- ---------- -------- --------
Gross profit ................... 541,720 947,928 891,464 117,725 129,180
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES .......... 492,577 539,178 541,459 163,604 118,074
----------- ----------- ---------- -------- --------
Income from operations ......... 49,143 408,750 350,005 (45,879) 11,106
OTHER INCOME (EXPENSE):
Interest, net .................... (4,619) (1,056) (4,638) 374 (1,124)
Other, net ....................... 74,350 278,866 114,675 56,250 31,250
----------- ----------- ---------- -------- --------
NET INCOME ........................ $ 118,874 $ 686,560 $ 460,042 $10,745 $41,232
=========== =========== ========== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-70
<PAGE>
FILMART PRODUCTIONS INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- RETAINED SHAREHOLDERS'
SHARES AMOUNTS EARNINGS EQUITY
-------- --------- ------------- --------------
<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 ................................... -- -- 460,042 460,042
--- ----
Distributions ................................ -- -- (104,681) (104,681)
--- ---- ---------- ----------
BALANCE AT DECEMBER 31, 1997 .................. 100 1,375,022 1,375,022
---
Net income (unaudited) ....................... -- -- 41,232 41,232
Distributions (unaudited) .................... -- -- (23,016) (23,016)
--- ---- ---------- ----------
BALANCE AT MARCH 31, 1988 (unaudited) ......... 100 $ -- $1,393,238 $1,393,238
=== ==== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-71
<PAGE>
FILMART PRODUCTIONS INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................................... $ 118,874 $ 686,560 $ 460,042
Adjustments to reconcile net income to net cash provided by
(used in) operating activities-
Depreciation and amortization ................................. 17,919 16,226 15,625
Barter receivables ............................................ (8,788) (191,142) (163,660)
Changes in operating assets and liabilities-
Accounts receivable .......................................... (17,073) 3,957 (13,108)
Merchandise inventories ...................................... (18,935) 21,040 (76,709)
Prepaid expenses and other current assets .................... (1,412) (35,741) 36,903
Prepaid advertising from barter transactions ................. (60,000) (225,000) (135,000)
Other assets ................................................. (5,350) (1,422) (128,436)
Advances to shareholder ...................................... -- (176,722) 52,841
Customer deposits ............................................ 53,619 (20,841) (31,433)
Accounts payable and accrued liabilities ..................... (30,947) 54,244 64,421
--------- ---------- -----------
Net cash provided by (used in) operating activities ........ 47,907 131,159 81,486
--------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............................ (15,989) (150) (711)
Proceeds from sale of property and equipment ................... -- 300 --
--------- ---------- -----------
Net cash provided by (used in) investing activities ........ (15,989) 150 (711)
--------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of payable to shareholder ................ 40,625 -- --
Principal payments on payable to shareholder .................... (20,624) (84,532) (25,444)
Distributions to shareholders ................................... (50,853) -- (104,681)
--------- ---------- -----------
Net cash used in financing activities ...................... (30,852) (84,532) (130,125)
--------- ---------- -----------
NET INCREASE (DECREASE) IN CASH ................................. 1,066 46,777 (49,350)
CASH, beginning of period ....................................... 28,915 29,981 76,758
--------- ---------- -----------
CASH, end of period ............................................. $ 29,981 $ 76,758 $ 27,408
========= ========== ===========
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 6,633
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-------------------------
1997 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................................... $ 10,745 $ 41,232
Adjustments to reconcile net income to net cash provided by
(used in) operating activities-
Depreciation and amortization ................................. 4,056 3,707
Barter receivables ............................................ (8,183) 16,330
Changes in operating assets and liabilities-
Accounts receivable .......................................... (7,086) (49,999)
Merchandise inventories ...................................... (2,592) 10,146
Prepaid expenses and other current assets .................... (1,510) (677)
Prepaid advertising from barter transactions ................. (56,250) (25,750)
Other assets ................................................. (750) --
Advances to shareholder ...................................... (6,004) 8,504
Customer deposits ............................................ (24,940) 2,168
Accounts payable and accrued liabilities ..................... 18,075 (7,957)
---------- ----------
Net cash provided by (used in) operating activities ........ (74,439) (2,296)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............................ -- --
Proceeds from sale of property and equipment ................... -- --
---------- ----------
Net cash provided by (used in) investing activities ........ -- --
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of payable to shareholder ................ -- --
Principal payments on payable to shareholder .................... -- --
Distributions to shareholders ................................... -- (23,016)
---------- ----------
Net cash used in financing activities ...................... -- (23,016)
---------- ----------
NET INCREASE (DECREASE) IN CASH ................................. (74,439) (25,312)
CASH, beginning of period ....................................... 76,758 27,408
---------- ----------
CASH, end of period ............................................. $ 2,319 $ 2,096
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Capital contribution from forgiveness of obligation from
related party ................................................. $ -- $ --
Cash paid during the period for interest ....................... 135 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-72
<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 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 have entered 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 $364,000, and
$520,000, as of December 31, 1996, 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 $248,000 and $250,000 of art sales through the barter
companies and received approximately $37,000 and $60,000 of goods and services
through the barter companies during the years ended December 31, 1996 and 1997,
respectively. As of December 31, 1996 and 1997, the Company had barter
receivables of approximately $200,000 and $364,000, respectively.
During 1995, the Company entered into a two-year agreement with a third party to
provide consulting services in exchange for advertising. During 1996 and 1997,
the Company recognized $225,000, and $114,675, respectively, of consulting
revenue as other income. At December 31, 1996 and 1997, the Company had prepaid
advertising expenses of $285,000, $420,000, respectively, related to this
agreement. The right to receive advertising under this agreement begins to
expire in 2000. The agreement expires in August, 1998.
F-73
<PAGE>
FILMART PRODUCTIONS INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED )
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 $70,000, during the years ended December
31, 1995, 1996 and 1997, respectively.
Income Taxes
For income tax purposes, the Company and its shareholders have elected to be
treated as an S Corporation under the Internal Revenue Code and a similar
section in the state code. In accordance with the provisions of such elections,
the Company's income and losses were passed through to its shareholders;
accordingly, no provision for income taxes has been recorded.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, accounts receivable,
accounts payable and debt. The carrying amount of these financial instruments
approximates fair value due either to length of maturity or existence of
interest rates that approximate prevailing market rates.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Interim Financial Information
The interim financial statements as of March 31, 1998, and for the three months
ended March 31, 1997 and 1998, 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.
Reclassifications and Adjustments
Certain reclassifications and adjustments have been made to the prior-period
amounts to conform to current-period presentations.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
(YEARS) 1996 1997
------------- ----------- ------------
<S> <C> <C> <C>
Furniture, fixtures and equipment ......... 5-7 $ 92,951 $ 93,662
Less- Accumulated depreciation ............ (56,430) (72,055)
--------- ---------
$ 36,521 $ 21,607
========= =========
</TABLE>
F-74
<PAGE>
FILMART PRODUCTIONS INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED )
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
1996 1997
------------ -----------
<S> <C> <C>
Accounts payable, trade .......... $ 113,466 $175,165
Taxes payable .................... 6,354 14,076
Other ............................ 9,927 4,927
--------- --------
$ 129,747 $194,168
========= ========
</TABLE>
5. PAYABLE TO SHAREHOLDER:
The Company had borrowings from a shareholder totaling $25,444 at December 31,
1996. The borrowings were unsecured, interest-bearing and payable upon demand.
The borrowings accrued interest at 4 percent annually. At December 31, 1996
accrued interest on the borrowings was $1,056. In 1997, the payable and accrued
interest was paid by the Company.
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, 1995, 1996 and 1997 was
approximately $59,000, $68,000, and $58,000 respectively. Future minimum lease
payments under noncancelable operating leases are as follows:
<TABLE>
<S> <C>
Year ending December 31,
1998 ............................. $23,000
1999 ............................. 17,000
-------
$40,000
=======
</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, 1996 and 1997, respectively.
7. SALES TO SIGNIFICANT CUSTOMERS:
During 1996 and 1997, 14 percent and 25 percent of the Company's net sales were
to one customer. During 1995, no customer accounted for more than 10 percent of
total sales.
F-75
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN
SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH
DATE.
----------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary .............................. 3
Risk Factors .................................... 10
The Company ..................................... 18
Use of Proceeds ................................. 20
Dividend Policy ................................. 20
Dilution ........................................ 21
Capitalization .................................. 22
Selected Financial Data ......................... 23
Management's Discussion and Analysis of Financial
Condition and Results of Operations .......... 25
Business ........................................ 38
Management ...................................... 47
Certain Transactions ............................ 55
Principal Stockholders .......................... 59
Description of Capital Stock .................... 60
Shares Eligible for Future Sale ................. 63
Underwriting .................................... 65
Legal Matters ................................... 67
Experts ......................................... 67
Additional Information .......................... 67
Index to Financial Statements ................... F-1
</TABLE>
----------------------------------------
UNTIL _______, 1998 (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.
================================================================================
================================================================================
2,700,000 SHARES
[COLLECTIBLES USA LOGO]
COMMON STOCK
-----------------------------
PROSPECTUS
-----------------------------
CRUTTENDEN ROTH
INCORPORATED
, 1998
================================================================================
<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 Initial Listing Fee) are
estimated.
<TABLE>
<S> <C>
SEC Registration Fee .................................... $ 11,291
NASD Filing Fee ......................................... 4,226
Nasdaq National Market Initial Listing Fee .............. 66,875
Blue Sky Fees and Expenses .............................. 10,000
Printing and Engraving Costs ............................ 435,000
Legal Fees and Expenses ................................. 1,290,000
Accounting Fees and Expenses ............................ 3,750,000
Transfer Agent and Registrar Fees and Expenses .......... 10,000
Representative's Financial Advisory Fee ................. 450,000
Miscellaneous ........................................... 172,608
----------
Total ................................................ $6,200,000
==========
</TABLE>
- ------------
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.
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.
II-1
<PAGE>
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, pursuant to an amendment, December 31, 1998 (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 and December 1997, CEFC issued to accredited investors
$400,000 principal amount of 5.0% convertible subordinated notes due, pursuant
to an amendment, December 31, 1998 and $279,000 principal amount of 5.0%
convertible subordinated notes due December 31, 1998 (the "1997 Notes," and
together with the 1996 Notes, the "Notes"). $400,000 of 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 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.
On August 6, 1996, the Company sold a $300,000 5% note due, pursuant to an
amendment, December 31, 1998 (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 itends 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, pursuant
to an amendment, December 31, 1998 (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, pursuant to an
amendment, December 31, 1998 (the "CEFC Note-3") and in December 1997, the
Company sold a $279,000 5% note due December 31, 1998 (the "CEFC Note-4," and,
together with the CEFC Note-1, CEFC Note-2 and the CEFC Note-3, the "CEFC
Notes") to CEFC. Upon consummation of the Offering, the principal amount of the
CEFC Note-3 and CEFC Note-4 will become due and payable immediately. No interest
is payable on the CEFC Note-3 and CEFC Note-4 in the event the Offering is
consummated. The Company intends to repay the CEFC Note-3 and CEFC Note-4 with a
portion of the proceeds of the Offering.
In February 1998 and May 1998, the Company sold an aggregate principal
amount of $1,550,000 12% notes (the "CUSA Notes"). The CUSA Notes become due and
payable on February 28, 1999. In the event the Offering is consummated, the CUSA
Notes automatically will convert into a number of shares of Common Stock, which
number shall be determined by dividing the aggregate amount of CUSA Notes by an
amount equal to 50% of the initial public offering price. $700,000 of the CUSA
Notes were issued to entities affiliated with Michael A. Baker and Paul T.
Shirley, both of whom will become directors of the Company upon consummation of
the Offering.
II-2
<PAGE>
The proceeds of the CEFC Notes and the CUSA Notes were used by the Company
to pay various expenses incurred in connection with its efforts to complete the
Acquisitions and effect the Offering.
In May 1997, Collectibles USA issued 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 dividing (X) 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 dividing (X) 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 79,902 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 June 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)
2.2 Amendment No. 1, dated as of October 15, 1997, together with
Amendment No. 2, dated as of November 28, 1997, to Agreement and Plan
of Organization, dated as of May 9, 1997, by and among Collectibles
USA, Inc., Filmart Acquisition Corp., Filmart Productions and the
stockholders named therein.
2.3 Amendment No. 1, dated as of October 15, 1997, together with
Amendment No. 2, dated as of November 28, 1997, to Agreement and Plan
of Organization, dated as of May 9, 1997, by and among Collectibles
USA, Inc., ARA Acquisition Corp., American Royal Arts Corp., and the
stockholders named therein.
2.4 Amendment No. 1, dated as of October 15, 1997, together with
Amendment No. 2, dated as of November 28, 1997, to Agreement and Plan
of Organization, dated as of May 9, 1997, by and among Collectibles
USA, Inc., Stone's Acquisition Corp., Stone's Shops Inc., and the
stockholders named therein.
2.5 Amendment No. 1, dated as of October 15, 1997, together with
Amendment No. 2, dated as of November 28, 1997, to Agreement and Plan
of Organization, dated as of May 9, 1997, by and among Collectibles
USA, Inc., St. George Acquisition Corp., St. George, Inc., and the
stockholders named therein.
2.6 Amendment No. 1, dated as of October 15, 1997, together with
Amendment No. 2, dated as of November 28, 1997, to Agreement and Plan
of Organization, dated as of May 9, 1997, by and among Collectibles
USA, Inc., Elwell Acquisition Corp., Elwell Stores, Inc., and the
stockholders named therein.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------------ -----------------------------------------------------------------
<S> <C>
2.7 Amendment No. 1, dated as of November 28, 1997, to Agreement and
Plan of Organization, dated as of May 9, 1997, by and among
Collectibles USA, Inc., DKG Acquisition Corp., DKG Enterprises,
Inc., and the stockholders named therein.
2.8 Amendment No. 1, dated as of November 28, 1997, to Agreement and
Plan of Organization, dated as of May 9, 1997, by and among
Collectibles USA, Inc., Animation USA Acquisition Corp.,
Animation USA, Inc., and the stockholders named therein.
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, together with Amendment No. 1 dated May 31, 1998
10.5 Form of Representative's Warrant
10.6* Agreement, dated as of June 1998, between the Company and
SourceNet Solutions, Inc.
10.7 Employment Agreement, dated as of August 11, 1997, between the
Company and Neil J. DePascal, Jr.
together with Amendment No. 1 dated May 28, 1998
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 and
Addendum No. 2 dated March 16, 1998
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 together with Letter Agreement dated as of
June 1998
10.12 Employment Agreement, dated August 25, 1997, between the Company
and Shonnie Bilin together with Amendment No. 1 dated May 28,
1998
10.13** Trademark License Agreement, dated June 15, 1987, between
Hallmark Cards Incorporated and Reef's Hallmark Shop
10.14* Agreement, dated as of April 1998, between the Company and
Administaff, Inc.
10.15 Assignment and License Agreement, dated as of April 28, 1982, by
and among Hallmark Cards, Inc. and
Stone's Shops, Inc.
10.16 Trademark Assignment and License Agreement, dated as of July 18,
1984, by and among Hallmark Cards, Inc. and Stone's Shops, Inc.
10.17 Trademark Assignment and License Agreement, dated as of August
13, 1984, by and among Hallmark Cards, Inc. and Stone's Shops,
Inc.
10.18 Trademark License Agreement, dated as of May 14, 1985, by and
among Hallmark Cards, Inc. and Stone's Shops, Inc.
10.19 Trademark Sublicense Agreement, dated as of September 1, 1992, by
and among Hallmark Marketing Corporation and Stone's Shops, Inc.
10.20 Trademark Sublicense Agreement, by and among Hallmark Marketing
Corporation and Stone's Shops, Inc.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------------- ----------------------------------------------------------------
<S> <C>
10.21 Consulting Agreement, dated as of May 31, 1998, between the
Company and Wasatch Capital Corporation
10.22 Letter Agreement, dated as of May 31, 1998, between the Company
and RGR Financial Group, LLC
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, 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 Unity Marketing
</TABLE>
- ---------
* To be filed by amendment.
** Previously filed.
(B) FINANCIAL STATEMENT SCHEDULES
Not applicable.
II-5
<PAGE>
ITEM 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in such
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance on Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it is declared effective.
(2) That for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Amendment No. 3 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 2nd day of June, 1998.
COLLECTIBLES USA, INC.
BY: /s/ Shonnie D. Bilin
--------------------------------------
Shonnie D. Bilin
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 Ronald Rafaloff, his or her true and
lawful attorney-in-fact with full power of substitution and resubstitution, for
him or her and in his or her name, place and stead, in any and all capacities
(including his or her capacity as a director and/or officer of Collectibles USA,
Inc. to sign and file any and all amendments (including post-effective
amendments) to this 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 Act of
1933, and he or she 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. 3 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/ Shonnie D. Bilin President and Chief Executive Officer June 2, 1998
----------------------- (Principal Executive Officer)
Shonnie D. Bilin
/s/ Neil J. DePascal, Jr. Chief Financial Officer June 2, 1998
----------------------- (Principal Financial and
Neil J. DePascal, Jr. Accounting Officer)
/s/ Ronald P. Rafaloff Chairman of the Board June 2, 1998
-----------------------
Ronald P. Rafaloff
</TABLE>
II-7
<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)
2.2 Amendment No. 1, dated as of October 15, 1997, together with
Amendment No. 2, dated as of November 28, 1997, to Agreement and Plan
of Organization, dated as of May 9, 1997, by and among Collectibles
USA, Inc., Filmart Acquisition Corp., Filmart Productions and the
stockholders named therein.
2.3 Amendment No. 1, dated as of October 15, 1997, together with
Amendment No. 2, dated as of November 28, 1997, to Agreement and Plan
of Organization, dated as of May 9, 1997, by and among Collectibles
USA, Inc., ARA Acquisition Corp., American Royal Arts Corp., and the
stockholders named therein.
2.4 Amendment No. 1, dated as of October 15, 1997, together with
Amendment No. 2, dated as of November 28, 1997, to Agreement and Plan
of Organization, dated as of May 9, 1997, by and among Collectibles
USA, Inc., Stone's Acquisition Corp., Stone's Shops Inc., and the
stockholders named therein.
2.5 Amendment No. 1, dated as of October 15, 1997, together with
Amendment No. 2, dated as of November 28, 1997, to Agreement and Plan
of Organization, dated as of May 9, 1997, by and among Collectibles
USA, Inc., St. George Acquisition Corp., St. George, Inc., and the
stockholders named therein.
2.6 Amendment No. 1, dated as of October 15, 1997, together with
Amendment No. 2, dated as of November 28, 1997, to Agreement and Plan
of Organization, dated as of May 9, 1997, by and among Collectibles
USA, Inc., Elwell Acquisition Corp., Elwell Stores, Inc., and the
stockholders named therein.
2.7 Amendment No. 1, dated as of November 28, 1997, to Agreement and Plan
of Organization, dated as of May 9, 1997, by and among Collectibles
USA, Inc., DKG Acquisition Corp., DKG Enterprises, Inc., and the
stockholders named therein.
2.8 Amendment No. 1, dated as of November 28, 1997, to Agreement and Plan
of Organization, dated as of May 9, 1997, by and among Collectibles
USA, Inc., Animation USA Acquisition Corp., Animation USA, Inc., and
the stockholders named therein.
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, together with Amendment No. 1 dated May 31, 1998
10.5 Form of Representative's Warrant
10.6* Agreement, dated as of June, 1998, between the Company and SourceNet
Solutions, Inc.
10.7 Employment Agreement, dated as of August 11, 1997, between the
Company and Neil J. DePascal, Jr. together with Amendment No. 1 dated
May 28, 1998
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER EXHIBIT DESCRIPTION NUMBER
- -------- -------------------------------------------------------------------- --------
<S> <C> <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 and
Addendum No. 2 dated March 16, 1998
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 together with Letter Agreement dated as of June, 1998
10.12 Employment Agreement, dated August 25, 1997, between the Company and
Shonnie Bilin together with Amendment No. 1 dated May 28, 1998
10.13** Trademark License Agreement, dated June 15, 1987, between Hallmark
Cards Incorporated and Reef's Hallmark Shop
10.14* Agreement, dated as of April, 1998, between the Company and
Administaff, Inc.
10.15 Assignment and License Agreement, dated as of April 28, 1982, by and
among Hallmark Cards, Inc. and Stone's Shops, Inc.
10.16 Trademark Assignment and License Agreement, dated as of July 18,
1984, by and among Hallmark Cards, Inc. and Stone's Shops, Inc.
10.17 Trademark Assignment and License Agreement, dated as of August 13,
1984, by and among Hallmark Cards, Inc. and Stone's Shops, Inc.
10.18 Trademark License Agreement, dated as of May 14, 1985, by and among
Hallmark Cards, Inc. and Stone's Shops, Inc.
10.19 Trademark Sublicense Agreement, dated as of September 1, 1992, by and
among Hallmark Marketing Corporation and Stone's Shops, Inc.
10.20 Trademark Sublicense Agreement, by and among Hallmark Marketing
Corporation and Stone's Shops, Inc.
10.21 Consulting Agreement, dated as of May 31, 1998, between the Company
and Wasatch Capital Corporation
10.22 Letter Agreement, dated as of May 31, 1998, between the Company and
RGR Financial Group, LLC
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, 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 Unity Marketing
</TABLE>
- ---------
* To be filed by amendment.
** Previously filed.
2,700,000 Shares
COLLECTIBLES USA, INC.
Common Stock, $.01 par value
FORM OF UNDERWRITING AGREEMENT
, 1998
CRUTTENDEN ROTH INCORPORATED
[Co-Manager]
As Representatives of the several Underwriters
named in Schedule A hereto
c/o Cruttenden Roth Incorporated
18301 Van Karman Avenue
Irvine, California 92612
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." Cruttenden Roth Incorporated
("Cruttenden"), and [Co-Manager] 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
<PAGE>
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, as amended (each, an "Agreement and
Plan of Organization"), 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
2
<PAGE>
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 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
3
<PAGE>
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 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., 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
4
<PAGE>
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 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., DKG Enterprises, Inc., Elwell
Stores, Inc., Filmart Productions Inc.,
5
<PAGE>
Stone's Shops, Inc. and St. George, 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 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
6
<PAGE>
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"), the Company's Restricted Voting Common
Stock, $.01 par value per share (the "Restricted Stock") and the Company's
$1,550,000 12% notes due February 28, 1999 (the "CUSA Notes"), 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 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.
7
<PAGE>
(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 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
8
<PAGE>
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 "NASD") 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, 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
9
<PAGE>
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.
10
<PAGE>
(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, 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,
11
<PAGE>
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 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
12
<PAGE>
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 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.
13
<PAGE>
(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 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
14
<PAGE>
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 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.
15
<PAGE>
(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;
Independent Underwriter. (a) 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").
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 Cruttenden
may designate (solely for the purpose of administrative convenience) and in such
denominations as Cruttenden may determine), against
16
<PAGE>
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
________, 1998, 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
Cruttenden. 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 Cruttenden, 18301 Van Karman Avenue, Irvine, California
92612.
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 forty-five (45) 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 Option Stock or any portion thereof may
be surrendered and terminated at any time upon notice by the Underwriters to the
Company.
17
<PAGE>
The option granted hereby may be exercised by the Underwriters by giving
written notice from Cruttenden 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 Cruttenden may
designate (solely for the purpose of administrative convenience) and in such
denominations as Cruttenden 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 Cruttenden. 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 $270 and other good and valuable
consideration, the 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
18
<PAGE>
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 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 18301 Van Karman Avenue, Irvine, California 92612, 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.
(b) The Company hereby confirms its engagement, in consideration of
$25,000, of the services of Cruttenden as, and Cruttenden hereby confirms its
agreement with the Company to render services as, a "qualified independent
underwriter" (in such capacity, the "Independent Underwriter") within the
meaning of Rule 2720 of the Conduct Rules ("Rule 2720") of the NASD with respect
to the offering and sale of the Stock. Payment of such $25,000 fee shall be due
and payable at the time of payment for the Firm Stock.
(i) The Independent Underwriter hereby represents and warrants to, and
agrees with, the Company and [Co-Manager] and the other Underwriters that with
respect to the offering and sale of Stock as described in the Prospectus:
(A) the Independent Underwriter is a "qualified independent
underwriter" within the meaning of Rule 2720;
(B) the Independent Underwriter has participated in the preparation of
the Registration Statement and the Prospectus and has exercised the usual
standards of "due diligence" with respect thereto;
(C) the Independent Underwriter has undertaken the legal
responsibilities and liabilities of an underwriter under the Securities
Act, including those contained in Section 11 thereof, subject to the
limitations on such liabilities set forth herein (including without
limitation, the nature of Cruttenden's underwriting commitment as several
and not joint);
(D) based upon, among other factors, the information set forth in the
Preliminary Prospectus and its review of such other documents and the
taking of such other actions as the Independent Underwriter, in its sole
discretion, has deemed necessary or appropriate for the purposes of
delivering its recommendation hereunder, the Independent Underwriter
recommends, as of the date of the execution and delivery of this Agreement,
that the public offering price for the Stock not exceed the amount of
$_______ per share, which
19
<PAGE>
price should in no way be considered or relied upon except as set forth
therein and in the letter referred to in clause (E) below; and
(E) the Independent Underwriter will furnish to the other Underwriters
on the date hereof a letter, dated the date hereof, substantially to the
effect set forth in Schedule C hereto.
(ii) The Company, the Independent Underwriter and the other
Underwriters agree to comply in all material respects with all of the
requirements of Rule 2720 applicable to them in connection with the offering and
sale of the Stock. The Company agrees to cooperate with Underwriters to enable
the Underwriters to comply with Rule 2720 and the Independent Underwriter to
perform the services contemplated by this Agreement.
(iii) The Independent Underwriter hereby consents to the references to
it as set forth under the caption "Underwriting" in the Prospectus.
(c) The Company hereby confirms its engagement, in consideration of
$450,000 (the "Financial Advisory Fee"), of the services of Cruttenden as, and
Cruttenden confirms its agreement with the Company to render services as, a
financial advisor to the Company. Payment of the first $225,000 of the Financial
Advisory Fee shall be due and payable at the time of payment for the Firm Stock
and the remaining portion of the Financial Advisory Fee shall be due and payable
within ninety (90) days thereafter.
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
20
<PAGE>
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
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.
21
<PAGE>
(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.
(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
22
<PAGE>
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.
(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.
23
<PAGE>
(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
Cruttenden, 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, the Restricted
Common Stock and the CUSA Notes, 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 Cruttenden.
(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
24
<PAGE>
conference with respect to the Company or any of the Founding 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.
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 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
25
<PAGE>
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
26
<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
27
<PAGE>
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 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
28
<PAGE>
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 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
29
<PAGE>
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 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
30
<PAGE>
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.
(d) The Company also agrees to indemnify and hold harmless Cruttenden and
each person, if any, who controls Cruttenden within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act, from and
against any and all losses, claims, damages, liabilities and judgments incurred
as a result of Cruttenden's participation as a "qualified independent
underwriter" within the meaning of Rule 2720 in connection with the offering of
the Stock, except for any losses, claims, damages, liabilities and judgments
resulting from Cruttenden's, or such controlling person's, willful misconduct or
gross negligence.
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:
(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
31
<PAGE>
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
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
32
<PAGE>
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
33
<PAGE>
the Underwriters stating that 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, 1998, 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:
34
<PAGE>
(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 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
35
<PAGE>
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 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) Cruttenden 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
36
<PAGE>
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.
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 Cruttenden 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
37
<PAGE>
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 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
38
<PAGE>
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.
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
39
<PAGE>
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 Cruttenden Roth Incorporated, 18301 Van Karman
Avenue, Irvine, California 92612, attention: Jay Sherwood, 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 Shonnie D.
Bilin.
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 and Venue. 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; provided that any suit, action
or proceeding arising in connection with this Agreement shall be brought in the
courts of the State of California, located in Orange County, or in the United
States District Court encompassing such county, and each party hereby submits to
the jurisdiction of such courts for the purpose of any such suit, action or
proceeding. The parties hereto hereby irrevocably waive any objections which
they may now or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or relating to this Agreement brought in the courts
located in the State California, Orange County, or in the United States District
Court encompassing such County, and hereby further irrevocably waive any claim
that any suit, action or proceeding brought in any such court has been brought
in an inconvenient forum.
40
<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.
41
<PAGE>
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:
42
<PAGE>
Accepted and delivered in
___________________ as of the date first
above written.
CRUTTENDEN ROTH INCORPORATED
[Co-Manager]
Each acting on its own behalf and
as a Representative of the several
Underwriters referred to in the
foregoing Agreement.
By: Cruttenden Roth Incorporated
By:______________________________
Name:
Title:
43
<PAGE>
SCHEDULE A
Number of shares of
Name Firm Stock to be Purchased
Cruttenden Roth Incorporated........
[Co-Manager]........................
---------
Total............................... 2,700,000
=========
44
<PAGE>
SCHEDULE B
Ronald P. Rafaloff
RGR Financial Group LLC
Shonnie D. Bilin
Neil J. DePascal, Jr.
Roy C. Elwell
Jerry Gladstone
David K. Green
David J. Stone
Michael A. Baker
The Incline Group
Wasatch Capital Corporation
MT Partners
Paul T. Shirley
Shirley Family Trust
David L. Yankey
45
<PAGE>
SCHEDULE C
46
<PAGE>
EXHIBIT I
Matters to be covered in
opinion of Counsel to the Company 1/
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
- --------
1/ Capitalized terms used herein but not defined shall have the meanings given
such terms in the Underwriting Agreement.
47
<PAGE>
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 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, Restricted Common Stock and the CUSA Notes,
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 Bylaws, 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
48
<PAGE>
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 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
49
<PAGE>
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, 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.
50
<PAGE>
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 "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.
51
<PAGE>
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.
52
FORM OF AGREEMENT AND PLAN OF ORGANIZATION
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF ORGANIZATION
dated as of May 9, 1997
by and among
COLLECTIBLES USA, INC.
[COMPANY] ACQUISITION CORP.
(a subsidiary of Collectibles USA, Inc.)
[COMPANY]
and
the STOCKHOLDERS named herein
- ------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
1. THE MERGER 5
1.1 Delivery and Filing of Articles of Merger 5
1.2 Effective Time of the Merger 5
1.3 Certificate of Incorporation, Bylaws and
Board of Directors of Surviving
Corporation 5
1.4 Certain Information With Respect to the
Capital Stock of the COMPANY, CEI and
NEWCO 6
1.5 Effect of Merger 7
2. CONVERSION OF STOCK 8
2.1 Manner of Conversion 8
3. DELIVERY OF MERGER CONSIDERATION 9
4. CLOSING 10
5. REPRESENTATIONS AND WARRANTIES OF COMPANY AND STOCKHOLDERS 11
5.1 Due Organization 11
5.2 Authorization 12
5.3 Capital Stock of the COMPANY 12
5.4 Transactions in Capital Stock;
Organization Accounting 12
5.5 No Bonus Shares 13
5.6 Subsidiaries 13
5.7 Predecessor Status; etc 13
5.8 Spinoff by the COMPANY 14
5.9 Financial Statements 14
5.10 Liabilities and Obligations 14
5.11 Accounts and Notes Receivable 15
5.12 Intellectual Property; Permits and
Intangibles 16
5.13 Environmental Matters 17
5.14 Personal Property 18
5.15 Significant Customers; Material
Contracts and Commitments 18
5.16 Real Property 19
5.17 Insurance 20
5.18 Compensation; Employment Agreements;
Organized Labor Matters 20
5.19 Employee Plans 21
5.20 Compliance with ERISA 22
5.21 Conformity with Law; Litigation 23
5.22 Taxes 23
5.23 No Violations 27
i
<PAGE>
5.24 Government Contracts 28
5.25 Absence of Changes 28
5.26 Deposit Accounts; Powers of Attorney 29
5.27 Validity of Obligations 30
5.28 Relations with Governments 30
5.29 Disclosure 30
5.30 Prohibited Activities 31
5.31 Authority; Ownership 32
5.32 Preemptive Rights 32
5.33 No Intention to Dispose of CEI Stock 32
5.34 Transactions with Directors, Officers
and Affiliates. 32
6. REPRESENTATIONS OF CEI and NEWCO 33
6.1 Due Organization 33
6.2 Authorization 34
6.3 Capital Stock of the COMPANY 34
6.4 Transactions in Capital Stock,
Organization Accounting 34
6.5 Subsidiaries 34
6.6 Financial Statements 35
6.7 Liabilities and Obligations 35
6.8 Conformity with Law; Litigation 36
6.9 No Violations 36
6.10 Validity of Obligations 37
6.11 CEI Stock 37
6.12 No Side Agreements 37
6.13 Business; Real Property; Material
Agreements 37
6.14 Taxes 37
7. COVENANTS PRIOR TO CLOSING 40
7.2 Conduct of Business Pending Closing 42
7.3 Prohibited Activities 42
7.4 No Shop 44
7.5 Notice to Bargaining Agents 44
7.6 Agreements 44
7.7 Notification of Certain Matters 44
7.8 Amendment of Schedules 45
7.9 Cooperation in Preparation of
Registration Statement 47
7.10 Final Financial Statements 48
7.11 Further Assurances 48
7.12 Authorized Capital 48
ii
<PAGE>
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY 49
8.1 Representations and Warranties 49
8.2 Performance of Obligations 49
8.3 No Litigation 50
8.4 Opinion of Counsel 50
8.5 Registration Statement 50
8.6 Consents and Approvals 50
8.7 Good Standing Certificates 50
8.8 No Material Adverse Change 50
8.9 Closing of IPO 50
8.10 Secretary's Certificate 51
8.11 Employment Agreements 51
8.12 Release 51
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF CEI AND NEWCO 51
9.1 Representations and Warranties 52
9.2 Performance of Obligation 52
9.3 No Litigation 52
9.4 Secretary's Certificate 52
9.5 No Material Adverse Change 52
9.6 STOCKHOLDERS' Release 53
9.7 Termination of Related Party Agreements 53
9.8 Opinion of Counsel 53
9.9 Consents and Approvals 53
9.10 Good Standing Certificates 53
9.11 Registration Statement 54
9.12 Employment Agreements 54
9.13 Closing of IPO 54
9.14 FIRPTA Certificate 54
10. COVENANTS OF CEI AND THE STOCKHOLDERS AFTER CLOSING 54
10.1 Release From Guarantees; Repayment of
Certain Obligations 54
10.2 Preservation of Tax and Accounting Treatment 54
10.3 Preparation and Filing of Tax Returns 54
10.4 Directors and Officers. 55
10.5 Preservation of Employee Benefit Plans 55
11. INDEMNIFICATION 56
11.1 General Indemnification by the STOCKHOLDERS 56
11.2 Indemnification by CEI 57
11.3 Third Person Claims 58
iii
<PAGE>
11.4 Exclusive Remedy 60
11.5 Limitations on Indemnification 60
12. TERMINATION OF AGREEMENT 61
12.1 Termination 61
12.2 Liabilities in Event of Terminatio 62
13. NONCOMPETITION 62
13.1 Prohibited Activities 62
13.2 Damages 63
13.3 Reasonable Restraint 63
13.4 Severability; Reformation 63
13.5 Independent Covenant 64
13.6 Materiality 64
14. NONDISCLOSURE OF CONFIDENTIAL INFORMATION 64
14.1 STOCKHOLDERS 64
14.2 CEI AND NEWCO 65
14.3 Damages 66
14.4 Survival 66
15. TRANSFER RESTRICTIONS 66
15.1 Transfer Restrictions 66
16. FEDERAL AND STATE SECURITIES ACT REPRESENTATIONS 67
16.1 Compliance with Law 68
16.2 Economic Risk; Sophistication 68
17. REGISTRATION RIGHTS 69
17.1 Piggyback Registration Rights 69
17.2 Demand Registration Rights 69
17.3 Registration Procedures 70
17.4 Underwriting Agreement 71
17.5 Availability of Rule 144 71
18. GENERAL 71
18.1 Cooperation 71
18.2 Successors and Assigns 72
18.3 Entire Agreement 72
18.4 Counterparts 72
18.5 Brokers and Agents 72
18.6 Expenses 72
18.7 Notices 73
iv
<PAGE>
18.8 Governing Law 74
18.9 Exercise of Rights and Remedies 74
18.10 Time 74
18.11 Reformation and Severability 74
18.12 Remedies Cumulative 75
18.13 Captions 75
18.14 Amendments and Waivers 75
18.15 Survival of Representations and Warranties 75
ANNEX I FORM OF ARTICLES OF MERGER
ANNEX II CERTIFICATE OF INCORPORATION AND BYLAWS OF CEI AND NEWCO
ANNEX III CONSIDERATION TO BE PAID TO STOCKHOLDERS
ANNEX IV STOCKHOLDERS AND STOCK OWNERSHIP OF THE COMPANY
ANNEX V STOCKHOLDERS AND STOCK OWNERSHIP OF CEI
ANNEX VI FORM OF OPINION OF COUNSEL TO CEI
ANNEX VII FORM OF OPINION OF COUNSEL TO COMPANY AND STOCKHOLDERS
ANNEX VIII FORM OF EMPLOYMENT AGREEMENT
v
<PAGE>
AGREEMENT AND PLAN OF ORGANIZATION
THIS AGREEMENT AND PLAN OF ORGANIZATION (the "Agreement") is made as of
May 9, 1997, by and among COLLECTIBLES USA, INC., a Delaware corporation
("CEI"), [COMPANY] ACQUISITION CORP., a Delaware corporation ("NEWCO"),
[COMPANY], a ___________ corporation (the "COMPANY"), and each of [name
stockholders of COMPANY] (the "STOCKHOLDERS"). The STOCKHOLDERS are all the
Stockholders of the COMPANY.
WHEREAS, NEWCO is a corporation duly organized and existing under the
laws of the State of Delaware, having been incorporated on May 5, 1997, solely
for the purpose of completing the transactions set forth herein, and is a
wholly-owned subsidiary of CEI;
WHEREAS, the respective Boards of Directors of NEWCO and the COMPANY
(which together are hereinafter collectively referred to as "Constituent
Corporations") deem it advisable and in the best interests of the Constituent
Corporations and their respective stockholders that NEWCO merge with and into
the COMPANY pursuant to this Agreement and the applicable provisions of the laws
of the State[s] of Delaware [and ____________];
WHEREAS, CEI is entering into other separate agreements substantially
similar to this Agreement (the "Other Agreements"), each of which is entitled
"Agreement and Plan of Organization," with each of [name Founding Companies
other than COMPANY (collectively, the "Other Founding Companies")], and their
respective stockholders in order to acquire additional collectibles retailers
(the COMPANY, together with each of the Other Founding Companies, are
collectively referred to herein as the "Founding Companies");
WHEREAS, this Agreement, the Other Agreements and the IPO (as
hereinafter defined) of CEI Stock (as hereinafter defined) constitute the "CEI
Plan of Organization;"
WHEREAS, the Boards of Directors of CEI, NEWCO and each of the Founding
Companies have approved and adopted the CEI Plan of Organization as an
integrated plan to transfer the capital stock of the Founding Companies to CEI
and the cash raised in the IPO of CEI Stock to CEI as a transfer of property
under Section 351 of the Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, in consideration of the agreements of the Other Founding
Companies pursuant to the Other Agreements, the STOCKHOLDERS and the Board of
Directors of the COMPANY and the stockholders and the boards of directors of
each of CEI and NEWCO have approved this Agreement and the transactions
contemplated hereby;
WHEREAS, unless the context otherwise requires, capitalized terms used
in this Agreement or in any schedule attached hereto and not otherwise defined
herein shall have the following meanings for all purposes of this Agreement:
"Acquired Party" has the meaning set forth in Section 5.22.
"Acquisition Companies" means NEWCO and each of the other
Delaware companies wholly-owned by CEI prior to the Funding and
Consummation Date.
"Affiliates" has the meaning set forth in Section 5.8.
"Agreement" has the meaning set forth in the first paragraph
of this Agreement.
"A/R Aging Reports" has the meaning set forth in Section 5.11.
"Articles of Merger" means those Articles or Certificates of
Merger with respect to the Merger substantially in the form[s] attached
as Annex I hereto or with such changes therein as may be required by
applicable state laws.
"Balance Sheet Date" has the meaning set forth in Section 5.9.
"CEI" has the meaning set forth in the first paragraph of this
Agreement.
"CEI Charter Documents" has the meaning set forth in Section
6.1.
"CEI Documents" has the meaning set forth in Section 6.9.
"CEI Financial Statements" has the meaning set forth in
Section 6.6.
"CEI Plan of Organization" has the meaning set forth in the
fourth recital of this Agreement.
"CEI Relevant Group" has the meaning set forth in Section
6.14.
"CEI Stock" means the common stock, par value $.01 per share,
of CEI.
"Charter Documents" has the meaning set forth in Section 5.1.
"Closing" has the meaning set forth in Section 4.
2
<PAGE>
"Closing Date" has the meaning set forth in Section 4.
"Code" has the meaning set forth in the fifth recital of this
Agreement.
"COMPANY" has the meaning set forth in the first paragraph of
this Agreement.
"COMPANY Financial Statements" has the meaning set forth in
Section 5.9.
"COMPANY Stock" has the meaning set forth in Section 2.1.
"Constituent Corporations" has the meaning set forth in the
second recital of this Agreement.
"Demand Registration" has the meaning set forth in Section
17.2.
"Effective Time of the Merger" means the time as of which the
Merger becomes effective, which the parties hereto contemplate to occur
on the Funding and Consummation Date.
"Environmental Laws" has the meaning set forth in Section
5.13.
"ERISA" has the meaning set forth in Section 5.19.
"Expiration Date" has the meaning set forth in Section 5(A).
"Founding Companies" has the meaning set forth in the third
recital of this Agreement.
"Founding Stockholders" has the meaning set forth in Section
17.1.
"Funding and Consummation Date" has the meaning set forth in
Section 4.
"Indemnification Threshold" has the meaning set forth in
Section 11.5.
"Indemnified Party" has the meaning set forth in Section 11.3.
"Indemnifying Party" has the meaning set forth in Section
11.3.
"Intellectual Property" means all trademarks, service marks,
trade dress, trade names, patents and copyrights and any registration
or application for any of the foregoing, and any trade secret,
invention, process, know-how, computer software, technology systems,
product design or product packaging.
"IPO" means the initial public offering of CEI Stock pursuant
to the Registration Statement.
"Material Adverse Effect" has the meaning set forth in Section
5.1.
"Material Documents" has the meaning set forth in Section
5.23.
3
<PAGE>
"Merger" means the merger of NEWCO with and into the COMPANY
pursuant to this Agreement and the applicable provisions of the laws of
the State of Delaware [and other applicable state laws].
"NEWCO" has the meaning set forth in the first paragraph of
this Agreement.
"NEWCO Stock" means the common stock, par value $.01 per
share, of NEWCO.
"1934 Act" means the Securities Exchange Act of 1934, as
amended.
"1933 Act" means the Securities Act of 1933, as amended.
"Other Agreements" has the meaning set forth in the third
recital of this Agreement.
"Other Founding Companies" has the meaning set forth in the
third recital of this Agreement.
"Plans" has the meaning set forth in Section 5.19.
"Pricing" means the date of determination by CEI and the
Underwriters of the public offering price of the shares of CEI Stock in
the IPO; the parties hereto contemplate that the Pricing shall take
place on or immediately prior to the Closing Date.
"Qualified Plans" has the meaning set forth in Section 5.20.
"Registration Statement" means that certain registration
statement of CEI to be filed on Form S-1 covering the shares of CEI
Stock to be issued in the IPO.
"Relevant Group" has the meaning set forth in Section 5.22(i).
"Restricted Voting Stock" means the Restricted Voting Stock,
par value $0.01 per share, of CEI.
"Returns" has the meaning set forth at the end of Section
5.22.
"Schedule" means each Schedule attached hereto, which shall
reference the relevant sections of this Agreement, on which parties
hereto disclose information as part of their respective
representations, warranties and covenants.
"SEC" means the United States Securities and Exchange
Commission.
"Statutory Liens" has the meaning set forth in Section 7.3.
"STOCKHOLDERS" has the meaning set forth in the first
paragraph of this Agreement.
4
<PAGE>
"Surviving Corporation" shall mean the COMPANY as the
surviving party in the Merger.
"Tax" or "Taxes" has the meaning set forth at the end of
Section 5.22.
"Tax Losses" has the meaning set forth in Section 5.22 (xvi).
"Taxing Authority" has the meaning set forth at the end of
Section 5.22.
"Territory" has the meaning set forth in Section 13.1.
"Third Person" has the meaning set forth in Section 11.3.
"Transfer Taxes" has the meaning set forth in Section 18.6.
"Underwriters" means the prospective underwriters in the IPO,
as identified in the Registration Statement.
"Underwriting Agreement" means the Underwriting Agreement to
be dated the Closing Date between the Underwriters and the Company in
respect of the IPO.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements, representations, warranties, provisions and covenants herein
contained, the parties hereto hereby agree as follows:
1. THE MERGER
1.1 DELIVERY AND FILING OF ARTICLES OF MERGER. The Constituent
Corporations will cause the Articles of Merger to be signed, verified and filed
with the Secretary of State of the State of Delaware [and the Secretary of State
of the State of __________] and stamped receipt copies of each such filing to be
delivered to CEI on or before the Funding and Consummation Date.
1.2 EFFECTIVE TIME OF THE MERGER. At the Effective Time of the Merger,
NEWCO shall be merged with and into the COMPANY in accordance with the Articles
of Merger, the separate existence of NEWCO shall cease and the COMPANY shall be
the surviving party in the Merger. The COMPANY is sometimes hereinafter referred
to as the Surviving Corporation. The Merger will be effected in a single
transaction.
1.3 CERTIFICATE OF INCORPORATION, BY-LAWS AND BOARD OF DIRECTORS OF
SURVIVING CORPORATION. At the Effective Time of the Merger:
5
<PAGE>
(i) the Certificate or Articles of Incorporation of
the COMPANY then in effect shall be the Certificate or Articles of
Incorporation of the Surviving Corporation until changed as provided by
law; (ii) the By-laws of [NEWCO] [the COMPANY] then in effect shall be
the By-laws of the Surviving Corporation until amended as provided by
law.
(ii) the By-laws of [NEWCO] [the COMPANY] then in
effect shall be the By-laws of the Surviving Corporation until amended
as provided by law.
(iii) the Board of Directors of the Surviving
Corporation shall consist of the persons who are on the Board of
Directors of the COMPANY immediately prior to the Effective Time of the
Merger, provided that _______________ shall be elected as a director of
the Surviving Corporation effective as of the Effective Time of the
Merger; the Board of Directors of the Surviving Corporation shall hold
office subject to the provisions of the laws of the State of __________
and of the Certificate of Incorporation and By-laws of the Surviving
Corporation; and
(iv) the officers of the COMPANY immediately prior to
the Effective Time of the Merger shall continue as the officers of the
Surviving Corporation in the same capacity or capacities, and effective
upon the Effective Time of the Merger _________________ shall be
appointed as a vice president of the Surviving Corporation and David L.
Yankey shall be appointed as an assistant secretary of the Surviving
Corporation, each of such officers to serve, subject to the provisions
of the Certificate or Articles of Incorporation and By-laws of the
Surviving Corporation, until his or her successor is duly elected and
qualified.
1.4 CERTAIN INFORMATION WITH RESPECT TO THE CAPITAL STOCK OF THE
COMPANY, CEI AND NEWCO. The respective designations and numbers of outstanding
shares and voting rights of each class of outstanding capital stock of the
COMPANY, CEI and NEWCO as of the date of this Agreement are as follows:
(i) as of the date of this Agreement, the authorized
and outstanding capital stock of the COMPANY is as set forth on
Schedule 1.4 hereto;
(ii) immediately prior to the Funding and
Consummation Date, the authorized capital stock of CEI will consist of
30,000,000 shares of CEI Stock, of which the number of issued and
outstanding shares will be set forth in the Registration Statement,
_____
6
<PAGE>
shares of Restricted Voting Stock, of which the number of issued and
outstanding shares will be set forth in the Registration Statement, and
500,000 shares of preferred stock, $.01 par value, of which no shares
will be issued and outstanding; and
(iii) as of the date of this Agreement, the authorized capital
stock of NEWCO consists of 3,000 shares of NEWCO Stock, of which ten
(10) shares are issued and outstanding.
1.5 EFFECT OF MERGER. At the Effective Time of the Merger, the effect
of the Merger shall be as provided in the applicable provisions of the General
Corporation Law of the State of Delaware (the "Delaware GCL") [and the law of
the State of __________]. Except as herein specifically set forth, the identity,
existence, purposes, powers, objects, franchises, privileges, rights and
immunities of the COMPANY shall continue unaffected and unimpaired by the Merger
and the corporate franchises, existence and rights of NEWCO shall be merged with
and into the COMPANY, and the COMPANY, as the Surviving Corporation, shall be
fully vested therewith. At the Effective Time of the Merger, the separate
existence of NEWCO shall cease and, in accordance with the terms of this
Agreement, the Surviving Corporation shall possess all the rights, privileges,
immunities and franchises, of a public as well as of a private nature, and all
property, real, personal and mixed, and all debts due on whatever account,
including subscriptions to shares, and all Taxes, including those due and owing
and those accrued, and all other choses in action, and all and every other
interest of or belonging to or due to the COMPANY and NEWCO shall be taken and
deemed to be transferred to, and vested in, the Surviving Corporation without
further act or deed; and all property, rights and privileges, powers and
franchises and all and every other interest shall be thereafter as effectually
the property of the Surviving Corporation as they were of the COMPANY and NEWCO;
and the title to any real estate, or interest therein, whether by deed or
otherwise, vested in the COMPANY and NEWCO under the laws of the state of
incorporation of each thereof, shall not revert or be in any way impaired by
reason of the Merger. Except as otherwise provided herein, the Surviving
Corporation shall thenceforth be responsible and liable for all the liabilities
and obligations of the COMPANY and NEWCO and any claim existing, or action or
proceeding pending, by or against the COMPANY or NEWCO may be prosecuted as if
the Merger had not taken place, or the
7
<PAGE>
Surviving Corporation may be substituted in its place. Neither the rights of
creditors nor any liens upon the property of the COMPANY or NEWCO shall be
impaired by the Merger, and all debts, liabilities and duties of the COMPANY and
NEWCO shall attach to the Surviving Corporation, and may be enforced against
such Surviving Corporation to the same extent as if said debts, liabilities and
duties had been incurred or contracted by the Surviving Corporation.
2. CONVERSION OF STOCK
2.1 MANNER OF CONVERSION. The manner of converting the shares of (i)
outstanding capital stock of the COMPANY ("COMPANY Stock") and (ii) NEWCO Stock,
issued and outstanding immediately prior to the Effective Time of the Merger,
respectively, into shares of (x) CEI Stock and (y) common stock of the Surviving
Corporation, respectively, shall be as follows:
As of the Effective Time of the Merger:
(i) all of the shares of COMPANY Stock issued and
outstanding immediately prior to the Effective Time of the Merger, by
virtue of the Merger and without any action on the part of the holder
thereof, automatically shall be deemed to represent, with respect to
each STOCKHOLDER, (1) the right to receive the number of shares of CEI
Stock set forth on Annex III hereto with respect to such STOCKHOLDER
and (2) the right to receive the amount of cash set forth on Annex III
hereto with respect to such STOCKHOLDER;
(ii) all shares of COMPANY Stock that are held by the
COMPANY as treasury stock shall be cancelled and retired and no shares
of CEI Stock or other consideration shall be delivered or paid in
exchange therefor; and
(iii) each share of NEWCO Stock issued and
outstanding immediately prior to the Effective Time of the Merger,
shall, by virtue of the Merger and without any action on the part of
CEI, automatically be converted into one fully paid and non-assessable
share of common stock of the Surviving Corporation which shall
constitute all of the issued and outstanding shares of common stock of
the Surviving Corporation immediately after the Effective Time of the
Merger.
8
<PAGE>
All CEI Stock received by the STOCKHOLDERS pursuant to this Agreement
shall, except for restrictions on resale or transfer described in Sections 15
and 16 hereof, have the same rights as all the other shares of outstanding CEI
Stock by reason of the provisions of the Certificate of Incorporation of CEI or
as otherwise provided by the Delaware GCL. All voting rights of such CEI Stock
received by the STOCKHOLDERS shall be fully exercisable by the STOCKHOLDERS and
the STOCKHOLDERS shall not be deprived nor restricted in exercising those
rights. At the Funding and Consummation Date, CEI shall have no class of capital
stock issued and outstanding other than the CEI Stock and the Restricted Voting
Stock.
3. DELIVERY OF MERGER CONSIDERATION
3.1 On the Funding and Consummation Date the STOCKHOLDERS, who are the
holders of all outstanding certificates representing shares of COMPANY Stock,
shall, upon surrender of such certificates, receive (i) the respective number of
shares of CEI Stock and (ii) the amount of cash set forth on Annex III hereto
with respect to such STOCKHOLDER. The cash payable pursuant to clause (ii) shall
be paid by wire transfer to an account designated by each STOCKHOLDER.
3.2 The STOCKHOLDERS shall deliver in trust to Morgan, Lewis & Bockius
LLP, counsel to CEI, at the Closing the certificates representing COMPANY Stock,
duly endorsed in blank by the STOCKHOLDERS, or accompanied by stock powers duly
endorsed in blank, with signatures guaranteed by a national or state chartered
bank or other financial institution, and with all necessary Transfer Tax and
other revenue stamps, acquired at the STOCKHOLDERS' expense, affixed and
cancelled. The STOCKHOLDERS agree promptly to cure any deficiencies with respect
to the endorsement of the stock certificates or other documents of conveyance
with respect to such COMPANY Stock or with respect to the stock powers
accompanying any COMPANY Stock. Upon consummation of the IPO and the
transactions contemplated to occur on the Funding and Consummation Date, all of
such certificates shall be deemed released by such counsel to CEI without any
further action on the part of such counsel.
9
<PAGE>
4. CLOSING
At or prior to the Pricing, the parties shall take all actions
necessary to prepare to (i) effect the Merger (including, if permitted by
applicable state law, the advance filing with the appropriate state authorities
of the Articles of Merger, which shall become effective at the Effective Time of
the Merger) and (ii) effect the conversion and delivery of shares referred to in
Section 3 hereof; provided, that such actions shall not include the actual
completion of the Merger for purposes of this Agreement or the conversion and
delivery of the shares and transmission of funds by wire referred to in Section
3 hereof, each of which actions shall only be taken upon the Funding and
Consummation Date as herein provided. In the event that there is no Funding and
Consummation Date and this Agreement terminates, CEI hereby covenants and agrees
to do all things required by Delaware law [and all things which counsel for the
COMPANY advise CEI are required by applicable laws of the State of _________] in
order to rescind any merger or other actions effected by the advance filing of
the Articles of Merger as described in this Section. The taking of the actions
described in clauses (i) and (ii) above (the "Closing") shall take place on the
closing date (the "Closing Date") at the offices of Morgan, Lewis & Bockius LLP,
101 Park Avenue, New York, New York 10178. On the Funding and Consummation Date
(x) the Articles of Merger shall be or shall have been filed with the
appropriate state authorities so that they shall be or, as of 8:00 a.m. New York
City time on the Funding and Consummation Date, shall become effective and the
Merger shall thereby be effected, (y) all transactions contemplated by this
Agreement, including the conversion and delivery of shares, the transmission of
funds by wire in an amount equal to the cash portion of the consideration which
the STOCKHOLDERS shall be entitled to receive pursuant to the Merger referred to
in Section 3 hereof shall occur and (z) the closing with respect to the IPO
shall occur and be deemed to be completed. The date on which the actions
described in the preceding clauses (x), (y) and (z) occurs shall be referred to
as the "Funding and Consummation Date." During the period from the Closing Date
to the Funding and Consummation Date, this Agreement may only be terminated by
the parties if the underwriting agreement in respect of the IPO is terminated
pursuant to the terms of such underwriting agreement. This Agreement shall
10
<PAGE>
in any event terminate if the Funding and Consummation Date has not occurred
within 15 business days of the Closing Date. Time is of the essence.
5. REPRESENTATIONS AND WARRANTIES OF COMPANY AND STOCKHOLDERS
(A) Representations and Warranties of COMPANY and STOCKHOLDERS.
Each of the COMPANY and the STOCKHOLDERS jointly and severally
represent and warrant that all of the following representations and warranties
in this Section 5(A) are true at the date of this Agreement and, subject to
Section 7.8 hereof, shall be true at the time of the Closing and the Funding and
Consummation Date, and that such representations and warranties shall survive
the Funding and Consummation Date for a period of two years (the last day of
such period being the "Expiration Date"), except that (i) the representations
and warranties set forth in Section 5.22 hereof shall survive until such time as
the statute of limitations period has run for all tax periods ended on or prior
to the Funding and Consummation Date, which shall be deemed to be the Expiration
Date for Section 5.22, and (ii) solely for purposes of Section 11.1(iii) hereof
and solely to the extent that, in connection with the IPO, CEI actually incurs
liability under the 1933 Act, the 1934 Act or any other Federal or state
securities laws, the representations and warranties set forth herein shall
survive until the expiration of any applicable statute of limitations period,
which shall be deemed to be the Expiration Date for such purposes. For purposes
of this Section 5, the term "COMPANY" shall mean and refer to the COMPANY and
all of its subsidiaries, if any.
5.1 DUE ORGANIZATION. The COMPANY is a corporation duly incorporated,
validly existing and in good standing under the laws of the state of its
incorporation, and is duly authorized and qualified to do business under all
applicable laws, regulations, ordinances and orders of public authorities to
carry on its business in the places and in the manner as now conducted except
(i) as set forth on Schedule 5.1 or (ii) where the failure to be so authorized
or qualified would not have a material adverse effect on the business,
operations, affairs, prospects, properties, assets or condition (financial or
otherwise), of the COMPANY taken as a whole (as used herein with respect to the
COMPANY, or with respect to any other person, a "Material
11
<PAGE>
Adverse Effect"). Schedule 5.1 sets forth the jurisdiction in which the COMPANY
is incorporated and contains a list of all jurisdictions in which the COMPANY is
authorized or qualified to do business. True, complete and correct copies of the
Certificate or Articles of Incorporation and By-laws, each as amended, of the
COMPANY (the "Charter Documents") are all attached to Schedule 5.1. The minute
books and stock records of the COMPANY, as heretofore made available to CEI, are
correct and complete in all material respects. The most recent minutes of the
COMPANY, which are dated no earlier than ten business days prior to the date
hereof, affirm and ratify all prior acts of the COMPANY and of its officers and
directors on behalf of the COMPANY.
5.2 AUTHORIZATION. (i) The representatives of the COMPANY executing
this Agreement have the authority to enter into and bind the COMPANY to the
terms of this Agreement and (ii) the COMPANY has the full corporate right, power
and authority to enter into this Agreement and the Merger, subject to any
required approval of the shareholders and the Board of Directors of the COMPANY
described on Schedule 5.2, certified copies of which are attached thereto.
5.3 CAPITAL STOCK OF THE COMPANY. The authorized capital stock of the
COMPANY is as set forth in Section 1.4(i). All of the issued and outstanding
shares of capital stock of the COMPANY are owned by the STOCKHOLDERS in the
amounts set forth in Annex IV and further, except as set forth on Schedule 5.3,
are owned free and clear of all liens, security interests, pledges, charges,
voting trusts, restrictions, encumbrances and claims of every kind. All of the
issued and outstanding shares of capital stock of the COMPANY have been duly
authorized and validly issued, are fully paid and nonassessable, are owned of
record and beneficially by the STOCKHOLDERS and were offered, issued, sold and
delivered by the COMPANY in compliance with all applicable state and Federal
laws concerning the issuance of securities. Further, none of such shares were
issued in violation of the preemptive rights of any past or present stockholder.
5.4 TRANSACTIONS IN CAPITAL STOCK: ORGANIZATION ACCOUNTING. Except as
set forth on Schedule 5.4, the COMPANY has not acquired any COMPANY Stock since
January 1, 1994. Except as set forth on Schedule 5.4, (i) no option, warrant,
call, conversion right or commitment
12
<PAGE>
of any kind exists which obligates the COMPANY to issue any of its authorized
but unissued capital stock or its treasury stock; (ii) the COMPANY has no
obligation (contingent or otherwise) to purchase, redeem or otherwise acquire
any of its equity securities or any interests therein or to pay any dividend or
make any distribution in respect thereof; and (iii) neither the voting stock
structure of the COMPANY nor the relative ownership of shares among any of its
respective stockholders has been altered or changed in contemplation of the
Merger and/or the CEI Plan of Organization. Schedule 5.4 also includes complete
and accurate copies of all stock option or stock purchase plans, including a
list of all outstanding options, warrants or other rights to acquire shares of
the COMPANY's stock and a description of the material terms of such outstanding
options, warrants or other rights.
5.5 NO BONUS SHARES . Except as set forth on Schedule 5.5, none of the
shares of COMPANY Stock was issued pursuant to awards, grants or bonuses.
5.6 SUBSIDIARIES. Schedule 5.6 attached hereto lists the name of each
of the COMPANY's subsidiaries and sets forth the number and class of the
authorized capital stock of each of the COMPANY's subsidiaries and the number of
shares of each of the COMPANY's subsidiaries which are issued and outstanding,
all of which shares (except as set forth on Schedule 5.6) are owned beneficially
and of record by the COMPANY, free and clear of all liens, security interests,
pledges, charges, voting trusts, equities, restrictions, encumbrances and claims
of every kind. Except as set forth in Schedule 5.6, the COMPANY does not
presently own, of record or beneficially, or control, directly or indirectly,
any capital stock, securities convertible into capital stock or any other equity
interest in any corporation, association or business entity nor is the COMPANY,
directly or indirectly, a participant in any joint venture, partnership or other
non-corporate entity.
5.7 PREDECESSOR STATUS: ETC. Set forth on Schedule 5.7 is a list of all
names of all predecessor companies of the COMPANY, including the names of any
entities acquired by the COMPANY (by stock purchase, merger or otherwise) or
owned by the COMPANY or from whom the COMPANY previously acquired material
assets. Except as disclosed on Schedule 5.7, the COMPANY has not been a
subsidiary or division of another corporation or a part of an acquisition which
was later rescinded.
13
<PAGE>
5.8 SPIN-OFF BY THE COMPANY. Except as set forth on Schedule 5.8, there
has not been any sale, spin-off or split-up of material assets of either the
COMPANY or any other person or entity that directly, or indirectly through one
or more intermediaries, controls, or is controlled by, or is under common
control with, the COMPANY ("Affiliates") since January 1, 1994.
5.9 FINANCIAL STATEMENTS. Attached to Schedule 5.9 are copies of the
following financial statements of the COMPANY (the "COMPANY Financial
Statements"): the COMPANY's audited Consolidated Balance Sheet as of each of
December 31, 1996, 1995 and 1994 and Consolidated Statements of Income, Cash
Flows and Retained Earnings for each of the years in the three-year period ended
December 31, 1996 (December 31, 1996 being hereinafter referred to as the
"Balance Sheet Date"). Such Financial Statements have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods indicated (except as noted thereon or on Schedule
5.9). Except as set forth on Schedule 5.9, such Consolidated Balance Sheets as
of December 31, 1996, 1995 and 1994 present fairly the financial position of the
COMPANY as of the dates indicated thereon, and such Consolidated Statements of
Income, Cash Flows and Retained Earnings present fairly the results of
operations and cash flows for the periods indicated thereon.
5.10 LIABILITIES AND OBLIGATIONS. (a) The COMPANY has delivered to CEI
an accurate list (which is set forth on Schedule 5.10) as of the Balance Sheet
Date of (i) all liabilities of the COMPANY which are not reflected on the
balance sheet of the COMPANY at the Balance Sheet Date or otherwise reflected in
the COMPANY Financial Statements at the Balance Sheet Date, (ii) any material
liabilities of the COMPANY (including but not limited to all liabilities in
excess of $10,000) and (iii) all loan agreements, indemnity or guaranty
agreements, bonds, mortgages, liens, pledges or other security agreements to
which the COMPANY is a party. Except as set forth on Schedule 5.10, since the
Balance Sheet Date, the COMPANY has not incurred any material liabilities of any
kind, character and description, whether accrued, absolute, secured or
unsecured, contingent or otherwise, other than liabilities incurred in the
ordinary course of business.
14
<PAGE>
(b) The COMPANY has also set forth on Schedule 5.10, in the case of
those contingent liabilities related to pending or threatened litigation, or
other liabilities which are not fixed or are being contested, the following
information:
(i) a summary description of the liability together with the
following:
(a) copies of all relevant documentation relating thereto;
(b) amounts claimed and any other action or relief sought;
and
(c) name of claimant and all other parties to the claim,
suit or proceeding;
(ii) the name of each court or agency before which such claim,
suit or proceeding is pending;
(iii) the date such claim, suit or proceeding was instituted; and
(iv) a good faith and reasonable estimate of the maximum amount,
if any, which is likely to become payable with respect to
each such liability. If no estimate is provided, the
estimate shall for purposes of this Agreement be deemed to
be zero.
5.11 ACCOUNTS AND NOTES RECIEVABLE. The COMPANY has delivered to CEI an
accurate list (which is set forth on Schedule 5.11) of the accounts and notes
receivable of the COMPANY, as of the Balance Sheet Date, including any such
amounts which are not reflected in the balance sheet as of the Balance Sheet
Date, and including receivables from and advances to employees and the
STOCKHOLDERS. Within ten (10) days prior to Closing, the COMPANY shall provide
CEI (x) an accurate list of all outstanding receivables obtained subsequent to
the Balance Sheet Date and (y) an aging of all such accounts and notes
receivable showing amounts due in 30 day aging categories (the "A/R Aging
Reports"). Except to the extent reflected on Schedule 5.11 or as disclosed by
the COMPANY to CEI in a writing accompanying the A/R Aging Reports, as the case
may be, the accounts, notes and other receivables shown on Schedule 5.11 and on
the A/R Aging Reports are and shall be, and the COMPANY has no reason to believe
that any such account receivable is not or shall not be, collectible in the
amounts shown (in the case of the accounts and notes receivable set forth on
Schedule 5.11, net of reserves reflected in the Balance Sheet or in the A/R
Aging Reports).
15
<PAGE>
5.12 INTELLECTUAL PROPERTY; PERMITS AND INTANGIBLES. (a) The COMPANY
owns or has a valid license to use all Intellectual Property used in connection
with its business, the absence of any of which is reasonably likely to have a
Material Adverse Effect, and the COMPANY has delivered to CEI an accurate list
(which is set forth on Schedule 5.12(a)) of all Intellectual Property owned or
used by the COMPANY. Except as set forth on Schedule 5.12(a), each item of
Intellectual Property owned by the COMPANY is owned free and clear of all Liens
and each other item of Intellectual Property used by the Company is licensed to
the Company pursuant to a license agreement that is valid and in full force and
effect. Except as set forth on Schedule 5.12(a), all right, title and interest
in and to each item of Intellectual Property is owned by the COMPANY and is not
subject to any license, royalty arrangement or pending or threatened claim or
dispute. None of the Intellectual Property owned or, to the COMPANY's knowledge,
none of the Intellectual Property used by the COMPANY nor any product sold by
the COMPANY, infringes any Intellectual Property right of any other entity and,
to the COMPANY's knowledge, no Intellectual Property owned by the COMPANY is
infringed upon by any other entity.
(b) The COMPANY holds all licenses, franchises, permits and other
governmental authorizations the absence of any of which could have a Material
Adverse Effect and the COMPANY has delivered to CEI an accurate list and summary
description (which is set forth on Schedule 5.12(b)) of all such licenses,
franchises, permits and other governmental authorizations, including permits,
titles, licenses, franchises and certificates (it being understood and agreed
that a list of all environmental permits and other environmental approvals is
set forth on Schedule 5.13). To the knowledge of the COMPANY, the licenses,
franchises, permits and other governmental authorizations listed on Schedules
5.12(b) and 5.13 are valid, and the COMPANY has not received any notice that any
governmental authority intends to cancel, terminate or not renew any such
license, franchise, permit or other governmental authorization. The COMPANY has
conducted and is conducting its business in compliance with the requirements,
standards, criteria and conditions set forth in the licenses, franchises,
permits and other governmental authorizations listed on Schedules 5.12(b) and
5.13 and is not in violation of any of the foregoing except where such
non-compliance or violation would not have a Material Adverse Effect.
16
<PAGE>
Except as specifically provided in Schedule 5.12(a) or 5.12(b), the
transactions contemplated by this Agreement will not result in the infringement
by the COMPANY of any Intellectual Property right of any other entity or the
infringement of any Intellectual Property listed on Schedule 5.12(a), or result
in a default under or a breach or violation of, or adversely affect the rights
and benefits afforded to the COMPANY by, any licenses, franchises, permits or
government authorizations listed on Schedule 5.12(b) or Schedule 5.13.
5.13 ENVIRONMENTAL MATTERS. Except as set forth on Schedule 5.13, (i)
the COMPANY has complied with and is in compliance with all Federal, state,
local and foreign statutes (civil and criminal), laws, ordinances, regulations,
rules, notices, permits, judgments, orders and decrees applicable to it or any
of its properties, assets, operations and businesses relating to environmental
protection (collectively "Environmental Laws") including, without limitation,
Environmental Laws relating to air, water, land and the generation, storage,
use, handling, transportation, treatment or disposal of Hazardous Wastes and
Hazardous Substances including petroleum and petroleum products (as such terms
are defined in any applicable Environmental Law); (ii) the COMPANY has obtained
and adhered to all necessary permits and other approvals necessary to treat,
transport, store, dispose of and otherwise handle Hazardous Wastes and Hazardous
Substances, a list of all of which permits and approvals is set forth on
Schedule 5.13, and has reported to the appropriate authorities, to the extent
required by all Environmental Laws, all past and present sites owned and
operated by the COMPANY where Hazardous Wastes or Hazardous Substances have been
treated, stored, disposed of or otherwise handled; (iii) there have been no
releases or threats of releases (as defined in Environmental Laws) at, from, in
or on any property owned or operated by the COMPANY except as permitted by
Environmental Laws; (iv) the COMPANY knows of no on-site or off-site location to
which the COMPANY has transported or disposed of Hazardous Wastes and Hazardous
Substances or arranged for the transportation of Hazardous Wastes and Hazardous
Substances, which site is the subject of any Federal, state, local or foreign
enforcement action or any other investigation which could lead to any claim
against the COMPANY, CEI or NEWCO for any clean-up cost, remedial work, damage
to natural resources, property damage or personal injury, including, but not
limited to, any claim under the Comprehensive Environmental Response,
Compensation and Liability
17
<PAGE>
Act of 1980, as amended; and (v) the COMPANY has no contingent liability in
connection with any release of any Hazardous Waste or Hazardous Substance into
the environment.
5.14 PERSONAL PROPERTY. The COMPANY has delivered to CEI an accurate
list (which is set forth on Schedule 5.14) of (x) all personal property included
in "depreciable plant, property and equipment" (or similarly named line item) on
the balance sheet of the COMPANY as of the Balance Sheet Date or that will be
included on any balance sheet of the COMPANY prepared after the Balance Sheet
Date, (y) all other personal property owned by the COMPANY with a value
individually in excess of $10,000 (i) as of the Balance Sheet Date and (ii)
acquired since the Balance Sheet Date and (z) all leases and agreements in
respect of personal property, including, in the case of clause (z), a schedule
of the capital costs of all such assets which are subject to capital leases and
true, complete and correct copies of all such leases and agreements and, in the
case of clauses (x) and (y), an indication as to which of those assets are
currently owned, or were formerly owned, by STOCKHOLDERS or Affiliates of the
COMPANY or STOCKHOLDERS. Except as set forth on Schedule 5.14, (i) all personal
property used by the COMPANY in its business is either owned by the COMPANY or
leased by the COMPANY pursuant to a lease included on Schedule 5.14, (ii) all of
the personal property listed on Schedule 5.14 is in good working order and
condition, ordinary wear and tear excepted, and (iii) all leases and agreements
included on Schedule 5.14 are in full force and effect and constitute valid and
binding agreements of the COMPANY, and, to the COMPANY'S knowledge, of the
parties (and their successors) thereto in accordance with their respective
terms.
5.15 SIGNIFICANT CUSTOMER; MATERIAL CONTRACTS AND COMMITMENTS. The
COMPANY has delivered to CEI an accurate list (which is set forth on Schedule
5.15) of (i) all significant customers, it being understood and agreed that a
"significant customer," for purposes of this Section 5.15, means a customer (or
person or entity) representing 5% or more of the COMPANY's revenues for the year
ending on the Balance Sheet Date. Except to the extent set forth on Schedule
5.15, none of the COMPANY's significant customers have cancelled or
substantially reduced or, to the knowledge of the COMPANY, are currently
attempting or threatening to cancel a contract or substantially reduce
utilization of the services provided by the COMPANY.
18
<PAGE>
The COMPANY has listed on Schedule 5.15 all material contracts,
commitments and similar agreements to which the COMPANY is a party or by which
it or any of its properties are bound (including, but not limited to, contracts
with significant customers, joint venture or partnership agreements, contracts
with any labor organizations, strategic alliances and options to purchase land),
other than contracts, commitments and agreements otherwise listed on Schedule
5.10, 5.14, 5.16, 5.18 or 5.19 (a) in existence as of the Balance Sheet Date and
(b) entered into since the Balance Sheet Date, and in each case has delivered
true, complete and correct copies of such agreements to CEI. The COMPANY has
complied with all material commitments and obligations pertaining to it, and is
not in default under any contracts or agreements listed on Schedule 5.15, and no
notice of default under any such contract or agreement has been received. The
COMPANY has also indicated on Schedule 5.15 a summary description of all plans
or projects involving the opening of new operations, expansion of existing
operations or the acquisition of any personal property, business or assets
requiring, in any event, the payment of more than $25,000 by the COMPANY.
5.16 REAL PROPERTY. Schedule 5.16(a) includes a list of all real
property owned by the COMPANY (i) as of the Balance Sheet Date and (ii) acquired
since the Balance Sheet Date, and all other real property, if any, used by the
COMPANY in the conduct of its business. The COMPANY has good and insurable title
to the real property owned by it, including that reflected on Schedules 5.14 and
5.16, subject to no mortgage, pledge, lien, conditional sale agreement,
encumbrance or charge, except for:
(i) liens reflected on Schedule 5.10 or 5.15 as securing
specified liabilities (with respect to which no default by the
COMPANY exists);
(ii) liens for current taxes not yet due and payable and
assessments not in default;
(iii) easements for utilities serving the property only; and
(iv) easements, covenants and restrictions and other
exceptions to title shown of
record in the office of the County Clerks in which the
properties, assets and leasehold estates are located which do not
adversely affect the current use of the property.
19
<PAGE>
Attached to Schedule 5.16(a) are true, complete and correct copies of all title
reports and title insurance policies currently in possession of the COMPANY with
respect to real property owned by the COMPANY.
Schedule 5.16(b) includes an accurate list of real property leased by
the COMPANY and an indication as to which such properties, if any, are currently
owned, or were formerly owned, by STOCKHOLDERS or Affiliates of the COMPANY or
STOCKHOLDERS, and attached to Schedule 5.16(b) are true, complete and correct
copies of all leases and agreements in respect of such real property leased by
the COMPANY. Except as set forth on Schedule 5.16(b), all of such leases
included on Schedule 5.16(b) are in full force and effect and constitute valid
and binding agreements of the COMPANY and, to the COMPANY'S knowledge, of the
parties (and their successors) thereto in accordance with their respective
terms.
5.17 INSURANCE. Set forth on and attached to Schedule 5.17 are (i) an
accurate list as of the Balance Sheet Date of all insurance policies carried by
the COMPANY, (ii) an accurate list of all insurance loss runs and workers'
compensation claims received for the past three (3) policy years and (iii) true,
complete and correct copies of all insurance policies currently in effect. Such
insurance policies evidence all of the insurance that the COMPANY is required to
carry pursuant to all of its contracts and other agreements and pursuant to all
applicable laws. All of such insurance policies are currently in full force and
effect and shall remain in full force and effect through the Funding and
Consummation Date. No insurance carried by the COMPANY has ever been cancelled
by the insurer and the COMPANY has never been denied coverage.
5.18 COMPENSATION; EMPLOYMENT AGREEMENTS; ORGANIZED LABOR MATTERS. The
COMPANY has delivered to CEI an accurate list (which is set forth on Schedule
5.18) showing all officers, directors and key employees of the COMPANY, listing
all employment agreements with such officers, directors and key employees and
the annual rate of compensation (and the portions thereof attributable to
salary, bonus and other compensation, respectively) of each of such persons (i)
for the year ended on the Balance Sheet Date and (ii) for 1997. The COMPANY has
provided to CEI true, complete and correct copies of any employment agreements
for persons listed on Schedule 5.18. Since the Balance Sheet Date, there have
been no increases in the
20
<PAGE>
compensation payable or any special bonuses to any officer, director, key
employee or other employee, except ordinary salary increases implemented on a
basis consistent with past practices.
Except as set forth on Schedule 5.18, (i) the COMPANY is not bound by
or subject to (and none of its respective assets or properties is bound by or
subject to) any arrangement with any labor union, (ii) no employees of the
COMPANY are represented by any labor union or covered by any collective
bargaining agreement, (iii) no campaign to establish such representation is in
progress and (iv) there is no pending or, to the COMPANY's knowledge, threatened
labor dispute involving the COMPANY and any group of its employees nor has the
COMPANY experienced any labor interruptions over the past three years. The
COMPANY believes its relationship with employees to be good.
5.19 EMPLOYEE PLANS. The STOCKHOLDERS have delivered to CEI an accurate
schedule (which is set forth on Schedule 5.19) showing all employee benefit
plans of COMPANY, including all employment agreements and other agreements or
arrangements containing "golden parachute" or other similar provisions, and
deferred compensation agreements, together with true, complete and correct
copies of such plans, agreements and any trusts related thereto, and
classifications of employees covered thereby as of the Balance Sheet Date.
Except for the employee benefit plans, if any, described on Schedule 5.19,
COMPANY does not sponsor, maintain or contribute to any plan program, fund or
arrangement that constitutes an "employee pension benefit plan," nor has COMPANY
any obligation to contribute to or accrue or pay any benefits under any deferred
compensation or retirement funding arrangement on behalf of any employee or
employees (such as, for example, and without limitation, any individual
retirement account or annuity, any "excess benefit plan" (within the meaning of
Section 3(36) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")) or any non-qualified deferred compensation arrangement). For the
purposes of this Agreement, the term "employee pension benefit plan" shall have
the same meaning as is given that term in Section 3(2) of ERISA. The COMPANY has
not sponsored, maintained or contributed to any employee pension benefit plan
other than the plans set forth on Schedule 5.19, nor is the COMPANY required to
contribute to any retirement plan pursuant to the provisions of
21
<PAGE>
any collective bargaining agreement establishing the terms and conditions or
employment of any of COMPANY's employees.
The COMPANY is not now, nor can it as a result of its past activities
become, liable to the Pension Benefit Guaranty Corporation or to any
multiemployer employee pension benefit plan under the provisions of Title IV of
ERISA.
All employee benefit plans listed on Schedule 5.19 and the
administration thereof are in substantial compliance with their terms and all
applicable provisions of ERISA and the regulations issued thereunder, as well as
with all other applicable federal, state and local statutes, ordinances and
regulations.
All accrued contribution obligations of COMPANY with respect to any
plan listed on Schedule 5.19 have either been fulfilled in their entirety or are
fully reflected on the balance sheet of the COMPANY as of the Balance Sheet
Date.
5.20 COMPLIANCE WITH ERISA. All such plans listed on Schedule 5.19 that
are intended to qualify (the "Qualified Plans") under Section 401(a) of the Code
are, and have been so qualified and have been determined by the Internal Revenue
Service to be so qualified, and copies of such determination letters are
included as part of Schedule 5.19 hereof. Except as disclosed on Schedule 5.19,
all reports and other documents required to be filed with any governmental
agency or distributed to plan participants or beneficiaries (including, but not
limited to, actuarial reports, audits or tax returns) have been timely filed or
distributed, and copies thereof are included as part of Schedule 5.19 hereof.
Neither STOCKHOLDERS, nor any plan listed in Schedule 5.19, nor COMPANY has
engaged in any transaction prohibited under the provisions of Section 4975 of
the Code or Section 406 of ERISA. No such Plan listed in Schedule 5.19 has
incurred an accumulated funding deficiency, as defined in Section 412(a) of the
Code and Section 302(1) of ERISA; and COMPANY has not incurred any liability for
excise tax or penalty due to the Internal Revenue Service nor any liability to
the Pension Benefit Guaranty Corporation. The STOCKHOLDERS further represent
that:
(i) there have been no terminations, partial terminations or
discontinuance of contributions to any such Qualified Plan intended to
qualify under Section 401(a) of the Code without notice to and
approval by the Internal Revenue Service;
22
<PAGE>
(ii) no such plan listed in Schedule 5.19 subject to the
provisions of Title IV of ERISA has been terminated;
(iii) there have been no "reportable events" (as that phrase
is defined in Section 4043 of ERISA) with respect to any such plan
listed in Schedule 5.19;
(iv) COMPANY has not incurred liability under Section 4062 of
ERISA; and
(v) No circumstances exist pursuant to which the COMPANY could
have any direct or indirect liability whatsoever (including, but not
limited to, any liability to any multiemployer plan or the PBGC under
Title IV of ERISA or to the Internal Revenue Service for any excise
tax or penalty, or being subject to any statutory lien to secure
payment of any such liability) with respect to any plan now or
heretofore maintained or contributed to by any entity other than the
COMPANY that is, or at any time was, a member of a "controlled group"
(as defined in Section 412(n)(6)(B) of the Code) that includes the
COMPANY;
5.21 CONFORMITY WITH LAW; LITIGATION. Except to the extent set forth on
Schedule 5.21 or 5.13, the COMPANY is not in violation of any law or regulation
which violation would have a Material Adverse Effect, or of any order of any
court or Federal, state, municipal or other governmental department, commission,
board, bureau, agency or instrumentality having jurisdiction over any of them;
and except to the extent set forth on Schedule 5.21, 5.10 or 5.13, there are no
claims, actions, suits or proceedings, pending or, to the knowledge of the
COMPANY, threatened, against or affecting the COMPANY, at law or in equity, or
before or by any Federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality having jurisdiction over it
and no notice of any claim, action, suit or proceeding, whether pending or
threatened, has been received. The COMPANY has conducted and is conducting its
business in compliance with the requirements, standards, criteria and conditions
set forth in applicable Federal, state and local statutes, ordinances, permits,
licenses, orders, approvals, variances, rules and regulations, including all
such permits, licenses, orders and other governmental approvals set forth on
Schedules 5.12 and 5.13, and is not in violation of any of the foregoing.
5.22 TAXES. Except as set forth on Schedule 5.22:
23
<PAGE>
(i) All Returns required to have been filed by or with respect to
the COMPANY and any affiliated, combined, consolidated, unitary or
similar group of which the COMPANY is or was a member (a "Relevant
Group") with any Taxing Authority have been duly filed, and each such
Return correctly and completely reflects the Tax liability and all
other information required to be reported thereon. All Taxes (whether
or not shown on any Return) owed by the COMPANY, any subsidiary and
any member of a Relevant Group (individually, the "Acquired Party" and
collectively, the "Acquired Parties") have been paid.
(ii) To the knowledge of the COMPANY and the STOCKHOLDERS, the
provisions for Taxes to be paid by the COMPANY and any subsidiaries
(as opposed to any reserve for deferred Taxes established to reflect
timing differences between book and Tax income) in the COMPANY
Financial Statements are sufficient for all unpaid Taxes, being
current taxes not yet due and payable, of such Acquired Party.
(iii) No Acquired Party is a party to any agreement extending the
time within which to file any Return. No claim has ever been made by
any Taxing Authority in a jurisdiction in which an Acquired Party does
not file Returns that it is or may be subject to taxation by that
jurisdiction.
(iv) Each Acquired Party has withheld and paid all applicable
Taxes required to have been withheld and paid in connection with
amounts paid or owing to any employee, creditor, independent
contractor or other third party.
(v) No Acquired Party expects any Taxing Authority to assess any
additional Taxes against or in respect of it for any past period.
There is no dispute or claim concerning any Tax liability of any
Acquired Party either (i) claimed or raised by any Taxing Authority or
(ii) otherwise known to any Acquired Party. No issues have been raised
in any examination by any Taxing Authority with respect to any
Acquired Party which, by application of similar principles, reasonably
could be expected to result in a proposed deficiency for any other
period not so examined. Schedule 5.22(v) attached hereto lists all
federal, state, local and foreign income Tax Returns filed by or with
respect to any Acquired Party for all taxable periods ended on or
after January 1, 1991, indicates those Returns, if any, that have been
audited, and indicates those Returns that currently are the subject of
audit. Each Acquired Party has delivered to CEI complete and correct
copies of all federal, state, local and foreign income Tax Returns
filed by, and all Tax examination reports and statements of
deficiencies assessed against or agreed to by, such Acquired Party
since January 1, 1991.
24
<PAGE>
(vi) No Acquired Party has waived any statute of limitations in
respect of Taxes or agreed to any extension of time with respect to
any Tax assessment or deficiency.
(vii) No Acquired Party has made any payments, is obligated to
make any payments, or is a party to any agreement that under certain
circumstances could require it to make any payments, that are not
deductible under Section 280G of the Code.
(viii) No Acquired Party is a party to any Tax allocation or
sharing agreement.
(ix) None of the assets of any Acquired Party constitutes
tax-exempt bond financed property or tax-exempt use property, within
the meaning of Section 168 of the Code. No Acquired Party is a party
to any "safe harbor lease" that is subject to the provisions of
Section 168(f)(8) of the Internal Revenue Code as in effect prior to
the Tax Reform Act of 1986, or to any "long-term contract" within the
meaning of Section 460 of the Code.
(x) No Acquired Party is a "consenting corporation" within the
meaning of Section 341(f)(1) of the Code, or comparable provisions of
any state statutes, and none of the assets of any Acquired Party is
subject to an election under Section 341(f) of the Code or comparable
provisions of any state statutes.
(xi) No Acquired Party is a party to any joint venture,
partnership or other arrangement that is treated as a partnership for
federal income Tax purposes.
(xii) There are no accounting method changes or proposed or
threatened accounting method changes, of any Acquired Party that could
give rise to an adjustment under Section 481 of the Code for periods
after the Funding and Consummation Date.
(xiii) No Acquired Party has received any written ruling of a
Taxing Authority related to Taxes or entered into any written and
legally binding agreement with a Taxing Authority relating to Taxes.
25
<PAGE>
(xiv) Each Acquired Party has disclosed (in accordance with
Section 6662(d)(2)(B)(ii) of the Code) on its federal income Tax
Returns all positions taken therein that could give rise to a
substantial understatement of federal income Tax within the meaning of
Section 6662(d) of the Code.
(xv) No Acquired Party has any liability for Taxes of any person
other than such Acquired Party (i) under Section 1.1502-6 of the
Treasury regulations (or any similar provision of state, local or
foreign law), (ii) as a transferee or successor, (iii) by contract or
(iv) otherwise.
(xvi) There currently are no limitations on the utilization of
the net operating losses, built-in losses, capital losses, Tax credits
or other similar items of any Acquired Party (collectively, the "Tax
Losses") under (i) Section 382 of the Code, (ii) Section 383 of the
Code, (iii) Section 384 of the Code, (iv) Section 269 of the Code, (v)
Section 1.1502-15 and Section 1.1502-15A of the Treasury regulations,
(vi) Section 1.1502-21 and Section 1.1502-21A of the Treasury
regulations or (vii) Sections 1.1502-91 through 1.1502-99 of the
Treasury regulations, in each case as in effect both prior to and
following the Tax Reform Act of 1986.
(xvii) At the Balance Sheet Date, the Acquired Parties had
aggregate Tax Losses for federal income Tax purposes as described on
Schedule 5.22(xvii) attached hereto.
(xviii) The COMPANY is not an investment company as defined in
Section 351(e)(1) of the Code.
(xix) The fair market value of the assets of the COMPANY exceeds
the sum of its liabilities, plus the amount of liabilities, if any, to
which the assets are subject.
(xx) The COMPANY is not under the jurisdiction of a court in a
Title 11 or similar case within the meaning of Section 351(e)(2) of
the Code.
For purposes of this Section 5.22, the following definitions
shall apply:
"Returns" means any returns, reports or statements (including
any information returns) required to be filed for purposes of a particular Tax
with any Taxing Authority or governmental agency.
26
<PAGE>
"Tax" or "Taxes" means all Federal, state, local or foreign
net or gross income, gross receipts, net proceeds, sales, use, ad valorem, value
added, franchise, bank shares, withholding, payroll, employment, excise,
property, deed, stamp, alternative or add-on minimum, environmental or other
taxes, assessments, duties, fees, levies or other governmental charges of any
nature whatsoever, whether disputed or not, together with any interest,
penalties, additions to tax or additional amounts with respect thereto.
"Taxing Authority" means any governmental agency, board,
bureau, body, department or authority of any United States federal, state or
local jurisdiction or any foreign jurisdiction, having jurisdiction with respect
to any Tax.
5.23 NO VIOLATIONS. The COMPANY is not in violation of any Charter
Document. Except as set forth on Schedule 5.23, neither the COMPANY nor, to the
knowledge of the COMPANY or the STOCKHOLDERS, any other party thereto, is in
default under any lease, instrument, agreement, license, or permit set forth on
Schedule 5.12, 5.13, 5.14, 5.15, 5.16, 5.18 or 5.19 or any other material
agreement to which it is a party or by which its properties are bound (the
"Material Documents"); and, except as set forth on Schedule 5.23, (a) the rights
and benefits of the COMPANY under the Material Documents will not be adversely
affected by the transactions contemplated hereby and (b) the execution of this
Agreement and the performance by the COMPANY and the STOCKHOLDERS of their
obligations hereunder and the consummation by the COMPANY and the STOCKHOLDERS
of the transactions contemplated hereby will not result in any violation or
breach of, or constitute a default under, any of the terms or provisions of the
Material Documents or the Charter Documents. Except as set forth on Schedule
5.23, none of the Material Documents requires notice to, or the consent or
approval of, any governmental agency or other third party with respect to any of
the transactions contemplated hereby in order to remain in full force and effect
and consummation of the transactions contemplated hereby will not give rise to
any right to termination, cancellation or acceleration or loss of any right or
benefit. Except as set forth on Schedule 5.23, none of the Material Documents
prohibits the use or publication by the COMPANY, CEI or NEWCO of the name of any
other party to such Material Document, and none of the Material Documents
27
<PAGE>
prohibits or restricts the COMPANY from freely providing services to any other
customer or potential customer of the COMPANY, CEI, NEWCO or any Other Founding
Company.
5.24 GOVERNMENT CONTRACTS. Except as set forth on Schedule 5.24, the
COMPANY is not a party to any governmental contract subject to price
redetermination or renegotiation.
5.25 ABSENCE OF CHANGES. Since the Balance Sheet Date, except as set
forth on Schedule 5.25, there has not been:
(i) any material adverse change in the financial condition,
assets, liabilities (contingent or otherwise), income or business of
the COMPANY;
(ii) any damage, destruction or loss (whether or not covered by
insurance) materially adversely affecting the properties or business
of the COMPANY;
(iii) any change in the authorized capital of the COMPANY or the
outstanding securities issued by the Company or any change in the
classes, preferences or other rights defining the ownership interests
in the Company or any grant or issuance of any options, warrants,
calls, conversion rights or commitments;
(iv) any declaration or payment of any dividend or distribution
in respect of the capital stock or any direct or indirect redemption,
purchase or other acquisition of any of the capital stock of the
COMPANY;
(v) any increase in the compensation, bonus, sales commissions or
fees payable or to become payable by the COMPANY to any of its
officers, directors, STOCKHOLDERS, employees, consultants or agents,
except for ordinary and customary bonuses and salary increases for
employees in accordance with past practice;
(vi) any work interruptions, labor grievances or claims filed, or
any event or condition of any character, materially adversely
affecting the business of the COMPANY;
(vii) any sale or transfer, or any agreement to sell or transfer,
any material assets, property or rights of the COMPANY to any person,
including, without limitation, the STOCKHOLDERS and their affiliates;
28
<PAGE>
(viii) any cancellation, or agreement to cancel, any indebtedness
or other obligation owing to the COMPANY, including, without
limitation, any indebtedness or obligation of any STOCKHOLDERS or any
affiliate thereof;
(ix) any plan, agreement or arrangement granting any preferential
right to purchase or acquire any interest in any of the assets,
property or rights of the COMPANY or requiring consent of any party to
the transfer and assignment of any such assets, property or rights;
(x) any purchase or acquisition of, or agreement, plan or
arrangement to purchase or acquire, any property, rights or assets
outside of the ordinary course of the COMPANY's business;
(xi) any waiver of any material rights or claims of the COMPANY,
provided that the COMPANY may negotiate and adjust bills in the course
of good faith disputes with customers in a manner consistent with past
practice, provided, further, that such adjustments shall not be deemed
to be included on Schedule 5.11 unless specifically listed thereon;
(xii) any material breach, amendment or termination of any
contract, agreement, license, permit or other right to which the
COMPANY is a party or as to which it is a beneficiary;
(xiii) any transaction by the COMPANY outside the ordinary course
of its respective businesses;
(xiv) any cancellation or termination of a material contract with
a customer or client prior to the scheduled termination date;
(xv) any other distribution of property or assets by the COMPANY;
or
(xvi) any other activity prohibited by Section 7.3 that is not
specifically included in this Section 5.25.
5.26 DEPOSIT ACCOUNTS; POWERS OF ATTORNEY. The COMPANY has delivered to
CEI an accurate schedule (which is set forth on Schedule 5.26) as of the date of
this Agreement of:
(i) the name of each financial institution in which the COMPANY
has accounts or safe deposit boxes;
29
<PAGE>
(ii) the names in which the accounts or boxes are held;
(iii) the type of account and account number; and
(iv) the name of each person authorized to draw thereon or have
access thereto.
Schedule 5.26 also sets forth the name of each person, corporation, firm or
other entity holding a general or special power of attorney from the COMPANY and
a description of the terms of such power of attorney.
5.27 VALIDITY OF OBLIGATIONS. The execution and delivery of this
Agreement by the COMPANY and the performance of the transactions contemplated
herein have been duly and validly authorized by the Board of Directors of the
COMPANY and this Agreement has been duly and validly authorized by all necessary
corporate action and is a legal, valid and binding obligation of the COMPANY.
5.28 RELATIONS WITH GOVERNMENTS. The COMPANY has not made, offered or
agreed to offer anything of value to any governmental official, political party
or candidate for government office nor has it otherwise taken any action which
would cause the COMPANY to be in violation of the Foreign Corrupt Practices Act
of 1977, as amended, or any law of similar effect.
5.29 DISCLOSURE. (a) This Agreement, including the schedules hereto,
together with the completed Directors and Officers Questionnaires and
Registration Statement Questionnaires attached hereto as Schedule 5.29 and all
other documents and information made available to CEI and its representatives in
writing pursuant hereto or thereto, fairly present the business and operations
of the COMPANY for the time periods with respect to which such information was
requested. The COMPANY'S rights under the documents delivered pursuant hereto
would not be materially adversely affected by, and no statement made herein
would be rendered untrue in any material respect by, any other document to which
the COMPANY is a party, or to which its properties are subject, or by any other
fact or circumstance regarding the COMPANY (which fact or circumstance was, or
should reasonably, after due inquiry, have been known to the COMPANY) that is
not disclosed pursuant hereto or thereto. If, prior to the 25th day after the
date of the final prospectus of CEI utilized in connection with the IPO, the
COMPANY or the STOCKHOLDERS become aware of any fact or circumstance which would
change (or, if after
30
<PAGE>
the Funding and Consummation Date, would have changed) a representation or
warranty of COMPANY or STOCKHOLDERS in this Agreement or would affect any
document delivered pursuant hereto in any material respect, the COMPANY and the
STOCKHOLDERS shall immediately give notice of such fact or circumstance to CEI.
However, subject to the provisions of Section 7.8, such notification shall not
relieve either the COMPANY or the STOCKHOLDERS of their respective obligations
under this Agreement, and, subject to the provisions of Section 7.8, at the sole
option of CEI, the truth and accuracy of any and all warranties and
representations of the COMPANY, or on behalf of the COMPANY and of the
STOCKHOLDERS at the date of this Agreement and on the Closing Date and on the
Funding and Consummation Date, shall be a precondition to the consummation of
this transaction.
(b) The COMPANY and the STOCKHOLDERS acknowledge and
agree (i) that there exists no firm commitment, binding agreement, or promise or
other assurance of any kind, whether express or implied, oral or written, that a
Registration Statement will become effective or that the IPO pursuant thereto
will occur at a particular price or within a particular range of prices or occur
at all; (ii) that neither CEI or any of its officers, directors, agents or
representatives nor any Underwriter shall have any liability to the COMPANY, the
STOCKHOLDERS or any other person affiliated or associated with the COMPANY for
any failure of the Registration Statement to become effective, the IPO to occur
at a particular price or within a particular range of prices or to occur at all;
and (iii) that the decision of the STOCKHOLDERS to enter into this Agreement, or
to vote in favor of or consent to the proposed Merger, has been or will be made
independent of, and without reliance upon, any statements, opinions or other
communications, or due diligence investigations which have been or will be made
or performed by any prospective Underwriter, relative to CEI or the prospective
IPO.
5.30 PROHIBITED ACTIVITES. Except as set forth on Schedule 5.30, the
COMPANY has not, between the Balance Sheet Date and the date hereof, taken any
of the actions (Prohibited Activities) set forth in Section 7.3.
(B) REPRESENTATIONS AND WARRANTIES OF STOCKHOLDERS
Each STOCKHOLDER severally represents and warrants that the
representations and warranties set forth below are true as of the date of this
Agreement and, subject to Section
31
<PAGE>
7.8 hereof, shall be true at the time of the Closing and on the Funding and
Consummation Date, and that the representations and warranties set forth in
Sections 5.31, 5.32 and 5.33 shall survive until the second anniversary of the
Funding and Consummation Date, which shall be deemed to be the Expiration Date
for purposes of those Sections.
5.31 AUTHORITY; OWNERSHIP. Such STOCKHOLDER has the full legal right,
power and authority to enter into this Agreement. Such STOCKHOLDER owns
beneficially and of record all of the shares of the COMPANY stock identified on
Annex IV as being owned by such STOCKHOLDER, and, except as set forth on
Schedule 5.31, such COMPANY Stock is owned free and clear of all liens, security
interests, pledges, charges, voting trusts, restrictions, encumbrances and
claims of every kind.
5.32 PREEMPTIVE RIGHTS. Such STOCKHOLDER does not have, or hereby
waives, any preemptive or other right to acquire shares of COMPANY Stock or CEI
Stock that such STOCKHOLDER has or may have had other than rights of any
STOCKHOLDER to acquire CEI Stock pursuant to (i) this Agreement or (ii) any
option granted by CEI.
5.33 NO INTENTION TO DISPOSE OF CEI STOCK. No STOCKHOLDER has any
current plan or intention, or is under any binding commitment or contract, to
sell, exchange or otherwise dispose of shares of CEI Stock received pursuant to
Section 3.1.
5.34 TRANSACTIONS WITH DIRECTORS OFFICERS AND AFFILIATES. Except as
listed on Schedule 5.34 annexed hereto, there have been no transactions since
January 1, 1992 between the COMPANY and any of its directors, officers,
stockholders or affiliates or any of their Family Members (as defined below)
involving $60,000 or more. Each transaction set forth on Schedule 5.34 has been
on reasonable commercial terms which could have been obtained at the time from
bona fide third parties. To the best knowledge of the COMPANY, since January 1,
1992, none of the officers or directors of the COMPANY or any spouse or Family
Member (as defined below) of any of such persons, has been a director, officer
or consultant of, or owns directly or indirectly any interest in, any firm,
corporation, association or business enterprise which during such period has
been a significant supplier, customer or sales agent of the COMPANY or has
competed with or been engaged in any business of the kind being conducted by the
COMPANY except as disclosed on Schedule 5.34 annexed hereto. Except as disclosed
on Schedule 5.34, no
32
<PAGE>
Family Member (as defined below) of any STOCKHOLDER, officer or director of the
COMPANY is currently an employee or consultant receiving payments from the
COMPANY or otherwise on the payroll of the COMPANY or has any material claim
whatsoever against or owes any amount to the COMPANY, except for claims in the
ordinary course of business such as for accrued vacation pay and accrued
benefits under employee benefit plans. "Family Member" shall mean all relatives
and their spouses in a relationship of first cousins or closer.
6. REPRESENTATIONS OF CEI AND NEWCO
CEI and NEWCO jointly and severally represent and warrant that all of
the following representations and warranties in this Section 6 are true at the
date of this Agreement and, subject to Section 7.8 hereof, shall be true at the
time of the Closing and the Funding and Consummation Date, and that such
representations and warranties shall survive the Funding and Consummation Date
for a period of two years (the last day of such period being the "Expiration
Date"), except that (i) the warranties and representations set forth in Section
6.14 hereof shall survive until such time as the limitations period has run for
all tax periods ended on or prior to the Funding and Consummation Date, which
shall be deemed to be the Expiration Date for Section 6.14 and (ii) solely for
purposes of Section 11.2(iv) hereof, and solely to the extent that in connection
with the IPO, CEI actually incurs liability under the 1933 Act, the 1934 Act or
any other Federal or state securities laws, the representations and warranties
set forth herein shall survive until the expiration of any applicable
limitations period, which shall be deemed to be the Expiration Date for such
purposes.
6.1 DUE ORGANIZATION. CEI and NEWCO are each corporations duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and are duly authorized and qualified to do business under all
applicable laws, regulations, ordinances and orders of public authorities to
carry on their respective business in the places and in the manner as now
conducted except where the failure to be so authorized or qualified would not
have a Material Adverse Effect. True, complete and correct copies of the
Certificate of Incorporation and By-laws, each as amended, of CEI and NEWCO (the
"CEI Charter Documents") are all attached hereto as Annex II.
33
<PAGE>
6.2 AUTHORIZATION. (i) The respective representatives of CEI and NEWCO
executing this Agreement have the authority to enter into and bind CEI and NEWCO
to the terms of this Agreement and (ii) CEI and NEWCO have the full corporate
right, power and authority to enter into this Agreement and the Merger.
6.3 CAPITAL STOCK OF THE COMPANY. The authorized capital stock of CEI
and NEWCO is as set forth in Sections 1.4(ii) and (iii), respectively. All of
the issued and outstanding shares of the capital stock of NEWCO are owned by CEI
and all of the issued and outstanding shares of the capital stock of CEI are
owned by the persons set forth on Annex V hereof, in each case, free and clear
of all liens, security interests, pledges, charges, voting trusts, restrictions,
encumbrances and claims of every kind. All of the issued and outstanding shares
of the capital stock of CEI and NEWCO have been duly authorized and validly
issued, are fully paid and nonassessable, are owned of record and beneficially
by CEI and the persons set forth on Annex V, respectively, and further, such
shares were offered, issued, sold and delivered by CEI and NEWCO in compliance
with all applicable state and Federal laws concerning the issuance of
securities. Further, none of such shares were issued in violation of the
preemptive rights of any past or present stockholder of CEI or NEWCO.
6.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING. Except as
set forth on Schedule 6.4 of this Agreement, and as set forth in the
Registration Statement, (i) no option, warrant, call, conversion right or
commitment of any kind exists which obligates CEI or NEWCO to issue any of its
authorized but unissued capital stock or its treasury stock; and (ii) neither
CEI nor NEWCO has any obligation (contingent or otherwise) to purchase, redeem
or otherwise acquire any of its equity securities or any interests therein or to
pay any dividend or make any distribution in respect thereof. Schedule 6.4 also
includes complete and accurate copies of all stock option or stock purchase
plans of CEI and NEWCO, including a list, accurate as of the date hereof, of all
outstanding options, warrants or other rights to acquire shares of their
respective capital stock.
6.5 SUBSIDIARIES. NEWCO has no subsidiaries. CEI has no subsidiaries
except for NEWCO and each of the companies identified as "NEWCO" in each of the
Other Agreements. Except as set forth in the preceding sentence, neither CEI nor
NEWCO owns, of record or
34
<PAGE>
beneficially, or controls, directly or indirectly, any capital stock, securities
convertible into capital stock or any other equity interest in any corporation,
association or business entity nor is CEI or NEWCO, directly or indirectly, a
participant in any joint venture, partnership or other non-corporate entity.
6.6 FINANCIAL STATEMENTS. (a) Attached hereto as Schedule 6.6(a) are
copies of the following financial statements of CEI (the "CEI Financial
Statements"), which reflect the results of its operations from inception: CEI's
audited Balance Sheet as of December 31, 1996 and Statements of Income, Cash
Flows and Retained Earnings for the period from inception through December 31,
1996. Such CEI Financial Statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods indicated (except as noted thereon or on Schedule
6.6(a)). Except as set forth on Schedule 6.6(a), such Balance Sheets as of
December 31, 1996 present fairly the financial position of CEI as of such date,
and such Statements of Income, Cash Flows and Retained Earnings present fairly
the results of operations for the period indicated.
(b) Attached hereto as Schedule 6.6(b) are copies of the following
unaudited pro forma combined financial statements for CEI and the Founding
Companies (the "Pro Forma Financial Statements"): combined Balance Sheets as of
December 31, 1995 and December 31, 1996 and Statements of Income, Cash Flows and
Retained Earnings for the years ended December 31, 1994, 1995 and 1996. Such Pro
Forma Financial Statements have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis throughout the
period indicated (except as noted thereon or on Schedule 6.6(b)). Except as set
forth on Schedule 6.6(b), such Balance Sheets, as of the dates thereof, present
fairly the financial position of CEI and the Founding Companies, and such
Statements of Income, Cash Flows and Retained Earnings present fairly the
results of operations for the periods indicated.
6.7 LIABILITIES AND OBLIGATIONS. Except as set forth on Schedule 6.7,
CEI and NEWCO have no material liabilities, contingent or otherwise, except as
set forth in or contemplated by this Agreement and the Other Agreements and
except for fees and expenses incurred in connection with the transactions
contemplated hereby and thereby.
35
<PAGE>
6.8 CONFORMITY WITH LAW; LITIGATION. Except to the extent set forth on
Schedule 6.8, neither CEI nor NEWCO is in violation of any law or regulation
which violation would have a Material Adverse Effect, or of any order of any
court or Federal, state, municipal or other governmental department, commission,
board, bureau, agency or instrumentality having jurisdiction over either of
them; and except to the extent set forth in Schedule 6.8, there are no material
claims, actions, suits or proceedings, pending or, to the knowledge of CEI or
NEWCO, threatened, against or affecting CEI or NEWCO, at law or in equity, or
before or by any Federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality having jurisdiction over
either of them and no notice of any claim, action, suit or proceeding, whether
pending or threatened, has been received. CEI and NEWCO have conducted and are
conducting their respective businesses in compliance with the requirements,
standards, criteria and conditions set forth in applicable Federal, state and
local statutes, ordinances, permits, licenses, orders, approvals, variances,
rules and regulations and are not in violation of any of the foregoing.
6.9 NO VIOLATION. Neither CEI nor NEWCO is in violation of any CEI
Charter Document. None of CEI, NEWCO, or, to the knowledge of CEI and NEWCO, any
other party thereto, is in default under any lease, instrument, agreement,
license, or permit to which CEI or NEWCO is a party, or by which CEI or NEWCO,
or any of their respective properties, are bound (collectively, the "CEI
Documents"); and (a) the rights and benefits of CEI and NEWCO under the CEI
Documents will not be adversely affected by the transactions contemplated hereby
and (b) the execution of this Agreement and the performance of CEI's and NEWCO's
obligations hereunder and the consummation by them of the transactions
contemplated hereby will not result in any violation or breach or constitute a
default under, any of the terms or provisions of the CEI Documents or the CEI
Charter Documents. Except as set forth on Schedule 6.9, none of the CEI
Documents requires notice to, or the consent or approval of, any governmental
agency or other third party with respect to any of the transactions contemplated
hereby in order to remain in full force and effect and the consummation of the
transactions contemplated hereby will not give rise to any right to termination,
cancellation or acceleration or loss of any right or benefit of CEI or NEWCO.
36
<PAGE>
6.10 VALIDITY OF OBLIGATIONS. The execution and delivery of this
Agreement by CEI and NEWCO and the performance by them of the transactions
contemplated hereby have been duly and validly authorized by the respective
Boards of Directors of CEI and NEWCO and this Agreement has been duly and
validly authorized by all necessary corporate action and is a legal, valid and
binding obligation of CEI and NEWCO.
6.11 CEI STOCK. At the time of issuance thereof, the CEI Stock to be
delivered to the STOCKHOLDERS pursuant to this Agreement will constitute valid
and legally issued shares of CEI, fully paid and nonassessable, and with the
exception of restrictions upon resale set forth in Sections 15 and 16 hereof,
will be identical in all material and substantive respects to the CEI Stock
issued and outstanding as of the date hereof by reason of the provisions of the
Delaware GCL. The shares of CEI Stock to be issued to the STOCKHOLDERS pursuant
to this Agreement will not be registered under the 1933 Act, except as provided
in Section 17 hereof.
6.12 NO SIDE AGREEMENTS. Except with respect to the Schedules and the
merger consideration payable at the Effective Time of the Merger, the Other
Agreements are substantially identical to this Agreement in all material
respects. Neither CEI nor NEWCO has entered or will enter into any agreement
with any of the Founding Companies or any of the stockholders of the Founding
Companies or CEI other than the Other Agreements and the agreements contemplated
by each of the Other Agreements, including the employment agreements referred to
therein.
6.13 BUSINESS; REAL PROPERTY; MATERIAL AGREEMENTS. Neither CEI nor
NEWCO has conducted any operations or business since inception other than
activities related to the CEI Plan of Organization. Neither CEI nor NEWCO owns
or has at any time owned any real property or any material personal property or
is a party to any other agreement, except as listed on Schedule 6.13 and except
that CEI is a party to the Other Agreements and the agreements contemplated
thereby and to certain agreements which will be filed as Exhibits to the
Registration Statement.
6.14 TAXES. NEWCO is a newly formed entity which has no tax or
operational history. Except as set forth on Schedule 6.14:
(i) All Returns required to have been filed by or with respect to
CEI and any affiliated, combined, consolidated, unitary or similar
group of which CEI is or was a
37
<PAGE>
member (a "CEI Relevant Group") with any Taxing Authority have been
duly filed, and each such Return correctly and completely reflects the
Tax liability and all other information required to be reported
thereon. All Taxes (whether or not shown on any Return) owed by the
CEI Relevant Group have been paid.
(ii) The provisions for Taxes due by CEI and any subsidiaries (as
opposed to any reserve for deferred Taxes established to reflect
timing differences between book and Tax income) in the CEI Financial
Statements are sufficient for all unpaid Taxes, being current taxes
not yet due and payable, of the CEI Relevant Group.
(iii) No corporation in the CEI Relevant Group is a party to any
agreement extending the time within which to file any Return. No claim
has ever been made by any Taxing Authority in a jurisdiction in which
a corporation in the CEI Relevant Group does not file Returns that it
is or may be subject to taxation by that jurisdiction.
(iv) Each corporation in the CEI Relevant Group has withheld and
paid all Taxes required to have been withheld and paid in connection
with amounts paid or owing to any employee, creditor, independent
contractor or other third party.
(v) No corporation in the CEI Relevant Group expects any Taxing
Authority to assess any additional Taxes against or in respect of it
for any past period. There is no dispute or claim concerning any Tax
liability of any corporation in the CEI Relevant Group either (i)
Claimed or raised by any Taxing Authority or (ii) otherwise known to
any corporation in the CEI Relevant Group. No issues have been raised
in any examination by any Taxing Authority with respect to any
corporation in the CEI Relevant Group which, by application of similar
principles, reasonably could be expected to result in a proposed
deficiency for any other period not so examined. Schedule 6.14(v)
attached hereto lists all federal, state, local and foreign income Tax
Returns filed by or with respect to any corporation in the CEI
Relevant Group for all taxable periods, indicates those Returns, if
any, that have been audited, and indicates those Returns that
currently are the subject of audit. Each corporation in the CEI
Relevant Group will make available to the STOCKHOLDERS, at their
request, complete and correct copies of all federal,
38
<PAGE>
state, local and foreign income Tax Returns filed by, and all Tax
examination reports and statements of deficiencies assessed against or
agreed to by, CEI.
(vi) No corporation in the CEI Relevant Group has waived any
statute of limitations in respect of Taxes or agreed to any extension
of time with respect to any Tax assessment or deficiency.
(vii) No corporation in the CEI Relevant Group has made any
payments, is obligated to make any payments, or is a party to any
agreement that under certain circumstances could require it to make
any payments, that are not deductible under Section 280G the Code.
(viii) No corporation in the CEI Relevant Group is a party to any
Tax allocation or sharing agreement.
(ix) None of the assets of any corporation in the CEI Relevant
Group constitutes tax-exempt bond financed property or tax-exempt use
property, within the meaning of Section 168 of the Code. No
corporation in the CEI Relevant Group is a party to any "safe harbor
lease" that is subject to the provisions of Section 168(f)(8) of the
Internal Revenue Code as in effect prior to the Tax Reform Act of
1986, or to any "long-term contract" within the meaning of Section 460
of the Code.
(x) No corporation in the CEI Relevant Group is a "consenting
corporation" within the meaning of Section 341(f)(1) of the Code, or
comparable provisions of any state statutes, and none of the assets of
any corporation in the CEI Relevant Group is subject to an election
under Section 341(f) of the Code or comparable provisions of any state
statutes.
(xi) No corporation in the CEI Relevant Group is a party to any
joint venture, partnership or other arrangement that is treated as a
partnership for federal income Tax purposes.
(xii) There are no accounting method changes or proposed or
threatened accounting method changes, of any corporation in the CEI
Relevant Group that could give rise to an adjustment under Section 481
of the Code for periods after the Funding and Consummation Date.
39
<PAGE>
(xiii) No corporation in the CEI Relevant Group has received any
written ruling of a Taxing Authority related to Taxes or entered into
any written and legally binding agreement with a Taxing Authority
relating to Taxes.
(xiv) Each corporation in the CEI Relevant Group has disclosed
(in accordance with Section 6662(d)(2)(B)(ii) of the Code) on its
federal income Tax Returns all positions taken therein that could give
rise to a substantial understatement of federal income Tax within the
meaning of Section 6662(d) of the Code.
(xv) No corporation in the CEI Relevant Group has any liability
for Taxes of any person other than such corporation in the CEI
Relevant Group (i) under Section 1.1502-6 of the Treasury regulations
(or any similar provision of state, local or foreign law), (ii) as a
transferee or successor, (iii) by contract or (iv) otherwise.
(xvi) There currently are no limitations on the utilization of
the net operating losses, built-in losses, capital losses, Tax credits
or other similar items of any corporation in the CEI Relevant Group
under (i) Section 382 of the Code, (ii) Section 383 of the Code, (iii)
Section 384 of the Code, (iv) Section 269 of the Code, (v) Section
1.1502-15 and Section 1.1502-15A of the Treasury regulations, (vi)
Section 1.1502-21 and Section 1.1502-21A of the Treasury regulations
or (vii) sections 1.1502-91 through 1.1502-99 of the Treasury
regulations, in each case as in effect both prior to and following the
Tax Reform Act of 1986.
(xvii) Neither CEI nor NEWCO is an investment company as defined
in Section 351(e)(1) of the Code.
(xviii) Neither CEI nor NEWCO is under the jurisdiction of a
court in a Title 11 or similar case within the meaning of Section
351(e)(2) of the Code.
After giving effect to the Merger, the fair saleable value of the
business and assets of CEI and its subsidiaries will be in excess of the amount
that will be required to pay its principal liabilities on existing debts as they
become due and payable in accordance with their terms.
7. COVENANTS PRIOR TO CLOSING
40
<PAGE>
7.1 ACCESS AND COOPERATION; DUE DILIGENCE.(a) Between the date of this
Agreement and the Funding and Consummation Date, the COMPANY will afford to the
officers and authorized representatives of CEI and the Other Founding Companies
reasonable access, during normal business hours, to all of the COMPANY's sites,
properties, books and records and will furnish CEI with such additional
financial and operating data and other information as to the business and
properties of the COMPANY as CEI or the Other Founding Companies may from time
to time reasonably request. The COMPANY will cooperate with CEI and the Other
Founding Companies and their respective representatives, including CEI's
auditors and counsel, in the preparation of any documents or other material
(including the Registration Statement) which may be required in connection with
the transactions contemplated by this Agreement. CEI, NEWCO, the STOCKHOLDERS
and the COMPANY will treat all information obtained in connection with the
negotiation and performance of this Agreement or the due diligence
investigations conducted with respect to the Other Founding Companies as
confidential in accordance with the provisions of Section 14 hereof. In
addition, CEI will cause each of the Other Agreements, binding each of the Other
Founding Companies, to contain a provision similar to this Section 7.1 and a
provision similar to Section 14 requiring each such Other Founding Company, its
stockholders, directors, officers, representatives, employees and agents to keep
confidential any information obtained by such Other Founding Company and to
provide the COMPANY with reasonable access and information as will be provided
by the COMPANY pursuant to this Section 7.1(a).
(b) Between the date of this Agreement and the Funding and Consummation
Date, CEI will afford to the officers and authorized representatives of the
COMPANY access to all of CEI's and NEWCO's sites, properties, books and records
and will furnish the COMPANY with such additional financial and operating data
and other information as to the business and properties of CEI and NEWCO as the
COMPANY may from time to time reasonably request. CEI and NEWCO will cooperate
with the COMPANY, its representatives, auditors and counsel in the preparation
of any documents or other material which may be required in connection with the
transactions contemplated by this Agreement. The COMPANY will cause all
information
41
<PAGE>
obtained in connection with the negotiation and performance of this Agreement to
be treated as confidential in accordance with the provisions of Section 14
hereof.
7.2 CONDUCT OF BUSINESS PENDING CLOSING. Between the date of this
Agreement and the Funding and Consummation Date, the COMPANY will, except as set
forth on Schedule 7.2:
(i) carry on its business in the ordinary course substantially as
conducted heretofore and not introduce any new method of management,
operation or accounting;
(ii) maintain its properties and facilities, including those held
under leases, in as good working order and condition as at present,
ordinary wear and tear excepted;
(iii) perform in all material respects its obligations under
agreements relating to or affecting its assets, properties or rights;
(iv) keep in full force and effect present insurance policies or
other comparable insurance coverage;
(v) maintain and preserve its business organization intact and
use its best efforts to retain its present key employees and
relationships with suppliers, customers and others having business
relations with the COMPANY;
(vi) maintain compliance with all permits, laws, rules and
regulations, consent orders, and all other orders of applicable
courts, regulatory agencies and similar governmental authorities;
(vii) maintain present debt and lease instruments in accordance
with their respective terms and not enter into new or amended debt or
lease instruments, provided that debt and/or lease instruments may be
replaced if such replacement instruments are on terms at least as
favorable to the COMPANY as the instruments being replaced; and
(viii) maintain or reduce present salaries and commission levels
for all officers, directors, employees and agents, except for ordinary
and customary bonus and salary increases for employees in accordance
with past practices.
7.3 PROHIBITED ACTIVITIES. Except as disclosed on Schedule 7.3, between
the date hereof and the Funding and Consummation Date, the COMPANY will not,
without prior written consent of CEI:
(i) make any change in its Articles or Certificate of
Incorporation or By-laws;
42
<PAGE>
(ii) grant or issue any securities, options, warrants, calls,
conversion rights or commitments of any kind relating to its
securities of any kind other than in connection with the exercise of
options or warrants listed on Schedule 5.4;
(iii) declare or pay any dividend, or make any distribution in
respect of its stock whether now or hereafter outstanding, or
purchase, redeem or otherwise acquire or retire for value any shares
of its stock;
(iv) enter into any contract or commitment or incur or agree to
incur any liability or make any capital expenditure, except if it is
in the ordinary course of business (consistent with past practice) and
involves an amount not in excess of $10,000;
(v) create, assume or permit to exist any mortgage, pledge or
other lien or encumbrance upon any assets or properties whether now
owned or hereafter acquired, except (1) with respect to purchase money
liens incurred in connection with the acquisition of equipment with an
aggregate cost not in excess of $10,000 necessary or desirable for the
conduct of the business of the COMPANY, (2) (A) liens for taxes either
not yet due or being contested in good faith and by appropriate
proceedings (and for which adequate reserves have been established and
are being maintained) or (B) materialmen's, mechanics', workers',
repairmen's, employees' or other like liens arising in the ordinary
course of business (the liens set forth in clause (2) being referred
to herein as "Statutory Liens"), or (3) liens set forth on Schedule
5.10 or 5.15 hereto;
(vi) sell, assign, lease or otherwise transfer or dispose of any
property or equipment except in the ordinary course of business;
(vii) negotiate for the acquisition of any business or the
start-up of any new business;
(viii) merge or consolidate or agree to merge or consolidate with
or into any other corporation;
(ix) waive any material right or claim of the COMPANY, provided
that the COMPANY may negotiate and adjust bills in the course of good
faith disputes with customers in a manner consistent with past
practice, provided, further, that such
43
<PAGE>
adjustments shall not be deemed to be included on Schedule 5.11 unless
specifically listed thereon;
(x) commit a material breach or amend or terminate any material
contract, agreement, permit, license or other right to which the
COMPANY is a party or as to which it is a beneficiary; or
(xi) enter into any other transaction outside the ordinary course
of its business or prohibited hereunder.
7.4 NO SHOP . None of the STOCKHOLDERS or the COMPANY, nor any agent,
officer, director, trustee or any representative of any of the foregoing will,
during the period commencing on the date of this Agreement and ending with the
earlier to occur of the Funding and Consummation Date or the termination of this
Agreement in accordance with its terms, directly or indirectly: solicit or
initiate the submission of proposals or offers from any person for, participate
in any discussion pertaining to, or furnish any information to any person other
than CEI or its authorized agents relating to, any acquisition or purchase of
all or a material amount of the assets of, or any equity interest in, the
COMPANY or a merger, consolidation or business combination of the COMPANY.
7.5 NOTICE TO BARGAINING AGENTS. Prior to the Closing Date, the COMPANY
shall satisfy any requirement for notice of the transactions contemplated by
this Agreement under applicable collective bargaining agreements. Set forth on
Schedule 7.5 is a copy of such required notice, as sent.
7.6 AGREEMENTS. The STOCKHOLDERS and the COMPANY shall terminate (i)
any stockholders' agreements, voting agreements, voting trusts, options,
warrants and employment agreements between the COMPANY and any employee listed
on Schedule 9.12 hereto (other than the new employment agreements contemplated
by Section 9.12) and (ii) any existing agreement between the COMPANY and any
STOCKHOLDER, on or prior to the Funding and Consummation Date. A list of such
termination agreements is set forth on Schedule 7.6 and copies of each such
agreement are attached thereto.
7.7 NOTIFICATION OF CERTAIN MATTERS. The STOCKHOLDERS and the COMPANY
shall give prompt notice to CEI of (i) the occurrence or non-occurrence of any
event the
44
<PAGE>
occurrence or non-occurrence of which would be likely to cause any
representation or warranty of the COMPANY or the STOCKHOLDERS contained herein
to be untrue or inaccurate in any material respect at or prior to the Closing
and (ii) any material failure of any STOCKHOLDER or the COMPANY to comply with
or satisfy any covenant, condition or agreement to be complied with or satisfied
by such person hereunder. CEI and NEWCO shall give prompt notice to the COMPANY
of (i) the occurrence or non-occurrence of any event the occurrence or
non-occurrence of which would be likely to cause any representation or warranty
of CEI or NEWCO contained herein to be untrue or inaccurate in any material
respect at or prior to the Closing and (ii) any material failure of CEI or NEWCO
to comply with or satisfy any covenant, condition or agreement to be complied
with or satisfied by it hereunder. The delivery of any notice pursuant to this
Section 7.7 shall not be deemed to (i) modify the representations or warranties
hereunder of the party delivering such notice, which modification may only be
made pursuant to Section 7.8, (ii) modify the conditions set forth in Sections 8
and 9, or (iii) limit or otherwise affect the remedies available hereunder to
the party receiving such notice.
7.8 AMENDMENT OF SCHEDULES. (a) Each party hereto agrees that, with
respect to the representations and warranties of such party contained in this
Agreement, such party shall have the continuing obligation until the Funding and
Consummation Date to supplement or amend promptly the Schedules hereto with
respect to any matter hereafter arising or discovered which, if existing or
known at the date of this Agreement, would have been required to be set forth or
described in the Schedules, provided however, that supplements and amendments to
Schedules 5.10, 5.11, 5.14 and 5.15 shall only have to be delivered at the
Closing Date, unless such Schedule is to be amended to reflect an event
occurring other than in the ordinary course of business.
(b) Until 24 hours prior to the anticipated effectiveness of the
Registration Statement, and notwithstanding the foregoing clause (a), the
provisions of this clause (b) shall apply: no amendment or supplement to a
Schedule prepared by the COMPANY or the STOCKHOLDERS that constitutes or
reflects an event or occurrence that would have a Material Adverse Effect may be
made unless CEI and a majority of the Founding Companies other than the COMPANY
consent to such amendment or supplement; and provided further, that no
45
<PAGE>
amendment or supplement to a Schedule prepared by CEI or NEWCO that constitutes
or reflects an event or occurrence that would have a Material Adverse Effect may
be made unless a majority of the Founding Companies consent to such amendment or
supplement. In the event that one of the Other Founding Companies seeks to amend
or supplement a Schedule pursuant to Section 7.8 of one of the Other Agreements,
and such amendment or supplement constitutes or reflects an event or occurrence
that would have a Material Adverse Effect on such Other Founding Company, CEI
shall give the COMPANY notice promptly after it has knowledge thereof. If CEI
and a majority of the Founding Companies consent to such amendment or
supplement, which consent shall have been deemed given by CEI or any Founding
Company if no response is received from CEI or any such Founding Company within
24 hours following receipt of notice of such amendment or supplement (or sooner
if required by the circumstances under which such consent is requested), but the
COMPANY does not give its consent, the COMPANY may terminate this Agreement
pursuant to Section 12.1(iv) hereof. In the event that the COMPANY seeks to
amend or supplement a Schedule pursuant to this Section 7.8 and CEI and a
majority of the Other Founding Companies do not consent to such amendment or
supplement, this Agreement shall be deemed terminated by mutual consent as set
forth in Section 12.1(i) hereof. In the event that CEI or NEWCO seeks to amend
or supplement a Schedule pursuant to this Section 7.8 and a majority of the
Founding Companies do not consent to such amendment or supplement, this
Agreement shall be deemed terminated by mutual consent as set forth in Section
12.1(i) hereof.
(c) Between 24 hours prior to the anticipated effectiveness of the
Registration Statement and the Funding and Consummation Date, the provisions of
this clause (c) shall apply. No amendment or supplement to a Schedule prepared
by the COMPANY or the STOCKHOLDERS that constitutes or reflects an event or
occurrence that would have a Material Adverse Effect may be made unless CEI
consents to such amendment or supplement after consultation with the
Underwriters. CEI and NEWCO hereby covenant that neither CEI nor NEWCO will
amend or supplement any Schedule prepared by CEI or NEWCO that constitutes or
reflects an event or occurrence that would have a Material Adverse Effect on CEI
or NEWCO, as the case may be,
46
<PAGE>
without consulting with the Underwriters, and CEI shall provide immediate notice
of such amendment or supplement to the Founding Companies.
(d) For all purposes of this Agreement, including without limitation
for purposes of determining whether the conditions set forth in Sections 8.1 and
9.1 have been fulfilled, the Schedules hereto shall be deemed to be the
Schedules as amended or supplemented pursuant to this Section 7.8. No party to
this Agreement shall be liable to any other party if this Agreement shall be
terminated pursuant to the provisions of this Section 7.8, except that,
notwithstanding anything to the contrary contained in this Agreement, if the
COMPANY or the STOCKHOLDERS on the one hand, or CEI or NEWCO on the other hand,
amends or supplements a Schedule which results in a termination of this
Agreement and such amendment or supplement arises out of or reflects facts or
circumstances which such party knew about at the time of execution of this
Agreement and knew would result in a termination of this Agreement or if such
amendment or supplement otherwise is proposed in bad faith, such party shall pay
or reimburse CEI or the COMPANY and the STOCKHOLDERS, as the case may be, for
all of the legal, accounting and other out of pocket costs reasonably incurred
in connection with this Agreement and the IPO as it relates to CEI, the COMPANY
and the STOCKHOLDERS.
7.9 COOPERATION IN PREPARATION OF REGISTRATION STATEMENT. The COMPANY
and STOCKHOLDERS shall furnish or cause to be furnished to CEI and the
Underwriters all of the information concerning the COMPANY and the STOCKHOLDERS
requested by CEI or the Underwriters for inclusion in, and will cooperate with
CEI and the Underwriters in the preparation of, the Registration Statement and
the prospectus included therein (including audited and unaudited financial
statements, prepared in accordance with generally accepted accounting
principles, in form suitable for inclusion in the Registration Statement). The
COMPANY and the STOCKHOLDERS agree promptly to advise CEI if at any time during
the period in which a prospectus relating to the offering is required to be
delivered under the Securities Act, any information contained in the prospectus
concerning the COMPANY or the STOCKHOLDERS contains any untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and to provide the
information needed to correct such inaccuracy. Insofar as the information
relates solely to the
47
<PAGE>
COMPANY or the STOCKHOLDERS, the COMPANY represents and warrants as to such
information with respect to itself, and each STOCKHOLDER represents and
warrants, as to such information with respect to the COMPANY and himself or
herself, that the Registration Statement at its effective date, at the date of
the Final Prospectus (as defined in the Underwriting Agreement), the Preliminary
Prospectus (as defined in the Underwriting Agreement), and each amendment to the
Registration Statement, and at each closing date with respect to the IPO under
the Underwriting Agreement (including with respect to any over-allotment option)
will not include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not misleading.
7.10 FINAL FINANCIAL STATMENTS. The COMPANY shall provide prior to the
Funding and Consummation Date, and CEI shall have had sufficient time prior
thereto to review, the unaudited consolidated balance sheets of the COMPANY as
of the end of each fiscal quarter following the Balance Sheet Date that ends at
least 45 days prior to the Funding and Consummation Date, and the unaudited
consolidated statements of income, cash flows and retained earnings of the
COMPANY for all fiscal quarters ended after the Balance Sheet Date, disclosing
no material adverse change in the financial condition of the COMPANY or the
results of its operations from the financial statements as of the Balance Sheet
Date. Such financial statements shall have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods indicated (except as noted therein). Except as noted in
such financial statements, all of such financial statements will present fairly
the results of operations of the COMPANY for the periods indicated thereon.
7.11 FURTHER ASSURANCES. The parties hereto agree to execute and
deliver, or cause to be executed and delivered, such further instruments or
documents or take such other action as may be reasonably necessary or convenient
to carry out the transactions contemplated hereby.
7.12 AUTHORIZED CAPITAL. CEI shall maintain its authorized capital
stock as set forth in the Registration Statement filed with the SEC except for
such changes in authorized capital stock as are made to respond to comments made
by the SEC or requirements of any exchange or automated trading system for which
application is made to register the CEI Stock.
48
<PAGE>
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY
The obligations of the STOCKHOLDERS and the COMPANY with respect to
actions to be taken on the Closing Date and, to the extent specified in this
Section 8, on the Funding and Consummation Date, are subject to the satisfaction
or waiver on or prior to the Closing Date and/or the Funding and Consummation
Date, as the case may be, of all of the conditions set forth in this Section 8.
As of the Closing Date or the Funding and Consummation Date, as the case may be,
all conditions not satisfied shall be deemed to have been waived by the COMPANY
and the STOCKHOLDERS unless such parties have objected by notifying CEI in
writing of such objection on or before the closing on the Closing Date or
consummation of the transactions on the Funding and Consummation Date,
respectively, except that no such waiver shall be deemed to affect the survival
of the representations and warranties of CEI and NEWCO contained in Section 6
hereof.
8.1 REPRESENTATIONS AND WARRANTIES. All representations and warranties
of CEI and NEWCO contained in Section 6 (as amended by any amendment or
supplement to a Schedule that has received their requisite consents contemplated
by Section 7.8) shall be true and correct in all material respects as of the
Closing Date as though such representations and warranties had been made as of
that time; and a certificate to the foregoing effect dated the Closing Date and
signed by the President or any Vice President of CEI shall have been delivered
to the STOCKHOLDERS.
8.2 PERFORMANCE OF OBLIGATIONS. All of the terms, covenants and
conditions of this Agreement to be complied with and performed by CEI and NEWCO
on or before each of the Closing Date and the Funding and Consummation Date
shall have been duly complied with and performed in all material respects on or
before each of the Closing Date and the Funding and Consummation Date, as the
case may be; and certificates to the foregoing effect dated each of the Closing
Date and the Funding and Consummation Date and signed by the President or any
Vice President of CEI shall have been delivered to the STOCKHOLDERS.
49
<PAGE>
8.3 NO LITIGATION. No action or proceeding before a court or any other
governmental agency or body shall have been instituted or threatened to restrain
or prohibit the Merger or the IPO and no governmental agency or body shall have
taken any other action or made any request of the COMPANY as a result of which
the management of the COMPANY deems it inadvisable to proceed with the
transactions hereunder.
8.4 OPINION OF COUNSEL. The COMPANY shall have received an opinion from
counsel for CEI, dated the Closing Date, in the form annexed hereto as Annex VI.
8.5 REGISTRATION STATEMENT. The Registration Statement shall have been
declared effective by the SEC and no stop order suspending the effectiveness of
the Registration Statement shall be in effect and no proceeding therefor shall
have been instituted or shall be pending or contemplated under the 1933 Act and
the Underwriters shall have agreed to acquire on a firm commitment basis,
subject to the conditions set forth in the Underwriting Agreement, on terms such
that the aggregate value of the cash and the number of shares of CEI Stock to be
received by the STOCKHOLDERS is not less than the Minimum Value set forth on
Annex III.
8.6 CONSENTS AND APPROVALS. All necessary consents of and filings with
any governmental authority or agency relating to the consummation of the
transactions contemplated herein shall have been obtained and made.
8.7 GOOD STANDING CERTIFICATES. CEI and NEWCO each shall have delivered
to the COMPANY a certificate, dated as of a date no earlier than five days prior
to the Closing Date, duly issued by the Delaware Secretary of State and in each
state in which CEI or NEWCO is authorized to do business, showing that each of
CEI and NEWCO is in good standing and authorized to do business and that all
state franchise and/or income tax returns and taxes for CEI and NEWCO,
respectively, for all periods prior to the Closing have been filed and paid.
8.8 NO MATERIAL ADVERSE CHANGE. No event or circumstance shall have
occurred with respect to CEI or NEWCO which would constitute a Material Adverse
Effect.
8.9 CLOSING OF IPO. The closing of the sale of the CEI Stock to the
Underwriters in the IPO shall have occurred simultaneously with the Funding and
Consummation Date hereunder.
50
<PAGE>
8.10 SECRETARY'S CERTIFICATE. The COMPANY shall have received a
certificate or certificates, dated the Closing Date and the Funding and
Consummation Date and signed by the secretary of CEI and of NEWCO, certifying
the truth and correctness of attached copies of the CEI's and NEWCO's respective
Certificates of Incorporation (including amendments thereto), By-Laws (including
amendments thereto), and resolutions of the boards of directors and, if
required, the stockholders of CEI and NEWCO approving CEI's and NEWCO's entering
into this Agreement and the consummation of the transactions contemplated
hereby.
8.11 EMPLOYMENT AGREEMENTS. Each of the persons listed on Schedule 9.12
shall have been afforded the opportunity to enter into an employment agreement
substantially in the form of Annex VIII hereto.
8.12 RELEASE . The stockholders of CEI shall have delivered to CEI an
instrument, dated the Closing Date, releasing CEI from any and all (i) claims of
such stockholders against CEI and (ii) obligations of CEI to such stockholders,
except for (x) items specifically identified on Schedule 8.12, (y) continuing
obligations to such stockholders relating to their employment by CEI and (z)
obligations arising under this Agreement or the transactions contemplated
hereby.
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF CEI AND NEWCO
The obligations of CEI and NEWCO with respect to actions to be taken on
the Closing Date and, to the extent specified in this Section 9, on the Funding
and Consummation Date, are subject to the satisfaction or waiver on or prior to
the Closing Date and/or the Funding and Consummation Date, as the case may be,
of all of the conditions set forth in this Section 9. As of the Closing Date or
the Funding and Consummation Date, as the case may be, all conditions not
satisfied shall be deemed to have been waived by CEI and NEWCO unless such
parties have objected by notifying the COMPANY and the STOCKHOLDERS in writing
of such objection on or before the closing on the Closing Date or consummation
of the transactions on the Funding and Consummation Date, respectively, except
that no such waiver shall be deemed to affect the survival of the
representations and warranties of the COMPANY and the STOCKHOLDERS contained in
Section 5 hereof.
51
<PAGE>
9.1 REPRESENTATIONS AND WARRANTIES. All the representations and
warranties of the STOCKHOLDERS and the COMPANY contained in this Agreement (as
amended by any amendment or supplement to a Schedule that has received the
requisite consents contemplated by Section 7.8) shall be true and correct in all
material respects as of the Closing Date and the Funding and Consummation Date
with the same effect as though such representations and warranties had been made
on and as of such date; and the STOCKHOLDERS shall have delivered to CEI
certificates dated the Closing Date and signed by them to such effect.
9.2 PERFORMANCE OF OBLIGATIONS. All of the terms, covenants and
conditions of this Agreement to be complied with or performed by the
STOCKHOLDERS and the COMPANY on or before each of the Closing Date and the
Funding and Consummation Date shall have been duly performed or complied with in
all material respects on or before each of the Closing Date and the Funding and
Consummation Date, as the case may be; and the STOCKHOLDERS shall have delivered
to CEI certificates dated the Closing Date and the Funding and Consummation
Date, respectively, and signed by them to such effect.
9.3 NO LITIGATION. No action or proceeding before a court or any other
governmental agency or body shall have been instituted or threatened to restrain
or prohibit the Merger or the IPO and no governmental agency or body shall have
taken any other action or made any request of CEI as a result of which the
management of CEI deems it inadvisable to proceed with the transactions
hereunder.
9.4 SECRETARY'S CERTIFICATE. CEI shall have received a certificate or
certificates, dated each of the Closing Date and the Funding and Consummation
Date and signed by the secretary of the COMPANY, certifying the truth and
correctness of attached copies of the COMPANY's Certificate or Articles of
Incorporation (including amendments thereto), By-Laws (including amendments
thereto), and resolutions of the board of directors and the STOCKHOLDERS
approving the COMPANY's entering into this Agreement and the consummation of the
transactions contemplated hereby.
9.5 NO MATERIAL ADVERSE CHANGE. As of the Closing Date and as of the
Funding and Consummation Date, no event or circumstance shall have occurred with
respect to the COMPANY which would constitute a Material Adverse Effect, and the
COMPANY shall not
52
<PAGE>
have suffered any material loss or damages to any of its properties or assets,
whether or not covered by insurance, which change, loss or damage materially
affects or impairs the ability of the COMPANY to conduct its business.
9.6 STOCKHOLDERS' RELEASE. The STOCKHOLDERS shall have delivered to CEI
an instrument dated the Closing Date releasing the COMPANY from any and all (i)
claims of the STOCKHOLDERS against the COMPANY and CEI and (ii) obligations of
the COMPANY and CEI to the STOCKHOLDERS, except for (x) items specifically
identified on Schedules 5.10 and 5.15 as being claims of or obligations to the
STOCKHOLDERS, (y) continuing obligations to the STOCKHOLDERS relating to their
employment by the COMPANY and (z) obligations arising under this Agreement or
the transactions contemplated hereby.
9.7 TERMINATION OF RELATED PARTY AGREEMENTS. Except as set forth on
Schedule 9.7, or as contemplated by Section 9.12, all existing agreements
between the COMPANY and the STOCKHOLDERS shall have been cancelled effective
prior to or as of the Funding and Consummation Date.
9.8 OPINION OF COUNSEL. CEI shall have received an opinion from Counsel
to the COMPANY and the STOCKHOLDERS, dated the Closing Date and including a
statement to the effect that it may be relied upon as of the Funding and
Consummation Date, substantially in the form annexed hereto as Annex VII, and
the Underwriters shall have received a copy of the same opinion addressed to
them.
9.9 CONSENTS AND APPROVALS. All necessary consents of and filings with
any governmental authority or agency relating to the consummation of the
transactions contemplated herein shall have been obtained and made and all
consents and approvals of third parties listed on Schedule 5.23 shall have been
obtained.
9.10 GOOD STANDING CERTIFICATES. The COMPANY shall have delivered to
CEI a certificate, dated as of a date no earlier than five days prior to the
Closing Date, duly issued by the appropriate governmental authority in the
COMPANY's state of incorporation and, unless waived by CEI, in each state in
which the COMPANY is authorized to do business, showing the COMPANY is in good
standing and authorized to do business and that all state franchise and/or
53
<PAGE>
income tax returns and taxes for the COMPANY for all periods prior to the
Closing have been filed and paid.
9.11 REGISTRATION STATEMENT. The Registration Statement shall have been
declared effective by the SEC.
9.12 EMPLOYMENT AGREEMENT. Each of the persons listed on Schedule 9.12
shall have entered into an employment agreement substantially in the form of
Annex VIII hereto.
9.13 CLOSING OF IPO. The closing of the sale of the CEI Stock to the
Underwriters in the IPO shall have occurred simultaneously with the Funding and
Consummation Date hereunder.
9.14 FIRPTA CERTIFICATE. Each STOCKHOLDER shall have delivered to CEI a
certificate to the effect that he or she is not a foreign person pursuant to
Section 1.1445-2(b) of the Treasury regulations.
10. COVENANTS OF CEI AND THE STOCKHOLDERS AFTER CLOSING
10.1 RELEASE FROM GUARANTEES; REPAYMENT OF CERTAIN OBLIGATIONS. CEI
shall use its best efforts to have the STOCKHOLDERS released from any and all
guarantees on any indebtedness that they personally guaranteed and from any and
all pledges of assets that they pledged to secure such indebtedness for the
benefit of the COMPANY, with all such guarantees on indebtedness being assumed
by CEI. In the event that CEI cannot obtain such releases from the lenders of
any such guaranteed indebtedness on or prior to 180 days subsequent to the
Funding and Consummation Date, CEI shall pay off or otherwise refinance or
retire such indebtedness.
10.2 PRESERVATION OF TAX AND ACCOUNTING TREATMENT. Except as
contemplated by this Agreement or the Registration Statement, after the Funding
and Consummation Date, CEI shall not and shall not permit any of its
subsidiaries to undertake any act that would jeopardize the tax-free status of
the organization, including liquidate or merge the COMPANY into CEI.
10.3 PREPARATION AND FILING OF TAX RETURNS.
(i) The COMPANY shall, if possible, file or cause to be filed all
separate Returns of any Acquired Party for all taxable periods that
end on or before the Funding and
54
<PAGE>
Consummation Date. Each STOCKHOLDER shall pay or cause to be paid all
Tax liabilities (in excess of all amounts already paid with respect
thereto or properly accrued or reserved with respect thereto on the
COMPANY Financial Statements) shown by such Returns to be due.
(ii) CEI shall file or cause to be filed all separate Returns of,
or that include, any Acquired Party for all taxable periods ending
after the Funding and Consummation Date.
(iii) Each party hereto shall, and shall cause its subsidiaries
and affiliates to, provide to each of the other parties hereto such
cooperation and information as any of them reasonably may request in
filing any Return, amended Return or claim for refund, determining a
liability for Taxes or a right to refund of Taxes or in conducting any
audit or other proceeding in respect of Taxes. Such cooperation and
information shall include providing copies of all relevant portions of
relevant Returns, together with relevant accompanying schedules and
relevant work papers, relevant documents relating to rulings or other
determinations by Taxing Authorities and relevant records concerning
the ownership and Tax basis of property, which such party may possess.
Each party shall make its employees reasonably available on a mutually
convenient basis at its cost to provide explanation of any documents
or information so provided. Subject to the preceding sentence, each
party required to file Returns pursuant to this Agreement shall bear
all costs of filing such Returns.
(iv) Each of the COMPANY, NEWCO, CEI and each STOCKHOLDER shall
comply with the tax reporting requirements of Section 1.351-3 of the
Treasury Regulations promulgated under the Code, and treat the
transaction as a transfer of property under Section 351(a) of the
Code.
10.4 DIRECTORS AND OFFICERS. The persons named in the registration
statement shall be appointed as directors and elected as officers of CEI, as and
to the extent set forth in the registration statement, promptly following the
Funding and Consummation Date.
10.5 PRESERVATION OF EMPLOYEE BENEFIT PLANS. Following the Funding and
Consummation Date, CEI shall not terminate any health insurance, life insurance
or 401(k) plan in effect at the COMPANY until such time as CEI is able to
replace such plan with a plan that is
55
<PAGE>
applicable to CEI and all of its then existing subsidiaries. CEI shall have no
obligation to provide replacement plans that have the same terms and provisions
as the existing plans, provided, that any new health insurance plan shall
provide for coverage for preexisting conditions.
11. INDEMNIFICATION
The STOCKHOLDERS, CEI and NEWCO each make the following covenants that
are applicable to them, respectively:
11.1 GENERAL INDEMNIFICATION BY THE STOCKHOLDERS. The STOCKHOLDERS
covenant and agree that they, jointly and severally, will indemnify, defend,
protect and hold harmless CEI, NEWCO, the COMPANY and the Surviving Corporation
at all times, from and after the date of this Agreement until the Expiration
Date, from and against all claims, damages, actions, suits, proceedings,
demands, assessments, adjustments, costs and expenses (including specifically,
but without limitation, reasonable attorneys' fees and reasonable expenses of
investigation) incurred by CEI, NEWCO, the COMPANY or the Surviving Corporation
as a result of or arising from (i) any breach of the representations and
warranties of the STOCKHOLDERS or the COMPANY set forth herein (as amended by
any amendment or supplement to a Schedule that has received the requisite
consents contemplated by Section 7.8) or on the schedules or certificates
delivered in connection herewith as of the date made and as of the date any such
representations and warranties are re-confirmed, (ii) any breach on the part of
the STOCKHOLDERS or the COMPANY of any agreement under this Agreement, (iii) any
liability under the 1933 Act, the 1934 Act or other Federal or state law or
regulation, at common law or otherwise, either (1) arising out of or based upon
any untrue statement of a material fact relating to the COMPANY or the
STOCKHOLDERS, and provided to CEI or its counsel by the COMPANY or the
STOCKHOLDERS for inclusion in the Registration Statement or any prospectus
forming a part thereof, or any amendment thereof or supplement thereto, or (2)
arising out of or based upon any omission to state therein a material fact
relating to the COMPANY or the STOCKHOLDERS required to be stated therein or
necessary to make the statements therein not misleading, (iv) the matters
described on Schedule 11.1(iv) or (v) any Tax imposed upon or
56
<PAGE>
relating to any third party for a pre-Funding and Consummation Date period,
including, in each case, any such Tax for which an Acquired Party may be liable
under Section 1.1502-6 of the Treasury Regulations (or any similar provisions of
state, local of foreign law), as a transferee or successor, by contract or
otherwise, provided, however, (A) that in the case of any indemnity arising
pursuant to clause (iii), such indemnity shall not inure to the benefit of CEI,
NEWCO, the COMPANY or the Surviving Corporation to the extent that such untrue
statement was made in, or omission occurred in, any preliminary prospectus and
the STOCKHOLDERS provided, in writing, corrected information to CEI counsel and
to CEI for inclusion in the final prospectus, and such information was not so
included or properly delivered, and (B) that no STOCKHOLDER shall be liable for
any indemnification obligation pursuant to this Section 11.1 to the extent
attributable to a breach of any representation, warranty or agreement made
herein individually by any other STOCKHOLDER.
11.2 INDEMNIFICATION BY CEI. CEI covenants and agrees that it will
indemnify, defend, protect and hold harmless the STOCKHOLDERS at all times from
and after the date of this Agreement until the Expiration Date, from and against
all claims, damages, actions, suits, proceedings, demands, assessments,
adjustments, costs and expenses (including specifically, but without limitation,
reasonable attorneys' fees and expenses of investigation) incurred by the
STOCKHOLDERS as a result of or arising from (i) any breach by CEI or NEWCO of
its representations and warranties set forth herein (as amended by any amendment
or supplement to a Schedule that has received the requisite consents
contemplated by Section 7.8) or on the schedules or certificates delivered in
connection herewith as of the date made and as of the date any such
representations and warranties are re-confirmed, (ii) any breach on the part of
CEI or NEWCO of any agreement under this Agreement, (iii) any liability which
the STOCKHOLDERS may incur due to CEI's or NEWCO's failure to be responsible for
the liabilities and obligations of the COMPANY as provided in Section 1 hereof
(except to the extent that CEI or NEWCO has claims against the STOCKHOLDERS by
reason of such liabilities); (iv) any liability under the 1933 Act, the 1934 Act
or other Federal or state law or regulation, at common law or otherwise, either
(1) arising out of or based upon any untrue statement of a material fact
relating to CEI, NEWCO or any of the Other Founding Companies for inclusion in
57
<PAGE>
any preliminary prospectus, the Registration Statement or any prospectus forming
a part thereof, or any amendment thereof or supplement thereto, or (2) arising
out of or based upon any omission to state therein a material fact relating to
CEI or NEWCO or any of the Other Founding Companies required to be stated
therein or necessary to make the statements therein not misleading (v) the
matters described on Schedule 11.2(v) or (vi) any liability under the 1933 Act,
the 1934 Act or other Federal or state law regulation, at common law or
otherwise as a result of CEI's failure to include in the Registration Statement
any information provided at least ten days prior to the Funding and Consummation
Date by the COMPANY or the STOCKHOLDERS in writing to CEI or its counsel
specifically for inclusion in the Registration Statement.
11.3 THIRD PERSON CLAIMS. Promptly after any party hereto (hereinafter
the "Indemnified Party") has received notice of or has knowledge of any claim by
a person not a party to this Agreement ("Third Person"), or the commencement of
any action or proceeding by a Third Person, the Indemnified Party shall, as a
condition precedent to a claim with respect thereto being made against any party
obligated to provide indemnification pursuant to Section 11.1 or 11.2 hereof
(hereinafter the "Indemnifying Party"), give the Indemnifying Party written
notice of such claim or the commencement of such action or proceeding. Such
notice shall state the nature and the basis of such claim and a reasonable
estimate of the amount thereof. The Indemnifying Party shall have the right to
defend and settle, at its own expense and by its own counsel, any such matter so
long as the Indemnifying Party pursues the same in good faith and diligently,
provided that the Indemnifying Party shall not settle any criminal proceeding
without the written consent of the Indemnified Party unless the Indemnified
Party is fully released and exonerated. If the Indemnifying Party undertakes to
defend or settle, it shall promptly notify the Indemnified Party of its
intention to do so, and the Indemnified Party shall cooperate with the
Indemnifying Party and its counsel in the defense thereof and in any settlement
thereof. Such cooperation shall include, but shall not be limited to, furnishing
the Indemnifying Party with any books, records or information reasonably
requested by the Indemnifying Party that are in the Indemnified Party's
possession or control. All Indemnified Parties shall endeavor to use the same
counsel, which shall be the counsel selected by Indemnifying Party, provided
that if counsel to the Indemnifying Party shall have a conflict of interest in
the opinion of such counsel
58
<PAGE>
that prevents counsel for the Indemnifying Party from representing the
Indemnified Party, the Indemnified Party shall have the right to participate in
such matter through counsel of its own choosing and Indemnifying Party will
reimburse the Indemnified Party for the reasonable expenses of its counsel and
experts. After the Indemnifying Party has notified the Indemnified Party of its
intention to undertake to defend or settle any such asserted liability, and for
so long as the Indemnifying Party diligently pursues such defense, the
Indemnifying Party shall not be liable for any additional legal expenses
incurred by the Indemnified Party in connection with any defense or settlement
of such asserted liability, except (i) as set forth in the preceding sentence
and (ii) to the extent such participation is requested by the Indemnifying
Party, in which event the Indemnified Party shall be reimbursed by the
Indemnifying Party for reasonable additional legal expenses and out-of-pocket
expenses. If the Indemnifying Party desires to accept a final and complete
settlement of any such Third Person claim and the Indemnified Party refuses to
consent to such settlement, then the Indemnifying Party's liability under this
Section with respect to such Third Person claim shall be limited to the amount
so offered in settlement to said Third Person, and the Indemnifying Party, upon
payment of such settlement amount to such Third Person, shall be deemed released
from any and all obligation or liability with respect thereto. If the
Indemnifying Party does not undertake to defend such matter to which the
Indemnified Party is entitled to indemnification hereunder, or fails diligently
to pursue such defense, the Indemnified Party may undertake such defense through
counsel of its choice, at the cost and expense of the Indemnifying Party, and
the Indemnified Party may settle such matter, and the Indemnifying Party shall
reimburse the Indemnified Party for the amount paid in such settlement and any
other liabilities or expenses incurred by the Indemnified Party in connection
therewith, provided, however, that under no circumstances shall the Indemnified
Party settle any Third Person claim without the written consent of the
Indemnifying Party, which consent shall not be unreasonably withheld or delayed.
All settlements hereunder shall effect a complete release of the Indemnified
Party, unless the Indemnified Party otherwise agrees in writing. The parties
hereto will make appropriate adjustments for insurance proceeds in determining
the amount of any indemnification obligation under this Section.
59
<PAGE>
11.4 EXCLUSIVE REMEDY. The indemnification provided for in this Section
11 shall (except as prohibited by ERISA) be the exclusive remedy in any action
seeking damages or any other form of monetary relief brought by any party to
this Agreement against another party, provided that nothing herein shall be
construed to limit the right of a party, in a proper case, to seek injunctive
relief for a breach of this Agreement.
11.5 LIMITATIONS ON INDEMNIFICATION. CEI, NEWCO, the Surviving
Corporation and the other persons or entities indemnified pursuant to Section
11.1 or 11.2 shall not assert any claim other than a Third Person claim for
indemnification hereunder against the STOCKHOLDERS until such time as, and
solely to the extent that, the aggregate of all claims which such persons may
have against such the STOCKHOLDERS shall exceed 1.0% of the sum of (i) the cash
paid to STOCKHOLDERS plus (ii) the value (determined in accordance with the last
paragraph of Section 11.5) of the CEI Stock delivered to STOCKHOLDERS (the
"Indemnification Threshold"), provided, however, that CEI, NEWCO, the Surviving
Corporation and the other persons or entities indemnified pursuant to Section
11.1 may assert and shall be indemnified for any claim under Section 11.1(iv) or
11.1(v) at any time, regardless of whether the aggregate of all claims which
such persons may have against any STOCKHOLDER or all STOCKHOLDERS exceeds the
Indemnification Threshold, it being understood that the amount of any such claim
under Section 11.1(iv) or 11.1(v) shall not be counted towards the
Indemnification Threshold. STOCKHOLDERS shall not assert any claim for
indemnification hereunder against CEI or NEWCO until such time as, and solely to
the extent that, the aggregate of all claims which STOCKHOLDERS may have against
CEI or NEWCO shall exceed $50,000, provided, however, that STOCKHOLDERS and the
other persons or entities indemnified pursuant to Section 11.2 may assert and
shall be indemnified for any claim under Section 11.2(v) at any time, regardless
of whether the aggregate of all claims which such persons may have against any
of CEI, or NEWCO exceeds $50,000, it being understood that the amount of any
such claim under Section 11.2(v) shall not be counted towards such $50,000
amount. No person shall be entitled to indemnification under this Section 11 if
and to the extent that such person's claim for indemnification is directly or
indirectly related to a breach by such person of any representation, warranty,
covenant or other agreement set forth in this Agreement.
60
<PAGE>
Notwithstanding any other term of this Agreement (except the proviso to
this sentence), no STOCKHOLDER shall be liable under this Section 11 for an
amount which exceeds the amount of proceeds received by such STOCKHOLDER in
connection with the Merger, provided that a STOCKHOLDER's indemnification
obligations pursuant to Section 11.1(iv) or 11.1(v) shall not be limited.
Indemnity obligations hereunder may satisfied through the payment of cash or the
delivery of CEI Stock, or a combination thereof. For purposes of calculating the
value of the CEI Stock received or delivered by a STOCKHOLDER (for purposes of
determining the Indemnification Threshold, the limitation on indemnity set forth
in the second preceding sentence and the amount of any indemnity paid), CEI
Stock shall be valued at its initial public offering price as set forth in the
Registration Statement.
12. TERMINATION OF AGREEMENT
12.1 Termination. This Agreement may be terminated at any time prior
to the Closing Date solely:
(i) by mutual consent of the boards of directors of CEI and the COMPANY;
(ii) by the STOCKHOLDERS or the COMPANY (acting through its board of
directors), on the one hand, or by CEI (acting through its board of directors),
on the other hand, if the transactions contemplated by this Agreement to take
place at the Closing shall not have been consummated by October 31, 1997, unless
the failure of such transactions to be consummated is due to the willful failure
of the party seeking to terminate this Agreement to perform any of its
obligations under this Agreement to the extent required to be performed by it
prior to or on the Funding and Consummation Date;
(iii) by the STOCKHOLDERS or COMPANY, on the one hand, or by CEI, on the
other hand, if a material breach or default shall be made by the other party in
the observance or in the due and timely performance of any of the covenants,
agreements or conditions contained herein, and the curing of such default shall
not have been made on or before the Funding and Consummation Date;
(iv) pursuant to Section 7.8 hereof; or
(v) pursuant to Section 4 hereof.
61
<PAGE>
12.2 LIABILITIES IN EVENT OF TERMINATION. Except as provided in Section
7.8 hereof, the termination of this Agreement will in no way limit any
obligation or liability of any party based on or arising from a breach or
default by such party with respect to any of its representations, warranties,
covenants or agreements contained in this Agreement including, but not limited
to, legal and audit costs and out of pocket expenses.
13. NONCOMPETITION
13.1 PROHIBITED ACTIVITIES. The STOCKHOLDERS will not, for a period of
three (3) years following the Funding and Consummation Date, for any reason
whatsoever, directly or indirectly, for themselves or on behalf of or in
conjunction with any other person, company, partnership, corporation or business
of whatever nature:
(i) engage, as an officer, director, shareholder, owner, partner, joint
venturer, or in a managerial capacity, whether as an employee, independent
contractor, consultant or advisor, or as a sales representative, in any
collectibles retailing and animation art marketing businesses in direct
competition with CEI or any of the subsidiaries thereof, within the United
States of America or within 100 miles of where the COMPANY or any of its
subsidiaries or any of the Other Founding Companies conducted business prior to
the effectiveness of the Merger (the "Territory") ;
(ii) call upon any person who is, at that time, within the Territory,
an employee of CEI (including the subsidiaries thereof) in a sales
representative or managerial capacity for the purpose or with the intent of
enticing such employee away from or out of the employ of CEI (including the
subsidiaries thereof), provided that each STOCKHOLDER shall be permitted to call
upon and hire any member of his or her immediate family;
(iii) call upon any person or entity which is, at that time, or which
has been, within one (1) year prior to the Funding and Consummation Date, a
customer of CEI (including the subsidiaries thereof), of the COMPANY or of any
of the Other Founding Companies within the Territory for the purpose of
soliciting or selling products or services in direct competition with CEI within
the Territory;
62
<PAGE>
(iv) call upon any prospective acquisition candidate, on any
STOCKHOLDER's own behalf or on behalf of any competitor in the collectibles
retailing and animation art marketing businesses, which candidate, to the actual
knowledge of such STOCKHOLDER after due inquiry, was called upon by CEI
(including the subsidiaries thereof) or for which, to the actual knowledge of
such STOCKHOLDER after due inquiry, CEI (or any subsidiary thereof) made an
acquisition analysis, for the purpose of acquiring such entity; or
(v) disclose customers, whether in existence or proposed, of the
COMPANY to any person, firm, partnership, corporation or business for any reason
or purpose whatsoever except to the extent that the COMPANY has in the past
disclosed such information to the public for valid business reasons.
Notwithstanding the above, the foregoing covenant shall not be deemed
to prohibit any STOCKHOLDER from acquiring as an investment not more than two
percent (2%) of the capital stock of a competing business whose stock is traded
on a national securities exchange or over-the-counter.
13.2 DAMAGES. Because of the difficulty of measuring economic losses to
CEI as a result of a breach of the foregoing covenant, and because of the
immediate and irreparable damage that could be caused to CEI for which it would
have no other adequate remedy, each STOCKHOLDER agrees that, in the event of
breach by such STOCKHOLDER, the foregoing covenant may be enforced by CEI by
injunctions and restraining orders.
13.3 REASONABLE RESTRAINT. It is agreed by the parties hereto that the
foregoing covenants in this Section 13 impose a reasonable restraint on the
STOCKHOLDERS in light of the activities and business of CEI (including the
subsidiaries thereof) on the date of the execution of this Agreement and the
current plans of CEI.
13.4 SEVERABILITY; REFORMATION. The covenants in this Section 13 are
severable and separate, and the unenforceability of any specific covenant shall
not affect the provisions of any other covenant. Moreover, in the event any
court of competent jurisdiction shall determine that the scope, time or
territorial restrictions set forth are unreasonable, then it is the intention of
the parties that such restrictions be enforced to the fullest extent which the
court deems reasonable, and this Agreement shall thereby be reformed.
63
<PAGE>
13.5 INDEPENDENT COVENANT. All of the covenants in this Section 13
shall be construed as an agreement independent of any other provision in this
Agreement, and the existence of any claim or cause of action of any STOCKHOLDER
against CEI (including the subsidiaries thereof), whether predicated on this
Agreement or otherwise, shall not constitute a defense to the enforcement by CEI
of such covenants. It is specifically agreed that the period of three (3) years
stated at the beginning of this Section 13, during which the agreements and
covenants of each STOCKHOLDER made in this Section 13 shall be effective, shall
be computed by excluding from such computation any time during which such
STOCKHOLDER is in violation of any provision of this Section 13. The covenants
contained in Section 13 shall not be affected by any breach of any other
provision hereof by any party hereto and shall have no effect if the
transactions contemplated by this Agreement are not consummated.
13.6 MATERIALITY. The COMPANY and the STOCKHOLDERS hereby agree that
this covenant is a material and substantial part of this transaction.
14. NONDISCLOSURE OF CONFIDENTIAL INFORMATION
14.1 STOCKHOLDERS. The STOCKHOLDERS recognize and acknowledge that they
had in the past, currently have, and in the future may have, access to certain
confidential information of the COMPANY, the Other Founding Companies, and/or
CEI, such as operational policies, and pricing and cost policies that are
valuable, special and unique assets of the COMPANY's, the Other Founding
Companies' and/or CEI's respective businesses. The STOCKHOLDERS agree that they
will not disclose such confidential information to any person, firm,
corporation, association or other entity for any purpose or reason whatsoever,
except (a) to authorized representatives of CEI, (b) following the Closing, such
information may be disclosed by the STOCKHOLDERS as is required in the course of
performing their duties for CEI or the Surviving Corporation and (c) to counsel
and other advisers, provided that such advisers (other than counsel) agree to
the confidentiality provisions of this Section 14.1, unless (i) such information
becomes known to the public generally through no fault of any such STOCKHOLDERS,
(ii) disclosure is required by law or the order of any governmental authority
under color of law, provided, that prior to disclosing any information pursuant
to this clause (ii),
64
<PAGE>
the STOCKHOLDERS shall give prior written notice thereof to CEI and provide CEI
with the opportunity to contest such disclosure, or (iii) the disclosing party
reasonably believes that such disclosure is required in connection with the
defense of a lawsuit against the disclosing party. In the event of a breach or
threatened breach by any of the STOCKHOLDERS of the provisions of this Section
14, CEI shall be entitled to an injunction restraining such STOCKHOLDERS from
disclosing, in whole or in part, such confidential information. Nothing herein
shall be construed as prohibiting CEI from pursuing any other available remedy
for such breach or threatened breach, including the recovery of damages. In the
event the transactions contemplated by this Agreement are not consummated, the
STOCKHOLDERS shall have none of the above-mentioned restrictions on their
ability to disseminate confidential information with respect to the COMPANY.
14.2 CEI AND NEWCO. CEI and NEWCO recognize and acknowledge that they
had in the past and currently have access to certain confidential information of
the COMPANY, such as operational policies, and pricing and cost policies that
are valuable, special and unique assets of the COMPANY's business. CEI and NEWCO
agree that, prior to the Closing, or if the Transactions contemplated by this
Agreement are not consummated, they will not use or disclose such confidential
information to any person, firm, corporation, association or other entity for
any purpose or reason whatsoever, except (a) to authorized representatives of
the COMPANY, (b) to counsel and other advisers, provided that such advisors
(other than counsel) agree to the confidentiality provisions of this Section
14.1 and (c) to the Other Founding Companies and their representatives who have
agreed to maintain confidentiality pursuant to Section 7.1(a), unless (i) such
information becomes known to the public generally through no fault of CEI or
NEWCO, (ii) disclosure is required by law or the order of any governmental
authority under color of law, provided, that prior to disclosing any information
pursuant to this clause (ii), CEI and NEWCO shall, if possible, give prior
written notice thereof to the COMPANY and the STOCKHOLDERS and provide the
COMPANY and the STOCKHOLDERS with the opportunity to contest such disclosure, or
(iii) the disclosing party reasonably believes that such disclosure is required
in connection with the defense of a lawsuit against the disclosing party. In the
event of a breach or threatened breach by CEI or NEWCO of the provisions of this
Section, the COMPANY and the
65
<PAGE>
STOCKHOLDERS shall be entitled to an injunction restraining CEI and NEWCO from
disclosing, in whole or in part, such confidential information. Nothing herein
shall be construed as prohibiting the COMPANY and the STOCKHOLDERS from pursuing
any other available remedy for such breach or threatened breach, including the
recovery of damages. Upon any termination of this Agreement, CEI and NEWCO shall
return all confidential information of the Company then in their possession and
shall use commercially reasonable efforts to cause the Other Founding Companies
to return all confidential information of the Company then in their possession.
14.3 DAMAGES. Because of the difficulty of measuring economic losses as
a result of the breach of the foregoing covenants in Sections 14.1 and 14.2, and
because of the immediate and irreparable damage that would be caused for which
they would have no other adequate remedy, the parties hereto agree that, in the
event of a breach by any of them of the foregoing covenants, the covenant may be
enforced against the other parties by injunctions and restraining orders.
14.4 SURVIVAL. The obligations of the parties under this Article 14
shall survive the termination of this Agreement for a period of five years from
the Funding and Consummation Date, or in the event this Agreement in terminated,
for a period of five years from the date of termination.
15. TRANSFER RESTRICTIONS
15.1 TRANSFER RESTRICTIONS. Except for transfers (i) to immediate
family members who agree to be bound by the restrictions set forth in this
Section 15.1 (or trusts for the benefit of the STOCKHOLDERS or family members,
the trustees of which so agree), (ii) pursuant to Rule 144 (as it may be
amended) under the 1933 Act, (iii) pursuant to Section 17 hereof or (iv)
following the first anniversary of the Funding and Consummation Date, pursuant
to an exemption from registration under the Act and applicable state securities
laws, none of the STOCKHOLDERS shall (i) sell, assign, exchange, transfer,
encumber, pledge, distribute, appoint or otherwise dispose of (a) any shares of
CEI Stock received by the STOCKHOLDERS in the Merger or (b) any interest
(including, without limitation, an option to buy or sell) in any
66
<PAGE>
such shares of CEI Stock, in whole or in part, and no such attempted transfer
shall be treated as effective for any purpose; or (ii) engage in any
transaction, whether or not with respect to any shares of CEI Stock or any
interest therein, the intent or effect of which is to reduce the risk of owning
the shares of CEI Stock acquired pursuant to Section 2 hereof (including, by way
of example and not limitation, engaging in put, call, short-sale, straddle or
similar market transactions). Notwithstanding the foregoing, the STOCKHOLDERS
may encumber or pledge any of such shares of CEI Stock provided the pledgee or
other beneficiary of such encumbrance or pledge agrees to be bound by the
provisions of this Section as if a STOCKHOLDER and party hereto. The
certificates evidencing the CEI Stock delivered to the STOCKHOLDERS pursuant to
Section 3 of this Agreement will bear a legend substantially in the form set
forth below and containing such other information as CEI may deem necessary or
appropriate:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED, EXCHANGED,
TRANSFERRED, ENCUMBERED, PLEDGED, DISTRIBUTED, APPOINTED OR OTHERWISE DISPOSED
OF, AND THE ISSUER SHALL NOT BE REQUIRED TO GIVE EFFECT TO ANY ATTEMPTED SALE,
ASSIGNMENT, EXCHANGE, TRANSFER, ENCUMBRANCE, PLEDGE, DISTRIBUTION, APPOINTMENT
OR OTHER DISPOSITION PRIOR TO [anniversary of Funding and Consummation Date
corresponding to end of Rule 144 holding period][(PROVIDED, HOWEVER, THAT SUCH
SHARES MAY BE ENCUMBERED OR PLEDGED PROVIDED THE PLEDGEE OR OTHER BENEFICIARY OF
SUCH ENCUMBRANCE OR PLEDGE AGREES TO BE BOUND BY THE PROVISIONS OF THESE
RESTRICTIONS TO THE SAME EXTENT AS THE HOLDER THEREOF)]. UPON THE WRITTEN
REQUEST OF THE HOLDER OF THIS CERTIFICATE, THE ISSUER AGREES TO REMOVE THIS
RESTRICTIVE LEGEND (AND ANY STOP ORDER PLACED WITH THE TRANSFER AGENT) AFTER THE
DATE SPECIFIED ABOVE (AS IT MAY BE REDUCED AS PROVIDED HEREIN).
16. FEDERAL AND STATE SECURITIES ACT REPRESENTATIONS
The STOCKHOLDERS acknowledge that the shares of CEI Stock to be delivered to the
STOCKHOLDERS pursuant to this Agreement have not been and will not be registered
under the Act or any state securities laws and therefore may not be resold
without compliance with the Act and any applicable state securities laws. The
CEI Stock to be acquired by the STOCKHOLDERS pursuant to this Agreement is being
acquired solely for their own respective
67
<PAGE>
accounts, for investment purposes only, and with no present intention of
distributing, selling or otherwise disposing of it in connection with a
distribution.
16.1 COMPLIANCE WITH LAW. The STOCKHOLDERS covenant, warrant and
represent that none of the shares of CEI Stock issued to the STOCKHOLDERS will
be offered, sold, assigned, pledged, hypothecated, transferred or otherwise
disposed of except after full compliance with all of the applicable provisions
of the 1933 Act and the rules and regulations of the SEC or any applicable
exemption therefrom. All the CEI Stock shall bear the following legend in
addition to the legend required under Section 15 of this Agreement:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THE SHARES HAVE BEEN ACQUIRED
FOR INVESTMENT AND MAY NOT BE SOLD, ASSIGNED, EXCHANGED, TRANSFERRED,
ENCUMBERED, PLEDGED, DISTRIBUTED, APPOINTED OR OTHERWISE DISPOSED OF EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FOR THE SHARES UNDER THE ACT OR
AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT AND ANY APPLICABLE
STATE SECURITIES LAWS AND, IF REQUIRED BY COLLECTIBLES ENTERPRISES, INC., AN
OPINION OF COUNSEL TO COLLECTIBLES ENTERPRISES, INC. STATING THAT REGISTRATION
IS NOT REQUIRED UNDER THE ACT.
16.2 ECONOMIC RISK; SOPHISTICATION. The STOCKHOLDERS represent and
warrant that they are able to bear the economic risk of an investment in the CEI
Stock acquired pursuant to this Agreement, can afford to sustain a total loss of
such investment and have such knowledge and experience in financial and business
matters that they are capable of evaluating the merits and risks of the proposed
investment in the CEI Stock. The STOCKHOLDERS represent and warrant that they
have had an adequate opportunity to ask questions and receive answers from the
officers of CEI concerning any and all matters relating to the transactions
described herein including, without limitation, the background and experience of
the current and proposed officers and directors of CEI, the plans for the
operations of the business of CEI, the business, operations and financial
condition of the Other Founding Companies, and any plans for additional
acquisitions and the like. The STOCKHOLDERS have asked any and all questions in
the nature described in the preceding sentence and all questions have been
answered to their satisfaction.
68
<PAGE>
17. REGISTRATION RIGHTS
17.1 PIGGYBACK REGISTRATION RIGHTS. At any time following the Funding
and Consummation Date, whenever CEI proposes to register any CEI Stock for its
own or others' account under the 1933 Act for a public offering, other than (i)
any shelf registration of shares to be used as consideration for acquisitions of
additional businesses by CEI and (ii) registrations relating to employee benefit
plans, CEI shall give each of the STOCKHOLDERS prompt written notice of its
intent to do so. Upon the written request of any of the STOCKHOLDERS given
within 30 days after receipt of such notice, CEI shall cause to be included in
such registration all of the CEI Stock issued to the STOCKHOLDERS pursuant to
this Agreement which any such STOCKHOLDER requests, provided that CEI shall have
the right to reduce the number of shares to be included by the STOCKHOLDER in
such registration to the extent that inclusion of such shares could, in the
opinion of tax counsel to CEI or its independent auditors, jeopardize the status
of the transactions contemplated hereby and by the Registration Statement as a
tax-free organization. In addition, if CEI is advised in writing in good faith
by any managing underwriter of an underwritten offering of the securities being
offered pursuant to any registration statement under this Section 17.1 that the
number of shares to be sold by persons other than CEI is greater than the number
of such shares which can be offered without adversely affecting the offering,
CEI may reduce pro rata the number of shares offered for the accounts of such
persons (based upon the number of shares proposed to be sold by each such
person) to a number deemed satisfactory by such managing underwriter, provided,
that, for each such offering made by CEI after the IPO, such reduction shall be
made first by reducing the number of shares to be sold by persons other than
CEI, the STOCKHOLDERS and the stockholders of the Other Founding Companies
(collectively, the STOCKHOLDERS and the stockholders of the other Founding
Companies being referred to herein as the "Founding Stockholders"), and
thereafter, if a further reduction is required, by reducing the number of shares
to be sold by the Founding Stockholders.
17.2 DEMAND REGISTRATION RIGHTS. At any time after the date one year
after the Funding and Consummation Date, the holders of a majority of the shares
of CEI Stock issued to the stockholders of the Founding Companies pursuant to
this Agreement and the Other
69
<PAGE>
Agreements that have not been previously registered or sold and that are not
entitled to be sold under Rule 144(k) (or any successor provision) promulgated
under the 1933 Act may request in writing that CEI file a registration statement
under the 1933 Act covering the registration of shares of CEI Stock issued to
such stockholders (including any stock issued as (or issuable upon the
conversion or exchange of any convertible security, warrant, right or other
security that is issued by CEI as) a dividend or other distribution with respect
to, or in exchange for, or in replacement of such CEI Stock) then held by such
stockholders (a "Demand Registration"). Within ten (10) days of the receipt of
such request, CEI shall give written notice of such request to all other
stockholders of the Founding Companies and shall, as soon as practicable but in
no event later than 45 days after notice from any such stockholder, file and
thereafter use its best efforts to cause to become effective a registration
statement covering all such shares. CEI shall be obligated to effect only one
Demand Registration for all stockholders of the Founding Companies.
Notwithstanding the foregoing paragraph, following such a demand a
majority of CEI's disinterested directors (i.e. directors who have not demanded
or elected to sell shares in any such public offering) may defer the filing of
the registration statement for a 60 day period.
If at the time of any request by the stockholders of the Founding
Companies for a Demand Registration CEI has fixed plans to file within 60 days
after such request a registration statement covering the sale of any of its
securities in a public offering under the 1933 Act, no registration of the CEI
Stock held by the stockholders of the Founding Companies shall be initiated
under this Section 17.2 until 90 days after the effective date of such
registration unless CEI is no longer proceeding diligently to effect such
registration; provided that CEI shall provide the stockholders of the Founding
Companies the right to participate in such public offering pursuant to, and
subject to, Section 17.1 hereof.
17.3 REGISTRATION PROCEDURES. All expenses incurred in connection with
the registrations under this Article 17 (including all registration, filing,
qualification, legal, printer and accounting fees, but excluding underwriting
commissions and discounts), shall be borne by CEI. In connection with
registrations under Sections 17.1 and 17.2, CEI shall (i) use its best efforts
to prepare and file with the SEC as soon as reasonably practicable, a
registration
70
<PAGE>
statement with respect to the CEI Stock and use its best efforts to cause such
registration to promptly become and remain effective for a period of at least 45
days (or such shorter period during which stockholders of the Founding Companies
shall have sold all CEI Stock which they requested to be registered); (ii) use
its best efforts to register and qualify the CEI Stock covered by such
registration statement under applicable state securities laws as the holders
shall reasonably request for the distribution of the CEI Stock; and (iii) take
such other actions as are reasonable and necessary to comply with the
requirements of the 1933 Act and the regulations thereunder.
17.4 UNDERWRITING AGREEMENT. In connection with each registration
pursuant to Sections 17.1 and 17.2 covering an underwritten registered public
offering, CEI and each participating holder agree to enter into a written
agreement with the managing underwriters in such form and containing such
provisions as are customary in the securities business for such an arrangement
between such managing underwriters and companies of CEI's size and investment
stature, including indemnification provisions.
17.5 AVAILABILITY OF RULE 144. CEI shall not be obligated to register
shares of CEI Stock held by any STOCKHOLDER at any time when the resale
provisions of Rule 144(k) (or any successor provision) promulgated under the
1933 Act are available to such STOCKHOLDER for such shares.
18. GENERAL
18.1 COOPERATION. The COMPANY, the STOCKHOLDERS, CEI and NEWCO shall
each deliver or cause to be delivered to the other on the Funding and
Consummation Date, and at such other times and places as shall be reasonably
agreed to, such additional instruments as the other may reasonably request for
the purpose of carrying out this Agreement. The COMPANY will cooperate and use
its reasonable efforts to have the present officers, directors and employees of
the COMPANY cooperate with CEI on and after the Funding and Consummation Date in
furnishing information, evidence, testimony and other assistance in connection
with any Tax Return filing obligations, actions, proceedings, arrangements or
disputes of any nature with respect to matters pertaining to all periods prior
to the Funding and Consummation Date.
71
<PAGE>
18.2 SUCCESSORS AND ASSIGNS. This Agreement and the rights of the
parties hereunder may not be assigned (except by operation of law) and shall be
binding upon and shall inure to the benefit of the parties hereto, the
successors of CEI, and the heirs and legal representatives of the STOCKHOLDERS.
18.3 ENTIRE AGREEMENT. This Agreement (including the Schedules,
exhibits and annexes attached hereto) and the documents delivered pursuant
hereto constitute the entire agreement and understanding among the STOCKHOLDERS,
the COMPANY, NEWCO and CEI and supersede any prior agreement and understanding
relating to the subject matter of this Agreement. This Agreement, upon
execution, constitutes a valid and binding agreement of the parties hereto
enforceable in accordance with its terms and may be modified or amended only by
a written instrument executed by the STOCKHOLDERS, the COMPANY, NEWCO and CEI,
acting through their respective officers or trustees, duly authorized by their
respective boards of directors. Any disclosure made on any Schedule delivered
pursuant hereto shall be deemed to have been disclosed for purposes of any other
Schedule required hereby, provided that the COMPANY shall make a good faith
effort to cross reference disclosure, as necessary or advisable, between related
Schedules.
18.4 COUNTERPARTS. This Agreement may be executed simultaneously in two
or more counterparts, each of which shall be deemed an original and all of which
together shall constitute but one and the same instrument.
18.5 BROKERS AND AGENTS. Except as disclosed on Schedule 18.5, each
party represents and warrants that it employed no broker or agent in connection
with this transaction and agrees to indemnify the other parties hereto against
all loss, cost, damages or expense arising out of claims for fees or commissions
of brokers employed or alleged to have been employed by such indemnifying party.
18.6 EXPENSES. Whether or not the transactions herein contemplated
shall be consummated, CEI will pay the fees, expenses and disbursements of CEI
and its agents, representatives, accountants and counsel incurred in connection
with the subject matter of this Agreement and any amendments thereto, including
all costs and expenses incurred in the performance and compliance with all
conditions to be performed by CEI under this Agreement,
72
<PAGE>
including the fees and expenses of Arthur Andersen, LLP, Morgan, Lewis & Bockius
LLP, and any other person or entity retained by CEI, and the costs of preparing
the Registration Statement. Whether or not the transactions herein contemplated
shall be consummated, the STOCKHOLDERS shall pay the fees, expenses and
disbursements of the STOCKHOLDERS, the COMPANY and their respective agents,
representatives, accountants and counsel incurred in connection with the subject
matter of this Agreement and any amendments thereto, including all costs and
expenses incurred in the performance and compliance with all conditions to be
performed by the COMPANY and the STOCKHOLDERS under this Agreement, including
the fees and expenses of accountants and legal counsel to the COMPANY and the
STOCKHOLDERS. In addition, each STOCKHOLDER shall pay all sales, use, transfer,
real property transfer, recording, gains, stock transfer and other similar taxes
and fees ("Transfer Taxes") imposed in connection with the Merger, other than
Transfer Taxes, if any, imposed by the State of Delaware. Each STOCKHOLDER shall
file all necessary documentation and Returns with respect to such Transfer
Taxes. In addition, each STOCKHOLDER acknowledges that he, and not the COMPANY
or CEI, will pay all Taxes due upon receipt of the consideration payable
pursuant to Section 2 hereof, and will assume all Tax risks and liabilities of
such STOCKHOLDER in connection with the transactions contemplated hereby.
18.7 NOTICES. All notices of communication required or permitted
hereunder shall be in writing and may be given by depositing the same in United
States mail, addressed to the party to be notified, postage prepaid and
registered or certified with return receipt requested, or by delivering the same
in person to an officer or agent of such party.
(a) If to CEI, or NEWCO, addressed to them at:
Collectibles USA, Inc.
2081 Landings Drive
Mountain View, California 94043
with copies to:
Morgan, Lewis & Bockius LLP
101 Park Avenue
73
<PAGE>
New York, New York 10178
Attn: David W. Pollak, Esq.
(b) If to the STOCKHOLDERS, addressed to them at their
addresses set forth on Annex IV, with copies to such counsel
as is set forth with respect to each STOCKHOLDER on such
Annex IV;
(c) If to the COMPANY, addressed to it at:
[COMPANY]
-----------------------
-----------------------
Attn: _________________
and marked "Personal and Confidential"
or to such other address or counsel as any party hereto shall specify pursuant
to this Section 18.7 from time to time.
18.8 GOVERNING LAW. This Agreement shall be construed in accordance
with the laws of the State of New York without reference to its conflicts of law
provisions.
18.9 EXERCISE OF RIGHTS AND REMEDIES. Except as otherwise provided
herein, no delay of or omission in the exercise of any right, power or remedy
accruing to any party as a result of any breach or default by any other party
under this Agreement shall impair any such right, power or remedy, nor shall it
be construed as a waiver of or acquiescence in any such breach or default, or of
any similar breach or default occurring later; nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or default
occurring before or after that waiver.
18.10 TIME. Time is of the essence with respect to this Agreement.
18.11 REFORMATION AND SEVERABILITY. In case any provision of this
Agreement shall be invalid, illegal or unenforceable, it shall, to the extent
possible, be modified in such manner as to be valid, legal and enforceable but
so as to most nearly retain the intent of the parties, and if such modification
is not possible, such provision shall be severed from this Agreement, and in
either case the validity, legality and enforceability of the remaining
provisions of this Agreement shall not in any way be affected or impaired
thereby.
74
<PAGE>
18.12 REMEDIES CUMULATIVE. No right, remedy or election given by any
term of this Agreement shall be deemed exclusive but each shall be cumulative
with all other rights, remedies and elections available at law or in equity.
18.13 CAPTIONS. The headings of this Agreement are inserted for
convenience only, shall not constitute a part of this Agreement or be used to
construe or interpret any provision hereof.
18.14 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended
and the observance of any term of this Agreement may be waived only with the
written consent of CEI, NEWCO, the COMPANY and STOCKHOLDERS who will hold or who
hold at least 50% of the CEI Stock issued or to be issued upon consummation of
the Merger. Any amendment or waiver effected in accordance with this Section
18.14 shall be binding upon each of the parties hereto, any other person
receiving CEI Stock in connection with the Merger and each future holder of such
CEI Stock.
18.15 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Unless otherwise
provided herein, the representations, warranties, covenants and agreements of
the parties made herein and at the time of the Closing or in writing delivered
pursuant to the provisions of this Agreement shall survive the consummation of
the transactions contemplated hereby and any examination on behalf of the
parties until the Expiration Date.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
COLLECTIBLES USA, INC.
By:______________________
Name:
Title:
[COMPANY] ACQUISITION CORP.
By:______________________
Name:
Title:
[COMPANY]
By:______________________
Name:
Title:
STOCKHOLDERS:
______________________
[Name]
______________________
[Name]
<PAGE>
ANNEX I
FORM OF ARTICLES OF MERGER
<PAGE>
ANNEX II
CERTIFICATE OF INCORPORATION AND BY-LAWS OF CEI AND NEWCO
<PAGE>
ANNEX III
CONSIDERATION TO BE PAID TO STOCKHOLDERS
Aggregate consideration to be paid to STOCKHOLDERS:
$__________ in cash and __________ shares of Common Stock of
CEI, to be distributed as follows:
Consideration to be paid to each STOCKHOLDER:
Shares of Common
Stockholder Stock of CEI Cash
TOTALS:
MINIMUM VALUE: $____________
<PAGE>
ANNEX IV
STOCKHOLDERS AND STOCK OWNERSHIP OF THE COMPANY
The following is a list of the STOCKHOLDERS, their addresses and the number of
shares of the COMPANY Stock held by each thereof:
STOCKHOLDER SHARES OF STOCK HELD
<PAGE>
ANNEX V
STOCKHOLDERS AND STOCK OWNERSHIP OF CEI
Name of Shareholder Post-Split No. of Shares
of CEI Owned
<PAGE>
ANNEX VI
FORM OF OPINION OF COUNSEL TO CEI
[Date]
[COMPANY]
- ----------------
- ----------------
- ----------------
Ladies and Gentlemen:
We have acted as counsel to Collectibles USA, Inc., a Delaware
corporation ("CEI") and [COMPANY] Acquisition Corp., a Delaware corporation
("NEWCO") in connection with the transactions contemplated by the agreement (the
"Agreement") dated as of May 9, 1997 by and among CEI, NEWCO, [COMPANY] and the
stockholders named therein (the "Stockholders").
This opinion is being delivered to you pursuant to Section 8.4 of the
Agreement. All capitalized terms used herein, unless expressly defined herein,
shall have the meanings ascribed to such terms in the Agreement.
We have examined originals, or copies certified or otherwise identified
to our satisfaction, of such documents and corporate and public records as we
deemed to be necessary as a basis for the opinion hereinafter expressed. With
respect to such examination, we have assumed the genuineness of all signatures
appearing on all documents presented to us as originals, and the conformity to
the originals of all documents presented to us as conformed or reproduced
copies. Where factual matters material to such opinion were not independently
established, we have relied upon certificates of appropriate state and local
officials, upon representations of executive officers and responsible employees
and agents of CEI and NEWCO, and upon such other data as we deemed to be
appropriate under the circumstances. We also wish to advise you that when in the
following opinion we have made statements to our "knowledge" we shall mean (with
respect to matters of fact), that after an examination of documents made
available to us by CEI and NEWCO and after inquiry of officers thereof but
without any judgment or litigation searches or any other independent factual
investigation, we have no reason to believe that such statements are factually
incorrect. Statements made to our
<PAGE>
"knowledge" shall furthermore refer only to then current actual knowledge of
attorneys of our firm who have worked on matters for CEI and NEWCO.
Based upon the foregoing and such consideration of matters of law as we
deemed to be relevant, and subject to the qualifications and assumptions set
forth herein, we are of the following opinion:
(i) CEI and NEWCO have each been duly organized and are validly existing in
good standing under the laws of the State of Delaware;
(ii) the Agreement has been duly authorized, executed and delivered by each
of CEI and NEWCO, constitutes the valid and binding agreement of each thereof
and is enforceable against each thereof in accordance with its terms;
(iii) the authorized and outstanding capital stock of CEI is as set forth
in the CEI prospectus (the "Prospectus"), dated _______________, relating to the
sale to the public of __________ shares of CEI; each share of stock to be issued
to the Stockholders, to the stockholders of the Founding Companies other than
the Company and to the Underwriters has been duly and validly authorized and
issued; upon consummation of the transactions set forth in the Agreement and the
Other Agreements, and upon payment by the Underwriters as set forth in the
Underwriting Agreement dated _______________ between the Underwriters and CEI,
each of such shares will be fully paid and nonassessable; and, to our knowledge,
none of such shares will have been issued in violation of the preemptive rights
of any stockholder of CEI;
(iv) to our knowledge, except as set forth in the Prospectus, CEI does not
have any outstanding options, warrants, calls, conversion rights or other
commitments of any kind to issue or sell any of its capital stock;
(v) assuming the due authorization, execution, delivery and filing of the
Certificate of Merger with the Secretary of State of the State of Delaware, the
Merger shall become effective under the laws of the State of Delaware; upon the
consummation of the Merger, no shareholder of CEI will be entitled to any rights
as a dissenting shareholder;
(vi) to our knowledge, (a) neither CEI nor NEWCO is in violation of any
order with respect thereto issued by any court or agency (wherever located) and
(b) there are no claims, actions, suits or proceedings pending, or threatened
against or affecting either CEI or NEWCO, at law or in equity, or before or by
any federal, state, municipal or other governmental department, commission,
board, bureau, agency or instrumentality wherever located;
(vii) to our knowledge, neither CEI nor NEWCO is in default, or has
received any notice of default, under any contract or agreement to which it is a
party, except where such default would not have a material adverse effect on
CEI;
2
<PAGE>
(viii) to our knowledge, no notice to, consent, authorization, approval
or order of any court or governmental agency or body or of any other third party
is required in connection with the execution, delivery or consummation of the
Agreement by CEI or NEWCO, except for such notices, consents, authorizations,
approvals or orders as have already been made or obtained; and
(ix) the execution of the Agreement and the performance by CEI and NEWCO of
their respective obligations thereunder will not violate any of the terms or
provisions of their respective Articles of Incorporation or By-laws or result in
any breach of or default under any lease, instrument, license, permit or any
other agreement to which they are a party, except where such violations,
breaches or defaults would not have a material adverse effect on CEI.
The opinion set forth in paragraph (ii) above is subject to the following
qualifications: (i) the enforceability of the respective obligations of CEI and
NEWCO under the Agreement are subject to bankruptcy, insolvency, reorganization,
moratorium and other similar laws now or hereafter in effect relating to
creditors' rights; (ii) the availability of equitable remedies, including
specific performance and injunctive relief, is subject to the discretion of the
court before which any proceeding therefor may be brought; (iii) we have assumed
the due authorization, execution and delivery of the Agreement by each of the
other parties thereto other than CEI and NEWCO and (iv) no opinion is expressed
as to the enforceability of (1) provisions requiring indemnification for
liabilities under the securities law or (2) the non-competition provisions
included therein.
We understand that we have no obligation to update this opinion to reflect
any facts or circumstances occurring after the date hereof, provided however,
that unless we otherwise notify you in or prior to the Funding and Consummation
Date that this opinion may no longer be relied upon, you shall be entitled to
rely on this opinion as of the Funding and Consummation Date if it were dated on
such date.
We render the foregoing opinions as members of the Bar of the State of New
York and express no opinion as to laws other than the laws of the State of New
York, the General Corporation Law of the State of Delaware and the federal laws
of the United States of America (other than federal laws applicable to patents,
copyrights and trademarks).
Very truly yours,
3
<PAGE>
ANNEX VII
FORM OF OPINION OF COUNSEL TO COMPANY AND STOCKHOLDERS
[Date]
Collectibles Enterprises, Inc.
[address]
[Underwriters]
[address]
Ladies and Gentlemen:
We have acted as counsel to [Company], a [____________] corporation
(the "Company") in connection with the transactions contemplated by the
agreement (the "Agreement") dated as of May 9, 1997 among Collectibles USA, Inc.
("CEI"), [NEWCO], the Company and the stockholders named therein (the
"Stockholders").
This opinion is being delivered to you pursuant to Section 9.8 of the
Agreement. All capitalized terms used herein, unless expressly defined herein,
shall have the meanings ascribed to such terms in the Agreement.
We have examined originals, or copies certified or otherwise identified
to our satisfaction, of such documents and corporate and public records as we
deemed to be necessary as a basis for the opinion hereinafter expressed. With
respect to such examination, we have assumed the genuineness of all signatures
appearing on all documents presented to us as originals, and the conformity to
the originals of all documents presented to us as conformed or reproduced
copies. Where factual matters material to such opinion were not independently
established, we have relied upon certificates of appropriate state and local
officials, upon representations of executive officers and responsible employees
and agents of the Company, and upon such other data as we deemed to be
appropriate under the circumstances. We also wish to advise you that when in the
following opinion we have made statements to our "knowledge" we shall mean (with
respect to matters of fact), that after an examination of documents made
available to us by the Company after inquiry of officers of the Company but
without any judgment or litigation searches or any other independent factual
investigation, we have no reason to believe that such statements are factually
incorrect. Statements made to our "knowledge" shall furthermore refer only to
then current actual knowledge of attorneys of our firm who have worked on
matters for the Company.
<PAGE>
Based upon the foregoing and such consideration of matters of law as we
deemed to be relevant, and subject to the qualifications and assumptions set
forth herein, we are of the following opinion:
(i) the COMPANY has been duly organized and is validly existing
or subsisting in good standing under the laws of the State of
[____________];
(ii) the COMPANY is duly qualified to do business as a foreign
corporation in each of the jurisdictions set forth in Schedule 5.1 of
the Agreement and to our knowledge, the COMPANY has the required
authorities and permits to carry on its business in each of such
jurisdictions, except where the failure to be so qualified or have
such authorities and permits would not have a material adverse effect
on the COMPANY;
(iii) based solely on a review of the stock records and minutes
of the COMPANY, the authorized and outstanding capital stock of the
COMPANY is as represented in the Agreement; each share of such stock
has been duly and validly authorized and issued, and, to our
knowledge, is fully paid and nonassessable and was not issued in
violation of the preemptive rights of any STOCKHOLDER;
(iv) to our knowledge, the COMPANY does not have any outstanding
options, warrants, calls, conversion rights or other commitments of
any kind to issue or sell any of its capital stock;
(v) the Agreement has been duly authorized, executed and
delivered by the COMPANY and the STOCKHOLDERS party thereto and
constitutes a valid and binding agreement of the COMPANY and such
STOCKHOLDERS, enforceable against the COMPANY and such STOCKHOLDERS in
accordance with its terms;
(vi) [for non-Delaware Companies only] upon the filing of the
[relevant certificate] with [relevant filing authority] in the state
of [state of incorporation of COMPANY], the Merger shall become
effective under the laws of the state of [state of incorporation of
COMPANY]. Upon the consummation of the Merger, all of the outstanding
stock of the COMPANY will have been duly authorized and issued, and
will be fully paid and nonassessable, and will be beneficially owned
by CEI, free and clear of any security interest, claim, lien or
encumbrance, and no former shareholder of the COMPANY will be entitled
to any rights as a dissenting shareholder, [except . . . describe
exceptions under relevant state law].
(vii) to our knowledge, except to the extent set forth on
Schedules 5.10, 5.21 and 5.24 to the Agreement, (a) the COMPANY is not
in violation of any order with respect to the COMPANY issued by any
court or agency (wherever located) and (b) there are no claims,
actions, suits or proceedings pending, or threatened against or
affecting the COMPANY, at law or in equity, or before or by any
federal, state, municipal or other
2
<PAGE>
governmental department, commission, board, bureau, agency or
instrumentality wherever located;
(viii) to our knowledge, except to the extent set forth on
Schedule 5.15 to the Agreement, the COMPANY is not in default, and has
not received any notice of default, under any of the contracts or
agreements listed on such Schedule 5.15;
(ix) to our knowledge, no notice to, consent, authorization,
approval or order of any court or governmental agency or body or of
any other third party is required in connection with the execution,
delivery or consummation of the Agreement by any of the STOCKHOLDERS
except for such notices, consents, authorizations, approvals or orders
as have already been made or obtained; and
(x) the execution of the Agreement and the performance by the
COMPANY and the STOCKHOLDERS party thereto of their respective
obligations thereunder will not violate any of the terms or provisions
of COMPANY's Articles of Incorporation or the By-laws of the COMPANY
or result in any breach of or default under any lease, instrument,
license, permit or any other agreement listed on Schedule 5.12 or 5.15
to the Agreement, except to the extent specifically set forth on such
Schedules.
The opinion set forth in paragraph (v) above is subject to the
following qualifications: (i) the enforceability of the obligations of the
Company under the Agreement is subject to bankruptcy, insolvency,
reorganization, moratorium and other similar laws now or hereafter in effect
relating to creditors' rights; (ii) the availability of equitable remedies,
including specific performance and injunctive relief, is subject to the
discretion of the court before which any proceeding therefor may be brought;
(iii) we have assumed the due authorization, execution and delivery of the
Agreement by each of the other parties thereto other than the Company and (iv)
no opinion is expressed as to the enforceability of (1) provisions requiring
indemnification for liabilities under the securities law or (2) the
non-competition provisions included therein.
We understand that we have no obligation to update this opinion to
reflect any facts or circumstances occurring after the date hereof, provided
however, that unless we otherwise notify you in or prior to the Funding and
Consummation Date that this opinion may no longer be relied upon, you shall be
entitled to rely on this opinion as of the Funding and Consummation Date if it
were dated on such date.
We render the foregoing opinions as members of the Bar of the State of
[state of incorporation of COMPANY] and express no opinion as to laws other than
the laws of such state, the General Corporation Law of the State of Delaware and
the federal laws of the United States of America (other than federal laws
applicable to patents, copyrights and trademarks).
Very truly yours,
3
<PAGE>
ANNEX VIII
FORM OF EMPLOYMENT AGREEMENT
[to come]
<PAGE>
SCHEDULE to EXHIBIT 2.1
Identification of Substantially Identical Agreements and Plans of Organization
1 AGREEMENT AND PLAN OF ORGANIZATION made as of May 9, 1997, by and among
COLLECTIBLES USA, INC., a Delaware corporation ("CUI"), FILMART ACQUISITION
CORP., a Delaware corporation, FILMART PRODUCTIONS, INC., a New York
corporation, and each of Aron Laikin and Susan Spiegel pursuant to which
$100,000 in cash and 236,363 shares of Common Stock of CUI is to be paid, as
aggregate consideration, to the selling stockholders.*
2 AGREEMENT AND PLAN OF ORGANIZATION made as of May 9, 1997, by and among
COLLECTIBLES USA, INC., a Delaware corporation ("CUI"), ARA ACQUISITION CORP., a
Delaware corporation, AMERICAN ROYAL ARTS CORP., a Delaware corporation, and
Jerry Gladstone pursuant to which $2,814,000 in cash and 563,636 shares of
Common Stock of CUI is to be paid, as aggregate consideration, to the selling
stockholder.*
3 AGREEMENT AND PLAN OF ORGANIZATION made as of May 9, 1997, by and among
COLLECTIBLES USA, INC., a Delaware corporation ("CUI"), STONE'S ACQUISITION
CORP., a Delaware corporation, STONE'S SHOPS, INC., an Illinois corporation, and
each of David Stone and Mary Ella Stone pursuant to which $1,350,000 in cash and
350,000 shares of Common Stock of CUI is to be paid, as aggregate consideration,
to the selling stockholders.*
4 AGREEMENT AND PLAN OF ORGANIZATION made as of May 9, 1997, by and among
COLLECTIBLES USA, INC., a Delaware corporation ("CUI"), ST. GEORGE ACQUISITION
CORP., a Delaware corporation, ST. GEORGE, INC., a New Jersey corporation, and
each of Jean Holt, Robert St. George and Carmella Pugliese pursuant to which
$400,000 in cash and 85,000 shares of Common Stock of CUI is to be paid, as
aggregate consideration, to the selling stockholders.*
5 AGREEMENT AND PLAN OF ORGANIZATION made as of May 9, 1997, by and among
COLLECTIBLES USA, INC., a Delaware corporation ("CUI"), ELWELL ACQUISITION
CORP., a Delaware corporation, ELWELL STORES, INC., a Florida corporation, and
each of Roy C. Elwell and Kim A. Elwell pursuant to which $1,000,000 in cash and
168,181 shares of Common Stock CUI is to be paid, as aggregate consideration, to
the selling stockholders.*
6 AGREEMENT AND PLAN OF ORGANIZATION made as of May 9, 1997, by and among
COLLECTIBLES USA, INC., a Delaware corporation ("CUI"), DKG ACQUISITION CORP., a
Delaware corporation, DKG ENTERPRISES, INC., an Oklahoma corporation, and 4D
Investment Limited Partnership II pursuant to which $1,800,000 in cash and
359,090 shares of Common Stock of CUI is to be paid, as aggregate consideration,
to the selling stockholder.*
<PAGE>
7 AGREEMENT AND PLAN OF ORGANIZATION made as of May 9, 1997, by and among
COLLECTIBLES USA, INC., a Delaware corporation ("CUI"), ANIMATION USA
ACQUISITION CORP., a Delaware corporation, ANIMATION USA, INC., a Washington
corporation, and each of David Vice, Laine Ross, William A. Vice, Ruth Vice,
William A. Vice Revocable Trust, Craig Marria and Debra J. Marria pursuant to
which $600,000 in cash and 145,454 shares of Common Stock of CUI is to be paid,
as aggregate consideration, to the selling stockholders.*
* Pursuant to Item 601(b)(2) of Regulation S-K of the Securities Act of 1933, as
amended, supplemental copies of any omitted schedules or annexes will be
furnished to the Commission upon request.
AMENDMENT NO. 1
TO
AGREEMENT AND PLAN OF ORGANIZATION
AMENDMENT NO. 1, dated as of October 15, 1997 (this "Amendment"), to
the Agreement and Plan of Organization, dated as of May 9, 1997 (the
"Agreement"), by and among COLLECTIBLES USA, INC., a Delaware corporation
("CEI"), FILMART ACQUISITION CORP., a Delaware corporation ("Newco") FILMART
PRODUCTIONS, INC., a New York corporation (the "Company") and the Stockholders
named therein. Capitalized terms not otherwise defined herein have the
respective meanings set forth in the Agreement.
For good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto agree as follows:
1. Amendment to Section 1.3(iii) of the Agreement. Section 1.3(iii) of
the Agreement is hereby amended by deleting the phrase "David L. Yankey" in the
third line thereof and inserting in lieu thereof the phrase "W. Randolph
Ellspermann".
2. Amendment to Section 1.3(iv) to the Agreement. Section 1.3(iv) of
the Agreement is hereby amended by deleting the phrase "David L. Yankey" in the
third to fourth lines thereof and inserting in lieu thereof the phrase "W.
Randolph Ellspermann", and by deleting the phrase "David L. Yankey" in the
fourth to fifth lines thereof and inserting in lieu thereof the phrase "W.
Randolph Ellspermann".
3. Amendment to Section 12.1(ii) of the Agreement. Section 12.1(ii) of
the Agreement is hereby amended by deleting the phrase "October 31, 1997" in the
fourth line thereof and inserting in lieu thereof the phrase "November 30,
1997".
4. Amendment to Section 8.5 of the Agreement. (a) Section 8.5 of the
Agreement is hereby amended by deleting such section in its entirety and
replacing it with the following:
8.5 REGISTRATION STATEMENT. The Registration Statement shall
have been declared effective by the SEC and no stop order suspending
the effectiveness of the Registration Statement shall be in effect and
no proceeding therefor shall have been instituted or shall be pending
or contemplated under the 1933 Act and the Underwriters shall have
agreed to acquire on a firm commitment basis the CEI Stock being
offered in the IPO, subject to the conditions set forth in the
Underwriting Agreement, on terms such that the per share value of the
shares of CEI Stock to be received by the STOCKHOLDERS as set forth on
Annex III shall be a minimum of $9.00 per share, notwithstanding the
Minimum Value stated on Annex III.
<PAGE>
(b) The parties hereto acknowledge and agree that as a result of the
provisions of Section 4(a) of this Amendment No. 1, the Minimum Value stated on
Annex III shall have no further force or effect.
5. Amendment to Section 8.12 of the Agreement. Section 8.12 of the
Agreement is hereby amended by deleting such section in its entirety and
replacing it with the following:
8.12 RELEASE. The holders of CEI Stock shall have delivered to
CEI an instrument dated the Closing Date, releasing CEI from any and
all (i) claims of such holders against CEI and (ii) obligations of CEI
to such holders, except for (x) items specifically identified on
Schedule 8.12, (y) continuing obligations to such holders relating to
their employment by CEI and (z) obligations arising under this
Agreement or the transactions contemplated hereby.
6. Effect on Agreement. The Agreement shall continue in full force and
effect as amended by this Amendment. From and after the date hereof, all
references to the Agreement shall be deemed to mean the Agreement as amended by
this Amendment.
7. Governing Law. This Amendment shall be construed in accordance with
the laws of the State of New York without reference to its conflicts of law
provisions.
8. Counterparts. This Amendment may be executed simultaneously in two
or more counterparts, each of which shall be an original, and all of which
together constitute but one and the same instrument.
-2-
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed and
delivered by the duly authorized officer of each party hereto as of the date
first above written.
COLLECTIBLES USA, INC.
By /s/ RONALD RAFALOFF
----------------------------------
Name: RONALD RAFALOFF
Title:CHAIRMAN
FILMART ACQUISITION CORP.
By /s/ RONALD RAFALOFF
----------------------------------
Name: RONALD RAFALOFF
Title:CHAIRMAN
FILMART PRODUCTIONS, INC.
By /s/ SUSAN SPIEGEL
----------------------------------
Name: SUSAN SPIEGEL
Title: PRESIDENT
/s/ ARON LAIKIN
------------------------------------
Aron Laikin
/s/ SUSAN SPIEGEL
------------------------------------
Susan Spiegel
-3-
<PAGE>
AMENDMENT NO. 2
TO
AGREEMENT AND PLAN OF ORGANIZATION
AMENDMENT NO. 2, dated as of November 28, 1997 (this "Amendment"), to
the Agreement and Plan of Organization, dated as of May 9, 1997, as amended by
that certain Amendment No. 1, dated as of October 15, 1997 (the "Agreement"), by
and among COLLECTIBLES USA, INC., a Delaware corporation ("CEI"), FILMART
ACQUISITION CORP., a Delaware corporation ("Newco"), FILMART PRODUCTIONS, INC.,
a New York corporation (the "Company"), and the Stockholders named therein.
Capitalized terms not otherwise defined herein have the respective meanings set
forth in the Agreement.
For good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto agree as follows:
1. Amendment to Annex III of the Agreement. Annex III of the Agreement
is hereby amended by deleting such annex in its entirety and replacing it with
Exhibit A attached hereto.
2. Amendment to Section 12.1(ii) of the Agreement. Section 12.1(ii) of
the Agreement is hereby amended by deleting the phrase "November 30, 1997" in
the fourth line thereof and inserting in lieu thereof the phrase "July 31,
1998".
3. Amendment to Section 8.5 of the Agreement. (a) Section 8.5 of the
Agreement is hereby amended by deleting such section in its entirety and
replacing it with the following:
8.5 REGISTRATION STATEMENT. The Registration Statement shall
have been declared effective by the SEC and no stop order suspending
the effectiveness of the Registration Statement shall be in effect and
no proceeding therefor shall have been instituted or shall be pending
or contemplated under the 1933 Act and the Underwriters shall have
agreed to acquire on a firm commitment basis the CEI Stock being
offered in the IPO, subject to the conditions set forth in the
Underwriting Agreement, on terms such that the aggregate value of the
cash and the number of shares of CEI Stock to be received by the
STOCKHOLDER is not less than the Minimum Value set forth on Annex III.
(b) The parties hereto acknowledge and agree that as a result of the
provisions of Section 3(a) of this Amendment No. 2, the provisions of Section
4(b) of Amendment No. 1 shall have no further force or effect.
<PAGE>
4. Amendment to Section 1.3(iii) of the Agreement. Section 1.3(iii) of
the Agreement is hereby amended by deleting the phrase "W. Randolph Ellspermann"
in the third line thereof and inserting in lieu thereof the phrase "Ronald P.
Rafaloff".
5. Amendment to Section 1.3(iv) to the Agreement. Section 1.3(iv) of
the Agreement is hereby amended by deleting the phrase "W. Randolph Ellspermann"
in the third to fourth lines thereof and inserting in lieu thereof the phrase
"Ronald P. Rafaloff", and by deleting the phrase "W. Randolph Ellspermann" in
the fourth to fifth lines thereof and inserting in lieu thereof the phrase
"Ronald P. Rafaloff".
6. Amendment to Section 1.5 to the Agreement. Section 1.5 of the
Agreement is hereby amended by adding the following sentence to the end thereof:
Notwithstanding the foregoing, the amount of all debts and
liabilities of the Company assumed by the Surviving
Corporation shall not exceed $25,000, including up to $25,000
of debts and liabilities owed by the COMPANY to the
STOCKHOLDERS. Any debts and liabilities of the Company in
excess of such amount shall be assumed by and shall become the
obligation of the STOCKHOLDERS. CEI shall be entitled to
deduct from the amount of cash otherwise to be paid to the
STOCKHOLDERS pursuant to Section 2.1 at the Funding and
Consummation Date the amount of such excess. To the extent
that CEI does not so deduct any such amounts, the STOCKHOLDERS
shall promptly pay such debts and liabilities as and to the
extent requested by the Surviving Corporation from time to
time. For purposes of this Section 1.5, the dollar limitation
on debts and liabilities to be assumed by the Surviving
Corporation shall not apply to liabilities representing trade
payables for goods and services incurred in the ordinary
course of business, which shall be assumed by the Surviving
Corporation. Notwithstanding the foregoing, none of the debts
and liabilities to be assumed by the Surviving Corporation
shall include any debts or liabilities owed by the Company to
any of the STOCKHOLDERS, including, without limitation, any
liabilities representing accrued compensation and benefits or
interest.
7. Amendment to Section 7.3 to the Agreement. Section 7.3 of the
Agreement is hereby amended by deleting the word "or" from the end of clause (x)
thereof and adding the following to the end of clause (xi) thereof:
; or (xii) make any payment or distribution of any kind to any
of its STOCKHOLDERS, including any payments in respect of
salary or earnings of the COMPANY, other than payments in
respect of
-2-
<PAGE>
salaries not to exceed $4,167 per month in the aggregate to
all such STOCKHOLDERS (pro rated for partial months).
8. Effect on Agreement. The Agreement shall continue in full force and
effect as amended by this Amendment. From and after the date hereof, all
references to the Agreement shall be deemed to mean the Agreement as amended by
this Amendment.
9. Governing Law. This Amendment shall be construed in accordance with
the laws of the State of New York without reference to its conflicts of law
provisions.
10. Counterparts. This Amendment may be executed simultaneously in two
or more counterparts, each of which shall be an original, and all of which
together constitute but one and the same instrument.
-3-
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed and
delivered by the duly authorized officer of each party hereto as of the date
first above written.
COLLECTIBLES USA, INC.
By /s/ RONALD RAFALOFF
----------------------------------
Name: RONALD RAFALOFF
Title: CHAIRMAN
FILMART ACQUISITION CORP.
By /s/ RONALD RAFALOFF
----------------------------------
Name: RONALD RAFALOFF
Title: CHAIRMAN
FILMART PRODUCTIONS, INC.
By /s/ SUSAN SPIEGEL
----------------------------------
Name: SUSAN SPIEGEL
Title: PRESIDENT
/s/ ARON LAIKIN
------------------------------------
Aron Laikin
/s/ SUSAN SPIEGEL
------------------------------------
Susan Spiegel
-4-
AMENDMENT NO. 1
TO
AGREEMENT AND PLAN OF ORGANIZATION
AMENDMENT NO. 1, dated as of October 15, 1997 (this "Amendment"), to
the Agreement and Plan of Organization, dated as of May 9, 1997 (the
"Agreement"), by and among COLLECTIBLES USA, INC., a Delaware corporation
("CEI"), ARA ACQUISITION CORP., a Delaware corporation ("Newco") AMERICAN ROYAL
ARTS CORP., a Delaware corporation (the "Company") and the Stockholders named
therein. Capitalized terms not otherwise defined herein have the respective
meanings set forth in the Agreement.
For good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto agree as follows:
1. Amendment to Section 1.3(i) of the Agreement. Section 1.3(i) of the
Agreement is hereby amended by deleting the phrase "the COMPANY" in the first
line thereof and inserting in lieu thereof the phrase "NEWCO".
2. Amendment to Section 1.3(iii) of the Agreement. Section 1.3(iii) of
the Agreement is hereby amended by deleting the phrase "David L. Yankey" in the
third line thereof and inserting in lieu thereof the phrase "W. Randolph
Ellspermann".
3. Amendment to Section 1.3(iv) to the Agreement. Section 1.3(iv) of
the Agreement is hereby amended by deleting the phrase "David L. Yankey" in the
third to fourth lines thereof, and inserting in lieu thereof the phrase "W.
Randolph Ellspermann".
4. Amendment to Section 12.1(ii) of the Agreement. Section 12.1(ii) of
the Agreement is hereby amended by deleting the phrase "October 31, 1997" in the
fourth line thereof and inserting in lieu thereof the phrase "November 30,
1997".
5. Amendment to Section 8.5 of the Agreement. (a) Section 8.5 of the
Agreement is hereby amended by deleting such section in its entirety and
replacing it with the following:
8.5 REGISTRATION STATEMENT. The Registration Statement shall
have been declared effective by the SEC and no stop order suspending
the effectiveness of the Registration Statement shall be in effect and
no proceeding therefor shall have been instituted or shall be pending
or contemplated under the 1933 Act and the Underwriters shall have
agreed to acquire on a firm commitment basis the CEI Stock being
offered in the IPO, subject to the conditions set forth in the
Underwriting Agreement, on terms such that the per share value of the
shares of CEI Stock to be received by the
<PAGE>
STOCKHOLDERS as set forth on Annex III shall be a minimum of $9.00 per
share, notwithstanding the Minimum Value stated on Annex III.
(b) The parties hereto acknowledge and agree that as a result of the
provisions of Section 4(a) of this Amendment No. 1, the Minimum Value stated on
Annex III shall have no further force or effect.
6. Amendment to Section 8.12 of the Agreement. Section 8.12 of the
Agreement is hereby amended by deleting such section in its entirety and
replacing it with the following:
8.12 RELEASE. The holders of CEI Stock shall have delivered to
CEI an instrument dated the Closing Date, releasing CEI from any and
all (i) claims of such holders against CEI and (ii) obligations of CEI
to such holders, except for (x) items specifically identified on
Schedule 8.12, (y) continuing obligations to such holders relating to
their employment by CEI and (z) obligations arising under this
Agreement or the transactions contemplated hereby.
7. Effect on Agreement. The Agreement shall continue in full force and
effect as amended by this Amendment. From and after the date hereof, all
references to the Agreement shall be deemed to mean the Agreement as amended by
this Amendment.
8. Governing Law. This Amendment shall be construed in accordance with
the laws of the State of New York without reference to its conflicts of law
provisions.
9. Counterparts. This Amendment may be executed simultaneously in two
or more counterparts, each of which shall be an original, and all of which
together constitute but one and the same instrument.
-2-
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed and
delivered by the duly authorized officer of each party hereto as of the date
first above written.
COLLECTIBLES USA, INC.
By /s/ RONALD RAFALOFF
---------------------------------
Name: RONALD RAFALOFF
Title: CHAIRMAN
ARA ACQUISITION CORP.
By /s/ RONALD RAFALOFF
---------------------------------
Name: RONALD RAFALOFF
Title: CHAIRMAN
AMERICAN ROYAL ARTS CORP.
By /s/ JERRY GLADSTONE
---------------------------------
Name: JERRY GLADSTONE
Title: PRESIDENT
/s/ JERARD GLADSTONE
------------------------------------
Jerard Gladstone
-3-
<PAGE>
AMENDMENT NO. 2
TO
AGREEMENT AND PLAN OF ORGANIZATION
AMENDMENT NO. 2, dated as of November 28, 1997 (this "Amendment"), to
the Agreement and Plan of Organization, dated as of May 9, 1997, as amended by
that certain Amendment No. 1, dated as of October 15, 1997 (the "Agreement"), by
and among COLLECTIBLES USA, INC., a Delaware corporation ("CEI"), ARA
ACQUISITION CORP., a Delaware corporation ("Newco"), AMERICAN ROYAL ARTS CORP.,
a Delaware corporation (the "Company"), and the Stockholders named therein.
Capitalized terms not otherwise defined herein have the respective meanings set
forth in the Agreement.
For good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto agree as follows:
1. Amendment to Annex III of the Agreement. Annex III of the Agreement
is hereby amended by deleting such annex in its entirety and replacing it with
Exhibit A attached hereto.
2. Amendment to Section 12.1(ii) of the Agreement. Section 12.1(ii) of
the Agreement is hereby amended by deleting the phrase "November 30, 1997" in
the fourth line thereof and inserting in lieu thereof the phrase "July 31,
1998".
3. Amendment to Section 1.5 to the Agreement. Section 1.5 of the
Agreement is hereby amended by adding the following sentence to the end thereof:
Notwithstanding the foregoing, the amount of all Debts and
Liabilities (as hereinafter described) of the COMPANY assumed
by the Surviving Corporation shall not exceed $625,000,
together with interest thereon, which amount is owed by the
COMPANY to the STOCKHOLDER and will be paid by the Surviving
Corporation to the STOCKHOLDER (the "Stockholder Repayment
Amount") on the Funding and Consummation Date; provided, that
the Surviving Corporation also shall assume liabilities owed
by the COMPANY to the STOCKHOLDER incurred solely in
connection with the acquisition of assets reasonably required
in connection with the relocation of the COMPANY's principal
place of business to 123 Frost Street, Suite 201, Westbury,
New York 11590. Any Debts and Liabilities of the COMPANY in
excess of $625,000 plus accrued interest thereon shall be
assumed by and shall become the obligation of the STOCKHOLDER.
CEI shall be entitled to deduct
<PAGE>
from the amount of cash otherwise to be paid to the
STOCKHOLDER pursuant to Section 2.1 at the Funding and
Consummation Date the amount of such excess. To the extent
that CEI does not so deduct any such amounts, the STOCKHOLDER
shall promptly pay such Debts and Liabilities as and to the
extent requested by the Surviving Corporation from time to
time. For purposes of this Section 1.5, the term "Debts and
Liabilities" shall include all obligations for the payment of
money but shall expressly exclude all accounts payable,
customer deposits and all other liabilities of the Company
incurred in the ordinary course of business, including, but
not limited to, liabilities incurred in connection with
certain barter transactions and a capitalized phone lease.
Upon payment of the Stockholder Repayment Amount to the
STOCKHOLDER on the Funding and Consummation Date, none of the
Debts and Liabilities assumed by the Surviving Corporation
shall include any obligation for the payment of money owed by
the COMPANY to the STOCKHOLDER, including, without limitation,
any such obligation in respect of accrued compensation and
benefits or interest.
4. Amendment to Section 8.5 of the Agreement. (a) Section 8.5 of the
Agreement is hereby amended by deleting such section in its entirety and
replacing it with the following:
8.5 REGISTRATION STATEMENT. The Registration Statement shall
have been declared effective by the SEC and no stop order suspending
the effectiveness of the Registration Statement shall be in effect and
no proceeding therefor shall have been instituted or shall be pending
or contemplated under the 1933 Act and the Underwriters shall have
agreed to acquire on a firm commitment basis the CEI Stock being
offered in the IPO, subject to the conditions set forth in the
Underwriting Agreement, on terms such that the aggregate value of the
cash and the number of shares of CEI Stock to be received by the
STOCKHOLDER is not less than the Minimum Value set forth on Annex III.
(b) The parties hereto acknowledge and agree that as a result of the
provisions of Section 3(a) of this Amendment No. 2, the provisions of Section
4(b) of Amendment No. 1 shall have no further force or effect.
5. Amendment to Section 7.3 to the Agreement. Section 7.3 of the
Agreement is hereby amended by deleting the word "or" from the end of clause (x)
thereof and adding the following to the end of clause (xi) thereof:
; or (xii) make any payment or distribution of any kind to any
of its STOCKHOLDERS, including any payments in respect of
salary or earnings of the COMPANY, other than (1) payments in
respect of salaries not to exceed $7,083 per month (pro rated
for partial months) in the
-2-
<PAGE>
aggregate to all such STOCKHOLDERS, (2) payments in such
amount as may be required to enable the STOCKHOLDERS to pay
all applicable federal, state and local income Taxes arising
from the earnings of the COMPANY for the period from June 1,
1997 through the Funding and Consummation Date and (3)
$75,000, representing earnings of the COMPANY for the month of
May 1997.
6. Amendment to Schedule 7.3 to the Agreement. Schedule 7.3 of the
Agreement is hereby amended by adding the following to the end thereof:
The COMPANY shall be entitled to make capital expenditures and
incur liabilities representing acquisitions of assets
reasonably required in connection with the relocation of the
COMPANY's principal place of business to 123 Frost Street,
Suite 201, Westbury, New York 11590.
7. Amendment to Section 1.3(iii) of the Agreement. Section 1.3(iii) of
the Agreement is hereby amended by deleting the phrase "W. Randolph Ellspermann"
in the third line thereof and inserting in lieu thereof the phrase "Ronald P.
Rafaloff".
8. Amendment to Section 1.3(iv) to the Agreement. Section 1.3(iv) of
the Agreement is hereby amended by deleting the phrase "W. Randolph Ellspermann"
in the third to fourth lines thereof, and inserting in lieu thereof the phrase
"Ronald P. Rafaloff".
9. Effect on Agreement. The Agreement shall continue in full force and
effect as amended by this Amendment. From and after the date hereof, all
references to the Agreement shall be deemed to mean the Agreement as amended by
this Amendment.
10. Governing Law. This Amendment shall be construed in accordance with
the laws of the State of New York without reference to its conflicts of law
provisions.
11. Counterparts. This Amendment may be executed simultaneously in two
or more counterparts, each of which shall be an original, and all of which
together constitute but one and the same instrument.
-3-
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed and
delivered by the duly authorized officer of each party hereto as of the date
first above written.
COLLECTIBLES USA, INC.
By /s/ RONALD RAFALOFF
----------------------------------
Name: RONALD RAFALOFF
Title: CHAIRMAN
ARA ACQUISITION CORP.
By /s/ RONALD RAFALOFF
----------------------------------
Name: RONALD RAFALOFF
Title: CHAIRMAN
AMERICAN ROYAL ARTS CORP.
By /s/ JERRY GLADSTONE
----------------------------------
Name: JERRY GLADSTONE
Title:
/s/ JERARD GLADSTONE
------------------------------------
Jerard Gladstone
-4-
AMENDMENT NO. 1
TO
AGREEMENT AND PLAN OF ORGANIZATION
AMENDMENT NO. 1, dated as of October 15, 1997 (this "Amendment"), to
the Agreement and Plan of Organization, dated as of May 9, 1997 (the
"Agreement"), by and among COLLECTIBLES USA, INC., a Delaware corporation
("CEI"), STONE'S ACQUISITION CORP., a Delaware corporation ("Newco") STONE'S
SHOPS, INC., an Illinois corporation (the "Company") and the Stockholders named
therein. Capitalized terms not otherwise defined herein have the respective
meanings set forth in the Agreement.
For good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto agree as follows:
1. Amendment to Section 1.3(iii) of the Agreement. Section 1.3(iii) of
the Agreement is hereby amended by deleting the phrase "David L. Yankey" in the
third line thereof and inserting in lieu thereof the phrase "W. Randolph
Ellspermann".
2. Amendment to Section 1.3(iv) to the Agreement. Section 1.3(iv) of
the Agreement is hereby amended by deleting the phrase "David L. Yankey" in the
third to fourth lines thereof, by deleting the phrase "David L. Yankey" in the
fourth to fifth lines thereof, and inserting in lieu thereof the phrase "W.
Randolph Ellspermann".
3. Amendment to Section 12.1(ii) of the Agreement. Section 12.1(ii) of
the Agreement is hereby amended by deleting the phrase "October 31, 1997" in the
fourth line thereof and inserting in lieu thereof the phrase "November 30,
1997".
4. Amendment to Section 8.5 of the Agreement. (a) Section 8.5 of the
Agreement is hereby amended by deleting such section in its entirety and
replacing it with the following:
8.5 REGISTRATION STATEMENT. The Registration Statement shall
have been declared effective by the SEC and no stop order suspending
the effectiveness of the Registration Statement shall be in effect and
no proceeding therefor shall have been instituted or shall be pending
or contemplated under the 1933 Act and the Underwriters shall have
agreed to acquire on a firm commitment basis the CEI Stock being
offered in the IPO, subject to the conditions set forth in the
Underwriting Agreement, on terms such that the per share value of the
shares of CEI Stock to be received by the STOCKHOLDERS as set forth on
Annex III shall be a minimum of $9.00 per share, notwithstanding the
Minimum Value stated on Annex III.
<PAGE>
(b) The parties hereto acknowledge and agree that as a result of the
provisions of Section 4(a) of this Amendment No. 1, the Minimum Value stated on
Annex III shall have no further force or effect.
5. Amendment to Section 8.12 of the Agreement. Section 8.12 of the
Agreement is hereby amended by deleting such section in its entirety and
replacing it with the following:
8.12 RELEASE. The holders of CEI Stock shall have delivered to
CEI an instrument dated the Closing Date, releasing CEI from any and
all (i) claims of such holders against CEI and (ii) obligations of CEI
to such holders, except for (x) items specifically identified on
Schedule 8.12, (y) continuing obligations to such holders relating to
their employment by CEI and (z) obligations arising under this
Agreement or the transactions contemplated hereby.
6. Effect on Agreement. The Agreement shall continue in full force and
effect as amended by this Amendment. From and after the date hereof, all
references to the Agreement shall be deemed to mean the Agreement as amended by
this Amendment.
7. Governing Law. This Amendment shall be construed in accordance with
the laws of the State of New York without reference to its conflicts of law
provisions.
8. Counterparts. This Amendment may be executed simultaneously in two
or more counterparts, each of which shall be an original, and all of which
together constitute but one and the same instrument.
-2-
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed and
delivered by the duly authorized officer of each party hereto as of the date
first above written.
COLLECTIBLES USA, INC.
By /s/ RONALD RAFALOFF
----------------------------------
Name: RONALD RAFALOFF
Title: CHAIRMAN
STONE'S ACQUISITION CORP.
By /s/ RONALD RAFALOFF
----------------------------------
Name: RONALD RAFALOFF
Title: CHAIRMAN
STONE'S SHOPS, INC.
By /s/ DAVID STONE
----------------------------------
Name: DAVID STONE
Title: PRESIDENT
/s/ DAVID STONE
------------------------------------
David Stone
/s/ MARY ELLA STONE
------------------------------------
Mary Ella Stone
-3-
<PAGE>
AMENDMENT NO. 2
TO
AGREEMENT AND PLAN OF ORGANIZATION
AMENDMENT NO. 2, dated as of November 28, 1997 (this "Amendment"), to
the Agreement and Plan of Organization, dated as of May 9, 1997, as amended by
that certain Amendment No. 1, dated as of October 15, 1997 (the "Agreement"), by
and among COLLECTIBLES USA, INC., a Delaware corporation ("CEI"), STONE'S
ACQUISITION CORP., a Delaware corporation ("Newco"), STONE'S SHOPS, INC., an
Illinois corporation (the "Company"), and the Stockholders named therein.
Capitalized terms not otherwise defined herein have the respective meanings set
forth in the Agreement.
For good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto agree as follows:
1. Amendment to Annex III of the Agreement. Annex III of the Agreement
is hereby amended by deleting such annex in its entirety and replacing it with
Exhibit A attached hereto.
2. Amendment to Section 12.1(ii) of the Agreement. Section 12.1(ii) of
the Agreement is hereby amended by deleting the phrase "November 30, 1997" in
the fourth line thereof and inserting in lieu thereof the phrase "July 31,
1998".
3. Amendment to Section 8.5 of the Agreement. (a) Section 8.5 of the
Agreement is hereby amended by deleting such section in its entirety and
replacing it with the following:
8.5 REGISTRATION STATEMENT. The Registration Statement shall
have been declared effective by the SEC and no stop order suspending
the effectiveness of the Registration Statement shall be in effect and
no proceeding therefor shall have been instituted or shall be pending
or contemplated under the 1933 Act and the Underwriters shall have
agreed to acquire on a firm commitment basis the CEI Stock being
offered in the IPO, subject to the conditions set forth in the
Underwriting Agreement, on terms such that the aggregate value of the
cash and the number of shares of CEI Stock to be received by the
STOCKHOLDER is not less than the Minimum Value set forth on Annex III.
(b) The parties hereto acknowledge and agree that as a result of the
provisions of Section 3(a) of this Amendment No. 2, the provisions of Section
4(b) of Amendment No. 1 shall have no further force or effect.
4. Amendment to Section 1.5 to the Agreement. Section 1.5 of the
Agreement is hereby amended by adding the following sentence to the end thereof:
<PAGE>
Notwithstanding the foregoing, the amount of all debts and
liabilities of the COMPANY assumed by the Surviving
Corporation shall not exceed $40,000, including up to $40,000
of debts and liabilities owed by the COMPANY to the
STOCKHOLDERS (the "STOCKHOLDER Loans"). Any debts and
liabilities of the COMPANY in excess of such amount shall be
assumed by and shall become the obligation of the
STOCKHOLDERS. CEI shall be entitled to deduct from the amount
of cash otherwise to be paid to the STOCKHOLDERS pursuant to
Section 2.1 at the Funding and Consummation Date the amount of
such excess. To the extent that CEI does not so deduct any
such amounts, the STOCKHOLDERS shall promptly pay such debts
and liabilities as and to the extent requested by the
Surviving Corporation from time to time. For purposes of this
Section 1.5, the dollar limitation on debts and liabilities to
be assumed by the Surviving Corporation shall not apply to
liabilities representing trade payables for goods and services
incurred in the ordinary course of business, which shall be
assumed by the Surviving Corporation. Notwithstanding the
foregoing, and except as provided above, none of the debts and
liabilities assumed by the Surviving Corporation shall include
any debts or liabilities owed by the COMPANY to any of the
STOCKHOLDERS, including, without limitation, any liabilities
in respect of accrued compensation and benefits or interest.
In addition, the Surviving Corporation shall forgive up to an
aggregate of $5,000 of indebtedness owed by David, Michael,
Daniel and/or Steven Stone to the COMPANY; provided, that the
amount of the STOCKHOLDER Loans to be assumed by the Surviving
Corporation shall be reduced by any indebtedness so forgiven.
5. Amendment to Section 7.3 to the Agreement. Section 7.3 of the
Agreement is hereby amended by deleting the word "or" from the end of clause (x)
thereof and adding the following to the end of clause (xi) thereof:
; or (xii) make any payment or distribution of any kind to any
of its STOCKHOLDERS, including any payments in respect of
salary or earnings of the COMPANY, other than payments in
respect of salaries not to exceed $4,167 per month in the
aggregate to all such STOCKHOLDERS (pro rated for partial
months).
6. Amendment to Section 1.3(iii) of the Agreement. Section 1.3(iii) of
the Agreement is hereby amended by deleting the phrase "W. Randolph Ellspermann"
in the third line thereof and inserting in lieu thereof the phrase "Ronald P.
Rafaloff".
-2-
<PAGE>
7. Amendment to Section 1.3(iv) to the Agreement. Section 1.3(iv) of
the Agreement is hereby amended by deleting the phrase "W. Randolph Ellspermann"
in the third to fourth lines thereof, and inserting in lieu thereof the phrase
"Ronald P. Rafaloff".
8. Effect on Agreement. The Agreement shall continue in full force and
effect as amended by this Amendment. From and after the date hereof, all
references to the Agreement shall be deemed to mean the Agreement as amended by
this Amendment.
9. Governing Law. This Amendment shall be construed in accordance with
the laws of the State of New York without reference to its conflicts of law
provisions.
10. Counterparts. This Amendment may be executed simultaneously in two
or more counterparts, each of which shall be an original, and all of which
together constitute but one and the same instrument.
-3-
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed and
delivered by the duly authorized officer of each party hereto as of the date
first above written.
COLLECTIBLES USA, INC.
By /s/ RONALD RAFALOFF
----------------------------------
Name: RONALD RAFALOFF
Title: CHAIRMAN
STONE'S ACQUISITION CORP.
By /s/ RONALD RAFALOFF
----------------------------------
Name: RONALD RAFALOFF
Title: CHAIRMAN
STONE'S SHOPS, INC.
By /s/ DAVID STONE
----------------------------------
Name:
Title:
/s/ DAVID STONE
------------------------------------
David Stone
/s/ MARY ELLA STONE
------------------------------------
Mary Ella Stone
-4-
AMENDMENT NO. 1
TO
AGREEMENT AND PLAN OF ORGANIZATION
AMENDMENT NO. 1, dated as of October 15, 1997 (this "Amendment"), to
the Agreement and Plan of Organization, dated as of May 9, 1997 (the
"Agreement"), by and among COLLECTIBLES USA, INC., a Delaware corporation
("CEI"), ST. GEORGE ACQUISITION CORP., a Delaware corporation ("Newco") ST.
GEORGE, INC., a New Jersey corporation (the "Company") and the Stockholders
named therein. Capitalized terms not otherwise defined herein have the
respective meanings set forth in the Agreement.
For good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto agree as follows:
1. Amendment to Section 1.3(iii) of the Agreement. Section 1.3(iii) of
the Agreement is hereby amended by deleting the phrase "David L. Yankey" in the
third line thereof and inserting in lieu thereof the phrase "W. Randolph
Ellspermann".
2. Amendment to Section 1.3(iv) to the Agreement. Section 1.3(iv) of
the Agreement is hereby amended by deleting the phrase "David L. Yankey" in the
third to fourth lines thereof and inserting in lieu thereof the phrase "W.
Randolph Ellspermann", and by deleting the phrase "David L. Yankey" in the
fourth to fifth lines thereof and inserting in lieu thereof the phrase "W.
Randolph Ellspermann".
3. Amendment to Section 12.1(ii) of the Agreement. Section 12.1(ii) of
the Agreement is hereby amended by deleting the phrase "October 31, 1997" in the
fourth line thereof and inserting in lieu thereof the phrase "November 30,
1997".
4. Amendment to Section 8.5 of the Agreement. (a) Section 8.5 of the
Agreement is hereby amended by deleting such section in its entirety and
replacing it with the following:
8.5 REGISTRATION STATEMENT. The Registration Statement shall
have been declared effective by the SEC and no stop order suspending
the effectiveness of the Registration Statement shall be in effect and
no proceeding therefor shall have been instituted or shall be pending
or contemplated under the 1933 Act and the Underwriters shall have
agreed to acquire on a firm commitment basis the CEI Stock being
offered in the IPO, subject to the conditions set forth in the
Underwriting Agreement, on terms such that the per share value of the
shares of CEI Stock to be received by the
<PAGE>
STOCKHOLDERS as set forth on Annex III shall be a minimum of $9.00 per
share, notwithstanding the Minimum Value stated on Annex III.
(b) The parties hereto acknowledge and agree that as a result of the
provisions of Section 4(a) of this Amendment No. 1, the Minimum Value stated on
Annex III shall have no further force or effect.
5. Amendment to Section 8.12 of the Agreement. Section 8.12 of the
Agreement is hereby amended by deleting such section in its entirety and
replacing it with the following:
8.12 RELEASE. The holders of CEI Stock shall have delivered to
CEI an instrument dated the Closing Date, releasing CEI from any and
all (i) claims of such holders against CEI and (ii) obligations of CEI
to such holders, except for (x) items specifically identified on
Schedule 8.12, (y) continuing obligations to such holders relating to
their employment by CEI and (z) obligations arising under this
Agreement or the transactions contemplated hereby.
6. Effect on Agreement. The Agreement shall continue in full force and
effect as amended by this Amendment. From and after the date hereof, all
references to the Agreement shall be deemed to mean the Agreement as amended by
this Amendment.
7. Governing Law. This Amendment shall be construed in accordance with
the laws of the State of New York without reference to its conflicts of law
provisions.
8. Counterparts. This Amendment may be executed simultaneously in two
or more counterparts, each of which shall be an original, and all of which
together constitute but one and the same instrument.
-2-
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed and
delivered by the duly authorized officer of each party hereto as of the date
first above written.
COLLECTIBLES USA, INC.
By /s/ RONALD RAFALOFF
----------------------------------
Name: RONALD RAFALOFF
Title: CHAIRMAN
ST. GEORGE ACQUISITION CORP.
By /s/ RONALD RAFALOFF
----------------------------------
Name: RONALD RAFALOFF
Title: CHAIRMAN
ST. GEORGE, INC.
By /s/ ROBERT ST. GEORGE
----------------------------------
Name:
Title:
/s/ JEAN HOLT
------------------------------------
Jean Holt
/s/ ROBERT ST. GEORGE
------------------------------------
Robert St. George
/s/ CARMELLA PUGLIESE
------------------------------------
Carmella Pugliese
-3-
<PAGE>
AMENDMENT NO. 2
TO
AGREEMENT AND PLAN OF ORGANIZATION
AMENDMENT NO. 2, dated as of November 28, 1997 (this "Amendment"), to
the Agreement and Plan of Organization, dated as of May 9, 1997, as amended by
that certain Amendment No. 1, dated as of October 15, 1997 (the "Agreement"), by
and among COLLECTIBLES USA, INC., a Delaware corporation ("CEI"), ST. GEORGE
ACQUISITION CORP., a Delaware corporation ("Newco"), ST. GEORGE, INC., a New
Jersey corporation (the "Company"), and the Stockholders named therein.
Capitalized terms not otherwise defined herein have the respective meanings set
forth in the Agreement.
For good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto agree as follows:
1. Amendment to Annex III of the Agreement. Annex III of the Agreement
is hereby amended by deleting such annex in its entirety and replacing it with
Exhibit A attached hereto.
2. Amendment to Section 12.1(ii) of the Agreement. Section 12.1(ii) of
the Agreement is hereby amended by deleting the phrase "November 30, 1997" in
the fourth line thereof and inserting in lieu thereof the phrase "July 31,
1998".
3. Amendment to Section 8.5 of the Agreement. (a) Section 8.5 of the
Agreement is hereby amended by deleting such section in its entirety and
replacing it with the following:
8.5 REGISTRATION STATEMENT. The Registration Statement shall
have been declared effective by the SEC and no stop order suspending
the effectiveness of the Registration Statement shall be in effect and
no proceeding therefor shall have been instituted or shall be pending
or contemplated under the 1933 Act and the Underwriters shall have
agreed to acquire on a firm commitment basis the CEI Stock being
offered in the IPO, subject to the conditions set forth in the
Underwriting Agreement, on terms such that the aggregate value of the
cash and the number of shares of CEI Stock to be received by the
STOCKHOLDER is not less than the Minimum Value set forth on Annex III.
(b) The parties hereto acknowledge and agree that as a result of the
provisions of Section 3(a) of this Amendment No. 2, the provisions of Section
4(b) of Amendment No. 1 shall have no further force or effect.
4. Amendment to Section 1.5 to the Agreement. Section 1.5 of the
Agreement is hereby amended by adding the following sentence to the end thereof:
<PAGE>
Notwithstanding the foregoing, the amount of all debts and
liabilities of the Company assumed by the Surviving
Corporation shall not exceed $725,000. Any debts and
liabilities of the Company in excess of such amount shall be
assumed by and shall become the obligation of the
STOCKHOLDERS. CEI shall be entitled to deduct from the amount
of cash otherwise to be paid to the STOCKHOLDERS pursuant to
Section 2.1 at the Funding and Consummation Date the amount of
such excess. To the extent that CEI does not so deduct any
such amounts, the STOCKHOLDERS shall promptly pay such debts
and liabilities as and to the extent requested by the
Surviving Corporation from time to time. None of the debts and
liabilities assumed by the Surviving Corporation shall include
any debts or liabilities owed by the Company to any of the
STOCKHOLDERS, including, without limitation, any liabilities
in respect of accrued compensation and benefits or interest.
5. Amendment to Section 7.3 to the Agreement. Section 7.3 of the
Agreement is hereby amended by deleting the word "or" from the end of clause (x)
thereof and adding the following to the end of clause (xi) thereof:
; or (xii) make any payment or distribution of any kind to any of its
STOCKHOLDERS, including any payments in respect of salary or earnings
of the COMPANY, other than payments in respect of salaries not to
exceed $4,167 per month in the aggregate to all such STOCKHOLDERS (pro
rated for partial months).
6. Effect on Agreement. The Agreement shall continue in full force and
effect as amended by this Amendment. From and after the date hereof, all
references to the Agreement shall be deemed to mean the Agreement as amended by
this Amendment.
7. Governing Law. This Amendment shall be construed in accordance with
the laws of the State of New York without reference to its conflicts of law
provisions.
8. Counterparts. This Amendment may be executed simultaneously in two
or more counterparts, each of which shall be an original, and all of which
together constitute but one and the same instrument.
-2-
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed and
delivered by the duly authorized officer of each party hereto as of the date
first above written.
COLLECTIBLES USA, INC.
By /s/ RONALD RAFALOFF
----------------------------------
Name: RONALD RAFALOFF
Title: CHAIRMAN
ST. GEORGE ACQUISITION CORP.
By /s/ RONALD RAFALOFF
----------------------------------
Name: RONALD RAFALOFF
Title: CHAIRMAN
ST. GEORGE, INC.
By /s/ ROBERT ST. GEORGE
----------------------------------
Name:
Title: PRESIDENT
/s/ JEAN HOLT
------------------------------------
Jean Holt
/s/ ROBERT ST. GEORGE
------------------------------------
Robert St. George
/s/ CARMELLA PUGLIESE
------------------------------------
Carmella Pugliese
-3-
AMENDMENT NO. 1
TO
AGREEMENT AND PLAN OF ORGANIZATION
AMENDMENT NO. 1, dated as of October 15, 1997 (this "Amendment"), to
the Agreement and Plan of Organization, dated as of May 9, 1997 (the
"Agreement"), by and among COLLECTIBLES USA, INC., a Delaware corporation
("CEI"), ELWELL ACQUISITION CORP., a Delaware corporation ("Newco") ELWELL
STORES, INC., a Florida corporation (the "Company") and the Stockholders named
therein. Capitalized terms not otherwise defined herein have the respective
meanings set forth in the Agreement.
For good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto agree as follows:
1. Amendment to Section 1.3(iii) of the Agreement. Section 1.3(iii) of
the Agreement is hereby amended by deleting the phrase "David L. Yankey" in the
third line thereof and inserting in lieu thereof the phrase "W. Randolph
Ellspermann".
2. Amendment to Section 1.3(iv) to the Agreement. Section 1.3(iv) of
the Agreement is hereby amended by deleting the phrase "David L. Yankey" in the
third to fourth lines thereof and inserting in lieu thereof the phrase "W.
Randolph Ellspermann", and by deleting the phrase "David L. Yankey" in the
fourth to fifth lines thereof and inserting in lieu thereof the phrase "W.
Randolph Ellspermann".
3. Amendment to Section 12.1(ii) of the Agreement. Section 12.1(ii) of
the Agreement is hereby amended by deleting the phrase "October 31, 1997" in the
fourth line thereof and inserting in lieu thereof the phrase "November 30,
1997".
4. Amendment to Section 8.5 of the Agreement. (a) Section 8.5 of the
Agreement is hereby amended by deleting such section in its entirety and
replacing it with the following:
8.5 REGISTRATION STATEMENT. The Registration Statement shall
have been declared effective by the SEC and no stop order suspending
the effectiveness of the Registration Statement shall be in effect and
no proceeding therefor shall have been instituted or shall be pending
or contemplated under the 1933 Act and the Underwriters shall have
agreed to acquire on a firm commitment basis the CEI Stock being
offered in the IPO, subject to the conditions set forth in the
Underwriting Agreement, on terms such that the per share value of the
shares of CEI Stock to be received by the STOCKHOLDERS as set forth on
Annex III shall be a minimum of $9.00 per share, notwithstanding the
Minimum Value stated on Annex III.
<PAGE>
(b) The parties hereto acknowledge and agree that as a result of the
provisions of Section 4(a) of this Amendment No. 1, the Minimum Value stated on
Annex III shall have no further force or effect.
5. Amendment to Section 8.12 of the Agreement. Section 8.12 of the
Agreement is hereby amended by deleting such section in its entirety and
replacing it with the following:
8.12 RELEASE. The holders of CEI Stock shall have delivered to
CEI an instrument dated the Closing Date, releasing CEI from any and
all (i) claims of such holders against CEI and (ii) obligations of CEI
to such holders, except for (x) items specifically identified on
Schedule 8.12, (y) continuing obligations to such holders relating to
their employment by CEI and (z) obligations arising under this
Agreement or the transactions contemplated hereby.
6. Effect on Agreement. The Agreement shall continue in full force and
effect as amended by this Amendment. From and after the date hereof, all
references to the Agreement shall be deemed to mean the Agreement as amended by
this Amendment.
7. Governing Law. This Amendment shall be construed in accordance with
the laws of the State of New York without reference to its conflicts of law
provisions.
8. Counterparts. This Amendment may be executed simultaneously in two
or more counterparts, each of which shall be an original, and all of which
together constitute but one and the same instrument.
-2-
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed and
delivered by the duly authorized officer of each party hereto as of the date
first above written.
COLLECTIBLES USA, INC.
By /s/ RONALD RAFALOFF
----------------------------------
Name: RONALD RAFALOFF
Title: CHAIRMAN
ELWELL ACQUISITION CORP.
By /s/ RONALD RAFALOFF
----------------------------------
Name: RONALD RAFALOFF
Title: CHAIRMAN
ELWELL STORES, INC.
By /s/ ROY C. ELWELL
----------------------------------
Name:
Title: PRESIDENT
ROY AND KIM ELWELL, as tenants by the entirety:
/s/ ROY C. ELWELL /s/ KIM A. ELWELL
--------------------- -------------------------
Roy C. Elwell Kim A. Elwell
-3-
<PAGE>
AMENDMENT NO. 2
TO
AGREEMENT AND PLAN OF ORGANIZATION
AMENDMENT NO. 2, dated as of November 28, 1997 (this "Amendment"), to
the Agreement and Plan of Organization, dated as of May 9, 1997, as amended by
that certain Amendment No. 1, dated as of October 15, 1997 (the "Agreement"), by
and among COLLECTIBLES USA, INC., a Delaware corporation ("CEI"), ELWELL
ACQUISITION CORP., a Delaware corporation ("Newco"), ELWELL STORES, INC., a
Florida corporation (the "Company"), and the Stockholders named therein.
Capitalized terms not otherwise defined herein have the respective meanings set
forth in the Agreement.
For good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto agree as follows:
1. Amendment to Annex III of the Agreement. Annex III of the Agreement
is hereby amended by deleting such annex in its entirety and replacing it with
Exhibit A attached hereto.
2. Amendment to Section 12.1(ii) of the Agreement. Section 12.1(ii) of
the Agreement is hereby amended by deleting the phrase "November 30, 1997" in
the fourth line thereof and inserting in lieu thereof the phrase "July 31,
1998".
3. Amendment to Section 8.5 of the Agreement. (a) Section 8.5 of the
Agreement is hereby amended by deleting such section in its entirety and
replacing it with the following:
8.5 REGISTRATION STATEMENT. The Registration Statement shall
have been declared effective by the SEC and no stop order suspending
the effectiveness of the Registration Statement shall be in effect and
no proceeding therefor shall have been instituted or shall be pending
or contemplated under the 1933 Act and the Underwriters shall have
agreed to acquire on a firm commitment basis the CEI Stock being
offered in the IPO, subject to the conditions set forth in the
Underwriting Agreement, on terms such that the aggregate value of the
cash and the number of shares of CEI Stock to be received by the
STOCKHOLDER is not less than the Minimum Value set forth on Annex III.
(b) The parties hereto acknowledge and agree that as a result of the
provisions of Section 3(a) of this Amendment No. 2, the provisions of Section
4(b) of Amendment No. 1 shall have no further force or effect.
4. Amendment to Section 1.5 to the Agreement. Section 1.5 of the
Agreement is hereby amended by adding the following sentences to the end
thereof:
<PAGE>
Notwithstanding the foregoing, the amount of all debts and
liabilities of the COMPANY assumed by the Surviving
Corporation shall not exceed $900,000 including up to $30,000
of debts and liabilities owed by the COMPANY to the
STOCKHOLDERS (the "STOCKHOLDER Loans"). Any debts and
liabilities of the COMPANY in excess of such amount shall be
assumed by and shall become the obligation of the
STOCKHOLDERS. CEI shall be entitled to deduct from the amount
of cash otherwise to be paid to the STOCKHOLDERS pursuant to
Section 2.1 at the Funding and Consummation Date the amount of
such excess. To the extent that CEI does not so deduct any
such amounts, the STOCKHOLDERS shall promptly pay such debts
and liabilities as and to the extent requested by the
Surviving Corporation from time to time. For purposes of this
Section 1.5, the dollar limitation on debts and liabilities to
be assumed by the Surviving Corporation shall not apply to
liabilities representing trade payables for goods and services
incurred in the ordinary course of business, which shall be
assumed by the Surviving Corporation. Notwithstanding the
foregoing, and except as provided above, none of the debts and
liabilities assumed by the Surviving Corporation shall include
any debts or liabilities owed by the COMPANY to any of the
STOCKHOLDERS, including, without limitation, any liabilities
in respect of accrued compensation and benefits or interest.
In addition, the Surviving Corporation shall forgive up to
$70,000 of indebtedness owed by Roy Elwell to the COMPANY;
provided, that the amount of the STOCKHOLDER Loans to be
assumed by the Surviving Corporation shall be reduced by any
indebtedness so forgiven.
5. Amendment to Section 7.3 to the Agreement. Section 7.3 of the
Agreement is hereby amended by deleting the word "or" from the end of clause (x)
thereof and adding the following to the end of clause (xi) thereof:
; or (xii) make any payment or distribution of any kind to any
of its STOCKHOLDERS, including any payments in respect of
salary or earnings of the COMPANY, other than (A) payments in
respect of salaries not to exceed $7,083 per month in the
aggregate to all such STOCKHOLDERS (pro rated for partial
months) and (B) payments in such amount as may be required to
enable the STOCKHOLDERS to pay all applicable federal, state
and local income Taxes arising from the earnings of the
COMPANY for the period from May 9, 1997 through the Funding
and Consummation Date.
-2-
<PAGE>
6. Amendment to Section 1.3(iii) of the Agreement. Section 1.3(iii) of
the Agreement is hereby amended by deleting the phrase "W. Randolph Ellspermann"
in the third line thereof and inserting in lieu thereof the phrase "Ronald P.
Rafaloff".
7. Amendment to Section 1.3(iv) to the Agreement. Section 1.3(iv) of
the Agreement is hereby amended by deleting the phrase "W. Randolph Ellspermann"
in the third to fourth lines thereof, and inserting in lieu thereof the phrase
"Ronald P. Rafaloff".
8. Effect on Agreement. The Agreement shall continue in full force and
effect as amended by this Amendment. From and after the date hereof, all
references to the Agreement shall be deemed to mean the Agreement as amended by
this Amendment.
9. Governing Law. This Amendment shall be construed in accordance with
the laws of the State of New York without reference to its conflicts of law
provisions.
10. Counterparts. This Amendment may be executed simultaneously in two
or more counterparts, each of which shall be an original, and all of which
together constitute but one and the same instrument.
-3-
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed and
delivered by the duly authorized officer of each party hereto as of the date
first above written.
COLLECTIBLES USA, INC.
By /s/ RONALD RAFALOFF
--------------------------------------------------
Name: RONALD RAFALOFF
Title: CHAIRMAN
ELWELL ACQUISITION CORP.
By /s/ RONALD RAFALOFF
--------------------------------------------------
Name: RONALD RAFALOFF
Title: CHAIRMAN
ELWELL STORES, INC.
By /s/ ROY C. ELWELL
--------------------------------------------------
Name: ROY C. ELWELL
Title: PRESIDENT
ROY AND KIM ELWELL, as tenants by the entirety:
/s/ ROY C. ELWELL /s/ KIM A. ELWELL
---------------------- ----------------------
Roy C. Elwell Kim A. Elwell
-4-
AMENDMENT NO. 1
TO
AGREEMENT AND PLAN OF ORGANIZATION
AMENDMENT NO. 1, dated as of November 28, 1997 (this "Amendment"), to
the Agreement and Plan of Organization, dated as of May 9, 1997 (the
"Agreement"), by and among COLLECTIBLES USA, INC., a Delaware corporation
("CEI"), DKG ACQUISITION CORP., a Delaware corporation ("Newco"), DKG
ENTERPRISES, INC., an Oklahoma corporation (the "Company"), and the Stockholders
named therein. Capitalized terms not otherwise defined herein have the
respective meanings set forth in the Agreement.
For good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto agree as follows:
1. Amendment to Section 1.3(iii) of the Agreement. Section 1.3(iii) of
the Agreement is hereby amended by deleting the phrase "David L. Yankey" in the
third line thereof and inserting in lieu thereof the phrase "Ronald P.
Rafaloff".
2. Amendment to Section 1.3(iv) to the Agreement. Section 1.3(iv) of
the Agreement is hereby amended by deleting the phrase "David L. Yankey" in the
third to fourth lines thereof, and inserting in lieu thereof the phrase "Ronald
P. Rafaloff".
3. Amendment to Section 12.1(ii) of the Agreement. The parties hereto
acknowledge and agree that notwithstanding Section 12.1 (ii) of the Agreement,
the Agreement has remained in full force and effect since May 9, 1997 through
the date hereof and Section 12.1(ii) of the Agreement is hereby amended by
deleting the phrase "October 31, 1997" in the fourth line thereof and inserting
in lieu thereof the phrase "July 31, 1998".
4. Amendment to Section 8.12 of the Agreement. Section 8.12 of the
Agreement is hereby amended by deleting such section in its entirety and
replacing it with the following:
8.12 RELEASE. The holders of CEI Stock shall have delivered to
CEI an instrument dated the Closing Date, releasing CEI from any and
all (i) claims of such holders against CEI and (ii) obligations of CEI
to such holders, except for (x) items specifically identified on
Schedule 8.12, (y) continuing obligations to such holders relating to
their employment by CEI and (z) obligations arising under this
Agreement or the transactions contemplated hereby.
<PAGE>
5. Amendment to Section 1.5 to the Agreement. Section 1.5 of the
Agreement is hereby amended by adding the following sentence to the end thereof:
Notwithstanding the foregoing, the amount of all debt, as
evidenced by any promissory note, bond, debenture or other
similar instrument ("Indebtedness"), of the COMPANY assumed by
the Surviving Corporation shall not exceed $1,500,000 (the
"Allowable Indebtedness"). In the event the Indebtedness
exceeds the Allowable Indebtedness, such amount shall be
assumed by and shall become the obligation of the
STOCKHOLDERS. CEI shall be entitled to deduct from the amount
of cash otherwise to be paid to the STOCKHOLDERS pursuant to
Section 2.1 at the Funding and Consummation Date the amount of
such excess. To the extent that CEI does not so deduct any
such amounts, the STOCKHOLDERS shall promptly pay such
Indebtedness as and to the extent requested by the Surviving
Corporation from time to time. For purposes of this Section
1.5, the dollar limitation on Indebtedness to be assumed by
the Surviving Corporation shall not apply to Indebtedness
representing trade payables for goods and services incurred in
the ordinary course of business which shall be assumed by the
Surviving Corporation. Notwithstanding the foregoing, none of
the Indebtedness and liabilities assumed by the Surviving
Corporation shall include any liabilities or Indebtedness owed
by the COMPANY to any of the STOCKHOLDERS, including, without
limitation, any accrued liabilities representing accrued
compensation and benefits or interest, but specifically
excluding amounts due to the STOCKHOLDERS pursuant to those
certain leases listed on Schedule 5.16(B). In addition without
limiting the generality of the foregoing, the Surviving
Corporation shall not forgive the greater of the (i) $30,000
or (ii) the outstanding balance of all Indebtedness in
satisfaction of such Indebtedness and other liabilities, as
the case may be, owed by David Green to the Company, whether
or not evidenced by a promissory note, bond, debenture or
other similar instrument. CEI shall be entitled to deduct from
the amount of cash otherwise to be paid to David Green
pursuant to Section 2.1 at the Funding and Consummation Date
the greater of (i) $30,000 or (ii) the outstanding balance of
such Indebtedness in satisfaction of such Indebtedness and
other liabilities, as the case may be, in satisfaction of such
Indebtedness and other liabilities, owed by David Green to the
Company.
6. Amendment to Section 7.3 to the Agreement. Section 7.3 of the
Agreement is hereby amended by deleting the word "or" from the end of clause (x)
thereof and adding the following to the end of clause (xi) thereof:
-2-
<PAGE>
; or (xii) make any payment or distribution of any kind to any
of its STOCKHOLDERS, including any payments in respect of
salary or earnings of the COMPANY, other than payments in
respect of salaries not to exceed $7,083 per month in the
aggregate to all such STOCKHOLDERS (pro rated for partial
months).
7. Amendment to Annex III of the Agreement. Annex III of the Agreement
is hereby amended by deleting such annex in its entirety and replacing it with a
new Annex III attached as Exhibit A hereto.
8. Effect on Agreement. The Agreement shall continue in full force and
effect as amended by this Amendment. From and after the date hereof, all
references to the Agreement shall be deemed to mean the Agreement as amended by
this Amendment.
9. Governing Law. This Amendment shall be construed in accordance with
the laws of the State of New York without reference to its conflicts of law
provisions.
10. Counterparts. This Amendment may be executed simultaneously in two
or more counterparts, each of which shall be an original, and all of which
together constitute but one and the same instrument.
-3-
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed and
delivered by the duly authorized officer of each party hereto as of the date
first above written.
COLLECTIBLES USA, INC.
By /s/ RONALD RAFALOFF
----------------------------------
Name: RONALD RAFALOFF
Title: CHAIRMAN
DKG ACQUISITION CORP.
By /s/ RONALD RAFALOFF
----------------------------------
Name: RONALD RAFALOFF
Title: CHAIRMAN
DKG ENTERPRISES
By /s/ DAVID GREEN
-----------------------------------
Name:
Title:
4D INVESTMENT LIMITED PARTNERSHIP II
By /s/ DAVID GREEN
---------------------------------
David Green, a General Partner
By /s/ DARRA GREEN
---------------------------------
Darra Green, a General Partner
-4-
<PAGE>
Exhibit A
---------
ANNEX III
CONSIDERATION TO BE PAID TO STOCKHOLDER
Aggregate consideration to be paid to STOCKHOLDER:
$1,730,000 in cash and 385,845 shares of Common Stock of CEI, to
be distributed as follows:
Consideration to be paid to each STOCKHOLDER:
Shares of Common
Stockholder Stock of CEI Cash
- ----------- ------------ ----
4D Investment Limited 300,000 $1,730,000
Partnership II
N.P.C. Investment 85,845
Ltd. Partnership
TOTALS: 385,845 $1,730,000
MINIMUM VALUE: $4,593,000
-5-
AMENDMENT NO. 1
TO
AGREEMENT AND PLAN OF ORGANIZATION
AMENDMENT NO. 1, dated as of November 28, 1997 (this "Amendment"), to
the Agreement and Plan of Organization, dated as of May 9, 1997 (the
"Agreement"), by and among COLLECTIBLES USA, INC., a Delaware corporation
("CEI"), ANIMATION USA ACQUISITION CORP., a Delaware corporation ("Newco"),
ANIMATION USA, INC., a Washington corporation (the "Company"), and the
Stockholders named therein. Capitalized terms not otherwise defined herein have
the respective meanings set forth in the Agreement.
For good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto agree as follows:
1. Amendment to Section 1.3(iii) of the Agreement. Section 1.3(iii) of
the Agreement is hereby amended by deleting the phrase "David L. Yankey" in the
third line thereof and inserting in lieu thereof the phrase "Ronald P.
Rafaloff".
2. Amendment to Section 1.3(iv) to the Agreement. Section 1.3(iv) of
the Agreement is hereby amended by deleting the phrase "David L. Yankey" in the
third to fourth lines thereof and inserting in lieu thereof the phrase "Ronald
P. Rafaloff", and by deleting the phrase "David L. Yankey" in the fourth to
fifth lines thereof and inserting in lieu thereof the phrase "Ronald P.
Rafaloff".
3. Amendment to Section 1.5 to the Agreement. Section 1.5 of the
Agreement is hereby amended by adding the following sentence to the end thereof:
Notwithstanding the foregoing, the amount of all debt, as evidenced
by any promissory note, bond, debenture or other similar instrument
("Indebtedness"), of the Company assumed by the Surviving
Corporation shall not exceed $125,000 (the "Allowable
Indebtedness"). In the event the Indebtedness exceeds the Allowable
Indebtedness, such excess amount shall be assumed by and shall
become the obligation of the STOCKHOLDERS. CEI shall be entitled to
deduct from the amount of cash otherwise to be paid to the
STOCKHOLDERS pursuant to Section 2.1 at the Funding and
Consummation Date the amount of such excess. To the extent that CEI
does not so deduct any such amounts, the STOCKHOLDERS shall
promptly pay such Indebtedness as and to the extent requested by
the Surviving Corporation from time to
<PAGE>
time. For purposes of this Section 1.5, the dollar limitation on
Indebtedness assumed by the Surviving Corporation shall not apply
to liabilities representing trade payables for goods, accrued
and/or deferred compensation, services incurred in the ordinary
course of business and those disclosed on Schedule 5.10, which
shall be assumed by the Surviving Corporation.
4. Amendment to Section 12.1(ii) of the Agreement. The parties hereto
acknowledge and agree that notwithstanding Section 12.1(ii) of the Agreement,
the Agreement has remained in full force and effect since October 31, 1997
through the date hereof and Section 12.1(ii) of the Agreement is hereby amended
by deleting the phrase "October 31, 1997" in the fourth line thereof and
inserting in lieu thereof the phrase "July 31, 1998".
5. Amendment to Annex III of the Agreement. Annex III of the Agreement
is hereby amended by deleting such annex in its entirety and replacing it with
Exhibit A attached hereto.
6. Amendment to Section 8.12 of the Agreement. Section 8.12 of the
Agreement is hereby amended by deleting such section in its entirety and
replacing it with the following:
8.12 RELEASE. The holders of CEI Stock shall have delivered to
CEI an instrument dated the Closing Date, releasing CEI from any and
all (i) claims of such holders against CEI and (ii) obligations of CEI
to such holders, except for (x) items specifically identified on
Schedule 8.12, (y) continuing obligations to such holders relating to
their employment by CEI and (z) obligations arising under this
Agreement or the transactions contemplated hereby.
7. Amendment to Section 7.3 to the Agreement. Section 7.3 of the
Agreement is hereby amended by deleting the word "or" from the end of clause (x)
thereof and adding the following to the end of clause (xi) thereof:
; or (xii) make any payment or distribution of any kind to any of its
STOCKHOLDERS, including any payments in respect of salary or earnings
of the COMPANY, other than payments in respect of salaries not to
exceed $4,167 per month in the aggregate to all such STOCKHOLDERS
(prorated for partial months).
8. Effect on Agreement. The Agreement shall continue in full force and
effect as amended by this Amendment. From and after the date hereof, all
references to the Agreement shall be deemed to mean the Agreement as amended by
this Amendment.
9. Governing Law. This Amendment shall be construed in accordance with
the laws of the State of New York without reference to its conflicts of law
provisions.
-2-
<PAGE>
10. Counterparts. This Amendment may be executed simultaneously in two
or more counterparts, each of which shall be an original, and all of which
together constitute but one and the same instrument.
-3-
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed and
delivered by the duly authorized officer of each party hereto as of the date
first above written.
COLLECTIBLES USA, INC.
By /s/ RONALD RAFALOFF
----------------------------------
Name: RONALD RAFALOFF
Title: CHAIRMAN
ANIMATION USA ACQUISITION CORP.
By /s/ RONALD RAFALOFF
----------------------------------
Name: RONALD RAFALOFF
Title: CHAIRMAN
ANIMATION USA, INC.
By /s/ DAVID M. VICE
----------------------------------
Name: DAVID M. VICE
Title: PRESIDENT
/s/ DAVID M. VICE
------------------------------------
David Vice
/s/ LAINE ROSS
------------------------------------
Laine Ross
/s/ WILLIAM A. VICE
------------------------------------
William A. Vice
/s/ RUTH VICE
------------------------------------
Ruth Vice
-4-
<PAGE>
WILLIAM A. VICE REVOCABLE TRUST
By: /s/ WILLIAM A. VICE
---------------------------------
Name:
Title: TRUSTEE
/s/ Craig Marria
---------------------------------
Craig Marria
/s/ Debra J. Marria
---------------------------------
Debra J. Marria
-5-
EXHIBIT 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
COLLECTIBLES USA, INC.
The undersigned, an officer of COLLECTIBLES USA, INC., a
corporation organized and existing under the laws of the State of Delaware (the
"Corporation"), does hereby certify as follows:
FIRST: The name of the Corporation is
COLLECTIBLES USA, INC.
SECOND: The Certificate of Incorporation of the Corporation
was filed in the Office of the Secretary of State of the State of Delaware on
January 18, 1996 under the name Collectibles Enterprises, Inc. The Corporation
filed an Amended and Restated Certificate of Incorporation in the Office of the
Secretary of State of the State of Delaware on May 12, 1997, June 11, 1997 and
July 9, 1997.
THIRD: This Amended and Restated Certificate of Incorporation
was duly adopted in accordance with the provisions of Sections 242 and 245 of
the Delaware General Corporation Law, the Board of Directors having duly adopted
resolutions setting forth and declaring advisable this Amended and Restated
Certificate of Incorporation, and in lieu of a vote of stockholders, written
consent to this Amended and Restated Certificate of Incorporation having been
given in accordance with Section 228 of the Delaware General Corporation Law.
FOURTH: This Amended and Restated Certificate of Incorporation
is being filed pursuant to Sections 242 and 245 of the Delaware General
Corporation Law in order to amend and restate the Amended and Restated
Certificate of Incorporation of the Corporation.
FIFTH: The Amended and Restated Certificate of Incorporation
of the Corporation is hereby amended and restated in its entirety as follows:
ARTICLE ONE
The name of the Corporation is:
COLLECTIBLES USA, INC.
ARTICLE TWO
The address of the Corporation's registered office in the
State of Delaware is 15 East North Street, in the City of Dover, County of Kent.
The name of its registered agent at such address is United Corporate Services,
Inc.
<PAGE>
ARTICLE THREE
The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the Delaware General
Corporation Law.
ARTICLE FOUR
The total number of shares of all classes of stock which the
Corporation shall have authority to issue is thirty-six million two hundred
thousand (36,200,000) shares, of which five million (5,000,000) shares,
designated as Preferred Stock, shall have a par value of one cent ($.01) per
share (the "Preferred Stock"), thirty-one million two hundred thousand
(31,200,000) shares, designated as Common Stock, shall have a par value of one
cent ($.01) per share (the "Common Stock"); of such Common Stock, one million
two hundred thousand (1,200,000) shares shall be designated as Restricted Voting
Common Stock, par value of one cent ($ .01) per share (the "Restricted Voting
Common Stock").
A statement of the powers, preferences and rights, and the
qualifications, limitations or restrictions thereof, in respect of each class of
stock of the Corporation is as follows:
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the
Board of Directors as shares of one or more classes or series. Subject to the
provisions of this Amended and Restated Certificate of Incorporation and the
limitations prescribed by law, the Board of Directors is expressly authorized by
adopting resolutions to issue the shares, fix the number of shares and change
the number of shares constituting any series, and to provide for or change the
voting powers, designations, preferences and relative, participating, optional
or other special rights, qualifications, limitations or restrictions thereof,
including dividend rights (and whether dividends are cumulative), dividend
rates, terms of redemption (including sinking fund provisions), a redemption
price or prices, conversion rights and liquidation preferences of the shares
constituting any class or series of the Preferred Stock, without any further
action or vote by the stockholders.
COMMON STOCK AND RESTRICTED VOTING COMMON STOCK
1. Dividends.
Subject to the preferred rights of the holders of shares of
any class or series of Preferred Stock as provided by the Board of Directors
with respect to any such class or series of Preferred Stock, the holders of the
Common Stock, including the Restricted Voting Common Stock, shall be entitled to
receive, as and when declared by the Board of Directors out of the funds of the
Corporation legally available therefor, such dividends (payable in cash, stock
or otherwise) as the Board of Directors may from time to time determine, payable
to stockholders of record on such dates, not exceeding 60 days preceding the
dividend payment dates, as shall be fixed for such purpose by the Board of
Directors in advance of payment of each particular dividend. All dividends on
the Common Stock shall be paid pari passu with dividends on Restricted Voting
Common Stock.
2. Liquidation.
2
<PAGE>
In the event of any liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, after the distribution or
payment to the holders of shares of any class or series of Preferred Stock as
provided by the Board of Directors with respect to any such class or series of
Preferred Stock, the remaining assets of the Corporation available for
distribution to stockholders shall be distributed among and paid to the holders
of Common Stock and Restricted Voting Common Stock ratably in proportion to the
number of shares of Common Stock and Restricted Voting Common Stock held by them
respectively.
3. Voting Rights.
Except as otherwise required by law or as provided by the
Board of Directors with respect to any class or series of Preferred Stock, the
entire voting power and all voting rights shall be vested exclusively in the
Common Stock and Restricted Voting Common Stock. Holders of Restricted Voting
Common Stock voting separately as a class shall be entitled to elect one member
of the Board of Directors, but shall not otherwise be entitled to vote in the
election of directors of the Corporation. Subject to the immediately preceding
sentence, and except as otherwise required by law, each holder of shares of
Restricted Voting Common Stock shall be entitled to .1 of a vote for each share
of Restricted Voting Common Stock standing in such holder's name on the books of
the Corporation. The holders of shares of Restricted Voting Common Stock shall
have no right to vote separately as a class except as set forth herein or as
specifically required by law. Except as otherwise required by law, each holder
of shares of Common Stock (other than Restricted Voting Common Stock) shall be
entitled to one vote for each share standing in such holder's name on the books
of the Corporation.
4. Conversion of the Restricted Voting Common Stock
Each share of Restricted Voting Common Stock will
automatically convert into Common Stock on a share for share basis (a) in the
event of a transfer or sale of such share of Restricted Voting Common Stock by
the holder thereof (other than a distribution by a holder to its partners or
beneficial owners or a transfer to a related party of such holder (as defined in
Sections 267, 707, 318 and/or 4946 of the Internal Revenue Code of 1986)), (b)
in the event any person or group of persons acting in concert acquires
beneficial ownership of 15% or more of the outstanding shares of Common Stock of
the Corporation other than in connection with the Company's initial public
offering, (c) in the event any person or group of persons acting in concert
offers to acquire 15% or more of the outstanding shares of Common Stock of the
Corporation other than in connection with the Company's initial public offering
or (d) in the event a majority of the aggregate number of votes which may be
cast by the holders of outstanding shares of Common Stock and Restricted Voting
Common Stock entitled to vote approve such conversion. After July 1, 1998, the
Board of Directors may elect to convert any outstanding shares of Restricted
Voting Common Stock into shares of Common Stock in the event 80% or more of the
originally outstanding shares of Restricted Voting Common Stock have been
previously converted into shares of Common Stock.
3
<PAGE>
ARTICLE FIVE
1. Board of Directors.
The directors shall not be classified with respect to the time
for which they shall severally hold office. The directors shall be elected
annually to hold office until their successors have been duly elected and
qualified at each annual meeting of stockholders. At each annual meeting of
stockholders at which a quorum is present, the persons receiving a plurality of
the votes cast shall be directors. Election of directors need not be by written
ballot unless the By-laws of the Corporation so provide.
For so long as any shares of Restricted Voting Common Stock
shall remain outstanding, notwithstanding the foregoing, the holders of
Restricted Voting Common Stock voting seperately as a class shall be entitled to
elect one member of the Board of Directors, but shall not otherwise be entitled
to vote in the election of directors of the Corporation, and only the holders of
Restricted Voting Common Stock shall be entitled to remove such member from the
Board of Directors.
2. Vacancies.
Any vacancy on the Board of Directors resulting from death,
retirement, resignation, disqualification or removal from office or other cause,
as well as any vacancy resulting from an increase in the number of directors
which occurs between annual meetings of the stockholders at which directors are
elected, shall be filled only by a majority vote of the remaining directors then
in office, though less than a quorum, except that those vacancies resulting from
removal from office by a vote of the stockholders may be filled by a vote of the
stockholders at the same meeting at which such removal occurs. The directors
chosen to fill vacancies shall hold office for a term expiring at the end of the
next annual meeting of stockholders. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director. If the vacancy on the Board of Directors results from the death,
retirement, resignation, disqualification or removal from office of the director
elected by the holders of Restricted Voting Common Stock, only the holders of
Restricted Voting Common Stock shall be entitled to fill such vacancy.
Notwithstanding the foregoing, whenever the holders of one or
more classes or series of Preferred Stock shall have the right, voting
separately as a class or series, to elect directors, the election, term of
office, filling of vacancies, removal and other features of such directorships
shall be governed by the terms of the resolution or resolutions adopted by the
Board of Directors pursuant to ARTICLE FOUR applicable thereto, and each
director so elected shall not be subject to the provisions of this ARTICLE FIVE
unless otherwise provided therein.
3. Power to Make, Alter and Repeal By-laws.
In furtherance and not in limitation of the powers conferred
by statute, the Board of Directors is expressly authorized to make, alter and
repeal the By-laws of the Corporation.
ARTICLE SIX
4
<PAGE>
The Corporation reserves the right to amend, alter, change or
repeal any provision in this Amended and Restated Certificate of Incorporation,
in the manner now or hereafter prescribed by statute.
ARTICLE SEVEN
No director of the Corporation shall be liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law or (iv) for any transaction from which the director derived an improper
personal benefit.
ARTICLE EIGHT
The Corporation shall, to the fullest extent permitted by
Section 145 of the Delaware General Corporation Law, as the same may be amended
and supplemented, indemnify each director and officer of the Corporation from
and against any and all of the expenses, liabilities or other matters referred
to in or covered by said section and the indemnification provided for herein
shall not be deemed exclusive of any other rights to which those indemnified may
be entitled under any By-law, agreement, vote of stockholders, vote of
disinterested directors or otherwise, and shall continue as to a person who has
ceased to be a director or officer and shall inure to the benefit of the heirs,
executors and administrators of such persons and the Corporation may purchase
and maintain insurance on behalf of any director or officer to the extent
permitted by Section 145 of the Delaware General Corporation Law.
ARTICLE NINE
Whenever a compromise or arrangement is proposed between the
Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for the Corporation under the
provisions of section 291 of Title 8 of the Delaware Code or on the application
of trustees in dissolution or of any receiver or receivers appointed for the
Corporation under the provisions of section 279 of Title 8 of the Delaware Code,
order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of the Corporation, as the case may be, to
be summoned in such manner as the said court directs. If a majority in number
representing three-fourths in value of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of the Corporation, as the
case may be, agree to any compromise or arrangement and to any reorganization of
the Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of the Corporation, as the case may be, and also on the
Corporation.
[Signature Page to Follow]
5
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Amended and
Restated Certificate of Incorporation on behalf of the Corporation and does
verify and affirm, under penalty of perjury, that this Amended and Restated
Certificate of Incorporation is the act and deed of the Corporation and that the
facts stated herein are true as of this 2nd day of June, 1998.
COLLECTIBLES USA, INC.
By: /s/ NEIL J. DEPASCAL
-----------------------------------
Name: Neil J. DePascal, Jr.
Title: Executive Vice President,
Chief Financial Officer and
Assistant Secretary
6
EMPLOYMENT AGREEMENT BETWEEN THE COMPANY AND JERRY GLADSTONE
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement"), by and among Collectibles
USA, Inc., a Delaware corporation ("Collectibles"), American Royal Arts Corp., a
New York corporation and a wholly-owned subsidiary of Collectibles (the
"Company"), and Jerry Gladstone ("Employee"), is hereby entered into as of this
9th day of May, 1997 and shall become effective only as of the date of the
consummation of the initial public offering of the common stock of Collectibles.
This Agreement hereby supersedes any other employment agreements or
understandings, written or oral, between Employee and the Company and/or
Collectibles.
R E C I T A L S
The following statements are true and correct:
As of the date of this Agreement, the Company is engaged primarily in
the business of marketing collectible merchandise and animation art products.
Employee is employed hereunder by the Company in a confidential
relationship wherein Employee, in the course of his employment with the Company,
has and will continue to become familiar with and aware of information as to the
Company's and Collectibles' customers, specific manner of doing business,
including the processes, techniques and trade secrets utilized by the Company
and Collectibles, and future plans with respect thereto, all of which has been
and will be established and maintained at great expense to the Company and
Collectibles; this information is a trade secret and constitutes the valuable
good will of the Company and Collectibles. Therefore, in consideration of the
mutual promises, terms, covenants and conditions set forth herein and the
performance of each, it is hereby agreed as follows:
A G R E E M E N T S
1. EMPLOYMENT AND DUTIES.
(a) The Company hereby employs Employee as President of the Company. As
such, Employee shall have responsibilities, duties and authority reasonably
accorded to and expected of a President of the Company and will report directly
to the Board of Directors of the Company (the "Board"). Employee hereby accepts
this employment upon the terms and conditions herein contained and, subject to
paragraph 1(c), agrees to devote his time, attention and efforts to promote and
further the business of the Company.
(b) Employee shall faithfully adhere to, execute and fulfill all
policies established by the Company.
<PAGE>
(c) Employee shall not, during the term of his employment hereunder, be
engaged in any other business activity pursued for gain, profit or other
pecuniary advantage if such activity interferes with Employee's duties and
responsibilities hereunder. The foregoing limitations shall not be construed as
prohibiting Employee from making personal investments in such form or manner as
will neither require his services in the operation or affairs of the companies
or enterprises in which such investments are made nor violate the terms of
paragraph 3 hereof.
2. COMPENSATION.
For all services rendered by Employee, the Company shall compensate
Employee as follows:
(a) Base Salary. The base salary payable to Employee shall be $50,000
per year, payable on a regular basis in accordance with the Company's standard
payroll procedures but not less than monthly. On at least an annual basis, the
Board will review Employee's performance and may recommend increases to such
base salary if, in its discretion, any such increase is warranted. Such
recommended increase would, in all likelihood, require approval by the Board of
Directors of Collectibles or a duly constituted committee thereof.
(b) Incentive Bonus Plan. For 1997 and subsequent years, it is the
Company's intent to develop a written Incentive Bonus Plan (which may be
Collectibles' Incentive Bonus Plan) setting forth the criteria under which
Employee and other officers and key employees will be eligible to receive
year-end bonus awards.
(c) Executive Perquisites, Benefits And Other Compensation. Employee
shall be entitled to receive additional benefits and compensation from the
Company in such form and to such extent as specified below:
(d) Payment of all premiums for coverage for Employee and his dependent
family members under health, hospitalization, disability, dental, life and other
insurance plans that the Company or Collectibles may have in effect from time to
time, benefits provided to Employee under this clause (i) to be at least equal
to such benefits provided to Collectibles executives.
(e) Reimbursement for all business travel and other out-of-pocket
expenses reasonably incurred by Employee in the performance of his services
pursuant to this Agreement. All reimbursable expenses shall be appropriately
documented in reasonable detail by Employee upon submission of any request for
reimbursement, and in a format and manner consistent with Collectibles' expense
reporting policy.
(f) The Company shall provide Employee with other executive perquisites
as may be available to or deemed appropriate for Employee by the Board and
participation in all other Company-wide or Collectibles-wide employee benefits
as available from time to time.
2
<PAGE>
3. NON-COMPETITION AGREEMENT.
(a) Employee will not, during the period of his employment by or with
the Company, and for a period of two (2) years immediately following the
termination of his employment under this Agreement, for any reason whatsoever,
directly or indirectly, for himself or on behalf of or in conjunction with any
other person, persons, company, partnership, corporation or business of whatever
nature:
(i) engage, as an officer, director, shareholder, owner, partner,
joint venturer, or in a managerial capacity, whether as an employee,
independent contractor, consultant or advisor, or as a sales
representative, in any collectibles or animation art business in
direct competition with the Company or Collectibles, within the United
States or within 100 miles of any other geographic area in which the
Company or Collectibles or where any of the Company's or Collectibles'
subsidiaries conducts business, including any territory serviced by
the Company or Collectibles or any of such subsidiaries (the
"Territory");
(ii) call upon any person who is, at that time, within the
Territory, an employee of the Company or Collectibles (including the
respective subsidiaries thereof) in a managerial capacity for the
purpose or with the intent of enticing such employee away from or out
of the employ of the Company or Collectibles (including the respective
subsidiaries thereof);
(iii) call upon any person or entity which is, at that time, or
which has been, within one (1) year prior to that time, a customer of
the Company or Collectibles (including the respective subsidiaries
thereof) within the Territory for the purpose of soliciting or selling
products or services in direct competition with the Company or
Collectibles within the Territory; or
(iv) call upon any prospective acquisition candidate, on
Employee's own behalf or on behalf of any competitor, which candidate
was, to Employee's actual knowledge after due inquiry, either called
upon by the Company or Collectibles (including the respective
subsidiaries thereof) or for which the Company or Collectibles made an
acquisition analysis, for the purpose of acquiring such entity.
Notwithstanding the above, the foregoing covenant shall not be deemed
to prohibit Employee from acquiring as an investment not more than one percent
(1%) of the capital stock of a competing business, whose stock is traded on a
national securities exchange or over-the-counter.
(b) Because of the difficulty of measuring economic losses to the
Company and Collectibles as a result of a breach of the foregoing covenants, and
because of the immediate and irreparable damage that could be caused to the
Company and Collectibles for which they would have no other adequate remedy,
Employee agrees that the foregoing covenants may be enforced by Collectibles or
the Company in the event of breach by Employee, by injunctions and restraining
orders.
(c) It is agreed by the parties that the foregoing covenants in this
paragraph 3 impose a
3
<PAGE>
reasonable restraint on Employee in light of the activities and business of the
Company or Collectibles (including Collectibles' other subsidiaries) on the date
of the execution of this Agreement and the current plans of Collectibles
(including Collectibles' other subsidiaries); but it is also the intent of the
Company, Collectibles and Employee that such covenants be construed and enforced
in accordance with the changing activities, business and locations of the
Company and Collectibles (including Collectibles' other subsidiaries) throughout
the term of these covenants, whether before or after the date of termination of
the employment of Employee. For example, if, during the term of this Agreement,
the Company or Collectibles (including Collectibles' other subsidiaries) engages
in new and different activities, enters a new business or establishes new
locations for its current activities or business in addition to or other than
the activities or business enumerated under the Recitals above or the locations
currently established therefor, then Employee will be precluded from soliciting
the customers or employees of such new activities or business or from such new
location and from directly competing with such new business within the United
States or within 100 miles of its then-established operating location(s), if
outside the United States, through the term of the covenants contained in this
paragraph 3.
It is further agreed by the parties hereto that, in the event that
Employee shall cease to be employed hereunder, and shall enter into a business
or pursue other activities not in competition with the Company or Collectibles
(including Collectibles' other subsidiaries), or similar activities or business
in locations the operation of which, under such circumstances, does not violate
clause (i) of this paragraph 3, and in any event such new business, activities
or location are not in violation of this paragraph 3 or of employee's
obligations under this paragraph 3, if any, Employee shall not be chargeable
with a violation of this paragraph 3 if the Company or Collectibles (including
Collectibles' other subsidiaries) shall thereafter enter the same, similar or a
competitive (i) business, (ii) course of activities or (iii) location, as
applicable.
(d) The covenants in this paragraph 3 are severable and separate, and
the unenforceability of any specific covenant shall not affect the provisions of
any other covenant. Moreover, in the event any court of competent jurisdiction
shall determine that the scope, time or territorial restrictions of any specific
covenant as set forth are unreasonable, then it is the intention of the parties
that such restrictions be enforced to the fullest extent which the court deems
reasonable, and the Agreement shall thereby be reformed.
(e) All of the covenants in this paragraph 3 shall be construed as an
agreement independent of any other provision in this Agreement, and the
existence of any claim or cause of action of Employee against the Company or
Collectibles, whether predicated on this Agreement or otherwise, shall not
constitute a defense to the enforcement by Collectibles or the Company of such
covenants. It is specifically agreed that the period of two (2) years following
termination of employment stated at the beginning of this paragraph 3, during
which the agreements and covenants of Employee made in this paragraph 3 shall be
effective, shall be computed by excluding from such computation any time during
which Employee is in violation of any provision of this paragraph 3.
4. PLACE OF PERFORMANCE.
4
<PAGE>
(a) Employee understands that he may be requested by the Board or
Collectibles to relocate from his present residence to another geographic
location in order to more efficiently carry out his duties and responsibilities
under this Agreement or as part of a promotion or other increase in duties and
responsibilities. In such event, if Employee agrees to relocate, the Company
will pay all relocation costs to move Employee, his immediate family and their
personal property and effects. Such costs may include, by way of example, but
are not limited to, pre-move visits to search for a new residence, investigate
schools or for other purposes; temporary lodging and living costs prior to
moving into a new permanent residence; duplicate home carrying costs; all
closing costs on the sale of Employee's present residence and on the purchase of
a comparable residence in the new location; and added income taxes that Employee
may incur if any relocation costs are not deductible for tax purposes. The
general intent of the foregoing is that Employee shall not personally bear any
out-of-pocket cost as a result of the relocation, with an understanding that
Employee will use his best efforts to incur only those costs which are
reasonable and necessary to effect a smooth, efficient and orderly relocation
with minimal disruption to the business affairs of the Company and the personal
life of Employee and his family.
(b) Notwithstanding the above, if Employee is requested by the Board to
relocate and Employee refuses, such refusal shall not constitute "good cause"
for termination of this Agreement under the terms of paragraph 5(c).
5. TERM; TERMINATION; RIGHTS ON TERMINATION.
The term of this Agreement shall begin on the date hereof and continue
for three years (the "Term") and, unless terminated sooner as herein provided,
shall continue thereafter on a year-to-year basis on the same terms and
conditions contained herein in effect as of the time of renewal. This Agreement
and Employee's employment may be terminated in any one of the followings ways:
(a) Death. The death of Employee shall immediately terminate this
Agreement with no severance compensation due to Employee's estate.
(b) Disability. If, as a result of incapacity due to physical or mental
illness or injury, Employee shall have been absent from his full-time duties
hereunder for four (4) consecutive months, then thirty (30) days after receiving
written notice (which notice may occur before or after the end of such four (4)
month period, but which shall not be effective earlier than the last day of such
four (4) month period), the Company may terminate Employee's employment
hereunder provided Employee is unable to resume his full-time duties at the
conclusion of such notice period. Also, Employee may terminate his employment
hereunder if his health should become impaired to an extent that makes the
continued performance of his duties hereunder hazardous to his physical or
mental health or his life, provided that Employee shall have furnished the
Company with a written statement from a qualified doctor to such effect and
provided, further, that, at the Company's request made within thirty (30) days
of the date of such written statement, Employee shall submit to an examination
by a doctor selected by the Company who is reasonably acceptable to Employee and
such doctor shall have concurred in the conclusion of Employee's doctor. In the
event this Agreement is terminated as a result of Employee's disability,
Employee shall receive from the Company, in a lump-sum payment due within ten
(10) days of the effective date of termination, the base salary at the rate then
in effect for whatever time period is
5
<PAGE>
remaining under the Term of this Agreement or for one (1) year, whichever amount
is greater.
(c) Good Cause. The Company may terminate the Agreement ten (10) days
after written notice to Employee for good cause, which shall be: (1) Employee's
willful, material and irreparable breach of this Agreement; (2) Employee's gross
negligence in the performance or intentional nonperformance continuing for ten
(10) days after receipt of written notice of need to cure of any of Employee's
material duties and responsibilities hereunder; (3) Employee's willful
dishonesty, fraud or misconduct with respect to the business or affairs of the
Company or Collectibles which materially and adversely affects the operations or
reputation of the Company or Collectibles; (4) Employee's conviction of a felony
crime; or (5) chronic alcohol abuse or illegal drug abuse by Employee. In the
event of a termination for good cause, as enumerated above, Employee shall have
no right to any severance compensation.
(d) Without Cause. At any time after the commencement of employment,
Employee may, without cause, terminate this Agreement and Employee's employment,
effective thirty (30) days after written notice is provided to the Company.
Employee may only be terminated without cause by the Company during the Term
hereof if such termination is approved by at least two-thirds of the members of
the Board of Directors of Collectibles. Should Employee be terminated by the
Company without cause during the Term, Employee shall receive from the Company,
in a lump-sum payment due on the effective date of termination, equal to the
Severance Base Salary for whatever time period is remaining under the Term of
this Agreement (not to exceed two years) or for one (1) year, whichever amount
is greater. For purposes of this Agreement, the "Severance Base Salary" shall be
$100,000 per year. Should Employee be terminated by the Company without cause at
any time after the Term, Employee shall receive from the Company, in a lump-sum
payment due on the effective date of termination, a severance payment equal to
$100,000. Further, any termination without cause by the Company shall operate to
shorten the period set forth in paragraph 3(a) and during which the terms of
paragraph 3 apply to one (1) year from the date of termination of employment. If
Employee resigns or otherwise terminates his employment without cause pursuant
to this paragraph 5(d), Employee shall receive no severance compensation.
(e) Change In Control Of Collectibles. In the event of a "Change in
Control" of Collectibles (as defined in paragraph 12(e) below) during the Term,
refer to paragraph 12 below.
(f) Upon termination of this Agreement for any reason provided above,
Employee shall be entitled to receive all compensation earned and all benefits
and reimbursements due through the effective date of termination. Additional
compensation subsequent to termination, if any, will be due and payable to
Employee only to the extent and in the manner expressly provided above or in
paragraph 12. All other rights and obligations of Collectibles, the Company and
Employee under this Agreement shall cease as of the effective date of
termination, except that the Company's obligations under paragraph 9 herein and
Employee's obligations under paragraphs 3, 6, 7, 8 and 10 herein shall survive
such termination in accordance with their terms.
(g) If termination of Employee's employment arises out of the Company's
failure to pay
6
<PAGE>
Employee on a timely basis the amounts to which he is entitled under this
Agreement or as a result of any other breach of this Agreement by the Company,
as determined by a court of competent jurisdiction or pursuant to the provisions
of paragraph 16 below, the Company shall pay all amounts and damages to which
Employee may be entitled as a result of such breach, including interest thereon
and all reasonable legal fees and expenses and other costs incurred by Employee
to enforce his rights hereunder. Further, none of the provisions of paragraph 3
shall apply in the event this Agreement is terminated as a result of a breach by
the Company.
6. RETURN OF COMPANY PROPERTY.
All records, designs, patents, business plans, financial statements,
manuals, memoranda, lists and other property delivered to or compiled by
Employee by or on behalf of the Company, Collectibles or their representatives,
vendors or customers which pertain to the business of the Company or
Collectibles shall be and remain the property of the Company or Collectibles, as
the case may be, and be subject at all times to their discretion and control.
Likewise, all correspondence, reports, records, charts, advertising materials
and other similar data pertaining to the business, activities or future plans of
the Company or Collectibles which is collected by Employee shall be delivered
promptly to the Company without request by it upon termination of Employee's
employment for any reason.
7. INVENTIONS.
Employee shall disclose promptly to Collectibles and the Company any
and all significant conceptions and ideas for inventions, improvements and
valuable discoveries, whether patentable or not, which are conceived or made by
Employee, solely or jointly with another, during the period of employment or
within one (1) year thereafter, and which are directly related to the business
or activities of the Company or Collectibles and which Employee conceives as a
result of his employment by the Company. Employee hereby assigns and agrees to
assign all his interests therein to the Company or its nominee. Whenever
requested to do so by the Company, Employee shall execute any and all
applications, assignments or other instruments that the Company shall deem
necessary to apply for and obtain Letters Patent of the United States or any
foreign country or to otherwise protect the Company's interest therein.
8. TRADE SECRETS.
Employee agrees that he will not, during or after the Term of this
Agreement with the Company, disclose the specific terms of the Company's or
Collectibles' relationships or agreements with their respective significant
vendors or customers or any other significant and material trade secret of the
Company or Collectibles, whether in existence or proposed, to any person, firm,
partnership, corporation or business for any reason or purpose whatsoever.
9. INDEMNIFICATION.
In the event Employee is made a party to any threatened, pending or
completed action, suit or
7
<PAGE>
proceeding, whether civil, criminal, administrative or investigative (other than
an action by the Company or Collectibles against Employee), by reason of the
fact that he is or was performing services under this Agreement, then the
Company shall indemnify Employee against all expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement, as actually and
reasonably incurred by Employee in connection therewith. In the event that both
Employee and the Company are made a party to the same third-party action,
complaint, suit or proceeding, the Company or Collectibles agrees to engage
competent legal representation, and Employee agrees to use the same
representation, provided that if counsel selected by Collectibles shall have a
conflict of interest that prevents such counsel from representing Employee,
Employee may engage separate counsel and the Company or Collectibles shall pay
all attorneys' fees of such separate counsel. Further, while Employee is
expected at all times to use his best efforts to faithfully discharge his duties
under this Agreement, Employee cannot be held liable to the Company or
Collectibles for errors or omissions made in good faith where Employee has not
exhibited gross, willful and wanton negligence and misconduct or performed
criminal and fraudulent acts which materially damage the business of the
Company.
10. NO PRIOR AGREEMENTS.
Employee hereby represents and warrants to the Company that the
execution of this Agreement by Employee and his employment by the Company and
the performance of his duties hereunder will not violate or be a breach of any
agreement with a former employer, client or any other person or entity. Further,
Employee agrees to indemnify the Company for any claim, including, but not
limited to, attorneys' fees and expenses of investigation and all fees and
expenses incurred by the Company pursuant to paragraph 9, by any such third
party that such third party may now have or may hereafter come to have against
the Company based upon or arising out of any non-competition agreement,
invention or secrecy agreement between Employee and such third party.
11. ASSIGNMENT; BINDING EFFECT.
Employee understands that he has been selected for employment by the
Company on the basis of his personal qualifications, experience and skills.
Employee agrees, therefore, that he cannot assign all or any portion of his
performance under this Agreement. Subject to the preceding two (2) sentences and
the express provisions of paragraph 12 below, this Agreement shall be binding
upon, inure to the benefit of and be enforceable by the parties hereto and their
respective heirs, legal representatives, successors and assigns.
12. CHANGE IN CONTROL.
(a) Unless he elects to terminate this Agreement pursuant to (c) below,
Employee understands and acknowledges that the Company may be merged or
consolidated with or into another entity and that such entity shall
automatically succeed to the rights and obligations of the Company hereunder or
that the Company may undergo another type of Change in Control. In the event
such a merger or consolidation or other Change in Control is initiated prior to
the end of the Term, then the provisions of this paragraph 12 shall be
applicable.
8
<PAGE>
(b) In the event of a pending Change in Control wherein the Company and
Employee have not received written notice at least five (5) business days prior
to the anticipated closing date of the transaction giving rise to the Change in
Control from the successor to all or a substantial portion of the Company's
business and/or assets that such successor is willing as of the closing to
assume and agree to perform the Company's obligations under this Agreement in
the same manner and to the same extent that the Company is hereby required to
perform, then such Change in Control shall be deemed to be a termination of this
Agreement by the Company without cause during the Term and the applicable
portions of paragraph 5(d) will apply; provided, however, under such
circumstances, that the amount of the lump-sum severance payment due to Employee
shall be triple the amount calculated under the terms of paragraph 5(d) and the
non-competition provisions of paragraph 3 shall not apply whatsoever.
(c) In any Change in Control situation, Employee may, at his sole
discretion, elect to terminate this Agreement by providing written notice to the
Company at least five (5) business days prior to the anticipated closing of the
transaction giving rise to the Change in Control. In such case, the applicable
provisions of paragraph 5(d) will apply as though the Company had terminated the
Agreement without cause during the Term; provided, however, that under such
circumstances, the amount of the lump-sum severance payment due to Employee
shall be double the amount calculated under the terms of paragraph 5(d) and the
non-competition provisions of paragraph 3 shall all apply for a period of two
(2) years from the effective date of termination.
(d) For purposes of applying paragraph 5 under the circumstances
described in (b) and (c) above, the effective date of termination will be the
closing date of the transaction giving rise to the Change in Control and all
compensation, reimbursements and lump-sum payments due Employee must be paid in
full by the Company at or prior to such closing. Further, Employee will be given
at least 30 days to elect whether to exercise all or any of his vested options
to purchase Collectibles Common Stock, including any options with accelerated
vesting under the provisions of Collectibles' Long-Term Incentive Plan, such
that he may convert the options to shares of Collectibles Common Stock at or
prior to the closing of the transaction giving rise to the Change in Control, if
he so desires.
(e) A "Change in Control" shall be deemed to have occurred if:
(i) any person, other than Collectibles, a subsidiary of
Collectibles or an employee benefit plan of Collectibles, acquires
directly or indirectly Beneficial Ownership (as defined in Section
13(d) of the Securities Exchange Act of 1934, as amended) of any
voting security of the Company and immediately after such acquisition
such Person is, directly or indirectly, the Beneficial Owner of voting
securities representing 50% or more of the total voting power of all
of the then-outstanding voting securities of the Company, unless the
transaction pursuant to which such acquisition is made is approved by
at least two-thirds (2/3) of the Board;
(ii) the following individuals no longer constitute a majority of
the members of the Board of Directors of Collectibles: (A) the
individuals who, as of the closing date of Collectibles' initial
public offering, constitute the Board of Directors of Collectibles
(the "Original Directors"); (B) the individuals who thereafter are
elected to the Board of Directors of
9
<PAGE>
Collectibles and whose election, or nomination for election, to the
Board of Directors of Collectibles was approved by a vote of at least
two-thirds (2/3) of the Original Directors then still in office (such
directors becoming "Additional Original Directors" immediately
following their election); and (C) the individuals who are elected to
the Board of Directors of Collectibles and whose election, or
nomination for election, to the Board of Directors of Collectibles was
approved by a vote of at least two-thirds (2/3) of the Original
Directors and Additional Original Directors then still in office (such
directors also becoming "Additional Original Directors" immediately
following their election);
(iii) the stockholders of Collectibles shall approve a merger,
consolidation, recapitalization, or reorganization of Collectibles, a
reverse stock split of outstanding voting securities, or consummation
of any such transaction if stockholder approval is not obtained, other
than any such transaction which would result in at least 75% of the
total voting power represented by the voting securities of the
surviving entity outstanding immediately after such transaction being
Beneficially Owned by at least 75% of the holders of outstanding
voting securities of Collectibles immediately prior to the
transaction, with the voting power of each such continuing holder
relative to other such continuing holders not substantially altered in
the transaction; or
(iv) the stockholders of Collectibles shall approve a plan of
complete liquidation of Collectibles or an agreement for the sale or
disposition by Collectibles of all or a substantial portion of
Collectibles' assets (i.e., 50% or more of the total assets of
Collectibles).
None of the transactions that occur in connection with the initial public
offering of Collectibles shall constitute a Change in Control.
(f) Employee must be notified in writing by the Company at any time
that the Company anticipates that a Change in Control may take place.
(g) Employee shall be reimbursed by the Company or its successor for
any excise taxes that Employee incurs under Section 4999 of the Internal Revenue
Code of 1986, as a result of any Change in Control. Such amount will be due and
payable by the Company or its successor within ten (10) days after Employee
delivers a written request for reimbursement accompanied by a copy of his tax
return(s) showing the excise tax actually incurred by Employee.
13. COMPLETE AGREEMENT.
This Agreement is not a promise of future employment. Employee has no
oral representations, understandings or agreements with the Company or any of
its officers, directors or representatives covering the same subject matter as
this Agreement.
This written Agreement is the final, complete and exclusive statement
and expression of the agreement between the Company and Employee and of all the
terms of this Agreement, and it cannot be
10
<PAGE>
varied, contradicted or supplemented by evidence of any prior or contemporaneous
oral or written agreements. This written Agreement may not be later modified
except by a further writing signed by a duly authorized officer of the Company
and Employee, and no term of this Agreement may be waived except by writing
signed by the party waiving the benefit of such term.
14. NOTICE.
Whenever any notice is required hereunder, it shall be given in writing
addressed as follows:
To the Company: Collectibles USA, Inc.
2081 Landings Drive
Mountain View, CA 94043
To Employee: c/o American Royal Arts Corp.
473 Old Country Road
Westbury, New York 11590
Notice shall be deemed given and effective three (3) days after the deposit in
the U.S. mail of a writing addressed as above and sent first class mail,
certified, return receipt requested, or if sooner, when actually received.
Either party may change the address for notice by notifying the other party of
such change in accordance with this paragraph 14.
15. SEVERABILITY; HEADINGS.
If any portion of this Agreement is held invalid or inoperative, the
other portions of this Agreement shall be deemed valid and operative and, so far
as is reasonable and possible, effect shall be given to the intent manifested by
the portion held invalid or inoperative. The paragraph headings herein are for
reference purposes only and are not intended in any way to describe, interpret,
define or limit the extent or intent of the Agreement or of any part hereof.
16. ARBITRATION.
Any unresolved dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by arbitration, conducted
before a panel of three (3) arbitrators Mountain View, California, in accordance
with the rules of the American Arbitration Association then in effect. The
arbitrators shall not have the authority to add to, detract from, or modify any
provision hereof nor to award punitive damages to any injured party. The
arbitrators shall have the authority to order back-pay, severance compensation,
vesting of options (or cash compensation in lieu of vesting of options),
reimbursement of costs, including those incurred to enforce this Agreement, and
interest thereon in the event the arbitrators determine that Employee was
terminated without disability or good cause, as defined in paragraphs 5(b) and
5(c), respectively, or that the Company has otherwise materially breached this
Agreement. A decision by a majority of the arbitration panel shall be final and
binding. Judgment
11
<PAGE>
may be entered on the arbitrators' award in any court having jurisdiction. The
direct expense of the arbitrators shall be borne by the Company.
17. GOVERNING LAW.
This Agreement shall in all respects be construed according to the laws
of the State of Delaware.
12
<PAGE>
18. COUNTERPARTS.
This Agreement may be executed simultaneously in two (2) or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
American Royal Arts Corp.
By: /s/ Jerry Gladstone
------------------------------------
Name: Jerry Gladstone
------------------------------------
Title: President
------------------------------------
COLLECTIBLES USA, INC.
By: /s/ Ronald Rafaloff
------------------------------------
Name: Ronald Rafaloff
------------------------------------
Title: Assistant Secretary
------------------------------------
Jerry Gladstone
/s/ Jerry Gladstone
-------------------------------------
13
<PAGE>
SCHEDULE TO EXHIBIT 10.1
Identification of Substantially Identical Employment Agreements
1. Employment Agreement, by and among Collectibles USA, Inc.
("Collectibles"), Animation, U.S.A., Inc., a Washington corporation and a
wholly-owned subsidiary of Collectibles (the "Company"), and Laine Ross,
pursuant to which she shall be employed as Vice President of the Company, and
shall receive a base salary of $25,000 per year for an initial term of three
years.*
2. Employment Agreement, by and among Collectibles, American Royal Arts
Corp., a New York corporation and a wholly-owned subsidiary of Collectibles (the
"Company"), and Jerry Gladstone, pursuant to which he shall be employed as
President of the Company, and shall receive a base salary of $50,000 per year
for an initial term of three years.*
3. Employment Agreement, by and among Collectibles, Elwell Stores, Inc.
(d/b/a The Reef Hallmark Shop), a Florida corporation and a wholly-owned
subsidiary of Collectibles (the "Company"), and Roy C. Elwell, pursuant to which
he shall be employed as President of the Company, and shall receive a base
salary of $25,000 per year for an initial term of three years.*
4. Employment Agreement, by and among Collectibles, Stone's Shops,
Inc., an Illinois corporation and a wholly-owned subsidiary of Collectibles (the
"Company"), and Michael Stone, pursuant to which he shall be employed as General
Manager of the Company, and shall receive a base salary of $47,000 per year for
an initial term of three years.*
5. Employment Agreement, by and among Collectibles, St. George, Inc.
(d/b/a Little Elegance), a New Jersey corporation and a wholly-owned subsidiary
of Collectibles (the "Company"), and Robert St. George, pursuant to which he
shall be employed as President of the Company, and shall receive a base salary
of $25,000 per year for an initial term of three years.*
6. Employment Agreement, by and among Collectibles, DKG Enterprises,
Inc. (d/b/a North Pole City Gifts & Collectibles; d/b/a North Pole City), an
Oklahoma corporation and a wholly-owned subsidiary of Collectibles (the
"Company"), and David K. Green, pursuant to which he shall be employed as
President of the Company, and shall receive a base salary of $50,000 per year
for an initial term of three years.*
7. Employment Agreement, by and among Collectibles, Filmart Productions
Inc. (d/b/a Cartoon World; d/b/a Filmart Galleries), a New York corporation and
a wholly-owned subsidiary of Collectibles (the "Company"), and Susan M. Spiegel,
pursuant to which she shall be employed as President of the Company, and shall
receive a base salary of $25,000 per year for an initial term of five years.*
<PAGE>
8. Employment Agreement, by and among Animation, U.S.A., Inc., a
Washington corporation and a wholly-owned subsidiary of Collectibles, and David
Vice, pursuant to which he shall be employed as President of the Company, and
shall receive a base salary of $25,000 per year for an initial term of three
years.*
9. Employment Agreement, by and among Elwell Stores, Inc. (d/b/a The
Reef Hallmark Shop), a Florida corporation and a wholly-owned subsidiary of
Collectibles, and Kim A. Elwell, pursuant to which she shall be employed as
Secretary & Treasurer of the Company, and shall receive a base salary of $25,000
per year for an initial term of three years.*
10. Employment Agreement, by and among Stone's Shops, an Illinois
corporation and a wholly-owned subsidiary of Collectibles, and David Stone,
pursuant to which he shall be employed as President of the Company, and shall
receive a base salary of $20,000 per year for an initial term of three years.*
11. Employment Agreement, by and among St. George, Inc. (d/b/a Little
Elegance), a New Jersey corporation and a wholly-owned subsidiary of
Collectibles, and Keith Holt, pursuant to which he shall be employed as
President of the Company, and shall receive a base salary of $25,000 per year
for an initial term of three years.*
12. Employment Agreement, by and among Filmart Productions Inc. (d/b/a
Cartoon World; d/b/a Filmart Galleries), a New York corporation and a
wholly-owned subsidiary of Collectibles, and Aron Laikin, pursuant to which he
shall be employed as Chief Operating Officer of the Company, and shall receive a
base salary of $25,000 per year for an initial term of five years.*
* Pursuant to Item 601(b)(2) of Regulation S-K of the Securities Act of 1933, as
amended, supplemental copies of any omitted schedules or annexes will be
furnished to the Commission upon request.
-2-
CONSULTING AGREEMENT
This Consulting Agreement between Collectibles USA, Inc., a Delaware
corporation ("Company"), and RGR Financial Group, LLC ("Consultant"), a Delaware
limited liability corporation, is hereby entered into this 12th day of June,
1997 to be effective as of the consummation of the initial public offering of
the Company's common stock.
NOW, THEREFORE, in consideration of the mutual promises, terms,
covenants and conditions set forth herein and the performance of each, it is
hereby agreed as follows:
1. Duties.
(a) The Company hereby engages Consultant as a merger and acquisition
consultant to assist the Company in implementing its strategy to acquire
additional retailers of collectibles and marketers of animation art, including
to the extent requested by the Company, (i) assisting the Company in designing
the Company's acquisition program and identifying and evaluating potential
acquisition candidates, their operations, historical performance and future
prospects, and (ii) advising the Company in discussions and negotiations with
acquisition candidates.
(b) The consulting activities will be provided primarily by Ronald P.
Rafaloff and Gary Rafaloff on behalf of Consultant. Consultant hereby accepts
this engagement upon the terms and conditions herein contained and agrees to
devote a reasonable amount of time, attention and efforts to promote and further
the business and services of the Company.
(c) Consultant agrees to keep the Company informed of its activities
hereunder. Specifically, after identifying a potential acquisition candidate and
gathering appropriate information with respect thereto, Consultant will provide
all such information to the Chief Executive Officer of the Company, or his
designee, and discuss the desirability of proceeding with such potential
candidate with the Chief Executive Officer of the Company and any such
discussion with the potential acquisition candidate shall take place with the
Chief Executive Officer or his designee. No discussion with respect to a
possible purchase price of such potential acquisition candidate shall take place
without the prior approval of the Chief Executive Officer of the Company and
shall take place in the presence of, or with the prior approval of, the Chief
Executive Officer or his designee. Any such acquisition shall, of course, be
subject to prior approval of the Board of Directors.
2. Compensation.
(a) For all services rendered by Consultant to the Company, the Company
shall compensate the Consultant based upon each acquisition candidate with which
an acquisition is
<PAGE>
consummated in accordance with Exhibit A attached hereto. No such compensation
shall be paid until such time as an acquisition is consummated.
(b) The Company shall reimburse Consultant for all ordinary and
necessary business expenses lawfully and reasonably incurred by Consultant in
the performance of its services. All reimbursable expenses shall be
appropriately documented in reasonable detail by Consultant upon submission of
any request for reimbursement.
3. Term; Termination; Rights of Termination. The term of this Agreement
shall begin on the date of this Agreement and continue for a period of one (1)
year subject to further extension if agreed to by both parties hereto.
4. Taxes. It is mutually understood and agreed that in the performance
of its services under this Agreement, Consultant is at all times performing its
services as an independent contractor, and acknowledges that it is responsible
for payment of its federal income tax, employment taxes and social security
taxes for its employees. Further, Consultant will comply with all taxing
authorities, regulations and laws, whether federal or state.
5. Nondisclosure and Nonuse of Confidential Information. Except as
required by the nature of Consultant's duties or with the prior written approval
of an authorized officer of the Company, Consultant will never, during the term
of this Agreement or thereafter, use or disclose any confidential information of
the Company, any of its customers or any potential acquisition candidate,
including without limitation customer lists, market research, strategic plans or
other information or discoveries, inventions, improvements, know-how, methods or
other trade secrets, whether developed by Consultant or others. Consultant will
comply with the Company's policies and procedures for the protection of
confidential information.
6. Use and Return of Documents. Consultant will not disclose any
documents, record, tapes and other media that contain confidential information
and will not copy any such material or remove it from the Company's offices
except as approved by an authorized officer of the Company. Upon termination of
this Agreement, Consultant will return to the Company all copies of documents,
records, tapes, and other media that contain confidential information.
7. Remedies. Consultant acknowledges that in the event of a violation
by it of this Agreement the harm to the Company could be irreparable. Consultant
agrees that, in addition to any other remedies provided by law, the Company will
be entitled to obtain injunctive relief against any such violation without
having to post a bond.
8. Complete Agreement. There are no oral representations,
understandings, or agreements with the Company or any of its officers, directors
or representatives covering the same subject matter as this Agreement. This
written Agreement is the final, complete and exclusive statement and expression
of the agreement between the Company and Consultant and of
2
<PAGE>
all the terms of this Agreement, and it cannot be varied, contradicted or
supplemented by evidence of any prior or contemporaneous oral or written
agreements. This written Agreement may not be later modified except by a further
writing signed by the Company and Consultant, and no term of this Agreement may
be waived except by writing signed by the party waiving the benefit of such
terms.
9. No Waiver. No waiver by the parties hereto of any default or breach
of any term, condition or covenant of this Agreement shall be deemed to be a
waiver of any subsequent default or breach of the same or any other term,
condition or covenant contained herein.
10. Assignment; Binding Effect. Consultant understands that it may not
assign its rights or obligations hereunder without the prior written consent of
the Company. Subject to the preceding sentence, this Agreement shall be binding
upon and inure to the benefit of the parties thereto and their respective heirs,
successors and assigns. It is further understood and agreed that the Company may
be merged or consolidated with another entity and that any such entity shall
automatically succeed to the rights, powers and duties of the Company hereunder.
11. Notices. Whenever any notice is required hereunder, it shall be
given in writing addressed as follows:
To the Company: One Battery Park Plaza
24th Floor
New York, NY 10004-1405
To Consultant: One Battery Park Plaza
24th Floor
New York, NY 10004-1405
Notice shall be deemed given and effective seven (7) days after the deposit in
the U.S. mail of a writing addressed as above and sent first class mail,
certified, return receipt requested, or when actually received. Either party may
change the address for notice by notifying the other party of such change in
accordance with this paragraph 11.
12. Severability; Headings. If any portion of this Agreement is held
invalid or inoperative, the other portions of this Agreement shall be deemed
valid and operative and, so far as is reasonable and possible, effect shall be
given to the intent manifested by the portion held invalid or inoperative. The
paragraph headings herein are for reference purposes only and are not intended
in the way to describe, interpret, define or limit the extent or intent of this
Agreement or of any part hereof.
3
<PAGE>
13. Governing Law; Place of Performance. This Agreement shall in all
respects be construed according to the laws of the State of New York.
RGR Financial Group, LLC
By: /s/ Ronald Rafaloff
------------------------------
Collectibles USA, Inc.
By: /s/ Ronald Rafaloff
------------------------------
4
<PAGE>
Exhibit A
Consultant shall be entitled to receive 3.2% of Pre-Tax Net Income for
the acquisition candidate. Pre-Tax Net Income is calculated based upon the
acquisition candidate's most recently completed fiscal year, with such additions
thereto as may be agreed to by the Chief Executive Officer of the Company, or
his designee, and the Consultant.
5
<PAGE>
AMENDMENT NO. 1 TO CONSULTING AGREEMENT
AMENDMENT NO. 1 TO CONSULTING AGREEMENT (this "Amendment")
dated as of May 31, 1998, by and between Collectibles USA, Inc., a Delaware
corporation ("Company"), and RGR Financial Group, LLC, a Delaware limited
liability corporation ("Consultant").
WHEREAS, the parties hereto have entered into a Consulting
Agreement (the "Consulting Agreement"), dated as of 12th day of June, 1997, to
be effective as of the consummation of the initial public offering of the
Company's common stock;
WHEREAS, the parties hereto desire to amend the Consulting
Agreement.
NOW, THEREFORE, in consideration of the premises and the
covenants and agreements herein contained, the parties agree as follows:
1. Amendment of Employment Agreement. The terms of the
Consulting Agreement shall be amended as follows, effective from and after the
date hereof:
(a) Exhibit A shall be amended by deleting it in its entirety
and substituting the following therefor:
Consultant shall be entitled to receive 3.2% of pre-tax net
income for the acquisition candidate. Pre-tax net income will
be calculated based upon the acquisition candidate's most
recently completed fiscal year, and shall be computed in
accordance with (i) generally accepted accounting principals
in the United States and (ii) the rules of Regulation SX,
Title 17 of the Code of Federal Regulations (Part 210), as
such may be amended.
(b) Section 11 shall be amended by providing that notices to
the Company be delivered to the attention of the "Chief Executive Officer"
rather than to "Ronald P. Rafaloff."
2. Binding Agreement. The provisions of this Amendment will be
binding upon, and will inure to the benefit of, the respective heirs, legal
representatives, successors and assigns of the parties hereto.
3. Governing Law. This Amendment will be governed by and
construed in accordance with the domestic laws of the State of New York without
giving effect to any choice of law or conflict of law provision or rule (whether
of the State of New York or any other jurisdiction) that would cause the
application of the laws of any jurisdiction other than the State of New York,
without regard to principles concerning conflicts of laws.
<PAGE>
4. Entire Agreement. This Amendment, together with the
Consulting Agreement, contains the entire agreement between the parties with
respect to the subject matter hereof and supersedes all prior agreements of the
parties with respect hereto.
5. Counterparts. This Amendment may be executed in several
counterparts, each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute one and the same
instrument.
[Signature Page to Follow]
- 2 -
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this
Amendment No. 1 to Consulting Agreement as of the date first written above.
COLLECTIBLES USA, INC.
By: /s/ NEIL J. DEPASCAL
---------------------------------
Name: Neil J. DePascal, Jr.
Title: Chief Financial Officer
RGR FINANCIAL GROUP, LLC
By: /s/ RONALD P. RAFALOFF
---------------------------------
Name: Ronald P. Rafaloff
Title: President
- 3 -
EXHIBIT 10.5
COLLECTIBLES USA, INC.
FORM 25 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 Cruttenden Roth Incorporated or its permitted
assigns, is entitled to purchase from the Company, at any time or from time to
time commencing on [the Effective Date], 1998 and prior to 5:00 P.M., New York
City time, on [5 years from Effective Date], 2003, 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.
- --------
1/ 120% of public offering price.
<PAGE>
Payment for Warrant Shares shall 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 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-
<PAGE>
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 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
-3-
<PAGE>
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, reclassifica tions, 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 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.
-4-
<PAGE>
(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 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.
-5-
<PAGE>
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], 1999 and ending on [5 years from
Effective Date], 2003, the Holder and/or the Holders of any other Warrants
and/or Warrant Shares who or which shall hold not less than 50% 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 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], 1999 and ending
on [7 years from
-6-
<PAGE>
Effective Date], 2005, 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 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
-7-
<PAGE>
(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 Cruttenden Roth Incorporated 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 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
-8-
<PAGE>
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 ______, 1998, by and among the Company, Cruttenden Roth
Incorporated 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 Cruttenden Roth Incorporated, (ii) to any
of the officers of Cruttenden Roth Incorporated, 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
-9-
<PAGE>
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 18301 Von Karman, Irvine, California 92612,
Att.: Jay Sherwood, facsimile no. (714) 852-9603 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.
IN WITNESS WHEREOF, Collectibles USA, Inc. has caused this Warrant to be
signed by its President and Chief Executive Officer and its corporate seal to be
hereunto affixed and attested by its Secretary this ____ day of ____________,
1998.
By:_____________________________________
Shonnie D. Bilin
President and Chief Executive Officer
ATTEST:
-10-
<PAGE>
- ------------------------------------
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-
<PAGE>
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT (this "Agreement") dated as of May
28 1998, by and between Collectibles USA, Inc., a Delaware corporation (the
"Company"), and Neil J. DePascal, Jr. (the "Executive").
WHEREAS, the Company and the Executive entered into that certain Employment
Agreement dated as of August 11, 1997 (the "Employment Agreement"); and
WHEREAS, the parties hereto desire to amend the terms of the Employment
Agreement to reflect changes to the Executive's compensation.
NOW, THEREFORE, in consideration of the premises and the covenants and
agreements herein contained, the parties agree as follows:
1. Amendment Of Employment Agreement. The terms of the Employment Agreement
shall be amended as follows, effective from and after the date hereof.
(a) Base Salary. Section 4(a) of the Employment Agreement shall be amended
by deleting the reference to "$140,000" and substituting therefor a reference to
"$150,000".
(b) One Time Lump-sum Payment; Incentive Bonus. Section 4(b) of the
Employment Agreement shall be amended by inserting the following sentence to the
end of such section:
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 $25,000.
(c) $4 Options. Section 4(d) of the Employment Agreement shall be amended
(i) by deleting references to "$7 Options" and substituting therefor references
to "$4 Options" and (ii) by deleting the first sentence of Section 4(d) and
substituting therefor the following sentence:
Promptly after the date hereof, the Executive shall be granted options to
purchase 40,000 shares of the Company's Common Stock, at an exercise price
of $4.00 per share (the "$4 Options").
<PAGE>
2. Binding Agreement. The provisions of this Agreement will be binding
upon, and will inure to the benefit of, the respective heirs, legal
representatives, successors and assigns of the parties hereto.
3. Governing Law. This Agreement will be governed by and construed in
accordance with the domestic laws of the State of New York without giving effect
to any choice of law or conflict of law provision or rule (whether of the State
of New York or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of New York, without regard to
principles concerning conflicts of laws.
4. Entire Agreement. This Agreement, together with the Employment
Agreement, contains the entire agreement between the parties with respect to the
subject matter hereof and supersedes all prior agreements of the parties with
respect hereto, and there are no written or oral terms or representations made
by either party other than those contained herein or in the Employment
Agreement.
5. Counterparts. This Agreement may be executed in several counterparts,
each such counterpart shall be deemed to be an original instrument, but all such
counterparts together shall constitute one and the same instrument.
[Signature Page to Follow]
- 2 -
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Amendment to
Employment Agreement as of the date first written above.
COLLECTIBLES USA, INC.
By: /s/ RONALD RAFALOFF
------------------------
Name: RONALD RAFALOFF
Title: CHAIRMAN
/s/ NEIL J. DEPASCAL
------------------------
NEIL J. DEPASCAL, JR.
LICENSING AGREEMENT
AGREEMENT dated this twenty-sixth day of March, 1996, between THE CURTIS
PUBLISHING COMPANY, LICENSING DIVISION, (hereinafter referred to as "licensor"),
located 1000 Waterway Boulevard, Indianapolis, IN 46202, and AMERICAN ROYAL ARTS
CORPORATION, (hereinafter referred to as "licensee") located at 473 Old Country
Road, Westbury, NY 11590.
WITNESSETH:
WHEREAS, Licensor was engaged in publishing the magazine The Saturday Evening
Post;
WHEREAS, Licensor is the owner of a library of distinctive and well-know
copyrighted magazine illustrations produced for The Sunday Evening Post.
WHEREAS, Licensee desires to utilize certain of said illustrations for its
merchandise upon the terms and conditions set forth below.
NOW THEREFORE, in consideration of the mutual promises and undertakings herein
contained and for other good and valuable considerations, intending to be
legally bound, the parties agree as follows:
1. DEFINITION OF TERMS
(a) "Customer Sales" shall mean sales of Goods by Licensee
directly or through its authorized wholesalers,
representatives or distributors to retail establishments for
eventual resale to the consumer.
(b) "Mail Order Sales" shall mean sales of Goods by Licensee
directly to the consumer through direct mail solicitation or
catalogues.
(c) "Original Term" shall mean the period beginning on April 1,
1996 and ending on March 31, 1998.
(d) "Contract Year" shall mean the period commencing on January
1st and ending on December 31st of the same year.
(e) A "Premium" shall mean any article used for the purposes of
increasing the sale of another item, promoting or publicizing
any product or service, or used to motivate a sales force,
merchant, consumer, or any other person to perform any act.
-1-
<PAGE>
(f) "Net Wholesale Selling Price" as used herein shall be defined
as meaning the price at which the Goods are sold to Licensee's
customers net of all returns actually made or allowed.
2. GRANT OF LICENSE
Subject to the limitations set forth in Paragraph 2(d) below, and the other
conditions of this Agreement, for the original term of this contract the
Licensor hereby grants to Licensee the rights to use the illustrations listed
under Schedule A below, (hereinafter referred to as "the Materials") on the
following merchandise (hereinafter referred to as "goods"):
(a) Description of Goods: A series of four (4) limited edition
lithographs of "Garfield Visits
Rockwell". Print run of 750 each plus 7
Artist's proofs of the four
illustrations to be marketed at
approximately $400 retail. Each piece
to be signed by Jim Davis of Paws,
Incorporated.
(b) Schedule A: Images for Schedule A to be selected.
(c) Market and Territory: Licensees shall only make sales of Goods
as described in Paragraph 1(a) and (b) above. The license
hereby granted extends to the United States, its territories,
and Canada.
(d) Limitations on License: No license is granted hereunder for
the use of Material for any purpose other than upon or in
connection with the Goods. No license is granted hereunder
for the manufacture, sale or distribution of Goods to be
used as premiums, for publicity purposes, in combination
sales, as giveaways, or to be disposed of under similar
methods of merchandising. In the event Licensee desires to
sell Goods for such purposes, Licensee acknowledges and
agrees that it must first seek and obtain a separate license
therefore from Licensor and that the user therefor must also
obtain a separate license from Licensor for such use of the
Goods.
(e) Exclusivity: For the Original Term of this Agreement, Licensor
shall not license any other person to use, in the Territory,
the Materials listed under Schedule A on the Goods listed in
Paragraph 2(a) and (b) above.
3. ROYALTIES
(a) Rate: In consideration of this license, the Licensee shall pay
the Licensor, during the Original Term of this Agreement and
any extension thereof, a royalty in the amount of eight
percent (8%) of the Net Selling Price of Goods sold. In
-2-
<PAGE>
computing Net Selling Price, no costs incurred in other
advertising and promoting allowances, or distributing the
Goods or any indirect expenses shall be deducted.
4. ACCOUNTING
Not later than the fifteenth day after every quarter during the Original Term
and any extension thereof, and thereafter so long as any sales are made by the
Licensee pursuant to this Agreement, the Licensee shall furnish to the Licensor
a full, complete and accurate statement showing the number of Goods, which have
been sold by the Licensee and the selling price thereof during the preceding
month. For the purposes of this Agreement, an item is considered to be sold when
it is ordered and invoiced or shipped, whichever is sooner.
5. PAYMENT
Simultaneous with the rendition of the statement as aforesaid in Paragraph 4
above, the Licensee shall pay to the Licensor, subject to the provisions of
Paragraph 3, such royalties as the statement indicated are due the Licensor.
6. DURATION
Except as otherwise provided in the following paragraphs, upon completion of the
Original Term, all rights granted the Licensee shall automatically terminate.
7. QUALITY
Licensee acknowledges that if the Goods manufactured and sold by it are of
inferior quality in material and workmanship, the substantial good will which
the Licensor has built up and now possesses in the Material will be impaired.
Accordingly, Licensee warrants that the Goods will be of high standard and of
such appearance and quality as shall be reasonably adequate and suited to their
exploitation to best advantage. Licensee shall submit to Licensor finished art
work and/or a facsimile of all Goods to be manufactured, together with its
cartons and containers, including packaging and wrapping material, which shall
be approved in writing by the Licensor before the Goods are advertised,
distributed or sold. Any article submitted and not disapproved within fourteen
(14) days of the receipt of same by Licensor shall be deemed to have been
approved. After samples of the Goods have been approved pursuant to this
paragraph, Licensee shall not depart therefrom without written consent of the
Licensor. In the event there is a departure from the approved sample of Goods
made or distributed by Licensee, or in the event there is an occurrence
connected with any such Goods or Licensee which reflects unfavorably upon
Licensor, the Licensor shall have the right in the reasonable exercise of its
sole discretion to withdraw its approval of such Goods, at which time this
Agreement shall automatically terminate with respect to such Goods.
-3-
<PAGE>
8. SAMPLES
Licensee shall supply Licensor with 1 sample of each of the complete Goods.
9. BOOKS AND RECORDS
The Licensee shall keep full, complete and accurate books of account and records
covering all transactions relating to the subject matter of this Agreement.
Licensor, through its authorized representative shall have the right to examine
such books of account and records and other documents and material in Licensee's
possession or under its control insofar as they relate to the manufacture and
sale of Goods. The Licensor shall have free and full access therefrom at any
reasonable hour of the day during which the Licensee's offices are open and in
any reasonable manner. Licensee need only retain such books of account and
records for a two-year period following the termination of this Agreement.
10. GOODWILL
The License acknowledges that the Material is unique and original and that the
Licensor is the owner thereof. The Licensee shall not, during the Original Term
of this Agreement or any time thereafter, dispute or contest, directly or
indirectly; the Licensor's ownership of the Material; The Licensor's exclusive
right (subject to this license) to use the Material; the validity of any of the
copyrights or trademarks pertaining thereto or the Licensor's ownership thereof.
Nor shall the Licensee assist or aid others in doing so. At the Licensor's
request, the Licensee shall cooperate with the Licensor in preventing or
stopping any infringement or unfair use by any third party of the Goods or the
Material. The Licensor shall bear the costs of preventing or stopping any such
infringement or unfair use, which it elects to pursue, and the Licensee's
obligation will be limited to providing full cooperation to Licensor.
11. LICENSEE'S EFFORTS
Licensee agrees that it will exercise its best efforts to manufacture,
distribute and sell the Goods within the territory. It is also agreed that
Licensee will use its best efforts to fulfill orders for Goods in a timely and
reasonable manner. Should there be an unforeseen delay in fulfilling customers'
order for Goods, Licensee will exercise all possible diligence in informing
those customers of the delay, and complying totally with Federal Trade
Commission regulations and all other relevant state and federal laws. In the
event of an unforeseen delay in fulfilling orders to customers, Licensee also
agrees that it will refrain from advertising or promoting Goods, or soliciting
orders from consumers until such problems are cured.
12. COPYRIGHT, ETC.
(a) The Licensor shall apply to register trademarks and claims to
copyright, and apply for design patents on the Goods and/or
the Material as may be reasonably necessary, in the Licensor's
sole discretion, to protect the Licensor's interests.
-4-
<PAGE>
All applications for registration of claims to copyright shall
identify the Licensor as the copyright proprietor; all
applications to register trademarks shall identify the
Licensor as the trademark owner; and all applications for
design patents shall correctly identify the inventor and shall
be assigned to the Licensor.
(b) If the Licensor requires any specimens of the Goods, or any
photographic reproductions of the same, for use in filing
copyright, trademark or patent applications, the Licensee
shall provide the Licensor with the same at Licensee's
expense.
(c) At the Licensor's request, the Licensee shall execute
assignments in favor of the Licensor of any and all
copyrights, trademarks or other property rights of whatever
kind relating to the Goods and/or the Material without further
consideration.
(d) Licensee shall ensure and warrant that it will provide a
legally sufficient copyright notice on the Goods and/or the
packaging, wrapping, advertising and promotional material
bearing any reproductions of the Goods or the Material, in the
following format designated by Licensor:
(C) 19** The Curtis Publishing Company
or such other format as Licensor shall from time to time
direct. The Licensee further warrants that it will take such
precautions as necessary to insure that any reproductions made
by its customers also bear the Licensor's legal copyright
notice.
13. ADVERTISING/STYLE GUIDELINES
All advertisements and promotional materials which Licensee intends to use to
promote Goods shall be submitted to Licensor for its written approval prior to
publication. Licensor shall have fourteen (14) days from the date of receipt of
said material in which to approve or disapprove it. Such approval shall not be
unreasonably withheld by Licensor.
To the fullest extent possible, the style guidelines of the Licensor will be
followed in advertising, labeling and promotion.
14. RIGHT OF TERMINATION
Without prejudice to any other rights, Licensor shall have the right to
terminate this Agreement upon written notice to Licensee, sent by certified
mail, return receipt requested, at any time that any of the following may occur:
-5-
<PAGE>
(a) If Licensee shall not have begun the bona fide manufacture or
production of the Goods licensed hereunder within ninety (90)
days from the commencement of the term hereof.
(b) If Licensee shall be unable to fulfill or obtain valid
purchase orders for the Goods throughout the territory hereof
for any reason for a period of six (6) months or more.
(c) If Licensee shall fail to make any payment due hereunder or to
deliver any of the statements herein referred to, and if such
default shall continue for a period of sixty (60) days.
(d) If Licensee shall be unable to pay its liabilities when due,
or shall make any assignment for the benefit of creditors, or
shall file any petition under Chapter 10, 11 or 12 of Title
11, United States Code, or file a voluntary petition in
bankruptcy or be adjudicated as bankrupt or insolvent, or if
any receiver is appointed for its business or property, or if
any trustee in United States government or of the several
states, Licensor shall have the right to terminate this
Agreement. Notwithstanding the foregoing, the Licensor shall,
at any time during the term of this contract, have the option
of demanding an assurance from Licensee of Licensee's ongoing
ability to perform the provisions of this contract, if, in the
reasonable opinion of Licensor, Licensee is unable to
adequately fulfill its requirements. If reasonable and
adequate assurance is not received by Licensor regarding
Licensee's ability to perform, Licensor shall have the right
to terminate this Agreement.
15. SALES AND AFTER EXPIRATION
Should this Agreement terminate for any reason or expire, Licensee may, at the
sole discretion of the Licensor, be permitted to sell its remaining inventory of
Goods for a period not to exceed one hundred and twenty (120) days following the
termination or expiration of this Agreement. Said request to sell remaining
inventory shall be sent to the Licensor within thirty (30) days before
expiration or from Licensee's receipt of any notice terminating the license
herein. However, the Licensee shall not, without prior written consent of the
Licensor, sell any such remaining Goods as distress merchandise or otherwise
than in the ordinary course of business. For the purpose of this Agreement, a
distress sale shall be defined as one in which the merchandise is sold for less
than fifty percent (50%) of the normal wholesale selling price. Licensee shall
pay royalties on all such sales in the manner provided for in this Agreement.
16. CESSATION OF USE
-6-
<PAGE>
Except as otherwise provided in Paragraph 15, the Licensee shall, forthwith
upon the expiration of this Agreement or any extension thereof, or upon its
sooner termination, discontinue the manufacturing, printing, promotion,
advertising, sale and distribution of Goods.
17. RIGHTS RESERVED BY LICENSOR
Any and all rights in and to said Material which are not expressly granted to
the Licensee are hereby reserved by the Licensor. Any one or more of such
reserved rights may be exercised or enjoyed by the Licensor, directly or
indirectly, at any and all times.
18. REIMBURSEMENT OF EXPENSES
Licensee agrees to reimburse Licensor for all labor, material and other expenses
incurred by Licensor at the direct request of Licensee.
Licensee further agrees to reimburse Licensor for the cost of any royalties
audit deemed necessary and proper by Licensor, provided such audit finds a
discrepancy of five percent (5%) or more.
19. LICENSOR'S CLAIM
Whatever claim Licensor may have against Licensee hereunder for royalties and/or
for damages shall become a first lien upon all of said Goods manufactured or
produced pursuant to the terms of this Agreement in the possession or under the
control of Licensee or its agents upon the expiration or termination of this
Agreement.
20. REMEDIES
All specific remedies provided for in this Agreement shall be cumulative and
shall not be exclusive of one another or any of any other remedies available in
law or equity. The failure of the Licensor to insist upon the strict performance
of any of the convenants or terms hereof to be performed by the Licensee shall
not be construed as a waiver of such covenants of terms.
21. LICENSEE'S WARRANTY
Licensee hereby agrees to be solely responsible for, to defend and indemnify
Licensor and its respective officers, agents and employees, and to hold each of
them harmless from any claims, demand, causes or action or damages, including
reasonable attorney's fees arising out of the distribution or use of the Goods,
other than those based solely on Licensee's use of the Material authorized by
this Agreement. Licensee will obtain and maintain product liability insurance in
the minimum amount of five hundred thousand dollars ($500,000) providing
protection for Licensor and its respective officers, agents and employees
against any attorney's fees arising out of any alleged defects in Goods or any
use thereof, in an amount and providing coverage
-7-
<PAGE>
satisfactory to Licensor. Such insurance policy shall provide that it may not be
canceled without at least ten days written notice by Licensor. Further, Licensor
will be furnished with a certificate of such insurance issued by the insuring
company.
22. LICENSOR'S WARRANTY
Licensor represents and warrants to Licensee that it is the sole owner and
proprietor of Material and has the power to enter into this Agreement. Licensor
hereby agrees to indemnify Licensee, its officers, agents and employees and to
hold them harmless against claims, demands, causes of action or damages, for
trademark or copyright infringement arising out of the use of the Material as
authorized by this Agreement, provided that Licensor is given immediate notice
of and shall have the option to undertake and conduct the defense of any such
claim, demand or cause of action. Licensee may, but shall not be obligated to,
join in such defense and be represented by its own counsel. All liabilities,
expenses, losses, damages and reasonable attorney's fees in connection with any
such claim shall be paid by the Licensor, except that if Licensee elects to be
represented by its own counsel, Licensee will pay its own attorney's fees.
Licensee agrees that while it may counsel Licensor concerning the disposition of
any such action, Licensor shall have the sole final decision concerning the
disposition of any action and the right to dispose of inventory and works in
progress as it sees fit.
23. NO PARTNERSHIP OR JOINT VENTURE
This Agreement does not constitute and shall not be construed as constituting a
partnership or joint venture between Licensor and Licensee. The Licensee shall
have no right to obligate or bind Licensor in any manner whatsoever and nothing
herein contained shall give or is intended to give any rights of any kind to any
third party.
24. NO ASSIGNMENT
The license hereby granted is and shall be personal to the Licensee and shall
not be assignable by any action of the Licensee or by operation of the law, and
any attempt at such assignment shall be null and void. The Licensee shall have
no right to grant any sub-licenses. Material change in ownership or corporate
firm of the Licensee shall render this Agreement null and void. This Agreement
shall inure to the benefit of and shall be binding upon the Licensor's
successors and assigns.
25. WAIVER AND MODIFICATION
No waiver or modification of any of the terms of this Agreement shall be valid
unless in writing and signed by the party against whom such modification or
waiver is sought to be enforced. No waiver by either party of a breach hereof of
a default hereunder shall be deemed a waiver by such party of a subsequent
breach or default of like or similar nature.
-8-
<PAGE>
26. NOTICE
Whenever notice is required to be given under this Agreement, it shall be deemed
to be good and sufficient notice if in writing, signed by an officer or an
authorized agent of the party serving such notice and sent by telegram, telex or
mailed by registered or certified mail, return receipt requested, to the other
party at the address stated above unless notification of a change of address is
given in writing.
27. CONSTRUCTION
This Agreement has been executed in the State of Indiana and shall be construed
in accordance with the laws of said State, irrespective of the forum in which
the Agreement or any part of it may come up for construction, interpretation, or
enforcement.
28. ENTIRE AGREEMENT
This Agreement contains the entire understanding of the parties. There are no
representations, warranties, promises, covenants or understandings other than
those herein contained.
IN WITNESS WHEREOF, the parties hereto have caused these presents to be signed
by their duly authorized officers as of the day and year first above written.
THE CURTIS PUBLISHING COMPANY AMERICAN ROYAL ARTS CORPORATION
LICENSING DIVISION
By: /s/ Illegible By: /s/ Jerry Gladstone
--------------------------------- --------------------------------
Title: President Title: President
-------------------------------- -------------------------------
Date: March 28, 1996 Date: April 10, 1996
-------------------------------- --------------------------------
-9-
<PAGE>
ADDENDUM TO LICENSING AGREEMENT
NO. 1
ADDENDUM TO THE LICENSING AGREEMENT DATED MARCH 26, 1996 BETWEEN THE CURTIS
PUBLISHING COMPANY, LICENSING DIVISION, HEREINAFTER REFERRED TO AS "LICENSOR"
AND AMERICAN ROYAL ARTS CORPORATION HEREINAFTER REFERRED TO AS "LICENSEE".
Paragraph 24 "No Assignment" shall be amended to state the following:
(a) The license hereby granted is and shall be personal to the Licensee
and shall not be assignable by any action of the Licensee or by
operation of law, and any attempt at such assignment shall be null and
void. The Licensee shall have no right to grant any sub-licenses.
Material change in ownership or corporate firm of the Licensee shall
render this Agreement null and void. This Agreement shall inure to the
benefit of and shall be binding upon the Licensor's successors and
assigns.
(b) Notwithstanding subsection (a) of this paragraph 24, Licensor
hereby consents and agrees to the acquisition by merger of all of the
outstanding shares of Licensee by Collectibles U.S.A., Inc., a Delaware
corporation residing at 2081 Landings Drive, Mountain View, California
94043
All other language and terms of the original agreement shall remain unchanged
and in effect.
IN WITNESS WHEREOF, the parties hereto have caused these presents to be signed
by their duly authorized officers as of the day and year first above written.
THE CURTIS PUBLISHING COMPANY AMERICAN ROYAL ARTS CORPORATION
LICENSING DIVISION
By: /s/ Illegible By: /s/ Jerry Gladstone
----------------------------- ------------------------------
Title: Senior Vice President Title: President
------------------------------ ------------------------------
Date: May 23, 1997 Date: June 2, 1997
------------------------------ ------------------------------
Contract ID #: AMERI 96-1G
-10-
<PAGE>
ADDENDUM TO LICENSING AGREEMENT NO. 2
ADDENDUM TO THE LICENSING AGREEMENT DATED MARCH 26, 1996, BETWEEN THE CURTIS
PUBLISHING COMPANY, LICENSING DIVISION, HEREINAFTER REFERRED TO AS "LICENSOR"
AND AMERICAN ROYAL ARTS HEREINAFTER REFERRED TO AS "LICENSEE".
Paragraph 1(c) "Original Term" shall be extended from March 31, 1998 until
March 31, 2000.
All other language and terms of the original agreement shall remain unchanged
and in effect.
IN WITNESS WHEREOF, the parties hereto have caused these presents to be signed
by their duly authorized officers as of the day and year first above written.
THE CURTIS PUBLISHING AMERICAN ROYAL ARTS
COMPANY
LICENSING DIVISION
BY: /s/ Joan S. Durham BY:
---------------------- ---------------------
TITLE: President TITLE: PRES
------------------- ------------------
DATE: 3/11/98 DATE: 3/16/98
-------------------- -------------------
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-
<PAGE>
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT (this "Agreement") dated as of May
28, 1998, by and between Collectibles USA, Inc., a Delaware corporation (the
"Company"), and Shonnie D. Bilin (the "Executive").
WHEREAS, the Company and the Executive entered into that certain Employment
Agreement dated as of August 25, 1997 (the "Employment Agreement");
WHEREAS, the Executive was the Executive Vice President -- Planning and
Development of the Company and recently has been appointed the President and
Chief Executive Officer of the Company; and
WHEREAS, the parties hereto desire to amend the terms of the Employment
Agreement to reflect changes to the Executive's compensation commensurate with
the Executive's responsibilities as the President and Chief Executive Officer of
the Company.
NOW, THEREFORE, in consideration of the premises and the covenants and
agreements herein contained, the parties agree as follows:
1. Amendment of Employment Agreement. The terms of the Employment Agreement
shall be amended as follows, effective from and after the date hereof:
(a) Employment. Section 2(a) of the Employment Agreement shall be amended
by deleting the first sentence and substituting therefor the following sentence:
The Executive shall be employed as an executive officer with the title of
President and Chief Executive Officer of the Company.
(b) Base Salary. Section 4(a) of the Employment Agreement shall be amended
by deleting the reference to "$150,000" and substituting therefor a reference to
"$175,000".
(c) $4 Options. Section 4(e) of the Employment Agreement shall be amended
(i) by deleting references to "$7 Options" and substituting therefor references
to "$4 Options" and (ii) by deleting the first sentence of Section 4(e) and
substituting therefor the following sentence:
Promptly after the date hereof, the Executive shall be granted options to
purchase 50,000 shares of the Company's Common Stock, at an exercise price
of $4.00 per share (the "$4 Options").
<PAGE>
In connection with this amendment, the Executive hereby surrenders any "$7
Options" and releases the Company from any obligations arising under such
options.
(d) IPO Stock Options. Section 4(f) of the Employment Agreement shall be
amended by deleting the reference to "40,000" and substituting therefor a
reference to "125,000."
2. Binding Agreement. The provisions of this Agreement will be binding
upon, and will inure to the benefit of, the respective heirs, legal
representatives, successors and assigns of the parties hereto.
3. Governing Law. This Agreement will be governed by and construed in
accordance with the domestic laws of the State of New York without giving effect
to any choice of law or conflict of law provision or rule (whether of the State
of New York or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of New York, without regard to
principles concerning conflicts of laws.
4. Entire Agreement. This Agreement, together with the Employment
Agreement, contains the entire agreement between the parties with respect to the
subject matter hereof and supersedes all prior agreements of the parties with
respect hereto, and there are no written or oral terms or representations made
by either party other than those contained herein or in the Employment
Agreement.
5. Counterparts. This Agreement may be executed in several counterparts,
each such counterpart shall be deemed to be an original instrument, but all such
counterparts together shall constitute one and the same instrument.
[Signature Page to Follow]
- 2 -
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Amendment No. 1 to
Employment Agreement as of the date first written above.
COLLECTIBLES USA, INC.
By:/s/ RONALD RAFALOFF
------------------------
Name: RONALD RAFALOFF
Title:CHAIRMAN
/s/ SHONNIE D. BILIN
------------------------
SHONNIE D. BILIN
ASSIGNMENT AND LICENSE AGREEMENT
This Agreement made and executed this _____ day of ______________,
19__, by and between Hallmark Cards, Incorporated, LICENSOR, and Stone's Shop,
Inc., David J. Stone - President, LICENSEE, 2508 S. Alpine, Rockford, IL 61108
doing business at Stone's Hallmark Shop, Brywood Center, Rockford, IL (the
"premises").
WHEREAS, LICENSEE acknowledges that LICENSOR is the sole and exclusive
owner of trademarks and trade names including the word "HALLMARK" alone and in
combination with a 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, inter alia; and,
WHEREAS, LICENSEE desires to do business as a corporation utilizing the
name Stone's Hallmark Shop, Rockford, IL in conjunction with the sale of
greeting cards, stationery, party goods, gifts and related social expression
products.
NOW, THEREFORE, for good and valuable consideration, the sufficiency
and receipt of which are hereby acknowledged and in further consideration of the
premises,
1. The LICENSEE, for himself, his heirs, administrators, successors and
assigns, does hereby absolutely grant, bargain, convey and assign unto LICENSOR
any and all legal and equitable right, title and interest, both tangible and
intangible, which LICENSEE has or may hereafter acquire in the trademark
"HALLMARK", including but not limited to any good will hereinafter generated or
created by LICENSEE or anyone acting or claiming under him.
2. LICENSOR does hereby grant unto LICENSEE a royalty-free license to
use the trademark and trade name HALLMARK(R) as part of the LICENSEE's store
trade name Stone's Hallmark Shop, Rockford, IL, and on the premises for the
promotion and sale of products sold by Hallmark Cards, Incorporated; provided,
however, that the license herein granted shall not extend to any use of the
trademark as a part of a corporate name; and further provided, that said license
herein granted shall be terminable by LICENSOR, at any time, by giving thirty
(30) days written notice to LICENSEE of such termination. Said license herein
granted may not be transferred or assigned and all rights thereto shall revert
to LICENSOR upon revocation of the license so granted.
3. During the term of this Agreement, LICENSEE: (A) shall use its best
efforts to promote and maintain the good will of the HALLMARK trademark and
image; (b) shall 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 said store; (c) shall maintain the store premises in a neat and
orderly fashion; (d) shall 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) shall not directly or indirectly disparage
the HALLMARK product line or use bait and switch selling techniques to a
customer registering 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) shall maintain HALLMARK products as its
primary product line provided, however, that the LICENSEE is not otherwise
restricted from inventory and sale of competing product lines.
4. LICENSEE hereby covenants and agrees to display the trademarks of
LICENSOR in conformity with the rules for such use as LICENSOR may, from time to
time, promulgate in order to protect the quality image and reputation which said
marks presently enjoy. Said rules now or hereafter promulgated by LICENSOR shall
be considered a part hereof as if fully enumerated herein. (Attached hereto and
incorporated by reference are the present "Guidelines for the Use of the
Trademark 'Hallmark,'" which LICENSEE, by his initials, indicates have been read
and agreed to.)
5. In the event that the license herein shall be revoked by LICENSOR,
LICENSEE hereby covenants and agrees to immediately cease the use of said
trademarks and to forthwith remove, destroy or otherwise obliterate any sign,
placard, poster, stationery, banner or lettering which utilizes the said
trademarks, or any part thereof, as LICENSOR may direct. LICENSOR shall be free
to enter the
<PAGE>
-2-
premises of LICENSEE and carry out the foregoing upon first giving LICENSEE
reasonable advance notice, without fee or liability for trespass.
6. LICENSEE shall, from time to time, submit to LICENSOR samples of
advertising material, letterheads, etc. for determination that the licensed name
and mark are being correctly demonstrated, which decision of the LICENSOR with
respect thereto shall be final.
7. This Agreement supersedes all prior representations, whether oral or
written, and constitutes the entire understanding of the parties with respect to
the subject matter hereof. This Agreement may not be modified orally, but only
in writing and signed by the partly to be charged.
8. The license herein provided shall be granted upon execution by
LICENSOR in Kansas City, Missouri and the rights of the parties determined by,
and this license construed according to the Laws of the State of Missouri.
9. Time is hereby declared to be of the essence.
10. The LICENSEE agrees that LICENSOR is neither a partner, joint
venturer or franchisor of LICENSEE. This is not a franchise. LICENSEE
acknowledges that no fee is payable for this license and that it is not required
to follow any specific merchandising plan.
11. LICENSEE shall have the right to terminate this agreement by giving
LICENSOR ninety (90) days written notice of LICENSEE's intent to terminate. Said
written notice shall be placed in the United States Mail, Certified Mail-Return
Receipt Requested, addressed to LICENSOR in care of the Legal Department, 25th
and McGee, Kansas City, Missouri 64108. In the event this license is terminated,
LICENSEE covenants and agrees to immediately cease the use of said trademarks
and to remove, destroy, or otherwise obliterate any sign, placard, poster,
stationery, banner, advertising, merchandise bag, or lettering which utilizes
said trademarks, or any part thereof, by the date upon which the termination
becomes effective. LICENSE shall grant LICENSOR the right to enter LICENSEE's
premises to insure that the foregoing has been completed by LICENSEE, without
fee or liability for trespass, upon LICENSOR's first giving LICENSEE reasonable
advance notice. It is hereby stipulated and agreed that LICENSEE's failure to
immediately cease the use of the mark "HALLMARK" upon revocation of the license
herein granted will result in irreparable harm and injury to LICENSOR.
12. This Agreement shall automatically terminate on the occurrence of
the following: (1) termination of the owner's occupancy of the store premises;
or (2) termination of the lease of the store premises; or (3) closing of the
Hallmark account.
WHEREFORE, we the undersigned, have each hereunto set our hand and seal
the day and year first above written.
HALLMARK CARDS, INCORPORATED
By /s/ Charles J. Egan
-------------------------------------
ATTEST: Vice-President LICENSOR
/s/ Judith Whitaker
- ------------------------------------
Assistant Secretary
Stone's Shop, Inc.
/s/ David J. Stone
----------------------------------------
David J. Stone, President LICENSEE
WITNESS:
- -------------------------------------
<PAGE>
-3-
STATE OF MISSOURI )
) SS.:
COUNTY OF JACKSON )
Now on this 28 day of April, 1982, before me personally appeared
CHARLES J. EGAN, JR., Vice-President of Hallmark Cards, Incorporated, who, being
duly sworn stated on his oath that he signed the foregoing document upon
authority conferred upon him by the Board of Directors of said Corporation.
/s/ Kimberly S. Carleton
------------------------
Notary Public
My Commission expires: November 18, 1985
--------------------
INDIVIDUAL ACKNOWLEDGMENT
(For Sole Proprietorship or Partnership)
STATE OF )
) SS.:
COUNTY OF )
Now on this _____ day of ___________________________________, 19___,
before me personally appeared
____________________________________________________________, known to me, who
being duly sworn stated on (his/her/their) oath that (he/she/they) (has/have)
fully read the foregoing document and signed the same as (his/her/their) free
act and deed.
-----------------------------------
Notary Public
My Commission expires: ________________
CORPORATE ACKNOWLEDGMENT
STATE OF IL )
) SS.:
COUNTY OF WINNEBAGO)
Now on this 6th day of April, 1982, before me personally appeared David
J. Stone, to me personally known, who being by me duly sworn, did say that he is
the President of Stone's Shop, Inc., a corporation, and that the seal affixed to
the foregoing instrument is the corporate seal of said corporation and that said
instrument was signed and sealed in behalf of said corporation by authority of
its Board of Directors, and said David J. Stone acknowledged said instrument to
be the free act and deed of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my notarial
seal at my office in Rockford, Illinois, the day and year last above written.
/s/ Pamela S. F.
---------------------------
Notary Public
My Commission expires: December 5, 1983
-----------------
[ HALLMARK CARDS
LOGO]
HALLMARK CARDS INCORPORATED
KANSAS CITY, MISSOURI 64141
July 18, 1984
Don C. Freberg
Manager/Sales Information Center
Mr. David J. Stone, President
Stone's Shop, Incorporated
2508 South Alpine
Rockford, Illinois 61108
Re: Trademark Assignment and License Agreement
Dear Mr. Stone:
This will confirm the agreement between you and Hallmark Cards,
Incorporated regarding your desire to use the HALLMARK trademark in conjunction
with the operation of your social expression shop, located at 2601 North Mulford
Road, Brynwood Center, Rockford, Illinois 61111 (the "Shop"). Specifically,
Hallmark does hereby grant to you 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 -- Stone's Hallmark Shop -- and, in addition, to use the HALLMARK
trademark in other appropriate ways for the promotion and sale of HALLMARK
products at the Shop. This grant is subject to all of the following terms and
conditions.
1. That you hereby acknowledge that Hallmark is the sole and exclusive
owner of trademarks and tradenames including the name HALLMARK alone and in
combination with a 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;
2. That you, for yourself, your heirs, administrators, successors and
assigns, do hereby absolutely grant, bargain, convey and assign unto Hallmark
any and all legal and equitable right, title and interest, both tangible and
intangible, which you have or may hereafter acquire in the trademark HALLMARK,
including but not limited to any goodwill hereinafter generated or created by
you or anyone acting or claiming under you.
<PAGE>
3. That you hereby acknowledge that 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 you operate at any other location and further
that said license herein granted shall be terminable by Hallmark, at any time,
by the giving to you of 30 days written notice.
4. That you hereby acknowledge that the license herein granted may not
be transferred or assigned and that all rights granted herein shall revert to
Hallmark upon revocation of this agreement by Hallmark.
5. That, in connection with your operation of the Shop, you hereby
agree to:
(a) use your best efforts to promote and maintain the
goodwill of the HALLMARK trademark and image;
(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 the 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 your primary product line,
provided, however, that you are not otherwise restricted from the
inventory and sale of competing product lines.
6. That you hereby agree to 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 you hereby agree to be bound by said
rules. Attached to this letter are the present GUIDELINES FOR THE USE OF THE
TRADEMARK "HALLMARK".
7. That you hereby agree to, from time to time, submit to Hallmark,
samples of advertising material, letterheads, etc. for determination that your
use of the HALLMARK trademark is, in Hallmark's judgment, correct.
-2-
<PAGE>
8. That you hereby acknowledge that this agreement supersedes all prior
oral or written representations and constitutes the entire understanding between
you and Hallmark with respect to the use of the HALLMARK trademark in connection
with your operation of the shop and that this agreement may be modified only in
writing.
9. That you hereby acknowledge that this agreement shall be subject to
and construed in accordance with the laws of the state of Missouri and shall
become effective upon receipt by Hallmark in Kansas City, Missouri of this
letter agreement signed by you.
10. That you hereby acknowledge that Hallmark is not your partner,
joint venturer or franchisor and that the relationship between you and Hallmark
is not a franchise relationship and that no fee is required to follow any
specific merchandising plan.
11. That you shall have the right to terminate this agreement by giving
Hallmark 30 days written notice of your 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 580, Kansas City, Missouri 64141.
12. That this agreement shall automatically terminate on the occurrence
of the following: (1) termination of your right to occupy the premises with
respect to which the license herein has been granted or (2) the closing of your
account with Hallmark.
13. That, in the event this license is terminated, for any reason by
either party, you hereby agree 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. You further
agree to permit Hallmark the right to enter your premises to ensure that the
foregoing has been completed upon Hallmark's first giving you reasonable advance
notice. You further acknowledge and agree that your failure to immediately cease
the use of the HALLMARK trademark upon revocation of the license herein granted
will result in irreparable harm and injury to Hallmark.
-3-
<PAGE>
Please acknowledge that the foregoing represents our agreement by
signing and returning the enclosed copy of this letter.
Very truly yours,
HALLMARK CARDS, INCORPORATED
By /s/ Don C. Freberg
------------------------------
Don C. Freberg
Agreed to this 24th day of July, 1984.
STONE'S SHOP, INCORPORATED
By /s/ David J. Stone
-------------------------------
David Stone
-4-
[HALLMARK CARDS
LOGO]
HALLMARK CARDS INCORPORATED
KANSAS CITY, MISSOURI 64141
August 13, 1984
Don C. Freberg
Manager/Sales Information Center
Mr. David J. Stone, President
Stone's Shop, Incorporated
2508 South Alpine
Rockford, Illinois 61108
Re: Trademark Assignment and License Agreement
Dear Mr. Stone:
This will confirm the agreement between you and Hallmark Cards,
Incorporated regarding your desire to use the HALLMARK trademark in conjunction
with the operation of your social expression shop, located at 400 Lincoln
Highway, Rochelle, Illinois 61068 (the "Shop"). Specifically, Hallmark does
hereby grant to you 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 --
Stone's Hallmark Shop -- and, in addition, to use the HALLMARK trademark in
other appropriate ways for the promotion and sale of HALLMARK products at the
Shop. This grant is subject to all of the following terms and conditions.
1. That you hereby acknowledge that Hallmark is the sole and exclusive
owner of trademarks and tradenames including the name HALLMARK alone and in
combination with a 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;
2. That you, for yourself, your heirs, administrators, successors and
assigns, do hereby absolutely grant, bargain, convey and assign unto Hallmark
any and all legal and equitable right, title and interest, both tangible and
intangible, which you have or may hereafter acquire in the trademark HALLMARK,
including but not limited to any goodwill hereinafter generated or created by
you or anyone acting or claiming under you.
3. That you hereby acknowledge that 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
<PAGE>
you operate at any other location and further that said license herein granted
shall be terminable by Hallmark, at any time, by the giving to you of 30 days
written notice.
4. That you hereby acknowledge that the license herein granted may not
be transferred or assigned and that all rights granted herein shall revert to
Hallmark upon revocation of this agreement by Hallmark.
5. That, in connection with your operation of the Shop, you hereby
agree to:
(a) use your best efforts to promote and maintain the
goodwill of the HALLMARK trademark and image;
(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 the 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 your primary product line,
provided, however, that you are not otherwise restricted from the
inventory and sale of competing product lines.
6. That you hereby agree to 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 you hereby agree to be bound by said
rules. Attached to this letter are the present GUIDELINES FOR THE USE OF THE
TRADEMARK "HALLMARK".
7. That you hereby agree to, from time to time, submit to Hallmark,
samples of advertising material, letterheads, etc. for determination that your
use of the HALLMARK trademark is, in Hallmark's judgment, correct.
-2-
<PAGE>
8. That you hereby acknowledge that this agreement supersedes all prior
oral or written representations and constitutes the entire understanding between
you and Hallmark with respect to the use of the HALLMARK trademark in connection
with your operation of the shop and that this agreement may be modified only in
writing.
9. That you hereby acknowledge that this agreement shall be subject to
and construed in accordance with the laws of the state of Missouri and shall
become effective upon receipt by Hallmark in Kansas City, Missouri of this
letter agreement signed by you.
10. That you hereby acknowledge that Hallmark is not your partner,
joint venturer or franchisor and that the relationship between you and Hallmark
is not a franchise relationship and that no fee is required to follow any
specific merchandising plan.
11. That you shall have the right to terminate this agreement by giving
Hallmark 30 days written notice of your 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 580, Kansas City, Missouri 64141.
12. That this agreement shall automatically terminate on the occurrence
of the following: (1) termination of your right to occupy the premises with
respect to which the license herein has been granted or (2) the closing of your
account with Hallmark.
13. That, in the event this license is terminated, for any reason by
either party, you hereby agree 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. You further
agree to permit Hallmark the right to enter your premises to ensure that the
foregoing has been completed upon Hallmark's first giving you reasonable advance
notice. You further acknowledge and agree that your failure to immediately cease
the use of the HALLMARK trademark upon revocation of the license herein granted
will result in irreparable harm and injury to Hallmark.
-3-
<PAGE>
Please acknowledge that the foregoing represents our agreement by
signing and returning the enclosed copy of this letter.
Very truly yours,
HALLMARK CARDS, INCORPORATED
By /s/ Don C. Freberg
---------------------------------
Don C. Freberg
Agreed to this 16th day of August , 1984.
STONE'S SHOP, INCORPORATED
By /s/ David J. Stone
---------------------------------
David Stone
-4-
TRADEMARK LICENSE AGREEMENT
---------------------------
This Agreement is made this 14th day of May, 1985, (date to be
completed by K.C.) by and between Hallmark Cards, Incorporated (hereinafter
referred to as "Hallmark") and Stone's Stores Inc. (hereinafter referred to as
"Licensee").
WHEREAS, Hallmark is the sole and exclusive owner of trademarks and
tradenames including the work 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 State & Mulford
Road, Rockford, IL 61111 (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 -- Stone'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 trademark HALLMARK,
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
trademark HALLMARK.
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
-2-
<PAGE>
and that no fee is payable for this license and that Licensee is not required to
follow any specific merchandising plan.
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 580, Kansas City, Missouri 64141.
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
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 and injury to Hallmark.
-3-
<PAGE>
WHEREFORE, the parties hereto have executed this agreement in
duplicate.
HALLMARK CARDS, INCORPORATED
By /s/
-----------------------------
Sole Proprietorship Partnership Corporation
- ------------------- ----------- -----------
Stone's Shops, Inc.
- ------------------- ----------- -----------------------------
(Name of Corporation)
By /s/ David J. Stone
--------------------------
This Agreement is not effective until approved and executed by Hallmark
Cards, Incorporated in Kansas City, Missouri.
-4-
TRADEMARK SUBLICENSE AGREEMENT
This Agreement is made between Hallmark Marketing Corporation (hereinafter
referred to as "Hallmark Marketing") and Stone's Shops, Inc. (hereinafter
referred to as "Sublicensee").
WHEREAS, Hallmark Cards, Incorporated 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, Hallmark Cards, Incorporated has granted a license to Hallmark
Marketing Corporation to use and sublicense use of the HALLMARK trademark in
conjunction with retail social expressions shops; and
WHEREAS, Sublicensee desire to use the HALLMARK trademark in conjunction with
the operation of a social expression shop located at 1500 S. West St., Freeport
Plaza S/C, Freeport, IL 61032 (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 Marketing hereby grants to Sublicensee a royalty free
sublicense to use the trademark and tradename HALLMARK as part of
the Shop's tradename in the following manner and no other --
Stone'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. Sublicensee, for itself, its heirs, administrators, successors and
assignors, does hereby absolutely grant, bargain, convey and
assign unto Hallmark Cards, Incorporated 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 Sublicense 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
sublicense herein granted shall be terminable by Hallmark
Marketing Corporation at any time, by the giving to Sublicensee of
30 days written notice.
1
<PAGE>
4. The Sublicense herein granted may not be transferred or assigned
and all rights granted herein shall revert to Hallmark Marketing
Corporation upon termination of this agreement.
5. In connection with Sublicensee's operation of the shop,
Sublicensee will:
(a) use its best efforts to promote and maintain the goodwill of
the HALLMARK trademark and image;
(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 Sublicensee is not otherwise
restricted from the inventory and sale of competing products
lines;
6. Sublicensee shall display Hallmark's trademarks in conformity with
the rules for such use as Hallmark Marketing or Hallmark Cards,
Incorporated 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 Marketing or Hallmark Cards, Incorporated shall be
considered a part of this agreement and Sublicensee 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. Sublicensee will, from time to time, submit to Hallmark Marketing
Corporation, samples of advertising material, letterheads, etc.
for determination that its use of the HALLMARK trademark is in the
judgment of Hallmark Marketing and Hallmark Cards, Incorporated
correct.
2
<PAGE>
8. This agreement supersedes all prior oral or written
representations and constitutes the entire understanding between
Sublicensee and Hallmark Marketing with respect to the use of the
HALLMARK trademark in connection with Sublicensee'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 Marketing in Kansas City, Missouri.
10. Sublicensee acknowledges that neither Hallmark Marketing nor
Hallmark Cards, Incorporated is its partner, joint venturer or
franchisor and that the relationship between Sublicensee and
Hallmark Marketing is not a franchise relationship and that no fee
is payable for this sublicense and the Sublicensee is not required
to follow any specific merchandising plan.
11. Sublicensee shall have the right to terminate this agreement by
giving Hallmark Marketing 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 Marketing Corporation, 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 Sublicensee's right to occupy
the premises with respect to which the sublicense herein has been
granted or (2) the closing of the Sublicensee's account with
Hallmark Marketing.
13. In the event this sublicense is terminated, for any reason by
either party, Sublicensee hereby agrees to immediately cease using
the HALLMARK trademark and all other trademarks owned by Hallmark
Cards, Incorporated 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. Sublicensee further agrees to
permit Hallmark Marketing the right to enter premises to ensure
that the foregoing has been completed upon Hallmark Marketing's
first giving Sublicensee reasonable advance notice. Sublicensee
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 Cards Incorporated and Hallmark Marketing.
14. Sublicensee agrees that, prior to displaying any sign containing
the "Hallmark" trademark on the interior or exterior of the shop,
it shall obtain approval of same
3
<PAGE>
by submitting an appropriate application in writing to Hallmark
Marketing Corporation.
IN WITNESS WHEREOF, the parties hereto have executed this agreement in
duplicate.
HALLMARK MARKETING CORPORATION
By /s/ Gloria Hember 9/1/92
--------------------------------------------
To be signed at Hallmark Marketing Corporate
Headquarters/Date
<TABLE>
<CAPTION>
SOLE PROPRIETORSHIP PARTNERSHIP CORPORATION
<S> <C> <C> <C>
Stone's Shops, Inc.
- ------------------------- -------------------------- ------------------------------
SIGNATURE/DATE SIGNATURE/DATE (NAME OF CORPORATION)
By /s/ David J. Stone
-------------------------- --------------------------- --------------
SIGNATURE/DATE SIGNATURE/TITLE DATE
-------------------------- By --------------------------- ---------------
SIGNATURE/DATE SIGNATURE/TITLE DATE
</TABLE>
This Agreement is not effective until approved and executed by Hallmark
Marketing Corporation in Kansas City, Missouri.
4
<PAGE>
GUIDELINES FOR THE USE OF THE "HALLMARK" TRADEMARK
EXHIBIT A
1. In order to use the "Hallmark" trademark, Sublicensee agrees to feature
and devote its primary efforts to promoting products manufactured by
Hallmark Cards, Inc., or its subsidiaries or affiliated companies
(Hallmark) and to use its best efforts to promote and maintain the good
will of the Hallmark trademark and image, maintaining a sufficient
inventory and display of the range of Hallmark products as to enable
the public to purchase the same and not to mislead or deceive the
public as to the availability of Hallmark products in said store.
2. When a retail store name includes "Hallmark", a modifying personal name
identifying ownership must procede "Hallmark", and the word "Hallmark"
should be followed by the word "Shop" or a similar word. When the word
"Shop" is not used, a registered trademark symbol (R) should be applied
to the Hallmark logo as illustrated.
Note: When "Hallmark" is used as a part of the store name, such as
"Vicki's Hallmark Shop", a Trademark Sublicense Agreement must
be approved by Hallmark Marketing Corporation.
3. The store utilizing the "Hallmark" trademark as a part of the name
should be clean, neatly arranged and cared for, and kept in good
repair. Poor housekeeping, empty store racks or dirty or disheveled
displays may be cause for termination of the Trademark Sublicense.
4. The "Hallmark" trademark should never be used in a form other than that
presented by the Sublicensee. The owner or proprietor of the sublicense
should take careful steps to avoid the appearance that his business is
owned or operated by Hallmark Cards, Incorporated or Hallmark Marketing
Corporation. Neither Hallmark Cards nor Hallmark Marketing Corporation
is a partner, joint venturer or franchisor of the dealership. The only
relationship which exists other than that of Seller and Buyer is of
Trademark Sublicensor/Sublicensee.
5. Products which are incompatible with the image of Hallmark Cards,
Incorporated, may not be carried in the store. Hallmark Cards has
established and justifiably enjoys the reputation as a quality company
of high moral standing. Incompatible products would be those items
which a significant portion of the community would find distasteful,
repulsive, or in poor taste.
6. In order to protect the integrity of the trademark, you should not use
the trademark in advertising any more prominently than the other words
appearing in the store name.
7. While you are sublicensed to use the trademark, you should not use the
term "authorized Hallmark dealer" or any similar term.
<PAGE>
8. All store signs must meet the general and technical requirements
governing the use of the Hallmark trademark and a "Store Signage
Agreement" must be completed and approved.
TRADEMARK SUBLICENSE AGREEMENT
This Agreement is made between Hallmark Marketing Corporation (hereinafter
referred to as "Hallmark Marketing") and Stone's Shops, Inc. (hereinafter
referred to as "Sublicensee").
WHEREAS, Hallmark Cards, Incorporated 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, Hallmark Cards, Incorporated has granted a license to Hallmark
Marketing Corporation to use and sublicense use of the HALLMARK trademark in
conjunction with retail social expressions shops; and
WHEREAS, Sublicensee desire to use the HALLMARK trademark in conjunction with
the operation of a social expression shop located at Riverside & Milford,
Rockford, IL 61114 (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 Marketing hereby grants to Sublicensee a royalty free
sublicense to use the trademark and tradename HALLMARK as part
of the Shop's tradename in the following manner and no other
-- Stone'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. Sublicensee, for itself, its heirs, administrators, successors
and assignors, does hereby absolutely grant, bargain, convey
and assign unto Hallmark Cards, Incorporated 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 Sublicense 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 sublicense herein granted shall be terminable by
Hallmark Marketing Corporation at any time, by the giving to
Sublicensee of 30 days written notice.
1
<PAGE>
4. The Sublicense herein granted may not be transferred or
assigned and all rights granted herein shall revert to
Hallmark Marketing Corporation upon termination of this
agreement.
5. In connection with Sublicensee's operation of the shop,
Sublicensee will:
(a) use its best efforts to promote and maintain the
goodwill of the HALLMARK trademark and image;
(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 Sublicensee is not otherwise
restricted from the inventory and sale of competing
product lines;
6. Sublicensee shall display Hallmark's trademarks in conformity
with the rules for such use as Hallmark Marketing or Hallmark
Cards, Incorporated 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 Marketing or Hallmark Cards,
Incorporated shall be considered a part of this agreement and
Sublicensee 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. Sublicensee will, from time to time, submit to Hallmark
Marketing Corporation, samples of advertising material,
letterheads, etc. for determination that its use of the
HALLMARK trademark is in the judgment of Hallmark Marketing
and Hallmark Cards, Incorporated correct.
2
<PAGE>
8. This agreement supersedes all prior oral or written
representations and constitutes the entire understanding
between Sublicensee and Hallmark Marketing with respect to the
use of the HALLMARK trademark in connection with Sublicensee'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 Marketing in Kansas City,
Missouri.
10. Sublicensee acknowledges that neither Hallmark Marketing nor
Hallmark Cards Incorporated is its partner, joint venturer or
franchisor and that the relationship between Sublicensee and
Hallmark Marketing is not a franchise relationship and that no
fee is payable for this sublicense and the Sublicensee is not
required to follow any specific merchandising plan.
11. Sublicensee shall have the right to terminate this agreement
by giving Hallmark Marketing 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 Marketing Corporation, in care of Market
Development - 212, P.O. Box 419580, Kansas City, Missouri
64141-6580.
12. This agreement shall automatically terminate on the occurrence
of the following: (1) termination of Sublicensee's right to
occupy the premises with respect to which the sublicense
herein has been granted or (2) the closing of the
Sublicensee's account with Hallmark Marketing.
13. In the event this sublicense is terminated, for any reason by
either party, Sublicensee hereby agrees to immediately cease
using the HALLMARK trademark and all other trademarks owned by
Hallmark Cards, Incorporated 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. Sublicensee
further agrees to permit Hallmark Marketing the right to enter
premises to ensure that the foregoing has been completed upon
Hallmark Marketing's first giving Sublicensee reasonable
advance notice. Sublicensee 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 Cards
Incorporated and Hallmark Marketing.
14. Sublicensee agrees that, prior to displaying any sign
containing the "Hallmark" trademark on the interior or
exterior of the shop, it shall obtain approval of same
3
<PAGE>
by submitting an appropriate application in writing to
Hallmark Marketing Corporation.
IN WITNESS WHEREOF, the parties hereto have executed this agreement in
duplicate.
HALLMARK MARKETING CORPORATION
By /s/ Barbara Bolander
----------------------------------------
To be signed at Hallmark Marketing
Corporate Headquarters/Date
<TABLE>
<CAPTION>
SOLE PROPRIETORSHIP PARTNERSHIP CORPORATION
<S> <C> <C> <C>
Stone's Shops, Inc.
- ------------------------- -------------------------- ---------------------------
SIGNATURE/DATE SIGNATURE/DATE (NAME OF CORPORATION)
-------------------------- By /s/ David J. Stone ----------------
------------------------
SIGNATURE/DATE SIGNATURE/TITLE DATE
-------------------------- By ------------------------ ----------------
SIGNATURE/DATE SIGNATURE/TITLE DATE
</TABLE>
This Agreement is not effective until approved and executed by Hallmark
Marketing Corporation in Kansas City, Missouri.
4
<PAGE>
GUIDELINES FOR THE USE OF THE "HALLMARK" TRADEMARK
EXHIBIT A
1. In order to use the "Hallmark" trademark, Sublicensee agrees to feature
and devote its primary efforts to promoting products manufactured by
Hallmark Cards, Inc., or its subsidiaries or affiliated companies
(Hallmark) and to use its best efforts to promote and maintain the good
will of the Hallmark trademark and image, maintaining a sufficient
inventory and display of the range of Hallmark products as to enable
the public to purchase the same and not to mislead or deceive the
public as to the availability of Hallmark products in said store.
2. When a retail store name includes "Hallmark", a modifying personal name
identifying ownership must procede "Hallmark", and the word "Hallmark"
should be followed by the word "Shop" or a similar word. When the word
"Shop" is not used, a registered trademark symbol (R) should be applied
to the Hallmark logo as illustrated.
Note: When "Hallmark" is used as a part of the store name, such as
"Vicki's Hallmark Shop", a Trademark Sublicense Agreement must
be approved by Hallmark Marketing Corporation.
3. The store utilizing the "Hallmark" trademark as a part of the name
should be clean, neatly arranged and cared for, and kept in good
repair. Poor housekeeping, empty store racks or dirty or disheveled
displays may be cause for termination of the Trademark Sublicense.
4. The "Hallmark" trademark should never be used in a form other than that
presented by the Sublicensee. The owner or proprietor of the sublicense
should take careful steps to avoid the appearance that his business is
owned or operated by Hallmark Cards, Incorporated or Hallmark Marketing
Corporation. Neither Hallmark Cards nor Hallmark Marketing Corporation
is a partner, joint venturer or franchisor of the dealership. The only
relationship which exists other than that of Seller and Buyer is of
Trademark Sublicensor/Sublicensee.
5. Products which are incompatible with the image of Hallmark Cards,
Incorporated, may not be carried in the store. Hallmark Cards has
established and justifiably enjoys the reputation as a quality company
of high moral standing. Incompatible products would be those items
which a significant portion of the community would find distasteful,
repulsive, or in poor taste.
6. In order to protect the integrity of the trademark, you should not use
the trademark in advertising any more prominently than the other words
appearing in the store name.
7. While you are sublicensed to use the trademark, you should not use the
term "authorized Hallmark dealer" or any similar term.
<PAGE>
8. All store signs must meet the general and technical requirements
governing the use of the Hallmark trademark and a "Store Signage
Agreement" must be completed and approved.
CONSULTING AGREEMENT
This Consulting Agreement between Collectibles USA, Inc., a Delaware
corporation ("Company"), and Wasatch Capital Corporation ("Consultant"), is
hereby entered into this 31st day of May, 1998 to be effective as of the
consummation of the initial public offering of the Company's common stock.
NOW, THEREFORE, in consideration of the mutual promises, terms, covenants
and conditions set forth herein and the performance of each, it is hereby agreed
as follows:
1. Duties.
(a) The Company hereby engages Consultant (A) as a merger and acquisition
consultant to assist the Company in implementing its strategy to acquire
additional retailers of collectibles and marketers of animation art, including
to the extent requested by the Company, (i) assisting the Company in designing
the Company's acquisition program and identifying and evaluating potential
acquisition candidates, their operations, historical performance and future
prospects, (ii) advising the Company in discussions and negotiations with
acquisition candidates and (iii) advising the Company with respect to obtaining
debt and/or equity financing and (B) as a consultant to advise the Company with
respect to its management matters.
(b) Consultant hereby accepts this engagement upon the terms and conditions
herein contained and agrees to devote a reasonable amount of time, attention and
efforts to promote and further the business and services of the Company.
(c) Consultant agrees to keep the Company informed of its activities
hereunder. Specifically, after identifying a potential acquisition candidate and
gathering appropriate information with respect thereto, Consultant will provide
all such information to the Chief Executive Officer of the Company, or its
designee, and discuss the desirability of proceeding with such potential
candidate with the Chief Executive Officer of the Company and any such
discussion with the potential acquisition candidate shall take place with the
Chief Executive Officer or his designee. No discussion with respect to a
possible purchase price of such potential acquisition candidate shall take place
without the prior approval of the Chief Executive Officer of the Company and
shall take place in the presence of, or with the prior approval of, the Chief
Executive Officer or his designee. Any such acquisition shall, of course, be
subject to prior approval of the Board of Directors.
<PAGE>
2. Compensation.
(a) For all services rendered by Consultant to the Company, the Company
shall compensate the Consultant based upon each acquisition candidate with which
an acquisition is consummated in accordance with Exhibit A attached hereto. No
such compensation shall be paid until such time as an acquisition is
consummated.
(b) The Company shall reimburse Consultant for all ordinary and necessary
business expenses lawfully and reasonably incurred by Consultant in the
performance of its services. All reimbursable expenses shall be appropriately
documented in reasonable detail by Consultant upon submission of any request for
reimbursement.
3. Term; Termination; Rights of Termination. The term of this Agreement
shall begin on the date of this Agreement and continue for a period of three (3)
years subject to automatic one-year extensions unless either party notifies the
other at least 90 days before the end of the initial three-year term or one-year
extension term of the desire to not renew the agreement.
4. Taxes. It is mutually understood and agreed that in the performance of
its services under this Agreement, Consultant is at all times performing its
services as an independent contractor, and acknowledges that it is responsible
for payment of its federal income tax, employment taxes and social security
taxes. Further, Consultant will comply with all taxing authorities, regulations
and laws, whether federal or state.
5. Nondisclosure and Nonuse of Confidential Information. Except as required
by the nature of Consultant's duties or with the prior written approval of an
authorized officer of the Company, Consultant will never, during the term of
this Agreement or thereafter, use or disclose any confidential information of
the Company, any of its customers or any potential acquisition candidate,
including without limitation customer lists, market research, strategic plans or
other information or discoveries, inventions, improvements, know-how, methods or
other trade secrets, whether developed by Consultant or others. Consultant will
comply with the Company's policies and procedures for the protection of
confidential information.
6. Use and Return of Documents. Consultant will not disclose any documents,
record, tapes and other media that contain confidential information and will not
copy any such material or remove it from the Company's offices except as
approved by an authorized officer of the Company. Upon termination of this
Agreement, Consultant will return to the Company all copies of documents,
records, tapes, and other media that contain confidential information.
7. Remedies. Consultant acknowledges that in the event of a violation by
him of this Agreement the harm to the Company could be irreparable. Consultant
agrees that, in addition
<PAGE>
to any other remedies provided by law, the Company will be entitled to obtain
injunctive relief against any such violation without having to post a bond.
8. Complete Agreement. There are no oral representations, understandings,
or agreements with the Company or any of its officers, directors or
representatives covering the same subject matter as this Agreement. This written
Agreement is the final, complete and exclusive statement and expression of the
agreement between the Company and Consultant and of all the terms of this
Agreement, and it cannot be varied, contradicted or supplemented by evidence of
any prior or contemporaneous oral or written agreements. This written Agreement
may not be later modified except by a further writing signed by the Company and
Consultant, and no term of this Agreement may be waived except by writing signed
by the party waiving the benefit of such terms.
9. No Waiver. No waiver by the parties hereto of any default or breach of
any term, condition or covenant of this Agreement shall be deemed to be a waiver
of any subsequent default or breach of the same or any other term, condition or
covenant contained herein.
10. Assignment; Binding Effect. Consultant understands that it may not
assign its rights or obligations hereunder without the prior written consent of
the Company. Subject to the preceding sentence, this Agreement shall be binding
upon and inure to the benefit of the parties thereto and their respective heirs,
successors and assigns. It is further understood and agreed that the Company may
be merged or consolidated with another entity and that any such entity shall
automatically succeed to the rights, powers and duties of the Company hereunder.
11. Notices. Whenever any notice is required hereunder, it shall be given
in writing addressed as follows:
To the Company: One Battery Park Plaza
New York, NY 10004
Attention: Chief Executive Officer
To Consultant: 3322 Albans
Houston, TX 77005
Attention: Michael Baker
Notice shall be deemed given and effective seven (7) days after the deposit in
the U.S. mail of a writing addressed as above and sent first class mail,
certified, return receipt requested, or when actually received. Either party may
change the address for notice by notifying the other party of such change in
accordance with this paragraph 11.
12. Severability; Headings. If any portion of this Agreement is held
invalid or inoperative, the other portions of this Agreement shall be deemed
valid and operative and, so far as is reasonable and possible, effect shall be
given to the intent manifested by the portion held invalid or inoperative. The
paragraph headings herein are for reference purposes only and are not intended
<PAGE>
in the way to describe, interpret, define or limit the extent or intent of this
Agreement or of any part hereof.
13. Governing Law; Place of Performance. This Agreement shall in all
respects be construed according to the laws of the State of New York.
[Signature Page to Follow]
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first written above.
COLLECTIBLES USA, INC.
By: /s/ Ronald Rafaloff
----------------------------
Name: Ronald Rafaloff
Title: Chairman
WASATCH CAPITAL CORPORATION
By: /s/ Michael A. Baker
----------------------------
Name: Michael A. Baker
Title: Chairman of the Board
<PAGE>
EXHIBIT A
Consultant shall be entitled to receive 3.2% of Pre-Tax Net Income for the
acquisition candidate. Pre-Tax Net Income will be calculated based upon the
acquisition candidate's most recently completed fiscal year, and shall be
computed in accordance with (i) generally accepted accounting principals in the
United States and (ii) the rules of Regulation SX, Title 17 of the Code of
Federal Regulations (Part 210), as such may be amended.
-6-
RGR FINANCIAL GROUP, LLC
ONE BATTERY PARK PLAZA
24TH FLOOR
NEW YORK, NEW YORK 10004
May 31, 1998
Collectibles USA, Inc.
One Battery Park Plaza
24th Floor
New York, New York 10004
Dear Sir or Madam:
Reference is hereby made to (A) Collectibles USA, Inc.'s ("CUSA") offering
to accredited investors of $1,000,000 of shares of preferred stock designated as
the Series A Convertible Preferred Stock (the "Preferred Stock") of CUSA which
are convertible into shares of common stock of CUSA (the "Common Stock") and (B)
CUSA's offering (the "Note Offering") to accredited investors of $1,550,000
aggregate principal amount of 12% convertible notes due February 28, 1999 (the
"Notes") which Notes are convertible into shares of Common Stock.
In the event of the consummation of the initial public offering of the
Common Stock, the undersigned hereby agrees to transfer 11,986 and 79,063 shares
of Common Stock (assuming an $8.50 initial public offering price of the Common
Stock) to certain holders of, respectively, the Preferred Stock and the Notes.
In the event that the initial public offering price of the Common Stock shall be
greater than or less than $8.50, the undersigned agrees that the aforementioned
11,986 and 79,063 shares shall be appropriately adjusted.
Please indicate your acceptance of the terms hereof by signing in the
appropriate space below.
Very truly yours,
RGR FINANCIAL GROUP, LLC
By /s/ Ronald Rafaloff
--------------------------
Name: Ronald Rafaloff
Title: Chairman
Accepted and agreed to as of the date hereof:
COLLECTIBLES USA, INC.
By /s/ Neil J. DePascal Jr.
--------------------------
EXHIBIT 21
LIST OF SUBSIDIARIES (INCLUDING STATE OF INCORPORATION AND TRADE NAMES) OF THE
COMPANY
The following is a list of the existing subsidiaries of the Company.
<TABLE>
<CAPTION>
NAME SUBSIDIARY TRADE NAME STATE OF INCORPORATION
<S> <C> <C>
Base Acquisition Corp. NONE Delaware
Crystal Palace Acquisition Corp. NONE Delaware
DKG Acquisition Corp. NONE Delaware
Elwell Acquisition Corp. NONE Delaware
St. George Acquisition Corp. NONE Delaware
Stone Acquisition Corp. NONE Delaware
ARA Acquisition Corp. NONE Delaware
Animation U.S.A. Acquisition Corp. NONE Delaware
Filmart Acquisition Corp. NONE Delaware
</TABLE>
The following is a list of the subsidiaries of the Company as existing upon
consummation of the Acquisitions
<TABLE>
<CAPTION>
NAME SUBSIDIARY TRADE NAME STATE OF INCORPORATION
<S> <C> <C>
American Royal Arts Corp. NONE Delaware
Animation U.S.A., Inc. NONE Washington
DKG Enterprises, Inc. North Pole City Oklahoma
North Pole City Gifts & Collectibles
Elwell Stores, Inc. The Reef Hallmark Shop Florida
Filmart Productions, Inc. Cartoon World New York
Filmart Galleries
Animation Art Resources
St. George, Inc. Little Elegance New Jersey
Stone's Shops, Inc. NONE Illinois
</TABLE>
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.
ARTHUR ANDERSEN LLP
Houston, Texas
June 5, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JAN-31-1998
<EXCHANGE-RATE> 1
<CASH> 70,866
<SECURITIES> 0
<RECEIVABLES> 63,106
<ALLOWANCES> 0
<INVENTORY> 624,778
<CURRENT-ASSETS> 951,948
<PP&E> 164,425
<DEPRECIATION> (64,465)
<TOTAL-ASSETS> 1,125,092
<CURRENT-LIABILITIES> 1,230,360
<BONDS> 0
0
0
<COMMON> 1,584
<OTHER-SE> (106,852)
<TOTAL-LIABILITY-AND-EQUITY> 1,125,092
<SALES> 4,133,318
<TOTAL-REVENUES> 4,133,318
<CGS> 1,516,516
<TOTAL-COSTS> 1,957,708
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 645,037
<INCOME-TAX> 0
<INCOME-CONTINUING> 645,037
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 645,037
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 99.2
UNITY MARKETING
206 E.Church Street, Stevens, PA 17578
Tel 717-336-1600
Fax 717-336-1601
Collectibles USA, Inc. September 30, 1997
One Battery Park Plaza, 24th Floor
New York, NY 10004
Dear Gentlemen:
Unity Marketing consents to being named in the registration statement on form
S-1, and all amendments thereto, prepared by Collectibles USA, Inc., and to the
citing of research material for market data therein.
Unity Marketing
By: /s/ Pamela N. Danziger
----------------------
Name: Pamela N. Danziger
Title: President/CEO, Unity Marketing
