AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 29, 1998
REGISTRATION NO. 333-29181
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 4
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>
<CAPTION>
<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
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION, DATED JULY 29, 1998
PROSPECTUS
2,700,000 SHARES
[GRAPHIC OMITTED]
COMMON STOCK
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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."
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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.
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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) Interior of Little Elegance
2) Interior of North Pole City
3) Interior of American Royal Arts
4) Map of USA, indicating location of stores and corporate headquarters
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 June 30, 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
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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>
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(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 and 100,000 shares are Restricted Vote Common Stock held by
management, (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. 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 $4.00 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
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<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) .......... 9,117 2,082
Goodwill amortization(4) ................................. 517 129
---------- ----------
Operating income ......................................... 2,151 377
Interest and other income (expense), net(5) .............. 147 42
---------- ----------
Income before taxes ...................................... 2,298 419
Income taxes ............................................. 1,126 219
---------- ----------
Net income ............................................... $ 1,172 $ 200
========== ==========
Net income per share ..................................... $ 0.22 $ 0.04
========== ==========
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)
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<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ................................ $ 707 $ 6,113
Working capital (deficit) ................................ (8,824) (9) 12,622
Total assets ............................................. 38,810 38,639
Long-term obligations, net of current maturities ......... 321 --
Stockholders' equity ..................................... 17,612 33,802
</TABLE>
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(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) 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.
(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
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<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 Company has
received several of these consents, and is in the process of seeking the
others. There can be no assurance that any of those consents will be obtained.
The failure to obtain any such consents could have a material adverse effect on
the Company's financial condition and results of operations. See "Business --
Licenses."
NEED FOR ADDITIONAL CAPITAL
The Company expects that it will use significant amounts of capital for
acquisitions of other collectibles retailers and animation art marketers, for
operating purposes (including the acquisition and implementation of a
management information system) and to facilitate internal growth. The Company
intends to use shares of Common
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 received a commitment letter for a senior revolving credit
facility of up to $25.0 million with a commercial bank to be used for
acquisitions, working capital and other general corporate purposes. The credit
facility is subject to various conditions, including receipt of net proceeds
from the Offering of at least $14.5 million. There can be no assurance that the
Company will be able to obtain this credit facility or other financing it may
need on terms the Company deems acceptable, if at all. As a result, the Company
might be unable to implement its acquisition strategy 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 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.
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<PAGE>
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 53.6% of the pro forma total
assets and 61.2% 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."
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
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<PAGE>
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.
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
14
<PAGE>
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 36.1% 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 June 30, 1998 to be repaid is held by certain
stockholders and affiliates of the Founding Companies. The Company intends to
use a portion of the net proceeds of this Offering to pay approximately $1.0
million in connection with the conversion of the Series A Convertible Preferred
Stock upon consummation of the Offering and approximately $1.3 million of 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-4 will be converted to 44,750 shares of Restricted Vote
Common Stock and 25,000 shares of Common Stock. No proceeds from the Offering
will be used to redeem the CEFC Note-4. 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 upon consummation of the Offering. Concurrent with the
Offering, the CUSA Notes will be converted to shares of Restricted Vote 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
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<PAGE>
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 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
16
<PAGE>
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 June 30, 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. Offering expenses are estimated to be $ , of which
$ have already been paid. The Company intends to use a portion of the net
proceeds of the Offering to pay (i) approximately $1.0 million in 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 in 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 June 30, 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 $2.2 million and the use of proceeds for such
debt was to provide working capital. Approximately $2.5 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
9.2% for the period ending June 30, 1998 and matures at varying dates between
July 1998 and May 2003. The remaining indebtedness bore interest at a weighted
average per annum interest rate of 6.5% at June 30, 1998 and matures at various
dates from April 1999 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, including the proposed senior
revolving credit facility, 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 $3.1 million, or $0.93 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 $3.11 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 .................................... $(0.93)
Increase per share attributable to sale of Common Stock
in the Offering ........................................ 3.11
------
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% $ (3,087,499) (15.5)% $(0.93)
New investors .................... 2,700,000 45.0 22,950,000 115.5 8.50
--------- ----- ------------ -----
Total ........................... 6,006,094 100.0% $ 19,862,501 100.0%
========= ===== ============ =====
</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 related party(1) ............................................. $ 586 $ 6,220 $ --
====== ======== =======
Long-term obligations 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 ......................... -- 1,667 --
Common Stock: $.01 par value, 31,200,000 shares authorized;
2,952,536(2) shares issued and outstanding, pro forma combined;
and 6,006,094(2)(3) shares issued and outstanding, as adjusted ........ 2 29 60
Treasury Stock, at cost ................................................. (145) -- --
Additional paid-in capital .............................................. -- 16,994 33,742
Retained earnings ....................................................... 47 (1,078) --
------ -------- -------
Total stockholders' equity .............................................. (96) 17,612 33,802
------ -------- -------
Total capitalization .................................................. $ (96) $ 17,933 $33,802
====== ======== =======
</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 held by
sponsors of the transaction and 100,000 shares of Restricted Vote Common
Stock held by management (pro forma combined); 1,320,258 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 585,000 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) .................... 9,117 2,082
Goodwill amortization(4) ........................................... 517 129
---------- ----------
Operating income ................................................... 2,151 377
Interest and other income (expense), net(5) ........................ 147 42
---------- ----------
Income before taxes ................................................ 2,298 419
Income taxes ....................................................... 1,126 219
---------- ----------
Net income ......................................................... $ 1,172 $ 200
========== ==========
Net income per share ............................................... $ 0.22 $ 0.04
========== ==========
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) $ (8,824)(9) $12,622
Total assets .......................... 1,147 38,810 38,639
Long-term obligations
net of current maturities
and long-term notes
payable to stockholders .............. -- 321 --
Stockholders' equity (deficit) ........ (96) 17,612 33,802
</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 53.6% of the pro forma total assets of the Company will be
goodwill (approximately $20.7 million) and will be amortized over a 40-year
period resulting in an annual amortization expense of approximately $517,000.
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% 2,384 47.9%
------ ----- ------ -----
Gross profit .......... $2,706 53.5% $2,588 52.1%
====== ===== ====== =====
</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 $86,000, or 1.7%, 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
47.9% 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 14.7%,
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 has received a commitment letter from NationsBank providing
for a senior revolving credit facility of up to $25.0 million. It is expected
that such credit facility, if obtained, will be guaranteed by the Founding
Companies and will be secured by a pledge of the stock of each of the Founding
Companies and a security interest in the Company's accounts receivable and
inventory. Indebtedness under the credit facility will bear interest at a rate
27
<PAGE>
equal to either LIBOR plus 1.50% to 2.25%, or the higher of NationsBank's prime
rate plus 0.25% to 0.75% or the Federal Funds rate plus 0.50%. The credit
facility is expected to have a term of three years and include a $5.0 million
sublimit for the issuance of letters of credit. The proceeds of the credit
facility will be used for acquisitions, working capital, capital expenditures,
refinancing of existing indebtedness and other corporate purposes. The credit
facility is subject to various conditions, including the successful completion
of the Offering with net proceeds to the Company of at least $14.5 million and
the negotiation and execution of definitive documentation with respect to the
credit facility. It is expected that such facility, if obtained, will require
the Company to comply with various loan covenants including: (i) maintenance of
certain financial ratios; (ii) restrictions on additional indebtedness; (iii)
restrictions on liens, guarantees, advances and dividends; and (iv) certain
limitations on the opening of new stores within the next 12 months.
The Company intends to pursue selected acquisition opportunities. The
timing, size or success of any acquisition efforts is unpredictable.
Accordingly, the Company is unable to accurately estimate its expected capital
commitments. Funding for future acquisitions will likely come from a
combination of the net proceeds of the Offering, cash flow from operations,
borrowings under the anticipated senior revolving credit facility and the
issuance of additional equity. The Company plans to register 2,500,000 shares
of its Common Stock under the Securities Act after the completion of the
Offering for use by the Company as consideration for future acquisitions. The
contemplated offering of such 2,500,000 additional shares will be made only by
means of a prospectus.
COLLECTIBLES USA, INC.
Collectibles USA, Inc. was founded on January 18, 1996 ("Inception") to
form a national specialty retailer of collectibles merchandise and marketer of
animation art. The Company has entered into definitive agreements to complete
the Acquisitions and the Offering and, subsequent to the Offering, intends to
acquire, through merger or purchase, companies similar to the Founding
Companies in order to expand its national operations. The Company has not
conducted any operations, and all activities to date have related to the
Offering and Acquisitions. The Company has adopted a 52/53 week fiscal year
ending on the last Sunday in January.
RESULTS OF OPERATIONS -- COLLECTIBLES USA, INC.
The following table sets forth certain selected financial data for
Collectibles USA, Inc. on a historical basis for the periods indicated (dollars
in thousands):
<TABLE>
<CAPTION>
INCEPTION THIRTEEN WEEKS ENDED
(JANUARY 18, 1996) FIFTY-TWO ----------------------
THROUGH WEEKS ENDED APRIL 27, APRIL 26,
JANUARY 26, 1997 JANUARY 25, 1998 1997 1998
-------------------- ----------------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales ................................... $ -- $ -- $ -- $ --
Cost of sales ............................... -- -- -- --
--------- --------- ------ -------
Gross profit ................................ -- -- -- --
Selling, general and administrative expenses 1,403 1,010 78 120
--------- --------- ------ -------
Loss from operations ........................ (1,403) (1,010) (78) (120)
--------- --------- ------ -------
Interest expense, net ....................... 12 57 10 501
--------- --------- ------ -------
Net loss .................................... $ (1,415) $ (1,067) $ (88) $ (621)
========= ========= ====== =======
</TABLE>
UNAUDITED INTERIM RESULTS
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $120,000 in the thirteen weeks ended April 26,
1998 as compared to $78,000 in the thirteen weeks ended April 27, 1997. The
increase of $42,000 was primarily due to the payment of officers' salaries for
the entire thirteen weeks ended April 26, 1998 compared to payment of an
officer's salary for a portion of the thirteen weeks ended April 27, 1997.
Interest Expenses. Interest expenses were $501,000 in the thirteen weeks
ended April 26, 1998 as compared to $10,000 in the thirteen weeks ended April
27, 1997. The increase was the result of the issuance of additional notes,
which were outstanding for the entire thirteen weeks ended April 26, 1998 and
the amortization of the debt financing charges on the CEFC Note-4 and the CUSA
Notes which amounted to $452,000 during the thirteen weeks.
28
<PAGE>
FIFTY-TWO WEEKS ENDED JANUARY 25, 1998 COMPARED TO INCEPTION (JANUARY 18, 1996)
THROUGH JANUARY 26, 1997
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $1.0 million in the fifty-two weeks ended January
25, 1998 and $1.4 million in the period from Inception through January 26,
1997. Selling, general and administrative expenses for the period from
Inception through January 26, 1997 include a non-recurring, non-cash
compensation charge of $1.3 million for shares of Common Stock issued to
certain officers of the Company. Selling, general and administrative expenses
for the fifty-two weeks ended January 25, 1998 include non-recurring, non-cash
compensation charges of $673,000 for shares of Common Stock transferred from
the sponsors to certain officers of the Company and for the issuance of stock
options to certain officers of the Company. Management salaries are included in
selling, general and administrative expenses for the fifty-two weeks ended
January 25, 1998.
Interest Expenses. Interest expenses were $57,000 in the fifty-two weeks
ended January 25, 1998 and $12,000 in the period from Inception through January
26, 1997. The increase was the result of the issuance of additional notes,
which were outstanding for the fifty-two weeks ended January 25, 1998.
LIQUIDITY AND CAPITAL RESOURCES -- COLLECTIBLES USA, INC.
The initial capitalization of the Company occurred in June 1996 with the
issuance of 1,016,602 shares of Common Stock (at $.10 per share prior to the
stock split) to RGR Financial Group LLC ("RGR"), to an individual who is to
become a director upon consummation of the Offering and to another entity. In
November 1996, the Company issued 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 and an individual
who is to become a director upon consummation of the Offering and another
entity exchanged 1,016,602 shares of Common Stock for an equal number of shares
of Restricted Vote Common Stock. The holders of the Restricted Vote Common
Stock are entitled to one-tenth of one vote for each share held on all matters
on which they are entitled to vote. The Restricted Vote Common Stock will
automatically convert into Common Stock on a share-for-share basis upon certain
defined circumstances. In November 1997, RGR transferred to management 70,000
shares of Common Stock 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 and, as of April
1998, received from a former management member 25,000 shares of Common Stock.
In May 1997, the Company 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 consummation of
the Offering, each share of Series A Convertible Preferred Stock will
automatically convert into shares of Common Stock based upon defined criteria.
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, of which 11,986 shares will be transferred from RGR.
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.
In August 1996, the Company issued the 5% CEFC Notes-1 and 2 in the
amounts of $300,000 and $555,000, respectively, due December 31, 1998, to
Collectibles Enterprise Funding Corp., a Delaware corporation ("CEFC"), which
is owned by RGR. In June 1997, the Company issued the 5% CEFC Note-3 in the
amount of $400,000, due December 31, 1998, to CEFC. Proceeds from the notes
were used to pay certain expenses of the Offering. Upon consummation of the
Offering, the principal amounts of CEFC Notes-1, 2 and 3 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. The Company intends to
repay $1.3 million of principal from a portion of the proceeds of the Offering.
The notes are convertible into shares of Common Stock at specified percentages
of the initial public offering price. RGR has agreed to transfer 171,956 shares
of Common Stock to the former noteholders upon consummation of the Offering.
29
<PAGE>
In December 1997, the Company issued the 5% CEFC Note-4 in the amount of
$279,000, due December 31, 1998, to CEFC. Proceeds from the note were used to
pay certain expenses of the Offering. Upon consummation of the Offering, the
note is convertible into shares of Common Stock and Restricted Vote Common Stock
at the lower of $4.00 per share or 50% of the initial public offering price. RGR
has agreed to transfer 69,750 shares of Common Stock to the former noteholders.
Subsequent to the fifty-two weeks ended January 25, 1998, the Company
entered into the following transactions: In February and May 1998, the Company
issued the 12% CUSA Notes in the amount of $1.3 million and $300,000,
respectively, due February 28, 1999. Proceeds from the notes were used to pay
certain expenses of the Offering. Upon consummation of the Offering, the notes
are convertible into shares of Common Stock at a price of 50% of the initial
public offering price. 364,705 shares of Common Stock will be issued to the
former noteholders by the Company, of which 79,063 shares of Common Stock will
be transfered to the former noteholders by RGR.
In August 1997, the Company entered into an Agreement and Release with a
former director and executive officer, whose employment was terminated in June
1997. The agreement provides, among other things, that such officer will (i)
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 and (ii) surrender
95,000 shares of the 174,580 shares of Common Stock previously owned by him.
In July 1998, the Company received a commitment letter from NationsBank
providing for a senior revolving credit facility of up to $25.0 million.
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>
YEAR ENDED JANUARY
FISCAL YEAR ENDED OCTOBER 31, 31,
------------------------------------------- ---------------------
1995 1996 1997
--------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales .............. $4,051 100.0% $4,121 100.0% $ 4,289 100.0%
Cost of sales .......... 1,560 38.5 1,571 38.1 1,506 35.1
------ ----- ------ ----- ------- -----
Gross profit ........... 2,491 61.5 2,550 61.9 2,783 64.9
Selling, general and
administrative
expenses .............. 1,760 43.4 1,764 42.8 1,778 41.5
------ ----- ------ ----- ------- -----
Income from
operations ............ 731 18.1 786 19.1 $ 1,005 23.4
Interest income
(expense), net ........ 18 0.4 24 0.6 24 0.6
------ ----- ------ ----- ------- -----
Net income ............. $ 749 18.5% $ 810 19.7% $ 1,029 24.0%
====== ===== ====== ===== ======= =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, THREE MONTHS ENDED APRIL 30,
---------------------------------------------------------------
1998 1997 1998
--------------------- --------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales .............. $4,133 100.0% $1,100 100.0% $806 100.0%
Cost of sales .......... 1,516 36.7 346 31.5 292 36.2
------ ----- ------ ----- ---- -----
Gross profit ........... 2,617 63.3 754 68.5 514 63.8
Selling, general and
administrative
expenses .............. 1,958 47.4 483 43.9 400 49.6
------ ----- ------ ----- ---- -----
Income from
operations ............ 659 15.9 271 24.6 114 14.2
Interest income
(expense), net ........ (14) ( 0.3) 6 0.5 1 0.1
------ ----- ------ ----- ---- -----
Net income ............. $ 645 15.6% $ 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.
30
<PAGE>
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.
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 $106,000 and $1.6 million, 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.
31
<PAGE>
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.
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>
SIX MONTHS ENDED MAY 31,
------------------------------------------------
1997 1998
------------------------ -----------------------
<S> <C> <C> <C> <C>
Net sales ......................... $3,202 100.0% $ 3,222 100.0%
Cost of sales ..................... 1,659 51.8 1,656 51.4
------ ----- ------- -----
Gross profit ...................... 1,543 48.2 1,566 48.6
Selling, general and
administrative expenses .......... 944 29.5 932 28.9
------ ----- ------- -----
Income from operations ............ 599 18.7 634 19.7
Interest income (expense), net (1) 0.0 0.0 0.0
-------- ----- -------- -----
Income before income
taxes ............................ 598 18.7 634 19.7
Provision for income taxes ........ 227 7.1 238 7.4
------- ----- -------- -----
Net income ........................ $ 371 11.6% $ 396 12.3%
======= ===== ======== =====
</TABLE>
UNAUDITED INTERIM RESULTS
Net Sales. Net sales were $3.2 million for the six months ended May 31,
1998 as compared to $3.2 million for the six months ended May 31, 1997.
Cost of Sales. Costs of sales were $1.7 million, or 51.4% of net sales, in
the six months ended May 31, 1998 as compared to $1.7 million, or 51.8% of net
sales, in the six months ended May 31, 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $932,000, or 28.9% of net sales, in the six months
ended May 31, 1998 as compared to $944,000, or 29.5% of net sales, in the six
months ended May 31, 1997, a decrease of $12,000, primarily due to a decrease
in advertising 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.
32
<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 $2.4 million and $1.9 million at
May 31, 1998 and November 30, 1997, respectively. The primary source of this
working capital was cash flows from operations.
Cash used in operating activities was $222,000 for the six months ended
May 31, 1998 primarily for the payment of 1997 and 1998 income taxes. Cash
provided by operating activities was $356,000 for the fiscal year ended
November 30, 1997 and was primarily from net income before depreciation and
amortization. The working capital increases were mainly related to the cash
from growth in sales.
Cash used for investing activities was $4,000 and $17,000 for the six
months ended May 31, 1998 and 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>
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.
33
<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 $72,000 and $143,000 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%
====== ===== ====== ===== ====== =====
</TABLE>
<PAGE>
<TABLE>
<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>
34
<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.
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.
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.
36
<PAGE>
No cash was used for investing activities for the three months ended March
31, 1998 and in the fiscal year ended December 31, 1997.
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.
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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.
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.
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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
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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.
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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 Solutions, 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
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administration, 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
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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
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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 Company has
received several of these consents, and is in the process of seeking the
others. There can be no assurance that any of those consents will be obtained.
The animation art sold by the Company is produced by the Company under
certain licenses or rights with a majority of the art being obtained from the
studios or artists that create the art, including Disney and Warner
Brothers/Hanna-Barbera. The art is either bought from the artist or studio or
is sold by the Company on a consignment basis.
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The Company generates its design ideas by closely collaborating with the
studio that licenses the character to be included in the artwork. It generally
takes an average of six weeks to create a new piece of original animation art.
During this period, the Company's artists, or artists working as independent
contractors, generate a prototype design which is thereafter submitted to the
artist or animation studio for its approval.
Marketing. A significant portion of the Company's animation art marketing
efforts is conducted through database direct mail, telemarketing and Internet
marketing programs, which utilize databases aggregating approximately 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.
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<PAGE>
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."
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 $350,000 through June 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
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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 has received several of these consents, and is in the process of
seeking the others. There can be no assurance that any of those consents will
be obtained. The Company believes it maintains excellent relations with the
companies with which it has authorized dealer agreements.
FACILITIES
The Company maintains 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.
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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) ........... 50 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 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 services to American Medical Response, Inc.
("AMR"), a Boston based company engaged in the provision of a
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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 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."
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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 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
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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>
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 -- 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
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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.
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.
52
<PAGE>
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 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.
53
<PAGE>
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
375,000 shares of Common Stock under the Plan at an exercise price equal to the
initial public offering price.
1997 NON-EMPLOYEE DIRECTORS' STOCK PLAN
The Company's 1997 Non-Employee Directors' Stock Plan (the "Directors'
Plan"), which was adopted by the Board of Directors and approved by the
Company's stockholders as of May 1997, provides for an automatic grant to each
non-employee director of an initial option to purchase 40,000 shares of Common
Stock upon commencement of the Offering or such person's subsequent initial
election to the Board of Directors. In addition, the Directors' Plan provides
for an automatic annual grant, after each annual meeting of stockholders
following the Offering, to each non-employee director of an option to purchase
5,000 shares of Common Stock; provided, however, that a non-employee director
will not be granted an annual option if he or she was granted an initial option
during the preceding three months.
The number of shares to be subject to initial or annual option grants
after the first annual meeting of stockholders following the Offering may be
changed by the Board of Directors. A total of 250,000 shares of Common Stock
are reserved for issuance under the Directors' Plan. The number of shares
reserved, as well as the number to be subject to automatically granted options,
will be adjusted in the event of stock splits, stock dividends and other
extraordinary corporate events.
Options granted under the Directors' Plan will have an exercise price per
share equal to the fair market value of a share at the date of grant. Options
will expire at the earlier of ten years after the date of grant or one year
after termination of service as a director. Options will become exercisable one
year after the date of grant, subject to acceleration by the Board of
Directors, and will be forfeited upon termination of service as a director for
reasons other than death or disability unless the director served for at least
11 months after the date of grant or the option was otherwise exercisable at
the date of termination. In addition, the Directors' Plan permits non-employee
directors to elect to receive, in lieu of cash directors' fees, shares or
credits representing "deferred shares" to be settled at future
54
<PAGE>
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.
Concurrently with the consummation of the Offering, the Company will grant
options to purchase 120,000 shares of Common Stock under the Directors' Plan at
an exercise price equal to the initial public offering price.
55
<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. Upon consummation of the Offering, the
principal amount will be converted into shares of Restricted Vote Common Stock
and Common Stock.
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 Restricted Vote 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
56
<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 in
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 (i)
RGR shall transfer a total of 91,049 shares of Common Stock to the Company for
cancellation, and, concurrently therewith, (ii) the Company shall issue 79,063
shares of Restricted Vote Common Stock and 11,986 shares of Common Stock,
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. In addition, upon consummation of the Offering, Ronald P.
Rafaloff will receive options to purchase 150,000 shares of Common Stock at the
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 June 30, 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 as of June 30, 1998 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 $ 663 50,397
North Pole City ............. 1,730 1,210 385,845
Reef Hallmark ............... 850 899 186,346
Stone's Hallmark ............ 1,148 20 373,766
Animation Art Galleries
- -----------------------
American Royal Arts ......... 2,592 625 540,000
Animation USA ............... 350 103 75,000
Filmart ..................... 700 -- 150,000
------ ------ -------
TOTAL ..................... $7,770 $3,520 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
57
<PAGE>
Companies, their stockholders and of the Company, the performance by each of
the parties of their respective covenants, the nonexistence of a material
adverse change in the results of operations and the absence of material
litigation.
The agreements, 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 June 30, 1998, the aggregate
amount of indebtedness of these Founding Companies that was personally
guaranteed was approximately $2.5 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 $1,210 David K. Green
Little Elegance 300 Jean Holt
Keith N. Holt
Carmella Pugliese
Robert St. George
Reef Hallmark 879 Roy C. Elwell
Kim A. Elwell
Animation USA 103 David M. Vice
Laine Ross
------
Total $2,492
======
</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 JUNE 30, 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
58
<PAGE>
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 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, whose employment terminated in June 1997. The agreement
provides that Mr. Yankey (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 Mr. Yankey from any and all
claims (other than acts constituting material fraud, theft or a felony)
relating to Mr. Yankey's employment. To permit Mr. Yankey 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.
59
<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(7) 73.9% 613,847(2)(8) 10.1%
One Battery Park Plaza, 24th Floor
New York, NY 10004-1405
Shonnie D. Bilin 100,000(3)(8) 7.8% 100,000(3)(8) 1.6%
744 Clover Hill Court
Elk Grove Village, IL 60007
Neil J. DePascal, Jr. 90,000(4)(8) 7.0% 90,000(4)(8) 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(8) 2.0% 167,647(5)(8) 2.8%
3322 Albans
Houston, TX 77005
Paul T. Shirley -- -- 56,861(6)(8) 0.9%
875 Lakeshore Boulevard
Incline Village, NV 89451
RGR Financial Group LLC 946,602(7) 73.9% 613,847(2)(8) 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.
(7) Represents 921,602 shares of Restricted Vote Common Stock.
(8) Represents shares of Restricted Vote Common Stock.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's authorized capital stock consists of 31,200,000 shares of
Common Stock, par value $.01 per share, of which 1,200,000 shares are
designated as Restricted 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, 1,071,602 shares of Restricted
Vote Common Stock are outstanding and held of record by four 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 1,320,258
shares will be Restricted Vote Common Stock. The following summary of the terms
and provisions of the Company's capital stock 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
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<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.
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<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
increase its 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.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The market price of the Common Stock could be adversely affected by the
sale of substantial amounts of Common Stock in the public market. Upon
consummation of the Offering, 6,006,094 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
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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."
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<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
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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.
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<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.
68
<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 Forma 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-13
Balance Sheets ........................................................................ F-14
Statements of Operations .............................................................. F-15
Statements of Stockholders' (Deficit) Equity .......................................... F-16
Statements of Cash Flows .............................................................. F-17
Notes to Financial Statements ......................................................... F-18
Founding Companies
American Royal Arts Corp.
Report of Independent Public Accountants .............................................. F-24
Balance Sheets ........................................................................ F-25
Statements of Operations .............................................................. F-26
Statements of Stockholder's Equity (Deficit) .......................................... F-27
Statements of Cash Flows .............................................................. F-28
Notes to Financial Statements ......................................................... F-29
Stone's Shops, Inc.
Report of Independent Public Accountants .............................................. F-33
Balance Sheets ........................................................................ F-34
Statements of Operations .............................................................. F-35
Statements of Shareholders' Equity .................................................... F-36
Statements of Cash Flows .............................................................. F-37
Notes to Financial Statements ......................................................... F-38
DKG Enterprises, Inc.
Report of Independent Public Accountants .............................................. F-43
Balance Sheets ........................................................................ F-44
Statements of Operations .............................................................. F-45
Statements of Shareholders' Equity .................................................... F-46
Statements of Cash Flows .............................................................. F-47
Notes to Financial Statements ......................................................... F-48
Elwell Stores, Inc.
Report of Independent Public Accountants .............................................. F-52
Balance Sheets ........................................................................ F-53
Statements of Operations .............................................................. F-54
Statements of Shareholders' (Deficit) ................................................. F-55
Statements of Cash Flows .............................................................. F-56
Notes to Financial Statements ......................................................... F-57
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Animation U.S.A., Inc.
Report of Independent Public Accountants ......... F-61
Balance Sheets ................................... F-62
Statements of Operations ......................... F-63
Statements of Shareholders' Equity ............... F-64
Statements of Cash Flows ......................... F-65
Notes to Financial Statements .................... F-66
Filmart Productions, Inc.
Report of Independent Public Accountants ......... F-70
Balance Sheets ................................... F-71
Statements of Operations ......................... F-72
Statements of Shareholders' Equity ............... F-73
Statements of Cash Flows ......................... F-74
Notes to Financial Statements .................... F-75
</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 USA has
not and cannot quantify these savings until completion of the acquisitions of
the Founding Companies. It is anticipated that these savings will be offset by
additional costs and expenditures for corporate management and administration,
corporate expenses related to being a public company, systems integration and
facilities expansion. However because these costs cannot be accurately
quantified at this time, they have not been included in the pro forma financial
information of Collectibles USA.
The unaudited pro forma combined balance sheet gives effect to the Acquisitions
and the Offering as if they had occurred on April 30, 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>
COLLECTIBLES AMERICAN STONE'S NORTH
USA ROYAL ARTS 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 ................................. 5,188,768 67,434 81,288 3,225
Goodwill, net ..................................... -- -- -- --
------------- ---------- ---------- ----------
Total assets ..................................... $ 5,226,001 $1,147,113 $4,015,688 $2,672,412
============= ========== ========== ==========
LIABILITIES AND
STOCKHOLDERS' (DEFICIT) EQUITY
Accounts payable and accrued liabilities .......... $ 2,050,251 $ 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 .......................... 3,270,875 586,000 6,000 --
Current maturities of long-term obligations ....... -- -- 14,400 --
------------- ---------- ---------- ----------
Total current liabilities ........................ 5,321,126 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 ................................ 5,321,126 1,243,432 1,958,204 1,810,401
Stockholders' (deficit) equity:
Preferred stock .................................. 1,666,667 -- -- --
Common stock ..................................... 11,912 1,584 1,000 500
Treasury stock ................................... -- (145,000) -- --
Additional paid-in capital ....................... 1,774,252 -- 39,000 --
Retained (deficit) earnings ...................... (3,547,956) 47,097 2,017,484 861,511
------------- ---------- ---------- ----------
Total stockholders' (deficit) equity ............. (95,125) (96,319) 2,057,484 862,011
------------- ---------- ---------- ----------
Total liabilities and stockholders' equity ....... $ 5,226,001 $1,147,113 $4,015,688 $2,672,412
============= ========== ========== ==========
<CAPTION>
LITTLE REEF ANIMATION
ELEGANCE HALLMARK USA FILMART TOTAL
------------ -------------- ------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
ASSETS
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 5,650,472
Goodwill, net ..................................... -- -- -- -- --
---------- ---------- ----------- ---------- -----------
Total assets ..................................... $1,610,146 $1,354,090 $ 479,190 $1,582,962 $18,087,602
========== ========== =========== ========== ===========
LIABILITIES AND
STOCKHOLDERS' (DEFICIT) EQUITY
Accounts payable and accrued liabilities .......... $ 295,024 $ 687,344 $ 264,211 $ 186,211 $ 5,669,480
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 -- -- -- 4,300,913
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 12,612,571
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 13,450,110
Stockholders' (deficit) equity:
Preferred stock .................................. -- -- -- -- 1,666,667
Common stock ..................................... 27,000 500 192,700 -- 235,196
Treasury stock ................................... -- -- -- -- (145,000)
Additional paid-in capital ....................... -- 99,275 -- -- 1,912,527
Retained (deficit) earnings ...................... 544,084 (190,069) (157,287) 1,393,238 968,102
---------- ---------- ----------- ---------- -----------
Total stockholders' (deficit) equity ............. 571,084 (90,294) 35,413 1,393,238 4,637,492
---------- ---------- ----------- ---------- -----------
Total liabilities and stockholders' equity ....... $1,610,146 $1,354,090 $ 479,190 $1,582,962 $18,087,602
========== ========== =========== ========== ===========
<CAPTION>
PRO FORMA
PRO FORMA PRO FORMA POST ACQUISITIONS AS
ADJUSTMENTS COMBINED ADJUSTMENTS ADJUSTED
--------------- --------------- ------------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents ......................... $ -- $ 707,310 $ 5,405,953 $ 6,113,263
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 5,704,049 (5,576,730) 127,319
Goodwill, net ..................................... 20,699,683 20,699,683 -- 20,699,683
------------ ------------ ------------- -----------
Total assets ..................................... $ 20,772,077 $ 38,809,679 $ (170,777) $38,638,902
============ ============ ============= ===========
LIABILITIES AND
STOCKHOLDERS' (DEFICIT) EQUITY
Accounts payable and accrued liabilities .......... $ -- $ 5,669,480 $ (2,050,251) $ 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 .......................... -- 4,300,913 (4,300,913) --
Current maturities of long-term obligations ....... (22,615) 378,230 (378,230) --
------------ ------------ ------------- -----------
Total current liabilities ........................ 7,747,385 20,359,956 (16,040,156) 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 21,197,495 (16,361,008) 4,836,487
Stockholders' (deficit) equity:
Preferred stock .................................. -- 1,666,667 (1,666,667) --
Common stock ..................................... (205,671) 29,525 30,536 60,061
Treasury stock ................................... 145,000 -- -- --
Additional paid-in capital ....................... 15,081,020 16,993,547 16,748,807 33,742,354
Retained (deficit) earnings ...................... (2,045,657) (1,077,555) 1,077,555 --
------------ ------------ ------------- -----------
Total stockholders' (deficit) equity ............. 12,974,692 17,612,184 16,190,231 33,802,415
------------ ------------ ------------- -----------
Total liabilities and stockholders' equity ....... $ 20,722,077 $ 38,809,679 $ (170,777) $38,638,902
============ ============ ============= ===========
</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 ....... 1,009,971 1,957,708 1,818,203 1,992,902 1,097,089
Goodwill amortization .......... -- -- -- -- --
------------ ---------- ---------- ---------- ----------
Income (loss) from
operations .................... (1,009,971) 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 .................. (1,067,445) 645,057 1,167,132 68,519 4,376
Provision for income taxes ..... -- -- 465,555 (65,039) (14,112)
------------ ---------- ---------- ---------- ----------
Net income (loss) .............. $ (1,067,445) $ 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 10,123,348 (1,006,692) 9,116,656
Goodwill amortization .......... -- -- -- -- 517,217 517,217
---------- ---------- ---------- ----------- ------------- -----------
Income (loss) from
operations .................... 316,863 (39,142) 350,005 1,662,151 489,475 2,151,626
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 1,490,099 807,962 2,298,061
Provision for income taxes ..... -- (18,143) -- 368,261 757,850 1,126,111
---------- ---------- ---------- ----------- ------------- -----------
Net income (loss) .............. $ 265,463 $ (34,902) $ 460,042 $ 1,121,838 $ 50,112 $ 1,171,950
========== ========== ========== =========== ============= ===========
Net income per share ........... $ 0.22
===========
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 twelve months ended January 31, 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 ROYAL 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 ....... 120,586 400,530 411,124 498,818 264,689
Goodwill amortization .......... -- -- -- -- --
---------- -------- ---------- ---------- ---------
Income (loss) from
operations .................... (120,586) 114,043 516,509 (208,388) (37,420)
Other (income) expense:
Interest, net ................. 500,683 (710) (1,914) 41,352 20,524
Other, net .................... -- -- -- (809) --
---------- -------- ---------- ---------- ---------
Income (loss) before
income taxes .................. (621,269) 114,753 518,423 (248,931) (57,944)
Provision for income taxes ..... -- -- 192,770 (512) --
---------- -------- ---------- ---------- ---------
Net income (loss) .............. $ (621,269) $114,753 $ 325,653 $ (248,419) $ (57,944)
========== ======== ========== ========== =========
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 ...................... $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 2,201,308 (120,036) 2,081,272
Goodwill amortization .......... -- -- -- -- 129,304 129,304
-------- -------- --------- ---------- ----------- ----------
Income (loss) from
operations .................... 45,082 65,890 11,106 386,236 (9,268) 376,968
Other (income) expense:
Interest, net ................. 15,040 2,913 1,124 579,012 (589,134) (10,122)
Other, net .................... -- -- (31,250) (32,059) -- (32,059)
-------- -------- --------- ---------- ----------- ----------
Income (loss) before
income taxes .................. 30,042 62,977 41,232 (160,717) 579,866 419,149
Provision for income taxes ..... -- 23,931 -- 216,189 3,192 219,381
-------- -------- --------- ---------- ----------- ----------
Net income (loss) .............. $ 30,042 $ 39,046 $ 41,232 $ (376,906) $ 576,674 $ 199,768
======== ======== ========= ========== =========== ==========
Net income per share ........... $ 0.04
==========
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 .................................................. -- 20,699,683 20,699,683
--------- ------------ ------------
Total assets .................................................. $ 22,394 $ 30,699,683 $ 20,722,077
========= ============ ============
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 ..................................... 15,081,020 15,081,020
Retained (deficit) earnings .................................... 45,009 (2,090,666) (2,045,657)
Treasury stock ................................................. -- 145,000 145,000
--------- ------------ ------------
Total stockholders' (deficit) equity ......................... 45,009 12,929,683 12,974,692
--------- ------------ ------------
Total liabilities and stockholders' (deficit) equity ........... $ 22,394 $ 20,699,683 $ 20,722,077
========= ============ ============
<CAPTION>
ADJUSTMENT
--------------------------------------------------
(D) (E) (F)
---------------- ---------------- ----------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents ...................................... $ 16,445,835 $ (3,269,882) $ (7,770,000)
Other assets, net .............................................. (5,576,730) -- --
------------ ------------ ------------
Total assets .................................................. $ 10,869,105 $ (3,269,882) $ (7,770,000)
============ ============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
EQUITY
Accounts payable and accrued liabilities ....................... $ (2,050,251) $ -- $ --
Pro forma cash consideration due to founding companies ......... -- -- (7,770,000)
Line of credit ................................................. -- (1,540,762) --
Payable to related parties ..................................... (3,270,875) (1,030,038) --
Current maturities of long-term obligations .................... -- (378,230) --
------------ ------------ ------------
Total current liabilities ..................................... (5,321,126) (2,949,030) (7,770,000)
Long-term obligations, net of current maturities ............... -- (320,852) --
Total liabilities ............................................. (5,321,126) (3,269,882) (7,770,000)
------------ ------------ ------------
Stockholders' (deficit) equity:
Series A preferred stock ...................................... (1,666,667) -- --
Common stock .................................................. 30,536 -- --
Additional paid-in capital .................................... 16,748,807 -- --
------------ ------------ ------------
Retained (deficit) earnings ................................... 1,077,555 -- --
Total stockholders' (deficit) equity ......................... 16,190,231 -- --
------------ ------------ ------------
Total liabilities and stockholders' (deficit) equity ........... $ 10,869,105 $ (3,269,882) $ (7,770,000)
============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
POST ACQUISITION
ADJUSTMENTS
-----------------
<S> <C>
ASSETS
Cash and cash equivalents ...................................... $ 5,405,953
Other assets, net .............................................. (5,576,730)
-------------
Total assets .................................................. $ (170,777)
=============
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
EQUITY
Accounts payable and accrued liabilities ....................... $ (2,050,251)
Pro forma cash consideration due to founding companies ......... (7,770,000)
Line of credit ................................................. (1,540,762)
Payable to related parties ..................................... (4,300,913)
Current maturities of long-term obligations .................... (378,230)
-------------
Total current liabilities ..................................... (16,040,156)
Long-term obligations, net of current maturities ............... (320,852)
Total liabilities ............................................. (16,361,008)
-------------
Stockholders' (deficit) equity:
Series A preferred stock ...................................... (1,666,667)
Common stock .................................................. 30,536
Additional paid-in capital .................................... 16,748,807
-------------
Retained (deficit) earnings ................................... 1,077,555
Total stockholders' (deficit) equity ......................... 16,190,231
-------------
Total liabilities and stockholders' (deficit) equity ........... $ (170,777)
=============
</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 $11.1 million, determined using the fair value of $7.65 per
share has been recorded attributable to the 1,445,740 shares issued to RGR
Financial Group, LLC (RGR), a consultant to Collectibles, and shares
issued to third parties upon conversion of the preferred stock, the CEFC
notes and the CUSA notes. The Company will record a non-recurring,
non-cash charge upon the consummation of the initial public offering of
$765,000 for the estimated fair value of $7.65 per share for the 100,000
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 ................... $4,638 $ (96) $ (95) $4,829
Distribution of assets and liabilities to
Founding Companies .................... (8) -- -- (8)
Tax adjustments ......................... 54 -- -- 54
------- ----- ----- -------
$4,684 $ (96) $ (95) $4,875
======= ===== ===== =======
</TABLE>
(c) Records the cash proceeds from the issuance of 2,700,000 shares of Common
Stock based on an assumed Offering price of $8.50 per share, net of
estimated offerings costs. 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 amortization of the remaining debt financing charges in
connection with the CEFC and CUSA notes conversion recorded at the date of
the Offering on the books of Collectibles USA.
(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 ..................... -- -- -- 517 -- -- 517
-------- ------ ------ ------ -------- ------ --------
Income (loss) from operation ............. -- 334 673 (517) -- -- 490
Other (income) expense:
Interest (income) expense, net ........... 1,864 -- -- -- (2,182) -- (318)
Other, net ............................... -- -- -- -- -- -- --
-------- ------ ------ ------ -------- ------ --------
Income (loss) before income taxes ......... (1,864) 334 673 (517) 2,182 -- 808
Provision for income taxes ................ -- -- -- -- -- 758 758
-------- ------ ------ ------ -------- ------ --------
Net income (loss) ......................... $ (1,864) $ 334 $ 673 $ (517) $ 2,182 $ (758) $ 50
======== ====== ====== ====== ======== ====== ========
</TABLE>
5. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
ADJUSTMENTS:
Three Months Ended April 30, 1998
(a) Reflects the amortization of the remaining debt financing charges in
connection with the CEFC and CUSA notes conversion recorded at the date of
the Offering on the books of Collectibles USA.
(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 amortization of goodwill to be recorded as a result of the
Acquisitions over a 40 year period.
(d) 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.
(e) 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) (E) ADJUSTMENTS
----------- ---------- --------- ----------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Selling, general and administrative expenses .......... $ -- $ (120) $ -- $ -- $ -- $(120)
Goodwill amortization ................................. -- -- 129 -- -- 129
-------- ------ ------ -------- ---- -----
Income (loss) from operation ......................... -- 120 (129) -- -- (9)
Other (income) expense:
Interest (income) expense, net ....................... 1,417 -- -- (2,006) -- (589)
Other, net ........................................... -- -- -- -- -- --
-------- ------ ------ -------- ---- -------
Income (loss) before income taxes ..................... (1,417) 120 (129) 2,006 -- 580
Provision for income taxes ............................ -- -- -- -- 3 3
-------- ------ ------ -------- ---- -------
Net income (loss) ..................................... $ (1,417) $ 120 $ (129) $ 2,006 $ (3) $ 577
======== ====== ====== ======== ==== =======
</TABLE>
F-11
<PAGE>
COLLECTIBLES USA, INC., AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS - (CONTINUED)
6. STOCKHOLDERS' EQUITY:
The equity structure of Collectibles USA on an historical basis before the
Acquisitions and Offering and on a combined basis after the Acquisitions and
Offering is as follows:
<TABLE>
<CAPTION>
SHARES SHARES
OUTSTANDING OUTSTANDING
AS OF SHARES ISSUED AFTER
APRIL 30, 1998 OR TRANSFERRED OFFERING
---------------- ---------------- ------------
<S> <C> <C> <C>
SERIES A CONVERTIBLE PREFERRED STOCK ................ 20,000 (20,000) 0
COMMON STOCK:
CEFC note holders (restricted stock)(a) ............. 0 241,706 241,706
CUSA note holders (restricted stock) ................ 0 364,705 364,705
Series A convertible preferred stock ................ 0 79,902 79,902
Former officers ..................................... 119,580 0 119,580
Present officers (restricted stock) ................. 100,000 0 100,000
Promoters, including RGR (restricted stock) ......... 971,602 (332,755) 638,847
Founding companies .................................. 0 1,761,354 1,761,354
Shares sold in this Offering ........................ 0 2,700,000 2,700,000
------- --------- ---------
Total Common Stock ................................. 1,191,182 4,814,912 6,006,094
========= ========= =========
</TABLE>
- ----------
(a) 25,000 shares of the CEFC note holders are not restricted stock.
F-12
<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-13
<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 ........................................ 828,856 4,692,939 5,188,768
------------ ------------ ------------
Total assets ................................................. $ 1,362,037 $ 4,808,127 $ 5,226,001
============ ============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
EQUITY
CURRENT LIABILITIES:
Accrued liabilities ............................................ $ 586,198 $ 2,747,983 $ 2,050,251
Notes payable-related party .................................... 855,000 1,534,000 3,270,875
------------ ------------ ------------
Total current liabilities .................................... 1,441,198 4,281,983 5,321,126
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. ................. -- 1,666,667 1,666,667
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 1,640,919 1,774,252
Deficit ........................................................ (1,414,798) (2,793,354) (3,547,956)
------------ ------------ ------------
Total stockholders' (deficit) equity ......................... (79,161) (526,144) (95,125)
------------ ------------ ------------
Total liabilities and stockholders' (deficit) equity ......... $ 1,362,037 $ 4,808,127 $ 5,226,001
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-14
<PAGE>
COLLECTIBLES USA, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
INCEPTION FIFTY-
(JANUARY 18, TWO
1996) WEEKS THIRTEEN WEEKS ENDED
THROUGH ENDED --------------------------------
JANUARY 26, JANUARY 25, APRIL 27, APRIL 26,
1997 1998 1997 1998
---------------- --------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES ......................... $ -- $ -- $ -- $ --
COST OF SALES ..................... -- -- -- --
------------ ------------ --------- ----------
Gross profit ................... -- -- -- --
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ......................... 1,402,984 1,009,971 78,196 120,586
------------ ------------ --------- ----------
Operating loss .................... (1,402,984) (1,009,971) (78,196) (120,586)
OTHER EXPENSE:
Interest expense ................. 11,814 57,474 10,077 500,683
------------ ------------ --------- ----------
NET LOSS .......................... $ (1,414,798) $ (1,067,445) $ (88,273) $ (621,269)
============ ============ ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-15
<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 1,666,667
Issuance of stock options .............. -- -- -- --
Purchase of treasury stock ............. -- -- -- --
Distribution of treasury stock ......... -- -- -- --
Amortization of conversion features -- -- -- --
Sponsor shares transferred to
management ............................ -- -- -- --
--------- ------- ------ ----------
BALANCE AT JANUARY 25, 1998 . 1,191,182 11,912 20,000 1,666,667
Net loss (unaudited) ................... -- -- -- --
Amortization of conversion features
(unaudited) ........................... -- -- -- --
--------- ------- ------ ----------
BALANCE AT APRIL 26, 1998
(unaudited) ............................ 1,191,182 $11,912 20,000 $1,666,667
========= ======= ====== ==========
<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 ............................... -- (1,414,798) -- (1,414,798)
---------- ------------ --------- -------------
BALANCE AT JANUARY 26, 1997.............. 1,323,725 (1,414,798) -- (79,161)
Net loss ............................... -- (1,067,445) -- (1,067,445)
Issuance of convertible preferred
stock .................................. (666,667) -- -- 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
Amortization of conversion features 311,111 (311,111) -- --
Sponsor shares transferred to
management ............................ 344,250 -- -- 344,250
---------- ------------ --------- -------------
BALANCE AT JANUARY 25, 1998 . 1,640,919 (2,793,354) -- 526,144
Net loss (unaudited) ................... -- (621,269) -- (621,269)
Amortization of conversion features
(unaudited) ........................... 133,333 (133,333) -- --
---------- ------------ --------- -------------
BALANCE AT APRIL 26, 1998
(unaudited) ............................ $1,774,252 $ (3,547,956) $ -- $ (95,125)
========== ============ ========= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-16
<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 ................................................... $ (1,414,798) $ (1,067,445) $ (88,273) $ (621,269)
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 and amortization .............................. -- 1,118 -- 487,250
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 ................................. (828,856) (3,864,083) (1,529,909) (495,829)
Accrued liabilities ..................................... 586,198 2,161,785 1,149,571 (697,732)
------------ ------------ ------------ ------------
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-17
<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-18
<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 and restricted voting common stock
(Restricted 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
Restricted Common Stock at a price equal to 50% of the initial public offering
price.
The value of the convertible $279,000 CEFC note and the $1,250,000 note
discussed above are recorded at face value, adjusted for the amortization of
the value of the conversion feature attached to the notes. The conversion
feature was calculated at the date of issuance as the difference between the
conversion price and the assumed Offering price of $8.50 per share, multiplied
by the number of shares into which the security is convertible. The amount is
being amortized as a charge to interest expense over the period from issuance
to the first conversion date.
F-19
<PAGE>
COLLECTIBLES USA, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED )
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 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 (the Promoters).
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 1,016,602 shares of Common Stock
for an equal number of shares of 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.
In November 1997, RGR transferred to management 70,000 shares of Common Stock
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. RGR received 25,000 shares of Common
Stock from a former officer of the Company.
As of April 30, 1998, after the transfers of Common Stock, 971,602 shares of
Restricted Common Stock and Common Stock were held by RGR and an individual who
is to become a director upon consummation of the Offering.
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.
F-20
<PAGE>
COLLECTIBLES USA, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED )
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 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
F-21
<PAGE>
COLLECTIBLES USA, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED )
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.
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 $250,000 and a six-month convertible note for the
principal amount of $100,000 (convertible at the Offering price) as a severance
payment.
Common Stock Options
In August and September 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. The Company recorded a non-recurring, non-cash
compensation charge of $328,500, representing the estimated fair value of the
shares, as if the Founding Companies had been combined.
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. These additional options
vest over a three year period in one-third increments annually.
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 Restricted Common Stock at a price equal to 50% of the
initial public offering price. The notes will be recorded at face value,
adjusted for the value of the conversion feature of the notes.
F-22
<PAGE>
COLLECTIBLES USA, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED )
The Company has received a commitment letter for a senior revolving credit
facility of up to $25 million, which would be available if net proceeds from
the Offering are not at least $14.5 million. The credit facility will be used
for acquisitions, working capital and other general corporate purposes. It is
expected that such facility, if obtained, will require the Company to comply
with various loan covenants including, (i) maintenance of certain financial
ratios; (ii) restrictions on additional indebtedness; (iii) restrictions on
liens, guarantees, advances and dividends; and (iv) certain limitations on the
operating of new stores within the next 12 months.
The Company has entered into an agreement with RGR pursuant to which (i) RGR
shall transfer a total of 91,049 shares of Common Stock to the Company for
cancellation, and, concurrently therewith, (ii) the Company shall issue 79,063
and 11,986 shares of Restricted Common Stock (assuming an $8.50 initial public
offering price per share), respectively, to holders of certain CUSA Notes and
Series A Convertible 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.
F-23
<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 and 1996, 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-24
<PAGE>
AMERICAN ROYAL ARTS CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31,
------------------------------ APRIL 30,
1997 1998 1998
-------------- ------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
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-25
<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-26
<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-27
<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
<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-28
<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-29
<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-30
<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-31
<PAGE>
AMERICAN ROYAL ARTS CORP.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED )
7. SIGNIFICANT SUPPLIERS:
During the year ended October 31, 1995, one supplier accounted for 10 percent
of total inventory purchases. For the year ended October 31, 1996, and for the
year ended January 31, 1997, one supplier accounted for 13 percent of total
inventory purchases. For the year ended January 31, 1998, one supplier
accounted for 14 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-32
<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-33
<PAGE>
STONE'S SHOPS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30, MAY 31,
------------------------------ ------------
1996 1997 1998
-------------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................... $ 82,610 $ 383,289 $ 144,128
Merchandise inventories ................................. 2,673,712 3,427,982 3,340,805
Prepaid expenses and other current assets ............... 86,681 36,387 37,158
----------- ---------- ----------
Total current assets .................................. 2,843,003 3,847,658 3,522,091
PROPERTY AND EQUIPMENT, net .............................. 286,837 222,621 188,701
OTHER ASSETS, net ........................................ -- 81,288 90,624
----------- ---------- ----------
Total assets .......................................... $ 3,129,840 $4,151,567 $3,801,416
=========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Customer deposits ....................................... $ 25,946 $ 36,852 $ 21,606
Accounts payable and accrued liabilities ................ 1,499,985 1,846,143 1,123,000
Current maturities of long-term obligations ............. 14,400 14,400 14,400
Payable to shareholder .................................. 30,000 6,000 --
----------- ---------- ----------
Total current liabilities ............................. 1,570,331 1,903,395 1,159,006
LONG-TERM OBLIGATIONS, net of current maturities ......... 28,800 14,400 7,200
DEFERRED INCOME TAXES .................................... 500,455 501,941 507,441
----------- ---------- ----------
Total liabilities ..................................... 2,099,586 2,419,736 1,673,647
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 2,087,769
----------- ---------- ----------
Total shareholders' equity ............................ 1,030,254 1,731,831 2,127,769
----------- ---------- ----------
Total liabilities and shareholders' equity ............ $ 3,129,840 $4,151,567 $3,801,416
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
STONE'S SHOPS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30, SIX MONTHS ENDED MAY 31,
----------------------------------------------- -----------------------------
1995 1996 1997 1997 1998
-------------- -------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES .......................... $ 4,281,040 $ 4,985,549 $5,744,826 $3,201,997 $3,222,088
COST OF SALES ...................... 2,268,690 2,496,574 2,762,629 1,659,576 1,655,695
----------- ----------- ---------- ---------- ----------
Gross profit .................... 2,012,350 2,488,975 2,982,197 1,542,421 1,566,393
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ........... 1,787,457 2,117,010 1,818,203 943,931 932,346
----------- ----------- ---------- ---------- ----------
Income from operations .......... 224,893 371,965 1,163,994 598,490 634,047
OTHER INCOME (EXPENSE):
Interest (net) ..................... (10,438) (2,891) (24) (947) 8
Other, (net) ....................... -- -- 3,162 -- --
----------- ----------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES ......... 214,455 369,074 1,167,132 597,543 634,055
PROVISION FOR INCOME TAXES ......... 128,101 193,941 465,555 226,927 238,117
----------- ----------- ---------- ---------- ----------
NET INCOME ......................... $ 86,354 $ 175,133 $ 701,577 $ 370,616 $ 395,938
=========== =========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<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) .............. -- -- -- 395,938 395,938
----- ------ ------- ---------- ----------
BALANCE AT MAY 31, 1998
(unaudited) ......................... 1,000 $1,000 $39,000 $2,087,769 $2,127,769
===== ====== ======= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
STONE'S SHOPS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NOVEMBER 30, SIX MONTHS ENDED MAY 31,
---------------------------------------- ---------------------------
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 $ 370,616 $ 395,938
Adjustments to reconcile net income to net
cash provided by operating activities-- ...............
Depreciation and amortization ......................... 55,800 63,467 81,071 38,373 38,373
Deferred income taxes ................................. 109,366 178,534 1,486 30,001 5,500
Loss on sale of assets ................................ -- 9,765 -- -- --
Changes in operating assets and liabilities-- .........
Merchandise inventories ............................... (540,902) (483,307) (754,270) (257,275) 87,177
Prepaid expenses and other current assets ............. (7,726) (43,943) 50,294 20,576 (771)
Other Assets .......................................... -- -- (81,288) (30,000) (9,336)
Customer deposits ..................................... 5,291 7,428 10,906 7,965 (15,246)
Accounts payable and accrued liabilities .............. 443,413 182,259 346,158 86,419 (723,143)
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) operating
activities ......................................... 151,596 89,336 355,934 266,675 (221,508)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .................... (113,260) (98,816) (16,855) -- (4,453)
Proceeds from sales of property and equipment .......... - 12,575 -- 1,340 --
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) investing
activities ......................................... (113,260) (86,241) (16,855) 1,340 (4,453)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term obligations and note
payable to shareholder ................................ - (25,400) (38,400) (31,190) (13,200)
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) (31,190) (13,200)
---------- ---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH ......................... 106,936 7,695 300,679 236,825 (239,161)
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 $ 319,435 $ 144,128
========== ========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for-
Interest .............................................. $ 10,438 $ 2,891 $ 3,246 $ 947 $ 3,404
Income taxes .......................................... - (1,238) 10,225 -- 535,656
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<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-38
<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 May 31, 1998, and for the six months
ended May 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 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-39
<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:
<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-40
<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-41
<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 and 1996, three suppliers accounted
for 26, 19 and 16 percent of total inventory purchases. During the year ended
November 31, 1997, three suppliers accounted for 29, 16 and 16 percent of total
inventory purchases.
F-42
<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-43
<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-44
<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-45
<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-46
<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 .............................. $ -- $ --
<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-47
<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-48
<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-49
<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-50
<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 year ended March 31, 1996, one supplier accounted for 26 percent of
total inventory purchases. During the year ended March 31, 1997, two suppliers
accounted for 20% and 12% of total inventory purchases. During 1998, two
suppliers accounted for 20% and 14% of total inventory purchases.
F-51
<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-52
<PAGE>
ELWELL STORES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------- --------------
1996 1997 1998
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
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-53
<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-54
<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-55
<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
<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-56
<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-57
<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-58
<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-59
<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:
The Company had purchases of approximately 30, 19 and 18 percent of total sales
from three major suppliers for the year ended December 31, 1995 and sales of
approximately 30, 19 and 19 percent and 35, 24 and 22 percent of total sales to
three major suppliers for the years ended December 31, 1996 and 1997.
F-60
<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-61
<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-62
<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-63
<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-64
<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-65
<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-66
<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
<PAGE>
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-67
<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-68
<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, three suppliers accounted
for 24, 11 and 10 percent of total inventory purchases and 24, 10 and 10
percent of total inventory purchases, respectively.
F-69
<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-70
<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-71
<PAGE>
FILMART PRODUCTIONS INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEAR ENDED DECEMBER 31, 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-72
<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-73
<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
<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)
---------- ----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
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-74
<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
as the value of the goods or services is a more readily determinable measure of
market value in the transaction. 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. The revenue is
recorded when the services have been provided and a prepaid asset is
recognized. The prepaid asset is reduced as expenses are incurred. During 1996
and 1997, the Company recognized
F-75
<PAGE>
FILMART PRODUCTIONS INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED )
$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.
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-76
<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 the years ended December 31, 1996 and 1997, 14 percent and 25 percent of
the Company's net sales were to one customer. During the year ended December
31, 1995, no customer accounted for more than 10 percent of total sales.
F-77
<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 ........................................ 39
Management ...................................... 48
Certain Transactions ............................ 56
Principal Stockholders .......................... 60
Description of Capital Stock .................... 61
Shares Eligible for Future Sale ................. 64
Underwriting .................................... 66
Legal Matters ................................... 68
Experts ......................................... 68
Additional Information .......................... 68
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
[GRAPHIC OMITTED]
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 with a
portion of the proceeds of the Offering. Upon consummation of the Offering, the
principal amount of the CEFC Note-4 will be converted into shares of the
Company's Restricted Vote Common Stock and Common Stock.
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 Restricted Vote
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.
In August 1997, the Company issued options to purchase an aggregate of
90,000 shares of Common Stock to certain officers of the Company, pursuant to
the Company's 1997 Long-Term Incentive Plan.
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.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<S> <C>
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 [Intentionally Omitted]
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 July 8, 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 1, 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.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------------- ---------------------------------------------------------------------------------------------------
<S> <C>
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,
together with Letter Amendment, dated July 29, 1998
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. 4 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 29th day of July, 1998.
COLLECTIBLES USA, INC.
BY: /s/ Shonnie D. Bilin
--------------------------------------
Shonnie D. Bilin
President and Chief Executive Officer
Pursuant to the requirement of the Securities Act of 1933, this Amendment
No. 4 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 July 29, 1998
----------------------- (Principal Executive Officer)
Shonnie D. Bilin
/s/ Neil J. DePascal, Jr. Chief Financial Officer July 29, 1998
----------------------- (Principal Financial and
Neil J. DePascal, Jr.
/s/ Ronald P. Rafaloff Accounting Officer) July 29, 1998
----------------------- Chairman of the Board
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 [Intentionally Omitted]
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 July 8, 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 1, 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, together with Letter Amendment, dated July 29, 1998
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.
COLLECTIBLES USA, INC.
August 8, 1997
Mr. David L. Yankey
13500 Country Way Road
Los Altos Hills, California 94022
Dear David:
This letter (the "Agreement and Release") confirms the termination of your
employment with Collectibles USA, Inc. (the "Company") effective June 11, 1997.
Our understanding and agreement with respect to the termination of your
employment is as follows:
1. You hereby confirm your termination of employment and all directorships
with the Company effective June 11, 1997, provided that the Company confirms
that you were paid your salary through June 30, 1997. You further confirm that,
except as provided in paragraph 11 hereof, the Employment Agreement between you
and the Company, dated as of May, 1997, shall not become effective, and all
provisions thereof shall be null and void ab initio provided, however, that you
shall be entitled to retain all salary, bonuses, compensation and other payments
made to you by the Company.
2. Subject to paragraph 20 hereof, upon your execution and delivery of this
Agreement and Release, you shall be entitled to receive a payment of $350,000,
in consideration for cancellation of the Employment Agreement and as full and
final resolution of all actual and potential claims for back pay, severance or
other form of compensation, or otherwise relating to the termination of your
employment, compensation and benefits with the Company. Such payment shall be
made to you within three days of the consummation of the Company's initial
public offering (the "IPO") of its Common Stock, par value $.01 per share (the
"Common Stock").
3. Of the 174,580 shares of Common Stock purchased by you on November 15,
1996, you shall be entitled to retain 104,580 shares and you shall forfeit the
remaining shares of Common Stock. On the effective date of this Agreement and
Release, you shall surrender any rights in the stock certificate for the 174,580
shares of Common Stock, whereupon the Company will deliver to you a new stock
certificate (the "New Stock Certificates") for 104,580 shares (the "Shares") of
Common Stock. You acknowledge and agree that any ownership interest that you may
have in any other shares of Common Stock of the Company, or any right to be
awarded or acquire such shares of Common Stock, shall be forfeited. Provided
that all of the other persons holding 100,000 shares or more of Common Stock are
required to do so, you agree to enter into a lock-up arrangement with the
Underwriters of the IPO whereby you will agree not to, directly or indirectly,
<PAGE>
David L. Yankey
August 8, 1997
Page 2
sell or otherwise transfer or dispose of any shares of Common Stock that you
retain hereunder for a period of 180 days after the date of the Prospectus (the
"Lock-up Period") relating to the IPO without the prior written consent of such
Underwriters. You shall deliver the New Stock Certificates to be held by Morgan,
Lewis & Bockius LLP, the Company's counsel, or another suitable escrow agent
acceptable to you and the Company, until the expiration of the Lock-Up Period.
Upon the earlier of (i) the expiration of the Lock-Up Period and (ii) the
abandonment by the Company of the IPO, the New Stock Certificates shall be
promptly redelivered to you.
4. Other than as set forth herein, you will not receive compensation,
payments or benefits of any kind from the Company or Releasees (as that term is
defined in paragraph 6(c) below) and you expressly acknowledge and agree that
you are not entitled to any additional compensation, payment or benefits.
5. You understand and agree that the compensation, payments and benefits
provided for in this Agreement and Release are being provided to you in
consideration for your acceptance and execution of, and in reliance upon your
representations in, this Agreement and Release. The releases provided by you in
this Agreement and Release are subject to and conditioned upon the Company's
compliance with the terms hereof.
6. a. You agree to accept the compensation, payments and benefits provided
for in paragraph 2 hereof in full resolution and satisfaction of, and hereby
IRREVOCABLY AND UNCONDITIONALLY RELEASE, REMISE AND FOREVER DISCHARGE the
Company and Releasees from, any and all agreements, promises, liabilities,
claims and demands of any kind whatsoever, in law or equity, whether known or
unknown, suspected or unsuspected, fixed or contingent, apparent or concealed,
which you, your heirs, executors, administrators, successors or assigns ever
had, now have or in the future may have against the Company and Releasees,
including, without limitation, any and all claims arising out of or relating to
your employment, the Employment Agreement, your compensation and benefits with
the Company and/or the termination thereof, and any and all present contract,
tort or fraud claims, present claims for defamation or other personal injury,
present claims under any federal, state or municipal wage payment,
discrimination or fair employment practices law, statute or regulation and
present claims for costs, expenses and attorneys' fees with respect thereto, but
excluding liabilities, claims and demands relating to matters in connection with
your employment with the Company in which the Company has: (i) committed any
material act of fraud or theft, or (ii) engaged in conduct in connection with
your employment that constitutes a felony. THIS RELEASE AND WAIVER INCLUDES,
WITHOUT LIMITATION, ANY AND ALL CLAIMS UNDER THE AGE DISCRIMINATION IN
EMPLOYMENT ACT, 29 U.S.C. SS.SS. 621-634. However, it is agreed that you do not
waive your rights for coverage or indemnification under any directors & officers
policy, or bylaws of the Company for acts or omissions occurring during your
employment.
<PAGE>
David L. Yankey
August 8, 1997
Page 3
b. By signing this Agreement and Release and by acceptance of the
compensation, payments and benefits provided for in paragraph 2 above, you
WAIVE, RELEASE AND COVENANT NOT TO SUE the Company and Releasees with respect to
any matter relating to or arising out of your employment, compensation and
benefits with the Company and/or the termination thereof, including without
limitation any and all claims described in subparagraph (a) of this paragraph,
and you agree that neither you nor any person, organization or entity acting on
your behalf will (i) file, participate in or assist, facilitate or permit the
bringing or maintenance of any claim against the Company or Releasees, whether
in the form of a federal, state or municipal court lawsuit or administrative
agency action, an arbitration proceeding or otherwise, arising out of or
relating to your employment, compensation and benefits with the Company and/or
the termination thereof, including without limitation any and all claims
described in subparagraph (a) of this paragraph, or (ii) seek reinstatement or
any other monetary or equitable relief from the Company and Releasees, however
that relief might be called, on the basis of any such claim, except for claims
for breach of this Agreement and Release or relating to liabilities specifically
excluded from release under paragraph 6(a). You warrant and represent (A) that
you have not filed any claim or demand for relief against the Company or
Releasees, (B) that there are no outstanding claims or demands for relief within
the meaning of this paragraph 6(b) and (C) that in the event any such claim or
demand is or has been filed by someone other than you without your consent, you
will immediately upon becoming aware of such matters and without further notice
take all actions necessary to withdraw or dismiss such claim or demand as it
relates to you with prejudice, if possible.
c. For purposes of this Agreement and Release, the term "Company" when
used in conjunction with "Releasees" includes the Company and its past, present
and future direct and indirect parents, subsidiaries, affiliates, divisions,
predecessors, successors, and assigns, and their respective current and former
officers, directors, shareholders, representatives, agents, attorneys and
employees, in their official and individual capacities, jointly and
individually.
7. a. The Company hereby IRREVOCABLY AND UNCONDITIONALLY RELEASES, REMISES
AND FOREVER DISCHARGES you from any and all agreements, promises, liabilities,
claims and demands of any kind whatsoever, in law or equity, whether known or
unknown, suspected or unsuspected, fixed or contingent, apparent or concealed,
which the Company, its successors or assigns ever had, now have or in the future
may have against you, including, without limitation, any and all claims arising
out of or relating to your employment, the Employment Agreement, your
compensation and benefits with the Company and/or the termination thereof, and
any and all present contract, tort or fraud claims, present claims for
defamation or other personal injury, present claims under any federal, state or
municipal wage payment, discrimination or fair employment practices law, statute
or regulation and present claims for costs, expenses and attorneys' fees with
respect thereto, but excluding liabilities, claims and demands relating to
matters in connection with your employment with the Company in which you have:
(i) committed any
<PAGE>
David L. Yankey
August 8, 1997
Page 4
material act of fraud or theft or (ii) engaged in conduct in connection with
your employment that constitutes a felony.
b. By signing this Agreement and Release, the Company WAIVES, RELEASES
AND COVENANTS NOT TO SUE you with respect to any matter relating to or arising
out of your employment, compensation and benefits with the Company and/or the
termination thereof, including without limitation any and all claims described
in subparagraph (a) of this paragraph, and the Company agrees that neither it
nor any person, organization or entity acting on its behalf will (i) file,
participate in or assist, facilitate or permit the bringing or maintenance of
any claim against you, whether in the form of a federal, state or municipal
court lawsuit or administrative agency action, an arbitration proceeding or
otherwise, arising out of or relating to your employment, compensation and
benefits with the Company and/or the termination thereof, including without
limitation any and all claims described in subparagraph (a) of this paragraph,
or (ii) seek reinstatement or any other monetary or equitable relief from you,
however that relief might be called on the basis of any such claim, except for
claims for breach of this Agreement and Release or relating to liabilities
specifically excluded from release under paragraph 6(a). The Company warrants
and represents (A) that the Company has not filed any claim or demand for relief
within the meaning of this paragraph 7(b) and (B) that in the event any such
claim or demand is or has been filed by someone other than the Company without
its consent, the Company will immediately upon becoming aware of such matters
and without further notice take all actions necessary to withdraw or dismiss
such claim or demand with prejudice.
8. a. The Company shall prepare and file a registration statement to
effect the registration under the Securities Act of 1933, as amended (the
"Securities Act"), of the Shares, all to the extent requisite to permit the
public resale of the Shares. The Company shall initiate such registration
statement at least 60 days prior to the end of the Lock-Up Period and shall use
best efforts to cause the Registration Statement which is the subject of this
Section 8 to be declared effective by the Securities and Exchange Commission
(the "Commission") immediately upon the expiration of the Lock-Up Period.
b. The Company will pay all registration expenses (including all
registration, filing, qualification, legal and accounting fees), in connection
with any registration pursuant to this Section 8.
c. A registration pursuant to this Section 8 shall not be deemed to
have been effected (i) unless a registration statement with respect thereto has
become effective within the time period specified herein, provided that a
registration which does not be come effective after the Company has filed a
registration statement with respect thereto solely by reason of your refusal to
proceed shall be deemed to have been effected by the Company, (ii) if, after it
has become effective,
<PAGE>
David L. Yankey
August 8, 1997
Page 5
such registration becomes subject to any stop order, injunction or other order
or extraordinary requirement of the Commission or other governmental agency or
court for any reason, (iii) if, after it has become effective, such registration
ceases to be effective for more than an aggregate of ninety (90) days. The
Company covenants with you that it shall take such action as is necessary to
keep such registration statement current and effective through at least November
30, 1998.
d. If the Company has fixed plans to file a registration statement
within 60 days after the expiration of the Lock-Up Period covering the sale of
any of its securities in a public offering under the Securities Act, no
registration of the Shares shall be initiated under this Section 8 until 90 days
after the effective date of such registration unless the Company is no longer
proceeding diligently to effect such registration; provided that (i) the Company
shall provide you with the right to participate in such public offering and (ii)
notwithstanding the foregoing, in no event shall the Company's obligation to
file and use its best efforts to have the registration statement under Section
8a be declared effective, be delayed for more than 60 days from the end of the
Lock-Up.
e. If at the time of expiration of the Lock-Up Period, or such earlier
time as the Shares are to be delivered to you, the holding period required under
Rule 144 promulgated pursuant to the Securities Act has been met, then the New
Stock Certificates shall be delivered without any restrictive legends and the
transfer agent will be so instructed by the Company.
f. You agree that you shall not sell more than 25,000 Shares in any
calendar week under such registration statement and you further agree that you
shall give the managing underwriter of the Company's IPO the first opportunity
to handle the sale of such Shares, provided, however, that if such underwriter
is not willing to make such sales on your behalf, or will not be able to obtain
a price that is as desirable as those attainable by another broker-dealer, then
you may sell such Shares through another broker-dealer. The Company shall
deliver to you, within 30 days of the date hereof, notice of the appropriate
person at such underwriter to contact with respect to any such sale of shares.
9. a. Nothing contained in this Agreement and Release shall be deemed to
constitute an admission or evidence of any wrongdoing or liability on the part
of you or the Company or Releasees.
10. a. You have returned and/or agree to immediately return, freight
collect, to the Company any and all original and duplicate copies of all files,
calendars, books, records, notes, manuals, computer disks, diskettes and any
other magnetic and other media materials you have in your possession or under
your control belonging to the Company or Releasees or containing confidential or
proprietary information concerning the Company or Releasees or their customers
or operations. You have also returned your Company keys, credit cards, etc. to
the Company and you
<PAGE>
David L. Yankey
August 8, 1997
Page 6
will return the Company's cellular telephone. By signing this Agreement and
Release, you confirm that you have not retained in your possession or under your
control any of the documents or materials described in this paragraph.
b. The Company acknowledges that you have no legal responsibility for
the Company's offices, or bank accounts, at 2081 Landings Drive, Mountain View,
CA 94043.
11. You agree that the provisions of Sections 5 and 9 of the Employment
Agreement (and only such provisions) shall be incorporated by reference herein,
shall become effective upon your execution and delivery of this Agreement and
Release and shall remain in full force and effect as provided therein.
12. You agree that upon the Company's instructions you will assist and
cooperate with the Company and Releasees in connection with the defense or
prosecution of any claim that may be made against or by the Company or
Releasees, or in connection with any ongoing or future investigation or dispute
or claim of any kind involving the Company or Releasees, including any
proceeding before any arbitral, administrative, regulatory, self-regulatory,
judicial, legislative, or other body or agency, to the extent such claims,
investigations or proceedings relate to services performed or required to be
performed by you, pertinent knowledge possessed by you, or any act or omission
by you, such assistance and cooperation to be reasonable in scope and duration
and consistent with your employment with the Company and shall not unreasonably
interfere with your business or job responsibilities. The Company shall
reimburse you for reasonable expenses incurred by you for your time in providing
such assistance and cooperation, and, if more than nominal efforts are required
of you, the Company shall compensate you in an amount mutually agreed upon.
13. This Agreement and Release may not be changed orally, and no
modification, amendment or waiver of any of the provisions contained in this
Agreement and Release, nor any future representation, promise or condition in
connection with the subject matter of this Agreement and Release, shall be
binding upon any party hereto unless made in writing and signed by such party.
14. This Agreement and Release shall be subject to and governed by and
interpreted in accordance with the laws of the State of New York, without regard
to conflicts of law principles.
15. This Agreement shall inure to the benefit of and shall be binding upon
(i) the Company and Releasees, its successors and assigns, and any company with
which the Company may merge or consolidate or to which the Company may sell
substantially all its assets and (ii) you and your executors, administrators,
heirs and legal representatives. You may not sell or otherwise assign your
rights, obligations or benefits under this Agreement.
<PAGE>
David L. Yankey
August 8, 1997
Page 7
16. This Agreement and Release contains the entire agreement between us and
supersedes and, except as specifically provided herein, terminates any and all
previous agreements between us, whether written or oral. All prior and
contemporaneous discussions and negotiations have been and are merged and
integrated into, and are superseded by, this Agreement and Release. No waiver by
either party of any provision or condition of this Agreement and Release at any
time shall be deemed a waiver of such provision or condition at any prior or
subsequent time or of any other provision or condition at the same or any prior
or subsequent time.
17. In the event of breach of any provision of this Agreement and Release
by either party, the aggrieved party shall be entitled to recover such damages
sustained as a consequence of such breach.
18. In the event any provision of this Agreement and Release shall be held
to be void, voidable, unlawful or, for any reason, unenforceable, the remaining
portions shall remain in full force and effect.
19. If this Agreement and Release conforms to our understanding and is
acceptable to you, please indicate your agreement by signing and dating the
enclosed copy of this Agreement and Release and returning it to the Company. YOU
WILL THEN BE PERMITTED TO REVOKE THIS AGREEMENT AND RELEASE AT ANY TIME DURING
THE PERIOD OF SEVEN DAYS FOLLOWING THE EXECUTION THEREOF, AND THIS AGREEMENT AND
RELEASE WILL NOT BE EFFECTIVE OR ENFORCEABLE AND NO PAYMENTS WILL BE MADE
HEREUNDER UNTIL THE SEVEN-DAY REVOCATION PERIOD HAS EXPIRED. IN THE EVENT YOU
FAIL TO EXECUTE AND RETURN THIS AGREEMENT AND RELEASE ON A TIMELY BASIS, OR YOU
EXECUTE AND THEN ELECT TO REVOKE THIS AGREEMENT AND RELEASE, THIS AGREEMENT AND
RELEASE WILL BE OF NO FURTHER FORCE AND EFFECT, AND NEITHER YOU NOR THE COMPANY
WILL HAVE ANY FURTHER RIGHTS OR OBLIGATIONS HEREUNDER.
20. Any unresolved dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by arbitration, conducted
before a panel of three (3) arbitrators in New York, NY, in accordance with the
rules of the American Arbitration Association then in effect. The arbitrators
shall not have the authority to add to, detract from, or modify any provision
hereof nor to award punitive damages to any injured party. A decision by the
arbitration panel shall be final and binding. Judgment may be entered on the
arbitrators' award in any court having jurisdiction.
21. You agree that you will not, either directly or indirectly, disparage
(whether in writing or orally) the Company or the Releasees in any manner
whatsoever to the public, the media, customers, suppliers or other persons or
entities who transact business with the Company,
<PAGE>
David L. Yankey
August 8, 1997
Page 8
or current or former employees of the Company, at any time. The Company agrees
that its officers and directors will not, directly, or indirectly, disparage
(whether in writing or orally) you in any manner whatsoever to the public, the
media, customers, suppliers or other persons or entities who transact business
with the Company, or current or former employees of the Company, at any time,
provided, however, that you hereby acknowledge and agree that no statement or
other disclosure directly or indirectly relating to you set forth in any filing
(including but not limited to any registration statements filed) in connection
with the IPO shall be deemed to cause the Company to be in breach of its
obligations pursuant to this Section 21.
22. All notices in connection with or provided for under this Agreement and
Release shall be validly given or made only if made in writing and delivered
personally or mailed by registered or certified mail, return receipt requested,
postage prepaid, to the party entitled or required to receive the same, as
follows:
If to David L. Yankey, addressed to:
Mr. David L. Yankey
13500 Country Way Road
Los Altos Hills, CA 94022
If to the Company and Releasees, addressed to:
Mr. Ronald P. Rafaloff
RGR Financial Group
1 Battery Park Plaza
24th Floor
New York, NY 10004-1405
with a copy to:
David W. Pollak, Esq.
Morgan, Lewis & Bockius LLP
101 Park Avenue
New York, New York 10178-0060
23. The Company represents and warrants that this Agreement and Release is
within its corporate powers, the execution and delivery hereof has been duly
authorized, and that its provisions do not conflict with any other agreements,
laws or regulations by which it is bound.
<PAGE>
David L. Yankey
August 8, 1997
Page 9
24. Execution of this Agreement and Release with signatures transmitted via
facsimile shall be considered valid.
Sincerely yours,
COLLECTIBLES USA, INC.
By: /s/ RONALD RAFALOFF
-----------------------------------
Ronald P. Rafaloff, President
THIS AGREEMENT AND RELEASE ARE LEGAL DOCUMENTS. YOU SHOULD CONSULT WITH AN
ATTORNEY PRIOR TO SIGNING THIS AGREEMENT AND RELEASE.
BY SIGNING THIS AGREEMENT AND RELEASE YOU ACKNOWLEDGE THAT YOU ARE COMPETENT,
THAT YOU WERE AFFORDED A TIME PERIOD OF AT LEAST 21 DAYS TO REVIEW AND CONSIDER
THIS AGREEMENT AND RELEASE WITH AN ATTORNEY OF YOUR CHOICE, THAT YOU HAVE IN
FACT RETAINED COUNSEL IN THIS MATTER WHO HAS ASSISTED YOU IN THE NEGOTIATION AND
DRAFTING OF THE TERMS OF THIS AGREEMENT, THAT YOU HAVE READ AND UNDERSTAND AND
ACCEPT THESE DOCUMENTS AS FULLY AND FINALLY RESOLVING, WAIVING AND RELEASING ANY
AND ALL CLAIMS WHICH YOU MAY HAVE AGAINST THE COMPANY AND RELEASEES (AS DEFINED
ABOVE), INCLUDING ANY AND ALL CLAIMS UNDER THE AGE DISCRIMINATION IN EMPLOYMENT
ACT, THAT NO PROMISES OR INDUCEMENTS HAVE BEEN MADE TO YOU EXCEPT AS SET FORTH
IN THIS AGREEMENT AND RELEASE AND THE ATTACHMENTS, AND THAT YOU HAVE SIGNED THIS
AGREEMENT AND RELEASE KNOWINGLY, FREELY AND VOLUNTARILY, INTENDING TO BE LEGALLY
BOUND BY ITS TERMS. THE FOREGOING PARAGRAPH IS A SUMMARY DESCRIPTION OF THE
GENERAL IMPORT OF THIS INSTRUMENT AND
<PAGE>
David L. Yankey
August 8, 1997
Page 10
DOES NOT ALTER OR IN ANY WAY AMEND THE DETAILED PROVISIONS CONTAINED IN THE BODY
HEREOF.
ACCEPTED AND AGREED:
/s/ DAVID L. YANKEY Date: August 8, 1997
- ---------------------------------- ---------------
David L. Yankey
WITNESSED BY:
[SIG]
- ----------------------------------
COLLECTIBLES USA, INC.
One Battery Park Plaza, 24th Floor
New York, New York 10004
David L. Yankey
13500 Country Way Road
Los Altos Hills, CA 94022
July 8, 1998
Dear Mr. Yankey:
Reference is made to the Agreement and Release, dated as of August 8, 1997
(the "Release Agreement"), between Collectibles USA, Inc. (the "Company") and
you. All capitalized terms used herein but not defined shall have the meanings
set forth in the Release Agreement.
Please be advised that the Company proposes to amend effective as of June
1, 1998 the Release Agreement as follows:
(1) The $350,000 payment that you are entitled to receive pursuant to
paragraph 2 of the Release Agreement shall be payable by delivery,
within three business days of the consummation of the Company's IPO of
its Common Stock, of (A) a $250,000 lump-sum payment by wire transfer
of funds to an account designated by you and (B) a $100,000
convertible promissory note (the "Note") executed by the Company in
the form attached hereto as Exhibit A.
(2) Paragraph 3 of the Release Agreement is amended by: (A) deleting the
reference to "104,580 shares" of Common Stock in the first sentence
and substituting therefor a reference to "79,580 shares" of Common
Stock; (B) deleting the second sentence in its entirety and
substituting therefor the following, "On the effective date of your
acceptance of this letter, you shall surrender any rights in the stock
certificate for the 104,580 shares of Common Stock, which certificate
was issued to you (and is currently held in escrow) upon your
surrender of rights in the stock certificate for 174,580 shares of
Common Stock, whereupon the Company will deliver to you a new stock
certificate (the "New Stock Certificates") for 79,580 shares of Common
Stock."; and (C) deleting the reference to "100,000" in the fourth
sentence and substituting therefor "75,000."
(3) Paragraph 8(a) of the Release Agreement is amended by deleting it in
its entirety and substituting therefor the following: "The Company
shall prepare and file a
<PAGE>
registration statement to effect the registration under the Securities
Act of 1933, as amended (the "Securities Act"), of the 79,580 shares
and any shares acquired by you upon the conversion of the Note
(collectively, the "Shares"), all to the extent requisite to permit
the public resale of the Shares. In connection with this registration
process, the Company shall furnish you with copies of a prospectus,
enter into and perform its obligations under an underwriting
agreement, if any, cause the registered Shares to be listed on each
securities exchange on which similar securities issued by the Company
are listed, if any, and provide a transfer agent and CUSIP number for
the registered Shares . The Company shall initiate such registration
statement at least 90 days prior to the end of the Lock-Up Period and
shall use best efforts to cause the registration statement which is
the subject of this Section 8 to be declared effective by the
Securities and Exchange Commission (the "Commission") immediately upon
the expiration of the Lock-Up Period."
(4) Paragraph 8(c) of the Release Agreement is amended by deleting the
last sentence and substituting therefor the following: "The Company
covenants with you that it shall take such action as is necessary to
keep such registration statement current and effective through the
longer of (i) at least the six month anniversary of the expiration of
the Lock-Up Period or (ii) the six month anniversary of the date such
registration statement was first declared effective."
(5) Paragraph 8(d) of the Release Agreement is amended by inserting ",
within three months of the IPO," after "If the Company".
(6) The following paragraph is added to the Release Agreement:
"8. g. At all times while you retain the option to convert all or
part of the Note into shares of Common Stock, the Company shall
reserve and keep available out of its authorized but unissued Common
Stock such number of its shares of Common Stock, which shall not be
subject to preemption or any similar right, as shall be sufficient to
effect the conversion of the entire principal due under the Note."
The Company also shall reimburse you, by wire transfer of funds to an
account designated by you, for the legal fees and expenses incurred by you in
connection with this amendment to the Release Agreement; provided, that, the
Company's reimbursement obligation shall not exceed $2,000.00, shall be
contingent upon receipt by the Company of sufficient documentation of such fees
and expenses, and shall be made within 15 days of the Company's receipt of such
documentation.
Furthermore, the Company hereby acknowledges that your ownership and
operation of Wings America, Inc., an operator of retail clothing stores in
Northern California, which stores incidentally sell objects which may be deemed
collectible items to customers of the Company, shall not constitute a violation
of any of the terms of your Employment Agreement with the Company.
<PAGE>
Sincerely,
COLLECTIBLES USA, INC.
By:/s/ SHONNIE BILIN
----------------------
Name:
Title: CEO
The foregoing is hereby agreed to as of
July 8, 1998.
By:/s/ DAVID YANKEY
---------------------------
David L. Yankey
EXHIBIT A
CONVERTIBLE PROMISSORY NOTE
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"). NO INTEREST IN THIS NOTE MAY BE OFFERED OR SOLD EXCEPT PURSUANT TO
(i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE EXTENT
APPLICABLE, PURSUANT TO RULE 144 UNDER THE ACT (OR ANY SIMILAR RULE UNDER THE
ACT), OR (iii) AN EXEMPTION FROM REGISTRATION UNDER THE ACT WHERE THE HOLDER OF
THIS NOTE HAS FURNISHED AN OPINION OF COUNSEL THAT AN EXEMPTION FROM
REGISTRATION UNDER THE ACT IS AVAILABLE.
July ___, 1998 $100,000
New York, New York
FOR VALUE RECEIVED, COLLECTIBLES USA, INC., a Delaware corporation with a
principal address at One Battery Park Plaza, 24th Floor, NY, NY 10004 (the
"Company"), DOES HEREBY UNCONDITIONALLY PROMISE TO PAY to David L. Yankey (the
"Registered Holder"), on the sixth-month anniversary of the closing of the
initial public offering of the Company's common stock, par value $.01 per share
(the "Common Stock"), registered under the Act with the Securities and Exchange
Commission pursuant to an effective registration statement on Form S-1, ONE
HUNDRED THOUSAND DOLLARS ($100,000), together with interest accrued, from the
date hereof (computed on the basis of a 360-day year of twelve 30-day months),
on the unpaid principal amount hereof from time to time outstanding, in like
money, at a rate per annum equal to 5%.
Interest on Overdue Principal and upon Events of Default. The Company
promises to pay interest, on demand, on any overdue principal and, to the extent
permitted by law, overdue interest from their due dates at a per annum rate
equal to 7% or, if less, the maximum legal rate of interest. Additionally, while
any Event of Default (as hereinafter defined) exists or is continuing, the
Company agrees that, during such period, interest shall accrue on the unpaid
principal amount at a rate per annum equal to 7% or, if less, the maximum legal
rate of interest
Acceleration. If any of the following conditions or events ("Events of
Default") shall occur and be continuing:
a. Failure to Make Payments When Due. Failure to pay any principal or
interest on this Note when the same becomes due and payable; or
b. Default in Other Agreements. Any event or condition occurs that
results in any indebtedness of the Company or any of its subsidiaries
in excess of $1,000,000 in the
<PAGE>
aggregate becoming due prior to its scheduled maturity or that enables
or permits (with or without the giving of notice, the lapse of time or
both) the holder or holders of such indebtedness or any trustee or
agent on its or their behalf to cause any such indebtedness to become
due, or to require the prepayment, repurchase, redemption or
defeasance thereof, prior to its scheduled maturity; or
c. Involuntary Bankruptcy; Appointment of Receiver, Etc. (i) A court
having jurisdiction in the premises shall enter a decree or order for
relief in respect of the Company or any of its subsidiaries in an
involuntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, which decree or order is not
stayed; or any other similar relief shall be granted and remain
unstayed under any applicable federal or state law; or (ii) an
involuntary case is commenced against the Company or any of its
subsidiaries under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect; or a decree or order of a
court having jurisdiction in the premises for the appointment of a
receiver, liquidator, sequestrator, trustee, custodian or other
officer having similar powers over the Company or any of its
subsidiaries or over all or a substantial part of any of their
respective Assets and Properties, shall have been entered; or an
interim receiver, trustee or other custodian of the Company or any of
its subsidiaries for all or a substantial part of its or their Assets
and Properties is involuntarily appointed; or a warrant of attachment,
execution or similar process is issued against any substantial part of
the Assets and Properties of the Company or any of its subsidiaries,
and the continuance of any such events in this clause (ii) for thirty
(30) days unless dismissed, bonded, stayed, vacated or discharged; or
d. Voluntary Bankruptcy; Appointment of Receiver, Etc. The Company or any
of its subsidiaries shall commence a voluntary case under any
applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or shall consent to the entry of an order for
relief in an involuntary case, or to the conversion of an involuntary
case to a voluntary case, under any such law, or shall consent to the
appointment of or making possession by a receiver, trustee or other
custodian for all or a possession by a receiver, trustee or other
custodian for all or a substantial part of its Assets and Properties;
the making by the Company or any of its subsidiaries of any assignment
for the benefit of creditors; the admission by the Company or any of
its subsidiaries in writing of its inability to pay its debts as such
debts become due; or the board of directors of the Company or any of
its subsidiaries (or any committee thereof) adopts any resolution or
otherwise authorizes action to approve any of the foregoing; or
e. Judgments and Attachments. Any money judgment, writ or warrant of
attachment, or similar process involving in any individual case or in
the aggregate at any time an amount in excess of $1,000,000 (not
covered by insurance) for the Company or any of its subsidiaries shall
be entered or filed against the Company or any of its subsidiaries or
any of its
2
<PAGE>
or their Assets and Properties and shall remain undischarged,
unvacated, unbonded or unstayed for a period of thirty (30) days or in
any event later than five (5) days prior to the date of any proposed
sale thereunder; or
f. Merger or Disposal of Assets. The Company merges with, consolidates
into or acquires all or a substantial part of the assets of another
person, or the consummation of any sale, lease, transfer or other
disposition of all or a substantial part of the Company's Assets and
Properties; or
g. Representations. Any representation or warranty by the Company
hereunder shall prove to have been incorrect in any material respect;
or
h. Covenants. The Company shall fail to perform or observe any term,
provision, covenant or agreement hereunder and such failure has not
been remedied within twenty (20) days of the Company's receipt of the
Registered Holder's written notice to the Company of such failure or
the Company shall fail to perform or observe any term, covenant or
agreement under that certain Agreement and Release dated as of August
8, 1997 and as amended July 8, 1998 between the Company and the
Registered Holder (as amended, the "Agreement and Release");
THEN, (i) upon the occurrence of any Event of Default described in the
foregoing subsections (c) or (d), the unpaid principal amount of and accrued
interest on the Note shall automatically become immediately due and payable,
without presentment, demand, protest, notice of acceleration, notice of intent
to accelerate or other requirements of any kind, all of which are hereby
expressly waived by the Company, and (ii) upon the occurrence of any other Event
of Default, the Registered Holders may, by written notice to the Company,
declare the Note to be, and the same shall forthwith become, due and payable,
together with accrued interest thereon.
Conversion. At the Maturity Date, the Registered Holder, at his option,
upon ten days' written notice to the Company, may convert all or a part of the
principal amount of this Note into Common Stock at a price per share equal to
the initial public offering price of the Common Stock. Any shares acquired by
the Registered Holder upon the conversion of the Note shall be registered under
the Act pursuant to and in accordance with Paragraph 8 of the Agreement and
Release. The Company shall pay to the Registered Holder (i) the principal amount
of the Note which was not converted into securities pursuant to the immediately
preceding sentence and (ii) all accrued and unpaid interest hereon.
3
<PAGE>
Representations and Warranties. The Company hereby represents and warrants
that as of the date of this Note:
a. Binding Agreement. The execution, delivery and performance by the
Company of this Note and all obligations hereunder, including all
obligations under the Agreement and Release, have been duly authorized
by all necessary corporate action. This Note has been duly executed on
behalf of the Company and constitutes a legal, valid and binding
obligation of the Company enforceable in accordance with its terms
except as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application
relating to or concerning equitable remedies. No consents,
authorizations, licenses or exemptions, which have not been received,
are necessary for the authorization, execution or performance of this
Note.
b. Organization. The Company is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation and has all requisite power to perform its obligations
under this Note and to own and operate its assets and conduct its
business where currently conducted.
c. No Event of Default. No Event of Default (as herein defined) has
occurred and is continuing, nor has any event occurred which but for
the giving of notice or the lapse of time or both might constitute an
Event of Default.
Definitions. As used in this Note, the following defined terms shall have
the meanings indicated below:
"Assets and Properties" of any Person means all assets and properties of
every kind, nature, character and description (whether real, personal or mixed,
whether tangible or intangible, and wherever situated), including the goodwill
related thereto, operated, owned or leased by such Person, including without
limitation cash, cash equivalents, investment assets, accounts and notes
receivable, chattel paper, documents, instruments, general intangibles, real
estate, equipment, inventory, goods and intellectual property.
"Person" means any natural person, corporation, limited liability company,
general partnership, limited partnership, limited liability partnership,
proprietorship, other business organization, trust, union, association or
governmental or regulatory authority.
Loss or Destruction of Note. Upon receipt of evidence reasonable
satisfactory to the Company (an affidavit of any Registered Holder shall be
satisfactory) of the ownership and the loss, theft, destruction or mutilation of
this Note, and in the case of any such loss, theft or destruction, upon receipt
of indemnity reasonably satisfactory to the Company (provided that if such
Registered Holder is a financial institution or other institutional investor its
own agreement shall be satisfactory) or, in the case of any such mutilation upon
surrender of this Note, the Company shall (at its expense) execute and deliver
in lieu of such Note, a Note of like kind representing the same rights
represented by such lost, stolen, destroyed or mutilated Note and dated as of
the date to which interest has been
4
<PAGE>
paid on the unpaid principal amount of the Note so lost, stolen, destroyed or
mutilated, or, if no interest has been paid thereon, then dated as of the date
of the Note so lost, stolen, destroyed or mutilated.
Payments. The Company shall make all cash payments of principal, interest
and all other amounts payable on this Note in money of the United States that at
the time of payment is legal tender for payment of public and private debts. The
Company shall make all cash payments of principal and interest on this Note by
immediately available funds. All payments shall be made without withholding
(whether on account of tax or otherwise) deduction, set-off, counter claim or
other defense. Payments of principal and interest and other amounts payable
hereunder are to be delivered at the following address:
David L. Yankey
13500 Country Way Road
Los Altos Hills, CA 94022
or to such other address or to the attention of such other individual or entity
as specified by prior written notice to the Company. All payments shall be
applied, first, to all accrued and unpaid interest hereon, and, second, to
principal.
Records. The Company shall maintain at its principal executive offices
books for the registration and the registration of transfer of this Note. The
Company may deem and treat the Registered Holders as the absolute owners hereof
(notwithstanding any notation of ownership or other writing thereon made by
anyone) for all purposes and shall not be affected by any notice to the
contrary.
No Rights as a Stockholder. Prior to conversion of this Note as provided
herein, the Registered Holder shall have no rights under this Note as a
stockholder of the Company.
Waiver. Any term or condition of this Note may be waived at any time by the
party that is entitled to the benefit thereof, but no such waiver shall be
effective unless set forth in a written instrument duly executed by or on behalf
of the party waiving such term or condition. No waiver by any party of any term
or condition of this Note, in any one or more instances, shall be deemed to be
or construed as a waiver of the same or any other term or condition of this Note
on any future occasion. All remedies, either under this Note or by law or
otherwise afforded, will be cumulative and not alternative.
Amendments. This Note may be amended, supplemented or modified only by a
written instrument duly executed by or on behalf the Registered Holder and the
Company.
Assignment. No obligation hereunder may be assigned (by operation of law or
otherwise) by the Company or assumed by another individual or entity without the
prior written consent of the Registered Holder and any attempt to do so will be
void. Subject to the preceding sentence, this Note is binding upon, inures to
the benefit of and is enforceable by the Registered Holder and the Company and
their respective successors and assigns.
5
<PAGE>
Expenses. The Company promises to pay all costs and expenses, including,
without limitation, reasonable attorneys' fees and costs, incurred by the
Registered Holders in connection with the Registered Holder's enforcement of his
rights hereunder.
Governing Law. THIS NOTE SHALL 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.
Interest Limitations. It is the intention of the Company and Registered
Holder to conform strictly to all applicable usury laws now or hereafter in
force, and any interest payable under this Note shall be subject to reduction to
the amount not in excess of the maximum legal amount allowed under the
applicable usury laws as now or hereafter construed by the courts having
jurisdiction over such matters. The aggregate of all interest (whether
designated as interest, service charges, points or otherwise) contracted for,
chargeable, or receivable under this Note shall under no circumstances exceed
the maximum legal rate upon the unpaid principal balance of this Note remaining
unpaid from time to time. If such interest does exceed the maximum legal rate,
it shall be deemed a mistake and such excess shall be canceled automatically
and, if theretofore paid, rebated to the Company or credited on the principal
amount of this Note, or if this Note has been repaid, then such excess shall be
rebated to the Company.
[signature page to follow]
6
<PAGE>
IN WITNESS WHEREOF, the Company has executed and delivered this Note as of
the date first above written.
COLLECTIBLES USA, INC.
By:
---------------------------
Name:
Title:
ADMINISTAFF.
PERSONNEL MANAGEMENT SERVICE AGREEMENT
THIS PERSONNEL MANAGEMENT SERVICE AGREEMENT ("the Agreement"), is between
Administaff Companies, Inc., ("Administaff"), a Delaware corporation, with its
principal place of business at 19001 Crescent Springs Drive, Kingwood, Texas
77339-3802, and Collectibles USA, Inc. ("Client").
I. PERSONNEL
Administaff agrees to furnish Client, and Client agrees to engage from
Administaff, worksite employees ("Staff") for the job functions listed in
Exhibit A ("Confidential Census"). Client warrants that information supplied to
Administaff on confidential census is accurate. Client will amend Exhibit A to
reflect each change or addition of a Staff and his or her job function within
five days of such change or addition. Client warrants that information on
worksite employees assigned by Administaff concerning job descriptions is
current and accurate. If such information is inaccurate, Client shall promptly
so notify Administaff.
II. TERMS OF AGREEMENT
This Agreement shall commence on the date this Agreement is executed and remain
in force until either Administaff or Client terminates the Agreement by giving
sixty (60) days prior written notice.
III. ADMINISTRATION
3.1 Administaff is responsible for the following:
a. reserving a right of direction and control over Staff assigned to
Client's location, although Client is responsible for the service or
product provided or produced by Client;
b. payment of salaries and wages and compliance with rules and
regulations governing the reporting and payment of all federal and
state taxes on payroll wages paid under this Agreement including, but
not limited to: (i) federal income tax withholding provisions of the
Internal Revenue Code; (ii) provisions of state and/or local income
tax withholding laws, if applicable; (iii) provisions of the Federal
Insurance Contributions Act (FICA); (iv) provisions of the Federal
Unemployment Tax Act (FUTA); and, (v) provisions of applicable state
unemployment tax laws;
c. providing employee benefits, if any are agreed to be provided by
Administaff, compliance with the Consolidated Omnibus Reconciliation
Act (COBRA) and
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Employee Retirement Income Security Act (ERISA) as to plans sponsored
by Administaff.
d. procurement of workers' compensation insurance and administration of
claims;
e. compliance with the Immigration Reform and Control Act (IRCA); the
Consumer Credit Protection Act, Title III;
f. development and implementation of policies and practices relating to
personnel management services including, but not limited to,
recruiting, interviewing, testing, selecting, orientation of,
training, evaluating, replacing, supervising, disciplining,
reassigning and terminating Staff;
g. compliance with any state statute or regulations governing a
professional employer organization.
3.2 Client is responsible for the following:
a. the service or product provided or produced by Client;
b. retaining such sufficient direction and control over Staff as is
necessary to conduct Client's business and without which Client would
be unable to conduct its business, discharge any fiduciary
responsibility that it may have, or comply with any applicable
licensure, regulatory or statutory requirement of Client;
c. compliance with any professional licensing, fidelity bonding, and
professional liability insurance requirements;
d. compliance with Occupational Safety and Health Administration (OSHA)
regulations; Environmental Protection Agency (EPA) regulations; Fair
Labor Standards Act (FLSA); Worker Adjustment and Retraining
Notification Act (WARN); compliance with governmental contracting
provisions; and any state and/or local equivalent of any of these;
e. liability for all obligations, including organizing process expenses,
related to Client's collective bargaining agreement and any benefits
arising from such agreement;
f. the operation of Client's business, equipment or property including
motor vehicles.
3.3 Administaff and Client will be jointly responsible for the following:
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a. all federal, state and local employment discrimination laws,
including, but not limited to, Title VII of the 1964 Civil Rights Act,
Age Discrimination in Employment Act (ADEA), and Americans with
Disabilities Act (ADA), Family and Medical Leave Act (FMLA),
b. authority to hire, discipline, reassign and terminate Staff,
c. selection of fringe benefits, including, but not limited to, holidays,
vacation, sick leave, parental leave, military leave, and leave of
absence.
3.4 Nothing in paragraphs 3.1, 3.2 or 3.3 above shall be construed to require
either Administaff or Client to provide any of the matters referred to therein
except as provided by law or as otherwise specifically provided by this
Agreement.
IV. SUPERVISION AND EMPLOYMENT
4.1 Administaff shall designate one or more on-site supervisors from among
Staff. On-site supervisors shall be responsible for facilitating personnel
management services provided by Administaff. Client retains responsibility for
its products or services.
4.2 Staff are not authorized by Administaff to undertake any work inconsistent
with the job functions specified in Exhibit A. In no event shall Client request
Staff to perform any service outside of that employee's ability or training if
such service would expose the Staff or other persons to personal harm or danger.
V. EMPLOYMENT AGREEMENT
All Staff furnished by Administaff to Client and listed on Exhibit A and any
assigned in the future shall be required to execute an Employment Agreement as
set forth in Exhibit C (Employment Agreement) before such employee shall
commence the term of assignment with Client.
VI. SAFE WORK ENVIRONMENT
6.1 Client agrees that it will comply, at its sole cost and expense, with all
federal, state or local health and safety laws, regulations, ordinances,
directives and rules relating to workplace, including all directives concerning
a safe work environment from Administaff or Administaff's workers' compensation
insurance carrier.
6.2 Client shall provide and ensure use of all personal protective equipment as
required by federal, state or local laws, regulations, ordinances, directives or
rules, or as deemed necessary by Administaff or Administaff's workers'
compensation insurance carrier.
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6.3 Client and Administaff agree to immediately report to each other all
accidents and injuries involving Staff assigned to Client.
6.4 Administaff and Administaff's workers' compensation insurance carrier shall
have the right to inspect Client's workplace, including but not limited to any
job sites at which Staff will be assigned. To the extent possible, such
inspections shall be scheduled at mutually convenient times.
VII. INSURANCE
7.1 Administaff shall keep in force at all times during this Agreement,
workers' compensation insurance covering all Staff furnished to Client pursuant
to the terms of this Agreement. Upon written request by Client, Administaff
shall request that its insurance carrier furnish a Certificate of Insurance
verifying coverage.
7.2 Client warrants and represents to Administaff that it has in force at the
effective date of this Agreement and will maintain during this Agreement and any
extensions, the following insurance coverage and limits as a minimum. Such
coverage shall be at the Client's sole cost and expense and provided by a state
approved insurance company, approved by Administaff and rated by Best's at A- or
better.
a. General Liability. Commercial General Liability in standard form on
"occurrence basis" covering Client's operations with minimum limited
of:
(1) $2,000,000.00 General Aggregate
(2) $2,000,000.00 Products/Completed Operations Aggregate
(3) $1,000,000.00 Personal and Advertising Injury
(4) $1,000,000.00 Each Occurrence.
Other coverage may be required for special operations to be
determined.
b. Automobile Liability. Comprehensive automobile liability insurance
covering all owned, hired and non-owned vehicles, with minimum limits
of One Million and No/100 Dollars ($1,000,000) combined single limits
per occurrence for Bodily Injury and Property Damage Liability. Client
warrants that all persons operating Client's vehicles are duly
licensed and covered under the Client's Automobile Liability insurance
policy without exception. Client agrees to furnish to Administaff a
list of drivers upon request.
7.3 Policy Requirements. All insurance policies to be obtained and maintained
by Client shall provide for thirty (30) days written notice to Administaff prior
to alteration, cancellation, non-renewal or material change by endorsement of
the coverage. All such insurance policies shall be endorsed to include, at no
additional cost to Administaff, Administaff as an additional insured with
respect to client's business, and each of the policies shall be primary
insurance and
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not excess over or contributory with any other valid, existing and applicable
insurance carried by Administaff. All automobile insurance policies obtained by
Client pursuant to this Agreement shall also be endorsed to include, at no
additional cost to Administaff, Staff who shall be operating motor vehicles for
Client. In addition, Client agrees to comply with all applicable Department of
Transportation, Interstate Commerce Commission and Motor Carrier Act
requirements and regulations if Client uses Staff to operate motor vehicles and
agrees to indemnify, defend and holds Administaff harmless from and against any
liability, expense (including court costs and attorneys' fees) and claims
relating to the non-compliance or violation.
7.4 Client shall make available, if requested, copies of all insurance
certificates required to this Section, signed by authorized representatives of
the insurance companies, to Administaff prior to the commencement date of this
Agreement and at any renewal or replacement.
7.5 Waiver of Subrogation. Each party to this Agreement hereby waives any claim
in its favor against the other party by way of subrogation or otherwise, which
arises during this Agreement, for any and all liability, loss or damage which is
covered by policies of insurance, to the extent that such liability, loss or
damage is recovered under such policies of insurance. Since the mutual waivers
will preclude the assignment of any aforesaid claim by way of subrogation or
otherwise to an insurance company or any other person, each party agrees to
immediately give to each of its insurance carriers, written notice of the terms
of said annual waiver, and to have its insurance policies properly endorsed, if
necessary, to prevent the invalidation of said insurance coverage by reason of
said waiver. Each arty shall cause its insurance carriers to provide written
evidence of the acceptance of said waiver.
VIII. ENROLLMENT FEE
Client agrees to pay Administaff a non-refundable enrollment fee in the sum
specified in Exhibit B (Client Service Application). This enrollment fee is due
and payable at the time that this Agreement is signed by Client.
IX. SERVICE FEE
In exchange for the personnel management services provided by Administaff,
Administaff and Client agree as follows:
9.1 The Administaff fee rate percentages are set forth in Exhibit B and is
calculated utilizing the data submitted by Client in Exhibit A. If such
information is inaccurate, Client shall immediately agree to amend Exhibit A to
reflect the current information and shall pay, within ten (10) days notice from
Administaff of the error, any additional costs incurred by Administaff as a
result of the inaccuracy.
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9.2 Each pay period, Client shall pay Administaff its fee comprised of: (i) the
gross payroll of Staff during such pay period, and, (ii) a service fee equal to
the applicable fee rate percentage specified in Exhibit B multiplied by the
gross payroll of Staff during such pay period.
9.3 Exhibit B shall set forth the fees to be charged by Administaff and such
exhibit will be signed by the parties.
9.4 Exhibit B may be changed from time to time and the changes shall be
effective as stated on the Exhibit and agreed to by the Client as evidenced by
the signature thereon.
9.5 Any increase in the fee will be billed with the next effective payroll and
be kept current at all times except for retroactive changes or statutory and/or
regulatory changes known at the time the payroll is billed.
9.6 The fee provided for by this Agreement shall be due and payable on receipt
of the invoice for said fee.
9.7 Client shall use a method of payment approved in advance by Administaff.
9.8 Client or on-site supervisor shall report to Administaff all time worked by
all Staff each pay period and shall provide Administaff with written
verification of same including rate of pay for each.
9.9 Client shall notify Administaff within five (5) business days of receipt of
the payroll of any error in billing.
9.10 Client shall reimburse Administaff for services requested by Client and not
contemplated by this Agreement.
X. DEFAULT
10.1 Acts of default by Client shall include, but are not limited to:
a. failure of Client to pay a fee when due;
b. failure of Client to comply within thirty (30) days of any directive
of Administaff, when such directive is promulgated or made necessary
by: (i) a federal, state or local governmental agency; or (ii) an
insurance carrier providing coverage to Administaff and/or its Staff;
(iii) specific circumstances which currently or potentially affect the
safety or violate the legal rights of Administaff or Staff;
c. direct payments of taxable wages by Client to Staff for services
contemplated by this Agreement;
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d. commission or omission of any act that usurps any right or obligation
of Administaff as an employer of Staff covered by this Agreement;
e. violation by Client of any provision of this Agreement;
f. filing by or against Client for bankruptcy or reorganization or Client
becomes insolvent or has a receiver, supervisor, liquidator, or
similar appointee appointed over its assets or property;
g. an assignment by Client for the benefit of creditors; or
h. a money judgment against Client which remains unsatisfied for more
than thirty (30) days.
10.2 In the event Administaff incurs any expenses, fines and/or liabilities as a
result of an act of default by Client as set forth above, Client shall reimburse
Administaff for all actual expenses, fees and/or liabilities, including, but not
limited to, reasonable attorneys' fees, court costs and any related expenses.
10.3 In the event that this Agreement is terminated due to a default by Client,
Client shall pay to Administaff, as liquidated damages, a sum calculated in
accordance with the following formula:
A sum equal to the average fee, as calculated pursuant to Paragraph 9.2
hereof for: (i) the pay periods that have occurred during the three (3)
months immediately preceding the date of termination; or, (ii) if the
Agreement is terminated prior to the expiration of three (3) months, the
pay periods that have occurred prior to the date of termination.
Such payment shall not release Client from any other obligations under this
Agreement arising prior to or resulting from such termination.
10.4 Upon an act of default by Client, Administaff shall have the option, in its
sole and absolute discretion, of terminating this Agreement.
10.5 Notwithstanding anything herein or in any other agreement or document to
the contrary, Client expressly agrees that Administaff shall under no
circumstances be liable for any special, incidental or consequential damages of
any nature whatsoever arising under or relating to this Agreement.
XI. INDEMNITY
11.1 Client hereby further agrees to indemnify, defend and hold Administaff
harmless from and against any and all liability, expense (including cost of
investigation, court costs and
7
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attorneys' fees) and claims for damage of any nature whatsoever, whether known
or unknown and whether direct or indirect, as though expressly set forth and
described herein which Administaff may incur, suffer, become liable for or which
may be asserted or claimed against Administaff as a result of the failure of
Client to follow the directives, procedures and policies of Administaff as they
relate to Staff.
11.2 Client hereby further agrees to indemnify, defend and hold Administaff
harmless from and against any and all liability, expense (including cost of
investigation, court costs and attorneys' fees) and claims for damage of any
nature whatsoever, whether known or unknown and whether direct or indirect,
arising from operation by Client, Client's employees or Staff of any form or
type of motor vehicle.
11.3 Client hereby further agrees to indemnify and hold Administaff harmless
from and against any and all liability, expenses (including cost of
investigation, court costs and attorneys' fees) and claims for damage of any
nature whatsoever, whether known or unknown and whether direct or indirect,
arising from the product and/or services provided by Client.
11.4 Client hereby further agrees to indemnify and hold Administaff harmless
from and against any and all claims, losses, causes of action, liability,
expense (including costs of investigation, court costs and attorneys' fees) and
damages of any nature whatsoever, whether known or unknown, arising from
employee unionization and/or provision of union benefits.
11.5 The indemnities provided herein shall be deemed to be contractual in nature
and shall survive termination of this Agreement.
XII. REPRESENTATIONS AND WARRANTIES
12.1 Client agrees to comply with Administaff's personnel management policies
and directives.
12.2 Client agrees to provide Administaff with a copy of any notice, complaint
or charge of a government agency and/or legal action concerning (i) Client's
workplace; (ii) Client's compliance with any laws, rules, regulations or
ordinances relating to the workplace; or, (iii) any Staff assigned to Client
immediately upon receipt of such notice, complaint, charge or legal action.
12.3 Client agrees to cooperate fully with Administaff in any investigation
involving Staff assigned to Client whether such investigation is initiated by a
government agency or by Administaff.
12.4 Administaff reserves the right at its sole discretion to provide a defense
in any lawsuit arising from a claim involving Staff subject to its investigation
of the facts and circumstances of such a claim.
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12.5 Client warrants and represents to Administaff that, prior to entering into
this Agreement, Client has informed Administaff of any pension and/or benefit
plans that Client may currently provide or has heretofore provided for any
owners, partners, shareholders, directors, officers, employees or agents of
Client. Client acknowledges that if Client currently provides or has previously
provided any pension or benefit plans to such individuals or their dependents,
certain complex rules under ERISA and the Internal Revenue Code may apply to
these plans, as well as to any plans maintained by Administaff, as a result of
this Agreement. If Client currently maintains or has maintained any such plans,
Client acknowledges that Administaff has advised Client to seek advice from a
qualified professional regarding the effect of this Agreement on such plans.
12.6 Client acknowledges that at the time of termination of this Agreement,
Administaff will send Staff employment termination notices.
XIII. ARBITRATION
13.1 Administaff and Client agree and stipulate that all claims, disputes and
other matters in question between Administaff and Client arising out of, or
relating to this Agreement or the breach thereof will be decided by arbitration
in accordance with the Federal Arbitration Act (9 U.S.C. ss.ss. 10 and 11) and
the Commercial Arbitration Rules of the American Arbitration Association then
obtaining subject to the limitations of this Article XIII. This agreement to so
arbitrate and any other agreement or consent to arbitrate entered into in
accordance herewith as provided in this Article XIII will be specifically
enforceable under the prevailing law of any court having jurisdiction.
13.2 Notice of the demand for arbitration will be filed in writing with the
other party to the Agreement and with the American Arbitration Association. The
demand for arbitration shall be made within a reasonable time after the claim,
dispute or other matter in question has arisen, and in no event shall any such
demand be made after the date when institution of legal or equitable proceedings
based on such claim, dispute or other matter in question would be barred by the
applicable statute of limitations.
13.3 No arbitration arising out of, or relating to, this Agreement shall include
by consolidation, joinder or in any other manner any other person or entity who
is not a party to this contract unless:
a. the inclusion of such other person or entity is necessary if complete
relief is to be afforded among those who are already parties to the
arbitration, and/or such other person or entity is substantially
involved in a question of law or fact which is common to those who are
already parties to the arbitration and which will arise in such
proceedings; and,
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b. the written consent of the other person or entity sought to be
included and Administaff and Client has been obtained for such
inclusion, which consent shall make specific reference to this
paragraph; but no such consent shall constitute consent to arbitration
of any dispute not specifically described in such consent or to
arbitration with any party not specifically identified in such
consent.
13.4 The award rendered by the arbitrators will be final, judgment may be
entered upon it in any court having jurisdiction thereof, and will not be
subject to modification or appeal except to the extent permitted by Sections 10
and 11 of the Federal Arbitration Act (9 U.S.C. ss.ss. 10 and 11).
XIV. MISCELLANEOUS
14.1 Third Party Beneficiaries. This Agreement is between Administaff and Client
and creates no individual rights of Administaff, Staff or any other third
parties as against Client or Administaff.
14.2 Client agrees to comply, at its sole cost and expense, with any applicable
specific directives promulgated by: (i) a federal, state or local governmental
body, department or agency, (ii) an insurance carrier providing coverage to
Administaff and/or its employees affecting this Agreement, and/or (iii)
Administaff as made necessary by circumstances which currently or specifically
affect Administaff, Client or Staff.
14.3 Neither party shall assign this Agreement or its rights and duties
hereunder, or any interest herein, without the prior written consent of the
other party.
14.4 The prevailing party in any enforcement action arising in respect to this
Agreement shall be entitled to recover from the other party all costs of such
enforcement action including, without limitation, reasonable attorneys' fees,
court costs and related expenses.
14.5 EXCEPT FOR ARTICLE XIII OF THIS AGREEMENT, WHICH SHALL BE GOVERNED BY THE
FEDERAL ARBITRATION ACT (9 U.S.C. ss.ss. 10 AND 11), THIS AGREEMENT SHALL BE
GOVERNED BY THE LAWS OF THE STATE OF TEXAS.
14.6 This instrument, including the Exhibits attached hereto, contains the
entire Agreement of the parties and supersedes all prior and contemporaneous
agreements or understandings, whether written or oral, with respect to the
subject matter hereof. No amendment or modification hereto shall be valid unless
in writing and signed by both parties hereto.
14.7 If any provision of this Agreement, or any amendment thereof, should be
invalid, the remaining provision shall remain in effect and be so construed as
to effectuate the intent and purposes of this Agreement and any amendments
thereto.
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14.8 All notices, requests and communications provided hereunder shall be in
writing, and hand delivered or mailed by United States registered, certified, or
express mail, return receipt requested, and addressed to the party's principal
place of business as set forth in this Agreement adjacent the signature of each
party (or to such other address provided in writing by such party).
14.9 The waiver by either party hereto of a breach of any term or provision of
this Agreement shall not operate or be construed as a waiver of a subsequent
breach of the same provision by any party or of a breach of any other term or
provision of this Agreement.
14.10 Force Majeure. Neither Administaff nor Client shall be required to perform
any term, condition, or covenant of this Agreement so long as such performance
is delayed or prevented by force majeure, which shall mean acts of God, strikes,
lockouts, labor restrictions by any governmental authority, civil riot, floods,
and any other cause not reasonably within the control of Administaff or Client
and which by the exercise of due diligence Administaff or Client is unable,
wholly or in part, to prevent or overcome.
XV. EXHIBITS
The following exhibits and addendum are attached to this Agreement and
incorporated herein by reference for all purposes:
A. Exhibit A ("Confidential Census");
B. Exhibit B ("Client Service Application");
C. Exhibit C ("Employment Agreement");
D. Exhibit D ("State Specific Addendum").
THIS AGREEMENT is duly executed this 1 day of April , 199 8 .
--- ------- ---
FOR CLIENT: Collectibles USA, Inc. ADMINISTAFF COMPANIES, INC.
------------------------------------ 19001 Crescent Springs Drive
(Company Name) Kingwood, Texas 77339-3802
(800) 237-3170
By: /s/ Neil J. DePascal Jr. EVP & CFO
------------------------------------
(Signature) Title By: /s/ Jay E. Mincks
----------------------------
Neil J. DePascal Jr. Vice President
------------------------------------
(Name - Typed or Printed)
Address: 6402 Rippling Hollow Dr.
------------------------------------
Spring, TX 77379
------------------------------------
Tel. No.: 281-370-6730
------------------------------------
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EXHIBIT D
STATE SPECIFIC ADDENDUM
TEXAS
THIS ADDENDUM amends the Personnel Management Service Agreement (Agreement)
between Administaff Companies, Inc. (Administaff), a Delaware corporation, and
Collectibles USA, Inc. (Client), dated 4/1/98.
The parties recognize that Administaff is regulated by the Texas Staff
Leasing Services Act, Texas Labor Code, Chapter 91. Further, that those
regulations specify certain language must be included in the Agreement.
Therefore it is agreed that the following is hereby added to the Agreement.
Administaff:
1. Reserves a right of direction and control over Staff as to
administrative policies and duties relating to the services performed
by Staff;
2. Assumes responsibility for the payment of wages to Staff without
regard to payment by Client, subject to the termination provisions
hereof;
3. Assumes responsibility for payment of payroll taxes and collection of
taxes from payroll of Staff;
4. Retains a right to hire, fire, discipline and reassign Staff;
5. Retains a right of direction and control over the adoption of
employment policies and safety policies;
6. Retains the right to manage workers' compensation claims, claim
filings and related procedures.
The parties agree that if the Client fails to pay Administaff's invoice as
due, then in that event, this Agreement may be terminated instantly without
further notice at Administaff's sole direction with Client retaining its
obligations under 3.2 of the Agreement.
Client is hereby notified the address for the Texas Department of Licensing
and Regulation is P.O. Box 12157, Austin, Texas 78711, telephone number (800)
252-8026.
The parties recognize that Administaff has a right of direction and control
over Staff as it relates to personnel matters and that Client retains a right to
direction and control as to operational or product matters.
<PAGE>
Chapter 91 as amended, also provides that Administaff is not in the
unauthorized practice of an occupation, trade or profession which is licensed or
certified or otherwise regulated by a governmental entity solely by entering an
Agreement.
In all other aspects the Agreement remains as written. Any conflict between
this addendum and the Agreement shall be governed by this addendum.
DONE THIS 1 day of April , 199 8 , effective the same date as the Agreement
--- --------- ---
was executed.
CLIENT: ADMINISTAFF COMPANIES, INC.
By: /s/ Neil J. DePascal Jr. By: /s/ Jay E. Mincks
-------------------------------- ------------------------------
Title: EVP & CFO Title: VP
----------------------------- ---------------------------
<PAGE>
TEXAS STAFF LEASING AND CLIENT COMPANY CERTIFICATION
- --------------------------------------------------------------------------------
ADMINISTAFF COMPANIES, INC. (281) 358-8986
- --------------------------------------------------------------------------------
Name of Staff Leasing Firm Phone Number (Area Code & Number)
19001 CRESCENT SPRINGS DRIVE
- --------------------------------------------------------------------------------
Address (Street and Number, P.O. Box or
Route Number
KINGWOOD, TEXAS 77339-3802 760487432
- --------------------------------------------------------------------------------
City, State, Zip Code Federal Identification Number
SLSRVC 00000 324
- --------------------------------------------------------------------------------
License Number Under Art. 9104 of the Texas Sales & Use Tax Permit Number
Texas Labor Code
- --------------------------------------------------------------------------------
Collectibles USA, Inc. (281) 370-6730
- --------------------------------------------------------------------------------
Name of Client Company Firm Phone Number (Area Code & Number)
6402 Rippling Hollow Dr.
- --------------------------------------------------------------------------------
Address (Street and Number, P.O. Box or Route Number
Spring, TX 77379 13-3906920
- --------------------------------------------------------------------------------
City, State, Zip Code Federal Identification Number
The employee information provided in the attached listing is correct as of
4/1/98.
- ------
(effective date)
The parties entering into the contract are in compliance with the exemption
criteria Rule 3.364.
Either party to this certification can be held responsible for the assessment of
sales or use taxes which may become due for failure to comply with the
provisions of the Tax Code: Limited Sales, Excise, and Use Tax Act; Municipal
Sales and Use Tax Act; Sales and Use Taxes for Special Purpose Taxing
Authorities; County Sales and Use Tax Act; County Health Services Sales and Use
Tax; The Texas Health and Safety Code; Special Provisions Retailing to Hospital
District, Emergency Services Districts, and Emergency Districts in counties with
a population of 125,000 or less.
STAFF LEASING COMPANY CLIENT COMPANY
/s/ Jay E. Mincks /s/ Neil J. DePascal Jr.
- --------------------------------- --------------------------------
(Signature) (Signature)
Jay E. Mincks Neil J. DePascal Jr.
- --------------------------------- --------------------------------
(Printed Name) (Printed Name)
Vice President, Sales & Marketing EVP & CFO
- --------------------------------- --------------------------------
(Title) (Title)
4/30/98 April 1, 1998
- --------------------------------- --------------------------------
(Signature Date) (Signature Date)
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.
--------------------------
<PAGE>
RGR FINANCIAL GROUP, LLC
ONE BATTERY PARK PLAZA
24TH FLOOR
NEW YORK, NEW YORK 10004
July 29, 1998
Collectibles USA, Inc.
One Battery Park Plaza
24th Floor
New York, New York 10004
Dear Sir or Madam:
Reference is hereby made to the 2nd paragraph of the Letter Agreement,
dated as of May 31, 1998, between Collectibles USA, Inc. (the "Company") and RGR
Financial Group LLC ("RGR"), which specifies that RGR shall transfer 91,049
shares of common stock of the Company (the "Common Stock").
We hereby affirm that in the event of such a transfer, RGR will transfer a
total of 91,049 shares of Common Stock to the Company for cancellation, and
concurrently therewith, the Company shall issue 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, (i) preferred stock designated as
the Series A Convertible Preferred Stock, and (ii) 12% convertible notes due
February 28, 1999.
Very truly yours,
RGR FINANCIAL GROUP, LLC
By /s/ Ronald Rafaloff
--------------------------
Name: Ronald Rafaloff
Title:
Accepted and agreed to as of the date hereof:
COLLECTIBLES USA, INC.
By /s/ Shonnie Bilin
--------------------------
Name: Shonnie Bilin
Title:
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
July 29, 1998
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
