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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Amendment No. 3 to
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
Under Section 12(b) or 12(g)
of the Securities Exchange Act of 1934
Premier Classic Art, Inc.
(Exact name of registrant as specified in its charter)
Delaware 22-3680581
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1158 Staffler Road,
Bridgewater, New Jersey 08807
(Address of registrant's principal executive offices) (Zip Code)
(908) 526-7388
(Registrant's Telephone Number, Including Area Code)
Securities to be registered under Section 12(b) of the Act:
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Name of each exchange
Title of each class to be so registered: on which each class is to be registered:
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<S> <C>
None None
</TABLE>
Securities to be registered under Section 12(g) of the Act:
Common Stock,
par value $.0001
Copies to: Gerald A. Adler, Esquire
Bondy & Schloss LLP
6 East 43rd Street
New York, New York 10017-4656
Telephone No. (212)-661-3535
Fax No. (212) 972-1677
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Index to Form 10-SB Registration Statement
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Item Number and Caption Page
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PART I
1. Description of Business ............................................................... 1
2. Management's Discussion and Analysis of Financial Condition and Plan of Operation ..... 3
3. Description of Property ............................................................... 3
4. Security Ownership of Certain Beneficial Owners and Management ........................ 3
5. Management ............................................................................ 4
6. Executive Compensation ................................................................ 4
7. Certain Relationships and Related Transactions ........................................ 4
8. Description of Securities ............................................................. 5
PART II
1. Market For Common Equity and Related Shareholder Matters .............................. 6
2. Legal Proceedings ..................................................................... 6
3. Changes in and Disagreements with Accountants ......................................... 6
4. Recent Sales of Unregistered Securities ............................................... 6
5. Indemnification of Officers and Directors ............................................. 7
PART F/S
Financial Statements ..................................................................... 8-19
PART III
1. Index to Exhibits ..................................................................... 20
2. Description of Exhibits ............................................................... 20
Signatures ............................................................................... 21
</TABLE>
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PART I
DESCRIPTION OF BUSINESS
General Development of Business
Premier Classic Art, Inc. (the "Company") was incorporated as Pet-Con
Industries, Inc. in the State of Delaware on June 14, 1991. The Company
previously manufactured recyclable containers and bottles for sale to private
grocery product manufacturers and food packers. The Company discontinued these
operations in June 1995 and had no operating activities from then until
September 1999.
On September 1, 1999, the Company issued 1,158,845 shares of its common
stock to Mr. Trapp and 75,000 shares to Mr. Pistilli. Also, in September 1999
the Company issued 100,000 shares to Mr. Giltner Stevens, 306,980 shares to Mr.
Michael Salerno, 76,744 shares to Mr. Charles McLaughlin and 376,049 shares to
Royal Trading Ltd. In addition, in September 1999, the Company issued a
warrant, exercisable 13 months after issuance to Giltner Stevens to purchase
400,000 shares of its common stock at $1.50 per share. Finally, on September 2
1999, the Company closed an offering in which it sold 2,250,000 shares of its
common stock pursuant to Rule 504 Regulation D.
On September 2, 1999, the Company hired Charles Trapp as its President and
a director. At the same time, Louis A. Pistilli joined the Company as a director
and the Company's former president resigned.
On September 2, 1999, the Company purchased all of the outstanding shares
of stock of Cool Classic Incorporated, a Nevada corporation, in exchange for
3,069,788 shares of the Company's common stock. Cool Classic Incorporated is the
owner of 400,000 original, hand-painted animation production cels, which the
Company now plans to market and sell.
On September 3, 1999, the Company issued a $775,000 principle 10 1/2 %
convertible note due September 3, 2000. Interest is payable monthly, commencing
in December 1999 and payable in arrears from September 1999. The note is
convertible into 250,000 shares of the Company's common stock, at the option of
the holder, at a conversion price of $3.10 per share. The convertible note
contains a provision for an automatic conversion if the closing bid of the
common stock is greater than or equal to $5.50 per share for twenty consecutive
trading days. In connection with the execution of this note, the Company sold
the holder 100,000 shares of the Company's restricted common stock for $.001 per
share (which was below fair market value) and a warrant to purchase 400,000
shares of the Company's common stock at an exercise price of $1.00 per share.
Description of Business
Having acquired the outstanding stock of Cool Classic Incorporated with
its collection of 400,000 animation production cels, the Company intends to
market and sell these cels to the public through its website as well as through
art galleries, department type stores, other retail outlets and catalogues.
Pursuant to a Sub-Lease and Assembly Agreement, dated as of September 1999,
by and between the Company and Royal Animated Art, Inc., a California
corporation ("Royal"), the Company stores its collection of cels in a warehouse
leased by Royal from a third party. In addition, Royal has agreed to provide
services such as cleaning, sorting, cataloguing, matching with backgrounds,
matting and framing (as requested by the Company) as well as generally preparing
the cels for market. The Company is to pay Royal $1,000 per month for the
warehouse space as well as out of pocket costs for labor and materials plus 15%
of such costs as an estimate of Royal's overhead allocable to the Company's
products for the services rendered to the Company.
In addition to the marketing and sale of its own collection of cels, the
Company has entered into a Distribution Agreement, dated September 2, 1999,
with Royal. The agreement is for a three year term, subject to renewal As part
of the agreement, Royal grants the Company the non-exclusive right to purchase
and market reproductions of certain animation and comic strip images and
characters, including all animation art and comic strip lithographs, which
Royal has or acquires reproduction rights to. These rights are subject to any
restrictions or limitations contained in agreements under which Royal acquires
its rights and to the approval of Royal over whether and how many reproductions
of each particular piece of artwork should be sold to the Company. The Company
is to pay Royal a percentage of Royal's suggested retail price, depending on
whether the Company sells directly to the ultimate consumer (50%) or to
wholesalers, distributors, retailers and/or other middlemen (25%).
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Animation Cels
The term "cel" is used to describe the basic component of most types of
animation art. In its strictest sense, a cel is a plastic sheet, either
cellulose nitrate or cellulose acetate, on which animated characters are
painted. In practice, the term cel has come to mean that plastic sheet in
combination with the outline and coloring of a character, object or special
effect. Outlines can be either hand-inked or Xerographically transferred to the
sheet of plastic. Those outlines are then filled with color, either by
hand-painting or a serigraphic process, to complete the cel.
The Company's cel collection includes a combination of 12 field cels
(approximately 12" x 10" in size) and pan cels (approximately 36" x 10"). The
cels are selected from and were used in the production of Real
Ghostbusters/Slimer, Ewoks (Star Wars), He-Man, Master of the Universe, She-Ra,
Princess of Power, Bravestar, Flash Gordon, Shelly Duvall's Bedtime Stories,
Beethoven, Back to the Future and others.
Original Production Cels
These cels are hand-painted and have actually been used in the making of
animated films. They can have either Xerographed or hand-inked outlines and are
hand-painted at the studio. Each animation film is made of
<PAGE>
thousands of individual hand-painted cels. They are filmed in sequence to
create the illusion of motion. Many original production cels have been either
lost or destroyed through the years, which enhances their value as collectible
art. In addition each cel is a one-of-a-kind piece of art, and this rarity also
enhances its value. Because they were created to make an actual cartoon, each
cel is a component part of a larger movement. Different cels from the same
scene may be more or less desirable depending on a variety of factors such as
size, profile, and expression of the character, any damage to inking or paint
and overall visual appearance.
Sericels
Sometimes called serigraph cels, seri-cels re-create the look and feel of
the original art by means of Serigraphy, a fine art process. The serigraphy
process involves silk-screening each individual color to the cel, one at a
time. Every distinct shade is a separate screen and a separate pass in the
procedure. As a result of this fine art process, each color is flawlessly
reproduced. Sericels are also created in limited quantities, typically 2,500 to
5,000 peices. Because of their larger edition size, sericels are the most
affordable type of animation art and, the Company believes, ideal for the
beginning collector.
The Making of Cels
The Company does not produce its own cels. However, an understanding of the
production process is helpful toward an understanding of the nature of the cels
and their collectibility.
For production cels, the process begins when a storyboard is created by a
talented animator, who with the film director, determines the extent of the
background to be shown, the size of the characters and props to be used in each
scene. The animator makes a sketch from what will become each of approximately
16 frames per foot of film. Next, an outlined ink drawing is made of each of the
sketches. This outline is on a sheet of clear celluloid acetate. Each and every
inked outline is turned over to a painter and, by hand, the brilliant colors are
applied with special paints. Once each cel is hand painted and the foregrounds
and backgrounds are complete, the artwork is ready for photography. Using a
multiplane camera, the foreground, animation plane and the background are
meticulously arranged and photographed.
To produce a serigraph cel, or sericel, a hand cut, master screen is
prepared for each individual color of the original artwork. To produce this
Serigraph Cel, or Seri-Cel, a hand cut, master screen is prepared for each
individual color of the original artwork. The serigrapher meticulously applies
each color separately one screen at a time in perfect registration. The result
is an original work of art. The images chosen for a sericel are carefully
selected from the studio archives. Each sericel is limited in production to
only a certain number of pieces. After each edition size is achieved, the
screens used to create the art are destroyed, thus insuring their limited
status.
Industry and Competition
The Company believes that the collection of animation production cels is a
rapidly expanding pastime with more and more people every day discovering the
enjoyment and appreciating the hand-craftsmanship of these timeless works of
art. The Company is aware of two major distributors of animation cels, The Walt
Disney Co. (through its Walt Disney Art Classics division) and Time Warner Inc.
(through its Warner Bros. division) in addition to several distributors of
lesser stature. These distributors have significantly greater resources than
the Company. In addition, many collectors and distributors of cels have
established a presence on the Internet.
Sales and Marketing
Commencing January 11, 2000, the Company opened a website at
www.premierclassicart.com through which it offers for sale a selection of its
animation cels. The website receives an average of approximately 695 hits per
week. The Company recently sold 500 cels to a distributor at $40 per cel.
The Company will also attempt to market the cels through art galleries,
department stores, other retail outlets and catalogues. The Company has no
existing agreement with any such gallary or store.
2
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Seasonality
The Company's management believes that the demand for animation cels is
not subject to seasonal fluctuations.
Employees
The Company currently employs one executive and, if its revenue increases,
management expects that it will require one to three additional employees. The
Company also utilizes the services of Royal to prepare its cels for
presentation to the public. These are not regular employees of the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND PLAN OF OPERATION
Liquidity and Capital Resources
The Company does not have adequate cash reserves to meet its future cash
requirements. The Company is seeking to raise additional working capital through
debt or equity financings. The Company's ability to continue as a going concern
will depend upon successful completion of such financings and on its ability to
market its inventory. The Company has spent approximately $55,000 to sort the
cel art, copy the appropriate backgrounds and assemble the cels for sale. The
Company does not expect to have to purchase any property or equipment over the
next year that cannot be financed in the ordinary course of business.
Plan of Operation
The Company plans to continue marketing and selling its collection of cels
over the internet and through art galleries, department stores, other retail
outlets and catalogues. The Company currently has no agreement with any such
entity. The Company anticipates that it will take more than five years for it to
liquidate the collection so as to maximize its value and to take advantage of
opportunities to sell pieces when possible. The Company has received only
limited revenues from cels to date. Royal, in accordance with its agreement with
the Company provides the necessary artistic staff to process and prepare its
cels for presentation to the public. The Company has 35,000 cels ready for
presentation and distribution.
Since January 4, 2000, the Company has sold approximately cels to a
distributor at various prices. The Company cannot be certain that it will
continue to sell cels at the same prices or at this price.
PROPERTY
On September 3, 1999, the Company entered into a Sublease and Assembly
Agreement with Royal Animated Art, Inc. of California. The agreement provides
for the Company to pay Royal Animated Art, Inc. $1,000 per month for the use of
space in a warehouse facility in order to store the Company's collection of
cels. The agreement also provides for services to be performed by Royal in
connection with the cels and payment by the Company of Royal's costs in
connection with such services plus 15% of its overhead costs.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth the name and address of each officer and
director of the Company and each person who owns beneficially more than five
percent of the Common Stock of the Company, and the number of shares owned by
each such person and by all officers and directors as a group:
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<CAPTION>
Name and Address of Beneficial Owner Amount and Nature of Ownership Approximate % of Class
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<S> <C> <C>
Charles Trapp, Chairman, Chief Executive
Officer and President ......................... 1,158,845 15.2
Louis Pistilli, Secretary and Director ......... 125,000 1.6
James E. Cheatham, Director .................... 124,590 1.6
Joe Cool Collectibles, Inc. .................... 3,069,788 40.3
Giltner Stephens ............................... 1,000,000(1) 13.1
Herman Rush .................................... 266,667(2) 3.5
Directors and Officers as a Group .............. 1,408,435 18.4
</TABLE>
(1) Includes 250,000 shares underlying a convertible note, 350,000 shares of
common stock and warrant to purchase 400,000 shares of common stock at $1.00
per share which expires in September 2002.
(2) Includes an option to purchase 266,667 shares at $1.00 per share which
expires in September 2002.
3
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MANAGEMENT
Name Age Company Position
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Charles F. Trapp ........... 50 Chairman, Chief Executive Officer
and President
Louis A. Pistilli .......... 45 Director
James E. Cheatham .......... 63 Director
Charles F. Trapp is a certified public accountant and has served as the
Company's Chairman, Chief Executive Officer and President since September 1999.
Prior to that time, he was President of Somerset Kensington Capital Co. Inc., a
Company involved in financial restructuring and turnaround management. Mr.
Trapp was Vice President of Finance for A.W. Computer Systems, Inc. from
September 1996 to February 1999. A.W. filed Chapter 11 in May 1998 and
converted to Chapter 7 in February 1999.
Louis A. Pistilli is a certified public accountant and has been the
Secretary and a director of the Company since September 1999. He has been the
managing partner of the accounting firm of Pistilli & Romm LLC since January
1999. From January 1990 to December 1998, Mr. Pistilli served as managing
partner of the accounting firm of Pistilli & Company.
James E. Cheatham has been a director of the Company since September 1999.
Since September 1998, Mr. Cheatham has served as President of Giftrunner.com,
Inc., an Internet gift shopping website. From December 1995 to August 1998, he
served as President of Lionshare Group, a financial consulting company.
EXECUTIVE COMPENSATION
Commencing on September 1, 1999, the Company began paying its President
and CEO, Mr. Charles Trapp, a salary of 5,000 per month. As of December 31,
1999, Mr. Trapp has received an aggregate salary of $20,000 from the Company for
his services as President. Prior to being elected as the Company's President,
Mr. Trapp received 1,158,845 shares of the Company's common stock in exchange
for consulting services rendered. Mr. Trapp also receives as compensation a
Company-leased automobile and life insurance listing his wife as the
beneficiary.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Herman Rush, who owns an option to purchase 266,667 shares of the
Company's issued and outstanding common stock at $1.00 per share which expires
September 2002, is the President of Royal Animated Art, Inc. The Company has
entered into a Sub-Lease and Assembly Agreement, as well as a Distribution
Agreement, with Royal Animated Art, Inc.
Joe Cool Collectibles owns 3,069,788 shares of the Company's common stock.
Mr. Giltner Stephens owns 350,000 shares of the Company's common stock, a
warrant to purchase 400,000 shares at $1.00 per share which expires in
September 2002 and a one year $775,000 convertible note due September 2, 2002
and convertible into 250,000 shares at $3.10 per share.
In September 1999, the Company issued to Mr. Louis Pistilli 125,000 shares
in the aggregate (75,000 at $.001 per share for services rendered and 50,000 at
$.10 per share) pursuant to a 504 offering.
In September 1999, the Company issued to Charles F. Trapp 1,158,845 shares
of common stock at $.001 per share in exchange for services rendered.
DESCRIPTION OF SECURITIES
Common Stock
The Company is authorized to issue 50,000,000 shares of common stock,
$.001 par value, of which 7,643,946 shares are issued and outstanding. The
holders of common stock have one vote per share. None of the shares have
preemptive or cumulative voting rights, have any rights of redemption or are
liable for assessments or further calls. None of the shares have any conversion
rights. The holders of common stock are entitled to dividends, when and as
declared by the Board of Directors from funds legally available therefor. Upon
liquidations of the Company the holders of common stock are entitled to share
pro rata in any distribution to shareholders.
4
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Preferred Stock
The Company is authorized to issue 10,000,000 shares of Series A
cumulative convertible preferred stock, $.002 par value of which there are
136,000 shares issued and outstanding. The Series A cumulative convertible note
preferred stock is convertible into 30,600 shares of common stock.
Colonial Stock Transfer, 455 East 400 So. #100, Salt Lake City, Utah 84111
is the transfer agent and registrar for the Company's common stock and
preferred stock.
Shares Eligible for Future Sale
The Company has 7,649,946 shares of common stock outstanding, but, of
these shares, only 1,657,109 shares are freely tradable. All of the remaining
shares of common stock are considered "restricted securities" and in the
future, may be sold only in compliance with rule 144 or in an exempt
transaction under the Securities Act of 1933 (the "Act") unless registered
under the Act (the "restricted shares").
In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain conditions, a person, including an affiliate of the
Company (or persons whose shares are aggregated), who has owned restricted
shares of common stcok beneficially for at least one year is entitled to sell,
within any three month period, a number of shares that does not exceed the
greater of 1% of the total number of outstanding shares pf the same class or,
if the common stock is quoted on a national quotation system, the average
weekly trading volume during the four calendar weeks preceding the sale. A
person who has not been an affiliate of the Company for at least the three
months preceding the sale and who has beneficially owned shares of common stock
for at least two years is entitled to sell such shares under Rule 144 without
regard to any of the limitations described above.
Warrants
The Company has outstanding warrants to purchase 666,666 shares of its
common stock all at an exercise price of $1.00 per share. The warrants are for
a term of three years and are exercisable beginning on September 1999.
5
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PART II
MARKET FOR COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's securities trade are traded on the OTC Bulletin Board and in
the over-the-counter market "pink sheets". The Company's trading symbol is
"PART". Over-the-counter market quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commissions and may not represent actual
transactions. The following sets forth the range of high and low bid
information for the quarterly periods as reported on America Online:
High Low
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1997: (No quotations available
for 1997.)
1998: 1st Quarter .......... 0 0
2nd Quarter .......... 0 0
3rd Quarter .......... .01 .01
4th Quarter .......... 0 0
1999: 1st Quarter .......... 0 0
2nd Quarter .......... 0 0
3rd Quarter .......... 6 1/2 0
4th Quarter .......... 6 1/2 3 7/8
Holders
As of December 30, 1999, the number of holders of record of common stock,
excluding the number of beneficial owners whose securities are held in street
name was approximately 370.
Dividend Policy
The Company does not anticipate paying any cash dividends on its common
stock in the foreseeable future because it intends to retain its earnings to
finance the expansion of its business. Thereafter, the declaration of dividends
will be determined by the Board of Directors in light of conditions then
existing, including, without limitation, the Company's financial condition,
capital requirements and business condition.
The Company is prohibited from paying cash dividends on the common stock
until the preferred stock is converted into common stock or all preferred
dividends in arrears are brought current.
LEGAL PROCEEDINGS
The Company is not party to any material pending legal proceedings and has
no knowledge that any such proceedings are threatened.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
RECENT SALES OF UNREGISTERED SECURITIES
The following paragraphs set forth certain information with respect to all
securities sold by the Company within the past three years without registration
under the Securities Act of 1933, as amended (the "Securities Act"). The
information includes the names of the purchasers, the date of issuance, the
title and number of secur-ities sold and the consideration received by the
company for the issuance of these shares.
In September 1999, the Company issued to Charles F. Trapp 1,158,845 shares
of common stock and to Louis Pistilli 75,000 shares of comon stock each at
$.001 per share in exchange for services rendered.
In September 1999, the Company issued to Mr. Giltner Stevens 100,000
shares, to Mr. Michael Salerno 306,980 shares, to Mr. Charles McLaughlin 76,744
shares and to Royal Trading Ltd 376,049 shares each at $.001 per share and for
services rendered.
In September 1999, the Company issued 3,069,788 shares of common stock to
Joe Cool Collectibles, Inc. in exchange for all the outstanding stock of Cool
Classics, Inc.
6
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In September 1999 the company issued a warrant, exercisable 13 months
after issuance to Giltner B. Stevens to purchase 400,000 shares of the
Company's common stock at $1.50 per share.
The following individuals and/or entities purchsed the following number of
shares of common stock of the company at $.10 per share pursuant to Rule 504 of
Regulation D of the Securities Act of 1933, as amended which offering closed on
September 2, 1999.
SHAREHOLDERS NUMBER OF SHARES
Gerald A. Adler 41,660
Juan M. Camprubi Sala 250,000
John Catterson 41,670
Dauns Management, Inc. 150,000
Anthony DiNota 250,000
Edward David 250,000
Betty Jane Figlia 50,000
Joel S. Forman 41,660
Roslyn A. Haber 41,670
Mark Harmon 41,670
John P. Kneafsey 10,000
M & L Financial, Inc. 34,000
Charles McLaughlin 80,000
Jose Maria Losa 250,000
Carolina Lugo 336,000
Louis A. Pistilli 50,000
Joseph Rosenthal 41,670
Giltner B. Stevens 250,000
John J. Villa 20,000
West Valley Financial Management, Inc. 20,000
On September 3, 1999, the Company issued a $775,000 principle 10 1/2 %
convertible note due September 3, 2000. Interest is payable monthly, commencing
in December 1999 and payable in arrears from September 1999. The note is
convertible into 250,000 shares of the Company's common stock, at the option of
the holder, at a conversion price of $3.10 per share. The convertible note
contains a provision for an automatic conversion if the closing bid of the
common stock is greater than or equal to $5.50 per share for twenty consecutive
trading days. In connection with the execution of this note, the Company sold
the holder 100,000 shares of the Company's restricted common stock for $.001 per
share (which was below fair market value) and a warrant to purchase 400,000
shares of the Company's common stock at an exercise price of $1.00 per share.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 145 of the Delaware General Corporation Law (the "DGCL")
provides that a corporation may indemnify directors and officers as well as
other employees and individuals against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation, a
"derivative action"), if they 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, if they had
no reasonable cause to believe their conduct was unlawful. A similar standard is
applicable in the case of derivative actions, except that indemnification only
extends to expenses (including attorneys' fees) incurred in connection with the
defense or settlement of such actions, and the statute requires court approval
before there can be any indemnification where the person seeking indemnification
has been found liable to the corporation. The statute provides that it is not
exclusive of other indemnification that may be granted by a corporation's
bylaws, disinterested director vote, stockholder vote, agreement or otherwise.
7
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The Company's Certificate of Incorporation contains no specific
provision pertaining to the liability or indemnification of its officers or
directors. However, the Company's by-laws provide that no director or officer of
the corporation shall be liable for the acts, defaults or neglects of any other
director or officer, or for any loss sustained by the corporation, unless the
same has resulted from his own willful misconduct, willful neglect, or
negligence. The by-laws further provide as follows:
Each director and officer of the corporation and each person who shall
serve at the corporation's request as a director or officer of another
corporation in which the corporation owns shares of capital stock or of
which it is a creditor shall be indemnified by the corporation against
all reasonable costs, expenses and liabilities (including reasonable
attorney's fees) actually and necessarily incurred by or imposed upon
him in connection with, or resulting from, any claim, action, suit,
proceeding, investigation or inquiry of whatever nature in which he may
be involved as a party or otherwise by reason of his being or having
been a director or officer of the corporation or such director or
officer of such other corporation, at the time of the incurring or
imposition of such costs, expenses or liabilities, except in relation
to matters as to which he shall be finally adjudged in such action,
suit, proceeding, investigation or inquiry to be liable for willful
misconduct, willful neglect, or gross negligence toward or on behalf of
the corporation in the performance of his duties as such director or
officer of the corporation or as such director or officer of such other
corporation. As to whether or not a director or officer was liable by
reason of willful misconduct, willful neglect, or gross negligence
toward or on behalf of the corporation in the performance of his duties
as such director or officer of the corporation or as such director or
officer of such other corporation, in the absence of such final
adjudication of the existence of such liability, the Board of Directors
and each director and officer may conclusively rely upon an opinion of
legal counsel selected by or in the manner designated by the Board of
Directors. The foregoing right to indemnification shall be in addition
to and not in limitation of all other rights to which such person may
be entitled as a matter of law and shall inure to the benefit of the
legal representative of such person.
8
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PREMIER CLASSIC ART, INC.
FINANCIAL STATEMENTS
FOR THE NINE ENDED FEBRUARY 29, 2000 AND
FEBRUARY 28, 1999 AND THE SIX MONTHS ENDED
NOVEMBER 30, 1999 AND 1998
AND THE YEARS ENDED MAY 31, 1999, 1998
AND 1997
<PAGE>
PREMIER CLASSIC ART, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Independent Auditors' Report .......................................................... 1 - 2
Financial Statements:
Balance Sheets, February 29, 2000 (Unaudited), November 30, 1999, May 31, 1999 and
1998 ............................................................................... 3
Statement of Operations, Nine Months Ended February 29, 2000 and 1999 (Unaudited),
Six Months Ended November 30, 1999 and 1998 and the Years Ended May 31, 1999,
1998 and 1997 ...................................................................... 4
Statement of Stockholders' Equity (Deficiency) for the periods ended February 29, 2000
(Unaudited), November 30, 1999, May 31, 1999 and 1998 .............................. 5
Statement of Cash Flows, for the Nine Months Ended February 29, 2000 and 1999
(Unaudited), Six Months Ended November 30, 1999 and 1998 and the Years Ended
May 31, 1999, 1998 and 1997 ........................................................ 6
Notes to Financial Statements ........................................................ 7 - 15
</TABLE>
F-1
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Premier Classic Art, Inc.
We have audited the accompanying balance sheets of Premier Classic Art,
Inc.(the "Company") as of November 30, 1999, May 31, 1999 and May 31, 1998, and
the related statements of operations, stockholders' equity (deficiency), and
cash flows for the six months ended November 30, 1999 and 1998 and the years
ended May 31, 1999, 1998 and 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such financial statements referred to above present fairly, in
all material respects, the financial position of Premier Classic Art, Inc. at
November 30, 1999, May 31, 1999 and May 31, 1998 and the results of their
operations and their cash flows for the six months ended November 30, 1999 and
1998 and the years ended May 31, 1999, 1998 and 1997 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As more fully explained in Note 1 of Notes to
Financial Statements, the Company needs to obtain additional financing and sell
its inventory to liquidate its debts that are in default and support the
Company's overhead. These uncertainties raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of these
uncertainties.
WIENER, GOODMAN & COMPANY, P.C.
Certified Public Accountants
Eatontown, New Jersey
December 28, 1999, except for Note 4, as to
which the date is April 11, 2000.
F-2
<PAGE>
PREMIER CLASSIC ART, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
February 29, November
2000 30, 1999 May 31, 1999 May 31, 1998
-------------- -------------- -------------- ---------------
(Unaudited)
<S> <C> <C> <C> <C>
Current Assets:
Cash .............................................. $ 3,846 $ 217,758 $ -- $ --
Marketable securities ............................. 8,757 45,938 -- --
Accounts receivable ............................... 20,115 -- -- --
Prepaid expenses .................................. 416,666 459,920 -- --
Inventories ....................................... 365,954 307,389 -- --
------------ ------------ ------------ ------------
Total Current Assets ............................ 815,338 1,031,005 -- --
Other assets ...................................... 5,000 5,000 -- --
------------ ------------ ------------ ------------
TOTAL ASSETS .................................... $ 820,338 $ 1,036,005 $ -- $ --
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Short-term debt ................................... $ 775,000 $ 775,000 $ -- $ --
Current portion of long-term debt ................. -- 43,725 217,370 217,370
Accounts payable .................................. -- 6,330 46,263 46,263
Accrued expenses .................................. 90,856 76,739 151,408 128,008
------------ ------------ ------------ ------------
Total Current Liabilities ....................... 865,856 901,794 415,041 391,641
------------ ------------ ------------ ------------
Long-term debt .................................... -- -- -- 88,630
------------ ------------ ------------ ------------
Total Liabilities ............................... 865,856 901,794 415,041 480,271
------------ ------------ ------------ ------------
Commitments and Contingencies
Stockholders' Equity (Deficiency):
Series A cumulative convertible preferred stock
8% cumulative, par value $.002 per share,
authorized 10,000,000 shares; outstanding
136,000, 152,800, 256,800 and 256,800 shares 272 306 514 514
Common stock -- par value $.001 per share,
authorized 50,000,000 shares; outstanding
7,649,946, 7,640,166, 75,410, and 75,410
shares .......................................... 7,650 7,640 75 75
Additional paid-in capital ........................ 1,709,996 1,704,572 917,366 828,736
Cumulative other comprehensive (loss) ............. (38,050) (869) -- --
Deficit ........................................... (1,725,386) (1,577,438) (1,332,996) (1,309,596)
------------ ------------ ------------ ------------
Total Stockholders' Equity (Deficiency) ......... (45,518) 134,211 (415,041) (480,271)
------------ ------------ ------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIENCY) ................................... $ 820,338 $ 1,036,005 $ -- $ --
============ ============ ============ ============
</TABLE>
See notes to financial statements.
F-3
<PAGE>
PREMIER CLASSIC ART, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended Six Months Ended
February 29, February 28, November 30,
-------------- -------------- -----------------------------
2000 1999 1999 1998
-------------- -------------- ------------- --------------
(Unaudited)
<S> <C> <C> <C> <C>
Sales .............................................. $ 35,200 $ -- $ -- $ --
Cost and Expenses:
Cost of sales ..................................... 5,098 -- -- --
Selling, general and administrative ............... 748,085 -- 516,577 --
----------- ---------- ---------- ----------
753,183 -- 516,577 --
----------- ---------- ---------- ----------
Loss from operations ............................... (717,983) -- (516,577) --
Other expense
Interest expense .................................. 48,381 17,550 33,121 11,700
----------- ---------- ---------- ----------
Total other expense ................................ 48,381 17,550 33,121 11,700
----------- ---------- ---------- ----------
Loss before income taxes and extraordinary gain .... (766,364) (17,550) (549,698) (11,700)
Income tax provision ............................... -- -- -- --
----------- ---------- ---------- ----------
Loss before extraordinary gain ..................... (766,364) (17,550) (549,698) (11,700)
Extraordinary gain on extinguishment of debt ....... 373,974 -- 305,256 --
----------- ---------- ---------- ----------
Net (loss) ......................................... $ (392,390) $ (17,550) $ (244,442) $ (11,700)
=========== ========== ========== ==========
Net (loss) per common share
-- basic and diluted .............................. $ (0.16) $ (0.24) $ (0.16) $ (0.16)
Extraordinary gain on extinguishment of debt ....... 0.08 -- 0.09 --
----------- ---------- ---------- ----------
Net earnings (loss) per common sharebasic and
diluted ........................................... $ (0.08) $ (0.24) $ (0.07) $ (0.16)
=========== ========== ========== ==========
Weighted average of common shares outstanding
-- basic and diluted .............................. 4,836,186 75,410 3,437,212 75,410
=========== ========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended
May 31,
----------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Sales .............................................. $ -- $ -- $ --
Cost and Expenses:
Cost of sales ..................................... -- -- --
Selling, general and administrative ............... -- -- --
---------- ---------- ----------
-- -- --
---------- ---------- ----------
Loss from operations ............................... -- -- --
Other expense
Interest expense .................................. 23,400 23,400 23,400
---------- ---------- ----------
Total other expense ................................ 23,400 23,400 23,400
---------- ---------- ----------
Loss before income taxes and extraordinary gain .... (23,400) (23,400) (23,400)
Income tax provision ............................... -- -- --
---------- ---------- ----------
Loss before extraordinary gain ..................... (23,400) (23,400) (23,400)
Extraordinary gain on extinguishment of debt ....... -- -- --
---------- ---------- ----------
Net (loss) ......................................... $ (23,400) $ (23,400) $ (23,400)
========== ========== ==========
Net (loss) per common share
-- basic and diluted .............................. $ (0.31) $ (0.31) $ (0.31)
Extraordinary gain on extinguishment of debt ....... -- -- --
---------- ---------- ----------
Net earnings (loss) per common sharebasic and
diluted ........................................... $ (0.31) $ (0.31) $ (0.31)
========== ========== ==========
Weighted average of common shares outstanding
-- basic and diluted .............................. 75,410 75,410 75,410
========== ========== ==========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
PREMIER CLASSIC ART, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Comprehensive
Total (loss) Deficit
--------------- --------------- ----------------
<S> <C> <C> <C>
Balance June 1, 1997 .................................. $ (456,871) $ (1,286,196)
Retroactive effect of 1-for-50 reverse stock split
effective September 1, 1999 .........................
Net (loss) ........................................... (23,400) (23,400)
----------- ------------
Balance, May 31, 1998 ................................. (480,271) (1,309,596)
Capitalized debt ..................................... 88,630 --
Net (loss) ........................................... (23,400) (23,400)
----------- ------------
Balance, May 31, 1999 ................................. (415,041) (1,332,996)
Sale of common stock (at $.12 per share) ............. 15,000
Issuance of stock to repay accounts payable
(valued at $.10 per share) .......................... 1
Issuance of stock to repay debt and accrued
interest (valued at $.10 per share) ................. 2
Conversion of preferred stock to common stock......... --
Capitalized debt ..................................... 38,319
Issuance of common stock for services
(valued at $.10 per share) .......................... 209,362
Issuance of common stock in connection with
acquisition (valued at $1.75 per share) ............. 306,879
Issuance of common stock for services
(valued at $.10 per share) .......................... 1,400
Sale of common stock (at $.10 per share) ............. 223,600
Conversion of preferred stock to common stock
Net unrealized loss on marketable securities ......... (869) $ (869)
Net (loss) ........................................... (244,442) (244,442) (244,442)
-----------
$ (245,311)
===========
Balance, November 30, 1999 ............................ 134,211 (1,577,438)
Issuance of common stock to repay debt and
accrued interest (valued at $.10 per share) ......... 400
Conversion of preferred stock to common stock --
Issuance of common stock for services
(valued at $.40 per share) .......................... 5,000
Net unrealized loss on marketable securities ......... (37,181) (37,181)
Net (loss) for the three months ended
February 29, 2000 ................................... (147,948) (147,948) (147,948)
-----------
$ (185,129)
===========
Balance, February 29, 2000 ............................ $ (45,518) $ (1,725,386)
=========== ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Series A
Preferred Stock Common Stock
Net unrealized ------------------------ ---------------
(loss) on market- Shares Par Shares
able securities Outstanding Value Outstanding
------------------- ------------- --------- ---------------
<S> <C> <C> <C> <C>
Balance June 1, 1997 .................................. 256,800 $ 514 3,770,521
Retroactive effect of 1-for-50 reverse stock split
effective September 1, 1999 ......................... (3,695,111)
Net (loss) ...........................................
Balance, May 31, 1998 ................................. 256,800 514 75,410
Capitalized debt ..................................... -- --
Net (loss) ........................................... -- --
------- ----------
Balance, May 31, 1999 ................................. 256,800 514 75,410
Sale of common stock (at $.12 per share) ............. 124,590
Issuance of stock to repay accounts payable
(valued at $.10 per share) .......................... 925
Issuance of stock to repay debt and accrued
interest (valued at $.10 per share) ................. 2,360
Conversion of preferred stock to common stock......... (40,000) (80) 9,000
Capitalized debt .....................................
Issuance of common stock for services
(valued at $.10 per share) .......................... 2,093,618
Issuance of common stock in connection with
acquisition (valued at $1.75 per share) ............. 3,069,788
Issuance of common stock for services
(valued at $.10 per share) .......................... 14,000
Sale of common stock (at $.10 per share) ............. 2,236,000
Conversion of preferred stock to common stock......... (64,000) (128) 14,475
Net unrealized loss on marketable securities ......... (869)
Net (loss) ...........................................
Balance, November 30, 1999 ............................ (869) 152,800 306 7,640,166
Issuance of common stock to repay debt and
accrued interest (valued at $.10 per share) ......... 4,000
Conversion of preferred stock to common stock ........ (16,800) (34) 3,780
Issuance of common stock for services
(valued at $.40 per share) .......................... 2,000
Net unrealized loss on marketable securities ......... (37,181)
Net (loss) for the three months ended
February 29, 2000 ...................................
Balance, February 29, 2000 ............................ $ (38,050) 136,000 $ 272 7,649,946
========== ======= ====== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Common
Stock Stock
---------- ----------
Par Paid-In
Value Capital
---------- -------------
<S> <C> <C>
Balance June 1, 1997 .................................. $ 3,770 $ 825,041
Retroactive effect of 1-for-50 reverse stock split
effective September 1, 1999 ......................... (3,695) 3,695
Net (loss) ...........................................
Balance, May 31, 1998 ................................. 75 828,736
Capitalized debt ..................................... 88,630
Net (loss) ........................................... --
----------
Balance, May 31, 1999 ................................. 75 917,366
Sale of common stock (at $.12 per share) ............. 125 14,875
Issuance of stock to repay accounts payable
(valued at $.10 per share) .......................... 1
Issuance of stock to repay debt and accrued
interest (valued at $.10 per share) ................. 2
Conversion of preferred stock to common stock......... 9 71
Capitalized debt ..................................... 38,319
Issuance of common stock for services
(valued at $.10 per share) .......................... 2,094 207,268
Issuance of common stock in connection with
acquisition (valued at $1.75 per share) ............. 3,070 303,809
Issuance of common stock for services
(valued at $.10 per share) .......................... 14 1,386
Sale of common stock (at $.10 per share) ............. 2,236 221,364
Conversion of preferred stock to common stock 14 114
Net unrealized loss on marketable securities .........
Net (loss) ...........................................
Balance, November 30, 1999 ............................ 7,640 1,704,572
Issuance of common stock to repay debt and
accrued interest (valued at $.10 per share) ......... 4 396
Conversion of preferred stock to common stock 4 30
Issuance of common stock for services
(valued at $.40 per share) .......................... 2 4,998
Net unrealized loss on marketable securities .........
Net (loss) for the three months ended
February 29, 2000 ...................................
Balance, February 29, 2000 ............................ $ 7,650 $1,709,996
======== ==========
</TABLE>
F-5
<PAGE>
PREMIER CLASSIC ART, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended Six Months Ended
February 29, February 28, November 30,
-------------- -------------- ------------------------------
2000 1999 1999 1998
-------------- -------------- -------------- --------------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) .................................... $ (392,390) $ (17,550) $ (244,442) $ (11,700)
Adjustments to reconcile net (loss) to
cash provided by operating activities:
Common stock issued for services ............ 8,494 -- 3,494
Depreciation and amortization ............... 3,387 -- 3,387
Extraordinary gain on extinguishment
of debt .................................... (373,974) -- (305,256)
Non-cash compensation expense ............... 207,268 -- 207,268
Changes in operating assets and
liabilities:
(Increase) in marketable securities ......... (46,807) -- (46,807)
(Increase) in security deposits ............. (5,000) -- (5,000)
(Increase) in prepaid expenses .............. (20,115) -- (459,920)
Increase in accounts payable ................ (416,666) -- 6,330
(Increase) in inventories ................... (58,565) -- -- --
Increase in accrued expenses ................ 89,114 17,550 46,604 11,700
------------ ---------- ---------- ----------
Net Cash Used in Operating
Activities ................................. (1,005,254) -- (794,342) --
------------ ---------- ---------- ----------
Cash flows from financing activities:
Proceeds from sale of common stock ............ 238,600 -- 238,600 --
Proceeds from short term borrowings ........... 775,000 -- 775,000 --
Payments of short term borrowings ............. (4,500) -- (1,500) --
------------ ---------- ---------- ----------
Net Cash Provided by Financing
Activities ................................. 1,009,100 -- 1,012,100 --
------------ ---------- ---------- ----------
Net increase in cash ........................... 3,846 -- 217,758 --
Cash -- beginning of year ...................... -- -- -- --
------------ ---------- ---------- ----------
Cash -- end of year ............................ $ 3,846 $ -- $ 217,758 $ --
============ ========== ========== ==========
Supplemental disclosure of non-cash
financing activities:
Capital contribution to forgive debt .......... $ 38,319 $ 88,630 $ 38,319 $ --
============ ========== ========== ==========
Non-cash investing activities:
Unrealized (loss) on marketable securities $ 38,050 $ (869)
============ ----------
Common stock issued for inventory ............. $ 306,879 $ 306,879
============ ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended
May 31,
----------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) .................................... $ (23,400) $ (23,400) $ (23,400)
Adjustments to reconcile net (loss) to
cash provided by operating activities:
Common stock issued for services ............
Depreciation and amortization ...............
Extraordinary gain on extinguishment
of debt ....................................
Non-cash compensation expense ...............
Changes in operating assets and
liabilities:
(Increase) in marketable securities .........
(Increase) in security deposits .............
(Increase) in prepaid expenses ..............
Increase in accounts payable ................
(Increase) in inventories ................... -- -- --
Increase in accrued expenses ................ 23,400 23,400 23,400
---------- ---------- ----------
Net Cash Used in Operating
Activities ................................. -- -- --
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from sale of common stock ............ -- -- --
Proceeds from short term borrowings ........... -- -- --
Payments of short term borrowings ............. -- -- --
---------- ---------- ----------
Net Cash Provided by Financing
Activities ................................. -- -- --
---------- ---------- ----------
Net increase in cash ........................... -- -- --
Cash -- beginning of year ...................... -- -- --
---------- ---------- ----------
Cash -- end of year ............................ $ -- $ -- $ --
========== ========== ==========
Supplemental disclosure of non-cash
financing activities:
Capital contribution to forgive debt .......... $ 88,630 $ -- $ --
========== ========== ==========
Non-cash investing activities:
Unrealized (loss) on marketable securities
Common stock issued for inventory .............
</TABLE>
See notes to financial statements.
F-6
<PAGE>
PREMIER CLASSIC ART, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Premier Classic Art, Inc. (the "Company") formerly Pet-Con Industries,
Inc. previously manufactured recyclable containers and bottles for sale to
private label grocery product manufacturers and private label food packers. The
Company discontinued operations in June 1995. On September 1, 1999 the Company
changed its name and is currently engaged in the marketing of original,
hand-painted production animation cels through a variety of outlets throughout
the United States.
Basis of Presentation
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business.
The Company's operations have just commenced under new management.
The Company's ability to continue as a going concern is dependant upon its
ability to obtain needed working capital through additional equity and/or debt
financing and its ability to market its inventory. Management is actively
seeking additional capital to liquidate its current obligations. There is no
assurance that additional capital will be obtained or the Company will be able
to sell its current inventory. These uncertainties raise substantial doubt
about the ability of the Company to continue as a going concern.
The financial statements do not include any adjustments relative to the
recoverability and classification of recorded asset amounts and classification
of liabilities that might be necessary should the Company be unable to continue
as a going concern.
Use of Estimates
The preparation of the 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.
Marketable Securities
The Company classifies its investment in equity securities as "available
for sale", and accordingly, reflects unrealized losses, net of deferred taxes,
as a separate component of stockholders' equity (deficiency).
The fair values of marketable securities are estimated based on quoted
market prices. Realized gains or losses from the sales of marketable securities
are based on the specific identification method.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash
investments. The Company places its temporary cash investments with quality
financial institutions and, by policy, limits the amount of credit exposure
with any on financial institution.
Reverse Stock Split
Effective September 1, 1999 the Board of Directors approved a
one-for-fifty reverse stock split of its common stock. All references in the
accompanying financial statements to the number of shares and per share amounts
have been retroactively restated to reflect this transaction.
F-7
<PAGE>
PREMIER CLASSIC ART, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (Continued)
Prepaid Expenses
Prepaid expenses consist primarily of a three year consulting agreement in
the amount of $500,000 which was paid in cash by the Company in September 1999.
Consulting expense charged to operations for the nine months ended February 29,
2000 and February 28, 1999 was $83,333 and -0-, respectively. For the six
months ended November 30, 1999 and 1998 was $41,667 and -0-, respectively. For
the years ending May 31, 1999, 1998 and 1997, there was no consulting expense.
Inventories
Inventories, consisting of finished animated cels are stated at the lower
of cost (first-in, first-out) or market.
Revenue Recognition
Revenue will be recognized upon shipment of merchandise after the price to
the buyer is fixed and determinable and title passes to customers and
collectibility of the sales price is reasonably assured.
Stock-Based Compensation
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
No. 123). The standard encourages, but does not require, companies to recognize
compensation expense for grants of stock, stock options and other equity
instruments to employees based on fair value accounting rules. The Company has
adopted the disclosure-only provisions of SFAS No. 123. The Company recognizes
compensation expense for services to non-employees based on fair value
accounting rules.
Earnings Per Common Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share", which requires companies to present basic earnings per share ("EPS")
and diluted earnings per share instead of the primary and fully diluted EPS
that was required. The new standard requires additional information disclosures
and also makes certain modifications to the currently applicable EPS
calculations defined in Accounting Principles Board No. 15.
Basic and diluted loss per common share is computed by dividing net loss
by the weighted average number of common shares outstanding during the year.
Diluted earnings per common share are computed by dividing net earnings by the
weighted average number of common and potential common shares during the year.
Potential common shares are excluded from the loss per share calculation.
because the effect would be antidilutive. Potential common shares relate to the
preferred stock that is convertible into common stock, convertible debt and
outstanding warrants. The number of potential common shares outstanding were
947,946, 951,810, 59,064 and 59,064 as of February 29, 2000, November 30, 1999,
May 31, 1999 and May 31, 1998, respectively.
Fair Value of Financial Instruments
At November 30, 1999, the fair values of cash, other current assets,
accounts payable, accrued interest and other accrued liabilities approximated
their carrying values because of the short-term nature of these instruments.
The estimated fair values of the convertible debt subject to fair value
disclosures was determined by multiplying the number of common shares the debt
is convertible into by the quoted market price of the Company's Common Stock at
November 30, 1999.
Carrying Fair
Value Value
---------- -------------
Convertible debt ......... $775,000 $1,500,000
F-8
<PAGE>
PREMIER CLASSIC ART, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (Continued)
Unaudited Interim Financial Statements
The financial statements as of February 29, 2000 and for the nine months
ended February 29, 2000 and 1999 include, in the opinion of management, all
adjustments consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial position and results of operations for these
periods. The results for the interim period ended February 29, 2000 are not
necessarily indicative of the results that may be expected for the entire year.
2. MARKETABLE SECURITIES
<TABLE>
<CAPTION>
Estimated Gross Gross
Fair Unrealized Unrealized
Cost Value Gains Losses
---------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
February 29, 2000:
Marketable securities -- current:
Common stock .................. $46,807 $ 8,757 $-- $38,050
======= ======= === =======
November 30, 1999:
Marketable securities -- current:
Common stock .................. $46,807 $45,938 $-- $ 869
======= ======= === =======
</TABLE>
There were no realized gains or losses for the nine months ended February
29, 2000 and February 28, 1999 or for the six months ended November 30, 1999
and 1998 or the years ended May 31, 1999, 1998 and 1997.
3. ACQUISITION
On September 8, 1999, the Company acquired the inventory of original,
hand-painted production animation cels, of Cool Classic, Inc., a subsidiary of
Joe Cool Collectibles, Inc. for 3,069,788 shares of the Company's common stock,
which represents approximately 40% of the total outstanding shares of the
Company.
The acquired inventory was accounted for as a non-monetary transaction in
accordance with Accounting Principles Board Opinion No. 29, "Accounting for
Non-Monetary Transactions" (APB No. 29). The Company recorded the inventory
value at $306,879. Cool Classic, Inc. was not a business but a collection of
animated art cels and, accordingly, the Company has not included any proforma
unaudited results of operations.
4. DEBT
Short-term debt consisted of the following:
On September 3, 1999, the Company issued a $775,000 principle 10 1/2 %
convertible note due September 3, 2000. Interest is payable monthly, commencing
in December 1999 and payable in arrears from September 1999. The note is
convertible into 250,000 shares of the Company's common stock, at the option of
the holder, at a conversion price of $3.10 per share. The convertible note
contains a provision for an automatic conversion if the closing bid of the
common stock is greater than or equal to $5.50 per share for twenty consecutive
trading days. In connection with the execution of this note, the Company sold
the holder 100,000 shares of the Company's restricted common stock for $.001
per share (which was below fair market value) and a warrant to purchase 400,000
shares of the Company's common stock at an exercise price of $1.00 per share.
This transaction resulted in additional interest expense of $9,900.
The holder of this note received a first priority security in the
Company's inventory and an insurance policy in the amount of $1.5 million,
naming the holder as an additional insurer.
F-9
<PAGE>
PREMIER CLASSIC ART, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
4. DEBT -- (Continued)
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
February 29, November 30, May 31, May 31,
2000 1999 1999 1998
-------------- -------------- ---------- ----------
<S> <C> <C> <C> <C>
10% notes payable to stockholders, obligation in default at
July 1997 (a) ............................................... $-- $ 3,000 $ 83,000 $ 83,000
12% note payable, obligation in default at May 31,
1994 (b) .................................................... -- -- 35,000 35,000
8% notes payable to stockholders, less discount of $6,957,
obligation in default at October 1998 (c) ................... -- 23,043 33,043 33,043
10% note payable, obligation in default at April 1994 (d) . -- -- 25,000 25,000
18% notes payable, obligation in default at December
1995 (e) .................................................... -- -- 23,645 23,645
12% note payable, obligation in default at June 1994 ......... -- 10,000 10,000 10,000
8% note payable to stockholder, less discount of $2,318,
obligation in default at September 1998 ..................... -- 7,682 7,682 7,682
--- ------- -------- --------
Total ........................................................ -- 43,725 217,370 217,370
Less current maturities ...................................... -- 43,725 217,370 217,370
--- ------- -------- --------
$-- $ -- $ -- $ --
=== ======= ======== ========
</TABLE>
- ------------
(a) On August 13, 1999, the Company paid $1,500 in cash for payment in full of
a $30,000 note with accrued interest of $21,645. On August 23, 1999, the
Company issued 1,000 shares of common stock for payment of the principal
of $50,000 and accrued interest of $36,075. In December 1999 the Company
paid principal of $3,000 and accrued interest of $4,610 in cash for full
payment of this debt.
(b) On August 23, 1999, the Company issued 700 shares of common stock for
payment of the principal of $35,000 and accrued interest of $28,495.
(c) On August 23, 1999, the Company issued 200 shares of common stock for
payment of principal of $10,000 and accrued interest of $4,644. On
December 10, 1999 the Company issued 3,000 shares of common stock for
payment of the principal of $23,043 and accrued interest of $14,833.
(d) On August 17, 1999 the president personally took responsibility for the
principal of $25,000 and the accrued interest of $13,319.
(e) On August 23, 1999, the Company issued 460 shares of common stock for
payment of the principal of $23,645 and accrued interest of $21,318.
(f) On December 20, 1999, the promissory note of $10,000 and accrued interest
of $8,554 was forgiven by the noteholder.
(g) On December 10, 1999, the Company issued 1,000 shares of common stock for
payment of the principal of $7,682 and accrued interest of $5,006.
The above transactions, (a through g),resulted in the Company issuing
6,360 shares of the Company's common stock and the Company recorded an
extraordinary gain on extinguishment of debt of $373,974 and $305,256 included
in the statement of operations for the nine months ended February 29, 2000 and
the six months ended November 30, 1999, respectively.
F-10
<PAGE>
PREMIER CLASSIC ART, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
5. STOCK OPTIONS AND WARRANTS
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation". In September 1999, the Company issued three-year warrants to
purchase 666,666 shares of Common Stock at an exercise price of $1.00 per
share. In connection with the short-term debt, the Company issued a warrant for
400,000 shares of common stock and in connection with the consulting agreement,
the Company issued a warrant to purchase 266,666 shares of common stock.
Information regarding the Company's warrants for the six months ended
November 30, 1999 is as follows:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
------------ -----------------
<S> <C> <C>
Warrants outstanding beginning of period ................. -- $ --
Warrants exercised ....................................... -- $ --
Warrants granted ......................................... 666,666 $ 1.00
Warrants cancelled ....................................... -- $ --
-------
Warrants outstanding, end of period ...................... 666,666 $ 1.00
=======
Warrants price range end of period ....................... $ 1.00
Weighted-average fair value of warrants granted during the
year .................................................... $ .56
</TABLE>
The following table summarizes information about fixed-price stock options
outstanding at November 30, 1999:
<TABLE>
<CAPTION>
Weighted Average Weighted Number
Range of Number Outstanding Remaining Contractual Average Exercise Exercisable at Weighted Average
Exercise Prices at November 30, 1999 Life Price November 30, 1999 Exercise Price
- ----------------- ---------------------- ----------------------- ------------------ ------------------- -----------------
<S> <C> <C> <C> <C> <C>
$ 1.00 666,666 3 years $ 1.00 666,666 $ 0.56
</TABLE>
6. STOCK BASED COMPENSATION
On September 1, 1999, the Company issued 2,093,618 shares of common stock
for consulting services rendered. The Company valued these shares at fair
market value and recorded additional compensation expense of $207,268 which is
included in selling general and administrative costs in the Statement of
Operations.
7. INCOME TAXES
The Company has a net operating loss ("NOL") carryforward of approximately
$900,000 expiring in various years through 2014. The Company has not reflected
any benefit of such NOL carryforward in the accompanying financial statements
in accordance with Financial Accounting Standards Board Statement No. 109
"Accounting for Income Taxes" (SFAS 109) as the realization of this deferred
tax benefit is not more than likely.
The Tax Reform Act of 1986 provided for a limitation on the life of NOL
carryforwards, following certain ownership changes. As a result of transactions
in the Company's common stock during the six months ended November 30, 1999, a
change in ownership of greater than 50%, as defined, has occurred. Under such
circumstances, the potential benefits from utilization of tax carryforwards may
be substantially limited or reduced on an annual basis.
There is no provision for income taxes for the six months ended November
30, 1999 and for the years ended May 31, 1999, as the Company had net losses.
F-11
<PAGE>
PREMIER CLASSIC ART, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
7. INCOME TAXES -- (Continued)
The tax effect of the net operating loss carryforward on deferred income
taxes at November 30, 1999 and May 31, 1999 was as follows:
Temporary
Difference Tax Effect
------------ -------------
Net operating loss .......... $ 900,000 $ 360,000
Valuation allowance ......... (900,000) (360,000)
---------- ----------
$ -- $ --
========== ==========
8. EXTRAORDINARY GAINS
In August 1999, the Company issued common shares to extinguish long-term
debt and accrued interest. In connection with these transactions the Company
recorded extraordinary gains of approximately $373,974 ($.08 per share) and
$305,000 ($.09 per share) for the nine months ended February 29, 2000 and the
six months ended November 30, 1999, respectively.
9. COMMITMENTS AND CONTINGENCIES
Leases
On September 3, 1999, the Company signed a sublease and assembly agreement
with a warehouse facility. The sublease requires the Company to pay certain
utility and related charges.
Future minimum lease payments are as follows:
Years Ending
November 30, Amount
- ---------------- ----------
2000 ......... $12,000
2001 ......... 5,000
2002 ......... --
2003 ......... --
2004 ......... --
-------
$17,000
=======
Rent expense for the nine months ended February 29, 2000 and February 28,
1999 and for the six months ended November 30, 1999 and 1998 was $6,000, -0-,
$3,000 and -0-, respectively. For the years ended May 31, 1999, 1998 and 1997,
there was no rent expense.
The assembly agreement requires the Company to pay actual labor and
material plus 15% of those costs to assemble the cels. The agreement also
requires the Company to pay actual labor, material and shipping costs plus 15%
of those costs to ship the cels.
Distribution Agreement
On September 3, 1999, the Company signed a three year distribution
agreement with an option to extend it for an additional two years. The
distribution agreement requires the Company to pay a fee of 50% of the
distributors retail price when the distributor sells directly to the ultimate
consumer and 25% when sold to wholesalers.
F-12
<PAGE>
PART III
Index and Description of Exhibits
1. Index to Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------- -----------------------------------------------------------------------------------------
<S> <C>
3.1 Certificate of Incorporation, together with all amendments*
3.2 By-Laws*
10.1 Marketing Agreement, dated as of September 14, 1999, by and between the Company and
Giltner B. Stevens*
10.2 Loan Agreement, dated September 2, 1999, by and between the Company and Giltner Stephens*
10.3 Sub-Lease and Assembly Agreement, dated as of September 3, 1999, by and between the
Company and Royal Animated Art, Inc.*
10.4 Plan and Agreement of Reorganization, dated as of September 2, 1999, by and among the
Company, Cool Classic Incorporated and Joe Cool Collectibles, Inc.*
10.5 Employment Agreement, dated as of September 1, 1999, by and between the Company and
Charles F. Trapp*
10.6 Distribution Agreement, dated as of September 1999, by and between the Company and Royal
Animated Art, Inc.*
27.1 Financial Data Schedule
</TABLE>
- ------------------
* Previously filed.
2. Description of Exhibits
Exhibits are set forth above under Item 1 of this Part III.
20
<PAGE>
SIGNATURE
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf the
undersigned thereto duly authorized.
Dated: April 13, 2000
Premier Classic Art, Inc.
/s/ Charles Trapp
By:---------------------------------------
Name: Charles Trapp
Title: President and CEO
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Financial Statements of Premier Classic Art, Inc. and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 5-MOS
<FISCAL-YEAR-END> MAY-31-2000
<PERIOD-START> JUN-01-1999
<PERIOD-END> FEB-29-2000
<CASH> 3,846
<SECURITIES> 0
<RECEIVABLES> 20,115
<ALLOWANCES> 0
<INVENTORY> 365,954
<CURRENT-ASSETS> 815,338
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 820,338
<CURRENT-LIABILITIES> 865,856
<BONDS> 0
0
272
<COMMON> 7,650
<OTHER-SE> (53,440)
<TOTAL-LIABILITY-AND-EQUITY> 820,338
<SALES> 35,200
<TOTAL-REVENUES> 0
<CGS> 5,098
<TOTAL-COSTS> 753,183
<OTHER-EXPENSES> 48,381
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48,381
<INCOME-PRETAX> (766,364)
<INCOME-TAX> 0
<INCOME-CONTINUING> (427,367)
<DISCONTINUED> 0
<EXTRAORDINARY> 373,974
<CHANGES> 0
<NET-INCOME> (392,390)
<EPS-BASIC> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
