SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended March 31, 1995 Commission File No. 1-8653
CIRCLE FINE ART CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-2855867
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
303 E. Wacker Drive
Suite 830
Chicago, Illinois 60601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 312-616-1300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
As of April 30, 1995 there were approximately 9,165,870 shares of Common
Stock, $.01 par value per share outstanding. The exact number cannot be
accurately determined because of the effect of a one-for-three stock split
effected on December 13, 1994 which rounded up all one-for-three fractional
shares.
<PAGE>
QUARTERLY REPORT ON FORM 10Q
CIRCLE FINE ART CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
CIRCLE FINE ART CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31 Six Months Ended March 31
1995 1994 1995 1994
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales $4,331,000 $4,012,000 $9,788,000 $9,834,000
Cost of Sales 2,051,000 2,067,000 4,545,000 4,603,000
------------ ------------ ------------ ------------
Gross Profit 2,280,000 1,945,000 5,243,000 5,231,000
Selling Expenses 2,924,000 2,724,000 5,786,000 5,524,000
General and Admin-
istrative Expenses 464,000 657,000 1,047,000 1,267,000
------------ ------------ ------------ ------------
Loss from Operations (1,108,000) (1,436,000) (1,590,000) (1,560,000)
Interest Expense 420,000 733,000 1,209,000 1,341,000
Gain (Loss) on Invest-
ment in Affiliates 203,000 - 286,000 (34,000)
------------ ------------ ------------ ------------
Net Loss Before Income (1,325,000) (2,169,000) (2,513,000) (2,935,000)
Taxes, Discontinued
Operations and
Extraordinary Gain
Income Taxes - - - -
------------ ------------ ------------ ------------
Net Loss Before
Discontinued
Operations and
Extraordinary Gain (1,325,000) (2,169,000) (2,513,000) (2,935,000)
Gain on Sale of
Discontinued Operations 348,000 - 348,000 -
Loss from Operations of
Discontinued
Operations (31,000) (50,000) (90,000) (71,000)
Extraordinary Gain, net
of applicable income
taxes of $0 - - 4,441,000 -
------------ ------------ ------------ ------------
Net Income/(Loss) $(1,008,000) $(2,219,000) $2,186,000 $(3,006,000)
Net Loss Per Common and
Common Equivalent
Share Before
Discontinued
Operations and
Extraordinary Gain (.14) (1.92) (.42) (2.60)
Net Gain Per Common and
Common Equivalent
Share on Sale of
Discontinued
Operations .04 - .06 -
Net Loss Per Common and
Common Equivalent
Share from Operations
of Discontinued
Operations (.01) (.05) (.02) (.06)
Net Income Per Common
and Common Equivalent
Share for
Extraordinary Gain - - .75 -
Net Income (Loss) Per
Common and Common
Equivalent Share (.11) (1.97) .37 (2.66)
------- -------- -------- --------
Weighted Average
Number of Common
Shares Outstanding 9,382,878 1,130,092 5,937,545 1,130,092
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
<TABLE>
<CAPTION>
CIRCLE FINE ART CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS March 31, 1995 September 30,
(Unaudited) 1994
<S> <C> <C>
Current Assets:
Cash $310,000 $151,000
Receivables, Net of Allowance
for Doubtful Accounts of $23,000 at
March 31, 1995 and $175,000 at
September 30, 1994 184,000 668,000
Barter Receivables, Net of Allowance
for Doubtful Accounts of $50,000 at
March 31, 1995 and $343,000 at
September 30, 1994 131,000 736,000
Inventories 12,284,000 12,077,000
Other Current Assets 566,000 743,000
------------ ------------
Total Current Assets 13,475,000 14,375,000
Investment in Art 4,101,000 4,101,000
Property, Plant and Equipment, Net 5,194,000 5,432,000
Other Assets 852,000 321,000
------------ ------------
$23,622,000 $24,229,000
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current Maturities of Long-Term Debt $523,000 -
Accounts Payable 4,272,000 4,535,000
Barter Payable 163,000 1,057,000
Accrued Expenses:
Interest 62,000 3,890,000
Compensation 512,000 714,000
Taxes, other then payroll 247,000 387,000
Other 807,000 1,192,000
Customer Deposits and Credits 420,000 488,000
Notes Payable - 1,100,000
Debt in Default - 24,137,000
------------ ------------
Total Current Liabilities 7,006,000 37,500,000
------------ ------------
Long-Term Debt 16,838,000 -
Shareholders' Equity (Deficit): Preferred
Stock, $.01 par value; authorized 100,000
shares; 4,000 shares issued and outstanding. - -
Common Stock, $.01 par value; authorized
15,000,000 shares; 9,165,870 shares issued
and outstanding at March 31, 1995: $.10 par
value; authorized 5,000,000 shares;
1,133,425 shares issued and outstanding at
September 30, 1994. 91,000 340,000
Additional Paid-In Capital 14,934,000 3,822,000
Accumulated Deficit (15,137,000) (17,323,000)
------------ ------------
(112,000) (13,161,000)
Less 6,667 shares of Treasury
Stock at Cost (110,000) (110,000)
------------ ------------
Total Shareholders' Equity (Deficit) (222,000) (13,271,000)
------------ ------------
$23,622,000 $24,229,000
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
<TABLE>
<CAPTION>
CIRCLE FINE ART CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 1995 AND 1994
1995 1994
(Unaudited) (Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net Gain (loss) $2,186,000 $(3,006,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 593,000 595,000
Gain on Sale of Discontinued Operations (348,000) -
(Gain)/Loss on investment in affiliates (286,000) 34,000
Loss on write off of leasehold improvements
on closed galleries 25,000 -
Extraordinary gain (4,441,000) -
Other (256,000) (6,000)
Change in operating assets and liabilities:
Receivables 1,437,000 (203,000)
Inventories (207,000) 754,000
Other current assets 177,000 (124,000)
Accounts payable, accrued compensation and
accrued expenses (1,216,000) 1,566,000
Customer deposits and credits (68,000) 3,000
------------ ------------
Net cash (used) in operating activities (2,404,000) (375,000)
INVESTING ACTIVITIES:
Capital expenditures (370,000) (101,000)
------------ ------------
Net cash used in investing activities (370,000) (101,000)
FINANCING ACTIVITIES:
Repayment of debt (400,000) (26,000)
Proceeds from issuance of new loans 2,500,000 -
Net proceeds from issuance of new stock 1,933,000 -
Payment of bridge loans (1,100,000) -
------------ ------------
Net cash provided by (used in) 2,933,000 (26,000)
financing activities
Net increase (decrease) in cash 159,000 (502,000)
Cash at beginning of period 151,000 551,000
------------ ------------
Cash at end of period $310,000 $49,000
Supplemental disclosures of
cash flow information:
Cash paid during the year for:
Interest $518,000 $24,000
Income Taxes - -
Supplemental disclosures of non-cash
investing and financing activities:
Conversion of debt to equity $4,930,000 -
Issuance of preferred stock upon
conversion of long-term debt $4,000,000 -
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
CIRCLE FINE ART CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MARCH 31, 1995
1. Summary of significant accounting policies:
Basis of Presentation:
The accompanying consolidated financial statements include the accounts of
Circle Fine Art Corporation (the "Company) and its wholly-owned subsidiaries.
All intercompany accounts and transactions have been eliminated in the
consolidated financial statements. The Company's investment in its one 50%
owned affiliate is accounted for by the equity method. The 1994 consolidated
financials have been reclassified to conform to the 1995 presentation without
affecting the previously reported net loss or shareholders' equity (deficit).
Earnings per share and the number of shares outstanding for 1994 are restated
for the December 1994 one for three stock split.
Allowance for Doubtful Accounts:
The Company, on a periodic basis, reviews the collectibility of its
receivables and based on these reviews provides for an allowance for doubtful
accounts. When a receivable is determined to be uncollectible it is written
off.
Inventories:
Inventories are valued at the lower of cost (specific identification
method) or market.
Investment in Art:
The Company has segregated certain works of art which are intended to be
held as a long-term investment. This art is valued at the lower of cost
(specific identification method) or market.
Property, Plant and Equipment:
Property, plant and equipment are stated at cost.
Depreciation is provided by use of the straight-line method over the
estimated useful lives of these assets. Leasehold improvements are amortized
under the straight-line method over the shorter of the estimated useful life
of the asset or the term of the lease.
Revenue Recognition:
Retail gallery sales are recognized when the entire selling price has
been received and substantial performance has been completed. Wholesale sales
are recognized at the time of shipment to the customer. Merchandise subject
to customer deposits is included in inventories, and the deposits are
reflected as a current liability.
<PAGE>
CIRCLE FINE ART CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED MARCH 31, 1995
1. Summary of significant accounting policies (continued):
Barter Transactions:
The Company sells some of its inventories through barter transactions
with certain of the Company's suppliers of goods and services, as well as
through barter exchange organizations. These transactions are recorded based
on the fair value of the goods or services involved. Receivables from
unsettled barter transactions at March 31, 1995 and September 30, 1994 were
$131,000 and $736,000, respectively. Payables from unsettled barter
transactions at March 31, 1995 and September 30, 1994 were $163,000 and
$1,057,000 respectively.
2. Nature of Activities:
The Company sells fine art, jewelry and related products at retail
through art galleries. The Company operates one of the largest groups of fine
art galleries specializing in high priced limited edition fine art in the
United States. The Company also sells fine art to other retail art galleries
on a wholesale basis.
3. Inventories:
<TABLE>
<CAPTION>
Inventories at March 31, 1995 and September 30, 1994 consist of the
following:
3/31/95 09/30/94
------------ ------------
<S> <C> <C>
Merchandise for sale $11,793,000 $11,638,000
Raw materials and work in process 491,000 439,000
------------ ------------
$12,284,000 $12,077,000
</TABLE>
4. Property, plant and equipment:
<TABLE>
<CAPTION>
Property, plant and equipment at March 31, 1995 and September 30, 1994
consist of the following:
3/31/95 09/30/94
------------ ------------
<S> <C> <C>
Land $1,697,000 $1,697,000
Building and improvements 2,199,000 2,199,000
Furniture, fixtures and equipment 3,967,000 4,059,000
Leasehold improvements 2,524,000 2,265,000
------------ ------------
10,387,000 10,220,000
Less accumulated depreciation
and amortization 5,193,000 4,788,000
------------ ------------
$5,194,000 $5,432,000
</TABLE>
<PAGE>
CIRCLE FINE ART CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED MARCH 31, 1995
5. Long-Term Debt and Debt in Default:
<TABLE>
<CAPTION>
Long-Term Debt at March 31, 1995 and Debt in Default at
September 30, 1994 consists of the following:
Long-Term Debt in
Debt Default
3/31/95 09/30/94
------------ ------------
<S> <C> <C>
Standard Chartered Debt:
Term Loan A payable to bank, due in
monthly principal and interest
installments of $100,000 with final
payment due December, 1999. Loan
bears interest at prime rate (which
was 9% at March 31, 1995). Interest
in excess of 8% is deferred and
added to the outstanding balance of
Term Loan B. $9,883,000 -
Term Loan B payable to bank
including deferred interest on Term
Loan A due December, 1999. Loan
bears interest at prime rate, which
was 9% at March 31, 1995. 1,891,000 -
Term note payable to bank. - 11,865,000
Term notes payable with a term of
nine years and interest paid
monthly at 8%. Notes bear interest
at prime rate (which was 9% at
March 31, 1995) with any interest
in excess of 8% (deferred interest)
paid concurrently with final payment
due December, 2003. 2,500,000 -
Deferred interest on Term Notes. 6,000 -
</TABLE>
<PAGE>
CIRCLE FINE ART CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED MARCH 31, 1995
<TABLE>
<CAPTION>
5. Long-Term Debt and Debt in Default: (continued)
Long-Term Debt in
Debt Default
3/31/95 09/30/94
---------- ------------
<S> <C> <C>
Chrysler Debt:
Term Note due in quarterly principal
payments of $125,000 commencing
immediately following the retirement
of the SCB Loans. Note bears interest
at prime rate (which was 9% at
March 31, 1995) and paid quarterly at
8% with any excess interest deferred
and paid concurrently with final
principal payment. 1,000,000 -
1987 secured subordinated notes. - 3,757,000
1989 secured subordinated notes. - 2,500,000
Additional secured 1987 and 1989
subordinated notes. - 1,173,000
1992 secured subordinated note due
September 2001 - 2,500,000
Real estate lease and related
Industrial Revenue Bonds, due in
quarterly installments of $40,000
through 2004, interest at prime plus
1% (10% at March 31, 1995 and 8.75%
at September 30, 1994 1,480,000 1,720,000
Real estate mortgage note, due
in monthly installments through
November 2009, at a variable interest
rate (8.97% at March 31, 1995 and
6.63% at September 30, 1994) 217,000 221,000
Real estate mortgage note, due
in monthly installments through
February 2002. Interest at 9.25% 384,000 401,000
------------ ------------
$17,361,000 $24,137,000
Less current maturities 523,000 -
------------ ------------
Long-term debt less current maturities $16,838,000 $24,137,000
</TABLE>
<PAGE>
CIRCLE FINE ART CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED MARCH 31, 1995
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
Results of Operation:
Consolidated net sales were $4.3 million for the quarter ended
March 31, 1995 compared to $4.0 million for the comparable quarter a year ago.
For the first six months of fiscal 1995 consolidated net sales were relatively
flat. The increased sales for the quarter ending March 31, 1995 were
primarily related to an increase in wholesale and printing revenues of
approximately $250,000 over the comparable fiscal 1994 period. Total retail
sales and same store sales for the three and six month periods ending
March 31, 1995 were approximately the same as fiscal 1994. For the six month
period ending March 31, 1995, photography sales increased 36% over fiscal
1994. This was offset by an 18% decrease in animation sales for the same
period.
The consolidated gross profit margin increased 3.9 and .8 percentage
points during the three and six month periods ending March 31, 1995
respectively. These increases can be attributed primarily to the increase in
sales within the Company's limited edition graphics product line during the
second quarter of the current fiscal year. Sales of this product line
typically result in higher margins for the Company.
Consolidated selling expenses increased $200,000 and $262,000 for the
three and six months ending March 31, 1995. These increases are attributable
to additional promotional and advertising expenses and higher levels of retail
salaries and commissions. The Company operated 25 galleries (exclusive of
joint venture galleries) as of March 31, 1995 and 24 galleries as of
March 31, 1994.
Consolidated administrative expenses decreased 29% and 17% for the three
and six months ending March 31, 1995. This decrease is primarily attributable
to certain settlements of existing liabilities made during the second quarter
of fiscal 1995 for significantly less than their respective original amounts.
These settlements resulted in approximately a $200,000 reduction of previously
existing liabilities. This gain was partially offset by $105,000 in management
fees incurred during fiscal 1995 compared to fiscal 1994.
Consolidated interest expense for the quarter ended March 31, 1995
decreased $313,000 or 43% when compared to the comparable period a year ago.
This decreased is due to the restructuring of the Company's debt as of
December 13, 1994. For the six month period ending March 31, 1994, the
Company incurred the default rate of interest on its term note and promissory
notes. Since the restructuring, the Company's debt is based on the prime rate
of interest.
<PAGE>
CIRCLE FINE ART CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED DECEMBER 31, 1994
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation (continued)
During the second quarter of 1995, the Company recognized a $219,000
gain from the dissolution of a joint venture with Bulova Corporation. The
Company also recognized approximately $70,000 of income relating to the
dissolution of two 50% owned subsidiaries as well as earnings from continuing
operations of the Company's 50% owned subsidiary in Kansas City, Missouri.
During the second quarter of fiscal 1995, the Company sold the barter
exchange which the Company began in fiscal 1992. This transaction resulted in
a gain of $348,000 which is recorded on the Company's Statement of Operations
as Gain on Sale of Discontinued Operations.
Liquidity and Capital Resources:
Consummation of the Company's Restructuring on December 13, 1994
provided the Company with additional working capital and reduced the Company's
debt service burden. However, the Company remains highly leveraged. The
ability of the Company to service its debt obligations is dependent upon
increased net sales being generated. The Company continues to be subject to
substantial indebtedness and approximately $1.9 million in principal and
interest payments are due during the next twelve months. Although the Company
believes that it will be able to generate sufficient cash flow to service its
indebtedness during the remainder of fiscal 1995, if the Company is not able
to satisfy these obligations, the Company will once again be in default under
its loan agreements. There can be no assurances that sales will increase
sufficiently to permit repayment of even the Company's decreased debt or that
there will be increased demand for the Company's products.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
None
b. Reports on Form 8-K:
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrants has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CIRCLE FINE ART CORPORATION
Registrant
DATE: May 12, 1995 By: Joseph R. Atkin
Joseph R. Atkin
Vice President and
Chief Financial Officer
DATE: May 12, 1995 By: Brian Bettencourt
Principal Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-01-1994
<PERIOD-END> MAR-31-1995
<EXCHANGE-RATE> 1
<CASH> 310,000
<SECURITIES> 0
<RECEIVABLES> 315,000
<ALLOWANCES> 73,000
<INVENTORY> 12,284,000
<CURRENT-ASSETS> 13,475,000
<PP&E> 5,194,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 23,622,000
<CURRENT-LIABILITIES> 7,006,000
<BONDS> 16,838,000
<COMMON> 91,000
0
0
<OTHER-SE> (203,000)
<TOTAL-LIABILITY-AND-EQUITY> 23,622,000
<SALES> 9,788,000
<TOTAL-REVENUES> 9,788,000
<CGS> 4,545,000
<TOTAL-COSTS> 5,786,000
<OTHER-EXPENSES> 1,047,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,209,000
<INCOME-PRETAX> (2,513,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,513,000)
<DISCONTINUED> 258,000
<EXTRAORDINARY> 4,441,000
<CHANGES> 0
<NET-INCOME> 2,186,000
<EPS-PRIMARY> .37
<EPS-DILUTED> 0
</TABLE>
