<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/AMENDED
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended SEPTEMBER 30, 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
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ----------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($.01 par value)
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
------ ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. (X)
The aggregate market value of the shares of common stock held by nonaffiliates
based on the last sale price of such shares as reported by OTC Bulletin Board
on December 20, 1995 was approximately $286,000.
As of December 20, 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 reverse stock
split effected on December 13, 1994 which rounded up all one-for-three
fractional shares.
<PAGE>
PART I
Item 1. Business
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Circle Fine Art Corporation (the "Company") was incorporated in Delaware on
October 19, 1975. The Company sells fine art, jewelry and related products at
retail through 24 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. The Company conducts substantially all of its
business through its wholly-owned subsidiary Circle Fine Art Corporation of
Illinois ("Circle-Illinois") and subsidiaries of Circle-Illinois. Except as
otherwise used herein, the term the Company refers to Circle Fine Art
Corporation, Circle-Illinois and the subsidiaries of Circle-Illinois.
References herein to fiscal years are to the year ended on September 30 of
such year.
Ongoing Financial Difficulties
Since 1990, the Company has suffered recurring losses from operations and
continues to have a net capital deficiency. As a result of its losses, since
June 1995 the Company has not made scheduled principal and interest payments,
has failed to comply with various loan covenants, and has deferred real estate
lease and rental payments. The Company has been able to continue to operate
through the date hereof only by failing to make such required debt service
payments, reducing and not replacing inventory, and postponing the payments
due its artists, landlords and other vendors. The Company has been unable to
purchase sufficient amounts of new inventory which has further adversely
affected the Company's net sales. If the Company fails to significantly
increase its net sales, it may find it necessary to undertake other actions as
may be appropriate including, without limitation, further curtailments of its
business operations and/or further debt restructuring. (See "Management's
Discussion and Analysis of Financial Condition and Result sof Operations.")
Beginning in 1990, the business of selling fine art at retail suffered
disproportionately from a general economy-wide recession with the decline in
the art market being characterized as the largest decline in over 50 years.
During this period, retail sales of fine art dropped significantly throughout
the industry and many galleries of the Company and its competitors were
closed. Although the recession ended in 1993 and the art market in general
has recovered to some extent, the effects of the recession left the Company
unable to service the interest and principal payments on its indebtedness and
to purchase sufficient amounts of new inventory to adequately stock its
galleries and market its products to take advantage of the recovery. Since
1992, the Company's management has been focused on downsizing the Company's
business and restructuring the indebtedness of the Company to best assure its
survival and to maintain the Company as a going concern.
<PAGE>
In fiscal 1992, the Company's sales decreased to $25.7 million from $35.6
million in fiscal 1991, a decrease of approximately $9.9 million, or 28%. In
addition, the Company's losses increased from approximately $3.6 million in
fiscal 1991 to approximately $6.4 million in fiscal 1992, resulting in a
significant cash deficiency. As a result, the Company failed to make its
scheduled interest or principal payments to two of its principal lenders,
Chrysler Capital Corporation ("Chrysler") and Standard Chartered Bank ("SCB").
In August 1992, a $500,000 new cash investment was made in the Company and the
terms of the Company's indebtedness were modified.
In fiscal 1993, the Company's net sales decreased by $2.9 million from
fiscal 1992 to $22.6 million. Sales decreased from the prior year throughout
all of the Company's distribution channels and in all geographical areas of
the United States. During fiscal 1993, the Company closed ten retail
galleries which contributed heavily to the reduction in sales volume. The
decline in sales affected all of the Company's key product lines other than
photography. In addition to closing unprofitable galleries, the Company
significantly reduced the number of personnel at the administrative, retail
and production levels, and reduced expenses in all categories. Despite these
efforts and the 1992 Restructuring, the continued decline in sales resulted in
the Company defaulting once again under its indebtedness to Chrysler and SCB
in April 1993.
Net sales for fiscal 1994, were $18.8 million, a decline of approximately
$3.8 million or 16% from the corresponding period of the prior year. During
fiscal 1994, the Company closed four retail galleries and continued its
efforts to reduce the number of personnel and its expenses on a day-to-day
basis. During this period, the Company was able to continue to operate by
failing to make required interest and principal payments on its indebtedness,
reducing and not replacing inventory, and increasing the age of payables.
Net sales during this period were adversely affected as the Company was unable
to purchase or manufacture adequate quantities of new inventory, especially
jewelry and animation art.
Restructuring
On December 13, 1994, an investment of $5 million (the "New Investment")
was made in the Company by an investor group led by The Winbrook Group, Ltd.
("Winbrook") and Winbrook assumed control of the Company with the principals
of Winbrook constituting a majority of the Board of Directors of the Company
and Winbrook providing the services of Louis Yaseen as President and Chief
Executive Officer of the Company. In connection with the foregoing, (i) SCB
forgave $2.61 million of accrued interest, penalties and fees, and the
maturity of the remaining principal amount of $11.86 million in indebtedness
was extended until 1999 with interest and principal payments on such
indebtedness being reduced to an aggregate of $100,000 per month, and (ii)
Chrysler contributed $6.73 million of its indebtedness and accrued interest to
the capital of the Company, and exchanged $4 million of its indebtedness for
newly-issued senior preferred stock of the Company, retaining a $1 million
note (the "New Chrysler Loan") due upon repayment in full of the outstanding
indebtedness to SCB. The New Investment was made in consideration of units
consisting of an aggregate of 8,039,111 shares of common stock of the Company
("Common Stock") and $2.5 million of secured subordinated notes issued by
Circle-Illinois (the "Investor Notes"), pursuant to a Note and Common Stock
Purchase Agreement (the "Purchase Agreement"), and was used to repay bridge
loans made by the Winbrook-led investors, purchase new inventory, pay certain
past due payroll, sales and other taxes, mortgage and lease payments, and
other payables to artists and other suppliers, and pay the legal, professional
and other fees of the Company and the other parties to the Restructuring, and
for general working capital purposes. The foregoing transactions are
hereinafter referred to as the "Restructuring". As part of the Restructuring,
the Restated Certificate of Incorporation of the Company was amended to
increase the number of authorized shares of Common Stock to 15,000,000, reduce
the number of shares of Preferred Stock to 100,000 and the par value of all
capital stock of the Company to $.01 per share and to effect a one-for-three
reverse stock split (the "Reverse Stock Split"). Except as otherwise
indicated all share amounts and per share prices are presented herein after
giving effect to the Reverse Stock Split.
<PAGE>
Current Financial Difficulties
Net sales for fiscal 1995 were $20.4 million, an increase of approximately
$1.6 million or 8% increase from fiscal 1994. These sales increases were
accomplished in part by reducing the pricing at the retail level on many of
the Company-owned product lines. In addition, the Company sold through its
retail galleries an increased amount of art works consigned to the Company.
These sales resulted in typically lower gross margins than the sale of the
Company's own publications. Also, the Company actively sold certain of its
owned inventory to both individuals and other art dealers at significant
pricing discounts. During fiscal 1995, the Company closed an additional three
retail galleries and continued its efforts to reduce the number of personnel
and its expenses on a day-to-day basis. In February 1995, the Company sold
its subsidiary Art of Barter, Inc.'s assets in consideration of $348,000 which
was paid by the assumption of indebtedness. Despite these efforts and the
Restructuring, the Company defaulted again in June 1995 under its new Chrysler
Loan, SCB Loan, as well as its Investor Notes (see complete discussion under
Liquidity and Capital Resources). In order to continue to reduce expenses and
personnel, the Company has plans during the first four months of fiscal 1996
to close an additional three retail locations (see complete discussion under
Item 2 Properties).
Merchandise
Approximately 55%, 53% and 59% of the dollar volume of the art sold by the
Company in fiscal 1995, 1994 and 1993 respectively, consisted of signed and
numbered, limited edition fine art graphics, including original lithographs,
etchings, and serigraphs, and fine art multiples (three-dimensional works of
art and jewelry in limited editions, designed and signed by the artist and
fabricated by him, or to his specifications). Approximately 15%, 17% and 19%
of the dollar volume of the art sold by the Company in fiscal 1995, 1994 and
1993 respectively consisted of animation art and approximately 9%, 11% and 4%
in dollar volume of the art sold by the Company in fiscal 1995, 1994, and 1993
respectively consisted of limited edition photography. The balance of art
sold by the Company consisted of paintings, drawings, sculptures and other
unique works created by artists. The Company believes that it is one of the
largest publishers of, and dealers in, contemporary original graphics and fine
art multiples and retailers of animation art in the United States.
<PAGE>
The Company publishes its own editions of graphics and multiples that it
commissions artists to create for a fee. The Company also distributes
editions of graphics published by others. Other than animation art,
approximately 76%, 90% and 81% of the graphics and multiples sold during
fiscal 1995, 1994 and 1993 respectively by the Company were its own
publications. The Company from time to time also publishes fine art posters
and art books which are sold principally in its own retail galleries and
through its wholesale distribution system. These publishing activities,
however, have been significantly curtailed since fiscal 1992.
Unique works of original art, including paintings, sculptures and drawings
are either purchased outright directly from artists or consigned by artists
and other dealers and then offered for sale in the Company's art galleries.
The Company operates an artists' workshop in New York City ("The American
Atelier") where original graphics are created by artists and printed by The
American Atelier and a fine art jewelry atelier in Scottsdale, Arizona, which
coordinates the production and manufacture of its line of "Art to Wear" and
"Toons To Wear" jewelry. The Company also operates a frame factory in Pomona,
California and a frame design facility in New York City.
Artists and Art Suppliers
The Company is dependent upon the artists who supply it with original
artwork and graphics and other art suppliers who provide the Company with
limited edition photography and animation art. A substantial portion of the
Company's net sales are generated from a limited number of artists and art
suppliers. The Company's principal artists and art suppliers include Erte,
Time-LIFE, Vasarely and Walt Disney, the combined sales of whose artwork
generated approximately 35%, 47% and 46% of the Company's net sales in fiscal
1995, 1994 and 1993 respectively. Net sales of works of art of Erte and
Vasarely accounted for 16% and 4%, respectively of the Company's net sales in
fiscal 1995, 21% and 8% respectively of the Company's net sales in fiscal 1994
and 22% and 11% respectively of the Company's net sales in fiscal 1993. Net
sales of limited edition photography provided by Time-LIFE accounted for 8%,
11% and 4% of the Company's net sales in fiscal 1995, 1994 and 1993
respectively and net sales of animation art provided by Walt Disney comprised
6%, 7% and 9% of the Company's net sales in fiscal 1995, 1994 and 1993
respectively. In fiscal 1995, the Company sold approximately $1.0 million of
works of art by the artist Peter Max. The remainder of the Company's net
sales are generated from approximately 200 other artists and animation art
suppliers. In the normal course of the Company's business, some of these
artists change their affiliations.
The Company's arrangements with its artists and suppliers generally are
governed by licenses and other agreements, many of which are oral or have
expired by their terms. The Company has financed operations, in part, by
postponing payment of amounts due its artists and suppliers and many of the
Company's suppliers will not provide goods to the Company unless payment has
been received prior to shipment. As of September 30, 1995, payments of an
aggregate of approximately $1.4 million due and owing the Company's artists
and suppliers were past due. As of December 20, 1995, the amount due and
owning to the Company's artists and suppliers was approximatley $1,532,000.
For failure to make payments when due, the Company has been and continues to
be in default under most of its agreements with its artists and suppliers.
Consequently, the Company has been unable to purchase sufficient amounts of
new inventory nor replace fast selling inventory, and has resultingly reduced
its inventory levels in fiscal 1995 by approximately $1,500,000. Since 1994,
the Company has been engaged in litigation with Vasarely regarding the sale of
artwork that he produced. See Legal Proceedings.
<PAGE>
Marketing
The Company markets its products in its galleries by providing a wide
selection of products across multiple price ranges utilizing a commission
sales force. The Company's marketing efforts in its galleries focuses
primarily on gallery shows. Gallery shows offer the Company's own inventory
of the artist plus art held on consignment. Each of the Company's galleries
typically hosts two to four shows each year.
Competition
The distribution and sale of art at both the retail and wholesale level are
highly competitive. There are a substantial number of art galleries,
publishers, and art dealers which compete in every aspect of the Company's
business. Most of the galleries that compete with the Company consist of
single or small group galleries which are individually owned. The Company
also competes with mail-order houses, auction houses, and other retailers who
sell both original art and art reproductions. Competition in the art market
is based, in large part, on service and price, on trends in collector taste,
and on the ability to obtain the works of artists whose popularity is high or
increasing.
Employees
As of September 30, 1995, the Company employed 222 persons, of which 129
were employed in the galleries, 60 were employed in the Company's framing and
production facilities and 33 were employed at the Company's executive offices
in Chicago, Illinois. Of the total Company employees, approximately 206 were
full time and 16 were part-time. The Company's sales personnel in the
galleries are compensated on a commission basis. None of the Company's
employees are represented by a labor union. Despite the Company's financial
difficulties, the Company believes that its relationship with its employees is
good. Subsequent to September 30, 1995 through the date of this document,
there have not been any material changes in the duties of nor number of
employees of the Company. However, approximately 20 employees, primarily
commissioned sales persons will be terminated in connection with store
closings planned during fiscal 1996.
<PAGE>
Joint Ventures
In an effort to expand net sales while minimizing capital outlays, the
Company entered into joint ventures with third parties who would provide the
investment to open new galleries. In this manner eight new galleries were
opened over a three-year period. The joint ventures established by the
Company generally were not successful and the administration and accounting
requirements of the joint ventures resulted in the Company incurring
additional expenses. The galleries opened by these joint ventures in Beverly
Hills, California; Englewood, New Jersey; and Bal Harbour, Florida are no
longer operating. The galleries opened by joint ventures in Atlanta, Georgia,
Atlantic City, New Jersey and Chicago, Illinois are now owned and operated
solely by the Company. Of the seven joint ventures that were at one time in
existence, five have now been terminated. The remaining two joint ventures
consist of gallery locations in Kansas City, Missouri and Troy, Michigan. The
location in Kansas City, Missouri continues to operate. The location in Troy,
Michigan was closed in December 1995. See Item 3. Legal Proceedings regarding
this location. The Company does not expect to enter into any new joint
ventures in the future.
Item 2. Properties
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The Company currently operates 24 art galleries in 12 states and the
province of Ontario. The Company's galleries are located in upscale malls,
specialty retail centers and prime shopping areas. All of the Company's
galleries are located in leased premises and are operated under leases which
generally obligate the Company to make fixed rental payments plus in certain
cases additional rental payments based upon a percentage of gallery revenue
above a stated level. The following table sets forth the location, the square
footage and lease expiration date for each of the galleries operated by the
Company on December 1, 1995.
<TABLE>
<CAPTION>
Square Lease
State Location Feet Expiration Date
- ------------------------ ------------------ --------- -----------------------
<S> <C> <C> <C>
California 140 Maiden Lane 4,300 April 30, 2002
San Francisco
Ghiradelli Square
San Francisco 14,760 December 31, 1995
Disneyland Hotel
Anaheim 800 May 31, 1997, with 10
year renewal option
South Coast Plaza
Costa Mesa 2,397 January 31, 1996
Old Town 3,675 January 31, 1999, with
San Diego 5 year renewal option
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Square Lease
State Location Feet Expiration Date
- ------------------------ ------------------ --------- -----------------------
<S> <C> <C> <C>
Colorado Cherry Creek
Denver 11,000 March 1, 1998
Florida Worth Avenue
Palm Beach 2,000 September 30, 1996
Bal Harbour Shops
Bal Harbour 1,500 August 14, 1999
Georgia Lenox Square
Atlanta 3,500 July 31, 2000
Illinois 520 North Michigan
Avenue
Chicago 1,344 October 31, 1998
540 North Michigan
Avenue
Chicago 3,320 August 31, 1996
Northbrook Court
Northbrook 1,763 December 31, 1996
Louisiana 316 Royal Street
New Orleans 2,500 June 30, 1996
532 Royal Street
New Orleans 2,500 December 31, 1999
Michigan Somerset Mall
Troy 1,994 September 13, 2001
Missouri Country Club Plaza
Kansas City 1,090 October 31, 1998
Nevada Ceasar's Forum
Las Vegas 2,279 December 31, 1996
New Jersey Woodbridge Center
Woodbridge 2,684 November 18, 1996
Bally's Park Place
Casino
Atlantic City 5,310 March 31, 1996
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Square Lease
State Location Feet Expiration Date
- ------------------------ ------------------ --------- -----------------------
<S> <C> <C> <C>
New York 780 Seventh Avenue
New York 1,800 March 1, 2000
Soho
New York 7,875 April 1, 1998
Trump Tower
New York 556 December 31, 2002
Ontario 33 Hazelton Avenue
Toronto 3,078 December 4, 2000
Virginia Tysons Galleria
1705 M International
Drive
McLean 2,513 January 31, 1996
</TABLE>
Many of the Company's leases are due to expire in fiscal 1996. Management
has reviewed the operations and other factors regarding each location. Plans
are in progress as follows with regard to each of the following specific
locations:
A. Ghirardelli Square - San Francisco, California
This lease expires on December 31, 1995 and the Company will terminate
operations at this location on that date.
B. South Coast Plaza - Costa Mesa, California
This lease expires on January 31, 1996 and will not be renewed.
C. Worth Avenue - Palm Beach, Florida
This lease expires on September 30, 1996 and will not be renewed.
D. 540 N. Michigan Avenue - Chicago, Illinois
This lease expires on August 31, 1996. The Company plans to renew the
lease.
E. 316 Royal Street - New Orleans, Louisiana
This lease expires on June 30, 1996. Although the location has been
released to another retailer in a non-related industry, the Company plans
to relocate this location in the same general area.
<PAGE>
F. Bally's Park Place Casino - Atlantic City, New Jersey
The Company plans to renew this lease and continue operations at this
location.
G. Tysons Galleria - McLean, Virginia
This lease expires on January 31, 1996. The Company plans to vacate this
location on that date.
The Company considers all of its continuing gallery leases important to the
continued viability of the Company.
During the past three fiscal years, the Company has been unable to pay its
obligations, including certain lease payments, when due and as of September
30, 1995 was in arrears under 10 of the leases described above. As a result
of such late payments and other violations caused by the Company's financial
difficulties, the Company is in violation under most of its leases and such
leases could be terminated under the terms of such leases at any time. The
relationships of the Company with its landlords have been substantially
adversely affected and the Company has been and is currently the subject of
pending and threatened lawsuits. The landlord of the gallery in Union
Station, St. Louis, Missouri, has filed suit in the State of Missouri Circuit
Court to collect $113,800 in rent and other charges as of September 30, 1995.
As of September 30, 1995, the Company was in arrears under its gallery leases
for an aggregate amount of approximately $600,000. At December 20, 1995, the
Company was in arrears under its gallery leases in an agregate amount of
approximately $830,000 of which approximately $550,000 related to continuing
gallery leases.
As an additional consequence of the Company's financial difficulties, the
Company has been unable to properly maintain the physical appearance of its
galleries and many of the Company's galleries require replacement of worn
carpeting and refurbishment.
Although the Company has significantly reduced the number of its galleries
over the past three years, the Company has and expects to continue to open new
galleries. In fiscal 1993, the Company closed 10 galleries and opened three
galleries. In fiscal 1994, the Company closed galleries in San Francisco,
California, Sherman Oaks, California, Bal Harbour, Florida, and Englewood, New
Jersey. During fiscal 1995, the Company closed four galleries located in
Scottsdale, Arizona, Seattle, Washington, St. Louis, Missouri and Las Vegas,
Nevada. In addition, the Company currently plans to close an additional four
galleries in fiscal 1996. In addition to the above closings, the Company
opened in fiscal 1995 three new galleries in McLean, Virginia (which is being
closed), Bal Harbour, Florida and New Orleans, Louisiana. The Company also
relocated its gallery in Toronto, Canada. In October 1995, the Company also
relocated its Animation Gallery in Chicago, Illinois.
<PAGE>
The Company operates an artist workshop for the creating and printing of
fine graphics, a framing factory and a curating department in a 18,500 square
foot commercial condominium at 599 Broadway in New York City. This facility
is leased from the New York City Industrial Development Agency and the Company
has the option to acquire this property. This property is subject to a
mortgage held by Marine Midland Bank, N.A. ("Marine Midland"). Although the
Company and other tenants have occupied the premises at 599 Broadway since
1989 no certificate of occupancy for this building has ever been issued and
the Company and other tenants could be subject to fines and other penalties
resulting therefrom. The Company also manufacturers frames in a 15,000 square
foot leased facility in Pomona, California, under a lease which expires in
February 1997 (with a three year renewal option) and operates a fine art
jewelry design and distribution center in Scottsdale, Arizona, under a
month-to-month lease. (See Liquidity and Capital Resources.)
The Company occupies its executive offices, with 13,500 square feet,
located at 303 East Wacker Drive, Chicago under a lease expiring in June 1996.
The Company's other properties include a 6,000 square foot retail and storage
space at 599 Broadway, New York, which it leases to an unrelated fine art
retailer, a condominium in New York which is used primarily by Jack Solomon
and Carolyn Solomon when in New York, a leased apartment in each of Chicago
and New York for use by artists and employees and numerous storage facilities.
The Company has received an offer of $312,000 for the New York condominium and
has accepted a contract for its sale, resulting in a write down of the book
value of this property of $49,000, which is reflected in the fiscal 1995
operating results.
Item 3. Legal Proceedings
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As a result of the Company's financial difficulites, the Company has been
unable to pay its obligations when due and it has been or is currently subject
to pending and threatened lawsuits brought by its artists, landlords and joint
venture partners.
In December, 1993, Victor Vasarely ("Vasarely") and his son Yvaral Vasarely
("Yvaral") filed a lawsuit against the Company, Jack Solomon and Carolyn
Solomon in the Circuit Court of Wayne County, Michigan alleging monetary
damages of approximately $700,000 and requesting an accounting, return of
works of art and other relief. The Company filed a counterclaim and the
Michigan Court subsequently granted the plaintiffs a restraining order against
the Company from selling certain artwork in the Company's possession. On
October 6, 1994 the Michigan lawsuit was dismissed without prejudice. On
November 4, 1994, Vasarely and Yvaral filed a lawsuit in the Circuit Court of
Cook County, Illinois which seeks the same relief against the Company, Jack
Solomon and Carolyn Solomon as did the Michigan lawsuit. The Company has
asserted counterclaims as well as a third-party complaint against Michelle
Vasarely, the wife of Yvaral and daughter-in-law of Vasarely. Further, the
Company is, pursuant to Court order and agreement of the parties, providing an
accounting to plaintiffs of all plaintiffs' artwork sold by the Company and
all payments made to plaintiffs. Finally, an order of replevin was entered by
the Court, granting Yvaral's request to take possession of certain artwork.
Plaintiff was ordered to post a substantial bond in order to recover the
artwork, and has to date not done so. The case is in the early discovery
stage.
<PAGE>
In April 1994, the principal of the Company's joint venture partner in the
Atlanta gallery unilaterally closed the gallery and appropriated joint
venture funds and art owned by the Company consigned to the joint venture.
The Company brought legal actions against the joint venture partner in the
Superior Court of Fulton County, Georgia and as a result of a court order all
such funds and art were placed under custody of the Court. The Company is
seeking to retain sole control of these assets and damages from its joint
venture partner. The joint venture partner has counterclaimed for the return
of her original investment and other damages. This matter is currently in the
discovery stage with both parties taking depositions.
On October 30, 1995 Chemical Bank filed an action in the Circuit Court of
Cook County, Illinois, Law Division, alleging the sum due of $51,057.51 on a
credit card. The Company has made an offer of settlement to which there has
been no response.
Two complaints were filed against Circle-Illinois, one for eviction and the
other for damages in the Circuit Court for the 15th Judicial Circuit of Palm
Beach County, Florida, Circuit Division, for the Company's landlord for its
Worth Avenue store. Circle-Illinois entered into a Joint Stipulation for
Settlement and Final Judgment upon Default in both matters on or about October
5, 1995. On December 5, 1995, attorneys for the landlord served notice of
default and their intention to enter a final judgment of eviction and a final
judgment for damages pursuant to the above-referenced stipulations. The
Company has no knowledge of whether the landlord has done so.
Earlier this year, G.S. Associates, the Company's landlord, for its
Ghirardelli Square store, filed a complaint in Superior Court of California,
City and County of San Francisco, against Circle-Illinois for eviction and for
payment of rent. On August 11, 1995 Circle-Illinois entered into an amendment
to its lease for the store premises at Ghirardelli Square in San Francisco,
California which included a Settlement Agreement and a Stipulation for Entry
of Judgment in the event of default on the Settlement Agreement. On December
15, 1995, the Company received notice from the landlord's attorney alleging
that Circle-Illinois has defaulted and that the landlord has moved for
Judgment Pursuant to Stipulation. The Company intends to vacate the premises
on or before December 31, 1995.
On or about August 1995, the Company's landlord for its Troy, Michigan
store, Somerset Collection L.P., filed two complaints in the District Court
for the 52-4th Judicial District, State of Michigan, against the Company and
Circle-Illinois, one for eviction and for damages. The Company and Circle-
Illinois attempted to settle these matters but was unable to do so. A Writ
for Possession was entered on December 7, 1995 in the eviction matter and
Circle-Illinois vacated the premises three days later.
See "Item 7. Properties" regarding certain litigation between the Company
and the landlord of its Union Station, St. Louis, Missouri gallery.
The Company is also party to certain other litigation incidental to its
business none of which if determined adversely to the Company would have a
material adverse effect on the Company or its operations.
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
None.
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related
- ------- -----------------------------------------------------
Stockholder Matters
-------------------
The Company's Common Stock is traded over the counter under the symbol
CFNE. Prior to August 3, 1993, the Common Stock was successively traded on
the Nasdaq National Market and on the Nasdaq Small Cap Market. Effective
August 2, 1993, the Common Stock was delisted from the Nasdaq Small Cap Market
as a result of its failure to meet capital and surplus requirements. The
prices shown below represent the high and low bid quotations for the Common
Stock as quoted by the OTC Bulletin Board. Such prices reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
Period High($) Low($)
---------------------- --------- ---------
<S> <C> <C>
Fiscal 1995
First Quarter 1 11/16 1/8
Second Quarter 3/4 1/8
Third Quarter 3/4 1/8
Fourth Quarter 1/4 1/8
Fiscal 1994
First Quarter 1-1/2 3/8
Second Quarter 1-1/2 15/16
Third Quarter 1-1/2 15/16
Fourth Quarter 1-1/2 15/16
The number of holders of record of the Company's Common Stock as of
December 20, 1995, was 427.
No cash dividends have been declared or paid in respect of the Common Stock
during the last three full fiscal years, nor does the Board of Directors
contemplate the declaration and payment of any such dividends in the
foreseeable future. Under the terms of the Company's debt agreements, the
Company is prohibited from declaring or paying dividends on the Common Stock.
Item 6. Selected Financial Data
- ------- -----------------------
The following selected financial data should be read in conjunction with
the consolidated financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein. The summary financial information for each of the
five fiscal years ended September 30 are derived from the Company's
consolidated financial statements for such fiscal years, which financial
statements have been audited by Altschuler, Melvoin and Glasser LLP,
independent public accountants, for the fiscal year ended September 30, 1995
and 1994, Ernst & Young, independent public accountants, for the three fiscal
years ended September 30, 1993, 1992 and 1991. In light of the current
financial condition of the Company, its historical performance may not be
indicative of its future financial condition or results of operations. All
dollar amounts other than per share data are in thousands. All share and per
share amounts give effect to the Reverse Stock Split effective on December 13,
1994.
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
Fiscal year ended September 30
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operating Data
- --------------
Net Sales $20,369 $18,831 $22,649 $25,628 $35,595
Cost of Sales 10,544 9,192 11,021 10,551 14,293
---------- ---------- ---------- ---------- ----------
Gross Profit 9,825 9,639 11,628 15,077 21,302
Selling Expenses 11,672 11,180 13,344 15,923 20,306
Loss for Closed
Galleries 205 258 604 569 -
General and Admin-
istrative Expense 2,456 2,444 2,771 2,706 3,010
---------- ---------- ---------- ---------- ----------
Income (Loss) from
Operations (4,508) (4,243) (5,091) (4,121) (2,014)
Interest Expense (5,000) (2,989) (2,309) (2,274) (2,883)
Debt Restructuring
Costs - - - (371) -
Gain on Sale of
Property - - - 814 -
Gain/(Loss) on
Investment in
Affiliates 278 17 (77) (421) (686)
---------- ---------- ---------- ---------- ----------
Income (Loss) before
Income Taxes,
Discontinued
Operations and
Extraordinary Gain (9,230) (7,215) (7,477) (6,373) (5,583)
Provision (Benefit)
for Income Taxes - - - - (1,931)
Gain on Sale of
Discontinued
Operations 348 - - - -
Loss from Operations
of Discontinued
Operations (90) (202) (63) 7 -
Extraordinary Gain 4,441 - - - -
---------- ---------- ---------- ---------- ----------
Net Loss (4,531) (7,417) (7,540) (6,366) (3,652)
========== ========== ========== ========== ==========
Net Operating Loss
per Common and Common
Equivalent Share (.60) (3.77) (4.50) (4.72) 2.43
Net Loss per Common
and Common Equivalent
Share (.60) (6.58) (6.67) (7.29) (4.42)
========== ========== ========== ========== ==========
Weighted Average Common
and Common Equivalent
Shares Outstanding 7,545,081 1,126,759 1,130,093 872,956 826,906
Other Data
- ----------
Depreciation and
Amortization 1,054 1,182 1,620 1,641 1,678
Capital Expenditures 603 335 961 556 1,229
Balance Sheet Data
- ------------------
Total Assets 21,411 24,229 26,474 30,565 38,315
Short Term Indebtedness
(Debt in Default) 17,278 25,237 24,180 1,367 24,802
Long Term Debt (less
current maturity) - - - 22,503 -
Stockholders Equity (6,939) (13,271) (5,854) 1,686 7,184
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operation
--------------------
Results of Operation:
1995 compared to 1994
In December 1994, the Company restructured its outstanding debt which
included a) the issuance of $2,500,000 of new equity and $2,500,000 of new
long term debt to a group of investors led by The Winbrook Group; b) the
exchange of a significant portion of the Company's subordinated debt for
preferred stock by Chrysler; and c) a restructuring by SCB of its outstanding
debt into two levels of debt, each with certain deferred interest provisions.
These matters are explained in greater detail in the Liquidity and Capital
Resource section. Please refer to the Company's 1994 Annual Report on Form
10-K for a complete and detailed discussion of the Restructuring.
Upon the completion of the Company's restructuring, Louis Yaseen became
President and Chief Executive Officer. Under his leadership, the Company
opened a new animation gallery in New Orleans, relocated the Company's gallery
in Toronto, Canada, and completely renovated its gallery in Las Vegas, Nevada.
In addition, distribution agreements were initiated with new artists and
suppliers including Playboy Magazine, Alfred Wertheimer, a photographer of
Elvis Presley during his early years, and with the artist Peter Max.
In June 1995, Erwin Marks succeeded Louis Yaseen as President and Chief
Executive Officer. Mr. Marks has re-focused the Company's retail activities
by lowering certain pricing, eliminating the Company's regional manager
system, and closing certain non-profitable locations.
Although sales in fiscal 1995 increased by 8% over fiscal 1994, the
restructuring did not materially affect the level of sales nor eliminate the
continued large annual losses which the Company experienced during the prior
three fiscal years.
Net sales ($20.4 million) increased in fiscal 1995 $1.6 million or 8% when
compared to sales in fiscal 1994 ($18.8 million). Sales increased in all
major distribution channels. Same store retail sales increased in total 3%,
the western region of the United States same store sales increased 23% over
fiscal 1994 results. This increase was partially offset by a decrease of 20%
in same store sales for the eastern region. Sales of the Company's unique
works and limited edition graphics product lines increased 43% and 33%
respectively, when compared to fiscal 1994. Product lines decreasing in sales
include photography (13%) and animation (5%).
Gross margins as a percentage of sales for fiscal 1995 decreased by three
percentage points. This decrease can be primarily attributed to the Company
establishing reserves for approximately $550,000 relating to certain work in
progress inventory which may not be completed and therefore would not be
saleable. Overall, the Company's margins on products sold remained relatively
constant with the prior year even though the Company has been unable to
purchase sufficient amounts of new inventory and therefore has relied more
heavily on inventory consigned to the Company by artists and other publishers.
<PAGE>
The Company's consolidated selling expenses increased $.5 million or 4% to
$11.7 million in fiscal 1995 when compared to fiscal 1994 ($11.2 million).
This increase is primarily due to the 8% increase in Company sales resulting
in increased commissions paid. Also, the Company increased its gallery show
and advertising expenses by $300,000 in fiscal 1995.
Consolidated administrative expenses for fiscal 1995 remained flat with
fiscal 1994 amounts. The Company continues to reduce operating expenses and
administrative personnel. However, these savings have been offset by
increased legal expenses and management fees.
The Company incurred approximately $200,000 relating to closing galleries
in fiscal 1995. This relates to writing off leasehold improvements and other
costs associated with closing four gallery locations. In fiscal 1994, the
Company incurred $258,000 relating to the same type of activity.
In fiscal 1995, the Company expensed $5.0 million of interest. This amount
includes $3.1 million relating to penalties and default interest on the
Company's debt in default and $1.9 million relating to interest per the
original terms of the Company's debt. In fiscal 1994, a total of $3.0 million
was expensed relating to interest expense. This amount included approximately
$1.3 million in default interest and $1.7 million relating to interest per the
original terms of the loan.
The Company recognized a $278,000 gain on investments in affiliates. This
is primarily attributed to final dissolution for the Company's partnership in
Classic Moments resulting in a gain of $221,000. Other gains totalling
approximately $57,000 were realized from ceasing operations from two retail
gallery joint ventures during fiscal 1995. The Company currently operates
only one 50% joint venture (Kansas City Animation Gallery).
In February of 1995, the Company sold its interest in the Art of Barter
barter exchange, which it operated since fiscal 1992. In relation to this
transaction, the Company recognized a $348,000 gain on sale of discontinued
operations. This was a non-cash transaction, and resulted in the transfer of
certain specific barter liabilities to the new owners. The Company also
recognized $90,000 of loss relating to operations from the exchange until the
time of sale. Previous years results from operations have been restated on
the Company's Condensed Consolidated Statement of Operations.
An extraordinary gain of $4.4 million is included in the fiscal 1995
results. This gain is attributed to the Restructuring and consists of accrued
interest that was forgiven by the debt holders. See Note 7 of the financial
statements of this report for further discussion.
1994 compared with 1993
Net sales were $18.8 million for fiscal 1994, a $3.8 million or 17%
decrease from the previous year. Sales decreased from the prior year
throughout all of the Company's distribution channels and in all geographical
areas of the United States. The decline in sales affected all of the
Company's key product lines other than photography with unique works of art,
jewelry and animation showing the largest declines. These declines were
offset in part by a 149% increase on sales of photography. The decline in
sales can principally be attributed to the closings of retail galleries and
the inability on the part of the Company to purchase adequate quantities of
new inventory, especially jewelry and animation products.
<PAGE>
Gross margins as a percentage of sales for fiscal 1994 remained
substantially unchanged when compared to fiscal 1993.
The Company's consolidated selling expense decreased $2.0 million from
$13.3 million to $11.2 million or 14% in fiscal 1994 compared to fiscal 1993.
The decrease in selling expenses can be principally attributed to reductions
in the number of galleries in operation. During fiscal 1993 and continuing
into fiscal 1994, the Company closed numerous unprofitable galleries. As a
result of these closings, fiscal 1994 expenses have been impacted to a greater
extent than fiscal 1993. All major categories of expenses (including
salaries, facility costs and rent) have shown declines from fiscal 1993
levels.
Consolidated administrative expenses were $2,444,000 in fiscal 1994
compared with $2,771,000 in fiscal 1993. In fiscal 1994, the Company reduced
administrative personnel and operating expenses, but these reductions were
partially offset by higher legal and other professional fees incurred in
connection with the Restructuring.
Interest expenses increased $680,000 or 29% in fiscal 1994 when compared to
fiscal 1993. This increase was primarily attributal to default interest rates
being charged by the Company's lenders for all of fiscal 1994.
In fiscal 1993, the Company had a loss on investments of $77,000 which
resulted from the losses from its five retail gallery operations in which it
holds a 50% ownership interest. In fiscal 1994, the Company recognized a
$81,000 gain relating to dissolution of one of the Company's 50% joint
ventures. This gain was offset by $64,000 of operating losses from five
retail gallery joint venture operations.
The Company took a one-time charge to earnings of $258,000 for specific
expenses associated with the closing of four locations during the 1994 fiscal
year. These expenses were primarily those costs associated with the write-off
of leasehold improvements at each of the gallery locations closed and the cost
of transporting all inventory and equipment to the Company's central
distribution facility in Los Angeles, California.
No income tax benefit was recognized for 1994. Net operating losses
suffered during fiscal 1994 may be available to offset taxable income in
future periods.
Liquidity and Capital Resources
- -------------------------------
Commencing in June 1995, the Company has failed to make its scheduled
month-end $100,000 payment under its Amended and Restated Credit Agreement
with SCB. As a result of this non-payment and the violation of certain
financial covenants, SCB on September 28, 1995 informed the Company that such
actions "constitute defaults under the provisions of clauses (a) and (b)
respectively of the definition of the term "Default' set forth in the Credit
Agreement." Resultingly, SCB imposed a late payment fee in the amount of
$2,560,000 due and payable on July 16, 1995. In addition, SCB retroactively
to June 26, 1995 imposed the default rate of interest (prime + 6%) which
currently equates to 14.75% per annum.
<PAGE>
The Company is in communication with SCB regarding these matters, and, at
SCB's request, submitted a detailed "turn-around and restructuring plan" for
the Bank's consideration on August 31, 1995. In December 1995, management of
the Company and representatives of SCB met to consider various restructuring
alternatives. Although no definitive plans have been agreed upon, active
negotiations and discussions are continuing.
The Company has not made its scheduled interest payment since May 1995 on
its real estate lease payable to Marine Midland Bank and the related
Industrial Revenue Bond related to its 18,500 square foot facility at 599
Broadway, New York, New York. In addition, the Company did not make its
scheduled quarterly $40,000 principal reduction payment due July 1, 1995 and
October 1, 1995. As a result of these non payments and the violation of
certain financial covenants, the Company is subject to a declaration of
default by this lender, although no such default has been declared as of
December 20, 1995. The Company has had various discussions with this lender
regarding these matters.
The Company did not make its scheduled quarterly $20,000 interest payments
due June 30, 1995 and September 30, 1995 related to the Company's $1,000,000
subordinate promissory note payable to Chrysler. As a result of this non
payment, the violation of certain financial covenants and the cross default
provisions contained in the related Securities Purchase Agreement, Chrysler on
October 24, 1995 notified the Company of the "existence of an event of default
for the non-payment of interest of $40,000 since March 31, 1995."
The Company has failed to make its scheduled monthly interest payments on
its Investor Notes since June 30, 1995.
In addition, the Company is in arrears on its monthly payments on both of
its real estate mortgage notes.
The above mentioned non payments and violations of debt covenants have
caused debt aggregating $17,278,000 to be presented as debt in default in the
accompanying Consolidated Balance Sheet as of September 30, 1995. The Company
is currently negotiating with its lenders regarding its debt agreements, but
to date, the Company has been given no assurances from its lenders that a
favorable outcome will occur. While Standard Chartered Bank, Chrysler Capital
Corporation and the Company's other lendors have not taken any actions against
the Company, they have reserved their rights to pursue all available remedies
at any time in the future.
The Company's financial condition and prospects depends upon its ability to
generate sufficient sales revenue to meet cash flow requirements and to reduce
and maintain operating expenses at their lowest acceptable levels. In order
to accomplish this, the Company is continuing its efforts to lower operating
expenses through staff reduction, reduction of discretionary spending and is
closing certain marginal gallery locations. The Company also has and will
continue to limit major capital expenditures and reduce inventory levels in
order to provide funds for operations and debt reduction. The lack of
operating cash, however, sometimes causes the Company to incur unnecessary
expenses, such as late fees, penalties, and interest charges, with respect to
normal operating expenses. During fiscal 1995, the Company's customer
deposits and credits increased $637,000. This is attributed to the Company
accepting an increased level of orders from customers for product which must
be purchased by the Company in order to complete the sale.
<PAGE>
If the Company does not successfully restructure its debt agreements,
reinstate leases in default, and obtain additional financing, which sources
have not been identified, then the Company will be unable to meet its existing
obligations and the Company may find it necessary to undertake other actions
as may be appropriate. (See Item 1. Business.)
Item 8. Financial Statements and Supplementary Data
- ------- -------------------------------------------
The financial statements and related financial information required to be
filed pursuant to Item 8 of Part II of Form 10-K are indexed on Page F-1 of
this report and are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------- ----------------------------------------------------------------
Financial Disclosures
- ---------------------
Ernst & Young was the Company's independent public accountant for the
fiscal year ended September 30, 1993. The Company engaged Altschuler, Melvoin
and Glasser LLP as its independent public accountants for the 1994 and 1995
fiscal year end audit. The decision to change accountants was approved by the
Board of Directors of the Company.
During the Company's 1993, 1994 and 1995 fiscal years, there were not any
disagreements with Ernst & Young or Altschuler, Melvoin and Glasser LLP on any
matter of accounting principles or practices, financial statement disclosure,
or auditing scope or procedure.
The opinions of Altschuler, Melvoin and Glasser LLP dated December 19, 1994
and December 22, 1995 respectively of the consolidated financial statements of
the Company as of September 30, 1994 and 1995 and for the year ended September
30, 1994 and 1995 contains a modification relating to the Company's ability to
continue as a going concern.
The opinion of Ernst & Young dated December 3, 1993 on the consolidated
financial statements of the Company as of September 30, 1993 and September 30,
1992 and for the three years ended September 30, 1993 contains a modification
relating to the Company's ability to continue as a going concern.
PART III
Item 10. Directors and Executive Officers of the Registrant
- -------- --------------------------------------------------
The following information is provided with respect to each Director and
Executive Officer of the Company.
Expiration
Name of Position of Term
Director Age with Company as Director
- --------- ----- ----------------------------------------- -----------
Joel 51 Director and Chairman of the Board 1997
Stone since December 1994.
Louis 51 Director since December 1994. 1996
Yaseen
<PAGE>
Item 10. Directors and Executive Officers of the Registrant (continued)
- -------- --------------------------------------------------
Expiration
Name of Position of Term
Director Age with Company as Director
- --------- ----- ----------------------------------------- -----------
Jack 67 Managing Director and Founder --
Solomon since December 1994.
Carolyn 52 Executive Vice President since --
Solomon December 1994.
John 49 Director since December 1994. 1995
Sorin
David 48 Director since June 1995. 1997
Pollick
Erwin 58 President since June 1995. --
Marks
Joseph 50 Vice President of Finance, Secretary
Atkin and Chief Financial Officer since
December 1994.
Joel A. Stone has served as Chairman of the Board of the Company since the
Restructuring, is a principal of Winbrook and is also President and CEO of
Strategic Realty Advisors, Inc., a Chicago based real estate investment and
management firm. Mr. Stone was a founder of VMS Realty Partners and also
serves as its President. VMS was one of the largest real estate companies
during the 1980's. Mr. Stone has served as Chairman of the Company since
December 1994. Mr. Stone is both a Certified Public Accountant and an
attorney. He serves as a director of one of Winbrook's other companies. Mr.
Stone takes an active role on behalf of Winbrook and its companies in
negotiations and financing activities. Mr. Stone serves on the boards of a
number of philanthropic organizations.
Erwin A. Marks is President and CEO of Circle Fine Art Corporation.
Currently, he also serves on the boards of directors of Gantos, a $200 million
retailer of women's clothing and accessories and Value Merchants, Inc., a $140
million retailer of variety merchandise, both NASDAQ listed corporations.
From 1991 through 1995, he served as Managing Director of Heller Investments,
Inc., a subsidiary of Heller Financial, Inc. Mr. Marks received his B.A. from
Chicago State University and a M.A. from Northwestern University.
Louis G. Yaseen served as President and Chief Executive Officer of the
Company from the closing of the restructuring on December 13, 1994 until he
resigned in June 1995. He has served as Director of the Company since
December 1994. Mr. Yaseen served as President of DoveBar International, Inc.,
a nationally known manufacturer and marketer of specialty ice cream products
from its inception until it was sold to Mars, Inc. in 1986. Mr. Yaseen
continued to manage the business until mid-1988, when he agreed to assist in
establishing a European ice cream operation for Mars. Since early 1990, Mr.
Yaseen has been involved with Winbrook and its predecessor company. Winbrook
provided his services on a full time basis to the Company at no charge from
June 1994 until the closing of the Restructuring, acting as an observer and
advisor to the Chairman and President,, at the request of Standard Chartered
Bank and the Company. Prior to his DoveBar experience, Mr. Yaseen was Vice
President of Duff & Phelps Financial Consulting Co., where he performed
numerous corporate valuations and was instrumental in establishing a mergers
and acquisitions division. Mr. Yaseen received his MBA from the University of
Chicago.
<PAGE>
G. David Pollick is currently a Visiting Scholar in the Graduate School of
Education at Harvard University. From 1993 to 1995, he served as Co-Chief
Executive Officer and President of the Art Institute of Chicago and The School
of the Art Institute of Chicago. From 1991 through 1992, Mr. Pollick served as
acting President of State University of New York College at Cortland. Mr.
Pollick received his Ph.D. in Philosophy from the University of Ottawa. His
areas of scholarly interest and expertise include aesthetics, phenomenology,
philosophy, and the history of art. He has lectured extensively and published
numerous scholarly articles on art, philosophy, and education.
John P. Sorin is a principal of Winbrook and is also a practicing physician
at Northwestern Memorial Hospital in Chicago. As co-founder of a predecessor
private venture capital firm, he has been an active investor since 1989. Dr.
Sorin also serves as a board director of one of the other Winbrook companies.
Jack Solomon is currently Managing Director and Founder of the Company.
From 1981 to December 1994, he served as Chairman of the Company and as a
Director. In June 1995, Mr. Solomon resigned as a Director. Mr. Solomon
holds a B.S. in Business Administration and an LL.B. from the University of
Nebraska plus an LL.M. from the University of Michigan Law School. Mr.
Solomon practiced law in Chicago from 1953 to 1981 where he rose to become a
senior partner of the law firm of Solomon, Rosenfeld, Stiefel and Elliot. Mr.
Solomon specialized in art law, representing various artists and art dealers.
In 1981, Mr. Solomon left the practice of law to devote full time to the
Company. He is a past President and a member of the Board of Directors of The
Fine Art Publishers Association, an industry trade association. Mr. Solomon
is a frequent lecturer on art matters. He has also appeared on numerous
national and local television broadcasts relating to art and has authored
numerous articles for periodicals and has written books on art. Mr. Solomon
is the husband of Carolyn Solomon.
Carolyn Solomon is currently Executive Vice President of the Company. From
1983 to December 1994, Ms. Solomon was the President and Chief Operating
Officer of the Company. In 1987, she was elected a Director of the Company.
Ms. Solomon resigned as a Director of the Company in June 1995. Ms. Solomon
is also currently President of the Company's Jewelry Division. Ms. Solomon is
the wife of Jack Solomon.
Joseph Atkin, a certified public accountant, is Vice President of Finance,
Secretary and Chief Financial Officer of the Company. Prior to this position
he was a Vice President, Treasurer and Chief Financial Officer of the Company
and had served in such capacities since 1980. Prior to his position with the
Company, Mr. Atkin was successively a member of the audit and tax staff of
Peat Marwick Mitchell, a public accounting firm, controller of the Chicago
division of a national home building company, and Vice President of certain
Illinois-based companies. Mr. Atkin received his M.B.A. from Indiana
University and his undergraduate degree from Washington University in St.
Louis.
<PAGE>
Pursuant to a Voting Agreement, Winbrook has the right to designate two (or
three) additional directors and M.H. Meyerson & Co., Inc., the placement agent
in connection with the Restructuring, (the "Placement Agent") will have the
right to designate an additional director, although neither the Placement
Agent nor Winbrook has indicated its intention to exercise such rights. See
"Voting Agreement" below.
Compliance with Section 16(a) of the Exchange Act
Under the securities laws of the United States, the directors and executive
officers of the Company and persons who own more than 10% of the Company's
Common Stock are required to report their ownership of the Company's Common
Stock and any changes in that ownership to the Securities and Exchange
Commission and any exchange or quotation system on which the Common Stock is
listed as quoted. The Company is required to disclose in this Annual Report
any late filings during the 1995 fiscal year. To the Company's knowledge,
based solely upon its review of the copies of such reports required to be
furnished to the Company during the fiscal year ended September 30, 1995,
during the two years ended September 30, 1994 and 1995, all Section 16(a)
filing requirements applicable to its officers, directors and greater than 10%
owners were complied with.
Item 11. Executive Compensation
The following table sets forth, for the last three completed fiscal years,
the compensation of the three executive officers of the Company whose total
salary and bonus for fiscal 1995 exceeded $100,000 and the two persons who
served as Chief Executive Officer during fiscal 1995 (collectively referred to
as the "Named Executive Officers"):
<TABLE>
Summary Compensation Table
<CAPTION>
Annual Long Term
Compensation Compensation
------------ Awards
and Payouts <F1>
------------------
Securities
Name and Principal Underlying
Position Year Salary Bonus Options/SARS (#)
- ---------------------------- ---- -------- ------- ------------------
<S> <C> <C> <C> <C>
Jack Solomon, Founder and 1995 $125,000 -- 371,342
Managing Director 1994 125,000 -- --
1993 125,000 -- --
Carolyn Solomon, Executive
Vice President 1995 145,000 -- 311,242
1994 125,000 -- --
1993 125,000 -- --
Joseph Atkin, Vice President 1995 $158,000 $32,000 92,836
and Chief Financial Officer 1994 150,000 -- --
1993 150,000 -- --
Louis Yaseen, Chief Executive
Officer <F2> 1995 -- -- 302,996
1994 -- -- --
1993 -- -- --
Erwin Marks, Chief Executive
Officer <F3> 1995 42,000 25,000 100,000
1994 -- -- --
1993 -- -- --
<FN>
<F1>
None of the Named Executive Officers received long-term compensation other
than the stock options to acquire shares of Common Stock set forth below
during the last three completed fiscal years.
<F2>
Yaseen was compensated by the Winbrook Group, Ltd. (see Management Agreement
for further details).
<F3>
Became CEO in June 1995.
</FN>
</TABLE>
<PAGE>
Options
- -------
The following table sets forth the individual grants of stock options made
during fiscal 1995 to each of the Named Executive Officers (all figures give
effect to the Revised Stock Split effected on December 13, 1994):
<TABLE>
<CAPTION>
Individual Grants
-------------------
Potential Realized Value
Number of Percentage of as assumed Annual
Securities Total Options Exercise Rates of Stock Price
Underlying Granted to or Base Appreciation for Option
Options Employees in Price per Expiration Term
Name Granted Fiscal Year Share Date 5% 10%
- --------------- ---------- ------------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Jack Solomon 371,342 31.5% $.389 12/04 $90,845 $196,158
Carolyn Solomon 218,406 18.5% $.400 1/05 $54,942 $139,233
92,836 7.9% $.389 12/04 $19,910 $49,040
Joseph Atkin 92,836 7.9% $.389 12/04 $19,910 $49,040
Erwin Marks 100,000 8.5% $.400 01/06 $28,414 $74,125
Louis Yaseen 302,996 25.7% $.389 12/04 $64,983 $160,055
</TABLE>
The following table sets forth the number of shares of Common Stock subject
to options held at the end of fiscal 1995 by each of the Named Executive
Officers. None of these options were in-the-money at the end of fiscal 1995.
<TABLE>
<CAPTION>
Number of Shares of Common Stock
Underlying Unexercised
Name Options at Fiscal Year-End (#)
-------------------------- --------------------------------
<S> <C>
Jack Solomon 371,342
Carolyn Solomon 311,242
Joseph Atkin 92,836
Erwin Marks 100,000
Louis Yaseen 302,996
</TABLE>
No options were exercised by the Named Executive Officers during fiscal 1995.
<PAGE>
Directors' Compensation
- -----------------------
Directors of the Company are not compensated by the Company for their
services.
Employment Contracts
- --------------------
Jack Solomon. At the closing of the Restructuring, the Company entered
into a three-year employment agreement with Jack Solomon. During the term of
the agreement, Mr. Solomon will have the title "Managing Director and Founder"
and, subject to the supervision of the Chief Executive Officer, will, among
other things, have responsibility for the Company's relationships with its
artists, dealers and other suppliers, the purchase of art and the mobilization
of art exhibitions, the international activities of the Company and oversight
over the production of art at the American Atelier. Under the employment
agreement, Mr. Solomon received an annual salary of $125,000 during the first
year of the agreement, and will receive annual salaries of $150,000 during the
second year of the agreement and $175,000 during the third and any subsequent
year for which the agreement is extended. In the event the employment
agreement is extended by mutual agreement, Mr. Solomon will be entitled to a
$50,000 bonus on each of the fourth and fifth anniversary dates of the
agreement. Under the agreement, Mr. Solomon will continue to have the use of
a Company-owned car and use of the Company-owned apartment in New York at the
Company's discretion. In the event the employment agreement is not renewed by
the Company at the end of the three-year term, Mr. Solomon will be entitled to
receive four quarterly payments aggregating $150,000 and, if the employment
agreement is initially renewed and Mr. Solomon remains employed by the Company
until the end of the fourth year (or the fifth year if the agreement is
renewed for a second one-year term), then upon the termination of his
employment, Mr. Solomon shall be entitled to receive four quarterly payments
aggregating $120,000. Upon Mr. Solomon's death or qualifying disability, the
Company shall pay to Mr. Solomon's legal representative or to Mr. Solomon
$100,000, if such events occur during the first year, $125,000 if such events
occur during the second year, $150,000, if such events occur during the third
year and $170,000, if such events occur after the third year. In the event
Mr. Solomon is terminated without cause, he will be entitled to receive
severance payments equal to his base compensation for the remaining term of
his agreement.
In the event that Carolyn Solomon's employment is terminated during the
term of Jack Solomon's employment agreement, Jack Solomon may elect to
terminate his own employment with the Company. In the event that Carolyn
Solomon was terminated for cause or voluntarily terminated her own employment,
and Jack Solomon voluntarily elects to terminate his employment, Jack Solomon
will receive no severance from the Company and will forfeit any unvested
options. In the event Carolyn Solomon were terminated without cause, Jack
Solomon will have the option to terminate his own employment and receive
severance equal to (i) 32/52's of his annual base salary payable quarterly in
arrears during the 12 months following the termination of his employment
during the first year, and (ii) 100% of his annual base salary during the next
twelve months thereafter. Those payments will be in lieu of any other
payments. In addition, any unvested options will automatically vest. Jack
Solomon would however have an obligation to continue in his current executive
position for up to 120 days at the Company's discretion at his regular salary.
In all circumstances, any non-compete provision applicable to Carolyn Solomon
would be identically applicable to Jack Solomon if Jack Solomon were to
voluntarily terminate his employment with the Company as a result of Carolyn
Solomon's termination.
<PAGE>
On December 13, 1994, Mr. Solomon was granted options to acquire 371,342
shares of Common Stock at an exercise price of $.388 (125% of the price per
share paid by the Investors). One-third of the options will vest on each of
the first, second and third anniversaries of the closing of the Restructuring.
In the event of Mr. Solomon's death, qualifying disability or his termination
without cause, all unvested options shall vest immediately. In the event that
Mr. Solomon voluntarily terminates his employment (other than for cause) or is
terminated for cause, all unvested options will be forfeited. As part of the
Purchase Agreement, Mr. Solomon has made certain personal representations and
warranties in order to induce the new investors to make the investment
contemplated thereby. Under the Purchase Agreement, Mr. Solomon's liability
for the breach of his representations and warranties is limited to $250,000.
If Mr. Solomon's liability would have been greater than $250,000 but for such
limitations, the unvested options that would have vested on the first
anniversary of the closing of the Restructuring will be forfeited. If Mr.
Solomon's liability would have been greater than $500,000, then the unvested
options that would have vested on the second anniversary of the closing of the
Restructuring will be forfeited and if Mr. Solomon's liability would have been
greater than $750,000, then all of the unvested options will be forfeited.
Under the terms of this new employment agreement, Mr. Solomon's existing
options to purchase 18,334 shares of Common Stock were cancelled and his
existing supplementary compensation agreement was terminated.
As part of his employment agreement, Mr. Solomon agreed that during the
term of the agreement and for a period of one year after termination thereof,
he could not engage in any business in competition with the Company; provided
that if Mr. Solomon voluntarily terminates his employment during the initial
three-year term (other than for cause), or is terminated for certain specified
causes, the agreement not to compete will be applicable for the balance of the
three-year term plus one year.
Carolyn Solomon. At the closing of the Restructuring, the Company entered
into a three-year employment agreement with Carolyn Solomon. During the term
of the agreement, Ms. Solomon will have the title "Executive Vice President"
and, subject to the supervision of the Chief Executive Officer, will have
responsibility for, among other things, managing the Company's jewelry
division and will participate as a member of the Company's senior management.
Under the employment agreement, Ms. Solomon received an annual salary of
$150,000 during the first year of the agreement, and is to receive an annual
salary of $162,500 during the second year of the agreement and $175,000 during
the third and any subsequent year for which the agreement is extended. During
the term of Ms. Solomon's employment agreement, no employee of the jewelry
division will be paid a salary higher than Ms. Solomon's salary at that time.
Ms. Solomon was eligible to receive, but did not receive, a performance bonus
of up to $50,000 in fiscal 1995, based primarily on achievement of jewelry
division sales goals to be mutually determined by Ms. Solomon and the Company.
<PAGE>
In the event that Jack Solomon's employment is terminated during the term
of Carolyn Solomon's employment agreement, Carolyn Solomon may elect to
terminate her own employment with the Company. In the event that Jack Solomon
was terminated for cause or voluntarily terminated his own employment (other
than for cause), and Carolyn Solomon voluntarily elected to terminate her
employment, Carolyn Solomon would receive no severance from the Company and
would forfeit any unvested options. In the event that (a) Carolyn Solomon's
employment with the Company is terminated without cause or (b) Jack Solomon's
employment with the Company is terminated without cause and Carolyn Solomon
exercises an option pursuant to her employment agreement to terminate her own
employment, she will receive as severance (i) 20/52's of her annual base
salary quarterly during the 12 months following if such termination occurs
prior to the first anniversary of the Closing, or (ii) 100% of her annual base
salary during the next twelve month, thereafter as severance. Those payments
will be in lieu of any other payments. Notwithstanding the above, in the
event Jack Solomon were to become disabled, Carolyn Solomon will be given a
six-month unpaid leave of absence at that time, provided the Company would pay
for Carolyn Solomon's benefits during that period. In addition, any unvested
options would automatically vest. Carolyn Solomon, would, however have an
obligation to continue in her current executive position for up to 120 days at
the Company's discretion at his regular salary. In all circumstances, any
non-compete provision applicable to Jack Solomon would be identically
applicable to Carolyn Solomon if Carolyn Solomon were to voluntarily terminate
her employment with the Company as a result of Jack Solomon's termination.
On December 13, 1994, Ms. Solomon was granted options to acquire 92,836
shares of Common Stock at an exercise price of $.388 (125% of the price per
share paid by the Investors). One-third of the options will vest on each of
the first, second, and third anniversaries of the closing of the
Restructuring. In the event of Ms. Solomon's death, qualifying disability or
her termination without cause, all unvested options shall vest immediately.
In the event that Ms. Solomon voluntarily terminates her employment or is
terminated for cause all unvested options will be forfeited.
Under the terms of this new employment agreement, Ms. Solomon's existing
options to purchase 18,334 shares of Common Stock were cancelled and her
existing supplementary compensation agreement was terminated.
As part of her employment agreement, Ms. Solomon agreed that during the
term of her employment and for a period of one year after termination thereof,
she will not engage in any business in competition with the Company; provided
that, if Ms. Solomon voluntarily terminates her employment during the first
three-year term other than for cause or is terminated by the Company for
certain specified causes, the agreement not to compete will be applicable for
the balance of the three-year term plus one year (other than for cause) or is
terminated by the Company for certain specified causes.
<PAGE>
Effective May 1, 1995, Carolyn Solomon entered into a new Employment
Agreement with the Company. This new Agreement continued all terms of the
previous Agreement except Ms. Solomon waived any right to receive a
Performance Bonus for her duties as President of the Jewelry Division for
calendar year 1995 only. In addition to her duties as provided in the
Employment Agreement, Ms. Solomon assumed the duties, but not the title, of
President of the Company's Retail Art Division beginning May 1, 1995 until
December 31, 1995. Ms. Solomon was removed from this position in August 1995.
For her additional work and responsibilities as President of the Retail
Division, Ms. Solomon received:
(I) An art package valued at $25,000 similar to the packages, using the
same valuation approach as the art packages detailed in Item 13; and
(ii) Employee stock options to purchase 218,406 shares of the Company's
Common Stock at an exercise price of $0.40 per share. The Additional
Options are exercisable by Carolyn Solomon after January 1, 1996.
In addition, the following incentive bonuses are to be paid to Carolyn
Solomon promptly after January 1, 1996 if the Company's retail sales of art
exceed $15,000,000 for the period from May 1, 1995 through December 31, 1995:
(I) A cash payment of $25,000 or, at the Company's sole option instead of
the cash payment, an additional art package valued at $25,000 upon the
same terms and conditions as described above.
(ii) Additional employee stock options to acquire an additional 109,203
shares of the Common Stock of the Company upon the same terms and
conditions as described above.
Joseph Atkin. At the closing of the Restructuring, the Company entered
into a two-year employment agreement with Joseph Atkin. During the term of
the agreement, Mr. Atkin will have the title "Vice President of Finance and
Chief Financial Officer" and, subject to the supervision of the Chief
Executive Officer, is responsible for, among other things, all finance
functions, insurance, financing activities, landlord relations, and oversight
of shipping, distribution and was responsible for the Company's barter
operations. Under the agreement, Mr. Atkin received an annual salary of
$150,000 during the first year of the agreement and will be entitled to
receive $162,500 during the second year of the agreement. During the first
year of the agreement, Mr. Atkin was entitled to up to $35,000 in bonuses upon
the achievement of certain performance goals and up to an additional $15,000
bonus at the discretion of the Chief Executive Officer. In total, Mr. Atkin
received a bonus of $32,000 related to fiscal 1995. In the event his
employment is not renewed at the end of the two year term, Mr. Atkin will be
entitled to a severance payment equal to his then annual base salary paid in
installments. In the event Mr. Atkin becomes disabled or unable to perform
his duties he will receive six months salary (or three months salary if such
disability occurs in the first year of the Agreement). In the event Mr.
Atkin's employment is terminated by the Company without cause, Mr. Atkin will
receive his regular salary for the remainder of the term of the agreement plus
an additional year.
<PAGE>
On December 13, 1994, Mr. Atkin was granted options to acquire 92,836
shares of Common Stock at an exercise price of $.388 (125% of the price paid
by the New Investors). One-half of the options will vest on each of the first
and second anniversaries of the closing of the Restructuring. In the event of
Mr. Atkin's death, qualifying disability or his termination without cause, all
unvested options shall vest immediately. In the event that Mr. Atkin
voluntarily terminates his employment or is terminated for cause, all unvested
options will be forfeited.
Under the terms of this new employment agreement, Mr. Atkin's existing
options to purchase 17,000 shares of Common Stock were cancelled and his
existing supplementary compensation agreement was terminated.
Erwin Marks. On June 19, 1995, the Company entered into a three-year
Employment Agreement with Erwin Marks. During the term of the Agreement, Mr.
Marks will have the title of "President and Chief Executive Officer" and
subject to the control and direction of the Board of Directors will have
responsibility for among other things, the Company's businesses, strategic
planning for the Company and supervising and assigning duties to the acting
presidents of the Company's Retail Art Division and Jewelry Division. Under
the Agreement, Mr. Marks will receive an annual salary of $150,000 during the
first year of the Agreement, $160,000 during the second year of the Agreement
and $175,000 during the third year of the Agreement. Mr. Marks will be
entitled to receive performance bonuses, if certain performance goals are met,
which shall not exceed $150,000; $175,000; and $200,000, respectively for the
first, second and third years of his employment.
The Company may elect, in its sole discretion, to pay any portion of any
bonus due in excess of $50,000 in shares of the Company. For this purpose,
the shares shall be valued at two-third's of the average trading price of the
shares for the 21 trading days preceding the payment of the bonus.
In June 1995, Mr. Marks was granted options to purchase 100,000 shares of
the Company's Common Stock at $.40 per share.
Upon each of September 30, 1996, September 30, 1997, and September 30,
1998, provided that Mr. Marks remains employed by the Company on each such
date, Mr. Marks shall receive additional options to purchase 100,000 shares at
an exercise price of $0.40 per share upon the same terms and conditions as
contained in the Stock Option Agreement.
If Mr. Marks' employment is terminated on or before September 30, 1996, he
will be entitled to receive a severance payment equal to 75% of his annual
base salary, to be paid in equal monthly installments during the period of
October 1, 1996 through June 30, 1997. Mr. Marks shall also be entitled to
receive the options to be granted to him as of September 30, 1996 and the
Company shall continue to provide all insurance and welfare benefits.
If Mr. Marks' employment is terminated as of September 30, 1997, Mr. Marks
will be entitled to receive a severance payment equal to 50% of his annual
base salary to be paid in six (6) substantially equal monthly installments
during the period of October 1, 1997 through March 30, 1998. Mr. Marks will
also be entitled to receive the options to be granted to him as of September
30, 1997 and the Company shall continue to provide all insurance and welfare
benefits.
<PAGE>
In the event that Mr. Marks becomes disabled and is unable to perform the
essential duties of his position, then the Company is to pay him the following
compensation during such disability period:
(1) In the first year of this Agreement, three (3) months of his annual
base salary.
(2) In the second year of this Agreement, six (6) months of his annual base
salary.
(3) In the third year of this Agreement, nine (9) months of his annual base
salary.
If the term of Mr. Marks' employment is not extended beyond September 30,
1998, Mr. Marks will be entitled to receive a severance payment equal to 25%
of his annual base salary to be paid in three (3) substantially equal monthly
installments during the period of October 1, 1998 through December 31, 1998.
Per his employment agreement, Mr. Marks has the right to indemnification under
certain circumstances relating to any possible legal liability arising from
his employment with the Company. Mr. Marks also has certain rights of
protection relating to any change in ownership or control of the Company.
(See Exhibit 10.33 filed herwith.)
Management Agreement
- --------------------
The Winbrook Group, Ltd. is a Chicago based venture capital firm that
typically provides early round equity financing to start up, emerging, and
underperforming companies. Winbrook's focus has been primarily in companies
which manufacture, market, and distribute consumer products. Its investments
include companies involved in proprietary school tools and activities products
for children sold through the mass market; new age beverages; and a patented
electronic dental plaque remover sold both through dental professionals and at
retail.
Winbrook maintains an active presence in each of its companies--both at
board level and on a day-to-day basis working with the CEO and other senior
executives both on strategic and tactical matters.
As a condition to the Restructuring, the Company entered into a management
agreement (the "Management Agreement") with Winbrook. Pursuant to the
Management Agreement, Winbrook provides to the Company day-to-day executive
management services until December 31, 1997 (subject to automatic consecutive
one-year renewals, unless Winbrook or the Company terminates the Management
Agreement in writing, more than 60 days prior to the end of the then-remaining
term). Winbrook provided the Company with the services of Louis Yaseeen to
serve as the president and chief executive officer of the Company until his
resignation and the appointment of Mr. Erwin Marks as President and Chief
Executive Officer in June 1995. If neither Mr. Yaseen nor a successor is then
serving as CEO, Winbrook will use its best efforts to provide the Company with
necessary support and consultation. For the provision of these services,
Winbrook will receive an annual fee of $360,000 in the year ended December 31,
1995 (an additional prorated portion to be paid for any period after the
Closing but prior to January 1, 1995), to be increased by 10% for each
succeeding year. Winbrook may elect to terminate the Management Agreement at
any time upon 120 days' notice. The Management Agreement may be terminated by
the Company, prior to its scheduled maturity date, upon the occurrence of (i)
Winbrook's uncured default under the Management Agreement, (ii) Winbrook's
uncured willful and wanton misconduct intended to harm the Company, or (iii)
the resignation of Mr. Yaseen (or any successor) and the uncured failure of
Winbrook to use its best efforts to provide a successor acceptable to the
Company's Board of Directors within a specified time period. Decision to
terminate the Management Agreement for any of the reasons set forth in the
preceding sentence, or for any other matter prior to the end of the then
applicable term are to be made by a committee of the Company's Board of
Directors consisting of each of the then serving directors of the Company not
affiliated with Winbrook. Should the Management Agreement be terminated by the
Company other than for any of the reasons specifically set forth in clauses
(i) through (iii) above, Winbrook shall be entitled to receive, in addition to
any other damages under law or otherwise, its full fee for the remainder of
the term of the Management Agreement, and all options issued to Messrs. Stone,
Yaseen and Sorin pursuant to the 1994 Stock Option Plan (as hereinafter
defined) shall immediately vest and become exercisable.
<PAGE>
Additionally, pursuant to the Management Agreement, the Company agreed to
indemnify Winbrook, its principals, and the respective affiliates of Winbrook
and its principals (each a "Winbrook Party") against any costs, expenses or
liabilities related to their provision of services to the Company, and has
covenanted not to sue such parties based upon any actions arising from the
services of Winbrook, Mr. Yaseen (or any successor) or any other Winbrook
Party to the Company, other than claims arising from the willful and wanton
misconduct of any Winbrook Party which was taken with the intent to harm the
Company. Such indemnity and covenant not to sue are, among other things,
explicitly designed to protect each Winbrook Party from any liability
resulting from any conflict of interest which arises for any reason,
including, without limitation, because (i) Winbrook is the provider of
services pursuant to the Management Agreement; (ii) its principals hold both
stock and debt interests in the Company; (iii) its principals will constitute
a majority of the Board of Directors, and pursuant to the Voting Agreement (as
hereinafter defined), will have the right to continue to elect a majority of
the Board of Directors; and (iv) the Agent, Winbrook's affiliate, will control
the enforcement of the remedies of the holders of the Investor Notes.
In fiscal 1995, Winbrook was paid $60,000 under the terms of the Management
Agreement during the months of December, January, and February. Certain
additional amounts due were reduced by agreement by the amount of compensation
and related payroll costs associated with the employment of Erwin Marks, Chief
Executive Officer, from June 1995 to September 1995. At September 30, 1995,
$180,000 was accrued on the Company's books as due to Winbrook related to the
Management Agreement.
Old Stock Option Plans
- ----------------------
In April 1992, the Incentive Stock Option Plan adopted by the Company in
1982 (the "1982 Plan") expired. As of November 1, 1995, options to purchase
3,917 shares at an exercise price of $9.00 were outstanding under the 1982
Plan. In April 1993, the Company adopted a new Incentive Stock Option Plan
(the "1993 Plan") making 66,666 shares available for sale pursuant to employee
stock options. No options were granted under the 1993 Plan.
<PAGE>
1994 Stock Option Plan
- ----------------------
As part of the Restructuring, the stockholders approved the Company's 1994
Stock Option Plan (the "1994 Plan"). The 1994 Plan provides that the number
of shares of Common Stock available to be granted will equal 1,855,699 shares,
representing 15 percent of the number of shares of Common Stock outstanding
immediately following the closing of the Restructuring assuming exercise of
all then outstanding options and warrants ("Fully Diluted Outstanding
Shares").
Under the terms of the 1994 Plan, options to purchase shares of Common
Stock have been granted to the eight executive officers and directors of the
Company as follows:
<TABLE>
<CAPTION>
Percentage of
Shares Subject to outstanding shares
Option Under on a fully
Participant 1994 Plan diluted basis
--------------------- ----------------- --------------------
<S> <C> <C>
Jack Solomon 371,342 3.39%
Joel Stone 302,996 2.77
Louis Yaseen 302,996 2.77
John Sorin 302,996 2.77
Carolyn Solomon 311,242 2.84
Erwin Marks 100,000 .91
Joseph Atkin 92,836 .85
--------- ------
1,784,408 16.30%
========= ======
</TABLE>
The exercise price for all of the foregoing options ranges from $.3888 to
$.40 per share.
One third of the options granted to Joel Stone, Louis Yaseen, John Sorin,
Jack Solomon and Carolyn Solomon will vest and become exercisable on each of
the first, second and third anniversaries of the closing of the Restructuring.
One half of the options granted to Joseph Atkin will vest and become
exercisable on each of the first and second anniversaries of the closing of
the Restructuring.
Upon the death or disability of any of the optionholders or in the case of
Jack Solomon, Carolyn Solomon and Joseph Atkin, upon the termination of his or
her respective employment without cause, all of the options granted to such
optionholders shall vest immediately. In the case of Jack Solomon, Carolyn
Solomon and Joseph Atkin, upon the voluntary termination of employment by the
optionholders or termination by the Company for cause, all unvested options
granted to such optionholders will be cancelled and forfeited. Upon
termination of the Management Agreement, all unvested options granted to
Messrs. Stone, Yaseen and Sorin will be cancelled and forfeited. In the event
that the Management Agreement is terminated other than upon the terms and
conditions for termination specified therein (and other than by the vote of
directors who are affiliates of Winbrook) all unvested options granted to
Messrs. Stone, Yaseen and Sorin shall become immediately vested and
exercisable.
The 1994 Plan is administered by a committee consisting of members of the
Company's Board of Directors, comprised of Messrs. Stone, Yaseen and Sorin.
<PAGE>
Profit Sharing and 401(K) Savings Plan
- --------------------------------------
Effective January 1988, the Company implemented a Profit Sharing and 401(K)
Savings Plan. All full-time employees who are 21 years of age or more are
eligible to join the plan after they complete one year of service. Employees
may defer not less than 2% nor more than 15% of their compensation each year
instead of receiving that amount in cash. The maximum employee contribution
is limited by federal law to $9,240 for the calendar year ended December 31,
1995. No profit sharing contribution was declared or paid by the Company
during fiscal years 1994 or 1995.
Compensation Committee Interlocks and Insider Participation
- -----------------------------------------------------------
The Company has no compensation committee. Jack Solomon, Carolyn Solomon,
Joseph Atkin and Erwin Marks are all employed under management contracts.
Jack Solomon and Carolyn Solomon served as directors of the Company until
their resignation in June 1995. None of the foregoing officers or directors
of the Company served in the last fiscal year as a director or member of the
compensation committee of another entity whose executive officers served as
directors of the Company. See Item 13 - Certain Relationships and Related
Transactions - for a description of the transactions between the Company and
each of the above foregoing directors and officers.
The following table summarizes certain information concerning repricing of
stock options held by executive officers since October 1, 1985:
<TABLE>
<CAPTION>
Length of
Exercise Original Term
Number of Market Price Price at Remaining at
Shares Stock at Time Time of Date of
Underlying of Repricing Repricing New Exercise Repricing or
Name and Position Date Options or Amendment or Amendment Price Amendment
- ----------------- ------------ ---------- ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Jack Solomon 1/26/94 10,000 $1.125 $18.75 $1.125 12 months
8,334 1.125 9.00 1.125 24 months
12/13/94<F1> 371,342 .75 1.125 .388 60 months
Carolyn Solomon 1/26/94 10,000 1.125 18.75 1.125 12 months
8,334 1.125 9.00 1.125 24 months
12/13/94<F1> 92,836 .75 1.125 .388 60 months
Joseph Atkin 1/26/94 3,333 1.125 30.75 1.125 8 months
3,333 1.125 23.61 1.125 24 months
3,333 1.125 9.00 1.125 36 months
2,500 1.125 3.00 1.125 48 months
12/13/94<F1> 92,836 .75 1.125 .388 60 months
<FN>
<F1>
These options are exercisable on anniversary dates beginning on December 13, 1995 and ending on December 13, 1997.
</FN>
All share and price per share figures in the table above give effect to the Reverse Stock
Split.
</TABLE>
<PAGE>
Report of Board of Directors on Executive Compensation
- ------------------------------------------------------
In connection with the restructuring and the continued operations of the
Company, the Board entered into employment agreements with Jack Solomon,
Carolyn Solomon, Joseph Atkin and Erwin Marks. Such agreements are detailed
in Employment Contracts section. Also the Company adopted the 1994 Stock
Option Plan granting options to purchase 1,748,408 of Common Stock to seven of
the Company's officers and directors.
The Board of Directors considered compensation plans as reported by two
other public competing art gallery companies and found that the Company's
executives are receiving less than their counterparts.
Stock Price Performance Graph
- -----------------------------
The Stock Price Performance Graph compares the yearly percentage change in
the Company's cumulative total stockholder return on its Common Stock with the
cumulative total returns of the Standard & Poor's 500 Stock Index (the "S & P
500 Index") and the Nasdaq Retail Trade Index (the "Nasdaq Index"). The
comparison assumes $100 investments on September 30, 1989, in the Company's
Common Stock, the S&P 500 Index and the Nasdaq Index, and further assumes
reinvestment of dividends.
250
+
200 +
+
+ + $
150
$ $
$
$
100 #$+
#
50
#
#
0 # #
1990 1991 1992 1993 1994 1995
YEAR
# Circle Fine Art Corporation $ S & P 500 Index
+ NASDAQ Index
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -------- --------------------------------------------------------------
The following table sets forth as of December 31, 1995, the number of
shares of Common Stock beneficially owned by (i) each person who is known by
the Company to be the beneficial owner of more than 5% of the Common Stock and
(ii) each director and Named Executive Officer and the directors and officers
of the Company as a group. See "Voting Agreement" below, regarding agreements
among the holders of most of the outstanding voting securities which as result
of such security holders could be deemed a "group" pursuant to Rule 13-d
pursuant to the Exchange Act.
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial Ownership<F1> Percent<F2>
---------------------------- -----------
<S> <C> <C>
Joel Stone <F3><F11> 1,119,631 10.9%
Louis Yaseen <F4><F11> 553,392 5.7%
John Sorin <F5><F11> 857,505 8.7%
Jack Solomon <F6><F11> 567,193 5.8%
Carolyn Solomon <F7><F11> 355,562 3.7%
Erwin Marks <F11> 100,000 1.1%
Joseph Atkin <F8><F11> 54,786 0.6%
Directors and Executive Officers
as a Group (7 persons) 3,527,678 27.8%
David Nagelberg <F9><F12> 710,996 7.2%
Ronald Heller <F10> <F12> 710,996 7.2%
<FN>
<F1>
Except as otherwise noted, all shares are held of record and are beneficially
owned by the person indicated, with such person having sole voting and
investment power over such shares. The share numbers include all shares
purchasable pursuant to options or warrants held by such person, exercisable
prior to January 31, 1996.
<F2>
Determined based upon (i) the number of shares of Common Stock actually
outstanding and (ii) any shares subject to options or warrants held solely by
the person or group with respect to which such percentage is being calculated
or which are or will be exercised at any time prior to January 31, 1996.
<F3>
Includes 315,721 shares subject to warrants and 803,910 shares held by Jo-Bar
Enterprises LLC, a limited liability company owned by Mr. Stone and certain
members of his family, and of which Mr. Stone is the managing member. As
managing member, Mr. Stone has voting and investment power with respect to all
such shares. Does not include 201,997 shares that may be acquired by Mr.
Stone upon exercise of stock options that are not vested. See "Item 11.
Executive Compensation - 1994 Stock Option Plan."
<F4>
Includes 231,827 shares of stock subject to warrants held by Mr. Yaseen's
wife, Linda L. Yaseen, as well as 321,565 shares of Common Stock purchased by
Ms. Yaseen (which include 192,939 shares purchased directly by Ms. Yaseen and
128,626 shares purchased through a self directed IRA account)" pursuant to the
Restructuring, as to which Mr. Yaseen disclaims any beneficial interest as he
does not share (and will not share) voting or investment power other than
pursuant to the Voting Agreement discussed below. Does not include 201,997
shares that may be acquired by Mr. Yaseen upon exercise of stock options that
are not vested. See "Item 11. Executive Compensation - 1994 Stock Option
Plan."
<F5>
Includes 294,768 shares of stock subject to warrants and 562,737 shares held
by the John Sorin Living Trust dated 1990, as to which Mr. Sorin has exclusive
voting and investment power. Does not include 201,997 shares that may be
acquired by Mr. Sorin upon exercise of stock options that are not vested. See
"Item 11. Executive Compensation - 1994 Stock Option Plan."
<F6>
Does not include any shares owned of record by Mr. Solomon's wife, Carolyn
Solomon, Executive Vice President of the Company, as to which shares Mr.
Solomon shares no voting or investment power and disclaims beneficial
ownership, however, it does include 80,391 shares held in joint tenency by Mr.
and Ms. Solomon. Also does not include 247,561 shares that may be acquired
upon exercise of stock options that are not vested. See "Item 11. Executive
Compensation - 1994 Stock Option Plan."
<F7>
Does not include any shares owned by Ms. Solomon's husband, Jack Solomon,
Managing Director and Founder, as to which shares Ms. Solomon shares no voting
or investment power and disclaims beneficial ownership, however, it does
include 80,391 shares held in joint tenency by Mr. and Ms. Solomon. Also does
not include 61,892 shares that may be acquired upon exercise of stock options
that are not vested. See "Item 11. Executive Compensation - 1994 Stock
Option Plan."
<F8>
Does not include 46,418 shares that may be acquired upon exercise of stock
options that are not vested. Includes "(i)" 1,167 shares held by his
daughter, Judy Atkin; "(ii)" 1,167 held by his daughter, Lisa Atkin; "(iii)"
4,167 held by his wife, Carol Atkin. See "Item 11. Executive Compensation -
1994 Stock Option Plan."
<F9>
Includes (i) 349,036 shares subject to warrants held by Mr. Nagelberg and (ii)
160,782 shares held by Mr. Nagelberg's wife, Bette Nagelberg.
<F10>
Includes (i) 90,440 shares subject to warrants held by Mr. Heller, (ii) 62,358
shares subject to warrants held by Mr. Heller through a self directed I.R.A.
account, (iii) 196,238 shares subject to warrants held in joint tenancy by Mr.
Heller and his wife, Joyce Heller and (iv) 361,750 shares held in joint
tenancy by Mr. and Mrs. Heller.
<F11>
The address of Messrs. Solomon, Marks and Atkin and Ms. Solomon is 303 East
Wacker Drive, Suite 830, Chicago, Illinois. The address of Messrs. Stone,
Yaseen and Sorin is 8700 West Bryn Mawr, Chicago, Illinois.
<F12>
The address of Messrs. Nagelberg and Heller is 30 Montgomery Street, Jersey City, New Jersey, 07302.
</FN>
</TABLE>
<PAGE>
Voting Agreement
- ----------------
As a condition to the Restructuring, the Company, the Placement Agent, the
holders of the First Warrants and Second Warrants, Jack Solomon, Carolyn
Solomon and each of the New Investors entered into a voting agreement (the
"Voting Agreement"). Initially, the Board consists of five members: the three
Winbrook principals, Jack Solomon and Carolyn Solomon. In June 1995, both
Jack Solomon and Carolyn Solomon resigned as Board members. Furthermore, Mr.
David Pollick was named to the Board by the Winbrook Group in June 1995. The
Voting Agreement provides that the Placement Agent will have the right to
appoint a nominee and Winbrook will have the right to appoint two (or if the
Placement Agent appoints a director, three) additional nominees. Thus,
pursuant to the Voting Agreement, the Company's Board of Directors may in the
future consist of seven people (or nine if the Placement Agent exercises its
right to appoint a director), consisting of (i) one nominee of Jack Solomon
(initially to be Jack Solomon) so long as Jack Solomon continues to devote his
full time and efforts as an employee of the Company upon the terms set forth
in his employment agreement; (ii) one nominee of Carolyn Solomon (initially to
be Carolyn Solomon) so long as Carolyn Solomon continues to devote her full
time and efforts as an employee of the Company upon the terms set forth in her
employment agreement; (iii) until the third anniversary of the closing of the
Restructuring, and upon receipt of written notice from the Placement Agent,
one nominee of the Placement Agent; and (iv) five (or six, in the event that
the Placement Agent has nominated a director as described in clause (iii))
nominees of Winbrook, so long as affiliates of Winbrook (or their relatives)
hold at least one-third of the number of shares of Registrable Stock held by
affiliates of Winbrook as of the closing of the Restructuring.
The parties to the Voting Agreement also agreed to vote to remove any
director nominated as described above as directed by the person which
nominated such director, provided that Winbrook may not require the other
parties to the Voting Agreement to vote to remove any director nominated by
Winbrook which is not an affiliate of Winbrook or the Company. The Company's
Restated Certificate of Incorporation, however, currently precludes the
stockholders from removing any director before the expiration of his or her
term other than for cause and would have to be amended in order to permit such
removal. The Company has not been informed whether or not the Winbrook
designees to the Board will recommend that the Company so amend its Restated
Certificate of Incorporation. The Voting Agreement has a term of ten years,
but will be terminated at such earlier time, after the date of a firm
commitment public offering by the Company at a price not less than $5 per
share and yielding net proceeds to the Company of not less than $5 million,
on which Winbrook delivers a notice to each of the parties terminating the
Voting Agreement. The terms of the Voting Agreement will not be binding upon
any transferee of any New Investor's Common Stock which has purchased such
Common Stock in (i) a transaction exempt from registration under Rule 144
under the 1933 Act or (ii) an offering pursuant to an effective registration
statement under the 1933 Act.
The parties to the Voting Agreement collectively hold in excess of 85% of
the shares of Common Stock outstanding immediately following the closing of
the Restructuring (and upon exercise of all of the warrants and options
outstanding following the Restructuring, the percentage will increase even
further). Therefore, the Voting Agreement ensures (assuming that each of the
parties thereto performs its obligations) that Winbrook will have the ability
to nominate a majority of the Company's Board of Directors for the term of the
Voting Agreement or until (a) there have been sufficient transfers of Common
Stock by parties thereto or (b) the Company issues sufficient additional
voting securities not subject to the Voting Agreement such that (in either
such case) the parties to the Voting Agreement no longer control a majority of
the outstanding voting stock of the Company.
<PAGE>
Item 13. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
Concurrently with the execution and delivery of an agreement in principle
on June 29, 1994, Winbrook-led group of investors made a $500,000 bridge loan
to the Company due September 30, 1994, and in partial consideration thereof,
the Winbrook-led investors were issued warrants having a term of 10 years to
acquire approximately 7% of the Company's then outstanding shares at an
exercise price of $.04 per share. On September 22, 1994, the Winbrook-led
group of investors made a $600,000 bridge loan due December 31, 1994 to the
Company and extended the maturity date of the $500,000 term loan made on June
29, 1994, from September 30, 1994 to December 31, 1994. In partial
consideration thereof, the Winbrook-led group of investors were issued
warrants, having a term of 10 years, to acquire approximately 3.3% of the
Company's then outstanding shares at an exercise price of $.04 per share. As a
result of the foregoing transaction, the Winbrook-led group had made bridge
loans to the Company in an aggregate amount of $1.1 million and were issued
warrants to acquire approximately 11% of the Company's then outstanding shares
of Common Stock. In the Restructuring, the Bridge Loans were cancelled in
consideration of the Company issuing Common Stock and Investor Notes in
exchange. The Restructuring resulted in a change in control of the Company
with principals of Winbrook constituting a majority of the Board of Directors
of the Company.
In October 1994, Winbrook acquired a 50% interest in CAMA Inc., a joint
venture of the Company, ("CAMA"), from the Company's joint venture partners,
for $37,500. In addition, Winbrook agreed to hold the joint venture partners
harmless with respect to each of their respective guarantees (the "CAMA
Guarantees") of CAMA's debt (in the original principal amount of $250,000, of
which approximately $60,000 was then outstanding) to Manufacturer's Bank and
to cause the CAMA Guarantees to be released and the joint venture partners
provided certain other non-cash additional consideration. In the
Restructuring, Winbrook transferred its purchased interest in CAMA to the
Company in consideration for repayment of $37,500 being all amounts expended
by Winbrook in connection with such transaction, and provision to Winbrook of
an indemnity against any future liability related to CAMA or the CAMA related-
transaction.
During fiscal 1995, the Company charged to Joe Atkin's personal credit
cards various sums in order to provide the Company with goods and services
that it could not otherwise currently fund. Due to the Company's financial
situation, no corporate credit cards were available to the Company. During
fiscal 1995, Mr. Atkin's credit cards were used to purchase goods and services
on behalf of the Company in aggregate amounts of $290,000. All of these
amounts have been reimbursed by the Company. These items were in addition to
normal expense reimbursements to Mr. Atkin.
The Company has a policy of permitting officers, directors, and 5% or more
shareholders of the Company to purchase art from the Company for an amount not
less than 120% of the Company's cost but which is also significantly below the
list price for such art. In fiscal 1995, the following art purchases were
incurred:
<TABLE>
<CAPTION>
Sold To Inventory Cost Purchase Price Retail Price
----------------- -------------- -------------- ------------
<S> <C> <C> <C>
Ronald Heller $22,000 $67,000 $571,000
John Sorin 18,000 53,000 512,000
David Nagelberg 13,000 47,000 487,000
Joel Stone 10,000 42,000 433,000
Louis Yaseen 8,000 23,000 229,000
</TABLE>
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K
- -------- ----------------------------------------------------------------
Financial Statements and Financial Schedules
(a) List of documents filed as part of this report.
(1) Financial Statements
Report of Independent Auditors
Consolidated Statements of Operations for the years ended
September 30, 1995, 1994, and 1993
Consolidated Balance Sheets as of September 30, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended
September 30, 1995, 1994, and 1993
Consolidated Statements of Shareholders' Equity (Deficit) for the
years ended September 30, 1995, 1994, and 1993
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Report of Independent Auditors
II. Valuation and Qualifying Accounts
All other financial statements and schedules not listed have been
omitted because they are not applicable, not required or because the
required information is included in the consolidated financial
statements or notes thereto.
(b) Reports on Form 8-K
None
(c) Exhibits
The following exhibits are incorporated by reference or submitted
herewith as indicated .
Exhibit
Number Exhibit Description
- -------- -------------------
3.1 Restated Certificate of Incorporation (incorporated herein by
reference from Exhibit 3.1 to From 10-K filed December 27, 1994).
3.2 Restated By-laws (incorporated herein by reference from Exhibit 3.2
to Form 10-K filed December 27, 1994).
4.1 Certificate of Designation for Series A Cumulative Preferred Stock
(incorporated by reference from Exhibit 4 to Form 8-K filed
December 28, 1994.)
<PAGE>
4.2 Option of Winbrook Group, Ltd. to purchase Preferred Stock from
Chrysler Capital Corporation (filed herewith).
9 Voting Agreement dated December 13, 1994 between Circle Fine Art
Corporation, The Winbrook Group, Ltd., Carolyn Solomon, Jack
Solomon, M.H. Meyerson & Co., and each person who is a signatory
thereto (incorporated by reference from Exhibit 10.2 to Form 8-K
filed December 28, 1994.)
10.1 Warrant to purchase shares of common stock of Circle Fine Art
Corporation, dated December 10, 1987 (incorporated herein by
reference from Exhibit 4(b) to Form 10-K filed December 24, 1987).
10.2 Warrant to purchase shares of common stock of Circle Fine Art
Corporation dated July 28, 1989 (incorporated herein by reference
from Exhibit 4 (b) to Form 10-Q for the quarter ended June 30,
1989).
10.3 Warrant to purchase shares of common stock of Circle Fine Art
Corporation dated June 29, 1994 (incorporated herein by reference
from Exhibit 10.4 to Form 8-K filed July 5, 1994).
10.4 Warrant to purchase shares of common stock of Circle Fine Art
Corporation dated September 22, 1994 (incorporated herein by
reference from Exhibit 10.3 to Form 8-K filed September 28, 1994).
10.5 Warrant to purchase shares of common stock of Circle Fine Art
Corporation dated December 13, 1994 (incorporated herein by
reference from Exhibit 10.15 to Form 8-K filed December 28, 1994).
10.6 The 1982 Circle Fine Art Corporation Incentive Stock Option Plan
(incorporated herein by reference from Exhibit 4-1 to Form 10-Q for
the quarter ended March 31, 1982).
10.7 Profit Sharing and Savings Plan and Trust Summary Plan Description
(incorporated herein by reference from Exhibit 4 (e) to Form 10-K
filed December 24, 1987).
10.8 1989 Special Option Plan (incorporated herein by reference from
Appendix I of the Definitive Proxy Statement and form of Proxy
which was mailed to the Registrant's security holders as of
February 27, 1989).
10.9 1994 Stock Option Plan (incorporated herein by reference from
Exhibit 10.14 to Form 8-K filed December 28, 1994).
10.10 Second Amended and Restated Credit Agreement dated December 13,
1994 between Circle Fine Art Corporation of Illinois and Standard
Chartered Bank (incorporated herein by reference from Exhibit 10.16
to Form 8-K filed December 28, 1994).
<PAGE>
10.11 Documents related to Securities Purchase Agreement for Subordinated
Promissory Notes aggregating $5.0 million dated December 10, 1987,
including exhibits (incorporated herein by reference from Exhibit
10 (b) to Form 10-K filed December 24, 1987 and by reference from
Exhibit 4 (a), (b), (c), (d) and (e) to Form 10-Q for the quarter
ended June 30, 1989).
10.12 Documents related to Securities Purchase Agreement for Subordinated
Promissory Notes aggregating $5.0 million dated July 27, 1989,
including exhibits thereto (incorporated herein by reference from
Exhibits 4 (a), (b), (c), (d), and (e) to Form 10-Q for the quarter
ended June 30, 1989).
10.13 Bond documents related to the lease of the facility at 599
Broadway, New York City, including exhibits thereto (incorporated
herein by reference from Exhibit 10 (g) to Form 10-K filed December
23, 1988).
10.14 Documents related to Refinancing of Circle Fine Art Corporation by
Chrysler Capital Corporation (incorporated herein by reference from
Exhibit 10(r) to Form 10-K filed December 30, 1993).
10.15 Consolidated Amendment No. 3 to Securities Purchase Agreement and
Amendment No. 2 to Securities Purchase Agreement dated December 13,
1994 between Circle Fine Art Corporation, Circle Fine Art
Corporation of Illinois and Chrysler Capital (incorporated herein
by reference from Exhibit 10(t) to Form 10-K filed December 30,
1993).
10.16 Amendment No. 8 to Guaranty Agreement dated August 13, 1992, among
Marine Midland Bank, N.A., Circle Fine Art Corporation and Circle
Fine Art Corporation of Illinois (incorporated herein by reference
from Exhibit 10(t) to Form 10-K filed December 30, 1993).
10.17 Amendment No. 9 to Guaranty Agreement, dated December 21, 1992,
among Marine Midland Bank, N.A., Circle Fine Art Corporation and
Circle Fine Art Corporation of Illinois (incorporated herein by
reference from Exhibit 10(v) to Form 10-K filed December 30, 1993).
10.18 Management Agreement dated December 13, 1994 between Circle Fine
Art Corporation, Circle Fine Art Corporation of Illinois and The
Winbrook Group, Ltd. (incorporated by reference from Exhibit 10.3
to Form 8-K filed December 28, 1994.)
10.19 Registration Rights Agreement dated December 13, 1994 between
Circle Fine Art Corporation, Chrysler Capital Corporation, M.H.
Meyerson & Co., Inc. and the other parties thereto (incorporated by
reference from Exhibit 10.4 to Form 8-K filed December 28, 1994.)
10.20 Stock Restriction Agreement dated December 13, 1994 between Circle
Fine Art Corporation, Jack Solomon, Carolyn Solomon, Joseph Atkin,
Chrysler Capital Corporation and the other parties named therein
(incorporated by reference from Exhibit 10.5 to Form 8-K filed
December 28, 1994.)
<PAGE>
10.21 Agency Agreement, dated December 13, 1994, by and between Circle
Fine Art Corporation, Circle Fine Art Corporation of Illinois, CFA
Note Agent, L.L.C. and each of the other parties thereto
(incorporated by reference from Exhibit 10.6 to Form 8-K filed
December 28, 1994.)
10.22 Security Agreement dated December 13, 1994 in favor of CFA Note
Agent, L.L.C. by Circle Fine Art Corporation, Circle Fine Art
Corporation of Illinois, Circle Gallery, Ltd., Great Time
Corporation, Circle Gallery of Animation and Cartoon Art, Ltd.,
Circle Gallery of Canada, Ltd. Circle N.Y. Properties, Inc. and Art
of Barter, Inc. (incorporated by reference from Exhibit 10.7 to
Form 8-K filed December 28, 1994.)
10.23 Guarantee dated December 13, 1994 in favor of CFA Note Agent,
L.L.C. by Circle Fine Art Corporation, Circle Gallery, Ltd., Great
Time Corporation, Circle Gallery of Animation and Cartoon Art,
Ltd., Circle Gallery of Canada, Ltd., Circle N.Y. Properties, Inc.,
and Art of Barter, Inc. (incorporated by reference from Exhibit
10.8 to Form 8-K filed December 28, 1994.)
10.24 Subordinated Stock Pledge Agreement dated December 13, 1994 in
favor of CFA Note Agent, L.L.C. by Circle Fine Art Corporation
(incorporated by reference from Exhibit 10.9 to Form 8-K filed
December 28, 1994.)
10.25 Subordinated Patent, Trademark and License Mortgage dated December
13, 1994 in favor of CFA Note Agent, L.L.C. by Circle Fine Art
Corporation (incorporated by reference from Exhibit 10.10 to Form
8-K filed December 28, 1994.)
10.26 Employment Agreement, dated as of December 13, 1994, between Circle
Fine Art Corporation, Circle Fine Art Corporation of Illinois and
Jack Solomon (incorporated by reference from Exhibit 10.11 to Form
8-K filed December 28, 1994.)
10.27 Employment Agreement, dated as of December 13, 1994, between Circle
Fine Art Corporation, Circle Fine Art Corporation of Illinois and
Carolyn Solomon (incorporated by reference from Exhibit 10.12 to
Form 8-K filed December 28, 1994.)
10.28 Employment Agreement, dated as of December 13, 1994, between Circle
Fine Art Corporation, Circle Fine Art Corporation of Illinois and
Joe Atkin (incorporated by reference from Exhibit 10.13 to Form 8-K
filed December 28, 1994.)
10.29 Secured Subordinated Promissory Note issued December 13, 1994 by
Circle Fine Art Corporation of Illinois to Chrysler Capital
Corporation (incorporated by reference from Exhibit 10.18 to Form
8-K filed December 28, 1994.)
<PAGE>
10.30 Amendment No. 10 Guaranty Agreement dated December 7, 1994, among
Marine Midland Bank, N.A., Circle Fine Art Corporation and Circle
Fine Art Corporation of Illinois (incorporated by reference from
Exhibit 10.19 to Form 8-K filed December 28, 1994.)
10.31 Form of Purchase Option issued by Circle Fine Art Corporation on
December 13, 1994 to designees of M.H. Meyerson & Co., Inc. to
purchase an aggregate of 401,954 shares of the Common Stock, $.01
par value per share, of Circle Fine Art Corporation (incorporated
by reference from Exhibit 10.20 to Form 8-K filed December 28,
1994.)
10.32 Amendment to Employment Agreement dated December 13, 1994, between
Circle Fine Art Corporation and Carolyn Solomon (filed herewith).
10.33 Employment Agreement dated as of June 19, 1995 between Circle Fine
Art Corporation, Circle Fine Art Corporation of Illinois and Erwin
Marks (filed herewith).
16 Letter of Ernst & Young dated September 21, 1994 regarding
concurrence with statements made by Circle in this report
(incorporated herein by reference from Exhibit 16 to Form 8-K/A
filed September 22, 1994).
21 Subsidiaries of the Registrant (filed herewith).
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CIRCLE FINE ART CORPORATION
BY: JOSEPH R. ATKIN /S/
Joseph R. Atkin
Vice President of Finance and
Chief Financial Officer
Date: December 27, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated:
SIGNATURE TITLE DATE
- --------- ----- ----
JOEL STONE /S/ Chairman of the Board December 27, 1995
- -------------- -----------------
Joel Stone
ERWIN MARKS /S/ President and Chief Executive December 27, 1995
- --------------- Officer -----------------
Erwin Marks
LOUIS YASEEN /S/ Director December 27, 1995
- ---------------- -----------------
Louis Yaseen
JOHN SORIN /S/ Director December 27, 1995
- ---------------- -----------------
John Sorin
DAVID POLLICK /S/ Director December 27, 1995
- ----------------- -----------------
David Pollick
JOSEPH R. ATKIN /S/ Vice President of Finance and December 27, 1995
- ------------------- Chief Financial Officer -----------------
Joseph R. Atkin (Principal Financial Officer)
BRIAN BETTENCOURT /S/ Controller December 27, 1995
- --------------------- -----------------
Brian Bettencourt
<PAGE>
Financial Statements and Financial Schedules
(a) List of documents filed as part of this report.
PAGE
----
(1) Financial Statements
Report of Independent Auditors F-2-3
Consolidated Statements of Operations for the years
ended September 30, 1995, 1994 and 1993 F-4
Consolidated Balance Sheets as of September 30, 1995
and 1994 F-5
Consolidated Statements of Cash Flows for the years
ended September 30, 1995, 1994 and 1993 F-6
Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended September 30, 1995 and 1994 and 1993 F-7
Notes to Consolidated Financial Statements F-8-22
(2) Financial Statement Schedules
Report of Independent Auditors F-23
II. Valuation and Qualifying Accounts F-24
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Circle Fine Art Corporation
We have audited the accompanying consolidated balance sheet of CIRCLE FINE
ART CORPORATION (the "Company") as of September 30, 1995 and 1994 and the
related consolidated statements of operations, changes in shareholders'
equity and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Circle Fine
Art Corporation as of September 30, 1995 and 1994, and the consolidated
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
The financial statements have been prepared assuming that the Company will
continue as a going concern. As described in Notes 1 and 6 to the financial
statements, the Company has suffered recurring losses from operations and
has a net capital deficiency. In addition, the Company has not made certain
scheduled principal and interest payments and is in default under the
provisions of its loan agreements. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are described in Notes 1 and 6. The
consolidated financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from
the outcome of this uncertainty.
ALTSCHULER, MELVOIN AND GLASSER LLP
Chicago, Illinois
December 22, 1995
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
------------------------------
To the Board of Directors and Shareholders
Circle Fine Art Corporation
We have audited the consolidated balance sheet of Circle Fine Art
Corporation and Subsidiaries for the year ended September 30, 1993 (not
presented separately herein) and the related statements of operations,
shareholders' equity and cash flows and financial statement schedule
listed in the Index at Item 14(a) as of and for the year ended September
30, 1993. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Circle Fine Art Corporation and Subsidiaries at September 30, 1993 and
the consolidated results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement
schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
The financial statements and schedule referred to above have been
prepared assuming that Circle Fine Art Corporation and Subsidiaries will
continue as a going concern. As more fully described in Notes 1 and 6,
the Company has not made certain scheduled principal and interest
payments and has failed to comply with various loan covenants. In
addition, the lenders have demanded payment and expressed intent to
exercise other rights. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. The consolidated
financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result
from the possible inability of Circle Fine Art Corporation and
Subsidiaries to continue as a going concern.
ERNST & YOUNG LLP
Chicago, Illinois
December 3, 1993
F-3
<PAGE>
<TABLE>
CIRCLE FINE ART CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1995, 1994, AND 1993
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Net Sales $20,369,000 $18,831,000 $22,649,000
Cost of Sales 10,544,000 9,192,000 11,021,000
------------- ------------- -------------
Gross Profit 9,825,000 9,639,000 11,628,000
Selling Expenses 11,672,000 11,180,000 13,344,000
General and Administrative Expenses 2,456,000 2,444,000 2,771,000
Loss on Closed Galleries 205,000 258,000 604,000
------------- ------------- -------------
Loss from Operations (4,508,000) (4,243,000) (5,091,000)
Interest Expense (5,000,000) (2,989,000) (2,309,000)
Gain (Loss) on Investment
in Affiliates 278,000 17,000 (77,000)
------------- ------------- -------------
Loss from continuing operations
before Income Taxes and
Extraordinary (9,230,000) (7,215,000) (7,477,000)
Income Taxes - - -
------------- ------------- -------------
Loss from continuing operations
before Extraordinary Gain $(9,230,000) $(7,215,000) $(7,477,000)
------------- ------------- -------------
Gain on Sale of Discontinued
Operations, net of applicable income
taxes of $0 348,000 - -
Loss from Operations of Discontinued
Operations, net of applicable income
taxes of $0 (90,000) (202,000) (63,000)
------------- ------------- -------------
Loss before Extraordinary Gain (8,972,000) (7,417,000) (7,540,000)
Extraordinary Gain, net of applicable
income taxes of $0 4,441,000 - -
------------- ------------- -------------
Net Loss (4,531,000) (7,417,000) (7,540,000)
============= ============= =============
Loss from continuing operations
Per Common Shares Before
Extraordinary Gain (1.23) (6.40) (6.61)
Gain Per Common Share on Sale of
Discontinued Operations .05 - -
Loss Per Common Share from Operations
of Discontinued Operations (.01) (.18) (.06)
------------- ------------- -------------
Loss Per Common Share Before
Extraordinary Gain (1.19) (6.58) (6.67)
Extraordinary Gain Per Common Share .59 - -
------------- ------------- -------------
Net Loss Per Common Share $(.60) $(6.58) $(6.67)
============= ============= =============
Weighted Average Number of Common
Shares Outstanding 7,545,081 1,126,759 1,130,093
============= ============= =============
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
<TABLE>
CIRCLE FINE ART CORPORATION AND SUBSIDIARIES
--------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<CAPTION>
ASSETS September 30, 1995 September 30, 1994
- ------ ------------------ ------------------
<S> <C> <C>
Current Assets:
Cash $114,000 $151,000
Receivables, Net of Allowance
for Doubtful Accounts of $10,000
at September 30, 1995 and $175,000
at September 30, 1994 680,000 668,000
Barter Receivables, Net of Allowance
for Doubtful Accounts of $343,000
at September 30, 1994 19,000 736,000
Inventories 10,745,000 12,077,000
Other Current Assets 255,000 743,000
------------------ ------------------
Total Current Assets 11,813,000 14,375,000
Investment in Art 3,966,000 4,101,000
Property, Plant and Equipment, Net 4,810,000 5,432,000
Other Assets 822,000 321,000
------------------ ------------------
$21,411,000 $24,229,000
================== ==================
LIABILITIES AND SHAREHOLDERS'
- -----------------------------
EQUITY (DEFICIT)
- ----------------
Current Liabilities:
Accounts Payable 3,848,000 4,535,000
Barter Payable 243,000 1,057,000
Accrued Expenses:
Interest 3,458,000 3,890,000
Compensation 767,000 714,000
Taxes, other than payroll 143,000 387,000
Other 1,488,000 1,192,000
Customer Deposits and Credits 1,125,000 488,000
Notes Payable - 1,100,000
Debt in Default 17,278,000 24,137,000
------------------ ------------------
Total Current Liabilities 28,350,000 37,500,000
------------------ ------------------
Commitments and Contingencies
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;
9,172,536 shares issued and
outstanding at September 30, 1995;
$.30 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 (21,854,000) (17,323,000)
------------------ ------------------
(6,829,000) (13,161,000)
Less 6,667 shares of Treasury
Stock at Cost (110,000) (110,000)
------------------ ------------------
Total Shareholders' Equity (Deficit) (6,939,000) (13,271,000)
------------------ ------------------
$21,411,000 $24,229,000
================== ==================
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
<TABLE>
CIRCLE FINE ART CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1995, 1994, AND 1993
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(4,531,000) $(7,417,000) $(7,540,000)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization 1,063,000 1,182,000 1,620,000
Increase in Term Notes due to
non-cash interest 109,000 -- 500,000
Gain on Sale of Discontinued
Operations (348,000) -- --
(Gain)/Loss on investment in
affiliates (248,000) (17,000) 77,000
Loss on write off of leasehold
improvements on closed galleries 108,000 89,000 412,000
Extraordinary gain (4,441,000) -- --
Other 49,000 (178,000) 53,000
Change in operating assets and
liabilities:
Receivables 802,000 458,000 (160,000)
Income taxes refundable -- -- 134,000
Inventories 1,467,000 867,000 2,319,000
Other current assets 249,000 42,000 532,000
Accounts payable, accrued
compensation and accrued expenses 3,396,000 4,041,000 3,182,000
Customer deposits and credits 637,000 74,000 (43,000)
Other Assets (540,000) -- --
------------- ------------- -------------
Net cash provided by (used in)
operating activities (2,228,000) (859,000) 1,086,000
------------- ------------- -------------
INVESTING ACTIVITIES:
Capital expenditures (603,000) (335,000) (961,000)
Increase in investment in and
advances to affiliates -- (18,000) (10,000)
------------- ------------- -------------
Net cash used in investing activities (603,000) (353,000) (971,000)
------------- -------------- ------------
FINANCING ACTIVITIES:
Repayment of debt (539,000) (43,000) (645,000)
Proceeds from issuance of new loans 2,500,000 -- 455,000
Proceeds from issuance of new stock 1,933,000 -- --
Proceeds from note payable -- 1,100,000 --
Payment of note payable (1,100,000) -- --
------------- ------------- -------------
Net cash provided by financing
activities 2,794,000 1,057,000 (190,000)
------------- ------------- -------------
Net decrease in cash (37,000) (155,000) (75,000)
Cash at beginning of period 151,000 306,000 381,000
------------- ------------- -------------
Cash at end of period $114,000 $151,000 $306,000
============= ============= =============
Supplemental disclosures of cash
flow information:
Cash paid during the year for:
Interest $708,300 $80,200 $596,000
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.
F-6
<PAGE>
<TABLE>
CIRCLE FINE ART CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED SEPTEMBER 30, 1995, 1994, AND 1993
<CAPTION>
COMMON STOCK TREASURY STOCK
------------ --------------
ADDITIONAL RETAINED
PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1992 3,410,277 $341,000 (20,000) $(110,000) $3,821,000 $(2,366,000) $1,686,000
Net loss for fiscal year $(7,540,000) $(7,540,000)
------------- ------------- ------------- ------------- ------------- ------------- -------------
Balance at September 30, 1993 3,410,277 $341,000 (20,000) $(110,000) $3,821,000 $(9,906,000) $(5,854,000)
Net loss for fiscal year $(7,417,000) $(7,417,000)
Correction of shares issued
and outstanding (10,001) (1,000) 1,000
------------- ------------- ------------- ------------- ------------- ------------- -------------
Balance at September 30, 1994 3,400,276 $340,000 (20,000) $(110,000) $3,822,000 $(17,323,000) $(13,271,000)
Effect of 1 for 3 Stock Split (2,266,851) $(22,000) 13,333 $22,000
Reduction of Common Stock
Par Value $(307,000) $307,000
Restructuring Fees $(567,000) $(567,000)
Capital contribution resulting
from the conversion of
Subordinated Notes $4,930,000 $4,930,000
Issuance of Common Stock 8,039,111 $80,000 $2,420,000 $2,500,000
Issuance of Preferred Stock $4,000,000 $4,000,000
Net loss for fiscal year $(4,531,000) $(4,531,000)
------------- ------------- ------------- ------------- ------------- ------------- -------------
Balance at September 30, 1995 9,172,536 $91,000 (6,667) $(110,000) $14,934,000 $(21,854,000) $(6,939,000)
</TABLE>
The accompanying notes are an integral part of this statement.
F-7
<PAGE>
CIRCLE FINE ART CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1995, 1994, AND 1993
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 Company's consolidated financial statements have been presented on the
basis that it is a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business. Since 1990, the Company has suffered recurring losses from
operations and continues to have a net capital deficiency. As a result of
its losses, since June 1995 the Company has not made scheduled principal
and interest payments, has failed to comply with various loan covenants,
and has deferred real estate lease and rental payments. The Company has
been able to continue to operate through the date hereof only by failing
to make such required debt service payments, reducing and not replacing
inventory, and postponing the payments due its artists, landlords and
other vendors. The Company has been unable to purchase sufficient amounts
of new inventory which has further adversely affected the Company's net
sales.
The Company's financial condition and prospects depends upon its ability
to generate sufficient sales revenue to meet cash flow requirements and to
reduce and maintain operating expenses at their lowest acceptable levels.
In order to accomplish this, the Company is continuing its efforts to
lower operating expenses through staff reduction, reduction of
discretionary spending and is closing certain marginal gallery locations.
The Company also has and will continue to limit major capital expenditures
and reduce inventory levels in order to provide funds for operations and
debt reduction. The lack of operating cash, however, sometimes causes the
Company to incur unnecessary expenses, such as late fees, penalties, and
interest charges, with respect to normal operating expenses.
If the Company fails to significantly increase its net sales, it may find
it necessary to undertake other actions as may be appropriate including,
without limitation, further curtailments of its business operations and/or
further debt restructuring.
The consolidated financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and
classification of assets or the amounts and classifications of liabilities
that may result in the event such actions become necessary.
F-8
<PAGE>
CIRCLE FINE ART CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1994, AND 1993
1. Summary of significant accounting policies: (continued)
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.
Other Assets:
In fiscal 1995, the Company capitalized approximately $822,000 relating to
fees incurred for the December 1994 financial restructuring (see Note 7).
These fees are being amortized between a five and seven year period.
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.
F-9
<PAGE>
CIRCLE FINE ART CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1994, AND 1993
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 September 30, 1995 and 1994 were
$19,000 and $736,000, respectively. Payables from unsettled barter
transactions at September 30, 1995 and 1994 were $243,000 and $1,057,000,
respectively.
In February of 1995, the Company sold its interest in the Art of Barter
barter exchange to certain of the employees of Art of Barter, which it
operated since fiscal 1992. In relation to this transaction, the Company
recognized a $348,000 gain on sale of discontinued operations. The
transaction resulted in the transfer of non-cash assets and liabilities.
The Company also recognized $90,000 of loss relating to operations from
the exchange until the time of sale. Previous years results from
operations have been restated on the Company's Consolidated Statement of
Operations.
Advertising Expense:
The Company expenses advertising costs as incurred. These costs totalled
approximately $649,000, $192,000 and $501,000 for the years ended
September 30, 1995, 1994 and 1993, respectively.
Concentrations of Credit Risk:
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consists primarily of trade accounts
receivable. Concentrations of credit risk with respect to trade
receivables are limited due to the large number of customers located
throughout the United States comprising the Company's customer base. The
Company's largest customer (American Express) accounted for approximately
8% and 11% of sales in 1994 and 1993 and approximately 29% and 15% of
accounts receivable at September 30, 1994 and 1993. No single customer
represented greater than 10% of sales in fiscal 1995.
F-10
<PAGE>
CIRCLE FINE ART CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1994, AND 1993
1. Summary of significant accounting policies (continued):
Income Taxes:
The Company provides deferred taxes for temporary differences between
financial and tax reporting.
Earnings Per Share:
The Company calculates earnings per share based on the weighted average
number of shares outstanding for the fiscal year. Due to the anti-
dilutive effect of related options and warrants outstanding, such
instruments are not included as common stock equivalents in the weighted
average number of shares outstanding for each fiscal period.
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>
Inventories at September 30 consists of the following:
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Merchandise for sale $10,463,000 $11,638,000
Raw materials and work in process 282,000 439,000
-------------- --------------
$10,745,000 $12,077,000
============== ==============
</TABLE>
4. Property, plant and equipment:
<TABLE>
Property, plant and equipment at September 30 consists of the following:
<CAPTION>
Estimated
Useful
1995 1994 Lives
----------- ----------- --------------
<S> <C> <C> <C>
Land $1,697,000 $1,697,000 --
Building and improvements 2,150,000 2,199,000 31 years
Furniture, fixtures and equipment 3,584,000 4,059,000 5 to 7 years
Leasehold improvements 2,284,000 2,265,000 Lease period
----------- ----------- --------------
9,715,000 10,220,000
Less accumulated depreciation
and amortization 4,905,000 4,788,000
----------- -----------
$4,810,000 $5,432,000
</TABLE>
F-11
<PAGE>
CIRCLE FINE ART CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1994, AND 1992
Provisions for depreciation and amortization of property, plant and
equipment for fiscal years 1995, 1994 and 1993 amounted to $956,000,
$1,182,000 and $1,620,000, respectively.
5. Investments in Affiliates:
Investments in 50% owned affilities accounted for by the equity method
amounted to income of $279,000 and $17,000 and losses of $77,000 for the
fiscal years ended September 30 1995, 1994, and 1993 respectively. The
Company recognized a $221,000 gain relating to the final dissolution of
the Company's 50% joint venture Classic Moments. Summarized financial
information is not presented due to the immateriality of the affiliate
operations.
6. Debt in Default:
Commencing in June 1995, the Company failed to make its scheduled month-
end $100,000 payment under its Amended and Restated Credit Agreement with
Standard Chartered Bank. As a result of this non-payment and the
violation of certain financial covenants, Standard Chartered Bank on
September 28, 1995 informed the Company that, as a result, such actions
"constitute defaults under the provisions of clauses (a) and (b)
respectively of the definition of the term 'Default' set forth in the
Credit Agreement." As a result, Standard Chartered Bank imposed a late
payment fee in the amount of $2,560,000 due and payable on July 16, 1995.
In addition, Standard Chartered Bank retroactively to June 26, 1995
imposed the default rate of interest (prime + 6%) which currently equates
to 14.75% per annum.
The Company is in continuous communication with the Bank regarding these
matters, and, at the Bank's request, submitted a detailed "turn-around and
restructuring plan" for the Bank's consideration on August 31, 1995.
F-12
<PAGE>
CIRCLE FINE ART CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1994, AND 1993
6. Debt in Default (continued):
The Company did not make its scheduled interest payment for June, July,
August or September 1995 related to its real estate lease payable and the
related Industrial Revenue Bond. In addition, the Company did not make its
scheduled quarterly $40,000 principal reduction payment due July 1, 1995
and October 1, 1995. As a result of these non payments and the violation
of certain financial covenants, the Company is subject to a declaration of
default by this lender, although no such default has been declared as of
September 30, 1995. The Company has had various discussions with this
lender regarding these matters.
The Company did not make its scheduled quarterly $20,000 interest payments
due June 30, 1995 and September 30, 1995 related to the Company's
$1,000,000 subordinate promissory note with Chrysler Capital Corporation.
As a result of this non payment, the violation of certain financial
covenants and the cross default provisions contained in the related
Securities Purchase Agreement, Chrysler Capital Corporation on October 24,
1995 notified the Company of the "existence of an event of default for the
non-payment of interest of $40,000 since March 31, 1995."
The Company failed to make its scheduled interest payments related to its
term notes payable on the last day of each month since June 30, 1995.
In addition, the Company is in arrears on its monthly payments related to
both of its real estate mortgage notes.
<TABLE>
Debt in default at September 30, 1995 and September 30, 1994 consists of
the following:
<CAPTION>
1995 1994
------------- -------------
<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
8.75% at September 30, 1995). Interest in
excess of 8% is deferred and added to the
outstanding balance of Term Loan B. $9,819,000 -
Term Loan B payable to bank including deferred
interest on Term Loan A due December, 1999.
Loan bears interest at prime rate, which was
8.75% at September 30, 1995. $1,911,000 -
Term note payable to bank. - $11,865,000
</TABLE>
F-13
<PAGE>
CIRCLE FINE ART CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1994, AND 1993
<TABLE>
6. Debt in Default (continued):
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
Investor Notes
--------------
Term notes payable with a term of nine years
and interest paid monthly at 8%. Notes bear
interest at prime rate (which was 8.75% at
September 30, 1995) with any interest in
excess of 8% (deferred interest) paid con-
currently with final payment due December 2003. $2,500,000 -
Deferred interest on Term Notes. $17,000 -
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 8.75% at
September 30, 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. - 2,500,000
Others
------
Real estate lease and related Industrial
Revenue Bonds, due in quarterly installments
of $40,000 through 2004, interest at prime
plus 1% (10% at September 30, 1995 and 8.75%
at September 30, 1994) 1,440,000 1,720,000
Real estate mortgage note, due in monthly
installments through November 2009, at a
variable interest rate (8.97% at
September 30, 1995 and 6.63% at
September 30, 1994) 218,000 221,000
Real estate mortgage note, due in monthly
installments through February 2002.
Interest at 9.25% 373,000 401,000
------------- -------------
$17,278,000 $24,137,000
============= =============
</TABLE>
F-14
<PAGE>
CIRCLE FINE ART CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1994, AND 1992
6. Debt in Default (continued):
The above mentioned non payments and violations of debt covenants have
caused debt aggregating $17,278,000 to be presented as debt in default in
the accompanying Consolidated Balance Sheet as of September 30, 1995. The
Company also classified all debt outstanding at September 30, 1994 as debt
in default due to similar non-payments and violations of debt covenants.
The Company is currently negotiating with its lenders regarding its debt
agreements, but to date, the Company has been given no assurances from its
lenders that a favorable outcome will occur.
7. Financial Restructuring and Long Term Debt
On June 29, 1994, with the consent of the Bank and Chrysler, the Company
entered into an agreement in principle with the Winbrook Group, Ltd., a
Chicago based venture capital firm ("Winbrook"), to effect a financial
restructuring. Under the agreement in principle (i) a Winbrook led group
would make, in a private placement transaction, a $4 million investment
(increased to $5 million) in Circle Fine Art Corporation of Delaware
("Circle of Delaware") with $2 million (increased to $2.5 million)
representing common equity and $2 million (increased to $2.5 million)
representing long term notes and (ii) the Bank and Chrysler would
restructure their outstanding loans and accrued and unpaid interest to
Circle Fine Art Corporation of Illinois ("Circle of Illinois").
Concurrently, with the execution and delivery of the agreement in
principle, the Winbrook led group made a $500,000 bridge loan (the "Bridge
Loan") to Circle of Illinois initially due September 30, 1994. Pursuant
to an intercreditor agreement, the Bank and Chrysler agreed to refrain
from enforcing their respective remedies prior to the maturity of the
Bridge Loan and receive any repayment under their respective loan
facilities. In partial consideration of making the Bridge Loan, the
Winbrook led group were issued warrants to acquire 267,499 shares of the
Company's common stock, representing approximately 7% of the Company's
outstanding shares, at an exercise price of $.11 per share.
On September 22, 1994, Winbrook made a second bridge loan to Circle of
Illinois in an amount of $600,000 due on December 31, 1994 (the "Second
Bridge Loan") and the Company, Circle of Illinois, Winbrook, the Bank and
Chrysler entered into an amendment to the First Bridge Loan whereby the
maturity of the First Bridge Loan was extended until December 31, 1994.
Under this agreement, the Bank and Chrysler agreed that upon maturity of
the First and Second Bridge Loans (collectively, the "Bridge Loans") all
monies received by the Bank and Chrysler would be used to first repay the
Bridge Loans and the Bank would use its best efforts to cause the Bridge
Loans to be repaid by the Company by June 30, 1995. Additionally,
Winbrook agreed that it would not commence judicial proceedings (other
than filing of proofs of claims) to enforce the obligations of the Company
pursuant to the Bridge Loans until June 30, 1995. The Bridge Loans were
repaid upon closing of the Financial Restructuring.
F-15
<PAGE>
CIRCLE FINE ART CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1994, AND 1993
7. Financial Restructuring and Long Term Debt (continued)
On December 13, 1994, a Financial Restructuring was approved by the
Company's stockholders and completed.
On December 13, 1994, an investment of $5 million (the "New Investment")
was made in the Company by an investor group led by The Winbrook Group,
Ltd. ("Winbrook") and Winbrook assumed control of the Company with the
principals of Winbrook constituting a majority of the Board of Directors
of the Company and Winbrook providing the services of Louis Yaseen as
President and Chief Executive Officer of the Company. In connection with
the foregoing, (i) SCB forgave $2.61 million of accrued interest,
penalties and fees (reflected as part of "Extraordinary Gain"), and the
maturity of the remaining principal amount of $11.86 million in
indebtedness was extended until 1999 with interest and principal payments
on such indebtedness being reduced to an aggregate of $100,000 per month,
and (ii) Chrysler contributed $4.9 million of its indebtedness to the
capital of the Company, forgave $1.8 million of accrued interest
(reflected as part of "Extraordinary Gain"), and exchanged $4 million of
its indebtedness for newly-issued senior preferred stock of the Company,
retaining a $1 million note (the "New Chrysler Loan"), due upon repayment
in full of the outstanding indebtedness to SCB. The New Investment was
made in consideration of units consisting of an aggregate of 8,039,111
shares of common stock of the Company ("Common Stock") and $2.5 million of
secured subordinated notes issued by Circle-Illinois (the "Investor
Notes"), pursuant to a Note and Common Stock Purchase Agreement (the
"Purchase Agreement"), and was used to repay bridge loans made by the
Winbrook-led investors, purchase new inventory, pay certain past due
payroll, sales and other taxes, mortgage and lease payments, and other
payables to artists and other suppliers, and pay the legal, professional
and other fees of the Company and the other parties to the Restructuring,
and for general working capital purposes. The foregoing transactions are
hereinafter referred to as the "Restructuring". As part of the
Restructuring, the Restated Certificate of Incorporation of the Company
was amended to increase the number of authorized shares of Common Stock to
15,000,000, reduce the number of shares of Preferred Stock to 100,000 and
the par value of all capital stock of the Company to $.01 per share and to
effect a one-for-three reverse stock split (the "Reverse Stock Split").
Except as otherwise indicated all share amounts and per share gain or loss
data are presented herein after giving effect to the Reverse Stock Split.
8. Stock Option Plan and Warrants
The Company's 1982 Incentive Stock Option Plan terminated in April 1992.
A summary of transactions relating to the 1982 Plan for the year ended
September 30, 1995 and 1994 is as follows:
F-16
<PAGE>
CIRCLE FINE ART CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1994, AND 1993
<TABLE>
8. Stock Option Plan and Warrants (continued)
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Shares under option at beginning of year 4,900 6,100
Options granted - -
Options exercised - -
Options expired/canceled (2,033) (1,200)
-------- --------
Shares under option at end of year 2,867 4,900
</TABLE>
Exercise price of options exercisable at September 30, 1995 equaled $3.00
per share.
In consideration for the First Bridge Loan (see Note 7), and other
services Winbrook received warrants to purchase Common Stock in the
Company. The First Warrants were immediately transferred by Winbrook to
designees of its principals, and two persons (employed by the Placement
Agent) who purchased participation interests in the First Bridge Loans.
The warrants (the "First Warrants") were initially exercisable for 10
years to purchase 267,499 shares of Common Stock, representing
approximately 7.3% of the outstanding shares of Common Stock, for an
aggregate exercise price of approximately $29,313. The First Warrants
contain antidilution provisions such that upon consummation of the
Financial Restructuring as described in Note 7, the First Warrants would
continue to be exercisable to acquire approximately 7.3% of the Company's
outstanding shares of Common Stock.
In consideration of making the Second Bridge Loan, the Winbrook led group
was granted 133,725 warrants to acquire approximately 3% of the
outstanding common stock of the Company on a fully diluted basis for an
aggregate purchase price of approximately $14,650 or $.10958 per share
(the "Second Warrants"). The Second Warrants were immediately transferred
by Winbrook to designees of two of its principals and four persons who
purchased participation interests in the Second Bridge Loan (including the
two Placement Agent employees). As a result of making the Bridge Loans,
the Winbrook led group now holds warrants to acquire approximately 11% of
the Company's outstanding Common Stock for an aggregate purchase price of
approximately $43,963. As a result of the anti-dilution provisions
contained in the First Warrants and Second Warrants, upon consummation of
the Financial Restructuring, such warrants will be exercisable for
approximately 9.6% of the outstanding shares of Common Stock on a fully-
diluted basis, although the aggregate exercise price will remain
unchanged.
As part of the Restructuring, the stockholders approved the Company's 1994
Stock Option Plan (the "1994 Plan"). The 1994 Plan provides that the
number of shares of Common Stock available to be granted will equal
1,855,699 shares, representing 15 percent of the number of shares of
Common Stock outstanding immediately following the closing of the
Restructuring assuming exercise of all then outstanding options and
warrants ("Fully Diluted Outstanding Shares").
F-17
<PAGE>
CIRCLE FINE ART CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1994, AND 1993
8. Stock Option Plan and Warrants (continued)
Under terms of the 1994 Plan, options to purchase 1,466,002 shares of
Common Stock have been granted to seven executive officers and directors
of the Company at an option price of $.388 per share. These options
become exercisable over the next three years. Also under terms of the
1994 Plan, options to purchase 318,406 shares were awarded to two
executives of the Company. The option price on these options are $.40 per
share and are exercisable in January 1996. A summary of transactions
relating to the 1994 Plan for the year ended September 1995 is as follows:
<TABLE>
<CAPTION>
1995
--------------
<S> <C>
Shares under option at beginning of year -0-
Options granted 1,784,408
Options exercised -
Options expired/cancelled -
--------------
Shares under option at end of year 1,784,408
</TABLE>
9. Commitments and Contingencies:
The Company leases office, warehouse and retail gallery space under
various operating leases which expire on various dates through the year
2002 with, in some cases, renewal options at a formula increase in rent.
In addition, certain leases provide for the payment of additional rentals
based on percentages which range from 6% to 20% of annual sales at the
respective galleries. Some leases also provide for the payment of
additional rentals based on increases in real estate taxes and maintenance
costs. Rent expense under all leases was $2,595,000 in 1995, $2,635,000 in
1994, and $2,728,000 in 1993. At September 30, 1995, future minimum
rental commitments under noncancellable operating leases with terms in
excess of one year are as follows: 1996, $2,159,000; 1997, $1,454,000;
1998, $1,163,000; 1999, $942,000; 2000, $709,000; thereafter $456,000.
As a result of late payments and other violations caused by the Company's
financial difficulties, the Company is in violation under most of its
leases and such leases could be terminated under the terms of such leases
at any time. The relationships of the Company with its landlords have
been substantially adversely affected and the Company has been and is
currently the subject of pending and threatened lawsuits. Lawsuits filed
to date include the following:
Two complaints were filed against Circle-Illinois, one for eviction and
the other for damages in the Circuit Court for the 15th Judicial
Circuit of Palm Beach County, Florida, Circuit Division, for the
Company's landlord for its
F-18
<PAGE>
CIRCLE FINE ART CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1994, AND 1993
9. Commitments and Contingencies (continued):
Worth Avenue store. Circle-Illinois entered into a Joint Stipulation
for Settlement and Final Judgment upon Default in both matters on or
about October 5, 1995. On December 5, 1995, attorneys for the landlord
served notice of default and their intention to enter a final judgment
of eviction and a final judgment for damages pursuant to the above-
referenced stipulations. The Company has no knowledge of whether the
landlord has done so.
Earlier this year, G.S. Associates, the Company's landlord, for its
Ghirardelli Square store, filed a complaint in Superior Court of
California, City and County of San Francisco, against Circle-Illinois
for eviction and for payment of rent. On August 11, 1995 Circle-
Illinois entered into an amendment to its lease for the store premises
at Ghirardelli Square in San Francisco, California which included a
Settlement Agreement and a Stipulation for Entry of Judgment in the
event of default on the Settlement Agreement. On December 15, 1995,
the Company received notice from the landlord's attorney alleging that
Circle-Illinois has defaulted and that the landlord has moved for
Judgment Pursuant to Stipulation. The Company intends to vacate the
premises on or before December 31, 1995.
On or about August 1995, the Company's landlord for its Troy, Michigan
store, Somerset Collection L.P., filed two complaints in the District
Court for the 52-4th Judicial District, State of Michigan, against the
Company and Circle-Illinois, one for eviction and for damages. The
Company and Circle-Illinois attempted to settle these matters but was
unable to do so. A Writ for Possession was entered on December 7, 1995
in the eviction matter and Circle-Illinois vacated the premises three
days later.
The landlord of the gallery in Union Station, St. Louis, Missouri, has
filed suit in the State of Missouri Circuit Court to collect $113,800
in rent and other charges as of September 30, 1995.
The ultimate resolution of these matters is uncertain at this time. As of
September 30, 1995, the Company was in arrears under its gallery leases
for an aggregate amount of approximately $600,000. Such amounts are
included in accounts payable at September 30, 1995.
F-19
<PAGE>
CIRCLE FINE ART CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1994, AND 1993
9. Commitments and Contingencies (continued):
In December, 1993, Victor Vasarely ("Vasarely") and his son Yvaral
Vasarely ("Yvaral") filed a lawsuit against the Company, Jack Solomon and
Carolyn Solomon in the Circuit Court of Wayne County, Michigan alleging
monetary damages of approximately $700,000 and requesting an accounting,
return of works of art and other relief; that the Company filed a
counterclaim; that the Michigan Court subsequently granted the plaintiffs
a restraining order against the Company from selling certain artwork in
the Company's possession; and Michigan counsel has advised that on October
6, 1994 the Michigan lawsuit was dismissed without prejudice. on November
4, 1994, Vasarely and Yvaral filed this lawsuit in the Circuit Court of
Cook County, Illinois which seeks the same relief against the Company,
Jack Solomon and Carolyn Solomon as did the Michigan lawsuit. The Company
has asserted counterclaims as well as a third-party complaint against
Michelle Vasarely, the wife of Yvaral and daughter-in-law of Vasarely.
Further, the Company is, pursuant to Court order and agreement of the
parties, providing an accounting to plaintiffs of all plaintiffs' artwork
sold by the Company and all payments made to plaintiffs. Finally, an
order of replevin was entered by the Court, granting Yvaral's request to
take possession of certain artwork. Plaintiff was ordered to post a
substantial bond in order to recover the artwork, and has to date not done
so. The case is in the early discovery stage. Although the Company has
recorded liability for approximately $400,000 in payments as being past
due, the Company believes that it has substantial offsetting
counterclaims. Management believes the outcome of this matter will not
adversely effect the Company.
The Company is also party to certain other litigation incidental to its
business none of which if determined adversely to the Company would have a
material adverse effect on the company or its operations.
10.Profit Sharing and 401(K) Savings Plan:
In 1988, the Company implemented a Profit Sharing and 401(K) Savings Plan
which covers all employees who are 21 years of age or older and have
completed one year of service. Profit sharing contributions are at the
discretion of the Board of Directors. No contributions have been made
during the three years ended September 30, 1995.
11.Income Taxes:
Effective October 1, 1993, the Company adopted SFAS 109, "Accounting for
Income Taxes." The statement requires the use of the asset and liability
method for determining deferred income taxes. The Company previously
accounted for income taxes in conformity with Accounting Principles Board
Opinion No. 11 using the deferred method. The cumulative effect of
initial adoption on prior years' retained earnings was zero.
F-20
<PAGE>
CIRCLE FINE ART CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1994, AND 1993
11.Income Taxes (continued):
<TABLE>
At September 30, 1995 and 1994, the Company's net deferred income taxes
consisted of the following:
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Gross Deferred Tax Asset:
Net Operating Loss Carryforward $8,792,000 $7,356,600
Reserves 598,000 530,000
Uniform Inventory Capitalization 35,000 47,400
Vacation Accrual 61,000 --
Loan Restructuring Fee 81,000 --
Depreciation 190,000 --
------------- --------------
9,757,000 $7,934,000
Less Valuation Allowance (9,757,000) 7,792,700
------------- --------------
Net Asset -- 141,300
Deferred Tax Liability - Depreciation -- 141,300
------------- --------------
Net Deferred Tax 0 0
=== ===
</TABLE>
<TABLE>
The Company's effective income tax rate varies from the statutory Federal
income tax rate as a result of the following:
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Statutory rate (35.0)% (34.0)% (34.0)%
State income tax, net of
federal income tax benefit - - -
Effect of losses for which there
is no current available tax benefit 35.0 34.0 34.0
Other - - -
---------- ---------- ----------
Effective tax rate - - -
========== ========== ==========
</TABLE>
The Company has net operating loss carry forwards for income tax purposes
in the aggregate amount of $22,590,000 of which $5,400,000 expires in
2007, $7,200,000 in 2008 and $5,900,000 in 2009 and $4,090,000 in 2010.
F-21
<PAGE>
CIRCLE FINE ART CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1994, AND 1993
11.Income Taxes (continued)
As a result of the Financial Restructuring (Note 7), the ability of the
Company to utilize the net operating loss carryforwards may be materially
reduced or restricted based upon various provisions contained in the
Internal Revenue Code covering the limitations of net operating losses
when a change in control of a company occurs. The Company is in the
process of determining the extent to which the net operating loss
carryover will be available to offset future taxable income and,
accordingly, has provided a valuation allowance equal to 100% of the
deferred tax asset attributable to such net operating loss carryover.
12.Quarterly Financial Data (Unaudited)
<TABLE>
The following is a summary of unaudited quarterly results of operations
(in thousands, except per share data) for the years ended September 30,
1995 and 1994.
<CAPTION>
1995 1994
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $5,518 $4,331 $5,384 $5,136 $5,985 $4,069 $3,735 $5,381
Gross Profit 3,024 2,280 2,868 1,653 3,355 2,002 1,600 2,927
Net Income
(loss) 3,195 (1,008) (1,390) (5,328) (787) (2,219) (2,793) (1,618)
Net (loss)
per Average
Common Share .99 (.11) (.15) (.58) (.69) (1.98) (2.43) (1.47)
</TABLE>
During the fourth quarter of fiscal 1995, the Company recognized
approximately $2.9 million of default penalty and interest expense
relating to the Company's debt in default.
F-22
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SCHEDULES
To the Board of Directors and Stockholders
Circle Fine Art Corporation
In connection with our audit of the consolidated financial statements of
CIRCLE FINE ART CORPORATION, referred to in our report of December 22, 1995,
which is included in the accompanying Form 10-K, we have also audited
Schedule II for the years ended September 30, 1995 and 1994. In our opinion,
this schedule presents fairly, in all material respects, the information
required to be set forth therein. Our report on the consolidated financial
statements referred to above includes an explanatory paragraph which
discusses the Company's ability to continue as a going concern.
ALTSCHULER, MELVOIN AND GLASSER LLP
Chicago, Illinois
December 22, 1995
F-23
<PAGE>
<TABLE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
CIRCLE FINE ART CORPORATION AND SUBSIDIARIES
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------- ------------ ------------ ------------ ------------
BALANCE, CHARGED TO BALANCE,
BEGINNING COSTS AND DEDUCTIONS END OF
DESCRIPTION OF PERIOD EXPENSES <F1> PERIOD
- ------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Allowances deducted in
the balance sheet from
receivables:
Year ended September 30,
1995 $518,000 0 $508,000 $ 10,000
============ ============ ============ ============
1994 $265,000 $310,000 $57,000 $518,000
============ ============ ============ ============
1993 $40,000 $254,500 $29,500 $265,000
============ ============ ============ ============
Allowances deducted in
the balance sheet from
inventories:
1995 $ 0 $707,000 $ 0 $707,000
============ ============ ============ ============
<FN>
<F1>
Write-offs net of recoveries
</FN>
</TABLE>
F-24
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<CASH> 114,000
<SECURITIES> 0
<RECEIVABLES> 699,000
<ALLOWANCES> 10,000
<INVENTORY> 10,745,000
<CURRENT-ASSETS> 11,813,000
<PP&E> 4,810,000
<DEPRECIATION> 4,905,000
<TOTAL-ASSETS> 21,411,000
<CURRENT-LIABILITIES> 28,350,000
<BONDS> 0
0
0
<COMMON> 91,000
<OTHER-SE> (8,009,000)
<TOTAL-LIABILITY-AND-EQUITY> 21,411,000
<SALES> 20,369,000
<TOTAL-REVENUES> 20,369,000
<CGS> 10,544,000
<TOTAL-COSTS> 14,333,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,000,000
<INCOME-PRETAX> (9,230,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,230,000)
<DISCONTINUED> 258,000
<EXTRAORDINARY> 4,441,000
<CHANGES> 0
<NET-INCOME> 4,531,000
<EPS-PRIMARY> (.73)
<EPS-DILUTED> 0
</TABLE>
