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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-13141
MARTIN LAWRENCE LIMITED EDITIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4103583
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16250 Stagg Street, Van Nuys, CA 91406
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including
area code: (818) 988-0630
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of Each Class which registered
Common Stock, $0.01 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
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
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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 voting stock held by non-affiliates
of the Registrant on March 21, 1996 (4,479,216 shares of common stock) was
$3,079,461 based on the closing sale price for the Registrant's common stock on
the New York Stock Exchange on March 21, 1996*.
The number of shares outstanding of the Registrant's Common Stock as of
March 21, 1996 was 5,893,748.
DOCUMENTS INCORPORATED BY REFERENCE
None.
- -----------------------------------------------------------------
* This value is not intended to be a representation as to the value or worth of
the Registrant's shares of common stock. The number of shares held by
non-affiliates of the Registrant has been calculated by subtracting shares held
by persons affiliated with the Registrant from the outstanding shares.
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MARTIN LAWRENCE LIMITED EDITIONS, INC.
FORM 10-K
Year Ended December 31, 1995
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item
Number
In Form
10-K Page
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<S> <C>
PART I
1. Business.............................................. 1
2. Properties............................................ 11
3. Legal Proceedings..................................... 13
4. Submission of Matters to a Vote of Security Holders... 13
PART II
5. Market for Registrant's Common Equity and
Related Stockholder Matters........................... 14
6. Selected Financial Data............................... 15
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 16
8. Financial Statements and Supplementary Data........... 24
9. Changes in, and Disagreements with Accountants on,
Accounting and Financial Disclosure................... 24
PART III
10. Directors and Executive Officers of the Registrant.... 25
11. Executive Compensation................................ 27
12. Security Ownership of Certain Beneficial Owners
and Management........................................ 31
13. Certain Relationships and Related Transactions........ 33
PART IV
14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K........................................... 36
</TABLE>
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PART I
Item 1. BUSINESS
Introduction
Martin Lawrence Limited Editions, Inc. (the "Company"), whose
business dates back to 1976, was incorporated in the state of Nevada in October
1982 and was reincorporated in the state of Delaware in June 1987. The Company's
principal executive offices are located at 16250 Stagg Street, Van Nuys,
California 91406, a suburb of Los Angeles. The Company's telephone number is
(818) 988-0630.
General
The Company is an integrated publisher, retailer and
wholesaler of limited-edition serigraphs, lithographs, sculpture and other works
of fine art created by internationally renowned and emerging artists. The
Company also purchases, for resale, original works of art as well as
limited-edition works by recognized artists not published by the Company. The
Company's retail division sells fine art products through its retail art
galleries, which are generally located in high traffic, regional shopping malls
in major metropolitan areas in the states of California, Colorado, Hawaii,
Illinois, New York, Pennsylvania and the District of Columbia. The Company also
conducts auctions of its published and non-published art. The Company's
wholesale division distributes works of art published by the Company to retail
art galleries, dealers and others located throughout the United States and in
selected foreign markets. The Company also operates other retail concepts.
Martin Lawrence Museum Shops sells unique art objects and functional artwork
through locations within existing Martin Lawrence Galleries. Martin Lawrence
Frame Shops sell custom framing services as well as fine art, posters and Museum
Shop merchandise in individual retail locations and within some existing Martin
Lawrence Galleries. The Company continues to test factory outlet malls and,
depending on the results, may expand its use of this channel of distribution.
Industry Overview
The art industry is highly fragmented and includes thousands
of retail galleries as well as numerous publishers and wholesalers located
throughout the United States and abroad. Publishers consist mostly of
individuals and firms who engage solely in the publication of works of art for
sale on a wholesale basis. Most retail operations consist of only one art
gallery operated by a small number of people in one geographic location. The
Company believes that it is one of only a few companies to integrate the
publishing, retail and wholesale aspects of the art business. See "Vertical
Integration" and "Competition."
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Vertical Integration
The vertical integration of the Company's publishing and
distribution activities has contributed to its strength. The Company's vertical
integration strategy consists of approximately six phases:
1. Attracting and signing artists;
2. Printing works of art in the case of limited-
edition graphics (or casting works of sculpture);
3. Promoting and advertising the artists and their
works of art;
4. Distributing the works of art to wholesale
customers;
5. Selling the works of art to the public at its
retail galleries and at in-house art auctions; and
6. Framing the works of art for its retail customers.
With the exception of the printing of limited-edition
graphics, the casting of sculpture and less than 1% of the framing of works of
art for retail customers, each of the phases of the Company's business are
performed internally by the Company's employees. See "Publishing," "Retail
Operations - Marketing and Sales," "Retail Operations - Framing Division" and
"Wholesale Operations."
Publishing; Purchase for Resale
The Company's sales effort has emphasized the Company's role
as a publisher of works of art due to the higher gross profit margins that can
generally be derived from such activities as compared to purchasing such works
of art from other publishers. The Company is the "publisher" of the works of an
artist when it purchases an entire limited edition from the artist or some other
person or entity that has contracted with the artist. In most instances, the
Company enters into a publishing agreement with an artist on an exclusive basis,
thereby acquiring the exclusive right to produce entire limited editions of an
artist's original works created during the term of the agreement. These
agreements typically have an initial term of one to four years and may include
one or more options allowing the Company to renew the agreement for additional
periods.
The Company currently publishes works of art by numerous
artists including Steve Kaufman, Mark King, Mark Kostabi, Joanne Netting, Linnea
Pergola, Susan Rios and Laurie Zeszut. The Company has in the past published
works of art by, among others, Yaacov Agam, Charles Bragg, Guy Buffet, Robert
Cenedella, Yankel Ginzburg, Rodney Alan Greenblat, Keith Haring, Peter Max,
Lowell Nesbitt, Lorna Patrick, Leo Posillico, Fredrick Prescott, Kenny Scharf,
Rupert Jasen Smith, Seikichi Takara, Victor Vasarely, Doug Webb, Hiro Yamagata
and Yvaral.
The Company and, in particular, its President, Barry R.
Levine, actively seeks out on an ongoing basis new artists to be published by
the Company. Moreover, as the Company has grown and
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established its presence in the art business, artists have increasingly
approached the Company to publish their works. Once an artist has entered into a
publishing agreement with the Company, a comprehensive marketing strategy is
developed to introduce that artist and his or her works to the public, including
one-person shows featuring that artist, the distribution and sale of
commemorative posters and the design of other appropriate promotional materials
relating to the artist's works.
The limited-edition graphics published by the Company consist
principally of serigraphs, also commonly referred to as silkscreens. The
silkscreen process is accomplished by tightly stretching a porous fabric over a
frame to act as a screen. Separate screens are cut for each color that appears
in the original work of art, allowing the ink when applied to the screen by the
serigrapher to be pressed through the screen and transferred to the paper below.
Since each separate color requires a different silkscreen and separate
imprinting, the serigraphic process can require up to a year to produce an
entire edition of original prints. The artist, along with Company personnel in
most instances, supervises each step of the serigraphic process.
The Company prefers serigraphy to other processes such as
lithography, for example, because of the greater detail and texture derived from
serigraphy as compared to other processes. The Company also believes that
serigraphy more accurately reproduces its artists' original works. However, the
Company may choose to print limited editions by the use of other methods in the
future, if appropriate.
The Company began to publish regular and deluxe editions of
books chronicling the lives and works of certain of the Company's artists in
March 1986. The Company's first published book featured Hiro Yamagata. The
Company released its second book featuring Susan Rios in 1988. In 1989, the
Company published a catalogue raisonne of the works of Hiro Yamagata. In
February 1991, the Company published its third book, featuring the works of Mark
King. The Company has not published any books since 1992. The Company may choose
to publish additional books in the future, if appropriate.
Although the Company typically publishes works of art for
resale, since 1994, the Company has increased its purchases of works of art for
resale in order to: (1) preserve working capital in the short term and (2)
increase the diversity of artists offered by the Company.
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Retail Operations
Organization. Sales activities of each gallery are
administered by on-site directors who generally oversee a staff of four to seven
sales consultants. Gallery directors report to either the Company's regional
director or the Company's director of retail sales.
Gallery Locations. The Company currently has 23 retail art
galleries (including three temporary locations and one outlet store) and five
Frame Shops locations. See "Item 2. PROPERTIES."
Gallery Site Selection. The first step in determining
appropriate locations for new retail art galleries involves identifying affluent
neighborhoods in major metropolitan areas where regional shopping malls
currently exist or are planned for the near future. The establishment of
galleries in regional malls results in high visibility and name recognition for
the Company. The Company reviews demographic trends and projections for each
potential location. Furthermore, when evaluating potential sites for retail art
galleries, the Company seeks to select geographic areas with several major malls
within close proximity in order to "cluster" its galleries and thereby achieve
economies of scale in advertising, distribution and management.
Gallery Design. Historically, a typical gallery of the Company
contained approximately 2,500 to 3,000 square feet with a floor plan designed to
maximize the number of works of art that could be displayed and encouraged
customer traffic throughout the gallery. The average cost of building out a new
gallery was approximately $300,000, including the cost of a Martin Lawrence
Museum Shop. However, the Company's present strategy is to limit the size of its
new galleries to approximately 1,500 to 2,000 square feet in order to lower its
occupancy costs and leasehold improvement requirements. In 1995, the Company
opened two new galleries of approximately 1,600 and 1,300 square feet. The
leasehold improvements for these two galleries were approximately $100,000 and
$125,000, respectively. In February 1996, the Company opened a new gallery of
approximately 750 square feet and a gallery outlet store of approximately 1,200
square feet with leasehold improvements of approximately $90,000 and $28,000,
respectively. The Company has also in the past taken over the location of an
existing art gallery, thereby significantly reducing the costs of leasehold
improvements. The Company may consider leasing similar locations in the future.
See "Item 2. PROPERTIES."
Price Range and Clientele. The non-discounted retail prices of
the Company's works of art generally range from approximately $300 to $10,000
for Company-published limited-edition graphics and sculpture and from $2,000 to
$35,000 for original oil, acrylic and/or watercolor paintings, but individual
works may sell for higher prices, depending on the artist and the particular
work involved. The Company's average retail sales price for graphic works of art
is approximately $1,400. The
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Company's clientele generally consists of middle- and upper-income individuals.
To access larger segments of the general population, in 1992,
the Company entered into a financing arrangement with Household Bank (Illinois)
N.A. ("Household") that offers the Company's customers the option of making a
small down payment and obtaining a revolving charge account for the balance of
each purchase. The financing arrangement with Household is generally nonrecourse
to the Company and also offers the Company the option to structure other payment
plans with its customers. When a customer's credit is approved by Household, a
Martin Lawrence Galleries credit card, which can be used for future purchases,
is issued to the customer.
Marketing and Sales. The Company selectively advertises
through newspapers, magazines, television and radio, engages in direct mailings
of color brochures and offers its works of art as prizes on major television
game shows in exchange for promotional advertising time. This entire promotional
and marketing process is developed and implemented internally by the Company. In
1995, the Company expanded its marketing activities through hiring an in-house
marketing staff member. During 1995, the Company continued with television and
radio advertising of the Company's sales and auctions through an agreement with
a company that utilizes radio time on numerous stations within key market areas
where the Company operates. This television and radio advertising time was
obtained in exchange for artwork. The Company also operates a web site at
http://www.martinlawrence.com where visitors can purchase fine art, Museum Shop
merchandise, books and posters accessed from the Company's home page.
The sales staff at the Company's retail art galleries is
formally trained by the Company through the use of lectures by artists and art
consultants, video tapes, in-house seminars and other programs. The Company
emphasizes customer service to ensure that past customers both return for repeat
sales and recommend the Company to new purchasers. The Company's sales staff is
prepared to educate customers on issues relating to fine art in general, the
process by which the Company's works of art are printed or cast and the history
and background of the Company's artists. Customers are provided with written
biographical data on the artists published by the Company and are shown video
tapes of the artists' works and lives. Certain of the Company's artists attend
shows for the public and gallery clientele to promote their works and to enable
customers to meet them.
The Company provides purchasers with certain documentation
relating to works of art purchased. With respect to all works of art, the
Company issues a certificate of authenticity that includes an appraisal by the
Company indicating the current retail value of the piece for the purchaser's
insurance purposes. With respect to limited editions, the Company also provides
a "tirage" which includes, among other things, information about where the
limited edition was printed,
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who printed it and the number of pieces in that particular limited edition. The
tirage also includes a statement that the silkscreen, sculpture mold, cast or
similar item used for reproduction has been destroyed, thereby assuring the
Company's customers of the limited-edition status of the art purchased. As a
service to its clientele, the Company's sales staff periodically contacts
customers and offers to update the appraisals included in their certificates of
authenticity.
Framing Division. In early 1987, the Company established an
in-house framing division that was located initially in the Company's principal
Van Nuys facility. In early 1989, the framing facility was doubled in size. The
framing division handled substantially all of the Company's framing requirements
during 1995. Benefits from the in-house framing division include a lower cost
per frame and improved quality control. See "Martin Lawrence Frame Shops."
Martin Lawrence Museum Shops
In late 1987, in order to access a segment of the population
that generally does not purchase works of art with retail prices that exceed
$500 and to increase the Company's sales among existing customers, the Company
opened its first Martin Lawrence Museum Shop. These shops currently are located
within 18 of the Company's galleries and use approximately 150 to 200 square
feet of existing gallery space. Martin Lawrence Museum Shops sell unique and
limited-edition functional artworks such as sculpture, ceramics and giftware at
prices generally ranging from $25 to $500. The Company's strategy for the Martin
Lawrence Museum Shops concept is to give existing customers a broader selection
of merchandise from which to choose while attracting new customers who may not
be able to afford the Company's serigraphs and other works of fine art sold in
Martin Lawrence Galleries. In addition, the Martin Lawrence Museum Shops concept
may also attract new customers to Martin Lawrence Galleries. See "Item 2.
PROPERTIES."
Martin Lawrence Frame Shops and Masterpieces of the World
In April 1995, the Company formed two new subsidiaries, Martin
Lawrence Frame Shops, Inc. and Masterpieces of the World, Inc. for the purpose
of implementing some newly developed concepts.
Four Martin Lawrence Frame Shops locations opened in the
fourth quarter of 1995 and an additional location opened in January 1996. The
stores are in strip centers and storefront locations in Southern California and
offer custom framing services as well as fine art, posters and Museum Shop
merchandise. The Company also incorporated Frame Shops into four of its Southern
California gallery locations and may expand it to some of its other Southern
California gallery locations.
The Company has hired a Director of the Frame Shops division
with prior experience in the framing industry, and has
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approximately three employees in each of its Frame Shops locations. Custom
framing sales are made at the Frame Shops locations and the actual framing is
performed at the Company's framing facility in the Company's Van Nuys
distribution center. The Company believes that it is well-positioned to compete
in the expanding framing market by using its existing framing facility. See
"Retail Operations--Framing Division."
The capital requirements to open Martin Lawrence Frame Shops
are not extensive since the store models are simple. The Company has typically
paid approximately $10,000 to open each Frame Store location. In addition, the
Company enters into shorter term leases for the retail stores.
The Company has commenced an extensive advertising campaign to
promote Martin Lawrence Frame Shops. Such advertising includes newspaper
advertising and mailers, radio, television and billboards. The framing industry
is, however, very competitive. A substantial number of retail frame stores, both
retail chains and sole proprietorships, are located in the market in which the
Company operates. The Company competes on the basis of product diversity, price,
quality, service and location.
The Company opened five Masterpieces of the World retail
stores between May and July 1995 in regional shopping malls in California. The
Masterpieces of the World concept is the sale of framed oil paintings at
affordable prices, primarily under $500. The results of operations of
Masterpieces of the World did not meet the Company's expectations. Accordingly,
the Company began closing the stores in January 1996 and completed the closing
of the Masterpieces of the World concept in March 1996. All of the Masterpieces
of the World locations were leased under temporary leases and required minimal
capital expenditures to open. Although the Company has ceased operating
Masterpieces of the World retail stores, the Company believes that the concept
may be viable in other venues. The Company currently offers Masterpieces of the
World inventory in its Frame Shops locations and its gallery outlet store.
Think Big!
On May 24, 1993, the Company sold Think Big!, Inc. ("Think
Big!"), its wholly owned subsidiary, to an officer, director and principal
stockholder of the Company. Think Big! was acquired by the Company in 1990.
Think Big! markets and sells oversized replicas of everyday objects. See "Item
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
Purchase and Sale of More Expensive Works of Art
Historically, the Company periodically purchased original and
other more expensive works of art for resale based upon the demands of its
customers. In December 1987, in order to continue to meet these increasing
demands and to access a growing segment of the population, the Board of
Directors of the Company,
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on a trial basis, allocated $1 million of the Company's working capital to
purchase for resale original and other works of art with costs in excess of
$25,000 by artists not published by the Company (collectively referred to herein
as "More Expensive Works of Art"). Between 1987 and 1989, the Company allocated
additional funds for the purchase of More Expensive Works of Art. This program
was highly successful until the commencement of the recession and the dramatic
decline in the art market. In 1991, the Company reduced the carrying value of
the More Expensive Works of Art then held by the Company by approximately $2
million to reflect a decline in the market value of those works below the
Company's cost. Due to the decreased demand present in the art market from 1990
through mid-1993, the Company also reduced its purchases of More Expensive Works
of Art as compared to prior years. The Company's purchases in the foreseeable
future of More Expensive Works of Art are expected to be minimal, if at all.
However, the Company's purchases of works by certain artists with prices ranging
from approximately $5,000 to $10,000 has become more active based on the
increased demand for such works.
Wholesale Operations
The Company's wholesale customers consist of retail art
galleries and dealers located throughout the United States and in selected
foreign markets. The Company promotes its wholesale sales by providing regular
mailings of catalogs containing color brochures, current price lists and
biographies of the Company's artists to existing and potential customers. The
Company also makes its artists available to its wholesale customers for personal
appearances. The Company's wholesale personnel solicit galleries and other
dealers primarily through telemarketing, magazines and trade shows. The Company
is also contacted by potential wholesale customers who have received requests
from their customers for works of art published by the Company or have seen the
Company's advertisements in trade publications.
Barry R. Levine, the Company's President, oversees the
Company's retail and wholesale divisions. The Company's wholesale personnel are
responsible for specific geographic markets and are compensated exclusively on a
commission basis. These personnel, located at the Company's headquarters in Van
Nuys, California, engage in telemarketing activities that are supplemented by
periodic visits to existing and prospective clientele.
Export Sales
The Company also sells its published works to dealers in
certain foreign markets, primarily Japan and Germany. For the years ended
December 31, 1995, 1994, and 1993, the Company's total export sales were
$2,085,000, $1,485,000 and $2,157,000, respectively. The Company's primary
export market is Japan. Export sales to Japan were $778,000, $530,000 and
$691,000 in 1995, 1994 and 1993, respectively. The Company's net profit margins
on export sales have historically been similar to those margins achieved on
domestic sales.
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Auctions
In June 1992, the Company began conducting auctions of its
published and non-published works of art. The Company views the auctions as a
means of compensating for closed galleries and reaching new clientele in areas
where the Company does not have a retail presence as well as in areas in which
the Company has retail galleries. Auctions which are conducted in geographical
areas where the Company has retail galleries tend to reduce the retail sales per
square foot in those galleries. However, the Company believes that the
combination of its retail galleries and auctions has increased its overall sales
in those areas. The works of art sold at the Company's auctions generally are
sold at a lower price, and therefore have a lower gross margin, than works of
art sold in the Company's retail galleries. The Company promotes its auctions in
a manner similar to the manner in which it promotes its retail sales.
The auctions are conducted by the Company's existing staff.
The Company typically displays the works of art to be auctioned in one of its
own galleries or in a gallery of one of the Company's wholesale clients for
approximately one week prior to the auction. The auctions are generally held in
upscale hotels.
The Company anticipates that it will maintain the approximate
number of its auctions, both in areas where it has retail galleries as well as
other geographical areas. See "Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
Barter of Company Art
From time to time, the Company trades its artwork for goods
and services. This practice enables the Company to engage in radio and
television advertising that would otherwise be prohibitively expensive. See
"Item 1. BUSINESS - MARKETING AND SALES." The Company also trades art in its
existing inventory for other artwork in order to increase the selection of art
available at its art auctions.
Risk Management
The Company's inventory storage facilities are vaults designed
with fire-resistant walls and other safeguards. The Company has implemented a
variety of security safeguards at its retail galleries and Frame Shops locations
including the use of alarm systems, motion detectors and, in some instances,
guard services. In addition, the Company has in effect insurance policies
protecting against loss or damage to the Company's works of art. These policies
include coverage for each of the Company's works of art at their retail value.
As a result of the earthquake in Southern California in January 1994, the
Company recovered $1,090,000, which represents the net effect of the
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insurance proceeds received less the damages incurred. See "Item 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
Management Information and Network System
Each of the Company's retail art galleries and Frame Shops
locations is equipped with point-of-sale terminals permitting the electronic
collection of sales data. This system provides management and sales personnel
with detailed, on-line merchandising information and access to current inventory
and sales data and, consequently, increases management's internal control over
inventory and sales.
Trademarks and Service Marks
The Company employs the trademark "Martin Lawrence Limited
Editions" in connection with the works of art it sells on a wholesale basis. In
connection with works of art sold by the Company on a retail basis, the Company
employs the trademarks "Martin Lawrence Galleries," "Martin Lawrence Modern,"
and "Martin Lawrence Galleries Outlet." In addition, the Company uses the
service marks "Martin Lawrence Limited Editions," "Martin Lawrence Galleries,"
"Martin Lawrence Museum Shops" and "Martin Lawrence Galleries Outlet" in
connection with the procurement of works of art and certain services rendered by
the Company. Each of these marks is a federally registered trademark and/or
service mark of the Company. The Company's Martin Lawrence Limited Editions,
Martin Lawrence Galleries, Martin Lawrence Modern and Martin Lawrence Galleries
Outlet design logos are also federally registered trademarks and/or service
marks of the Company.
Competition
The publication, distribution and sale of works of fine art
and posters in both the retail and wholesale markets are highly competitive.
Some artists publish their own works of art or have agreements with publishers
other than the Company. A substantial number of art galleries and art dealers
are located in every market in which the Company operates. The Company also
competes with mail-order houses and other retailers that sell original works of
art, limited-edition graphics, sculptures and posters. The Company competes
primarily on the basis of product diversity, price, quality, service and
location.
Employees
As of March 21, 1996 the Company had approximately 210
full-time employees engaged in sales and administrative activities, none of whom
is represented by a labor union. The Company believes that its relationship with
its employees is satisfactory.
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Industry Segments
The Company operates in only one industry segment, the
publication and sale at the wholesale and retail levels of limited-edition
graphics, sculpture, oil and acrylic paintings and other original works of art
and posters. In addition, the Company has established an in-house framing
division and operates Martin Lawrence Frame Shops locations. Information
relating to the Company's revenues, results of operations and assets
attributable to the Company's operations for the fiscal years ended December 31,
1995, 1994 and 1993 is described elsewhere herein. See "Item 6. SELECTED
FINANCIAL DATA," "Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" and "Item 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA."
Seasonality
The Company's operations historically have not been materially
affected by seasonality.
Item 2. PROPERTIES
The Company's principal executive offices are in leased
premises of approximately 22,300 square feet located at 16250 Stagg Street, Van
Nuys, California 91406. The lease expires August 31, 1996, subject to the
Company's options to extend the lease for two additional five-year terms. The
Company also leases an additional 20,300 square feet of space at 16200 Stagg
Street for use in the Company's framing, curating, shipping and supply
operations. The 16200 Stagg Street lease also expires August 31, 1996 subject to
options to extend the lease for two additional five-year terms. The Company's
monthly lease payments under the 16250 and 16200 Stagg Street leases are $13,600
and $12,380. All lease payments under the Stagg Street leases are subject to
annual consumer price index adjustments. The Company is currently negotiating
the leases for the two spaces with the landlord. The Company anticipates that,
in August 1996 following the termination of the 16200 Stagg Street lease, it
will reduce the square footage of its distribution facility by 10,000 to 12,000
square feet.
In 1995, the Company closed three galleries for various
reasons. The closed galleries were located in Milpitas, California (a factory
outlet store), Los Angeles, California and Schaumburg, Illinois. The reasons for
the closures varied by location. Certain of the locations were closed due to
unsatisfactory performance or unfavorable lease terms. One of the galleries was
converted into a Martin Lawrence Frame Shops location.
In 1995, the Company opened four galleries, three in
California, a new gallery in the Century City Shopping Center, a temporary
location in the Glendale Galleria (converted from a Masterpieces of the World
location) and a new gallery in Northridge (replacing the gallery closed as a
result of the
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January 1994 Southern California earthquake). The Company also opened a
temporary gallery location in the Old Orchard Shopping Center in Skokie,
Illinois.
In 1995, the Company opened five Masterpieces of the World
locations in California in the Sherman Oaks Galleria in Sherman Oaks, the
Promenade Mall in Woodland Hills and Desert Fashion Plaza in Palm Springs
(within the existing Martin Lawrence Galleries location), Vallco Fashion Park in
Cupertino and the Glendale Galleria in Glendale. The Company has closed all of
the above locations. All of the locations, other than the store in the Desert
Fashion Plaza, were temporary stores.
In 1995, the Company opened four Martin Lawrence Frame Shops
locations in strip centers and storefront locations in Southern California.
The following table shows the locations of the Martin Lawrence
Galleries and Martin Lawrence Frame Shops as of March 21, 1996:
MARTIN LAWRENCE GALLERIES:
<TABLE>
<CAPTION>
California: Colorado:
----------- ---------
<S> <C>
Century City Shopping Center* Fillmore Plaza*
Los Angeles (1) Denver
Desert Fashion Plaza Hawaii:
Palm Springs
Lahaina Market Place*
The Galleria at South Bay* Lahaina, Maui
Redondo Beach
Illinois:
The Outlets at Gilroy*
Gilroy, CA Chicago Place*
Chicago
Glendale Galleria
Glendale (2)(3) Oakbrook Center*
Oak Brook
Main Place*
Santa Ana Old Orchard Shopping Center*
Skokie (2)
Newport Center Fashion Island*
Newport Beach New York:
Northridge Fashion Center* 457 West Broadway
Northridge (SoHo District)
New York City
Powell Street*
San Francisco Martin Lawrence Modern
(SoHo District)
Promenade Mall* New York City
Woodland Hills (1)(2)
Pennsylvania:
Sherman Oaks Fashion Square*
Sherman Oaks (1) Plaza at King of Prussia*
King of Prussia
</TABLE>
12
<PAGE> 16
MARTIN LAWRENCE GALLERIES (CONT'D):
<TABLE>
<S> <C>
Universal CityWalk* Washington, D.C.:
Universal City
Georgetown Park
Valley Fair* Washington, D.C.
Santa Clara
Westlake Plaza*
Westlake Village (1)
MARTIN LAWRENCE FRAME SHOPS:
9465 Santa Monica Blvd. 18663 Ventura Blvd.
Beverly Hills, CA Tarzana, CA
14531 Ventura Blvd. 11701 Wilshire Blvd.
Sherman Oaks, CA West Los Angeles, CA (4)
12240-1/2 Ventura Blvd. 11740 San Vicente Blvd.
Studio City, CA Los Angeles, CA (5)
</TABLE>
- --------------------
*Includes a Martin Lawrence Museum Shop.
(1) Includes a Martin Lawrence Frame Shops location. See "Item 1.
BUSINESS--Martin Lawrence Frame Shops and Masterpieces of the World."
(2) Temporary location.
(3) Closing April 1, 1996.
(4) Scheduled to close upon the opening of the 11740 San Vicente Blvd.
location.
(5) Scheduled to open in Spring 1996.
Item 3. LEGAL PROCEEDINGS
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during
the fourth quarter of the fiscal year covered by this report.
13
<PAGE> 17
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Effective October 3, 1990, the Company's Common Stock began
trading on the New York Stock Exchange under the symbol "MLE." Prior to that
date, the Company's Common Stock was traded in the NASDAQ National Market System
under the symbol "MLLE."
The following table sets forth the high and low sale prices
for the Company's Common Stock on the New York Stock Exchange for the periods
indicated.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1994
First Quarter.......................... $ 1 1/4 $ 3/4
Second Quarter......................... 1 5/8
Third Quarter.......................... 3/4 3/8
Fourth Quarter......................... 7/8 3/8
1995
First Quarter.......................... $ 15/16 $ 1/2
Second Quarter......................... 3/4 1/2
Third Quarter.......................... 15/16 9/16
Fourth Quarter......................... 1 3/8 1/2
</TABLE>
On March 21, 1996 the closing sale price for one share of the
Company's Common Stock was $.6875 on the New York Stock Exchange. At March 21,
1996 the approximate number of record and beneficial holders of the Company's
Common Stock was 570 and 2,000, respectively.
14
<PAGE> 18
Dividends
The Company has never declared or paid cash dividends on its
Common Stock and does not anticipate declaring cash dividends in the foreseeable
future. Dividends on the Company's 10% Cumulative Convertible Preferred Stock,
$.01 par value (the "Preferred Stock"), are payable semi-annually at the rate of
10% per annum on April 1 and October 1 of each year. Dividends on the shares of
Preferred Stock currently outstanding aggregate $130,000 for each such
semi-annual payment. See "Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Liquidity and Capital
Resources."
Item 6. SELECTED FINANCIAL DATA
The consolidated financial data in the following table is
qualified in its entirety by, and should be read in conjunction with, the
consolidated financial statements and notes thereto and other financial and
statistical information included elsewhere in this Annual Report. The following
table sets forth selected consolidated financial and operating data for each of
the five years in the period ended December 31, 1995.
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues............................ $ 19,942 $ 17,595 $ 18,660 $ 23,821 $ 24,869
Loss before income taxes............ (4,391) (4,269) (7,087) (5,848) (17,360)
Net loss applicable to
common stock...................... (4,476) (4,294) (6,685) (3,861) (11,501)
Loss per share...................... $ (.76) $ (.73) $ (1.13) $ (.66) $ (1.81)
Weighted average shares of
common stock outstanding.......... 5,894 5,894 5,894 5,894 6,346
<CAPTION>
At December 31,
----------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital..................... $ 9,000 $ 10,382 $ 13,944 $ 20,034 $ 23,701
Total assets........................ 18,766 20,307 24,348 30,847 42,452
Long-term debt...................... 214 - - - 1,935
Stockholders' equity................ 10,610 15,086 19,380 26,065 29,926
</TABLE>
15
<PAGE> 19
Item 6. SELECTED FINANCIAL DATA (Contd.)
SELECTED CONSOLIDATED OPERATING DATA
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues (in thousands)............. $ 19,942 $ 17,595 $ 18,660 $ 23,821 $ 24,869
Net sales (in thousands)............ 19,406 16,191 18,269 21,589 24,245
Retail............................ 14,636 11,316 12,842 15,271 19,442
Wholesale......................... 2,160 1,950 2,656 2,868 4,803
Auction:
Company-operated................ 2,610 2,892 2,491 1,314 -
Other........................... - 33 280 2,136 -
Percent of net sales
Retail............................ 75.4% 69.9% 70.3% 70.7% 80.2%
Wholesale......................... 11.1% 12.0% 14.6% 13.3% 19.8%
Auction:
Company-operated................ 13.5% 17.9% 13.6% 6.1% -
Other........................... - 0.2% 1.5% 9.9% -
Number of Martin Lawrence Galleries
at end of period.................. 21 21(1) 22 23 25
Number of Masterpieces of the
World at end of period............ 4 - - - -
Number of Martin Lawrence Frame
Shops at end of period............ 4 - - - -
Retail sales on a same-store basis
(galleries open two full years):
Retail sales per square foot of
selling space:
Current year...................... $ 352 $ 256 $ 209 $ 168 $ 172
Prior year........................ 261 245 210 186 310
Average sales per gallery
(in thousands):
Current year...................... $ 839 $ 737 $ 617 $ 536 $ 447
Prior year........................ 623 706 620 592 805
Percentage increase (decrease)...... 34.7% 4.4% 0% (9.5%) (44.5%)
Number of galleries open
two full years.................... 13 11 19 21 23
</TABLE>
- ------------------------
(1) Includes one gallery closed from January 1994 to December 15, 1995 as
the result of the Southern California earthquake.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introduction
The Company's business strategy includes the vertical
integration of various aspects of the art business, from publishing to retail
and wholesale distribution. The Company has typically emphasized the sale of
Company-published, limited-edition graphics due to the higher gross profit
margins that can generally be realized, compared to the resale of
limited-edition graphic works of art purchased from others. The Company has,
however, increased its purchase for resale of works of art from others in order
to preserve working capital in the short term and increase the diversity of
artists offered by the Company. The Company believes that it is one of only a
few companies to integrate the publishing, retail and wholesale aspects of the
art
16
<PAGE> 20
business. See "Item 1. BUSINESS - Vertical Integration" and " - Competition."
Results of Operations
Net sales for the year ended December 31, 1995 increased by
$3,215,000, or 19.9%, compared with the year ended December 31, 1994, while net
sales for the year ended December 31, 1994 decreased $2,078,000, or 11.4%,
compared with the year ended December 31, 1993. The increase from 1994 to 1995
was primarily due to the following: (1) lower retail sales in the first half of
1994 as a result of the Southern California earthquake and the severe winter
conditions across the United States; (2) sales generated by the Company's newest
artist whose works were first published in the second quarter of 1995; and (3)
increased sales of art purchased from other publishers.
The decrease in net sales from 1993 to 1994 was primarily due
to the following: (1) the Southern California earthquake in January 1994, which
resulted in the closure of two of the Company's galleries, one of which reopened
on April 30, 1994 and the other which reopened on December 15, 1995; (2) the
severe winter conditions across the United States; (3) the effect of the closure
of one gallery in Short Hills, New Jersey, on December 31, 1993; the closure of
another gallery in Cherry Creek, Colorado, in February 1994, which the Company
replaced by opening a new gallery in the same marketplace on July 1, 1994; and
the closure of the Company's West Los Angeles gallery in September 1994; (4) a
decrease in wholesale sales due to reduced purchases being made by consumers of
the Company's wholesale accounts and the Company's decreased publishing
activities; and (5) $401,000 in net sales in 1993 from Think Big!, Inc., a
subsidiary that was sold in May 1993. The decrease in net sales was mitigated by
the inclusion of $1,090,000, which represents the net effect of insurance
recoveries received due to the earthquake less the damages incurred.
The Company's strategy in this cost-conscious environment is
to continue to conduct art auctions and sales and other promotions at its retail
galleries. The Company will also continue to test the viability of factory
outlet stores. In addition, with respect to new artists published by the
Company, the Company intends to provide the collector with tremendous value at
moderate prices. The Company is also offering custom framing services through
its new Martin Lawrence Frame Shops stores. Significant improvement in the
Company's operating results is, to a large extent, dependent upon increased
consumer spending of discretionary income and the Company's ability to publish
artists that are appealing to consumers.
Historically, a majority of the Company's net sales have been
generated by the works of only a few of the Company's published artists. The
Company expects the mix of these artists to change over time due to factors such
as changing customer preference and the expiration or termination of publishing
agreements with artists. As a result of these factors, the Company maintains an
extensive inventory of the works of popular
17
<PAGE> 21
artists and constantly seeks to attract new promising artists and to promote
their works. The works of two of the Company's published artists accounted for
approximately 12% and 8% of the Company's net sales in 1995. The works of two of
the Company's published artists accounted for 11% and 7%, and 19% and 9%, of the
Company's net sales for 1994 and 1993, respectively. Two of the Company's
non-published artists accounted for 12% and 8% of net sales in 1995.
Retail Operations
Net sales from retail operations increased $3,320,000, or
29.3%, from 1994 to 1995. This increase was principally due to: (1) lower retail
sales in the first half of 1994 as a result of the Southern California
earthquake and the severe winter conditions across the United States; (2) sales
generated by the Company's newest artist whose works were first published in the
second quarter of 1995; and (3) increased sales of art purchased from other
publishers.
In 1995, retail sales on a same-store basis (13 stores)
increased 34.7%, from $623,000 per store in 1994 to $839,000 per store in 1995.
Same-store sales are calculated using only galleries open for the full two years
being compared. In 1994, retail sales on a same-store basis (11 stores)
increased 4.4%, from $706,000 per store in 1993 to $737,000 per store in 1994.
Retail sales accounted for 75.4%, 69.9%, and 70.3% of the
Company's net sales in 1995, 1994 and 1993, respectively. At December 31, 1995,
the Company had 29 retail locations (21 Martin Lawrence Galleries locations,
four Masterpieces of the World locations and four Martin Lawrence Frame Shops)
compared with 21 and 22 at December 31, 1994 and 1993, respectively.
The Company presently intends to explore the viability of
temporary locations and other locations that do not require extensive leasehold
improvements.
Wholesale Operations
Net sales from wholesale operations increased $210,000, or
10.8%, from 1994 to 1995, and decreased $706,000, or 26.6%, from 1993 to 1994.
The increase from 1994 to 1995 was due to sales generated by the Company's
newest artist whose works were first published in the second quarter of 1995.
The decrease from 1993 to 1994 was due to (1) reduced purchases being made in
1994 by consumers of the Company's wholesale accounts, (2) the Company's
decreased publishing activities and (3) the Company's purchase and resale in
1993 of certain works of art by one of the Company's formerly published artists.
The Company's wholesale division accounted for 11.1%, 12.0%
and 14.6% of the Company's net sales in 1995, 1994 and 1993, respectively.
18
<PAGE> 22
Sales through the wholesale division included approximately
$543,000 in 1995 and $548,000 in 1994 to third parties primarily in exchange for
radio advertising, which has helped further the Company's efforts to promote its
sales and auctions in the major metropolitan areas where the Company's galleries
are located. The Company recorded these transactions at the estimated fair
market value of the artwork sold or, in the absence of objectively determinable
value, at the Company's carrying value of the artwork. See Note 1 to
Consolidated Financial Statements.
Auction Sales
Net sales from Company-operated auctions decreased $282,000,
or 9.8%, from 1994 to 1995. This decrease was due to (1) slightly lower sales
per auction achieved in 1995 and (2) fewer auctions held in 1995 as compared to
1994. Net sales from Company-operated auctions increased $401,000, or 16.1%,
from 1993 to 1994. This increase was due to the increased number of auctions
held in 1994, particularly in geographical areas where the Company has no retail
presence.
Company-operated auctions accounted for 13.5%, 17.9% and 13.6%
of the Company's net sales in 1995, 1994 and 1993, respectively.
Auctions that are conducted in geographical areas where the
Company has retail galleries tend to reduce the retail sales per square foot in
those galleries. However, the Company believes that the combination of its
retail galleries and auctions have increased its overall sales in those areas.
The works of art sold at the Company's auctions generally have a lower sales
price, and therefore lower gross margin, than works of art sold in the Company's
retail galleries.
Cost of Sales
Cost of sales as a percentage of net sales was 39.1%, 36.6%
and 37.2% in 1995, 1994 and 1993, respectively. The increase in the cost of
sales percentage from 1994 to 1995 was primarily the result of (1) lower of cost
or market adjustments of $143,000 made in 1995 compared to $68,000 in 1994, (2)
the sale of certain works of art during 1995 at $144,000 below cost, (3)
increased sales of artwork not published by the Company, and (4) an increase in
the cost of frames produced as a result of a recalculation of the Company's
indirect cost.
The decrease in the cost of sales percentage from 1993 to 1994
was primarily the result of lower cost of frames produced.
Selling Expenses
Selling expenses as a percentage of net sales were 38.3%,
40.7% and 38.9% in 1995, 1994 and 1993, respectively. Selling expenses include
such items as advertising, sales commissions, brochures and other promotional
material costs, freight and certain salary expenses. The decrease in selling
19
<PAGE> 23
expenses as a percentage of net sales from 1994 to 1995 was primarily due to the
increase in sales and the reduction of certain fixed selling expenses.
The increase in selling expenses as a percentage of net sales
from 1993 to 1994 was due to increased Company-operated auction expenses.
See "Liquidity and Capital Resources."
General and Administrative Expenses
General and administrative expenses as a percentage of net
sales were 46.9%, 56.7% and 59.5% in 1995, 1994 and 1993, respectively. General
and administrative costs include all corporate overhead and all occupancy costs
relating to the Company's retail galleries. General and administrative expenses
are primarily fixed expenses.
The decrease in general and administrative expenses as a
percentage of net sales in 1995 was primarily due to the increase in net sales
and the decrease in depreciation expense. General and administrative expenses
decreased by $91,000 from 1994 to 1995. The decrease in general and
administrative expenses as a percentage of net sales from 1993 to 1994 was
primarily due to negotiating lower occupancy costs on certain leases, as well as
the closure of the Short Hills, New Jersey gallery in December 1993; the
Northridge gallery remaining closed due to the Southern California earthquake;
the closure of the Cherry Creek, Colorado gallery in February 1994 which the
Company replaced by opening a new gallery with lower occupancy costs in July
1994; and the closure of the Westside Pavilion gallery in West Los Angeles,
California, in September 1994. General and administrative expenses decreased by
$1,695,000 from 1993 to 1994.
Net Loss
The Company reported a net loss of $4,266,000 for 1995,
compared with a net loss of $4,294,000 for 1994. The net loss after dividends
and accretion on mandatorily redeemable preferred stock was $4,476,000 for 1995
compared with $4,294,000 in 1994. This resulted in a net loss per share of $0.76
in 1995, compared with a net loss per share of $0.73 in 1994. The increase in
the loss was primarily due to the inclusion in other income in 1994 of
$1,090,000 which represents the net effect of insurance recoveries received due
to the Southern California earthquake.
The Company reported a net loss of $4,294,000 for 1994, compared with a net loss
of $6,685,000 for 1993, resulting in a net loss per share of $0.73 in 1994,
compared with a net loss per share of $1.13 in 1993. The decrease in the loss
was primarily due to: (1) the inclusion in other income in 1994 of $1,090,000,
due to the Southern California earthquake; (2) the reduction in general and
administrative expenses; (3) a decrease in loss on gallery closures from 1993 to
1994; and (4) the inclusion in 1993 of $440,000 in loss on closure of a
distribution facility.
20
<PAGE> 24
Liquidity and Capital Resources
Several key components affect the Company's ability to meet
its financial needs, including funds generated from operations, levels of
accounts receivable and inventories, capital expenditures, short-term borrowing
capacity and the ability to obtain long-term capital on satisfactory terms.
On February 6, 1995, the Company issued 200,000 shares of its
10% Cumulative Convertible Preferred Stock, $.01 par value per share (the
"Preferred Stock"), pursuant to a private placement commenced in October 1994.
The shares of Preferred Stock were sold at $10.00 per share. The Company
received net proceeds of $1,786,000 from the initial closing of the offering. In
three additional closings of the private placement on September 18, 1995,
January 3, 1996 and February 8, 1996, the Company received additional net
proceeds of $232,500, $139,500 and $186,000, respectively, and issued an
aggregate of 60,000 shares of Preferred Stock. The private placement terminated
on February 5, 1996.
Dividends on the Preferred Stock are payable semi-annually at
the rate of 10% per annum on April 1 and October 1 of each year. Each share of
Preferred Stock will automatically convert into 10 shares of the Company's
common stock, subject to adjustment in certain events, when the trading price of
the common stock equals or exceeds $2.25 per share for 20 consecutive trading
days. In addition, holders of the Preferred Stock may, under certain
circumstances, elect to convert the Preferred Stock into common stock.
The Preferred Stock is redeemable by the Company on or after
January 1, 1997 at $10.80 per share, with redemption rates decreasing by $0.20
per year until the rate is $10.00 per share on or after January 1, 2001. The
Company must redeem all of the shares of Preferred Stock no later than January
1, 2005.
Holders of Preferred Stock will be entitled to elect 20% (not
less than two) of the Board of Directors when dividends on the Preferred Stock
have been in arrears in an amount equal to at least two semi-annual dividends.
The holders of Preferred Stock will be entitled to elect an additional 10% (not
less than one) of the directors upon each additional dividend arrearage until
either they can elect a majority of the Board of Directors or the dividends in
arrears have been paid in full.
Thomas Green, the principal of one of the placement co-agents
for the private placement, acquired 77,500 shares of the Preferred Stock in the
initial closing of the offering.
The proceeds from the offering were used principally for
acquiring new inventory, marketing and sales expansion, opening new galleries,
the payment of certain lease deferrals and for working capital and general
corporate purposes.
21
<PAGE> 25
In connection with its private placement of Preferred Stock,
the Company issued warrants to purchase an aggregate of 162,500 shares of common
stock to the placement co-agents for the offering (the "Warrants"). The Warrants
are exercisable at $1.20 per share of common stock for an 18-month period
commencing at such time that the common stock equals or exceeds $2.25 per share
for 20 consecutive trading days. The exercise price of the Warrants (other than
$.10 per share) may be paid with a promissory note secured by the shares of
common stock issuable upon exercise of the Warrants and maturing 18 months from
the date of issuance. The Warrants expire as follows: 125,000 on February 6,
2000, 15,625 on September 18, 2000, 9,500 on January 3, 2001 and 12,500 on
February 8, 2001.
Based upon the results of operations for 1993, the Company
received a tax refund in 1994 of approximately $437,000 as a result of carrying
back its net operating loss for 1993 to prior years. At December 31, 1995, the
Company had federal net operating loss carryforwards of approximately $7,768,000
expiring beginning in 2008. At December 31, 1995, the Company had California net
operating loss carryforwards of approximately $14,822,000 expiring beginning in
1998.
In December 1995, the Company received an aggregate refund of
$618,000 (after deducting $22,000 for taxes owed) from the Internal Revenue
Service. The refund was pursuant to the filing of a Form 1139, and was based on
Internal Revenue Code provisions allowing the Company a 10-year carryback period
for losses meeting certain statutory requirements. The filing is subject to
audit by the I.R.S. for three years from the date of the filing of the Company's
1994 federal income tax return. In the event the I.R.S. determines that any
portion of the refund was improperly made, the Company would be required to
return such portion of the refund to the I.R.S. plus interest and penalties, if
any.
As a result of the Southern California earthquake in January
1994, in 1995, the Company received an aggregate of $206,200 of proceeds under a
disaster assistance loan with the Small Business Administration (the "SBA
Loan"). The SBA Loan accrues interest at the rate of 4% per annum. Principal and
interest payments of $1,965 per month began on March 10, 1996 and the balance is
due on February 10, 2007. The SBA loan is secured by the Company's equipment and
machinery.
Due to the Company's net losses, the Company's cash flow has
been severely restricted. In order to alleviate some of the constraints on the
Company's cash flow, in March 1996, the Company took a series of measures to
reduce its overhead costs. The Company has reduced its staff at corporate
headquarters by approximately 15% through layoffs and attrition. The Company has
also terminated its full-time security staff at its corporate headquarters and
instituted alternative internal safeguards. In addition, the Company has plans
to reduce certain selling costs within its control. In September 1996, the
Company will reduce the square footage of its distribution facility in Van Nuys,
22
<PAGE> 26
California by 10,000 to 12,000 square feet. Finally, the Company continues to
evaluate its other leases.
In 1995, the Company reduced inventory levels by $1,105,000.
The Company plans to further reduce inventory levels in 1996 through promotions
and sales, factory outlet store sales and non-replenishment of certain
inventories acquired from other art publishers.
The Company is negotiating a transaction for loans with
several individuals (the "Lenders") for an aggregate of $475,000 to $500,000
(the "Loans"), which will have a maturity of six months and bear interest at the
rate of 24% per annum (with a default rate of 36% per annum). The Loans are
expected to fund on April 1, 1996. The proceeds of the Loans will be used for,
among other things, payment of the April 1, 1996 dividend on the Preferred Stock
(approximately $112,000) and general working capital. The Loans will be secured
by the Company's inventory with a cost of approximately $5,500,000. In
connection with the Loans, the Company will issue to the Lenders five-year
warrants to purchase an aggregate of 50,000 shares at $1.00 per share. Thomas
Green Securities, Inc. ("TGI") has arranged the Loans on behalf of the Company
and, for these services, the Company will pay TGI a fee of 4% of the aggregate
amount of the Loans.
The Company believes that, based on its current projections,
its cash and capital resources should be sufficient to meet its financing
requirements in 1996. The Company will continue its efforts to increase sales,
maintain margins, reduce inventory levels and minimize operational costs.
However, the Company can make no assurances that it will meet its current
projections. The Company is exploring alternative sources of liquidity,
including other sources of financing and reductions of inventory levels.
Notwithstanding the foregoing, in the event that additional financing is not
available, the Company may elect to undertake such other actions as may be
appropriate in light of the circumstances existing at the time.
Impact of Inflation
Because of the nature of the products it sells, the Company
believes that inflation may have some impact on its sales or profits.
Historically, in periods of high or increasing inflation, consumers have
increased their purchases of assets such as fine art whose value may increase in
excess of the rate of inflation. In addition, the increase in cost of sales that
typically occurs in inflationary periods has been mitigated for the Company by
the contractual agreements with the artists published by the Company, which fix
the fees paid by the Company for the works of art produced. However, the Company
cannot predict the impact of any future inflationary conditions. See "Item 1.
BUSINESS - Publishing."
23
<PAGE> 27
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and related financial information
required to be filed hereunder 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 DISCLOSURE
None.
24
<PAGE> 28
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table and discussion set forth certain
information with regard to the Company's directors and executive officers.
<TABLE>
<CAPTION>
Capacities in Which Term
Name Age Served of Office
- --------------------- --- ---------------------- ---------
<S> <C> <C> <C>
Allen A. Baron....... 55 Chairman of the Board,
Chief Financial Officer,
Treasurer and Secretary 1996
Barry R. Levine...... 51 Director and President 1998
Martin S. Blinder.... 49 Director 1996
Jack A. Rounick...... 60 Director 1997
Edwin W. Steidle..... 75 Director 1997
Ronald S. Beard...... 57 Director 1998
Dru Gartside......... 33 General Counsel and
Assistant Secretary
</TABLE>
- -----------------------
Allen A. Baron has served as Chairman of the Board of the
Company since September 15, 1994, as Treasurer/Chief Financial Officer since
July 1980, and as Secretary and a director since March 1982. Mr. Baron was a
practicing C.P.A. from 1966 to 1980. From 1970 to 1980, Mr. Baron was a partner
of Baron & Weiss, an accounting firm. From 1962 to 1969, Mr. Baron was an
accountant with Price Waterhouse.
Barry R. Levine has been President of the Company since 1990
and a director of the Company since July 1985. Between 1985 and 1989, Mr. Levine
was the Company's Vice President in charge of wholesale and retail operations
and from 1989 to 1990 he was an Executive Vice President of the Company. Mr.
Levine is responsible for the operation of the Company's retail and wholesale
divisions, coordinates the printing and casting of the Company's limited
editions and is closely involved in the maintenance of the Company's relations
with its artists. From 1982 until June 1985, Mr. Levine served as President, a
director and principal stockholder of Barry Levine Associates, Ltd., a New York
City-based company engaged primarily in the distribution of fine art. From 1973
until 1982, Mr. Levine was President, a director and principal shareholder of
Levine and Levine Graphics, Inc., a New York City-based publisher and
distributor of fine-art graphics.
Martin S. Blinder is a founder of the Company, and has served
as a director since its formation in January 1976, and as
25
<PAGE> 29
Chairman of the Board and Chief Executive Officer from July 1985 to September
15, 1994. He served as President from the Company's formation until 1990. Mr.
Blinder served as a consultant to the Company from September 15, 1994 to
September 15, 1995. Mr. Blinder has been honored and read into the Congressional
Record of the United States Senate and House of Representatives for the
advancement of the cause of fine art on numerous occasions. In addition, Mr.
Blinder has been honored by resolutions and awards from the Governor of Rhode
Island, the California State Assembly, the City and County of Los Angeles and,
most recently, the City of New York, for support of the arts. He is considered a
foremost expert in the field of contemporary art as well as a noted art
collector.
Jack A. Rounick has served as a director of the Company since
March 1984. Between March 1984 and May 1993, he was a Vice President of the
Company, identifying potential sites and overseeing the Company's initial site
development for its new galleries, as well as overseeing its Think Big!
operations. Between August 1987 and May 1993, Mr. Rounick served as the
Company's General Counsel, advising the Company on various legal matters. Mr.
Rounick was a practicing attorney and member of the Philadelphia-based law firm
of Pechner, Dorfman, Wolffe, Rounick & Cabot between 1972 and 1987. In May
1993, Mr. Rounick purchased the Company's Think Big! subsidiary, and serves as
its President. Pursuant to this transaction, Mr. Rounick resigned as general
counsel and a vice president of the Company. Mr. Rounick is also a director and
principal stockholder of Deb Shops, Inc., a Philadelphia-based operator of a
chain of women's specialty apparel stores. In August 1995, Mr. Rounick
commenced his own private law practice.
Edwin W. Steidle became a member of the Board of Directors of
the Company in 1987. From 1974 until 1983, Mr. Steidle was Chairman of the
Board of Directors of The May Company, California, a retail department store
chain. Mr. Steidle was President of Scott's Apparel, Inc. between 1983 and
1989, which operated two ladies specialty apparel stores in Southern California
until it ceased business operations in December 1989.
Ronald S. Beard became a member of the Board of Directors of
the Company in December 1988. Mr. Beard is a practicing attorney and since 1964
has been associated with the Los Angeles-based law firm of Gibson, Dunn &
Crutcher. Mr. Beard has been a partner in such law firm since 1971 and is
currently its Managing Partner and the Chairman of its Executive Committee. See
"Certain Relationships and Related Transactions."
Dru Gartside joined the Company in November 1993 as General
Counsel and Assistant Secretary. From October 1987 until November 1993, Ms.
Gartside practiced as an attorney with the Los Angeles-based law firm of Gibson,
Dunn & Crutcher.
See "Employment Agreements."
26
<PAGE> 30
Compliance With Section 16 of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 (the
"Exchange Act") requires the Company's directors, executive officers and persons
who own more than 10% of the Company's common stock (collectively "Covered
Persons") to file initial reports of ownership (Forms 3) and reports of changes
in ownership of common stock (Forms 4 and Forms 5) with the Securities and
Exchange Commission (the "Commission") as well as the Company and any exchange
upon which the Company's common stock is listed.
The Company is required to identify Covered Persons that the
Company knows have failed to file or filed late Section 16(a) reports during the
previous fiscal year. To the Company's knowledge, based solely on a review of
the copies of the reports furnished to the Company by Covered Persons and
written representations by such persons that no other reports were required,
during the year ended December 31, 1995 the Covered Persons complied with all
Section 16(a) filing requirements applicable to such Covered Persons.
Item 11. EXECUTIVE COMPENSATION
Executive Compensation
The following table sets forth information as to the
compensation for services rendered to the Company during the years indicated for
the Company's Chief Executive Officer and the other most highly compensated
executive officer whose compensation exceeded $100,000 (the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
------------------
(g)Securities
Annual Compensation Underlying Options
(a) Name and Principal Position (b) Year (c) Salary ($)(1) (#)
- ------------------------------- -------- ------------------- ------------------
<S> <C> <C> <C>
Allen A. Baron 1995 $176,126 100,000
Chairman of the Board, 1994 176,126 0
Chief Financial Officer, 1993 179,796 25,000
Secretary and Treasurer
Barry R. Levine 1995 $176,126 100,000
President and Director 1994 176,126 0
1993 179,796 25,000
</TABLE>
- ------------------------------
(1) Excludes compensation in the form of other personal benefits, which,
for each of the executive officers, did not exceed the lesser of
$50,000 or 10% of the total annual salary and bonus reported for each
year.
27
<PAGE> 31
Employment Agreements
On March 10, 1987, the Company entered into employment
agreements with Messrs. Baron and Levine. These agreements, as subsequently
amended, expire three years following termination of employment (a) by the
Company (other than for cause or following death or disability) or (b) by the
executive officer in the event that (i) his authority to function is removed or
limited in any material respect, (ii) the Company shall have materially breached
the agreement, (iii) any person or group (other than the current executive
officers) shall have acquired in excess of 15% of the voting securities of the
Company or otherwise acquired control of the Company, or (iv) the Company's
corporate offices shall have been relocated outside of Southern California. The
intent of these latter provisions is to protect the executive officers who are
critical to the Company's success, in the event of a non-negotiated takeover of
the Company. In lieu of continuing payments under the employment agreements
after termination of employment, the executive may elect to receive a lump sum
payment equal to three years' salary (without giving effect to the voluntary
reductions described below) discounted by a factor of 7% per annum. As a result
of a series of voluntary reductions by these executive officers in 1992, 1993
and 1994, the monthly base salary for each of Messrs. Baron and Levine was
$14,678 in 1994 and 1995 and is $14,678 in 1996. Messrs. Baron's and Levine's
salaries were not increased in 1994, 1995 and 1996 based on the Consumer Price
Index, as provided for under their employment agreements.
Under the executives' employment agreements, base salaries are
subject to cost-of-living and other discretionary increases. The agreements
permit the executive officers to participate in bonus plans adopted by the
Company. The Company did not have a bonus plan in effect during fiscal 1995.
Each of the executive officers is guaranteed the grant of a minimum number of
options each year during the term of his agreement. All such options are to be
exercisable at the fair market value (except for 10% holders of the Company's
Common Stock, whose options are to be exercisable at 110% of fair market value)
of the Company's Common Stock on the date of grant. In 1994, no option grants
were made to the executives. In 1995, each of Messrs. Baron and Levine were
granted options to purchase 100,000 shares at an exercise price of $.687 per
share. In the event of death or total disability, the executive officer or his
legal representative will be entitled to receive the then-current base salary
(without giving effect to the voluntary reductions taken in 1992, 1993 and 1994)
for a period of 12 months and, in the case of disability, the executive officer
will be entitled to medical, disability and term life insurance benefits for a
period of three years. The agreements, as amended, also entitle each executive
officer to such fringe benefits and perquisites as are generally made available
to executive officers of the Company.
28
<PAGE> 32
Effective March 8, 1996, Raffy Lorentzian resigned as the Vice
President, Finance of the Company to pursue personal endeavors. He continues,
however, to provide consulting services to the Company on an hourly basis. The
Company has hired a replacement for Mr. Lorentzian whose employment with the
Company will commence April 1, 1996.
Compensation of Directors
During 1995, the Company's outside directors were entitled to
receive a fee of $1,000 for each meeting of the Board of Directors that they
attended and for each meeting of the Compensation Committee, Audit Committee,
Stock Incentive Plan Committee and Profit Sharing Plan Committee that they
attended, if no meeting of the Board of Directors was held on the day such
committee met. In accordance with this policy, Messrs. Blinder, Steidle, Beard
and Rounick each received an aggregate of $2,000, $2,000, $2,000 and $2,000,
respectively, for their attendance at meetings of the Board of Directors and the
respective committees on which they served during 1995. No other directors
receive compensation for serving in such capacities.
In addition, under the Company's 1992 Employee Stock Incentive
Plan, non-employee directors receive an automatic grant of options to purchase
5,000 shares of common stock on October 15 of each year. The options granted to
Messrs. Blinder, Steidle, Beard and Rounick in 1995 are exercisable at $1.00 per
share (the fair market value of the common stock immediately preceding the date
of grant), are immediately exercisable and expire on the earlier of one year
after the director ceases to be a director of the Company and October 14, 2005.
The Company had a one-year consulting agreement with Mr.
Blinder which expired on September 14, 1995. Under the agreement, Mr. Blinder
was paid $10,000 per month for his services in addition to medical coverage
during the term of the agreement and a $1,000 per month expense allowance.
See "Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
29
<PAGE> 33
Stock Options
The following table illustrates the stock options that were
granted to each of the executive officers listed in the Summary Compensation
Table during fiscal 1995:
OPTION GRANTS IN FISCAL 1995
<TABLE>
<CAPTION>
Individual Grants
- --------------------------------------------------------------------------------------------
(c) Percent of
Total Options
Granted to
(b) Options Employees in (d) Exercise or (e) Expiration
(a) Name Granted (#)(1) Fiscal Year Base Price ($/Sh.) Date
- -------------------- -------------- ----------- ------------------ --------------
<S> <C> <C> <C> <C>
Allen A. Baron 100,000 28% $0.6870 6/12/05
Barry R. Levine 100,000 28% $0.6870 6/12/05
</TABLE>
- -------------------------
(1) Options vested on the date of grant.
The following table sets forth the number and value of
unexercised stock options at fiscal year-end 1995 for each of the Named
Executive Officers. The Named Executive Officers did not exercise any options
during fiscal 1995.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
Fiscal Fiscal
Year-End Year-End(1)
(b) Shares (#) ($)
Acquired (c) Value --------------------------------------
On Exercise Realized (d) Exercisable/ (e) Exercisable/
(a) Name (#) ($) Unexercisable Unexercisable
- ---------------- ----------- --------- ---------------- ----------------
<S> <C> <C> <C> <C>
Allen A. Baron 0 0 247,308 / 0 $ 0 / 0
Barry R. Levine 0 0 247,308 / 0 0 / 0
</TABLE>
- -------------------------
(1) Based upon the closing price of the Company's Common Stock on the New
York Stock Exchange on December 31, 1995, which was $.5625.
30
<PAGE> 34
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of March 21,
1996, with respect to the ownership of the Company's common stock by each person
known by the Company to be the beneficial owner of more than 5% of the Company's
Common Stock, by each director, by the Named Executive Officers and by all
executive officers and directors as a group.
<TABLE>
<CAPTION>
Amount and
Nature of
Name and Address of Beneficial Percent of
Beneficial Owner Ownership (1) Class (2)
- ---------------- ------------- -------------
<S> <C> <C>
Allen A. Baron
16250 Stagg Street
Van Nuys, CA 91406 410,675(3) 6.62%
Barry R. Levine
16250 Stagg Street
Van Nuys, CA 91406 319,193(4) 5.20%
Martin S. Blinder
16250 Stagg Street
Van Nuys, CA 91406 640,901(5) 10.40%
Jack A. Rounick
1224 Gulph Creek Drive
Radnor, PA 19087 815,967(6) 13.61%
Ronald S. Beard
333 South Grand Avenue
Los Angeles, CA 90071 29,898(7) (8)
Edwin W. Steidle
16250 Stagg Street
Van Nuys, CA 91406 51,898(9) (8)
All directors and officers 2,270,032(10) 32.97%
as a group (seven persons)
</TABLE>
- -------------------
(l) Unless otherwise indicated, each beneficial owner set forth in the
table has sole voting and investment power with respect to all of the
shares of common stock shown as beneficially owned.
(2) Based on 5,893,748 shares of common stock outstanding on March 21,
1996, as adjusted to include the number of shares subject to
exercisable options by each particular officer and/or director within
60 days from such date.
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<PAGE> 35
(3) Includes: (a) 99,367 shares held by Mr. Baron, as Trustee of the Allen
A. Baron Husband's Trust Agreement, dated August 15, 1989, (b) 92,308
shares that are subject to presently exercisable options held by Mr.
Baron under the 1987 Stock Option Plan, (c) 155,000 shares that are
subject to presently exercisable options held by Mr. Baron under the
1992 Stock Incentive Plan, and (d) 64,000 shares held by the Blinder
Research Foundation for Crohn's Disease, a foundation of which Mr.
Baron is a director and the Secretary and Treasurer, as to which Mr.
Baron does not have sole voting and investment power. Mr. Baron
disclaims beneficial ownership with respect to the shares held by the
Blinder Research Foundation. Does not include 815,967 shares held by
Jack Rounick subject to an irrevocable proxy pursuant to which Messrs.
Blinder and Baron may vote Mr. Rounick's shares except in certain
circumstances, which expires on May 21, 1996. See "Item 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
(4) Includes: (a) 71,885 shares held directly, (b) 92,308 shares which are
subject to presently exercisable options held by Mr. Levine under the
1987 Stock Option Plan, and (c) 155,000 shares which are subject to
presently exercisable options held by Mr. Levine under the 1992 Stock
Incentive Plan.
(5) Includes: (a) 351,299 shares held in trust by Martin S. Blinder and
Janet Blinder, as trustees of the Blinder Trust Agreement, dated April
9, 1986, (b) 15,100 shares and 6,600 shares, respectively, held under
the Uniform Gifts to Minors Act for the benefit of Mr. Blinder's
daughter and son, (c) 138,902 shares that are subject to presently
exercisable options held by Mr. Blinder under the 1987 Stock Option
Plan, (d) 65,000 shares that are subject to presently exercisable
options held by Mr. Blinder under the 1992 Stock Incentive Plan, and
(e) 64,000 shares held by the Blinder Research Foundation for Crohn's
Disease, a foundation of which Mr. Blinder is President and a director,
as to which Mr. Blinder does not have sole voting and investment power.
Mr. Blinder disclaims beneficial ownership with respect to the shares
held by the Blinder Research Foundation. Does not include 815,967
shares held by Jack Rounick subject to an irrevocable proxy pursuant to
which Messrs. Blinder and Baron may vote Mr. Rounick's shares except in
certain circumstances, which expires on May 21, 1996. See "Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
(6) Includes: (a) 5,969 shares which Mr. Rounick held as joint tenant with
his spouse, Noreen Rounick, as to which Mr. Rounick has shared voting
and investment power, (b) 57,686 shares which are subject to presently
exercisable options held by Mr. Rounick under the 1987 Stock Option
Plan, (c)
32
<PAGE> 36
45,000 shares which are subject to presently exercisable options held
by Mr. Rounick under the 1992 Stock Incentive Plan, (d) 132,678 shares
held by the Jack A. Rounick Irrevocable Trust for the benefit of Mr.
Rounick's daughter, of which Mr. Rounick is the trustee, and (e)
574,634 shares held by the Jack and Noreen Rounick Trust, dated July
31, 1987, of which Mr. Rounick and Noreen Rounick are trustees, as to
which Mr. Rounick has shared voting and investment power. Pursuant to
an irrevocable proxy, which expires on May 21, 1996, Messrs. Blinder
and Baron have the right to vote all of the shares, except in certain
instances. See "Item 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
(7) Includes: (a) 3,000 shares held directly, (b) 6,898 shares which are
subject to presently exercisable options held by Mr. Beard under the
1987 Stock Option Plan, and (c) 20,000 shares which are subject to
presently exercisable options held by Mr. Beard under the 1992 Stock
Incentive Plan.
(8) Less than 1%.
(9) Includes: (a) 25,000 shares held directly, (b) 6,898 shares which are
subject to presently exercisable options held by Mr. Steidle under the
1987 Stock Option Plan, and (c) 20,000 shares which are subject to
presently exercisable options held by Mr. Steidle under the 1992 Stock
Incentive Plan.
(10) Includes shares that are subject to options held by such officers and
directors that are presently exercisable or will be exercisable within
60 days of March 21, 1996.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has adopted a policy pursuant to which
transactions between the Company and its executive officers, directors and
principal stockholders (i.e., stockholders owning beneficially 5% or more of the
outstanding voting securities of the Company) will be submitted to the Board of
Directors for approval by a disinterested majority of the directors voting with
respect to the transaction. All current and future transactions involving the
Company's officials, its controlling persons or affiliates have been or will be
authorized or subsequently ratified by a majority of the Company's disinterested
directors and have been, and will be, on terms no less favorable than could be
obtained in an arms-length transaction with unaffiliated parties.
On May 24, 1993, the Company sold Think Big!, Inc., its wholly
owned subsidiary, to Jack A. Rounick, an officer, director and principal
stockholder of the Company. Pursuant to this transaction, Mr. Rounick resigned
as general counsel and a vice president of the Company. The purchase price was
approximately $820,000, of which $500,000 was paid at the closing, approximately
$133,000 was paid on June 15, 1993 and $150,000 was
33
<PAGE> 37
paid in October 1993. In 1995, the Company offset $6,600 that it owed to Mr.
Rounick with respect to his consignment of certain artwork which was sold by the
Company against the remaining balance of the purchase price. The remaining
$30,900 of the purchase price is evidenced by a non-interest-bearing note, which
was due on December 31, 1994, and remains unpaid. In connection with the
transaction, Think Big! subleased half of one of the Company's gallery locations
and agreed to pay half of the amounts due under the lease. Also in connection
with the sale of Think Big!, Allen A. Baron, the Chairman of the Board and Chief
Financial Officer, and Martin S. Blinder, a director of the Company, were
granted an irrevocable proxy to vote the shares of the Company's Common Stock
beneficially held by Mr. Rounick or his affiliates, except with respect to
certain matters. The proxy expires on May 21, 1996. In connection with the Think
Big! sale, Mr. Rounick and Think Big! agreed not to compete with the Company in
its businesses, including the Museum Shops; and the Company and Messrs. Blinder,
Levine and Baron agreed not to engage in the business of selling novelty
undersized or oversized products for a period not to exceed five years from the
sale date.
Historically, the Company's directors and executive officers
have purchased works of art from third parties and the Company for their private
collections. During the 1995 fiscal year, the Company purchased works of art
from, and sold works of art to, certain of the Company's directors and executive
officers. In most instances, the purchase by the Company of works of art from
these persons resulted from demand for a particular work or a particular
artist's work of art. All of these works were obtained on a basis at least as
favorable to the Company as that which could have been obtained from
unaffiliated parties. In each instance where a work of art was purchased by the
Company from an officer or director in 1995, such work was resold by the Company
at a profit. Due to the Company's decision to expand its customer base by
offering for sale a larger number of original and other works of art that are
not Company-published, the Company's Board of Directors has adopted a formal
policy whereby a director or executive officer purchasing an original or other
work of art from a third party for his or her private collection must promptly
notify the Company of the purchase. The Company then has 30 days within which to
purchase that work of art from the officer or director at the price paid by such
officer or director, if a majority of the disinterested members of the Company's
Board of Directors concludes that the purchase of that work of art would be in
the best interests of the Company. The Company's Board of Directors has also
adopted a policy whereby a person who serves as both a director and an officer
of the Company (a "Director and Officer") and who purchases artwork from the
Company must pay a purchase price ranging from 110% to 200% of the Company's
cost of the artwork, depending on the type of artwork involved. For example, a
director and officer purchasing a Company-published graphic from the Company
must pay a purchase price equal to 200% of the Company's cost of such graphic
work. Moreover, a director and officer must grant to the Company a right of
first refusal to
34
<PAGE> 38
repurchase any limited-edition graphic previously sold by the Company to that
director and officer. If the limited-edition graphic has been held by the
director and officer for at least one year, the Company may repurchase the
graphic work at the prevailing wholesale price. In the case of original artwork
originally purchased from the Company and later consigned to the Company for
resale by a director and officer, the Company will retain 5% to 10% of the sale
price plus an amount equal to the related commissions paid.
Since 1986, the Company has engaged Gibson, Dunn & Crutcher as
counsel to the Company in connection with various legal matters. Ronald S.
Beard, a director of the Company, is a partner of such firm.
See "Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources"
regarding the Company's relationship with Thomas Green and Thomas Green
Securities, Inc.
35
<PAGE> 39
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements. Reference is made to the Index to Financial
Statements and Schedules of the Company on page F-1 of this report.
(a)(2) Financial Statement Schedules. Reference is made to the Index to
Financial Statements and Schedules of the Company on page F-1 of this
report.
(a)(3) Exhibits.
The following documents are exhibits to this Annual Report on Form
l0-K:
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
3.1 Certificate of Incorporation of the Company as filed with the
Secretary of State of Delaware on May 4, 1987, filed as
Exhibit 3.1 to the Company's Registration Statement on Form
S-1 (Registration No. 33-14410) and by this reference
incorporated herein and made a part hereof.
3.2 Restated Certificate of Incorporation of the Company, as filed
with the Secretary of State of Delaware on June 4, 1987, filed
as Exhibit 3.2 to Amendment No. 1 to the Company's
Registration Statement on Form S-1 (Registration No. 33-14410)
and by this reference incorporated herein and made a part
hereof.
3.3 Certificate of Designation of 10% Cumulative Convertible
Preferred Stock, $.01 par value per share, of the Company, as
filed with the Secretary of State of Delaware on February 1,
1995, filed as Exhibit 3.3 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994 and by this
reference incorporated herein and made a part hereof.
3.4 Bylaws of the Company, as amended, filed as Exhibit 3.3 to
Amendment No. 1 to the Company's Registration Statement on
Form S-1 (Registration No. 33-14410) and by this reference
incorporated herein and made a part hereof.
4.1 Specimen Common Stock Certificate of the Company, filed as
Exhibit 4.1 to Amendment No. 1 to the Company's Registration
Statement on Form S-1 (Registration No. 33-14410) and by this
reference incorporated herein and made a part hereof.
</TABLE>
36
<PAGE> 40
4.2 Specimen 10% Cumulative Convertible Preferred Stock
Certificate of the Company, filed as Exhibit 4.2 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1994 and by this reference incorporated herein
and made a part hereof.
4.3 Stockholders' Rights Agreement, dated February 6, 1995,
between the Company and the holders of the Company's 10%
Cumulative Convertible Preferred Stock, filed as Exhibit 4.3
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994 and by this reference incorporated herein
and made a part hereof.
4.4 Warrants dated February 6, 1995, to purchase 125,000 shares of
the Company's Common Stock in favor of TGS Capital
Appreciation Partnership, filed as Exhibit 4.4 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1994 and by this reference incorporated herein
and made a part hereof.
10.1 Exclusive Artist-Publisher Agreement dated June 11, 1986
between Martin Lawrence Limited Editions, Inc., a California
corporation formerly known as Martin Lawrence Enterprises,
Inc. ("MLLE-California"), and Mark King, filed as Exhibit 10.2
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1989 and by this reference incorporated herein
and made a part hereof.
10.2 Exclusive Artist-Publisher Agreement dated June 11, 1989
between the Company and Mark King, filed as Exhibit 10.3 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1989 and by this reference incorporated herein
and made a part hereof.
10.3 Letter Agreement constituting First Amendment to Exclusive
Artist-Publisher Agreement dated October 19, 1989 between the
Company and Mark King, filed as Exhibit 10.4 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1989 and by this reference incorporated herein and made a part
hereof.
10.4 Second Amendment to Exclusive Artist-Publisher Agreement dated
March 9, 1990 between the Company and Mark King, filed as
Exhibit 10.5 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1989 and by this reference
incorporated herein and made a part hereof.
37
<PAGE> 41
10.5 Employment Agreement dated March 10, 1987 between the Company
and Allen A. Baron, filed as Exhibit 10.7 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1986 and by this reference incorporated herein and made a part
hereof.
10.6 Employment Agreement dated March 10, 1987 between the Company
and Barry R. Levine, filed as Exhibit 10.8 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1986 and by this reference incorporated herein and made a part
hereof.
10.7 Letter Agreement dated August 13, 1987 between the Company and
Allen A. Baron, filed as Exhibit 10.19 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1987 and
by this reference incorporated herein and made a part hereof.
10.8 Letter Agreement dated August 13, 1987 between the Company and
Barry R. Levine, filed as Exhibit 10.20 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1987 and by this reference incorporated herein and made a part
hereof.
10.9 Letter Agreement dated September 29, 1992 between the Company
and Allen A. Baron, filed as Exhibit 10.23 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1992, and by this reference incorporated herein and made a
part hereof.
10.10 Letter Agreement dated September 29, 1992 between the Company
and Barry R. Levine, filed as Exhibit 10.24 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1992, and by this reference incorporated herein and made a
part hereof.
10.11 Confidentiality Agreement dated March 9, 1992, between the
Company and Wayne Smith, filed as Exhibit 10.27 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1992, and by this reference incorporated herein
and made a part hereof.
10.12 Restated Martin Lawrence Profit Sharing Plan, filed as Exhibit
10.12 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1994 and by this reference incorporated
herein and made a part hereof.
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<PAGE> 42
10.13 First Amendment to the Martin Lawrence Profit Sharing Plan
dated August 17, 1995.
10.14 Trust Agreement under the Martin Lawrence Profit Sharing Plan
filed as Exhibit 28.2 to the Company's Registration Statement
on Form S-8 (Registration No. 33-19393) and by this reference
incorporated herein and made a part hereof.
10.15 1992 Stock Incentive Plan, filed as Exhibit 10.33 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1992, and by this reference incorporated herein
and made a part hereof.
10.16 Amendment Number One to the Company's 1992 Stock Incentive
Plan dated April 23, 1993.
10.17 Amendment Number Two to the Company's 1992 Stock Incentive
Plan dated February 20, 1995.
10.18 Form of Stock Incentive Plan Agreement for all employees
except for Director/Officers and Non-employee Directors used
in connection with the Company's 1992 Stock Incentive Plan,
filed as Exhibit 10.34 to the Company's Annual Report on Form
10-K for the year ended December 31, 1992, and by this
reference incorporated herein and made a part hereof.
10.19 Form of Stock Incentive Plan Agreement for Non-Employee
Directors used in connection with the Company's 1992 Stock
Incentive Plan, filed as Exhibit 10.35 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992, and
by this reference incorporated herein and made a part hereof.
10.20 Form of Stock Incentive Plan Agreement for Director/Officers
used in connection with the Company's 1992 Stock Incentive
Plan, filed as Exhibit 10.36 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1992, and by this
reference incorporated herein and made a part hereof.
10.21 Agreement between the Company and Household Bank (Illinois),
N.A., dated October 20, 1992, filed as Exhibit 10.46 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1992, and by this reference incorporated herein
and made a part hereof.
10.22 Stock Purchase Agreement dated May 24, 1993 between Jack A.
Rounick and the Company, filed as Exhibit 10.22 to the
Company's Annual Report on
39
<PAGE> 43
Form 10-K for the year ended December 31, 1993, and by this
reference incorporated herein and made a part hereof.
10.23 Covenant Not to Compete dated May 24, 1993 between the Company
and Think Big!, filed as Exhibit 10.22 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1993, and
by this reference incorporated herein and made a part hereof.
10.24 Covenant Not to Compete dated May 24, 1993 between the Company
and Jack A. Rounick, filed as Exhibit 10.22 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1993, and by this reference incorporated herein and made a
part hereof.
10.25 Covenant Not to Compete dated May 24, 1993 between Jack A.
Rounick and the Company, filed as Exhibit 10.22 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1993, and by this reference incorporated herein
and made a part hereof.
10.26 Covenant Not to Compete dated May 24, 1993 between Jack A.
Rounick and Martin S. Blinder, filed as Exhibit 10.22 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1993, and by this reference incorporated herein
and made a part hereof.
10.27 Covenant Not to Compete dated May 24, 1993 between Jack A.
Rounick and Barry R. Levine, filed as Exhibit 10.22 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1993, and by this reference incorporated herein
and made a part hereof.
10.28 Covenant Not to Compete dated May 24, 1993 between Jack A.
Rounick and Allen A. Baron, filed as Exhibit 10.22 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1993, and by this reference incorporated herein
and made a part hereof.
10.29 Placement Co-agent Agreement, dated October 1, 1994, among the
Company, Thomas Green Securities, Inc. and Agincourt Capital,
Inc. , filed as Exhibit 10.26 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1994 and by this
reference incorporated herein and made a part hereof.
22.1 Subsidiaries of the Company.
40
<PAGE> 44
24.1 Consent of Price Waterhouse LLP.
27 Financial Data Schedule, which is submitted electronically to
the Securities and Exchange Commission for information only
and not filed.
(b) The Company filed a Current Report on Form 8-K with the Securities and
Exchange Commission on January 27, 1995, announcing the Company's
initial closing of its private placement of convertible preferred
stock. The Company filed a Current Report on Form 8-K with the
Securities and Exchange Commission on October 10, 1995, announcing the
Company's additional closing of its private placement of convertible
preferred stock. By this reference, these Current Reports on Form 8-K
are incorporated herein and made a part hereof.
(c) Copies of Exhibits 10.13, 10.16, 10.17, 22.1 and 24.1 are attached
hereto. Exhibits 3.1 through 10.12, 10.14, 10.15, and 10.18 through
10.29 are incorporated by reference as described in Item 14(a)(3).
(d) Not Applicable.
41
<PAGE> 45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 29, 1996 MARTIN LAWRENCE LIMITED EDITIONS, INC.
By: /s/ Allen A. Baron
-------------------------------
Allen A. Baron
Chairman of the Board and Chief
Financial Officer
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 Company in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Capacity Date
- ---------- -------- ----
<S> <C> <C>
/s/ Allen A. Baron Chairman of the Board, March 29, 1996
- --------------------- Chief Financial Officer
Allen A. Baron (Principal Financial
Officer and Principal
Accounting Officer),
Treasurer and Secretary
/s/ Barry R. Levine Director, President March 29, 1996
- ---------------------
Barry R. Levine
/s/ Martin S. Blinder Director March 29, 1996
- ---------------------
/s/ Jack A. Rounick Director March 29, 1996
- ---------------------
Jack A. Rounick
/s/ Ronald S. Beard Director March 29, 1996
- ---------------------
Ronald S. Beard
/s/ Edwin W. Steidle Director March 29, 1996
- ---------------------
Edwin W. Steidle
</TABLE>
42
<PAGE> 46
MARTIN LAWRENCE LIMITED EDITIONS, INC.
Index to Financial Statements and Schedules*
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants...................... F-2
Consolidated Balance Sheet as of December 31, 1995
and December 31, 1994.................................. F-3
Consolidated Statement of Operations for the years
ended December 31, 1995, 1994 and 1993................. F-4
Consolidated Statement of Changes in Stockholders'
Equity for the years ended December 31, 1995, 1994
and 1993............................................... F-5
Consolidated Statement of Cash Flows for the years
ended December 31, 1995, 1994 and 1993................. F-6
Notes to Consolidated Financial
Statements............................................. F-7
Schedule II - Valuation and Qualifying Accounts........ S-1
</TABLE>
*Schedules other than those listed above have been omitted, either because they
are not applicable, are not required, or the information is shown in the
financial statements or notes thereto.
F-1
<PAGE> 47
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Martin Lawrence Limited Editions, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page F-1 present fairly, in all
material respects, the financial position of Martin Lawrence Limited Editions,
Inc. and its subsidiaries at December 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Los Angeles, California
March 19, 1996
F-2
<PAGE> 48
Martin Lawrence Limited Editions, Inc.
Consolidated Balance Sheet
<TABLE>
<CAPTION>
December 31,
1995 1994
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents (Notes 1 and 2) $ 769,000 $ 575,000
Accounts receivable, net (Note 3) 1,033,000 646,000
Inventories (Notes 1, 3, 11 and 13) 12,318,000 13,423,000
Prepaid expenses and other
current assets (Note 1) 363,000 423,000
Notes receivable, short-term (Note 10) 31,000 38,000
------------ ------------
Total current assets 14,514,000 15,105,000
Equipment and leasehold improvements,
net of accumulated depreciation and
amortization (Notes 1 and 3) 2,907,000 3,565,000
Other assets 693,000 668,000
Deferred income taxes (Note 5) 652,000 969,000
------------ ------------
Total assets $ 18,766,000 $ 20,307,000
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and
accrued expenses (Note 1) $ 3,170,000 $ 2,263,000
Accrued compensation and
employee benefits 512,000 462,000
Deferred rents--current (Note 11) 170,000 412,000
Customer deposits 155,000 204,000
Escrowed funds (Note 4) 150,000 -
Notes payable 16,000 6,000
Deferred income taxes (Note 5) 1,341,000 1,376,000
------------ ------------
Total current liabilities 5,514,000 4,723,000
Notes payable, long-term (Note 6) 214,000 23,000
Deferred rents (Note 11) 407,000 475,000
------------ ------------
Total liabilities 6,135,000 5,221,000
------------ ------------
Commitments and contingencies (Notes 11 and 12) - -
Mandatorily redeemable preferred stock--
$.01 par value, 1,000,000 shares authorized,
225,000 shares issued and outstanding
at December 31, 1995 (Note 4) 2,021,000 -
------------ ------------
Stockholders' equity (Note 7):
Preferred stock--$.01 par value,
4,000,000 shares authorized,
none issued or outstanding -
Common stock--$.01 par value,
20,000,000 shares authorized,
8,350,000 shares issued and
5,893,748 shares outstanding at
December 31, 1995 and 1994 83,000 83,000
Paid-in capital 27,709,000 27,709,000
Retained earnings (deficit) (9,397,000) (4,921,000)
Less cost of shares held in treasury--
2,456,000 shares at
December 31, 1995 and 1994 (7,785,000) (7,785,000)
------------ ------------
Total stockholders' equity 10,610,000 15,086,000
------------ ------------
Total liabilities and
stockholders' equity $ 18,766,000 $ 20,307,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE> 49
Martin Lawrence Limited Editions, Inc.
Consolidated Statement of Operations
<TABLE>
<CAPTION>
For the years ended December 31,
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Net sales $ 19,406,000 $ 16,191,000 $ 18,269,000
Other income 536,000 1,404,000 391,000
------------ ------------ ------------
19,942,000 17,595,000 18,660,000
------------ ------------ ------------
Costs and expenses:
Cost of sales 7,581,000 5,928,000 6,791,000
Selling expenses 7,431,000 6,596,000 7,111,000
General and admini-
strative expenses 9,093,000 9,184,000 10,879,000
Loss on gallery closings 212,000 150,000 451,000
Loss on closure of
distribution facility - - 440,000
Interest 16,000 6,000 75,000
------------ ------------ ------------
24,333,000 21,864,000 25,747,000
------------ ------------ ------------
Loss before taxes (4,391,000) (4,269,000) (7,087,000)
Provision for taxes (benefit) (125,000) 25,000 (402,000)
------------ ------------ ------------
Net loss (4,266,000) (4,294,000) (6,685,000)
Dividends and accretion on
mandatorily redeemable
preferred stock 210,000 - -
------------ ------------ ------------
Net loss applicable to
common stock $ (4,476,000) $ (4,294,000) $ (6,685,000)
============ ============ ============
Net loss per common share $ (.76) $ (.73) $ (1.13)
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 50
Martin Lawrence Limited Editions, Inc.
Consolidated Statement of Changes in Stockholders' Equity
For The Years Ended December 31, 1995, 1994, and 1993
<TABLE>
<CAPTION> Common Stock
-------------------- Paid-In Retained Treasury
Shares Amount Capital Earnings Stock Total
--------- -------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992 5,894,000 $ 83,000 $27,709,000 $ 6,058,000 $(7,785,000) $26,065,000
Net loss for the year - - - (6,685,000) - (6,685,000)
--------- -------- ----------- ----------- ----------- -----------
Balance, December 31, 1993 5,894,000 83,000 27,709,000 (627,000) (7,785,000) 19,380,000
Net loss for the year - - - (4,294,000) - (4,294,000)
--------- -------- ----------- ----------- ----------- -----------
Balance, December 31, 1994 5,894,000 83,000 27,709,000 (4,921,000) (7,785,000) 15,086,000
Net loss for the year - - - (4,266,000) - (4,266,000)
Dividends and accretion
on mandatorily redeemable
preferred stock 210,000 210,000
---------- -------- ----------- ----------- ----------- -----------
Balance, December 31, 1995 5,894,000 $ 83,000 $27,709,000 $(9,397,000) $(7,785,000) $10,610,000
========== ======== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE> 51
Martin Lawrence Limited Editions, Inc.
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
For the years ended December 31,
1995 1994 1993
------------- ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (4,266,000) $ (4,294,000) $ (6,685,000)
Adjustments to reconcile net
loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 867,000 1,037,000 1,370,000
Loss on sale of Think Big!, Inc. - - 21,000
Loss from gallery closings 212,000 150,000 451,000
Loss from closure of distribution facility - - 419,000
Changes in assets and liabilities
(net of effect of sale of Think Big!, Inc.):
Accounts receivable, net (387,000) 356,000 2,000
Income tax receivable - 454,000 1,332,000
Inventories 1,105,000 1,928,000 1,793,000
Prepaid expenses and other current assets 60,000 92,000 394,000
Notes receivable 7,000
Other assets (25,000) (28,000) (298,000)
Accounts payable and accrued expenses (Note) 849,000 219,000 442,000
Accrued compensation and employee benefits 50,000 (72,000) (19,000)
Customer deposits (49,000) 9,000 43,000
Escrowed funds 150,000 - -
Deferred rents (310,000) 3,000 73,000
Deferred income taxes 282,000 - 495,000
------------ ------------ ------------
Net cash used in
operating activities (1,455,000) (146,000) (167,000)
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of Think Big!, Inc. - - 500,000
Additions to equipment and
leasehold improvements (421,000) (292,000) (504,000)
------------ ------------ ------------
Net cash used in
investing activities (421,000) (292,000) (4,000)
------------ ------------ ------------
Cash flows from financing activities:
Repayment of long-term debt - - (1,933,000)
Net proceeds from issuance of
mandatorily redeemable
preferred stock 2,000,000 - -
Dividends paid on preferred stock (131,000) - -
Notes payable 201,000 29,000 -
Payment of notes receivable related to
the sale of Think Big!, Inc. - - 283,000
------------ ------------ ------------
Net cash provided by (used in)
financing activities 2,070,000 29,000 (1,650,000)
------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents 194,000 (409,000) (1,821,000)
Cash and cash equivalents at
beginning of year 575,000 984,000 2,805,000
------------ ------------ ------------
Cash and cash equivalents at
end of year $ 769,000 $ 575,000 $ 984,000
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE> 52
Martin Lawrence Limited Editions, Inc.
Notes to Consolidated Financial Statements
Note 1. Summary of Accounting Policies
Business
Martin Lawrence Limited Editions, Inc. and its subsidiaries (the
"Company") are publishers of original limited-edition fine art serigraphs,
lithographs, sculpture and posters. The Company also purchases, for resale,
original works of art as well as limited-edition works by recognized artists
that the Company does not publish. The Company distributes both the published
and non-published works through established dealers and its own national chain
of retail art galleries. Since 1992, the Company has also conducted auctions of
its published and non-published artwork. The Company operates another retail
concept--Martin Lawrence Museum Shops, which sells unique art objects and
functional artwork through locations within existing Martin Lawrence galleries.
In April 1995, the Company formed two new subsidiaries, Martin Lawrence
Frame Shops, Inc. and Masterpieces of the World, Inc. for the purpose of
implementing some newly developed concepts.
Four Martin Lawrence Frame Shops locations opened in the fourth quarter
of October 1995 and an additional location opened in January 1996. The stores
are in strip centers and storefront locations in Southern California and offer
custom framing services as well as fine art, posters and Museum Shop
merchandise. The Company also incorporated Frame Shops into four of its Southern
California gallery locations and may expand it to some of its other Southern
California gallery locations.
The Company opened five Masterpieces of the World retail stores between
May and July 1995 in regional shopping malls in California. The Masterpieces of
the World concept is the sale of framed oil paintings at affordable prices,
primarily under $500. The results of operations of Masterpieces of the World did
not meet the Company's expectations. Accordingly, the Company began closing the
stores in January 1996 and completed the closing of the Masterpieces of the
World concept in March 1996. All of the Masterpieces of the World locations were
leased under temporary leases and required minimal capital expenditures to open.
Although the Company has ceased operating Masterpieces of the World retail
stores, the Company believes that the concept may be viable in other venues. The
Company currently offers Masterpieces of the World inventory in its Frame Shops
locations and its gallery outlet store.
In 1995, the Company closed three galleries for various reasons,
including unsatisfactory performance or unfavorable lease terms. In 1995, the
Company also opened four new galleries. One of the Company's galleries was
closed due to the January 17, 1994
F-7
<PAGE> 53
Martin Lawrence Limited Editions, Inc.
Notes to Consolidated Financial Statements
(Continued)
Note 1. Summary of Accounting Policies (Contd.)
Business (Contd.)
Southern California earthquake and reopened December 15, 1995. Two of the new
galleries are temporary locations.
On February 6, 1995, the Company issued 200,000 shares of its 10%
Cumulative Convertible Preferred Stock, $.01 par value per share (the "Preferred
Stock"), pursuant to a private placement commenced in October 1994. The shares
of Preferred Stock were sold at $10.00 per share. The Company received net
proceeds of $1,786,000 from the initial closing of the offering. In three
additional closings of the private placement on September 18, 1995, January 3,
1996 and February 8, 1996, the Company received additional net proceeds of
$232,500, $139,500 and $186,000, respectively, and issued an aggregate of 60,000
shares of Preferred Stock. The private placement terminated on February 5, 1996.
See Note 4.
Due to the Company's net losses, the Company's cash flow has been
severely restricted. In order to alleviate some of the constraints on the
Company's cash flow, in March 1996, the Company took a series of measures to
reduce its overhead costs. The Company has reduced its staff at corporate
headquarters by approximately 15% through layoffs and attrition. The Company has
also terminated its full-time security staff at its corporate headquarters and
instituted alternative internal safeguards. In addition, the Company has plans
to reduce certain selling costs within its control. In September 1996, the
Company will reduce the square footage of its distribution facility in Van Nuys,
California by 10,000 to 12,000 square feet. Finally, the Company continues to
evaluate its other leases.
In 1995, the Company reduced inventory levels by $1,105,000. The
Company plans to further reduce inventory levels in 1996 through promotions and
sales, factory outlet store sales and non-replenishment of certain inventories
acquired from other art publishers.
The Company believes that, based on its current projections, its cash
and capital resources should be sufficient to meet its financing requirements in
1996. The Company will continue its efforts to increase sales, maintain margins,
reduce inventory levels and minimize operational costs. However, the Company can
make no assurances that it will meet its current projections. The Company is
exploring alternative sources of liquidity, including other sources of financing
and reductions of inventory levels. Notwithstanding the foregoing, in the event
that additional financing is not available, the Company may elect to undertake
such other actions as may be appropriate in light of the circumstances existing
at the time. See Note 14.
F-8
<PAGE> 54
Martin Lawrence Limited Editions, Inc.
Notes to Consolidated Financial Statements
(Continued)
Note 1. Summary of Accounting Policies (Contd.)
Principles of Consolidation
The consolidated financial statements include the accounts of Martin
Lawrence Limited Editions, Inc., a Delaware corporation, and its wholly owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated from the consolidated financial statements.
Cash and Cash Equivalents
Cash and cash equivalents include short-term investments with
maturities of 90 days or less and restricted cash of $32,000 and $26,000 at
December 31, 1995 and 1994, respectively, in certificate of deposit accounts.
The restricted cash is being held as collateral for certain lease, sales tax and
utility deposits.
Concentration of Credit Risk
The Company's wholesale customers consist of retail art galleries and
dealers located throughout the United States and in selected foreign markets.
Concentration of credit risk with respect to trade receivables is limited due to
the large number of the Company's customers and their dispersion. The Company
performs ongoing credit evaluations of its customers and generally does not
require collateral. The Company maintains reserves for potential credit losses
and such losses have been within management's expectations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Company uses management's estimates of value to reflect inventory
at the lower of cost or market. Due to the unique nature of the inventory, it is
possible that the Company's estimate may change in the near term.
Fair Value of Financial Instruments
As cash and cash equivalents, receivables, accounts payable and accrued
liabilities are all short-term in nature, their carrying amount approximate fair
value. The Company estimates that the carrying amount of notes payable and
mandatorily redeemable preferred stock approximates fair value.
F-9
<PAGE> 55
Martin Lawrence Limited Editions, Inc.
Notes to Consolidated Financial Statements
(Continued)
Note 1. Summary of Accounting Policies (Contd.)
Inventories
Inventories consist of completed artwork, frames, original works of art
held for sale, Museum Shop functional art and raw materials used in framing,
principally valued at the lower of cost (first-in, first-out) or market.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist principally of
payments to artists and printers for limited-edition graphics in progress.
Barter Transactions
The Company receives advertising and promotional services in exchange
for artwork. Advertising and promotional services are expensed the first time
the related advertising takes place. Revenues and expenses related to these
transactions are recorded based upon the estimated fair market value of the
artwork exchanged, or in the absence of objectively determinable value, at the
Company's carrying value of the artwork. Revenues and gross profit realized from
barter transactions aggregated $543,000 and $388,000, respectively, for 1995.
Revenues and gross profit realized from barter transactions aggregated $548,000
and $409,000, respectively, for 1994. The Company utilized $543,000 of related
advertising and other services during 1995. Barter transaction credits of
$78,000 are included in accounts payable and accrued expenses at December 31,
1995. The Company utilized $548,000 of related advertising and promotional
services during 1994. Unutilized advertising credits of $30,000 are included in
prepaid advertising at December 31, 1994.
F-10
<PAGE> 56
Martin Lawrence Limited Editions, Inc.
Notes to Consolidated Financial Statements
(Continued)
Note 1. Summary of Accounting Policies (Contd.)
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost. Depreciation
and amortization are computed using the straight-line method based upon
estimated useful lives, as follows:
<TABLE>
<S> <C>
Equipment 3 to 5 years
Leasehold improvements 3 to 10 years (limited to
lease term)
</TABLE>
Expenditures for maintenance and repairs are charged to expense, as
incurred.
Revenues
Revenue from sales of artwork is recognized upon passage of title to
the customer.
Other Income
Other income includes interest income on short-term investments and
other interest-bearing accounts of $28,000, $13,000 and $34,000 in 1995, 1994
and 1993, respectively. In addition, other income includes shipping income of
$326,000, $237,000 and $281,000 in 1995, 1994 and 1993, respectively. Other
income in 1994 included $1,090,000 from insurance recoveries primarily from the
Southern California earthquake.
Occupancy Costs
General and administrative expenses include occupancy costs for the
Company's retail locations of $2,732,000, $2,765,000 and $3,831,000 in 1995,
1994 and 1993, respectively. Occupancy costs include rent, common area
maintenance, merchants' dues, utilities and property taxes.
Loss on Gallery Closings
Loss on gallery closings includes the write-off of unamortized
leasehold improvements and termination fees of $303,000 that resulted from the
closure of one gallery in Illinois in the third quarter of 1995, and a gain of
$91,000 in the first quarter of 1995 from negotiating lease termination fees on
two of the Company's galleries closed in 1994. Loss on gallery closures for 1994
and 1993 were $150,000 and $451,000, respectively.
F-11
<PAGE> 57
Martin Lawrence Limited Editions, Inc.
Notes to Consolidated Financial Statements
(Continued)
Note 1. Summary of Accounting Policies (Contd.)
Income Taxes
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 (FAS 109), Accounting for Income Taxes. The
adoption of FAS 109 changes the Company's method of accounting for income taxes
from the deferred method (APB 11) to an asset and liability approach.
Previously, the Company deferred the tax effects of timing differences between
financial reporting and taxable income. The asset and liability approach
requires the recognition of deferred tax liabilities and assets for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax bases of other assets and liabilities. The adoption of FAS 109 did
not have a significant effect on the Company's consolidated financial position
or results of operations.
Stock-Based Compensation
Statement of Financial Standards No. 123 (SFAS 123), Accounting for
Stock-Based Compensation, issued in October 1995, and effective for fiscal years
beginning after December 15, 1995, encourages, but does not require, a fair
value based method of accounting for employee stock options or similar equity
instruments. It also allows an entity to elect to continue to measure
compensation cost using the intrinsic value based method of accounting
prescribed by Accounting Principles Board Option No. 25 (APB 25), Accounting for
Stock Issued to Employees, but requires pro forma disclosures of net income and
earnings per share as if the fair value based method of accounting had been
applied. While the Company is still evaluating SFAS 123, it currently expects to
elect to continue to measure compensation cost under APB 25 and comply with the
pro forma disclosure requirements in fiscal 1996. If the Company makes this
election, this statement will have no impact on the Company's results of
operations or financial position.
Net Loss Per Share
Net loss per share is computed by dividing net loss (after deduction of
dividends and accretion on mandatorily redeemable preferred stock) by the
weighted average number of shares outstanding. Net loss per share amounts
included in the Consolidated Statement of Operations are based upon the weighted
average shares outstanding of 5,894,000 in 1995, 1994 and 1993.
Accounts Payable and Accrued Expenses
At December 31, 1995 and 1994, the Company had rent payable of $436,000 and
$573,000, respectively, included in accounts payable and accrued expenses. At
December 31, 1995, financing activities of $58,000 for dividends payable were
included in accounts payable and accrued expenses.
F-12
<PAGE> 58
Martin Lawrence Limited Editions, Inc.
Notes to Consolidated Financial Statements
(Continued)
Note 2. Additional Cash Flow Information
Cash paid for interest and income taxes for each of the three years in
the period ended December 31, 1995 is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- -------
<S> <C> <C> <C>
Interest $ 16,000 $ 7,000 $ 65,000
========== ========== ==========
Income Taxes $ 35,000 $ 18,000 $ 55,000
========== ========== ==========
</TABLE>
F-13
<PAGE> 59
Martin Lawrence Limited Editions, Inc.
Notes to Consolidated Financial Statements
(Continued)
Note 3. Details of Certain Financial Statement Components
<TABLE>
<CAPTION>
December 31,
1995 1994
------------ ------------
<S> <C> <C>
Accounts Receivable
Amounts due from trade
customers $ 1,054,000 $ 667,000
Accounts receivable - other 4,000 3,000
Less: Allowance for
doubtful accounts ( 25,000) (24,000)
------------ ------------
$ 1,033,000 $ 646,000
============ ============
</TABLE>
<TABLE>
<CAPTION>
December 31,
1995 1994
------------ ------------
<S> <C> <C>
Inventories
Raw materials - framing $ 277,000 $ 204,000
Finished goods:
Limited editions, frames
and other 10,304,000 10,874,000
Original works of art 1,737,000 2,345,000
------------ ------------
$ 12,318,000 $ 13,423,000
============ ============
</TABLE>
<TABLE>
<CAPTION>
December 31,
1995 1994
------------ ------------
<S> <C> <C>
Equipment and
Leasehold Improvements
Equipment $ 4,113,000 $ 3,939,000
Leasehold improvements 6,858,000 6,954,000
------------ ------------
10,971,000 10,893,000
Less: Accumulated depreciation
and amortization (8,064,000) (7,328,000)
------------ ------------
$ 2,907,000 $ 3,565,000
============ ============
</TABLE>
Note 4. Credit Facility and Mandatorily Redeemable Preferred Stock
In October 1989, the Company entered into a revolving line of credit
agreement in the amount of $12,000,000. On September 27, 1991, the Company and
its bank mutually agreed to reduce the revolving line of credit to $8,000,000.
At December 31, 1992, the Company had outstanding borrowings of $1,933,000. The
line of credit was secured by the Company's accounts receivable, inventories and
equipment, and required compliance with certain tangible net worth, ratio and
capital expenditure covenants. At December 31, 1991, the Company was not in
compliance with all of these covenants. On March 18, 1992, the Company reached
an agreement with its bank to restructure its agreement with the bank. Under
this agreement, the Company agreed to apply any tax
F-14
<PAGE> 60
Martin Lawrence Limited Editions, Inc.
Notes to Consolidated Financial Statements
(Continued)
Note 4. Credit Facility and Mandatorily Redeemable Preferred Stock (Contd.)
refund received in 1993 with respect to fiscal year 1992 to repay any remaining
indebtedness to the bank and to terminate the line of credit agreement upon such
repayment. Based upon results of operations for 1992, the Company received a tax
refund of approximately $2,300,000 in 1993 as a result of carrying back its net
operating loss for 1992 to prior years, $1,933,000 of which was used to pay the
Company's remaining indebtedness to the bank. The Company currently has no
borrowing availability under this or any other line of credit agreement.
On February 6, 1995, the Company issued 200,000 shares of its 10%
Cumulative Convertible Preferred Stock, $.01 par value per share (the "Preferred
Stock"), pursuant to a private placement commenced in October 1994. The shares
of Preferred Stock were sold at $10.00 per share. The Company received net
proceeds of $1,786,000 from the initial closing of the offering. In three
additional closings of the private placement on September 18, 1995, January 3,
1996 and February 8, 1996, the Company received additional net proceeds of
$232,500, $139,500 and $186,000, respectively, and issued an aggregate of 60,000
shares of Preferred Stock. The $150,000 of gross proceeds from the February 8,
1996 closing was included as a liability (Escrowed Funds) at December 31, 1995
because the amounts were held in escrow subject to the escrow holder's clearing
of the funds prior to distribution of the funds to the Company. The private
placement terminated on February 5, 1996.
Dividends on the Preferred Stock are payable semi-annually at the rate
of 10% per annum on April 1 and October 1 of each year. Each share of Preferred
Stock will automatically convert into 10 shares of the Company's common stock,
subject to adjustment in certain events, when the trading price of the common
stock equals or exceeds $2.25 per share for 20 consecutive trading days. In
addition, holders of the Preferred Stock may, under certain circumstances, elect
to convert the Preferred Stock into common stock.
The Preferred Stock is redeemable by the Company on or after January 1,
1997 at $10.80 per share, with redemption rates decreasing by $0.20 per year
until the rate is $10.00 per share on or after January 1, 2001. The Company must
redeem all of the shares of Preferred Stock no later than January 1, 2005.
Holders of Preferred Stock will be entitled to elect 20% (not less than
two) of the Board of Directors when dividends on the Preferred Stock have been
in arrears in an amount equal to at least two semi-annual dividends. The holders
of Preferred Stock will be entitled to elect an additional 10% (not less than
one) of the directors upon each additional dividend arrearage until either
F-15
<PAGE> 61
Martin Lawrence Limited Editions, Inc.
Notes to Consolidated Financial Statements
(Continued)
Note 4. Credit Facility and Mandatorily Redeemable Preferred Stock (Contd.)
they can elect a majority of the Board of Directors or the dividends in arrears
have been paid in full.
Thomas Green, the principal of one of the placement co-agents for the
private placement, acquired 77,500 shares of the Preferred Stock in the initial
closing of the offering.
The proceeds from the offering were used principally for acquiring new
inventory, marketing and sales expansion, opening new galleries, the payment of
certain lease deferrals and for working capital and general corporate purposes.
In connection with its private placement of Preferred Stock, the
Company issued warrants to purchase an aggregate of 162,500 shares of common
stock to the placement co-agents for the offering (the "Warrants"). The Warrants
are exercisable at $1.20 per share of common stock for an 18-month period
commencing at such time that the common stock equals or exceeds $2.25 per share
for 20 consecutive trading days. The exercise price of the Warrants (other than
$.10 per share) may be paid with a promissory note secured by the shares of
common stock issuable upon exercise of the Warrants and maturing 18 months from
the date of issuance. The Warrants expire as follows: 125,000 on February 6,
2000, 15,625 on September 18, 2000, 9,500 on January 3, 2001 and 12,500 on
February 8, 2001. The fair value of the Warrants at the date of issuance was
determined to be de minimis.
Note 5. Income Taxes
The provision (benefit) for income taxes consisted of the following as
of December 31:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ---------- -----------
<S> <C> <C> <C>
Current
Federal $ (442,000) $ - $ (942,000)
State 35,000 25,000 45,000
---------- ---------- ----------
(407,000) 25,000 (897,000)
---------- ---------- ----------
Deferred
Federal 442,000 - 495,000
State (160,000) - -
---------- ---------- ----------
282,000 - 495,000
---------- ---------- ----------
Total $ (125,000) $ 25,000 $ (402,000)
========== ========== ==========
</TABLE>
At December 31, 1995, the Company had federal net operating loss
carryforwards of approximately $7,768,000 expiring beginning in 2008.
F-16
<PAGE> 62
Martin Lawrence Limited Editions, Inc.
Notes to Consolidated Financial Statements
(Continued)
Note 5. Income Taxes (Contd.)
During the third quarter of 1991, the State of California adopted a
law, retroactive to the beginning of 1991, which deferred utilization of
California net operating loss carryforwards for 1991 and 1992 to future years.
At December 31, 1995, the Company had California net operating loss
carryforwards of approximately $14,822,000 expiring beginning in 1998.
A reconciliation of tax expense (benefit) computed at federal statutory
rates for each of the three years in the period ended December 31, 1995 is as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Federal tax benefit
on loss computed
at statutory rates $ (1,493,000) $ (1,451,000) $ (2,410,000)
Carryforward 1,493,000 1,451,000 1,963,000
State income and
franchise taxes 35,000 25,000 45,000
Other (160,000) - -
------------ ------------ ------------
Income tax benefit
as reported $ (125,000) $ 25,000 $ (402,000)
============ ============ ============
Effective income tax
rate 2.8% 0.6% 5.7%
============ ============ ============
</TABLE>
Deferred tax liabilities/(assets) are comprised of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
------------- -------------
<S> <C> <C>
Inventory writedown $ 404,000 $ 755,000
State tax 360,000 301,000
Lease origination fees 53,000 53,000
Other 729,000 437,000
------------ ------------
Deferred tax liabilities 1,546,000 1,546,000
------------ ------------
NOL carryforward (3,675,000) (3,090,000)
AMT credits (437,000) (437,000)
Depreciation (1,259,000) (1,098,000)
Disposed assets - (156,000)
UCC inventory adjustment (41,000) (34,000)
Start-up costs - (31,000)
Other (125,000) (109,000)
------------ ------------
Deferred tax assets (5,537,000) (4,955,000)
------------ ------------
Valuation allowance 4,680,000 3,816,000
------------ ------------
Net deferred tax liability $ 689,000 $ 407,000
============ ============
</TABLE>
F-17
<PAGE> 63
Martin Lawrence Limited Editions, Inc.
Notes to Consolidated Financial Statements
(Continued)
Note 5. Income Taxes (Contd.)
The valuation allowance provided against deferred tax assets relates
primarily to the net operating loss carryforward and represents management's
best estimate that these carryforwards will more likely than not (a likelihood
of slightly more than 50%) not be realized during the carryforward period.
In December 1995, the Company received an aggregate refund of $618,000
(after deducting $22,000 for taxes owed) from the Internal Revenue Service. The
refund was pursuant to the filing of a Form 1139, and was based on Internal
Revenue Code provisions allowing the Company a 10-year carryback period for
losses meeting certain statutory requirements. The filing is subject to audit by
the I.R.S. for three years from the date of the filing of the Company's 1994
federal income tax return. In the event the I.R.S. determines that any portion
of the refund was improperly made, the Company would be required to return such
portion of the refund to the I.R.S. plus interest and penalties, if any.
As a result of the Company's private placement of 10% Cumulative
Convertible Preferred Stock (see Note 4), pursuant to Internal Revenue Code
Section 382, the Company's net operating loss carryforward that can be used to
annually reduce future taxable income may be limited. At present, the Company is
unable to reasonably estimate the amount of carryforwards, if any, that may be
lost.
Note 6. Notes Payable
As a result of the Southern California earthquake in January 1994, in
1995, the Company received an aggregate of $206,200 of proceeds under a disaster
assistance loan with the Small Business Administration (the "SBA Loan"). The SBA
Loan accrues interest at the rate of 4% per annum. Principal and interest
payments of $1,965 per month began on March 10, 1996 and the balance is due on
February 10, 2007. The SBA Loan is secured by the Company's equipment and
machinery.
Note 7. Stock Options
At December 31, 1995, the Company had two stock option plans (the 1992
Stock Incentive Plan and the 1987 Stock Option Plan). During 1992, the Company
terminated the 1989 Directors' and Officers' Non-Qualified Stock Option Plan and
the 1985 Stock Option Plan. During 1993, the Company terminated the 1987 Stock
Option Plan; however, there are still options outstanding under, and subject to,
the terms of the Plan. The 1992 Stock Incentive Plan provides for the grant to
eligible key employees and
F-18
<PAGE> 64
Martin Lawrence Limited Editions, Inc.
Notes to Consolidated Financial Statements
(Continued)
Note 7. Stock Options (Contd.)
directors of the Company of options and other awards to purchase up to 750,000
shares of the Company's common stock. The 1987 Stock Option Plan provided for
the grant to eligible key employees and directors of the Company of either
incentive or non-qualified stock options to purchase up to 1,000,000 shares of
the Company's common stock. The plans provide for the options to be granted at a
price not less than the fair market value at the date of grant. The options have
expiration dates ranging from five to ten years from the date of grant, and
certain of the options are subject to vesting rights that do not exceed five
years from the date of grant. The number of shares at January 1, 1995 and
December 31, 1995 that remained reserved for grant under the 1992 Stock
Incentive Plan were 427,500 and 92,900, respectively.
During 1991, the Company cancelled all unexpired and unexercised stock
options that had been granted under the 1985, 1987 and 1989 Plans, totalling
1,294,420 shares, and replaced them with options to purchase 507,600 shares
granted under the 1987 Plan. The new options were issued at exercise prices
equal to the fair market value of the Company's common stock at the time of
grant (which was lower than the exercise prices under the cancelled options) and
with shorter vesting periods. The shares subject to the new options issued to
directors and officers represented only 35.4% of the shares subject to the
cancelled options. All of the other employees' cancelled options were reissued
on a one-for-one basis with respect to the shares underlying those options.
On March 10, 1992, the Company granted options to purchase 25,000
shares of the Company's common stock outside of the Company's stock option plans
to a former officer of the Company, pursuant to a post-termination agreement
with the Company. The exercise price of these options was equivalent to the fair
market value of the Company's Common Stock at the time of grant. The options
expired on March 1, 1995.
In March 1995, the Company issued warrants to purchase 10,000 shares to
the landlord for the Company's headquarters. The warrants are exerciseable at
$1.00 per share and expire on March 16, 2000.
The table below summarizes the shares subject to options:
<TABLE>
<CAPTION>
Shares Price Range
----------- ------------------
<S> <C> <C>
Outstanding at December 31, 1992 891,350 $1.25 - $2.25
Granted 100,000 $0.625 - $0.75
Cancelled (84,400) $1.25 - $1.81
----------
Outstanding at December 31, 1993 906,950 $0.625 - $2.25
Granted 20,000 $0.5625 - $0.5625
Cancelled (51,400) $1.25 - $1.81
----------
Outstanding at December 31, 1994 875,550 $0.625 - $2.25
Granted 355,000 $0.687 - $1.00
Cancelled (100,450) $0.687 - $2.25
----------
Outstanding at December 31, 1995 1,130,100 $0.5625 - $1.99
==========
Exercisable at December 31, 1995 1,007,860
==========
</TABLE>
F-19
<PAGE> 65
Martin Lawrence Limited Editions, Inc.
Notes to Consolidated Financial Statements
(Continued)
Note 8. Export Sales
Export sales for the years ended December 31, 1995, 1994 and 1993 were
$2,085,000, $1,485,000 and $2,157,000, respectively. The Company's primary
export market is Japan. Export sales to Japan were $778,000, $530,000 and
$691,000 in 1995, 1994 and 1993, respectively.
Note 9. Employee Benefit Plans
In 1987, the Company adopted the Martin Lawrence Profit Sharing Plan
(the "Plan"). In 1993, the Plan was restated to, in part, reflect certain
changes in the laws relating to defined-benefit plans. The Plan is a
defined-contribution plan under which employees with at least twelve months of
continuous full-time service may defer compensation pursuant to Section 401(k)
of the Internal Revenue Code. The Company, at its discretion, may match a
portion of the employees' annual contributions. Additionally, the Company, at
its discretion, may make an annual contribution to the Plan for the benefit of
certain eligible employees with at least six months of continuous full-time
service and whose annual compensation is below a certain level, whether or not
those employees have elected to participate in the deferred compensation
component of the Plan. There were no Company contributions to the Plan in 1995,
1994 and 1993.
Note 10. Related Party Transactions
On May 24, 1993, the Company sold Think Big!, Inc., its wholly owned
subsidiary, to Jack A. Rounick, an officer, director and principal stockholder
of the Company. Pursuant to this transaction, Mr. Rounick resigned as general
counsel and a vice president of the Company. The purchase price was
approximately $820,000, of which $500,000 was paid at the closing, approximately
$133,000 was paid on June 15, 1993 and $150,000 was paid in October 1993. In
1995, the Company offset $6,600 that it owed to Mr. Rounick with respect to his
consignment of certain artwork which was sold by the Company against the
remaining balance of the purchase price. The remaining $30,900 of the purchase
price is evidenced by a non-interest-bearing note, which was due on December 31,
1994, and remains unpaid. In connection with the transaction, Think Big!
subleased half of one of the Company's gallery locations and agreed to pay half
of the amounts due under the lease.
During 1995, 1994 and 1993, the Company purchased works of art from
certain executive officers aggregating $7,600, $35,000 and $103,000,
respectively. In most instances, the works of art purchased by the Company from
these persons were necessary to satisfy a customer request for specific artwork
otherwise not readily available. The Company believes all of these purchases
were obtained on a basis at least as favorable to the Company as
F-20
<PAGE> 66
Martin Lawrence Limited Editions, Inc.
Notes to Consolidated Financial Statements
(Continued)
Note 10. Related Party Transactions (Contd.)
that which could have been obtained from unaffiliated parties. Sales of artwork
previously purchased from executive officers that was sold to unaffiliated
parties in 1995, 1994 and 1993 were $115,000, $261,000 and $275,000,
respectively, with related gross profit to the Company of $40,000, $101,000 and
$152,000, respectively.
Note 11. Commitments
The Company leases office, gallery and warehouse space at various
locations throughout the United States, and is committed to annual rentals under
non-cancellable operating leases, as follows:
<TABLE>
<S> <C>
1996 - $2,896,000 1999 - $1,319,000
1997 - $2,245,000 2000 - $ 833,000
1998 - $1,770,000 Thereafter - $ 834,000
</TABLE>
The above future minimum lease payments are based upon rents payable
pursuant to each lease, including contractual increases specified therein. The
terms of certain of the leases provide for increases in annual rents based on
the Consumer Price Index. Most of the leases for the Company's retail galleries
provide for additional rental payments based on a percentage of the gallery's
gross or net sales in excess of an agreed-upon amount. Additionally, certain of
the leases contain renewal options for periods of up to five years. Certain of
these leases also contain cancellation provisions if sales do not exceed
agreed-upon levels by a specific date.
Rents included in occupancy costs were $2,375,000, $2,558,000 and
$3,099,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
The Company has granted security interests in certain works of art
owned by it to several of its landlords for the purpose of securing the
Company's obligations under rent deferral agreements with those landlords.
Note 12. Litigation
The Company is involved in various legal matters and claims which are
being defended and handled in the ordinary course of business. While the
ultimate results of these matters cannot be determined, management does not
expect that they will have a material adverse effect on the Company's results of
operations or financial position.
F-21
<PAGE> 67
Martin Lawrence Limited Editions, Inc.
Notes to Consolidated Financial Statements
(Continued)
Note 13. Lower of Cost or Market Adjustment
In 1995 and 1994, adjustments of $143,000 and $68,000, respectively,
were made to reflect inventory at the lower of cost or market, as determined by
management's estimates of value below the Company's cost. There were no lower of
cost or market adjustments made in 1993. The adjustment of $143,000 to reflect
inventory at the lower of cost or market and an adjustment of $126,000 to reduce
inventory to the physical were made in the fourth quarter of 1995.
Note 14. Subsequent Events - Unaudited
The Company is negotiating a transaction for loans with several
individuals (the "Lenders"), including a holder of Preferred Stock, for an
aggregate of $475,000 to $500,000 (the "Loans"), which will have a maturity of
six months and bear interest at the rate of 24% per annum (with a default rate
of 36% per annum). The Loans are expected to fund on April 1, 1996. The proceeds
of the Loans will be used for, among other things, payment of the April 1, 1996
dividend on the Preferred Stock (approximately $112,000) and general working
capital. The Loans will be secured by the Company's inventory with a cost of
approximately $5,500,000. In connection with the Loans, the Company will issue
to the Lenders five-year warrants to purchase an aggregate of 50,000 shares at
$1.00 per share. Thomas Green Securities, Inc. ("TGI") has arranged the Loans on
behalf of the Company and, for these services, the Company will pay TGI a fee of
4% of the aggregate amount of the Loans.
F-22
<PAGE> 68
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Charged
Balance at to costs Balance
beginning and at end of
of period expenses Deductions period
---------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Deferred tax
valuation allowance:
Year Ended
December 31, 1993 - $1,118,000 - $1,118,000
Year Ended
December 31, 1994 $1,118,000 $2,698,000 - $3,816,000
Year Ended
December 31, 1995 $3,816,000 $ 864,000 - $4,680,000
</TABLE>
S-1
<PAGE> 1
EXHIBIT 10.13
FIRST AMENDMENT TO
MARTIN LAWRENCE PROFIT SHARING PLAN
(1994 AMENDMENT AND RESTATEMENT)
The Martin Lawrence Profit Sharing Plan (1994 Amendment and
Restatement) shall be amended as follows, effective January 1, 1989:
A. Section 2.24 is hereby amended in its entirety to read as follows:
2.24 "Normal Retirement Age" shall mean the Participant's 65th
birthday.
B. Section 2.16(b) is amended in its entirety to read as follows:
(b) Employees who work on an irregular and unscheduled "on-call or as
needed" basis in accordance with the regular administrative and employment
practices of the Company, and
IN WITNESS WHEREOF, this instrument of amendment is executed this 17th
day of August, 1995.
/s/ Allen A. Baron
----------------------
Allen A. Baron
Chairman of the Board
<PAGE> 1
EXHIBIT 10.16
AMENDMENT NUMBER ONE
MARTIN LAWRENCE 1992 STOCK INCENTIVE PLAN
THE MARTIN LAWRENCE 1992 STOCK INCENTIVE PLAN shall be amended by the
addition of a new sentence at the end of Section 2 to read as follows, effective
April 23, 1993:
Only persons who are employees of the Corporation shall be eligible to
receive grants of incentive stock options (as hereinafter defined).
IN WITNESS WHEREOF, this instrument of amendment is executed as of the
23rd day of April, 1993.
MARTIN LAWRENCE LIMITED
EDITIONS, INC.
By: /s/ Allen A. Baron
-----------------------
Allen A. Baron
Its: Chief Financial Officer
-----------------------
<PAGE> 1
EXHIBIT 10.17
AMENDMENT NUMBER TWO
MARTIN LAWRENCE 1992 STOCK INCENTIVE PLAN
THE MARTIN LAWRENCE 1992 STOCK INCENTIVE PLAN (the "Plan") shall be
amended, subject to approval of the stockholders, to increase the number of
shares available for grant under the Plan from 750,000 to 1,500,000 by replacing
the word "750,000" in each of Sections 6(a) and (b) of the Plan with the word
"1,500,000."
Date: March 1, 1996 MARTIN LAWRENCE LIMITED
------------------ EDITIONS, INC.
By: /s/ Allen A. Baron
-----------------------
Allen A. Baron
Chairman of the Board
<PAGE> 1
LIST OF SUBSIDIARIES OF THE COMPANY
Martin Lawrence Limited Editions of California, Inc., a California corporation
Martin Lawrence Frame Shops, Inc., a California corporation
Masterpieces of the World, Inc., a California corporation
Exhibit 22.1
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in each of the Registration
Statements on Form S-8 (Nos. 33-76728 and 33-19393) of Martin Lawrence Limited
Editions, Inc. of our report dated March 19, 1996 appearing on page F-2 of this
Annual Report on Form 10-K.
PRICE WATERHOUSE LLP
Los Angeles, California
March 26, 1996
Exhibit 24.1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AT DECEMBER 31, 1995 AND THE CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000745600
<NAME> MARTIN LAWRENCE LIMITED EDITIONS, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 769,000
<SECURITIES> 0
<RECEIVABLES> 1,058,000
<ALLOWANCES> 25,000
<INVENTORY> 12,318,000
<CURRENT-ASSETS> 14,514,000
<PP&E> 10,971,000
<DEPRECIATION> 8,064,000
<TOTAL-ASSETS> 18,766,000
<CURRENT-LIABILITIES> 5,514,000
<BONDS> 214,000
2,021,000
0
<COMMON> 83,000
<OTHER-SE> 10,527,000
<TOTAL-LIABILITY-AND-EQUITY> 18,766,000
<SALES> 19,406,000
<TOTAL-REVENUES> 19,942,000
<CGS> 7,581,000
<TOTAL-COSTS> 24,333,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,000
<INCOME-PRETAX> (4,391,000)
<INCOME-TAX> (125,000)
<INCOME-CONTINUING> (4,266,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,266,000)
<EPS-PRIMARY> (0.76)
<EPS-DILUTED> (0.76)
</TABLE>
