<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended: Commission File Number:
September 30, 1996 0-13141
MARTIN LAWRENCE LIMITED EDITIONS, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 95-4103583
--------------------------------- ---------------------
(State or other jurisdiction (IRS Employer Identi-
of incorporation or organization) fication Number)
16250 Stagg Street
Van Nuys, California 91406
-----------------------------------------------------
(Address and zip code of principal executive offices)
(818) 988-0630
----------------------------------------------------
(Registrant's telephone number, including area code)
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 the
filing requirements for at least the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
<TABLE>
<CAPTION>
Number of Shares Outstanding
Class at November 13, 1996
----- ------------------------------
<S> <C>
Common Stock, $.01 par value 5,893,748
</TABLE>
This document consists of 19 pages
<PAGE> 2
MARTIN LAWRENCE LIMITED EDITIONS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet for September 30, 1996
and December 31, 1995 (Unaudited).............. 3
Consolidated Statement of Operations
for the Nine Months Ended September 30, 1996
and September 30, 1995 and for the Three Months
Ended September 30, 1996 and September 30, 1995
(Unaudited).................................... 4
Consolidated Statement of Cash Flows
for the Nine Months Ended September 30, 1996
and September 30, 1995 (Unaudited)............. 5
Notes to Unaudited Consolidated
Financial Statements........................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations..................................... 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................ 18
Item 2. Changes in Securities............................ 18
Item 3. Defaults Upon Senior Securities.................. 18
Item 4. Submission of Matters to a Vote of
Security Holders............................... 18
Item 5. Other Information................................ 18
Item 6. Exhibits and Reports on Form 8-K................. 19
</TABLE>
Page 2 of 19
<PAGE> 3
Martin Lawrence Limited Editions, Inc.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
Sept. 30, 1996 Dec. 31, 1995
-------------- -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 365,000 $ 769,000
Accounts receivable, net (Note 2) 1,030,000 1,033,000
Inventories (Note 2) 10,692,000 12,318,000
Prepaid expenses and other current assets 402,000 363,000
Notes receivable, short-term 31,000 31,000
----------- -----------
Total current assets 12,520,000 14,514,000
Equipment and leasehold improvements,
net of accumulated depreciation and
amortization (Note 2) 2,061,000 2,907,000
Other assets 578,000 693,000
Deferred income taxes (Note 3) 652,000 652,000
----------- -----------
Total assets $15,811,000 $18,766,000
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses (Note 2) $ 3,186,000 $ 3,112,000
Accrued compensation and employee benefits 437,000 512,000
Deferred rents--current 22,000 170,000
Customer deposits 156,000 155,000
Escrowed funds (Note 4) - 150,000
Dividends payable 132,000 58,000
Notes payable (Note 5) 1,296,000 16,000
Deferred income taxes (Note 3) 1,341,000 1,341,000
----------- -----------
Total current liabilities 6,570,000 5,514,000
Notes payable, long-term 278,000 214,000
Deferred rents 357,000 407,000
----------- -----------
Total liabilities 7,205,000 6,135,000
----------- -----------
Commitments and contingencies - -
Mandatorily redeemable preferred stock--
$.01 par value, 1,000,000 shares
authorized, 260,000 shares issued
and outstanding at 9/30/96 (Note 4) 2,366,000 2,021,000
----------- -----------
Stockholders' equity:
Preferred stock--$.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 September 30, 1996 and December 31, 1995 83,000 83,000
Paid-in capital 27,709,000 27,709,000
Deficit (13,767,000) (9,397,000)
Less cost of shares held in treasury--
2,456,000 shares at September 30, 1996
and December 31, 1995 (7,785,000) (7,785,000)
----------- -----------
Total stockholders' equity 6,240,000 10,610,000
----------- -----------
Total liabilities and stockholders' equity $15,811,000 $18,766,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
Page 3 of 19
<PAGE> 4
Martin Lawrence Limited Editions, Inc.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Net sales $ 5,144,000 $ 6,205,000 $ 14,753,000 $ 14,656,000
Other income 79,000 112,000 293,000 368,000
------------ ------------ ------------ ------------
5,223,000 6,317,000 15,046,000 15,024,000
------------ ------------ ------------ ------------
Costs and expenses:
Cost of sales 2,031,000 2,252,000 5,891,000 5,452,000
Selling expenses 2,692,000 2,819,000 8,355,000 7,807,000
General and administrative
expenses 1,368,000 1,524,000 4,269,000 4,216,000
Interest 34,000 4,000 101,000 10,000
Net loss on gallery/Frame
Shops/distribution
facility closures 507,000 301,000 580,000 210,000
------------ ------------ ------------ ------------
6,632,000 6,900,000 19,196,000 17,695,000
------------ ------------ ------------ --------------
Loss before taxes (1,409,000) (583,000) (4,150,000) (2,671,000)
Provision for taxes (benefit) 5,000 (45,000) 13,000 (133,000)
------------ ------------ ------------ ------------
Net loss (1,414,000) (538,000) (4,163,000) (2,538,000)
Dividends and accretion on
mandatorily redeemable
preferred stock 73,000 58,000 215,000 146,000
------------ ------------ ------------ ------------
Net loss applicable to
common stock $ (1,487,000) $ (596,000) $ (4,378,000) $ (2,684,000)
============ ============ ============ ============
Net loss per common share $ (.25) $ (.10) $ (.74) $ (.46)
============ ============ ============ ============
Weighted average common
shares outstanding 5,894,000 5,894,000 5,894,000 5,894,000
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
Page 4 of 19
<PAGE> 5
Martin Lawrence Limited Editions, Inc.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,163,000) $ (2,538,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 654,000 654,000
Write-off of Frame Shops/galleries and
distribution facility leaseholds
upon closure 488,000 201,000
Changes in assets and liabilities:
Accounts receivable, net 3,000 (708,000)
Inventories 1,626,000 892,000
Prepaid expenses and other current assets (39,000) 53,000
Other assets 115,000 (24,000)
Accounts payable and accrued expenses 74,000 85,000
Accrued compensation and employee benefits (75,000) 42,000
Escrowed Funds (150,000)
Deferred rents (198,000) (225,000)
Customer deposits 1,000 (35,000)
Deferred income taxes - (152,000)
------------ ------------
Net cash provided by (used in) operating activities (1,664,000) (1,755,000)
------------ ------------
Cash flows from investing activities:
Additions to equipment and leasehold improvements (289,000) (256,000)
------------ ------------
Net cash used in investing activities (289,000) (256,000)
------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of mandatorily
redeemable preferred stock (Note 4) 326,000 2,019,000
Dividends paid on preferred stock (121,000) (30,000)
Notes payable 1,344,000 121,000
------------ -------------
Net cash provided by financing activities 1,549,000 2,110,000
------------ ------------
Net increase (decrease) in cash and cash equivalents (404,000) 99,000
Cash and cash equivalents at beginning of period 769,000 575,000
------------ ------------
Cash and cash equivalents at end of period $ 365,000 $ 674,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
Page 5 of 19
<PAGE> 6
Martin Lawrence Limited Editions, Inc.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS: NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The unaudited consolidated financial statements presented herein
include the accounts of Martin Lawrence Limited Editions, Inc., a Delaware
corporation, and its wholly owned subsidiaries (the "Company"). All significant
intercompany accounts and transactions have been eliminated from the
consolidated financial statements.
These financial statements have been prepared in accordance with the
instructions to Form 10-Q and do not contain certain information required by
generally accepted accounting principles. These statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Form 10-K for the year ended December 31, 1995. The accompanying
financial statements reflect all adjustments of a normal recurring nature which
are, in the opinion of management, necessary for a fair presentation.
Reclassification: Beginning in 1996, certain expenses, such as store
rents and other occupancy costs, which were previously classified as general
and administrative expenses have been reclassified as selling expenses. Such
expenses for the first nine months amounted to $2,567,000 in 1996 and
$2,374,000 in 1995 and for the third quarter, $858,000 in 1996 and $751,000 in
1995.
All prior year financial information has been restated to conform with
this year's presentation.
Note 2. Details of Certain Financial Statement Components
Accounts Receivable
<TABLE>
<CAPTION>
Sept. 30, 1996 December 31, 1995
-------------- -----------------
<S> <C> <C>
Amounts due from
trade customers $ 1,054,000 $ 1,054,000
Accounts receivable -
other 1,000 4,000
Less: Allowance for
doubtful accounts (25,000) (25,000)
----------- -----------
$ 1,030,000 $ 1,033,000
=========== ===========
Inventories
Sept. 30, 1996 December 31, 1995
-------------- -----------------
Raw materials -
framing $ 314,000 $ 277,000
Finished goods:
Limited editions,
frames and other 9,186,000 10,304,000
Original works of art 1,192,000 1,737,000
----------- -----------
$10,692,000 $12,318,000
=========== ===========
</TABLE>
Page 6 of 19
<PAGE> 7
Martin Lawrence Limited Editions, Inc.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS: NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
Note 2. Details of Certain Financial Statement Components
(Contd.)
Equipment and Leasehold Improvements
<TABLE>
<CAPTION>
Sept. 30, 1996 December 31, 1995
-------------- -----------------
<S> <C> <C>
Equipment $ 4,141,000 $ 4,113,000
Leasehold improvements 5,741,000 6,858,000
----------- -----------
9,882,000 10,971,000
Less: Accumulated
depreciation and
amortization 7,821,000 (8,064,000)
----------- -----------
$ 2,061,000 $ 2,907,000
=========== ===========
</TABLE>
Accounts Payable and Accrued Expenses
At September 30, 1996 and December 31, 1995, the Company had rent
payable of $401,000 and $436,000, respectively, included in accounts payable
and accrued expenses.
Note 3. Income Taxes
The income tax benefit for the three months and nine months ended
September 30, 1995 reflects adjustments to the deferred income tax liability.
The provision of $5,000 and $13,000 in the three months and nine months ended
September 30, 1996 relates to state income or franchise taxes.
Note 4. Mandatorily Redeemable Preferred Stock
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 January 3,
1996 closing was included as a liability (Escrowed Funds) at December 31, 1995
since the amounts were held in escrow subject to the escrow holder's clearing of
the funds prior to distribution 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
Page 7 of 19
<PAGE> 8
Martin Lawrence Limited Editions, Inc.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS: NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
Note 4. Mandatorily Redeemable Preferred Stock (Contd.)
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. Thomas Green subsequently acquired 5,000 additional
shares from one of the Preferred Stockholders.
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.
Note 5. Notes Payable
In April 1996, the Company entered into a Loan and Security Agreement
with four individuals (the "Lenders") and borrowed an aggregate of $500,000
(the "Short-Term Loan"). The Short-Term Loan was due October 1, 1996 but was
not paid. Since that date, the Short-Term Loan has accrued default interest at
the rate of 36% per annum. The Company has partially defaulted in payment of
the
Page 8 of 19
<PAGE> 9
Martin Lawrence Limited Editions, Inc.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS: NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
Note 5. Notes Payable (Contd.)
interest payments due to the Short-Term Noteholders on November 1, 1996. The
Company is arranging to meet with each of the Short-Term Noteholders to
negotiate repayment terms reflecting the financial constraints under which the
Company is presently operating. The Short-Term Loan is secured by the
Company's inventory with a cost of approximately $5,500,000. In connection
with the Short-Term Loan, the Company issued to the Lenders five-year warrants
to purchase an aggregate of 50,000 shares at $1.00 per share. Thomas Green
Securities, Inc. ("TGI") arranged the Short-Term Loan on behalf of the Company
and, for those services, the Company paid TGI a fee of $20,000.
On June 7, 1996, the Company entered into an agreement (the "Supplier
Agreement") with a major supplier of artwork to the Company. The Supplier
Agreement provides for (i) the Company's deferral of approximately $500,000
owed to the supplier pursuant to a non-interest bearing note (the "Supplier
Note") and (ii) certain extended payment terms relating to the Company's
continuing purchases of artwork from the supplier (the "Continuing
Obligations"). Both the Continuing Obligations and the Company's obligations
under the Supplier Note are secured by approximately $4,500,000 of the
Company's inventory valued at cost. In lieu of interest on the Supplier Note,
the Company conveyed to the supplier certain of the Company's artwork with a
cost of $30,400. The Company reduced the principal amount of the Supplier Note
through (i) the conveyance to the supplier of artwork with a cost to the
Company of $95,600 for a credit of $69,500 and (ii) the payment to the supplier
of $37,000 from the sale at auction of certain of the Company's inventory. The
balance of the Supplier Note was $393,500 as of June 25, 1996. This amount is
payable over an 18-month period commencing July 1, 1996 and continuing through
December 1, 1997. The Company has made each payment of $21,864 when due.
During the three months and nine months ended September 30, 1996, the Company's
sales of inventory provided by such supplier accounted for approximately 26%
and 25% of revenues, respectively.
On July 31, 1996, the Company entered into a Note Agreement with an
investor (the "Investor") pursuant to which the Investor loaned $500,000 to the
Company for the acquisition of graphics of certain selected artists (the
"Artwork"). The Company's obligations under the Note Agreement are secured by
the Artwork and the proceeds thereof. Upon the sale of a piece of Artwork, the
Investor is entitled to receive 25% of the net profits. To date, all amounts
have been paid to the Investor on a timely basis. Pursuant to the investment
program, the principal amount of the loan is being reinvested in Artwork on a
revolving basis during the initial six month period. Thereafter, at the
election of the Investor, the investment program may continue on an ongoing
basis for additional six month terms, provided that the Investor may request at
the end of any such six-month period that the loan be repaid within six months.
For services rendered in connection with arranging this financing, the Company
paid TGI a fee of $35,000.
Page 9 of 19
<PAGE> 10
Martin Lawrence Limited Editions, Inc.
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
1. Liquidity and Capital Resources
The Company believes that its current cash flow and existing sources
of liquidity will not allow it to meet its operating expenses and debt
obligations beyond year-end. In light of such circumstances, the Company is
reviewing various plans of reorganization within the federal debtor protection
laws. The plans under consideration by the Company include combinations of the
following: negotiating extensions and more advantageous terms for repayment of
the Company's secured creditors, identifying and securing new sources of
financing, closing certain retail locations, and restructuring the Company's
existing obligations. While the Company continues to explore various
alternatives, it anticipates that it will avail itself of the protections
offered pursuant to Chapter 11 of the United States Bankruptcy Code prior to
year-end.
Several key components have affected the Company's ability to meet its
financial needs, including the low level of funds generated from operations,
levels of accounts receivable and inventories, the need for capital
expenditures, the lack of short-term borrowing capacity and the inability to
obtain long-term capital. For the nine months ended September 30, 1996, the
Company experienced negative cash flow from operating activities of $1,664,000,
compared with a negative cash flow from operating activities of $1,755,000
during the same period last year.
Overall, cash decreased $404,000 in the first nine months of 1996,
compared with an increase of $99,000 for the comparable period last year. The
principal reason for this difference is the inclusion of net proceeds of
$2,019,000 from the Company's private placement during the nine months ended
September 30, 1995 compared to $326,000 in net proceeds from the private
placement and $1,344,000 in Notes Payable for the nine months ended September
30, 1996.
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, commencing in March 1996 and continuing through the third
quarter, the Company has taken a series of measures to reduce its overhead
costs. From June 30, 1996 through November 1, 1996, the Company has reduced
the number of its staff at corporate headquarters by approximately 14% through
layoffs and attrition for a total reduction of 26% since March 1996. In
addition to the May 1, 1996 sales commission reduction, the Company continues
to evaluate additional reductions of selling costs within its control.
On September 1, 1996, the Company closed its distribution facility and
moved to a location which is 12,000 square feet smaller for a reduction in
corporate rent of approximately $11,000 per month.
During the third quarter, the Company closed several gallery locations
which did not meet sales expectations. First, the Company elected not to renew
its lease for its Palm Springs location pursuant to a lease option and closed
the gallery on September 4, 1996 due to
Page 10 of 19
<PAGE> 11
Martin Lawrence Limited Editions, Inc.
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
1. Liquidity and Capital Resources (Contd.)
its poor performance. Second, in light of continued unprofitability, the
Company closed its Westlake Village location on August 27, 1996 and the
landlord, Trust Company of the West, has brought an action against the Company
for rent through the balance of the term of the lease (which expires May 31,
1998) of approximately $110,000. In light of the landlord's obligation to
mitigate its damages, the Company believes the action claims damages far in
excess of any damages suffered by Trust Company of the West. Third, the
Company closed its Brentwood location in October 1996. This location was
initially opened as a Frame Shop and converted to a gallery subsequent to the
Company's closures of its Frame Shops operations. The location failed to
perform to expectations as a gallery and was closed. The Company continues to
negotiate a settlement with the landlord in order to extricate itself from the
balance of the lease term. The Company continues to review the results of its
other galleries and evaluate those leases.
The Company's lease for its Santa Clara gallery expires on December
31, 1996 and as a result of the landlord's desire to put the current gallery
space to a different use, the landlord has offered the Company an alternative
space in the same mall. The Company is negotiating with the landlord regarding
the new space and evaluating the feasibility of building out the new space.
The Company makes no assurances that its negotiations with the landlord will
result in the continued operation of a gallery in Santa Clara.
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. A
recent tax court case may unfavorably impact the ultimate outcome of an audit.
In April 1996, the Company entered into a Loan and Security Agreement
with four individuals (the "Lenders") and borrowed an aggregate of $500,000
(the "Short-Term Loan"). The Short-Term Loan was due October 1, 1996 but was
not paid. Since that date, the Short-Term Loan has accrued default interest at
the rate of 36% per annum. The Company has partially defaulted in payment of
the interest payments due to the Short-Term Noteholders on November 1, 1996.
The Company is arranging to meet with each of the Short-Term Noteholders to
negotiate repayment terms reflecting the present financial constraints under
which the Company is presently operating. The Short-Term Loan is secured by
the Company's inventory with a cost of approximately $5,500,000. In connection
with the Short-Term Loan, the Company issued to the Lenders five- year warrants
to purchase an aggregate of 50,000 shares at $1.00 per share. TGI arranged the
Short-Term Loan on behalf of the Company and, for those services, the Company
paid TGI a fee of $20,000.
Page 11 of 19
<PAGE> 12
Martin Lawrence Limited Editions, Inc.
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
1. Liquidity and Capital Resources (Contd.)
On April 17, 1996, Woodfield Associates filed a lawsuit against the
Company in the Circuit Court for the Sixth Judicial Circuit for the State of
Michigan alleging, among other things, the Company's failure to satisfy its
lease obligations, including the payment of rent. On August 15, 1995, after
receiving a notice of forcible detainer action from the landlord for failure to
pay several months' rent, the Company vacated its premises in the Woodfield
Mall prior to the expiration of the lease. The term of the lease as set forth
in the lease agreement extended until January 31, 2001. The lawsuit demands
payment of $1,943,602.90 in damages for rent and other charges through the end
of the lease term. The Company believes that the damages sought by Woodfield
Associates are far in excess of any damages the landlord may have suffered and
is asserting an affirmative defense to such amounts alleging the Landlord's
failure to make a good faith effort to mitigate its damages.
On June 7, 1996, the Company entered into an agreement (the "Supplier
Agreement") with a major supplier of artwork to the Company. The Supplier
Agreement provides for (i) the Company's deferral of approximately $500,000 owed
to the supplier pursuant to a non-interest bearing note (the "Supplier Note")
and (ii) certain extended payment terms relating to the Company's continuing
purchases of artwork from the supplier (the "Continuing Obligations"). Both the
Continuing Obligations and the Company's obligations under the Supplier Note are
secured by approximately $4,500,000 of the Company's inventory valued at cost.
In lieu of interest on the Supplier Note, the Company conveyed to the supplier
certain of the Company's artwork with a cost of $30,400. The Company reduced
the principal amount of the Supplier Note through (i) the conveyance to the
supplier of artwork with a cost to the Company of $95,600 for a credit of
$69,500 and (ii) the payment to the supplier of $37,000 from the sale at auction
of certain of the Company's inventory. The balance of the Supplier Note which
was unpaid as of June 25, 1996, is payable over an 18-month period commencing
July 1, 1996 and continuing through December 1, 1997. The Company has made each
payment of $21,864 when due. During the three months and nine months ended
September 30, 1996, the Company's sales of inventory provided by such supplier
accounted for approximately 26% and 25% of revenues, respectively.
On July 31, 1996, the Company entered into a Note Agreement with an
investor (the "Investor") pursuant to which the Investor loaned $500,000 to the
Company for the acquisition of graphics of certain selected artists (the
"Artwork"). The Company's obligations under the Note Agreement are secured by
the Artwork and the proceeds thereof. Upon the sale of a piece of Artwork, the
Investor is entitled to receive 25% of the net profits. To date, all amounts
have been paid to the Investor on a timely basis. Pursuant to the investment
program, the principal amount of the loan is being reinvested in Artwork on a
revolving basis during the initial six month period. Thereafter, at the
election of the Investor, the investment program may continue on an ongoing
basis for additional six month terms, provided that the Investor may request at
the end of any such six-month period that the loan be repaid within six months.
For services rendered in connection with arranging this financing, the Company
paid TGI a fee of $35,000.
Page 12 of 19
<PAGE> 13
Martin Lawrence Limited Editions, Inc.
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
2. Results of Operations
a. Nine Months Ended September 30, 1996
Net sales for the nine months ended September 30, 1996 were
$14,753,000, an increase of 0.7%, compared with the same period in 1995.
Retail sales were $11,044,000, an increase of 1.9%, compared with the
same period last year. Retail operations provided 74.9% of total net sales
through the full-period operation of 17 galleries and the partial-period
operation of eight galleries, four Frame Shops and four Masterpieces of the
World locations. During the same period last year, retail operations provided
73.9% of the total net sales through the full-period operation of 18 galleries
and the partial-period operation of four galleries and five Masterpieces of the
World locations.
Retail sales on a same-store basis (15 stores) decreased 4.2%,
compared with the same period last year. The Company believes that this
decrease is due, in part, to a general industry-wide weakness in sales during
the second and third quarters of this year.
Between October 1995 and January 1996, the Company opened four Martin
Lawrence Frame Shops which offered retail custom framing services. These
stores did not perform to the Company's expectations and due to disappointing
results were closed in June 1996. However, the Company continues to offer
custom framing through several of its galleries.
The Company opened five Masterpieces of the World retail stores
between May and July 1995 in regional shopping malls in California. All of
these locations were taken on a temporary basis in order to test a new concept
in art retailing. Masterpieces of the World sold 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 and,
accordingly, the Company began closing the stores in January 1996 and completed
the closings in March. Although the Company has ceased operating Masterpieces
of the World retail stores, management believes that the concept may be viable
in other venues. The Company currently offers Masterpieces of the World
inventory in its gallery outlet store.
Wholesale sales provided 13.2% of net sales, compared with 12.0% of
net sales for the nine months ended September 30, 1995. Wholesale sales for
the first nine months of 1996 were $1,954,000, an increase of 11.0%, compared
with the same period last year. The Company believes that this increase is
primarily due in part to additional sales generated by the Company's newest
artist, as well as the sale of original works of art.
Page 13 of 19
<PAGE> 14
Martin Lawrence Limited Editions, Inc.
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
2. Results of Operations (Contd.)
a. Nine Months Ended September 30, 1996 (Contd.)
Auction sales provided 11.9% of net sales, compared with 14.1% of net
sales for the nine months ended September 30, 1995. Auction sales for the
first nine months of 1996 were $1,755,000, a decrease of 14.9% compared with
the same period last year. The Company believes that this decrease is
primarily due to fewer auctions held in the third quarter of 1996 compared with
the same period in 1995.
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 have increased its overall sales in those areas.
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 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 15.0%
and 5.2% of the Company's net sales during the first nine months of 1996. Two
of the Company's non-published artists accounted for approximately 12.5% and
10.8%, respectively, of the Company's net sales during the first nine months of
1996.
Cost of sales, as a percentage of net sales, was 39.9% and 37.2% for
the nine months ended September 30, 1996 and 1995, respectively. The increase
in the cost of sales percentage from 1995 to 1996 was primarily the result of
lower margins on selected works of art not published by the Company.
Selling expenses as a percentage of net sales were 56.6% and 53.3% for
the nine months ended September 30, 1996 and 1995, respectively. Selling
expenses include such items as retail sales location occupancy costs,
advertising, sales commissions, brochures and other promotional material costs,
freight and certain salary expenses.
Selling expenses increased $548,000 in the first nine months of 1996,
compared with the first nine months of 1995. The increase is primarily due to
an increase in fixed and variable compensation in the amount of $493,000
associated with new gallery and Frame Shops locations. Sales location
occupancy costs increased $260,000 over the same period last year. This
increase is due to the opening of new gallery and Frame Shops locations and
increased percentage rent under certain leases. All other selling expenses
decreased $205,000 compared with the comparable period last year.
Page 14 of 19
<PAGE> 15
Martin Lawrence Limited Editions, Inc.
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
2. Results of Operations (Contd.)
a. Nine Months Ended September 30, 1996 (Contd.)
General and administrative expenses as a percentage of net sales were
28.9% and 28.8% for the nine months ended September 30, 1996 and 1995,
respectively. General and administrative expenses include all corporate
overhead costs. General and administrative expenses increased $53,000,
compared with the same period in 1995, due in part to financing fees related to
the Short-Term Loan and the Investor Note Agreement (see Note 5 to financial
statements).
The Company had a net loss applicable to common stock of $4,378,000
for the nine months ended September 30, 1996, compared with a net loss
applicable to common stock of $2,684,000 in the same period last year. The
increase in the net loss is due to higher cost of sales and higher selling
costs associated with increased retail locations. In addition, there was a
loss of $580,000 from the closure of the Company's distribution facility,
gallery locations and Frame Shops stores. Loss on gallery closings for the
nine months ended September 30, 1995 was $210,000. Additionally, interest
expense for the nine months ended September 30, 1996 was $101,000, compared to
$10,000 for the same period in 1995. There was a tax provision of $13,000 for
the nine months ended September 30, 1996 compared to a tax benefit of $133,000
for the same period in 1995.
Page 15 of 19
<PAGE> 16
Martin Lawrence Limited Editions, Inc.
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
2. Results of Operations (Contd.)
b. Three Months Ended September 30, 1996
Net sales for the three months ended September 30, 1996 were
$5,144,000, a decrease of 17.1%, compared with the same period in 1995. The
Company believes that this decrease was primarily due to a general
industry-wide weakness in sales.
Retail sales were $4,079,000, a decrease of 15.3% compared with the
same period last year. Retail operations provided 79.3% of total net sales
during the three months ended September 30, 1996 through the full period
operation of 20 galleries and the partial-period operation of 4 galleries.
During the same period last year, retail operations provided 77.7% of total net
sales through the full-period operation of 18 galleries and two Masterpieces of
the World locations and the partial-period operation of three galleries and
three Masterpieces of the World locations.
Retail sales on a same-store basis (15 stores) decreased 18.1%
compared with the same period last year. The Company believes that this
decrease is due to a general industry-wide weakness in sales.
Wholesale sales provided 13.6% of net sales, compared with 9.7% of net
sales for the three months ended September 30, 1995. Wholesale sales for the
quarter were $699,000, an increase of 15.9% compared with the same period last
year. This increase is due in part to additional sales generated by the
Company's newest artist.
Auction sales provided 7.1% of net sales, compared with 12.6% of net
sales for the three months ended September 30, 1995. Auction sales for the
three months ended September 30, 1996 were $367,000, a decrease of 53.2%
compared with the same period last year. This decrease is due to 8 auctions
held in the third quarter of 1996 compared to 16 auctions held in the third
quarter of 1995.
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 have increased its overall sales in those areas.
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.
However, 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
artists and constantly seeks to attract new promising popular artists and to
promote their works. The works of two of the Company's published artists
accounted for approximately 15.7% and 4.5% of the Company's net sales during
the third quarter of 1996. The works of two of the Company's non- published
artists accounted for approximately 13.6% and 10.9%, respectively, of the
Company's net sales during the third quarter of 1996.
Page 16 of 19
<PAGE> 17
Martin Lawrence Limited Editions, Inc.
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
2. Results of Operations (Contd.)
b. Three Months Ended September 30, 1996 (Contd.)
Cost of sales, as a percentage of net sales, was 39.5% and 36.3% for
the nine months ended September 30, 1996 and 1995, respectively. The increase
in the cost of sales from 1995 to 1996 was primarily due to lower margins on
selected works of art not published by the Company.
Selling expenses, as a percentage of net sales, were 52.3% and 45.4%
for the three months ended September 30, 1996 and 1995, respectively. Selling
expenses include such items as advertising, sales commissions, brochures and
other promotional material costs, freight, certain salary expenses and retail
location occupancy costs. Selling expenses decreased $127,000 in the third
quarter of 1996, compared with the same period in 1995. Fixed and variable
compensation increased $79,000. Sales location occupancy costs increased
$101,000. All other selling expenses decreased $307,000 in the third quarter
of 1996 compared with the same period in 1995.
General and administrative expenses, as a percentage of net sales,
were 26.6% and 24.6% for the three months ended September 30, 1996 and 1995,
respectively. General and administrative expenses include all corporate
overhead. General and administrative expenses decreased by $156,000 compared
with the same period in 1995 due to a lower number of employees and their
related costs, and additional cost containment measures.
The Company had a net loss applicable to common stock of $1,487,000
for the three months ended September 30, 1996, compared with a net loss
applicable to common stock of $596,000 in the same period last year. The
increase in the net loss is primarily due to decreased sales and increased cost
of sales percentage. In addition, there was a loss of $507,000 from the
closure of the Company's distribution facility and gallery locations during the
third quarter of 1996 compared to a loss of $301,000 from gallery closures in
the third quarter of 1995.
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. 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 seeks to increase its publishing activities in order to
improve its gross margins and improve its wholesale and retail sales. To that
end, the Company has recently signed Brent Benger to a publishing agreement and
may release limited edition graphics of the artist's works in early 1997.
Significant improvement in the Company's operating results is, to a large
extent, dependent upon the successful implementation of a plan of
reorganization, increased consumer spending of discretionary income, and the
Company's ability to publish artists that are appealing to consumers. See
discussion regarding Liquidity and Capital Resources.
Page 17 of 19
<PAGE> 18
Martin Lawrence Limited Editions, Inc.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On April 17, 1996, Woodfield Associates filed a lawsuit
against the Company in the Circuit Court for the Sixth
Judicial Circuit for the State of Michigan alleging, among
other things, the Company's failure to satisfy its lease
obligations, including the payment of rent. On August 15,
1995, after receiving a notice of forcible detainer action
from the landlord for failure to pay several months' rent, the
Company vacated its premises in the Woodfield Mall prior to
the expiration of the lease. The term of the lease as set
forth in the lease agreement extended until January 31, 2001.
The lawsuit demands payment of $1,943,602.90 in damages for
rent and other charges through the end of the lease term. The
Company believes that the damages sought by Woodfield
Associates are far in excess of any damages the landlord may
have suffered and is asserting an affirmative defense to such
amounts alleging the Landlord's failure to make a good faith
effort to mitigate its damages.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
A proposal to approve an amendment to the Company's 1992 Stock
Incentive Plan to increase the number of shares available for
grant from 750,000 to 1,500,000 was passed at the Annual
Meeting of Stockholders on July 2, 1996.
ITEM 5. OTHER INFORMATION.
On July 26, 1996, the Company announced that the New York
Stock Exchange had advised the Company that trading in the
common stock of the Company would be suspended before the
opening of trading on Monday, August 12. The NYSE's action
was based on the fact that the Company had fallen below the
NYSE's continued listing criteria related to: aggregate
market value of publicly held shares; net tangible assets
available to common stock together with three-year average net
income; and aggregate market value of all outstanding common
shares together with three-year average net income. On August
9, 1996, the Company announced that the Company had been
cleared to trade its common stock on the OTC Bulletin Board
Service of the National Association of Securities Dealers
under the symbol "MLLE". The Company ceased trading on the
NYSE at the close of the market on Friday, August 9, 1996 and
commenced trading on the OTC Bulletin Board on Monday, August
12, 1996.
Page 18 of 19
<PAGE> 19
Martin Lawrence Limited Editions, Inc.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibit
10.30 Amendment to Consignment Agreement dated June 7, 1996 between
Chalk & Vermilion Fine Arts, L.L.C. and Martin Lawrence
Limited Editions, Inc.
SIGNATURE(S)
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARTIN LAWRENCE LIMITED EDITIONS, INC.
(Registrant)
DATED: November 15, 1996 BY: /s/ Allen A. Baron
-------------------------------------
ALLEN A. BARON
Chief Financial Officer and Treasurer
(Duly Authorized Officer)
Page 19 of 19
<PAGE> 1
EXHIBIT 10.30
AMENDMENT TO CONSIGNMENT AGREEMENT
AMENDMENT TO CONSIGNMENT AGREEMENT ("Modification Agreement") dated
June 7, 1996, made by and between
CHALK & VERMILLION FINE ARTS, L.L.C., a Connecticut limited liability company,
having an address at 200 Greenwich Avenue, Greenwich, Connecticut 06830
(hereinafter referred to as "CHALK"), and
MARTIN LAWRENCE LIMITED EDITIONS, INC., a Delaware corporation, having an
address at 16250 Stagg Street, Van Nuys, California 91406 (hereinafter referred
to as "MLLE");
WITNESSETH,
THAT WHEREAS,
A. Chalk and MLLE entered into a Consignment Agreement dated April 26, 1994
(a copy of which is attached hereto as EXHIBIT "A") (the "ORIGINAL
AGREEMENT");
B. MLLE has not made payments as required by the Original Agreement for
consigned Works (as such term is defined in the Original Agreement) that
were sold by it;
C. MLLE has requested Chalk to allow it to retain the Works on consignment,
to continue to deliver additional Works to MLLE notwithstanding MLLE's
failure to make timely payments for sold Works, and to defer payment of
the outstanding balance currently owed by MLLE to Chalk;
D. Chalk has agreed to allow MLLE to pay its outstanding trade debt to
Chalk pursuant to the terms of the Promissory Note of even date herewith
(a copy of which is attached hereto as EXHIBIT "B") (the "NOTE"); and
E. Chalk has agreed to continue delivering Works to MLLE pursuant to the
terms of the Original Agreement as modified by the provisions of this
Modification Agreement;
NOW, THEREFORE, in consideration of Ten Dollars and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties agree as follows:
1. Original Agreement. Except as modified hereby, the terms of the
Original Agreement shall continue in full force and effect. Capitalized terms
used in this Modification Agreement shall (unless otherwise defined in this
Modification Agreement) have the same meanings as they are given in the Original
Agreement. The terms of this Modification Agreement shall prevail if any
provision of this Modification Agreement conflicts with any of the provisions of
the Original Agreement. As used herein, the term "CONSIGNMENT AGREEMENT" shall
mean the Original Agreement as modified by this Modification Agreement.
<PAGE> 2
2. Past Sales.
(a) The parties agree that MLLE owes Chalk approximately
$500,000.00 for sales of Works made by MLLE through March 31, 1996. MLLE shall
pay $500,000.00 with respect to such pre April 1, 1996 receivables to Chalk
pursuant to the terms of the Note.
(b) MLLE shall reimburse Chalk $15,000.00 for legal fees incurred
by Chalk in connection with drafting and negotiating this Agreement and the
related agreements, and $1,750.00 for fees incurred by Chalk for filing the
financing statements described in this Consignment Agreement and for conducting
lien searches against MLLE; MLLE shall pay such $16,750.00 to Chalk by
conveying mutually acceptable art work to Chalk having a cost to MLLE equal to
$16,750.00. Such art shall be chosen and conveyed to Chalk within ten (10)
days after the date of this Agreement.
(c) MLLE has sold several works of art owned by it at auction on or
about May 8, 1996. MLLE has delivered irrevocable directions to Sotheby's and
Christie's to pay to Chalk any net proceeds of the auction sale of such art
works. Upon receipt of any such funds, Chalk shall credit such received
amount as a partial prepayment of the Note, whereupon the periodic payments
required to be paid thereafter by the Note shall be reduced in the manner set
forth in the Note. Chalk has agreed to accept the art listed on EXHIBIT 2(c)
in partial payment of the Note at an agreed upon value of $32,000; and the Note
will be credited in such amount upon MLLE delivering the art to Chalk in
"excellent" condition, with an appropriate bill of sale warranting title,
condition and provenance.
(d) Within two weeks after the date of this Agreement, the parties
will reconcile their accounts as of the close of business on March 31, 1996, to
determine the exact amount that was owed by MLLE to Chalk as of such date. If
the actual amount owed exceeds $500,000.00, MLLE shall pay Chalk one half of
such excess on July 15, 1996 and one half of such excess on July 25, 1996. If
the actual amount owed is less than $500,000.00, MLLE shall reduce the amount
payable by it to Chalk pursuant to Paragraph 3(a) by one half of such shortfall
for the payment due on July 15, 1996, and by one half of such shortfall for the
payment due on July 25, 1996.
3. Future Sales.
(a) With respect to sales of Works made by MLLE on or after April
1, 1996, MLLE shall pay Chalk the agreed upon price (as invoiced to MLLE by
Chalk in connection with delivery of the Works to MLLE) ("PRICE") for such
Works on the following dates:
(i) 50% of the Price for a Work shall be due and payable by
MLLE to Chalk on the 15th day of the second calendar
month following the month in which the Work is sold; and
(ii) 50% of the Price for a Work shall be due and payable by
MLLE to Chalk on the 25th day of the second calendar
month following the month in which the Work is sold.
- 2 -
<PAGE> 3
Accordingly, the first payment to be made by MLLE pursuant to the
terms of this Paragraph 3 shall be due and payable on June 15, 1996 in an
amount equal to 50% of the Price for Works sold during April, 1996.
(b) All payments made by MLLE with respect to the sales of Works
shall be credited first to any accrued and unpaid interest on past due payments
under this Consignment Agreement, then toward any amounts (other than principal
and interest) due pursuant to this Consignment Agreement, and then to payment of
the Price for the sold Works (paying the Price for the earliest sold Works
first).
(c) If MLLE sells any Works which are thereafter returned to MLLE
for credit by the purchaser within sixty days after the sale date for such
Work, then MLLE may credit the Price for such returned Work against sales of
Works made by MLLE during the month in which such Work is returned to MLLE by
its customer.
4. Late Payment - Consigned Works.
(a) If MLLE fails to make any payment to Chalk when due pursuant to
the provisions of Paragraph 3 hereof, then such past due amount shall bear
interest from the due date for such payment until paid at an interest rate equal
to the lesser of (i) the maximum rate permitted by applicable laws, or (ii)
eighteen percent (18%) per annum, and such interest shall be due and payable
upon demand by Chalk.
(b) Interest shall be computed based on a 365-day year and shall be
paid for the actual number of days elapsed. If any payment required hereunder
becomes due and payable on a Saturday, Sunday or legal holiday or a day on
which banking institutions are authorized to close in the state where payments
due under this agreement shall then be payable, the maturity of such payment
shall be extended to the next succeeding business day and interest shall
continue to accrue and shall be payable at the rate per annum herein specified
during such extension.
5. Consigned Works.
(a) MLLE warrants and represents to Chalk that as of the date set
forth on EXHIBIT "C", MLLE is in possession of the Works described on EXHIBIT
"C" hereto ("RECEIVED WORKS") and that such Received Works were delivered to it
by Chalk pursuant to this Consignment Agreement. MLLE acknowledges that title to
each of the Received Works and to each additional Work that Chalk has
delivered, or may in the future deliver, to MLLE remains with Chalk and that
such Works are and will be held by MLLE as consigned goods pursuant to the
terms of this Consignment Agreement.
(b) At any time and from to time, Chalk may, by written notice
given to MLLE, require MLLE to return to Chalk any or all of the Works, in
which event MLLE shall return to Chalk the Works so specified within the
following periods:
- 3 -
<PAGE> 4
(i) within seven days after MLLE receives such written
demand, for up to ten Works in any month that are so
specified by Chalk;
(ii) within seven days after MLLE receives such written
demand, if an Event of Default shall have occurred at
the time such notice is given by Chalk; and
(iii) (except as provided in Paragraph 5(b)(i) above) within
sixty days after MLLE receives such written demand, if
no Event of Default shall have occurred at the time such
notice is given by Chalk.
(c) If Chalk has not demanded that the Works be returned to it
pursuant to the provisions of this Agreement, MLLE may return to Chalk any or
all of the Works at any time and from time to time.
(d) MLLE shall execute UCC Financing Statements prepared by Chalk
for filing in each state (and county if local laws require county level filings)
in which MLLE has business locations in form adequate to identify the Works as
consigned goods under applicable provisions of the Uniform Commercial Code.
Chalk shall pay the filing fees for such filings that are charged by the various
recording offices and the service bureau retained by Chalk to file such forms.
(e) MLLE shall indicate on its books and records that the Works are
consigned goods and are not part of MLLE's owned inventory.
6. Collateral.
(a) MLLE's obligations under this Consignment Agreement and the
Note shall be secured by MLLE granting to Chalk a perfected first lien security
interest under the Uniform Commercial Code, on (i) those items of art that are
owned by MLLE and are described on EXHIBIT "D" hereof, (ii) all art works
acquired by MLLE (whether by purchase or by MLLE's publication of the same)
after the date of this Modification Agreement, and (iii) certain other property
described in the Security Agreement (collectively, the "COLLATERAL"). Chalk
agrees that MLLE may, from time to time, sell the Collateral in the ordinary
course of MLLE's business, as provided in the Security Agreement.
(b) The Collateral may be reduced from time to time under certain
circumstances as provided in the Security Agreement.
(c) MLLE warrants and represents to Chalk that MLLE owns and will
own all artwork that it publishes.
(d) Contemporaneously with the execution and delivery of this
Modification Agreement, MLLE has executed and delivered to Chalk a Security
Agreement in the form attached as EXHIBIT "E" ("SECURITY AGREEMENT") granting
Chalk a security interest in the
- 4 -
<PAGE> 5
Collateral, and financing statements adequate to perfect Chalk's security
interest in the Collateral in each state in which MLLE has a business
location. Upon demand by Chalk, MLLE shall pay (i) the filing fees for such
financing statement filings that are charged by the various recording offices
and the service bureau retained by Chalk to file such forms, subject to and in
accordance with the provisions of Paragraph 2(b), and (ii) the cost of
performing a lien search after the recordation of the financing statements
described in this Modification Agreement against MLLE in each state and county
in which MLLE has a business location to confirm that Chalk's security interest
in the Collateral is a first lien, subject to and in accordance with the
provisions of Paragraph 2(b).
7. Event of Default.
(a) Events of Default - Optional Acceleration. The occurrence of
any of the following events shall constitute an "EVENT OF DEFAULT":
(i) MLLE shall fail to pay any amount when required by the
terms of this Consignment Agreement and such failure
shall remain uncured for more than thirty (30) days past
the due date therefore;
(ii) MLLE shall fail to perform or observe in any material
respect any term, covenant or other provision contained
in this Consignment Agreement on its part to be
performed or observed (other than the covenant requiring
Maker to pay the amounts referred to in the immediately
preceding clause "(i)");
(iii) the occurrence of an "Event of Default" (as defined in
the Note) under the Note;
(iv) the occurrence of an "Event of Default" (as defined in
the Security Agreement) under the Security Agreement;
(v) if any warranty, representation or certification made in
the Security Agreement or in this Consignment Agreement
shall be false in any material respect when made;
(vi) the sale, assignment, transfer or encumbrance by MLLE of
the Collateral, or any part thereof, without the prior
written consent of Chalk in each instance; provided that
no consent shall be required for sales in the ordinary
course of MLLE's business to bona fide third party
purchasers on normal business price and terms, or for
sales to MLLE's officers and directors as long as (1)
the sale price for the artwork does not exceed
$50,000.00 in any year to such officers and directors as
a group, and (2) the price for such artwork is not less
than 200% of MLLE's cost for artwork published by MLLE
and 110% of MLLE's cost for artwork
- 5 -
<PAGE> 6
purchased by MLLE, (3) such purchase price is paid to
MLLE in cash at the time of each such sale.
(vii) If MLLE shall call a meeting of or make an assignment
for the benefit of creditors, file a petition in
bankruptcy, under Title 11 of the U.S. Code, as amended
(the "BANKRUPTCY CODE"), or be adjudicated insolvent or
bankrupt, file a petition in bankruptcy, or be
adjudicated insolvent or bankrupt, or be the subject of
an order for relief under the Bankruptcy Code, or
petition or apply to any tribunal for the appointment of
a receiver or a trustee for it or a substantial part of
its assets;
(viii) if MLLE shall file any petition seeking any
reorganization, arrangement, composition, readjustment,
liquidation, dissolution, or similar relief under any
present or future federal or state act or law relating
to bankruptcy, insolvency, or other relief for debtors,
whether now or hereafter in effect;
(ix) if MLLE shall have filed against it a petition,
application or proceeding described above in Section
7(a)(viii) or such a petition, application or proceeding
shall have been commenced against it, which remains
undismissed or unstayed for a period of sixty (60) days
or more;
(x) if MLLE shall suffer any such custodianship,
receivership or trusteeship to continue undischarged for
a period of sixty (60) days or more; or
(xi) if MLLE shall suffer or permit any creditor to obtain a
lien upon any of the Collateral through legal
proceedings or distraint which is not vacated within
sixty (60) days from the date thereof.
(b) Remedies. Upon the occurrence of any Event of Default, Chalk
may, in addition to any rights or remedies available to it hereunder, or under
the Note or Security Agreement, or at law or in equity, take such actions as it
deems advisable to protect and enforce its rights against MLLE and in and to
the Collateral, including the following actions, each of which may be pursued
concurrently or otherwise, at such time and in such order as Chalk may
determine, in its sole discretion, without impairing or otherwise affecting the
other rights and remedies of Chalk:
(i) declare the entire unpaid indebtedness evidenced by the
Note to be immediately due and payable;
(ii) require that MLLE pay for all Works sold by it
immediately upon demand by Chalk;
(iii) stop shipping Works to MLLE pursuant to this Consignment
Agreement and require that all Works be returned to
Chalk within seven days after demand from Chalk;
- 6 -
<PAGE> 7
(iv) institute proceedings for the complete foreclosure of
all or any of the liens created by the Security
Agreement against the Collateral;
(v) institute an action, suit or proceeding in equity for
the specific performance of any covenants, conditions or
agreements contained in this Consignment Agreement or in
the Security Agreement;
(vi) pursue such other remedies as Chalk may have under the
Note or Security Agreement; and
(vii) pursue such remedies as Chalk may have under applicable
law.
8. Certain Remedies.
(a) NO CLAIM MAY BE MADE BY MLLE, ANY OF ITS SHAREHOLDERS, OFFICERS
EMPLOYEES OR DIRECTORS, OR ANY OTHER PERSON AGAINST CHALK OR CHALK'S AFFILIATES,
MEMBERS, MANAGERS, OFFICERS, EMPLOYEES, ATTORNEYS OR AGENTS FOR ANY SPECIAL,
INDIRECT OR CONSEQUENTIAL DAMAGES OR, TO THE FULLEST EXTENT PERMITTED BY LAW,
FOR ANY PUNITIVE DAMAGES IN RESPECT OF ANY CLAIM OR CAUSE OF ACTION (WHETHER
BASED ON CONTRACT, TORT, STATUTORY LIABILITY OR ANY OTHER GROUND) BASED ON,
ARISING OUT OF OR RELATED TO THE TRANSACTIONS CONTEMPLATED HEREBY OR ANY ACT,
OMISSION OR EVENT OCCURRING IN CONNECTION THEREWITH, AND MLLE HEREBY WAIVES,
RELEASES AND AGREES NEVER TO SUE UPON ANY CLAIM FOR ANY SUCH DAMAGES, WHETHER
SUCH CLAIM NOW EXISTS OR HEREAFTER ARISES AND WHETHER OR NOT IT IS NOW KNOWN OR
SUSPECTED TO EXIST IN ITS FAVOR; PROVIDED, HOWEVER, THAT NOTHING CONTAINED IN
THIS PARAGRAPH SHALL LIMIT MLLE'S RIGHTS OR REMEDIES AS AGAINST ANY PERSON OR
ENTITY IN THE EVENT OF SUCH PERSON'S OR ENTITY'S FRAUDULENT CONDUCT.
(b) NO CLAIM MAY BE MADE BY CHALK, ANY OF ITS SHAREHOLDERS,
OFFICERS EMPLOYEES OR DIRECTORS, OR ANY OTHER PERSON AGAINST MLLE OR MLLE'S
AFFILIATES, MEMBERS, MANAGERS, OFFICERS, EMPLOYEES, ATTORNEYS OR AGENTS FOR ANY
SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES OR, TO THE FULLEST EXTENT PERMITTED
BY LAW, FOR ANY PUNITIVE DAMAGES IN RESPECT OF ANY CLAIM OR CAUSE OF ACTION
(WHETHER BASED ON CONTRACT, TORT, STATUTORY LIABILITY OR ANY OTHER GROUND) BASED
ON, ARISING OUT OF OR RELATED TO THE TRANSACTIONS CONTEMPLATED HEREBY OR ANY
ACT, OMISSION OR EVENT OCCURRING IN CONNECTION THEREWITH, AND CHALK HEREBY
WAIVES, RELEASES AND AGREES NEVER TO SUE UPON ANY CLAIM FOR ANY SUCH DAMAGES,
WHETHER SUCH CLAIM NOW EXISTS OR HEREAFTER ARISES AND WHETHER OR NOT IT IS NOW
KNOWN OR SUSPECTED TO EXIST IN ITS FAVOR; PROVIDED, HOWEVER, THAT NOTHING
CONTAINED IN THIS PARAGRAPH SHALL LIMIT CHALK'S RIGHTS
- 7 -
<PAGE> 8
OR REMEDIES AS AGAINST ANY PERSON OR ENTITY IN THE EVENT OF SUCH PERSON'S OR
ENTITY'S FRAUDULENT CONDUCT.
9. Exclusive Jurisdiction and Venue. MLLE hereby irrevocably and
unconditionally:
(a) consents to the jurisdiction of the courts of the State of New
York sitting in Westchester County, and of the United States District Court for
the Southern District of New York sitting in White Plains, New York, in any
actions, suits, or proceedings arising out of or in connection with this
Consignment Agreement (although this covenant shall not preclude an action
brought by Chalk to enforce the Note or to enforce or foreclose the liens
created under the Security Agreement in any other appropriate jurisdiction);
(b) waives any objection which MLLE may now or hereafter have to
the laying of venue of any of the aforesaid actions, suits, or proceedings
arising out of or in connection with this Consignment Agreement, the Note or
the Security Agreement brought in any of the aforesaid courts;
(c) waives the right to plead or claim that any such action, suit or
proceeding brought in any such court has been brought in an inconvenient forum;
(d) agrees that any action, suit or other proceeding brought by MLLE
against Chalk which arises under, or relates to, this Consignment Agreement, the
Note or the Security Agreement shall be brought by MLLE in a court of record of
the State of New York, County of Westchester, or in the United States District
Court for the Southern District of New York sitting in White Plains, New York;
(e) waives the requirements of personal service in connection with
any actions, suits, or proceedings arising out of or in connection with this
Consignment Agreement, the Note or the Security Agreement, and consents that all
service of process may be made by certified mail, return receipt requested,
addressed to MLLE and its attorney at the address of MLLE and its attorney set
forth below, or at such address, for MLLE and its attorney, as MLLE shall give
to Chalk by written notice sent by certified mail, return receipt requested.
Service so being deemed completed three (3) days after the same has been posted
as aforesaid; and
(f) waives the right, in litigation in which it and Chalk are
adverse parties, to trial by jury and the right to assert any set-off or
counterclaim of any nature or description.
10. Insurance.
(a) MLLE shall, at its own expense, maintain insurance with respect
to the Works in such amounts, against such risks, in such form and with such
insurers as shall be reasonably satisfactory to Chalk from time to time. Each
policy of insurance covering property damage shall provide for all losses with
respect to the Works to be paid directly to Escrow Agent. Each such policy
shall in addition (i) name MLLE and Chalk as insured parties thereunder
(without any representation or warranty by or obligation upon Chalk) as their
interests may appear, (ii)
- 8 -
<PAGE> 9
contain the agreement by the insurer that any loss thereunder with respect to
the Works shall be payable to Escrow Agent notwithstanding any action, inaction
or breach of representation or warranty by MLLE, (iii) provide that there shall
be no recourse against Chalk for payment of premiums or other amounts with
respect thereto and (iv) provide that at least ten days' prior written notice
of cancellation, modification or lapse shall be given to Chalk by the insurer.
MLLE shall, if so requested by Chalk, deliver to Chalk original or duplicate
policies of such insurance. Within three (3) business days after the date of
this Agreement, MLLE shall deliver to Chalk a certificate of insurance
evidencing the coverages and compliance with the requirements of this Paragraph.
(b) Upon the occurrence of any casualty (including, without
limitation, fire, flood, vandalism or water damage) resulting in damage or
destruction to all or any of the Works, such Works shall be deemed to have been
sold by MLLE in the month that the casualty occurred, and all insurance
proceeds in respect of such Works shall be paid to the Escrow Agent (as
hereinafter defined) by the insurance company, held by Escrow Agent pursuant to
an escrow agreement providing that Escrow Agent will (i) pay Chalk an amount
equal to the Price for such damaged Works, and (ii) return the balance of such
insurance proceeds to MLLE. MLLE shall pay the fees and costs, if any, of the
Escrow Agent. The Escrow Agent shall be Gibson, Dunn & Crutcher, in Los
Angeles, California, or such other person or entity as may be agreed to by
Chalk and MLLE.
11. Warrants.
Within thirty (30) days after the date of this Agreement, MLLE shall
issue and deliver to Chalk, MLLE's originally executed warrants pursuant to
which Chalk will be entitled to purchase an aggregate of 50,000 shares of
MLLE's common stock at $1.00 per share at any time during the five year period
commencing on the date of this Agreement. The warrants to be delivered to
Chalk pursuant to this Paragraph shall have terms that are substantially
identical to those contained in the five year warrants that MLLE agreed to
issue to the lenders in connection with the $500,000 loan to MLLE that was
placed by Thomas Green Securities, Inc. that closed on or about April 1, 1996.
12. Miscellaneous.
(a) This Consignment Agreement, the Note, the Security Agreement
and all other documents concerning or given in connection with this
Modification Agreement have been executed and delivered with the intention and
agreement that the laws of the State of New York (without reference to such
state's conflict of laws provisions) shall govern the same as to validity,
interpretation, construction, effect and in all other respects; provided,
however, that to the extent that the validity or perfection of the security
interest created by such documents, or remedies available to Chalk, in respect
of any particular Collateral are governed by the laws of a jurisdiction other
than the State of New York, the laws of such other jurisdiction shall govern
with respect to such matters.
- 9 -
<PAGE> 10
(b) Any notice required to be given by this Consignment Agreement
shall be in writing, and shall be delivered either (i) by hand, (ii) by
certified United States mail, return receipt requested, or (iii) by a
commercial delivery service guaranteeing overnight delivery, in any event with
postage and delivery charges prepaid. Such notice shall be deemed to have been
duly given on receipt if delivered by hand or by overnight carrier, or three
days after the date of deposit in an official depository of the United States
mails if mailed. All notices shall be mailed or delivered, as aforesaid,
addressed as follows:
To MLLE: MARTIN LAWRENCE LIMITED EDITIONS, INC.
16250 Stagg Street
Van Nuys, California 91406
Attention: Allen A. Baron
To Chalk: CHALK & VERMILLION FINE ARTS, L.L.C.
200 Greenwich Avenue
Greenwich, Connecticut 06830
Attention: David Rogath
With a copy to: KURZMAN & EISENBERG, LLP
One North Broadway, 10th Floor
White Plains, New York 10601
Attention: Joel S. Lever, Esq.
Each party may change the address or addresses to which notice is to be
delivered to it by notifying the other party of the new address or addresses in
the manner provided herein for the giving of notices and such change of address
shall be effective three (3) business days after such notice is given.
(c) Amendment and Waivers. This Consignment Agreement may be
amended only by a written instrument executed by the party against whom
enforcement of the amendment is sought. No waiver of the breach of any
provision of this Consignment Agreement shall be deemed or construed to be a
waiver of other or subsequent breaches.
(d) Parties in Interest. This Consignment Agreement shall be
binding upon and shall inure to the benefit of Chalk and its successors and
assigns, and of MLLE and its successor and assigns. Except as expressly
provided in this Consignment Agreement, no right or remedy pursuant to this
Consignment Agreement shall inure to the benefit of any person or entity who is
not a party to this Consignment Agreement (or such party's successors and
assigns).
(e) Entire Agreement. This Consignment Agreement, together with
the Exhibits attached hereto, and the agreements to be entered into by Chalk
and MLLE pursuant to this Consignment Agreement, constitute the entire
agreement among the parties pertaining to the subject matter hereof and
supersedes all prior oral and written agreements and understandings of the
parties with respect to the matters contained in this Consignment Agreement.
- 10 -
<PAGE> 11
(f) Gender, Number. Except where the context otherwise requires,
words used in the masculine gender include the feminine and neuter: the singular
number includes the plural, and the plural the singular; and the word "person"
includes a corporation or other entity or association as well as a natural
person.
(g) Counterparts. This Consignment Agreement may be executed in any
number of counterparts, each of which shall be deemed an original but all of
which shall constitute one and the same instrument.
(h) Exhibits. All Exhibits attached hereto are incorporated herein
by reference. All references made in this Consignment Agreement to "Sections"
refer to paragraphs and sections of this Consignment Agreement unless a
different document is expressly referred to.
(i) Headings. The descriptive headings of the several paragraphs,
subparagraphs, Exhibits of this Consignment Agreement are for convenience of
reference only and do not constitute a part of this Consignment Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Modification
Agreement to be executed by their respective authorized signatories, as of the
date first above written.
CHALK AND VERMILION FINE ARTS, L.L.C.,
a Connecticut limited liability company
By: /s/ DAVID ROGATH
-------------------------------------
David Rogath, Member/Manager
MARTIN LAWRENCE LIMITED EDITIONS, INC.,
a Delaware corporation
By: /s/ ALLEN A. BARON
-------------------------------------
Allen A. Baron, Chairman of the Board
- 11 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 365,000
<SECURITIES> 0
<RECEIVABLES> 1,055,000
<ALLOWANCES> (25,000)
<INVENTORY> 10,692,000
<CURRENT-ASSETS> 12,520,000
<PP&E> 9,882,000
<DEPRECIATION> (7,821,000)
<TOTAL-ASSETS> 15,811,000
<CURRENT-LIABILITIES> 6,570,000
<BONDS> 0
2,366,000
0
<COMMON> 83,000
<OTHER-SE> 6,157,000
<TOTAL-LIABILITY-AND-EQUITY> 15,811,000
<SALES> 14,753,000
<TOTAL-REVENUES> 15,046,000
<CGS> 5,891,000
<TOTAL-COSTS> 19,196,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 101,000
<INCOME-PRETAX> (4,150,000)
<INCOME-TAX> 13,000
<INCOME-CONTINUING> (4,163,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,163,000)
<EPS-PRIMARY> (.74)
<EPS-DILUTED> (.74)
</TABLE>
