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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER: 0-19644
GALLERY RODEO INTERNATIONAL
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
CALIFORNIA 33-0300193
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
421 North Rodeo Drive, Beverly Hills, California 90210
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER: (310) 273-2105
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 No X
--- ---
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
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-KSB
or any amendment to this Form 10-KSB. / /
State issuer's revenues for its most recent fiscal year: $6,392,213.
The aggregate market value of the voting stock held by non-affiliates
(11,205,650 shares of Common Stock) was $560,282.50 as of April 24, 1996. The
stock price for computation purposes was $0.05, based on the closing sale price
for the Registrant's Common Stock on NASDAQ Bulletin Board on April 24, 1996.
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 of non-affiliates
of the Registrant has been calculated by subtracting shares held by persons
affiliated with the Registrant from outstanding shares. The number of shares
outstanding of the Registrant's Common Stock as of April 24, 1996 was 15,751,681
shares.
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GALLERY RODEO INTERNATIONAL
INDEX TO ANNUAL REPORT
ON FORM 10-KSB
Page
----
PART I
Item 1. DESCRIPTION OF BUSINESS . . . . . . . . . . . . . . 3
Item 2A. FACTORS THAT MAY AFFECT FUTURE RESULTS. . . . . . . 5
Item 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . 6
Item 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . 8
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS . . . . . . . . . . . . . . . . . . . . . . 8
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . 9
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . 10
Item 7. FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . 12
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . 12
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS AND CONTROL
PERSON; COMPLIANCE WITH SECTION 16(a) OF THE
EXCHANGE ACT. . . . . . . . . . . . . . . . . . . . 13
Item 10. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . 15
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT. . . . . . . . . . . . . . . . . . . 18
Item 12. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS. . . . . . . . . . . . . . . . 19
Item 13. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . 20
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . 22
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS . . . . . . . . 23
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
a. BUSINESS DEVELOPMENT
Gallery Rodeo International (the "Company") was organized in 1988
under the name TJB Enterprises, Inc. as a blind pool/blank check company formed
for the purpose of seeking a merger with a private company. The Company was
organized as and is a California corporation.
On September 24, 1991, TJB Enterprises, Inc. consummated an Agreement
and Plan of Reorganization whereby it acquired from the two shareholders, 100%
of the outstanding capital stock of Gallery Rodeo of Beverly Hills, Inc., a
California corporation, Gallery Rodeo of Lake Arrowhead, Inc., a California
corporation, and Gallery Rodeo of Taos, Inc., a New Mexico corporation.
Concurrent with this transaction, the Company changed its name to Gallery Rodeo
International.
b. BUSINESS OF ISSUER
The Company is operating as a fine art retailer and publisher as it
has since inception and has also acquired properties to conduct hotel and casino
gaming operations. The Company, through its retail art locations, markets
original fine art and limited edition serigraphs, lithographs and sculpture.
The Company has expanded its business by purchasing various properties in
Colorado on which the Company intends to conduct casino gaming operations.
FINE ART BUSINESS
The Company operates fine art galleries in key resort and upscale
communities. The primary gallery is located in the "Rodeo Collection"
building at 421 North Rodeo Drive in the exclusive "Golden Triangle" section
of Beverly Hills, California. The Company also maintains its principal
executive offices at this location. In addition to the primary gallery located
in Beverly Hills, the Company operates three other Company-owned galleries,
two located in Beverly Hills, California and one in Lake Arrowhead, California.
In November 1994, the Company entered into a license agreement with
Macy's California, Inc., a national retail chain department store. Pursuant to
the agreement, the Company is granted the right to operate a retail art facility
in Macy/Bullock's San Francisco store. The initial term of the agreement is
four years with Macy's entitled to 15% of the net sales.
Pursuant to agreements, the Company has been granted certain
reproduction and marketing rights from the estate of Picasso to market certain
Picasso artworks. The Company's rights are exclusive only with respect to
certain images and editions. Sales under the Picasso agreements accounted for
approximately 3% of the Company's total sales in 1994 and in 1995.
Pursuant to license agreements, the Company has been granted certain
reproduction and marketing rights from Red Star Corporation through its
licensee, the Renoir Foundation for the Arts, to reproduce and market certain
Renoir bronze scultpings. These limited edition bronzes are cast from original
plasters with rights supported by the Renoir Foundation for the Arts and certain
members of the Renoir family. The Company has the exclusive reproduction and
marketing rights to such bronzes under such agreements. Such rights are
nonassignable. Sales under these agreements accounted for approximately 1% of
the Company's total sales in 1994 and in 1995.
The Company also contracts with a number of living artists.
Generally, these artists create artworks on an exclusive basis for the Company.
The Company then sells and distributes original works and publishes limited
edition reproductions of certain works. Among the artists with contractual
relationships with the Company are Brett-Livingstone Strong, Cai Jiang Bai,
Frederick E. Hart, Jiang Li, and Hu Yong Kai, and it is the focus of the Company
to review constantly and evaluate art and artists that will fit the marketing
profile consistent with the Company's growth.
During 1994, 13% of sales were made to one customer. No customer
accounted for more than 10% of total sales in 1995.
3
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In addition, the Company is planning to implement a franchise program
whereby the Company will work with entrepreneurs in establishing and operating
Gallery Rodeo franchises. The Company anticipates that this program will not
only provide fee income through the sales of individual franchise operations,
but will also increase the retail and profit capabilities of the Company as a
whole. As currently implemented, the Company has one franchise art gallery in
operation in Hot Springs, Arkansas. However the Company seeks to work with
other art galleries to expand its franchise program.
The Company utilizes direct marketing methods including direct mail,
radio, infomercials and 60-second television spots. The Company's resources
include a large inventory of fine art pieces, store leases and fixtures,
accounts receivable and various representation and licensing agreements with
individual artists.
The Company has filed for protection under trademark laws for the name
Gallery Rodeo International. Aside from this filing, the Company has no
registered trademarks, copyrights, patents or licenses.
Fine art retailing is an intensely competitive industry and the
Company competes with a number of competitors at competitive prices. No single
competitor dominates the market, which is made up of numerous small boutique art
houses and galleries.
REAL PROPERTY DEVELOPMENT
ELK CREEK GAMING HALL
On May 5, 1994, the Company purchased the Elk Creek Gaming Hall in
Cripple Creek, Colorado. The property was acquired by the Company from
Mountainscape Holding Corporation in consideration of 1,000,000 shares of the
Company's restricted Common Stock at a value of $.50 per share, the Company's
assumption of approximately $635,000 in debt and payment of $150,000.
On May 17, 1994, the Company entered into an agreement to lease the
premises previously known as the Turf Club Casino, which is located contiguous
to the Elk Creek Gaming Hall. Subsequently, on June 13, 1995, the Company
entered into an agreement for the sale of the Elk Creek Gaming Hall and
assignment of the lease of the Turf Club Casino. While the agreement was
executed on June 30, 1995, the terms of the agreement provide that Elk Creek
Gaming Hall is to be sold for $1,500,000 in the form of a $365,000 down payment;
a promissory note in the amount of $500,000 bearing interest at 10% with all
principal due in full within five years from close of escrow and the buyer's
assumption of two promissory notes - one in the principal amount of $361,000 and
another in the principal amount of $254,000.
THE BLOOMER PROPERTY
In connection with the development of the Elk Creek Gaming Hall and
Turf Club Casino properties, on May 17, 1994, the Company completed the purchase
of a 90% ownership interest in 13 contiguous lots located in Cripple Creek,
Colorado (the "Bloomer Property"). The Bloomer Property was acquired by the
Company for a total purchase price of $370,000 consisting of the following: (1)
$75,000 in cash paid to the seller; (2) a promissory note in the principal
amount of $120,000 in favor of the seller, payable, without interest, in 24
equal monthly installments of $5,000; and (3) 350,000 shares of restricted
Common Stock of the Company.
For purposes of determining the purchase price, the value assigned by
the Company to the restricted Common Stock of the Company was $.50 per share.
The Company financed the $75,000 cash payment pursuant to a promissory note made
by the Company and Mr. Thomas Harris, a former director of the Company, with
such promissory note secured by a Deed of Trust on the property. The lots
consist of two lots within the town's legalized gaming district, with the 11
remaining lots zoned for business buffer. On June 30, 1995, the Company entered
into an agreement for the sale of the land and buildings in Cripple Creek,
Colorado. Under the terms of the Agreement, the buyer is to purchase the
Bloomer Property at a price of $1,160,000 with payment to the Company in the
form of $150,000 on close of escrow ($15,000 of which was paid on June 30, 1995
and the remaining $135,000 to be paid subsequently); three promissory notes with
an aggregate principal amount of $624,400 (bearing interest at 7.50%); and
assumption, by the buyer, of existing indebtedness totalling $385,600. As of
December 31, 1995, the buyer has not closed escrow and, as a result, the Company
has not recorded the sale of the Bloomer Property.
4
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WANDERING STAR PROJECT IN CRIPPLE CREEK, COLORADO
In May 1993, the Company purchased 10 contiguous lots in Cripple Creek
Colorado, to be the site of the Company's proposed Wandering Star Hotel Casino
project (the "Wandering Star Project"). The Wandering Star Project is located
within Cripple Creek's approved gaming district, at the entrance to the downtown
gaming district, and is situated along Highway 67, the only paved road that
carries traffic to the town. The Company anticipates that the Wandering Star
Project, when completed, will add approximately two hundred hotel rooms to a
town that currently has approximately 200 hotel rooms, and which the Company
estimates currently is in need of approximately 1,500 rooms. In addition, the
Company expects that the casino floor area of the Wandering Star Project, at
approximately 24,000 square feet, will be approximately three times larger than
the average casino floor area in the town of Cripple Creek.
Based upon preliminary construction budget estimates obtained by the
Company, it is currently estimated that the Wandering Star Project will require
over $12 million to complete, excluding additional costs for offsite road,
utility construction and furniture, fixtures and equipment. In order to
complete the Wandering Star Project, the Company would need to seek additional
third-party financing in the form of equity investments and/or the incurrence of
additional debt. There can be no assurance that the Company would be able to
obtain such financing.
There currently are 24 casinos located in Cripple Creek, most of which
are relatively small and strictly gaming operations without hotel rooms. The
Holiday Inn has 62 rooms and the older Imperial Hotel contains 27 rooms. In
addition, a 50-room expansion to the existing 16-room Best Western Hotel and
Casino is planned. An addition to the Holiday Inn is in progress. Competition
in the gaming industry also comes from gaming facilities nationwide, including
casinos in Nevada and New Jersey, and other sources, such as state sponsored
lotteries, pari-mutuel wagering and gaming in new jurisdictions.
The Company's gaming operations for the Wandering Star Project are
subject to licensing by Colorado governmental authorities. The Company's
applications for project approval for the site have been granted by the City of
Cripple Creek. The Company currently is awaiting building approval for the
project. No assurance can be made that the necessary licenses and approvals
will be obtained.
EMPLOYEES
The Company has a total of 25 employees, 14 of whom are salaried
employees serving in management and administrative capacities, and 11 sales
personnel who are paid on a commission basis. Twenty-three of the 25 employees
are full-time employees.
ITEM 2A. FACTORS THAT MAY AFFECT FUTURE RESULTS
1. CONTINUED OPERATING LOSSES. While the Company has recorded a profit for 1995
of $144,815, the Company has had a history of losses. For the calendar years
ended December 31, 1993 and 1994, the Company incurred net losses of $3,574,435,
$3,286,737 respectively. At December 31, 1995, the Company had negative working
capital of $1,475,895 (as Total Current Liabilities exceeded Total Current
Assets by that amount), an accumulated deficit of $3,885,976 and shareholders'
equity of $1,312,245. Because of, among other things, the lack of a substantial
operating history with respect to the Company's venture into the gaming industry
on which to base its anticipated expense and revenues, the Company may continue
to incur further losses. There is no assurance that the Company's operations
will be successful or profitable in the future.
2. UNCERTAINTIES & LACK OF REVENUES FROM GAMING OPERATIONS. While the Company
has expended substantial resources for the development of gaming properties,
there can be no assurance that the Company will be successful in generating
revenues from gaming operations in the near future despite the Company's
obligation to service substantial amounts of debt incurred thereby.
5
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3. LIMITED MANAGEMENT. The Company is currently managed by only two full-time
officers. While the Company has additional in-house staff and otherwise
believes that it's management is sufficient for its needs, the Company may need
to add additional officers and staff if the Company is to implement its business
plans.
4. CURRENT FINANCIAL STRUCTURE & NEED FOR ADDITIONAL FINANCING. The Company's
financial structure is largely dependent upon short-term financing with total
current liabilities totalling $2,975,401 as of December 31, 1995. When this
amount is added to $945,682 in long-term debt plus $83,090 due a stockholder,
the Company had $4,004,173 in liabilities as of December 31, 1995 as compared to
$1,312,245 in stockholders' equity as of that date. While the Company's
management believes that its financial policies have been prudent and based on
its current projections, its cash, capital resources, and cash from operations
should be sufficient to meet its liquidity and financing requirements in 1996,
other than the third party financing necessary to complete the Wandering Star
Project, the Company's substantial reliance on short-term debt financing imposes
significant financial risks on the Company to meet its short-term debt
obligations without default or deficiency. If the Company is to reduce its use
of short-term debt financing, the Company will need to raise additional capital
from the sale of debt or equity. There can be no assurance that the Company
will be successful in continuing to meet its cash requirements or in raising a
sufficient amount of additional capital for the Wandering Star Project, or if it
is successful, that the Company will be able to achieve these objectives on
reasonable terms in light of the Company's current circumstances.
ITEM 2. PROPERTIES
EXECUTIVE OFFICES AND ART GALLERY PROPERTIES
The Company's executive offices, sales and marketing operations are
located in Beverly Hills, California. The primary gallery is located in the
"Rodeo Collection" building at 421 North Rodeo Drive in the exclusive "Golden
Triangle" section of Beverly Hills, California. The Company also operates three
other Company-owned galleries, two located in Beverly Hills, California and one
located in Lake Arrowhead, California.
The Company leases the above-mentioned properties pursuant to long-
term leases with options to renew. Substantially all leases contain multiple
renewal options.
In Beverly Hills, California, at the "Rodeo Collection" (421 North
Rodeo Drive), the Company leases approximately 5,012 square feet at a rate of
$51.12 per square foot. This property is leased through 1998.
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Also in Beverly Hills, California, at 310 North Beverly Drive, the
Company leases 3,095 square feet at a rate of $29 per square foot. This
property is leased through April 1999.
In Lake Arrowhead, California, at 28200 Highway 189, Suite E200, the
Company leases approximately 1,776 square feet at a rate of $26.36 per square
foot. This property is leased through 1996.
The Company previously maintained a gallery in Scottsdale, Arizona, at
7130 East Main Street, leasing approximately 1,600 square feet at a rate of
$14.09 per square foot. This lease for the Scottsdale gallery expired on August
31, 1994. The Company elected not to renew the lease.
The above per square foot rates are calculated on an annual basis.
ELK CREEK GAMING HALL
On May 5, 1994, the Company purchased the Elk Creek Gaming Hall in
Cripple Creek, Colorado. The property was acquired by the Company from
Mountainscape Holding Corporation in consideration of 1,000,000 shares of the
Company's restricted Common Stock at a value of $.50 per share, the Company's
assumption of approximately $635,000 in debt and payment of $150,000. Of the
original approximately $635,000 of debt, as of December 31, 1994, $358,455
remains outstanding under a note due August 1998, bearing interest at 3% above
prime and $257,259 remains outstanding under a note due July 2003, bearing
interest at 8%. Depreciation is being taken on the property over 30 years on
the straight-line method. The federal tax basis for the property is book value,
equal to $1,285,000. Property taxes on the property were approximately $15,650
in 1994.
On May 17, 1994, the Company entered into an agreement to lease the
premises previously known as the Turf Club Casino, which is located contiguous
to the Elk Creek Gaming Hall. The lease term extends through September 30,
1996, with minimum monthly rental payments of approximately $22,000. In
addition, the lease agreement contains an option to purchase the property for
$2,500,000. In order to exercise the option on the property, the Company would
need to seek additional third-party financing in the form of equity investments
and/or the incurrence of additional debt. There can be no assurance that the
Company would be able to obtain such financing.
Following the acquisition of the Elk Creek Gaming Hall and the Turf
Club Casino lease, the Company renovated the properties by expanding the Elk
Creek Gaming Hall to include the premises previously occupied by the Turf Club
Casino. On November 2, 1994, the newly expanded facility was reopened. The
Company has entered into a one-year lease to lease the facility to Elk Creek
Gaming Hall, Inc., a Nevada corporation, which has entered into a management
agreement to operate the casino with Willard Family Enterprises. The Company
intends to lease the property's gaming operations until the Company receives a
gaming license from the gaming authorities in the State of Colorado. There is
no assurance that a license will be granted.
Also in connection with the Elk Creek gaming Hall and Turf Club Casino
properties, on May 17, 1994, the Company completed the purchase of a 90%
ownership interest in 13 contiguous lots located in Cripple Creek, Colorado.
The property was acquired by the Company for a total purchase price of $370,000,
consisting of the following: (1) $75,000 in cash paid to the seller; (2) a
promissory note in the principal amount of $120,000 in favor of the seller,
payable, without interest, in 24 equal monthly installments of $5,000; and (3)
350,000 shares of restricted Common Stock of the Company.
For purposes of determining the purchase price, the value assigned by
the Company to the restricted Common Stock of the Company was $.50 per share.
The Company financed the $75,000 cash payment pursuant to a promissory note made
by the Company and Thomas Harris, a former director of the Company, with such
promissory note secured by a Deed of Trust on the property. Such note bears
interest at 14% per annum and is due and payable in May 1995. The outstanding
principal balance on such note was $85,000 as of December 31, 1994. No
depreciation is being taken on the property.
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The lots consist of two lots within the town's legalized gaming
district, with the 11 remaining lots zoned for business buffer. The remaining
10% ownership interest in the 13 contiguous lots is owned by Thomas Harris, a
former director of the Company. In connection with the Company's acquisition of
the property, Mr. Harris has granted to the Company a full power of attorney
with respect to his 10% ownership interest. Pursuant to the power of attorney,
Mr. Harris will receive 10% of the proceeds from the operation of any business
on the 13 contiguous lots, less all amounts expended by the Company in operating
the business. Mr. Harris will also receive 10% of the proceeds obtained from
sale of the 13 contiguous lots, less costs the Company incurs acquiring or
developing the property, costs of sale, including without limitation, fees,
commissions, attorneys' fees and other expenses incurred by the Company in
connection with the property. Except with respect to amounts owned to Mr.
Harris, the Company maintains an exclusive right to all rents received from the
13 contiguous lots, and to all funds obtained through financing or refinancing
of the property. In April 1995, the Company entered into an agreement to sell
the 13 contiguous lots subject to closing of escrow. Under the agreement, the
total selling price of the property is $1,160,000 consisting of $150,000 cash,
three promissory notes in favor of the Company aggregating $624,400 due on
various dates through 1999 and the assumption by the purchaser of $385,600 of
the Company's debt.
WANDERING STAR PROJECT
In May 1993, the Company purchased fee title to the 10 contiguous lots
in Cripple Creek, Colorado in three separate transactions for an aggregate
purchase price of $2,150,000, consisting of $150,000 cash, 1,750,000 shares of
Common Stock of the Company valued at approximately $0.82 per share,and options
to acquire an additional 500,000 shares at $2.00 per share expiring in May 1995
and promissory notes of the Company in the aggregate principal amount of
$562,000 due and payable at dates ranging from January 1995 to June 1995 and
bearing interest at rates ranging from 10% to 16%. Such promissory notes are
collateralized by first and second deeds of trust on the property and the
outstanding principal balance on such notes was $862,000 as of December 31,
1995. There is no depreciation being taken on the property.
The site of the Wandering Star Project consists of the 10 contiguous
lots which are approximately 25 feet by 125 feet each. The Wandering Star
Project is in compliance with all existing zoning requirements. Based upon
preliminary budget estimates obtained by the Company, it is currently estimated
that the construction of the Wandering Star Project will require over $12
million to complete, excluding additional costs for offsite road and utility
construction and furniture, fixtures and equipment. In order to complete the
Wandering Star Project, the Company would need to seek additional third-party
financing in the form of equity investments and/or the incurrence of additional
debt. There can be no assurance that the Company would be able to obtain such
financing.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are the defendants only in lawsuits
involving trade relationships and others which may be deemed ordinary, routine
litigation incidental to the Company's business, and none of which are material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The last meeting of the Company's shareholders was held on December
21, 1994. At the meeting, Stephen M. Thompson, George M. Maxson and Jack A.
Schneider were elected as the three directors to serve until the next Annual
Meeting of Shareholders and until their successors are elected and qualified.
The terms of the directors previously serving expired at the Annual Meeting.
8
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The Company's Common Stock is traded on the NASDAQ Bulletin Board
under the symbol, "GROI." The following table reflects the high and low prices
of the Company's Common Stock for the two years ended December 31, 1995.
<TABLE>
<CAPTION>
1994 High ($) Low ($)
- - ---- ------- -------
<S> <C> <C>
1st Quarter. . . . . . . . . 2 1/8 1
2nd Quarter. . . . . . . . . 2 1/4 1
3rd Quarter. . . . . . . . . 1 3/8 1/2
4th Quarter. . . . . . . . . 3/4 5/16
1995
- - ----
1st Quarter. . . . . . . . . 5/8 5/16
2nd Quarter. . . . . . . . . 3/8 1/8
3rd Quarter. . . . . . . . . 3/8 1/8
4th Quarter. . . . . . . . . 9/32 1/8
</TABLE>
The Company has followed the policy of reinvesting earnings in the
business and, consequently, has not paid any cash dividends. At the present
time, no change in this policy is under consideration by the Board of Directors.
The payment of cash dividends in the future will be determined by the Board of
Directors in light of conditions then existing, including the Company's
earnings, financial requirements and condition, opportunities for reinvesting
earnings, business conditions and other factors. The number of shareholders of
record of Common Stock on April 24, 1996 was approximately 754.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Total Revenues for the year ended December 31, 1995 were $6,392,213,
an increase of $2,471,363 or more than 63% compared with the year ended December
31, 1994. The increase from 1994 to 1995 was primarily due to a $596,363
increase in artwork sales through the Company's existing retail art studios and
$1,875,000 in royalty participant revenue generated from sales through The Price
Company, a retail chain of membership warehouse stores.
Cost of Sales as a percentage of Total Revenue were 19.60% and 47.23%
in 1995 and 1994, respectively. The decrease in the Cost of Sales percentage
from 1994 to 1995 was primarily the result of selling efforts directed toward
in-house artists.
Gross Profits were $5,139,034 or 80.40% of sales in 1995, compared to
$2,069,105 or 52.77% of sales in 1994. The $1,875,000 in Royalty Participant
Revenues contributed to the 148.37% increase in Gross Profits from $2,069,105 in
1994 to $5,139,034 in Gross Profits in 1995.
Selling expenses in 1995 were $1,638,241 in 1995 compared to
$1,705,778 in 1994. Selling expenses as a percentage of Total Revenues were
49.22% in 1995 compared to 43.51% in 1994. Selling expenses include
advertising, sales commissions, brochures and other promotional material costs,
and certain salary expenses. The decrease in selling expenses as a percentage
of net sales from 1994 to 1995 was due primarily to rising re-order sales which
carry lower marketing, promotion, and advertising costs.
General and Administrative Expenses in 1995 were $3,146,113. General
and Administrative Expenses as a percentage of Total Revenues were 69.65% and
84.97% in 1995 and 1994, respectively. General and Administrative Expenses
costs include all corporate overhead, all occupancy costs and interest. While
General and Administrative Expenses are primarily fixed expenses, the Company
achieved a $185,650 reduction in these expenses primarily by elimination of some
non-sales administrative personnel. In addition, the Company was able to
increase its Total Revenues in 1995 from 1994 without proportionately increasing
General and Administrative Expenses by eliminating staffing and overhead
expenses incurred in connection with certain real estate and gaming property
transactions.
Interest Expense (net of interest income) in 1995 was $320,292
compared to Interest Expense (net of interest income) of $256,759 in 1994. The
increase in Interest Expense of $63,533 during the year resulted primarily from
increased costs of debt funds.
In 1995 the Company also recognized $39,850 in Rental Income compared
to $110,000 in Rental Income during 1994. The decline in Rental Income was
primarily due to the sale of the Elk Creek Gaming Hall property. During 1995
the Company recognized a gain on the sale of property of $125,997 and, by
comparison, the Company did write-off in 1994 $205,762 paid in options to
purchase real property and a write-off of a note receivable of $218,069. And,
in 1995 the Company recorded $53,020 in Other Expenses (net of Other Income)
compared to $36,620 in Other Income in 1994 (net of Other Expenses).
As a result, the Company recorded $147,215 in Earnings Before Income
Taxes in 1995 compared to a $3,284,337 Loss Before Income Taxes in 1994.
Resulting in Net Earnings of $144,815 in 1995 compared to a Net Loss of
$3,286,737 in 1994 after provision for income taxes. Earnings Per Share in 1995
were $0.01 compared to a Loss Per Share of $0.23 in 1994.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
There are several components which 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 reasonable terms. For
the year ended December 31, 1995, the Company experienced a cash flow before
financing activities of $1,137,344. After financing activities, which utilized
$793,793, the Company recorded a net increase in cash for 1995 of $343,551. In
1994, the Company experienced a negative cash flow before financing activities
of $1,283,083. After financing activities which generated $1,249,886, the
Company recorded a net decrease in cash for 1994 of $33,197.
The increase in 1995 in cash flow before financing activities was
attributable primarily to the Company's profitability in 1995, reductions in the
Company's accounts receivables and inventories, reduced capital expenditures in
1995, and the Company's ability to complete sales of real property and
investments.
The following current portion of long-term debt is due and payable on
or before December 31, 1996:
<TABLE>
<CAPTION>
Description Principal Amount
- - ----------- ----------------
<S> <C>
Note payable, noninterest bearing, payable in monthly principal installments of $5,000
Note collateralized by a fourth deed of trust on the Bloomer Property . . . . . . . . . . . . . . . . $ 60,000
Notes payable, bearing interest at rates ranging from 11.05% to 20.50%, payable in monthly
principal and interest payments through June 1997. Note collateralized by certain
inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $255,451
Note payable, bearing interest at 18%, interest only payable monthly with final principal
and interest due May 1996. Note collateralized by a first deed of trust on the Bloomer
property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $325,600
10% Debenture due November 1999, convertible to the Company's common stock at an exercise
price of $1.50 per share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20,000
Note payable to stockholder, bearing interest at 18%, interest only payable monthly with final
principal and interest due May 1997. Note collateralized by a first deed of trust on the
Wandering Star Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $200,000
Note payable to stockholder, bearing interest at 15%, interest only payable monthly with final
principal and interest due June 1997. Note collateralized by a first deed of trust on the
Wandering Star Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100,000
Note payable to stockholder, bearing interest at 15%, interest only payable monthly with final
principal and interest due June 1997. Note collateralized by a second deed of trust on the
Wandering Star Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $200,000
Note payable to stockholder, bearing interest at 16%, interest only payable monthly with final
principal and interest due July 1997. Note collateralized by a first deed of trust on the
Wandering Star Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $162,000
Note payable to stockholder, bearing interest at 15%, interest only payable monthly with final
principal and interest due May 1997. Note collateralized by a first deed of trust on the
Wandering Star Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $150,000
Note payable to stockholder, bearing interest at 12-15%, interest only payable monthly with final
principal and interest due May 1997. Note collateralized by a first deed of trust on the
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Wandering Star Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $50,000
Note payable to bank, bearing interest at the bank's prime rate plus 2.75% (effective rate
of interest 11.25% at December 31, 1995 and 1994), payable in 11 monthly principal
installments $2,000 commencing April 29, 1997. Final principal and interest due
April 29, 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,743
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,540,794
Less: Current Maturities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $595,112
--------
Total Long-Term Debt As of December 31, 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 945,682
---------
---------
</TABLE>
In order to meet its obligations at maturity with respect to the
outstanding principal and interest on such notes payable, the Company will be
required to restructure the terms of such notes and/or refinance such notes
through additional third-party debt and/or equity financing. The Company can
make no assurance that it will be able to restructure such notes or as to the
ultimate terms thereof. In addition, there can be no assurance that the
Company will be successful in obtaining such third-party financing.
Although the Company currently has no available credit facilities, the
Company believes that, based on its current projections, its cash, capital
resources, and cash from operations should be sufficient to meet its liquidity
and financing requirements in 1996, other than the third-party financing
necessary to complete the Wandering Star Project. The Company can make no
assurances, however, that it will meet its current projections. In addition to
seeking additional financing for the Wandering Star Project, the Company is
exploring alternative sources of liquidity, including additional third-party
debt and/or equity financing.
The Company is currently involved in negotiations with the holders of the
Wandering Star debt and other hotel and casino management professionals that
could result in a reoganization of the Company, replacement of its present
management and restructuring of its $862,000 real estate credit facility
consisting of a series of six individual promissory notes. The Company fully
expects to finalize these negotiations in the very near future, however, in the
event that there is any lengthy delay or postponement, the holders of the
Wandering Star debt have agreed to a one year extension of the notes making up
the real estate credit facility at rates and collateral consistent with the
original loan agreements and with maturity dates beginning May 1997.
IMPACT OF INFLATION
Because of the nature of its products, the Company does not believe that
inflation has a significant impact on its sales or profits. In periods of high
or increasing inflation, a common investment strategy is to purchase assets,
such as fine art, whose value may increase in excess of the rate of inflation.
Management also anticipates that any impact from inflation would be mitigated 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.
ITEM 7. FINANCIAL STATEMENTS
The financial statements and related financial information required to be
filed hereunder are indexed on page 22 of this report and are incorporated
herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
12
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSON; COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The names and ages of the Directors and Executive Officers of the Company
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION SINCE
---- --- -------- -----
<S> <C> <C> <C>
Stephen M. Thompson . . . 47 Director, Chairman of the Board, 9/91
CEO and CFO
Richard Carthew . . . . . 41 Vice President of Sales and 9/91
Marketing
George M. Maxson. . . . . 61 Director 7/93
Jack A. Schneider . . . . 60 Director 12/94
Kathy Grant . . . . . . 38 Corporate Secretary 09/95
</TABLE>
The Directors serve until the next annual meeting of shareholders or until
their successors are elected.
STEPHEN M. THOMPSON is a Director, Chairman of the Board, Chief Executive
Officer and Chief Financial Officer of the Company and has been with the Gallery
Rodeo companies since 1988. Between 1985 and 1988, Mr. Thompson's primary
activity was that of an independent business consultant. Mr. Thompson worked as
a consultant for a number of companies during this period, including Wexco
International, a real estate development company, Bio Care, Inc., a biological
product distributor and First Fidelity Exchange, a precious metals marketing
concern. His duties included design and layout of collateral sales material and
writing and organization of sales and presentations. His duties also included
the hiring and training of sales and administrative staff.
RICHARD CARTHEW has worked for the Gallery Rodeo companies since 1988. In
1987, he worked as an independent art consultant and in 1987 was a Director for
the Lawrence Ross Galleries in Beverly Hills, California. Mr. Carthew attended
Santa Monica City College and received an AA in Business Administration in 1974.
GEORGE M. MAXSON has been a Director of the Company since July 1993. Since
1991, Mr. Maxson has been the Secretary and Treasurer and a Director of Vegas
Ventures Corporation, a real estate development firm in Las Vegas, Nevada. In
August 1993, Vegas Ventures Corporation filed a Chapter 11 bankruptcy petition.
This bankruptcy case was dismissed in January 1994. From 1984 to 1991, Mr.
Maxson was employed by the Riviera Hotel and Casino, where his last position was
Vice President of Casino Operations. In such capacity, Mr. Maxson's
responsibilities included assisting in the design and construction of the new
Casino and Entertainment Center as well as day to day operations and management
of the casino and its personnel.
JACK A. SCHNEIDER has been a Director of the Company since December 1994.
Mr. Schneider served as the Vice Chairman and Chief Operating Officer of
ActionTrac, Inc., a company headquartered in California, from 1993 to January
1995. ActionTrac, Inc. provides help desk services and solutions to computer
problems for companies and individuals worldwide. Prior to joining ActionTrac,
from 1977 to 1990, Mr. Schneider had full management responsibility at West
Coast Operations, a division of AIL (a subsidiary of Eaton Corporation). West
Coast Operations flight tested and production tested the U.S. Air Force's B-1
Bomber. In 1990, Mr. Schneider established the Technical Service Operations
(TSO) division of AIL. Under Mr. Schneider's direction, from 1990 to 1993, TSO
evolved from a field office operation to a diversified operating division. Mr.
Schneider joined AIL as a field engineer in 1965 and was subsequently promoted
to successive levels of management.
13
<PAGE>
Mr. Schneider received his Bachelor's degree in Electrical Engineering from the
City College of New York and completed graduate course work in Engineering
Management at Baruch University. Mr. Schneider is currently a Director of
ActionTrac, Inc. and a Director of 4-Front, Inc., a publicly held company
headquartered in London, England.
KATHY GRANT was elected Corporate Secretary on September 25, 1995. From
August 1991 to the present, Ms. Grant has also served as the Company's
Administrative Assistant to the President and Gallery Coordinator.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
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 (Form 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, the following Covered Persons during
the fiscal year ended December 31, 1995 failed to file on a timely basis reports
required by Section 16(a) of the Exchange Act:
<TABLE>
<CAPTION>
Number of Reports Not Filed on a
Name Position Timely Basis(2)
---- -------- --------------------------------
<S> <C> <C>
Stephen M. Thompson . . Director, Chairman of the Form 3; Form 4 (1 report); Form 5
Board, CEO, CFO(1)
Richard Carthew . . . . Director(1)(3) Form 3; Form 5
Thomas J. Harris. . . . Director Form 3; Form 4 (1 report); Form 5
George M. Maxson. . . . Director Form 3; Form 4 (1 report); Form 5
Kathy Grant . . . . . . Corporate Secretary Form 3
</TABLE>
- - ---------------
(1) Also beneficial owner of more than 10% of equity securities of
Registrant.
(2) To the Company's knowledge, based solely on a review of the copies of
the reports furnished to the Company by such persons, in the fiscal year ended
December 31, 1995, such persons have subsequently filed the reports required by
Section 16(a) of the Exchange Act.
(3) Mr. Carthew's term as director expired on December 21, 1994.
14
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table shows for the fiscal years ended December 31, 1995,
1994, and 1993 the cash compensation paid by the Company as well as certain
other compensation paid or accrued for the year, to the Chief Executive Officer
and the executive officers of the Company whose aggregate compensation was more
than $100,000 for such fiscal year (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMP.
------------------------------------------------------- -----------
AWARDS
- - ------
SHARES
FISCAL OTHER UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS (#)
- - --------------------------- ---- ------ ----- ------------ -----------
<S> <C> <C> <C> <C> <C>
Stephen M. Thompson 1995 $ 78,000 $ 0 * 1,000,000
Chairman of the Board and 1994 78,000 0 * --
Chief Executive Officer 1993 78,000 0 * --
Richard Carthew 1995 143,489 0 * --
Director(1), and V. P. 1994 221,489 0 * --
1993 187,816 0 * --
Kathy Grant
Corporate Secretary 1995 $40,000 0 * __
</TABLE>
- - ---------------
* The dollar value of perquisites and other personal benefits was less than the
reporting thresholds established by the Securities and Exchange Commission.
(1) Mr. Carthew's term as a director expired on December 21, 1994.
No officer received any compensation under stock plans during 1995.
Clipper Industries, Inc., is a corporation owned by the Thompson
Family Trust, with Stephen M. Thompson as Trustee. The beneficiaries under the
Thompson Family Trust are January Lee Thompson and other members of the Thompson
family, excluding Stephen M. Thompson. During the year ended December 31, 1995,
Clipper Industries, Inc. performed management consulting services for the
Company pursuant to which fees paid by the Company to Clipper Industries, Inc.
were $45,264.
No director's fees were paid during 1995. On January 16, 1995, the
Company issued an option to purchase 100,000 shares of the Company's restricted
Common Stock to Jack Schneider, a director of the Company. The option is
exercisable at $0.50 per share and will expire three years from the date of
grant.
In addition, the Company paid George M. Maxson, a director of the
Company, consulting fees totalling $17,539 during 1995.
15
<PAGE>
STOCK OPTIONS
The following table contains information concerning the grant of stock
options made during fiscal 1995 to the Named Executive Officers:
OPTIONS GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------------------------------
NUMBER OF SHARES
UNDERLYING % OF TOTAL OPTIONS EXERCISE
OPTIONS GRANTED IN EMPLOYEES IN OR BASE PRICE EXPIRATION
GRANTED (#) FISCAL YEAR ($/SHARE) DATE
---------------- ------------------------ ------------- ----
<S> <C> <C> <C>
Stephen M. Thompson 500,000 46% $0.45 10/99
500,000 46% 0.25 10/99
</TABLE>
The following table sets forth information with respect to the Named
Executive Officers, concerning the exercise of options during the fiscal year
ended December 31, 1995 and unexercised options held as of the end of that
fiscal year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF
SHARES UNDERLYING UNEXERCISED
ACQUIRED UNEXERCISED IN-THE-MONEY
ON VALUE OPTIONS AT OPTIONS AT
NAME EXERCISE(#) REALIZED($) FY-END(#)(1) FY-END($)(1)(2)
- - ---- ----------- ----------- ---------------- ----------------
<S> <C> <C> <C> <C>
Stephen M. Thompson -- -- 1,000,000$7,998
</TABLE>
- - ---------------
(1) All options are presently exercisable.
(2) Market value of underlying securities minus the exercise price. Based on
closing sale price of $0.05 per share on April 24, 1996.
(3) Exercise price equal to $0.125 per share.
EMPLOYMENT AGREEMENTS WITH NAMED EXECUTIVE OFFICERS
On October 14, 1994, a majority of the non-interested members of the
Board of Directors of the company approved the five-year employment agreement
between the Company and Mr. Thompson. The agreement provides, among other
things, a base compensation equal to 5% of the net cash receipts of the Company.
In addition, the Company is required to pay an annual bonus of $100,000 for each
year in which the Company's net profits exceed certain target profit levels, as
audited by the Company's independent accountants. Under the agreement, Mr.
Thompson is entitled to deferred compensation in the amount of $100,000 for each
year of service to the Company, payable in 24 installments commencing on the
first month after Mr. Thompson reaches the age of 50 or after termination of
employment, whichever occurs first.
Under the agreement, Mr. Thompson is granted an option to purchase
500,000 shares of the Company's Common Stock at an exercise price of $0.45 per
share. In addition, Mr. Thompson is also granted an option to purchase 500,000
shares of the Company's Common Stock at a purchase price of $0.25 per share.
Each of the options are currently vested and may be exercised for a period of 5
years or until the termination of employment, whichever is later.
16
<PAGE>
Under the agreement, in the event of Mr. Thompson's death or permanent
disability, the Company is required to pay him or his estate 50% of the then
current base salary and annual bonus for a period of 2 years from the date of
death or permanent disability. The agreement also provides an automobile and
personal security allowance for Mr. Thompson in the amount of $40,000 per year,
and reimbursement for reasonable business expenses incurred in promoting the
business of the Company. The Company also is required to maintain a life
insurance policy on the life of Mr. Thompson in the face amount of $1,500,000,
with the beneficiaries under such policy designated by Mr. Thompson.
The agreement provides that in the event of termination of Mr.
Thompson's employment by the Company for Cause (as defined) or in the event Mr.
Thompson terminates his employment other than for Good Reason (as defined), the
Company is required to pay to Mr. Thompson a lump sum in cash of all accrued
obligations. In the event the Company terminates Mr. Thompson's employment
without cause or if Mr. Thompson terminates his employment for Good Reason, the
Company is required to pay a lump sum in cash all base salary, annual bonus and
deferred compensation which would have been earned for the balance of the
employment term, and the Company is required to maintain the life insurance
policy described above for the balance of the term and to continue to provide to
Mr. Thompson and his family, for a period of two years following termination of
employment, all welfare and medical benefits previously provided by the Company
during the 90-day period preceding the termination.
In addition to the foregoing, under the agreement, in the event of a
Change of Control (as defined) of the Company and consequent termination of Mr.
Thompson's employment, the Company will be obligated to pay $1,000,000 to Mr.
Thompson in a lump sum payment.
17
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding beneficial
ownership as of April 24, 1996 of the Company's Common Stock, by any person who
is known to the Company to be the beneficial owner of more than 5% of the
Company's voting securities and by each Director and by Officers and Directors
of the Company as a group. The Company has only one class of stock.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
NAME AND ADDRESS SHARES OF CLASS
- - ---------------- -------------- ------------
<S> <C> <C>
Clipper Industries, Inc. . . . . . 3,765,843(1) 23.91%
4223 Las Vegas Blvd. South
Las Vegas, Nevada 89119
Richard Carthew. . . . . . . . . . 1,780,188 11.30%
421 N. Rodeo Drive
Beverly Hills, CA 90210
George M. Maxson . . . . . . . . . * *
421 N. Rodeo Drive
Beverly Hills, CA 90210
Jack A. Schneider. . . . . . . . . * *
421 N. Rodeo Drive
Beverly Hills, CA 90210
Kathy Grant. . . . . . . . . . . . * *
421 North Rodeo Drive
Beverly Hills, California 90210
All Officers and
Directors as a Group (4 persons) 5,546,031(1)(2)(3) 35.21%
Gary D. Kucher . . . . . . . . . . 1,200,000(2) 7.61%
421 N. Rodeo Drive
Beverly Hills, CA 90210
</TABLE>
- - -------------------
* Represents less than 1% of the Company's outstanding Common Stock.
(1) Represents shares held by Clipper Industries, Inc., a corporation owned by
the Thompson Family Trust, with Stephen M. Thompson as Trustee. The
beneficiaries under the Thompson Family Trust are January Lee Thompson and other
members of the Thompson family, excluding Stephen M. Thompson. Mr. Thompson
serves as sole Director, President and Treasurer of Clipper Industries, Inc.
Includes 1,000,000 shares of Common Stock purchasable under options granted
pursuant to Mr. Thompson's employment agreement.
(2) Includes 50,000 shares of Common Stock purchasable pursuant to options
issued to Mr. Kucher. The shares include 1,150,000 shares procured by Mr.
Kucher and which are the subject of a dispute between Mr. Kucher and the
Company.
(3) Includes 100,000 shares of Common Stock purchasable pursuant to options
issued to Mr. Schneider.
18
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Clipper Industries, Inc. (a corporation controlled by Stephen M.
Thompson) performed management consulting services for the Company. Fees paid
by the Company to Clipper Industries, Inc. were $45,264 and $86,150 during the
years ended December 31, 1995 and December 31, 1994, respectively. In addition,
in 1994, the Company purchased inventory from Clipper Industries in exchange for
200,000 shares of its restricted common stock valued at $160,000 ($0.80 per
share).
Pursuant to license agreements, the Company has been granted certain
exclusive, nonassignable reproduction and marketing rights from Red Star
Corporation through its licensee, the Renoir Foundation for the Arts, to
reproduce and market certain Renoir bronze sculptings. In consideration for the
granting of such licenses, Red Star Corporation acquired 1,250,000 shares of the
Company's Common Stock. Payments made to Red Star Corporation amounted to
approximately $24,500 and $62,000 in the fiscal year ended December 31, 1995 and
1994, respectively. In March 1995, the Company terminated its reproduction and
marketing rights with respect to certain of the Renoir bronze sculptings. The
Company did retain the exclusive rights with respect to other specific pieces of
the collection. Such reproduction and marketing rights are nonassignable. In
connection with such termination of the reproduction and marketing rights, Red
Star has agreed to return 850,000 of the 1,250,000 shares of the Company's
Common Stock previously issued to Red Star. On October 12, 1995, such 850,000
shares of Common Stock were returned to the Company. In addition, Red Star
agreed to reduce the Company's future minimum royalty payments.
In January 1993, the Company issued 1,150,000 shares of its restricted
Common Stock to Gary D. Kucher, a then officer of the Company, in consideration
of a promissory note dated January 23, 1993 in favor of the Company in the
principal amount of $143,750. The balance of the promissory note remains
outstanding and the Company is seeking return of the shares or payment of the
note. As of December 31, 1995, Gary D. Kucher, formerly Executive Vice
President of the Company, had a note payable to the Company totalling $143,750,
payable on demand at an interest rate of 4%. The Company is seeking return of
the shares or payment of the note balance.
During 1995, the Company had received advances from its two executive
officers, Stephen M. Thompson and Richard Carthew, both of whom are also major
stockholders, totalling $83,090 and, during 1995 the Company made advances to
stockholders totalling $112,405. These advances are noninterest bearing and, as
such, no interest has been accrued at December 31, 1995.
Clipper Industries, Inc., a major stockholder, performed management
consulting services for the Company. Fees paid by the Company to Clipper
Industries, Inc. were $45,264 and $86,150 during the years ended December 31,
1995 and 1994, respectively.
During 1995, the Company's Board of Directors approved transactions in
which two stockholders had notes payable to the Company totalling $21,750,
payable over five years at an interest rate of 2%.
During 1995, the Company paid $17,539 in consulting fees to George M.
Maxxon, a director of the Company.
19
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (FOOTNOTES ON FOLLOWING PAGE).
EXHIBITS (a)(1) Financial Statements. Reference is made to the Index
to Financial Statements of the Company on page 22 of
this report.
2 Agreement and Plan of Reorganization dated September
23, 1991. (1)
3.1 Articles of Incorporation of the Company, as
amended. (3)
3.2 Bylaws of the Company. (2)
10.1 Agreement dated April 16, 1991 between Donald Tilson,
Elizabeth Tilson and Steve Thompson and assignees. (3)
10.2 Sublease dated June 15, 1988 between T.R. Rogers, Inc.
And Gallery Rodeo of Beverly Hills, Inc. (3)
10.3 Lease Agreement dated March 29, 1990 between Wade
Stockhouse and Gallery Rodeo of Taos, Inc. (3)
10.4 Shopping Center Lease Agreement dated November 11, 1987
between Lake Arrowhead Associates Limited Partnership
and the Company. (3)
10.5 Agreement between the Company and Red Star
Corporation. (6)
10.6 Purchase Agreement and related documents between the
Company and MAXPRO Corporation. (5)
10.7 Agreement between the Company and Red Star
Corporation. (6)
10.8 Lease dated October 15, 1992 between the Company and
Rodeo Collection, Ltd. (7)
10.9 Assignment of Lease dated October 30, 1992 between the
Company and Barney Goldberg, d.b.a. Golden West
Galleries. (7)
10.10 Nonqualified Stock Option Agreement dated January 1,
1993 between the Company and Gary D. Kucher. (7)
10.11 Demand Note dated January 23, 1993 in the principal
amount of $143,750 by Gary D. Kucher in favor of the
Company. (7)
10.12 Shopping Center Lease Agreement dated March 31, 1993
between the Company and The Arrowhead Joint Venture.
(7)
10.13 Option Agreement dated November 2, 1993 and First
Addendum to Option Agreement dated November 2, 1993,
among the Company, The D&L Jordan Trust, Walter-
Laughlin Partnership and The Walter Company. (7)
10.14 Agreement dated November 2, 1993, and First Addendum to
Option Agreement dated November 2, 1993, among the
Company, Walter-Laughlin Partnership and The Walter
Company. (7)
10.15 Promissory Note of the Company dated December 15, 1993
in the principal amount of $200,000 in favor of
Sterling Bank, and related loan documents. (7)
21 Subsidiaries of the Company. (2)
20
<PAGE>
REPORTS ON FORM 8-K
(b) Reports on Form 8-K filed during the last quarter of 1995. The
Company did not file any Current Report on Form 8-K during the
last quarter of 1995.
Reference is made to the Company's Current Report on Form 8-K
dated August 18, 1995, as filed with the Commission on August 19,
1995.
Footnotes from prior page:
- - -----------------
(1) Previously filed with the Securities and Exchange Commission as an exhibit
to Current Report on Form 8-K of the Company, as filed September 23, 1991.
(2) Previously filed with the Securities and Exchange Commission as an exhibit
to Amendment No. 2 to the Registration Statement on Form 10 of the Company, as
filed April 6, 1992.
(3) Previously filed with the Securities and Exchange Commission as an exhibit
to the Registration Statement on Form 10 of the Company, as filed November 8,
1991.
(4) Previously filed with the Securities and Exchange Commission as an exhibit
to Current Report on Form 8-K of the Company, as filed May 17, 1993.
(5) Previously filed with the Securities and Exchange Commission as an exhibit
to Current Report on Form 8-K of the Company, as filed May 28, 1993.
(6) Previously filed with the Securities and Exchange Commission as an exhibit
to Current Report on Form 8-K of the Company, as filed June 18, 1993.
(7) Previously filed with the Securities and Exchange Commission as an exhibit
to the 1993 Annual Report on Form 10-KSB, as filed August 2, 1994.
21
<PAGE>
GALLERY RODEO INTERNATIONAL AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants. . . . 23
Audited Consolidated Financial Statements:
Consolidated Balance Sheet at December 31, 1995 . . . . 24
Consolidated Statements of Operations for the years ended
December 31, 1995 and December 31, 1994 . . . . . . . . 26
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1995 and December 31, 1994 . . 27
Consolidated Statements of Cash Flows for the years ended
December 31, 1995 and December 31, 1994 . . . . . . . . 28
Notes to Consolidated Financial Statements. . . . . . . 30
22
<PAGE>
GRANT THORNTON LLP
1000 Wilshire Boulevard, Suite 700
Los Angeles, California 90017-2464
9213-627-1717
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Gallery Rodeo International
We have audited the accompanying consolidated balance sheet of Gallery
Rodeo International and Subsidiaries as of December 31, 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1995 and 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Gallery Rodeo
International and Subsidiaries as of December 31, 1995 and the consolidated
results of their operations and their consolidated cash flows for the years
ended December 31, 1995 and 1994 in conformity with generally accepted
accounting principles.
/s/ Grant Thornton LLP
Los Angeles, California
March 18, 1996
23
<PAGE>
GALLERY RODEO INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 357,753
Accounts receivable, less allowance for doubtful accounts 151,756
of $53,748
Inventories 989,997
----------
Total current assets 1,499,506
LAND HELD FOR FUTURE DEVELOPMENT 2,150,000
LAND HELD FOR SALE 370,000
PROPERTY AND EQUIPMENT 221,234
OTHER ASSETS
Note Receivable 500,000
Advances to officers/stockholders 112,405
Distribution rights, net 66,230
Deposit on real property 260,614
Other 136,429
----------
$5,316,418
----------
----------
The accompanying notes are an integral part of this statement.
24
<PAGE>
GALLERY RODEO INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 595,112
Accounts payable 770,944
Accrued expenses and other liabilities 452,661
Customer deposits 1,156,684
----------
Total current liabilities 2,975,401
LONG TERM DEBT, less current maturities (including 945,682
$862,000 to stockholders)
ADVANCES FROM STOCKHOLDERS 83,090
STOCKHOLDERS' EQUITY
Common stock, 100,000,000 shares authorized; $.001 par
value; 15,511,681 shares issued and outstanding 15,511
Additional paid-in capital 5,348,210
Accumulated deficit (3,885,976)
----------
1,477,745
Less stockholders' loans (165,500)
----------
Total stockholders' equity 1,312,245
----------
$5,316,418
----------
----------
The accompanying notes are an integral part of this statement.
25
<PAGE>
GALLERY RODEO INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
1995 1994
--------- ----------
Revenue
Sales of artwork $4,517,213 $3,920,850
Royalty participant revenue 1,875,000 --
---------- ----------
Total revenue 6,392,213 3,920,850
Cost of sales of artwork 1,253,179 1,851,745
---------- ----------
Gross profit 5,139,034 2,069,105
Operating expenses
Selling expenses 1,638,241 1,705,778
General and administrative expenses 3,146,113 3,331,763
---------- ----------
Earnings (loss) from operations 354,680 (2,968,436)
Other income (expense)
Interest expense, net (320,292) (256,759)
Write-off of options to purchase property -- (205,762)
Rental income 39,850 110,000
Gain on sale of property 125,997 --
Other, net (53,020) 36,620
---------- ----------
Earnings (loss) before income taxes 147,215 (3,284,337)
Income taxes 2,400 2,400
---------- ----------
NET EARNINGS (LOSS) $ 144,815 (3,286,737)
---------- ----------
---------- ----------
EARNINGS (LOSS) PER SHARE $.01 $(.23)
---------- ----------
---------- ----------
The accompanying notes are an integral part of these statements.
26
<PAGE>
GALLERY RODEO INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
Common Stock Additional
------------------------ paid-in Accumulated Stockholders' Shares to be
Shares Amount capital deficit loans retired Total
----------- ----------- -------------- -------------- -------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 12,524,371 $12,524 $3,957,389 $(744,054) $(143,750) $ -- $3,082,109
Issuance of restricted stock for
land and buildings 1,000,000 1,000 499,000 -- -- -- $500,000
Issuance of restricted stock for
Bloomer property 350,000 350 174,650 -- -- -- 175,000
Issuance of restricted stock for
other assets 200,000 200 65,300 -- -- -- 65,500
Issuance of restricted stock for
inventory 625,188 625 371,239 -- -- -- 371,864
Issuance of restricted stock for
services rendered 68,000 68 27,856 -- -- -- 27,924
Issuance of restricted stock with
stockholders' loan proceeds 75,000 75 21,675 -- (21,750) -- --
Issuance of restricted stock for
options to purchase property 359,930 360 184,487 -- -- -- 184,847
Shares to be returned to the
Company in exchange of distribution
right -- -- -- -- -- (161,500) (161,500)
Net loss for the year -- -- -- (3,286,737) -- -- (3,286,737)
----------- ----------- -------------- -------------- -------------- ------------ ----------
Balance at December 31, 1994 15,202,489 15,202 5,301,596 (4,030,791) (165,500) (161,500) 959,007
Issuance of restricted stock as
settlement of certain debt 115,000 115 47,685 -- -- -- 47,800
Issuance of restricted stock for
services rendered 1,044,192 1,044 159,579 -- -- -- 160,623
Shares returned to the Company
in exchange of distribution right (850,000) (850) (160,650) -- -- 161,500 --
Net earnings for the year -- -- -- 144,815 -- -- 144,815
----------- ----------- -------------- -------------- -------------- ------------ ----------
Balance at December 31, 1995 15,511,681 $15,511 $5,348,210 $(3,885,976) $(165,000) $ -- $1,312,245
----------- ----------- -------------- -------------- -------------- ------------ ----------
----------- ----------- -------------- -------------- -------------- ------------ ----------
</TABLE>
The accompanying notes are an integral part of this statement.
27
<PAGE>
GALLERY RODEO INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
1995 1994
----------- ----------
Cash flow from operating activities
Net earnings (loss) $ 144,815 $(3,286,737)
Adjustments to reconcile net earnings (loss) to
net cash used in operating activities:
Depreciation and amortization 73,556 331,713
Gain on sale of real estate (125,997) --
Issuance of restricted stock for services 160,623 27,924
Write-off of options to purchase property -- 205,762
Write down of distribution rights 50,000 249,432
Charge off of uncollectible note receivable 218,069
Amortization of loan fees and distribution rights 162,246 --
Change in assets and liabilities:
Decrease (increase) in accounts receivable 547,083 (509,518)
(Increase) Decrease in inventories (162,342) 127,453
Decrease (increase) in other assets 23,617 (15,851)
Increase (decrease) in accounts payable 129,581 (56,583)
(Decrease) Increase in accrued expenses
and other liabilities (26,200) 222,548
(Decrease) increase in customer deposits (586,026) 1,614,876
---------- ----------
Net cash provided by (used in) operating
activities 609,025 (1,088,981)
Cash flows from investing activities:
Capital expenditures (37,025) (326,033)
Proceeds from sale of real estate 365,344 (218,069)
Proceeds from sale of investment 200,000 --
Increase in notes receivable -- (218,069)
Decrease in investment in art -- 350,000
---------- ----------
Net cash provided by (used in) investing
activities 528,319 (194,102)
Cash flows from financing activities:
Proceeds from long-term debt 325,600 933,178
Payments of long-term debt (777,527) --
Stockholders advances (144,866) 216,858
(Payment) borrowings on line of credit (200,000) 99,850
---------- ----------
Net cash (used in) provided by financing
activities (793,793) 1,249,886
---------- ----------
Net increase (decrease) in cash and cash
equivalents 343,551 (33,197)
Cash and cash equivalents at beginning of year 14,202 47,399
---------- ----------
Cash and cash equivalents at end of year $ 357,753 $ 14,202
---------- ----------
---------- ----------
The accompanying notes are an integral part of these statements.
28
<PAGE>
GALLERY RODEO INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- CONTINUED
YEAR ENDED DECEMBER 31,
1995 1994
----------- -----------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 314,878 $ 236,983
----------- -----------
----------- -----------
Income taxes $ 2,400 $ 2,400
----------- -----------
----------- -----------
Noncash investing and financing activities
Acquisition of real property:
Issuance of restricted stock $ -- $ 675,000
Liabilities assumed -- 830,000
----------- -----------
$ -- $ 1,505,000
----------- -----------
----------- -----------
Sale of real property (see Note B)
Issuance of restricted stock for inventory $ -- $ 371,864
----------- -----------
----------- -----------
Issuance of restricted stock for other assets $ -- $ 65,500
----------- -----------
----------- -----------
Issuance of restricted stock for options to
purchase property $ -- $ 184,847
----------- -----------
----------- -----------
Issuance of restricted stock with stockholder's
loan proceeds $ -- $ 21,750
----------- -----------
----------- -----------
Restricted Stock to be returned in exchange
for distribution rights $ 161,500 $ 161,500
----------- -----------
----------- -----------
Issuance of restricted stock as settlement of
certain debt $ 47,800 $ --
----------- -----------
----------- -----------
Inventory used for deposit on purchase of real
property $ 260,614 $ --
----------- -----------
----------- -----------
The accompanying notes are an integral part of these statements.
29
<PAGE>
Gallery Rodeo International and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
NOTE A - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Gallery Rodeo International (the Company) markets original fine art and
limited edition serigraphs, lithographs and sculpture, throughout the
United States. The Company promotes its own as well as other artists in
art galleries throughout the United States through its three company-owned
galleries. In 1994, the Company closed two retail locations in Taos, New
Mexico and Scottsdale, Arizona. In addition, the Company recently acquired
rights with respect to various properties in Colorado to develop hotels and
gaming casinos on these properties.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Gallery Rodeo
International and its wholly-owned subsidiaries, Gallery Rodeo of Beverly
Hills, Inc., Gallery Rodeo of Lake Arrowhead, Inc., Gallery Rodeo of Taos,
Inc., and Gallery Rodeo of Scottsdale, Inc. All material intercompany
transactions have been eliminated.
INVENTORIES
Inventories, consisting primarily of finished artworks, are valued at the
lower of cost (specific identification method) or market. Management
continually evaluates its inventory position and implements promotional or
other plans to reduce inventories to appropriate levels relative to its
sales estimates. Estimated losses are recorded when such plans are
implemented. It is at least reasonably possible that management's plans to
reduce inventory levels will be less than fully successful, and that such
an outcome would result in a change in the inventory allowance in the near-
term.
STATEMENT OF CASH FLOWS
The Company considers all highly liquid investments with maturities of
three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided by use
of the straight-line method for financial statement purposes based upon the
following estimated useful lives:
Building 30 years
Furniture, fixtures and equipment 3-7 years
Leasehold improvements 3-9 1/2 years
30
<PAGE>
Gallery Rodeo International and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1994
NOTE A - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
DISTRIBUTION RIGHTS
In 1993, the Company acquired the right to create and distribute bronze
reproductions of certain Renoir sculptings. Per the amended agreement
dated March 1995, the distribution right is being amortized on a straight-
line basis over the distribution term which is 70 months commencing April,
1995.
REVENUE RECOGNITION
Retail gallery sales are recognized when the entire selling price has been
received and substantial performance has been completed. Wholesale sales
are recognized at the time of shipment to the customer. Merchandise
subject to customer deposits is included in inventories, and the deposits
are reflected as a current liability.
On June 16, 1995, the Company entered into an agreement to sell artwork
through a large national discount retailer. Pursuant to this agreement the
Company entered into several Royalty Participation agreements with
individuals. In consideration for the right to share in the profits from
the sale of the artwork sold through the discount retailer, individuals
purchased varying percentyages of up to 10% of net revenue received through
the program. Total amounts received by the Company were $1,875,000. All
of this revenue was recognized in 1995 as the Company has substantially
fulfilled its obligation. There are no contingent royalty payments owed at
December 31, 1995.
INCOME TAXES
The Company adopted the Statement of Financial Accounting Standards No. 109
(SFAS No. 109) "Accounting for Income Taxes" which requires an asset and
liability method of accounting for income taxes. Under SFAS No. 109,
deferred tax assets are recognized and measured based on the likelihood of
realization of the related tax benefits in the future.
BARTER TRANSACTIONS
The Company sells some of its inventories through barter transactions with
certain of the Company's suppliers of goods and services, as well as
through barter exchange organizations. These transactions are recorded
based on the fair value of the goods or services involved. Net receivables
from unsettled barter transactions at December 31, 1995 was approximately
$23,457.
31
<PAGE>
Gallery Rodeo International and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1994
NOTE A - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
PERVASIVENESS 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.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is computed based on the weighted average number
of common and common equivalent (stock options) shares outstanding during
each year. The weighted average number of shares outstanding for the years
ended December 31, 1995 and 1994 was 15,005,812 and 14,405,971,
respectively. Fully diluted per share amounts are not materially different
from the amounts presented for primary earnings per share.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of the following information about the fair value of a
certain financial instrument for which it is practicable to estimate that
value. For purposes of the following disclosure, the fair value of a
financial instrument is management's best estimate of the amount at which
the instrument could be exchanged in a current transaction between willing
parties, other than in a forced sale or liquidation.
Changes in the assumptions or methodologies used to estimate fair value may
materially affect the estimated amounts. Also, management is concerned
that there may not be reasonable comparability between peer companies due
to the wide range of permitted assumptions and methodologies in the absence
of active markets. This lack of uniformity gives rise to a degree of
subjectivity in estimating financial instrument fair value.
32
<PAGE>
Gallery Rodeo International and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1994
NOTE A - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
The following assumptions and methodologies were used by management to
estimate the fair value of each class of financial instrument for which it
is practical to estimate that value:
CASH AND CASH EQUIVALENTS, NOTE RECEIVABLE, ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES, AND SHORT-TERM DEBT - The carrying amount of these items are a
reasonable estimate of their fair value because of the short maturity of
these instruments.
ACCOUNTS RECEIVABLE - The carrying amount is a reasonable estimate of fair
value based upon management's evaluation of customer credit worthiness.
NOTES RECEIVABLE - The fair value of the note receivable is determined by
analyzing discounted cash flow, using interest rates currently being
offered for loans with similar terms to borrowers of similar quality.
The caqrrying amount of $500,000 on the first trust deed loan approximates
its fair value.
LOANS TO OFFICERS/SHAREHOLDERS - The carrying amount of loans to
officers/shareholders is not materially different from the fair value,
based upon management evaluation of borrowers' credit worthiness.
ADVANCES TO/FROM OFFICERS/STOCKHOLDERS - The carrying amount of loans to
officers shareholders is not materially different from the fair value,
based upon management evaluation of borrowers' credit worthiness.
LONG-TERM DEBT AND DUE TO STOCKHOLDER - The carrying amount of these
instruments approximates fair value upon the Company's incremental
borrowing rate for similar type of borrowings.
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1995 consist of the following:
Furniture, fixtures and equipment $226,525
Leashold improvements 424,546
--------
651,071
Less accumulated depreciation and amortization 429,837
--------
$221,234
--------
--------
33
<PAGE>
Gallery Rodeo International and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1994
NOTE B - PROPERTY AND EQUIPMENT - Continued
On May 5, 1994, the Company purchased the real property known as the Elk
Creek Gaming Hall in the gaming district of Cripple Creek, Colorado for a
total purchase price of $1,285,000. The property was acquired by the
Company in consideration of 1,000,000 shares of the Company's restricted
common stock at a value of $.50 per share, the Company's assumption of
approximately $635,000 in debt and $150,000 in cash.
On June 13, 1995, the Company entered into an agreement for the sale of the
Elk Creek Gaming Hall and assignment of the lease of the Turf Club Casino.
The terms of the agreement provide that Elk Creek Gaming Hall is to be sold
for $1,500,000 in the form of $365,000 down payment; a promissory note in
the amount of $500,000 bearing interest at 10% with all principal due in
full within five years from close of escrow; and buyer's assumption of two
promissory notes - one in the principal amount of $361,000 and another
promissory note in the principal amount of $254,000. A gain of $126,000
was recognized on the sale.
NOTE C - LAND HELD FOR FUTURE DEVELOPMENT
In May 1993, the Company acquired a total of ten contiguous lots in Cripple
Creek, Colorado for a total purchase price of $2,150,000 on which it
intends to develop and operate a hotel and gambling casino, referred to as
the Wandering Star Hotel Casino. Seven of the lots were acquired for
1,750,000 restricted shares of the Company's common stock valued at an
average per share price of $.82 and options to acquire an additional
500,000 shares at $2 per share which expired in May 1995, plus
approximately $150,000 in cash and the Company's assumption of $162,000 in
debt. The remaining three lots were acquired for a purchase price of
$400,000 which was paid using a combination of seller and private financing
(see Note E). The property is classified as land held for future
development at December 31, 1995.
NOTE D - LAND HELD FOR SALE
On May 17, 1994, the Company purchased a 90% ownership interest in 13
contiguous lots located in Cripple Creek, Colorado (the "Bloomer property")
of which two lots are situated within the town's legalized gaming district.
The remaining 10% is owned by a director of the Company who has granted to
the Company a full power of attorney with respect to his ownership
interest. The Bloomer property was acquired by the Company for a total
purchase price of $370,000, consisting of the following: (1) $75,000 in
cash paid to the seller; (2) a promissory note in the principal amount of
$120,000 in favor of the seller, payable without interest, in 24 equal
monthly installments of $5,000, and (3) 350,000 shares of restricted common
stock of the Company. For purposes of determining the purchase price, the
value assigned to the restricted common stock of the Company was $.50 per
share. The Company financed the $75,000 cash payment pursuant to a
promissory note made by the Company and a director of the Company, with
such promissory note secured by a deed of trust on the Bloomer property.
34
<PAGE>
Gallery Rodeo International and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1994
NOTE D - LAND HELD FOR SALE - Continued
On June 30, 1995, the Company entered into an agreement for the sale of the
land and buildings in Cripple Creek, Colorado. Under the terms of the
agreement, the buyer is to purchase the Cripple Creek properties at a sales
price of $1,160,000 with payment to the Company in the form of $150,000 on
close of escrow ($15,000 of which was paid on June 30, 1995 and the
remaining $135,000 to be paid subsequently); three promissory notes with an
aggregate principal amount of $624,400 (bearing interest at 7.50%); and
assumption, by the buyer, of existing indebtedness totalling $385,600. At
December 31, 1995, the buyer has not closed escrow and, accordingly, the
Company has not recorded the sale in fiscal 1995 (see Note E).
NOTE E - LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1995:
Note payable, noninterest bearing, payable in monthly
principal installments of $5,000. Note collateralized
by a fourth deed of trust on the Bloomer property. $ 60,000
Notes payable, bearing interest at rates ranging from
11.05% to 20.5%, payable in monthly principal and
interest payments through June 1997. Note collateralized
by certain inventory. 255,451
Note payable, bearing interest at 18%, interest only
payable monthly with final principal and interest due
May, 1996. Note collateralized by a first deed of trust
on Bloomer property. 325,600
10% debenture due November 1999, to the Company's
common stock exercise price of $1.50 per share. 20,000
Note payable to stockholder, bearing interest at 18%,
interest only payable monthly with final principal and
interest due May 1997. Note collateralized by a first
deed of trust on the Wandering Star property. 200,000
Note payable to stockholder, bearing interest at 15%,
interest only payable monthly with final principal and
interest due June 1997. Note collateralized by a
second deed of trust on the Wandering Star property. 100,000
35
<PAGE>
Gallery Rodeo International and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1994
NOTE E - LONG-TERM DEBT - Continued
Note payable to stockholder, bearing interest
at 15%, interest only payable monthly with
principal and interest due June 1997.
Note collateralized by a second deed of trust
on the Wandering Star property. 200,000
Note payable to stockholder, bearing interest
at 16%, interest only payable monthly with
final principal and interest due July 1997.
Note collateralized by a first deed of trust on
the Wandering Star property. 162,000
Note payable to stockholder, bearing interest
at 15%, interest only payable monthly with
final principal and interest due May 1997.
Note collateralized by a first deed of trust on
the Wandering Star property. 150,000
Note payable to stockholder, bearing interest
at 12-15%, interest only payable monthly with
final principal and interest due May 1997. Note
collateralized by a second deed of trust on the
Wandering Star property. 50,000
Note payable to bank, bearing interest at the
bank's prime rate plus 2.75% (effective rate of
11.25% at December 31, 1995 and 1994), payable
in 11 monthly principal installments of $2,000
commencing April 28, 1994. Final principal and
interest payment due February 29, 1996 17,743
---------
1,540,794
Less current maturities 595,112
---------
$ 945,682
-----------
-----------
Estimated principal maturities of long-term debt are as follows:
Year ending
December 31,
--------------------
1996 $595,112
1997 945,682
--------------
$1,540,794
--------------
--------------
36
<PAGE>
Gallery Rodeo International and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1994
NOTE E - LONG-TERM DEBT - Continued
In order to meet its obligation at maturity with respect to the
outstanding principal and interest on their notes payable, the Company has
entered into an agreement to sell the Bloomer property resulting in the
assumption by the buyer of $385,600 of the Company's debt. At December
31, 1995, the buyer has not closed escrow and, accordingly, the Company
continues to reflect the outstanding debt on the Bloomer property (see
Note D).
The Company is currently involved in negotiations with the holders of the
Wandering Star debt and other hotel and casino management professionals
that could result in a reoganization of the Company, replacement of its
present management and restructuring of its $862,000 real estate credit
facility consisting of a series of six individual promissory notes. The
Company fully expects to finalize these negotiations in the very near
future, however, in the event that there is any lengthy delay or
postponement, the holders of the Wandering Star debt have agreed to a one
year extension of the notes making up the real estate credit facility at
rates and collateral consistent with the original loan agreements and with
maturity dates beginning May 1997.
NOTE F - INCOME TAXES
The provision for income taxes consists of current state income taxes
for the year ended December 31, 1995 and 1994.
A reconciliation of the U.S. statutory federal income tax rate to the
effective tax rate follows for the years ended December 31:
<TABLE>
<CAPTION>
1995 1994
---------- -----------
<S> <C> <C>
U.S. federal statutory rate 34.0% 34.0%
State income taxes 10.0% 10.0%
Utilization of net operating loss carryforward 44.0%
Net operating loss for which no tax benefit
is currently available (44.0%)
----------- -----------
- % - %
------------- -------------
------------- -------------
</TABLE>
37
<PAGE>
Gallery Rodeo International and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1994
NOTE F - INCOME TAXES - Continued
The major deferred tax asset items at December 31, 1995 are as follows:
Assets:
Bad debts $ 22,000
Valuation allowance for inventory 82,000
Net operating loss carryforwards 2,368,000
------------
2,472,000
Valuation allowance 2,472,000
------------
$ 0
------------
------------
The Company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets which may not be realized. The net change in
the valuation allowance was a decrease of $85,000 during 1995.
At December 31, 1995, the Company has approximately $6,073,000 of net
operating loss carryforwards available to offset future federal and state
taxable income, respectively, subject to certain state carryforward
limitations. The net operating loss carryforwards expire through 2009 for
federal purposes and 2000 for state purposes.
NOTE G - COMMITMENTS AND CONTINGENCIES
The Company leases various facilities and equipment under noncancellable
lease agreements expiring at various dates through 1999. Future minimum
rental commitments at December 31, 1995, under operating leases are as
follows:
Year ending Minimum lease
December 31, payments
------------- ---------------
1996 $ 389,879
1997 351,149
1998 246,789
1999 30,000
---------
$1,017,817
----------
----------
The terms of certain of the leases provide for increases in annual rents
based on the Consumer Price Index. Rental expense was approximately
$401,000 and $537,000, in 1995 and 1994, respectively. Sublease rental
income totalled $39,850 and $110,000 in 1995 and 1994, respectively.
38
<PAGE>
Gallery Rodeo International and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1994
NOTE G - COMMITMENTS AND CONTINGENCIES - Continued
The Company is involved in various litigation which has arisen out of the
ordinary course of business. Management believes that the disposition of
all litigation will not have a material effect on the Company's combined
financial position and results of operations. It is at least reasonably
possible that the Company's estimates of loss contingencies will change in
the near term.
NOTE H - RELATED PARTY TRANSACTIONS
At December 31, 1995, the Company had received advances from two of its
executive officers, who are also major stockholders, totalling $83,090 and
had made advances to stockholders totalling $112,405. These advances are
noninterest bearing and, as such, no interest has been accrued at December
31, 1995.
Clipper Industries, Inc., a major stockholder, performed management
consulting services for the Company. Fees paid by the Company to Clipper
Industries, Inc. were $45,264 and $86,150 during the years ended December
31, 1995 and 1994, respectively.
At December 31, 1995, a major stockholder and former officer of the
Company had a note payable to the Company totalling $143,750, payable on
demand at an interest rate of 4%. Interest income of approximately $6,000
was earned during 1995 and 1994, respectively.
Included in stockholders' equity at December 31, 1995, are two
stockholders' notes payable to the Company totalling $21,750, payable over
five years at an interest rate of 2%. Interest income of $1,000 was
earned during 1995 and 1994, respectively.
Red Star Corporation, a major stockholder, was paid approximately $24,500
and $62,000 for royalties in the year ended December 31, 1995 and 1994
respectively.
Included in the accompanying consolidated statements of operations is
interest expense to related parties approximating $134,000 in 1995
and 1994.
NOTE I - SALES TO MAJOR CUSTOMERS
During the year ended December 31, 1994, approximately 13% of sales were
made to one customer. No customer accounted for more than 10% of total
sales in 1995.
39
<PAGE>
Gallery Rodeo International and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1994
NOTE J - DISTRIBUTION RIGHTS
In March 1995, the Company sold back to Red Star Corporation ("Red Star")
its exclusive right to create and distribute bronze reproductions of
certain Renoir sculptings. The Company did retain the exclusive right to
specific pieces of the collection. In exchange for the release, Red Star
returned 850,000 restricted shares of the Company's common stock valued at
$161,500. In addition, Red Star agreed to reduce the Company's future
minimum monthly royalty payments. At December 31, 1995, the Company
reduced stockholders' equity by $161,500 for the shares returned by Red
Star.
NOTE K - PRIOR PERIOD ADJUSTMENTS
The financial statements for the year ended December 31, 1994 have been
restated from those originally presented to reflect the correction of an
overstatement in accrued liabilities of $287,698. The effect of the
restatement was to reduce the net loss by $287,698 ($0.02 per share) for
the period ended December 31, 1994.
40
<PAGE>
Gallery Rodeo International and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1994
NOTE L - FOURTH QUARTER ADJUSTMENTS
In the fourth quarter of fiscal 1995, the Company recorded an adjustment
for the reversal of the sale of the Bloomer property and a gain on the
sale of the Elk Creek property.
In the fourth quarter of fiscal 1994, the Company recorded the following
significant adjustments: (i) a reduction in inventory was recorded to
reflect an adjustment to the lower of cost or market; (ii) sales were
reduced and customer deposits were increased for revenue recognized prior
to shipment; (iii) allowance for doubtful accounts increased for accounts
deemed uncollectible; (iv) accrued liabilities were increased for
commissions payable not recorded; and (v) other assets were decreased for
impaired distribution rights.
The above adjustments affected the fourth quarter results of operations as
follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Decrease in sales $ - $ 547,000
-------------- -----------
-------------- -----------
Adjustment on sale of properties $ 1,037,000 $ -
-------------- -----------
-------------- -----------
Increase in cost of sales $ - $ 350,000
-------------- -----------
-------------- -----------
Increase in selling and general and
administrative expenses $ - $ 667,000
-------------- -----------
-------------- -----------
</TABLE>
NOTE M - STOCK OPTION PLAN
During 1995, the Company established a stock award plan under which it is
authorized to grant stock options to selected officers, directors,
employees and consultants. Shares subject to the plan shall not exceed 1
million shares of the common stock of the Company. No shares were
outstanding under the Plan at December 31, 1995.
In conjunction with the terms of an employment agreement entered into with
the Company's chief executive officer, an option to purchase 1,000,000
shares of the Company's common stock at a purchase prices ranging from
$0.25 to $0.45 per share was granted. The options are currently vested
and may be exercised at the later of five years or until termination of his
employment.
In addition, the Company has issued nonqualified stock options totalling
428,000 shares with exercise prices ranging from $0.50 to $1.00.
41
<PAGE>
Gallery Rodeo International and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1994
NOTE N - SUBSEQUENT EVENTS
In January 1996, the Company entered into an agreement to purchase
land in San Bernardino from an individual. The property is to be
acquired by the Company in consideration of 1,000,000 shares of the
Company's restricted common stock, the assumption of approximately
$315,000 in debt, the exchange of certain artwork and the
assumption of outstanding tax liens on the property, approximately
$85,000. Included in other assets at December 31, 1995 is a
$260,614 deposit on real property representing the cost of artwork
shipped to the seller in December 1995.
42
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
(Registrant): GALLERY RODEO INTERNATIONAL
By: /s/ Stephen M. Thompson Date: MAY 8, 1996
------------------------ -----------------
Stephen M. Thompson
Chief Executive Officer,
Chairman of the Board and
Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
date indicated.
By: /s/ Stepohen M. Thompson Date: MAY 8, 1996
------------------------- -----------------
Stephen M. Thompson
Director
By: /s/ George M. Maxson Date: MAY 8, 1996
------------------------- -----------------
George M. Maxson
Director
By: /s/ Jack A. Schneider Date: MAY 8, 1996
------------------------- -----------------
Jack A. Schneider
Director
43
<PAGE>
GALLERY RODEO INTERNATIONAL
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
- - ----------- ----------------------
24 Consent of Grant Thornton, LLP
27 Financial Data Schedule
44
<PAGE>
Exhibit No. 24
GRANT THORNTON LLP
1000 Wilshire Boulevard, Suite 700
Los Angeles, California 90017-2464
213-627-1717
May 7, 1996
Board of Directors
Gallery Rodeo International
421 North Rodeo Drive
Beverly Hills, California 90210
RE: Consent to Use of Opinion in 1995 Form 10-KSB
Dear Sirs:
Please let this letter serve as our consent to the use of our opinion
letter, dated March 18, 1996, as an exhibit in the Company's 1995 Form
10-KSB.
Sincerely,
/s/Grant Thornton LLP
45
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 357,753
<SECURITIES> 0
<RECEIVABLES> 151,756
<ALLOWANCES> 53,748
<INVENTORY> 989,997
<CURRENT-ASSETS> 1,499,506
<PP&E> 2,741,234<F1>
<DEPRECIATION> 429,837
<TOTAL-ASSETS> 5,316,418
<CURRENT-LIABILITIES> 2,975,401
<BONDS> 945,682
0
0
<COMMON> 1,312,245
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,316,418
<SALES> 4,517,213
<TOTAL-REVENUES> 6,392,213
<CGS> 1,253,179
<TOTAL-COSTS> 6,037,533
<OTHER-EXPENSES> (207,465)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (320,292)
<INCOME-PRETAX> 147,215
<INCOME-TAX> 2,400
<INCOME-CONTINUING> 147,215
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 144,815
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0
<FN>
<F1>Does not include other assets of $1,075,678.
</FN>
</TABLE>
