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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
X Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended February 29, 1996
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Transition report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from __________________ to __________________
Commission File number 0-18412
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PLAYORENA INC.
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(Name of small business issuer in its charter)
New York 11-2602120
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
22 Manhasset Avenue, Port Washington, New York 11050
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (516) 883-7529
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Securities registered pursuant to Section 12(b) of the Exchange Act: None
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Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock. $.001 par value
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(Title of class)
Common Stock Purchase Warrants
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(Title of class)
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 X No
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The number of shares outstanding of the registrant's Common Stock, as
of July 30, 1996 was 8,262,910 shares of Common Stock.
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TABLE OF CONTENTS
Page
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PART I
Item 1 - Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2 - Management's Discussion and Analysis or Plan of Operation . . . . . 6
PART II
Item 3 - Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . 8
Item 5 - Other Information . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 6 - Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . .13
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
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PLAYORENA INC.
BALANCE SHEET
FEBRUARY 29, 1996
(UNAUDITED)
ASSETS
$ -
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LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Notes payable $881,333
Cash overdraft 49,232
Accrued expenses 441,298
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TOTAL CURRENT LIABILITIES 1,371,863
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIENCY):
Common stock, $ .001 par value;
15,000,000 shares authorized,
8,262,910 shares issued and outstanding 8,263
Additional paid-in-capital 4,089,783
Accumulated deficit (5,469,909)
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TOTAL SHAREHOLDERS' DEFICIENCY (1,371,863)
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$ -
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See notes to financial statements.
1
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PLAYORENA INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
Three months ended
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February 29, February 28,
1996 1995
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EXPENSES:
General and administrative $ 5,070 $ 19,858
Interest expense 22,256 19,266
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TOTAL EXPENSES 27,326 39,124
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LOSS FROM CONTINUING OPERATIONS (27,326) (39,124)
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LOSS FROM DISCONTINUED OPERATIONS (60,238) (165,770)
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NET LOSS $ (87,564) $ (204,894)
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NET LOSS PER SHARE:
Continuing operations $ (0.00) $ (0.00)
Discontinued operations (0.01) (0.02)
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NET LOSS PER SHARE $ (0.01) $ (0.02)
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WEIGHTED AVERAGE SHARES USED IN COMPUTATION 8,262,910 8,196,000
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See notes to financial statements.
2
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PLAYORENA INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
Three months ended
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February 29, February 28,
1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(87,564) $(204,894)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 15,323 16,052
Change in operating assets and liabilities 21,680 105,751
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CASH USED IN OPERATING ACTIVITIES (50,561) (83,091)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment - 150
Proceeds from the sale of equipment - -
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CASH FLOWS FROM INVESTING ACTIVITIES - 150
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of) debt financing - 85,000
Decrease of capital lease obligations - (1,716)
Proceeds from officers - 1,400
Cash overdraft 49,232 -
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CASH PROVIDED BY FINANCING ACTIVITIES 49,232 84,684
NET INCREASE (DECREASE) IN CASH (1,329) 1,743
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CASH AT BEGINNING OF PERIOD 1,329 2,944
CASH AT END OF PERIOD $ - $ 4,687
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See notes to financial statements.
3
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PLAYORENA, INC.
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED FEBRUARY 29, 1996
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying financial statements are unaudited, but reflect all
adjustments which, in the opinion of management, are necessary for a fair
presentation of financial position and the results of operations for the
interim periods presented. All such adjustments are of a normal and
recurring nature. The results of operations for any interim period are not
necessarily indicative of the results attainable for a full fiscal year.
As discussed in the Company's Annual Report on Form 10-KSB, management has
agreed on a plan to discontinue the Company's operations and in this regard
has executed an Asset Sale Agreement. Accordingly, the accompanying
financial statements present such operations as discontinued operations.
2. LOSS PER SHARE
Per share information is computed based on the weighted average number
of shares outstanding during the period.
3. DISCONTINUED OPERATIONS
Assets and liabilities of the Company's discontinued operations
consist of the following at February 29, 1996:
Assets:
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Accounts receivable $ 29,308
Prepaid expenses 823
Property and equipment 202,871
Intangible assets 37,081
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Liabilities:
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Accounts payable and accrued expenses (471,442)
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Net $ (201,359)
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The revenues of the discontinued business were $118,192 for the three
month period ended February 29, 1996 and $222,051 for the three month
period ended February 28, 1995.
4. ACCRUED EXPENSES
Accrued expenses which are expected to remain with the continuing
entity consist of the following at February 29, 1996:
Interest $ 144,144
Professional fees 88,295
Other 7,500
Estimated losses through estimated disposal date 46,174
Estimated gain on disposal not recognized 155,185
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$441,298
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5
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Despite the best efforts of management to reduce costs by
significantly decreasing the number of locations in operation, during the fiscal
year ended November 30, 1995, the Company sustained losses from operations of
$477,693, and such losses continued for the first fiscal quarter of 1996 in the
aggregate amount of $87,564. As the Company has been unable to raise the
required capital, the Company's ability to continue its business in its present
form has been increasingly called into question. Accordingly, the Company has
decided to divest all of its operations and has executed an Asset Purchase
Agreement pursuant to which it has agreed to sell all of its assets and
properties (see "OTHER INFORMATION - Asset Purchase Agreement with Michael
Astor").
In light of the Company's agreement to sell all of its assets, the
Company is accounting for the historical results of its business as discontinued
operations. In this regard, the following discussion and analysis presents a
general, overall financial summary of the discontinued operations, rather than a
detailed discussion of the results of operations to be disposed in the near
future. As presented in the Company's recast financial statements, certain
expenses, consisting of minimal general and administrative expenses and debt
service costs, have been evaluated to be expenses attributable to the continuing
entity after consideration of the divestiture of operations.
The following discussion and analysis should be read in conjunction
with the Financial Statements and Notes thereto appearing elsewhere in this
report.
RESULTS OF OPERATIONS -
COMPARISON OF THREE MONTHS ENDED FEBRUARY
29, 1996 TO THREE MONTHS ENDED FEBRUARY 28, 1995
During the three month period ended February 29, 1996, revenues of the
discontinued operations decreased 47% to $118,192 from $222,051 in the same
period in 1995, as the Company greatly reduced the number of pre-school children
movement/play centers that it operates. Loss from discontinued operations
decreased from $165,770 in 1995 to $60,238 in 1996, reflecting the reduced cost
demands of the decreased level of the Company's activity.
The Company opened 4 new centers in January 1996 and operated a total
of 13 centers during the three month period ended February 29, 1996, as compared
to 51 centers in the same period in 1995.
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LIQUIDITY AND CAPITAL RESOURCES
At February 29, 1996, the Company had a working capital deficit of
$1,371,863 compared to a working capital deficit of $1,368,319 at February 28,
1995. Management has been attempting to reverse this downward trend by
significantly decreasing the number of Company owned centers in operation,
implementing staff reductions and seeking additional capital for the placement
of Playorena programs in alternative outlets. There can be no assurance that
the Company will be successful in obtaining any additional capital and placing
its programs in alternative outlets.
MANAGEMENT'S PLAN OF OPERATION
Management continues to believe that the Playorena program would
operate more profitably within a different environment than it has operated in
the past. Specifically, management feels that operating the program as part of
an existing childrens' retail outlet or day-care center would enable the program
to interface promotionally as well as providing mutually beneficial services.
Fixed, established locations could provide a more conducive environment and
greater visibility. Management believes that operating in such locations would
increase enrollments in the Playorena program, with reduced operating and
marketing costs. Although management has actively sought such outlets, the
program has not yet been operated in any such environment and there can be no
assurance that the Playorena program would work as contemplated or that any such
outlets would be willing to locate a Playorena program at its facility.
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PART II
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
LOAN TO THE COMPANY
On January 19, 1994, the Company executed and delivered to Robert M.
Rubin a Revolving 10% Promissory Note in the principal amount of $200,000 (the
"Note") pursuant to which the Company had borrowed as of February 18, 1994 the
maximum aggregate principal amount of $200,000. The loan is secured by a first
priority security interest in all of the assets of Playorena.
Advances made pursuant to the Note were due on September 30, 1995 and
were not paid. The Company does not at the present time have the resources to
repay the Note and Mr. Rubin has the right to foreclose on his security interest
in all of the assets of the Company. In consideration of the loan and credit
facility provided by Mr. Rubin, the Company issued 200,000 shares of the
Company's Common Stock to Mr. Rubin. Pursuant to the terms of the Asset
Purchase Agreement, dated as of March 31, 1995, between the Company and Michael
Astor, Mr. Rubin will be required to release his security interests so that the
entity acquiring the assets of the Company will acquire such assets free and
clear of any liens or encumbrances. (See "OTHER INFORMATION - Asset Purchase
Agreement with Michael Astor")
PRIVATE PLACEMENT OF EQUITY AND DEBT
In May 1994, the Company commenced and completed a private placement
of five units, each unit consisting of 22,222 shares of the Company's common
stock and a promissory note in the principal amount of $50,000, bearing interest
at the rate of ten percent per annum, with principal and interest due at the
earlier of the closing of any debt or equity offering of the Company's
securities yielding gross proceeds in excess of $1,500,000 or September 30,
1995. As each of the units were sold by the Company for $50,000, the Company
derived an aggregate of $250,000 from the private placement. With the exception
of one-half of one unit acquired by Lawrence E. Kaplan, a nominee to be elected
as a director of the Company, all of the units were acquired by unaffiliated
persons. The promissory notes were not repaid and the Company does not at the
present time have the resources to repay the promissory notes.
LINE OF CREDIT
Pursuant to the terms of a letter agreement dated November 18, 1994
(the "Letter Agreement") among the Company and each of Michael Astor, Susan
Astor and Fred Jaroslow (then current directors of the Company), in their
individual capacities, and Lawrence E. Kaplan, Stanley Kaplan and Mr. Rubin (the
"Investors"), the Company agreed to, among other things, issue an aggregate of
3,250,000 shares of common stock to Messrs. Andrew Kaplan (as Stanley Kaplan's
designee), Lawrence E. Kaplan and Rubin in consideration of the payment of an
aggregate of $4,200, past financial consulting services rendered and the joint
and several
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agreement among the Investors to make available to the Company a $275,000 line
of credit (the "Line of Credit").
The Letter Agreement establishing the Line of Credit provides that the
outstanding principal amount drawn down shall bear interest at the rate of 10%
per annum, with principal and interest due on September 30, 1995. To date, the
Company has borrowed the full amount available under the Line of Credit
($275,000). The Line of Credit was not repaid and the Company does not at the
present time have the resources to repay the Line of Credit.
ITEM 5. OTHER INFORMATION.
ASSET PURCHASE AGREEMENT WITH MICHAEL ASTOR
Beginning in April, 1995, the Company began negotiating with Michael
Astor with respect to the possible acquisition by Mr. Astor of all of the assets
of the Company. On April 14, 1995, the Company entered into an Asset Purchase
Agreement (the "Agreement") with Michael Astor (who, along with his wife, Susan
Astor, comprise all of the current officers and members of the Board of
Directors of the Company), pursuant to which an entity to be formed by Mr. Astor
(the "Purchaser") will acquire all of the assets and properties of the Company,
including, without limitation, all copyrights, trademarks, trade names
(including the name "Playorena"), accounts receivable, equipment, inventory,
cash and cash equivalents, in exchange for the Purchaser's assumption of certain
liabilities of the Company and the transfer to the Company by Mr. and Mrs. Astor
of 1,041,800 shares of common stock of the Company, $.001 par value per share
(the "Common Stock"), representing all of the Common Stock of the Company owned
by Mr. and Mrs. Astor. The assets to be transferred and the liabilities to be
assumed have an approximate value of $270,000 and $471,000, respectively, at
February 29, 1996.
The terms of the Agreement were negotiated on behalf of the Company by
Robert M. Rubin. Mr. Rubin owns 2,923,334 shares of Common Stock of the
Company, representing 22.9% of the issued and outstanding shares of Common
Stock. In addition, in consideration for a loan made to the Company by Mr.
Rubin in January 1994 and due in September 1995, Mr. Rubin was granted a first
priority security interest in all of the assets of the Company. As the Company
does not presently have the resources to repay the $200,000 principal amount of
the secured loan to Mr. Rubin, since September 30, 1995, Mr. Rubin has had the
right to foreclose on his security interest in all of the assets of the Company.
See "Defaults Upon Senior Securities - Loan to the Company". Pursuant to the
terms of the Agreement, Mr. Rubin will be required to release his security
interests so that the Purchaser will obtain title to the Company's assets free
and clear of any liens or encumbrances.
The Agreement specifically provides that the Company shall retain "all
claims for tax refunds, tax loss carry forwards or carry backs or tax credits of
any kind" applicable to the Company's business prior to the closing of the Asset
Sale. As of November 30, 1995, the
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Company has net operating loss carry forwards of approximately $4,900,000 that
expire between 1998 and 2009, and investment tax credit carry forwards of
approximately $16,000, which expire in 1998. Without future profits by the
Company, such tax losses are of limited or no value. The Agreement further
specifies that the following liabilities will NOT be assumed by the acquiring
entity:
(i) liabilities owed to certain affiliates of the Company, including Mr.
Rubin, estimated to be $878,333 in the aggregate (including $143,333 loaned to
the Company since January 1995);
(ii) liabilities owed to Solomon & Moskowitz, P.C. and certain other
professionals who have provided services to the Company, estimated to be $40,000
aggregate;
(iii) amounts owed to the Company's transfer agent and to Standard and
Poors, estimated to be $6,600 in the aggregate;
(iv) claims made against the Company by shareholders of the Company;
(v) certain fees incurred in connection with compliance with applicable
securities laws; and
(vi) all liabilities and obligations of the Company arising after the
closing of the Asset Sale.
The financial statements included in this Quarterly Report for the
fiscal quarter ended as of February 29, 1996, indicate that the Company had
negative working capital of $1,371,863 and a negative net worth of $1,371,863 as
of such date. Based upon the proposed structure of the transaction set forth in
the Agreement, immediately following the closing of the Asset Sale the Company
will have no assets or business but will retain estimated liabilities of
$1,170,504, plus certain obligations incurred between February 29, 1996 and the
date of the closing, plus possible liabilities with respect to certain
heretofore unasserted claims against the Company. In light of the fact that
subsequent to the closing the Company will not have any business or assets with
which to generate revenue, the Company will not have any means to satisfy such
liabilities or obligations unless and until the Company is able to raise
additional capital or acquire a profitable business. The Company does not
presently have any such plans and there can be no assurance that raising such
capital or acquiring a new business will be possible. If such capital should
become available or such a business should be offered to the Company, the
acquisition is likely to result in immediate and substantial dilution to the
shareholders of the Company.
Although the Agreement provides for the assumption by the Purchaser
and, indirectly, by Mr. Astor personally, of significant liabilities of the
Company, there can be no assurance that such liabilities will be satisfied. The
Purchaser will be formed by Mr. Astor for the purpose of acquiring the Playorena
assets and continuing the business on a significantly
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smaller scale. Neither the Purchaser nor Mr. Astor presently have sufficient
resources to satisfy all of the liabilities to be assumed.
In order to afford the Company the flexibility to attempt to raise
additional capital and/or acquire another business subsequent to the Asset Sale,
management believes that it would be in the Company's best interest to reverse
split the shares of Common Stock outstanding immediately subsequent to the Asset
Sale on a 20 shares for one share basis so that the number of shares of Common
Stock outstanding immediately subsequent to the reverse stock split will be
750,000 (including 3,278,890 pre-split shares to be issued prior to the closing
to Messrs. Rubin, Lawrence Kaplan, Stanley Kaplan and Jaroslow in consideration
for their lending the Company an aggregate of $143,333, see "Additional Loans
From Affiliates of the Company"). Increasing the number of authorized but
unissued shares of Common Stock will insure that authorized but unissued shares
will be available for stock dividends or stock splits, possible acquisitions,
financings, stock option or purchase plans and other corporate purposes in the
future, without the necessity of further shareholder action. Such flexibility
will enable the Company's Board of Directors to issue additional shares of
Common Stock without further approval by the shareholders upon such terms and at
such times as the Board may determine. Holders of the Common Stock have no
preemptive rights to subscribe to such shares. The Company currently has no
understandings, agreements, plans or commitments that would involve the issuance
of additional shares of Common Stock.
In light of its decision to divest all of its operations, the Company
is accounting for the historical results of the business as discontinued
operations. In this regard, in accordance with generally accepted accounting
principals, the Company has an unrecorded gain on disposal at February 29, 1996
of approximately $155,000, representing the amount by which estimated
liabilities to be assumed exceed estimated value at closing of assets to be
divested and estimated losses through disposal date. At the time that the Asset
Sale is consummated, the Company will recognize the actual dollar amount of this
unrecorded gain.
In light of the fact that the Agreement concerns the sale of assets to
an entity controlled by the current directors of the Company, the Board of
Directors had originally relied upon Mr. Rubin, a controlling shareholder of the
Company, to negotiate the transaction on behalf of the Company and the
shareholders. The Board of Directors subsequently adopted a resolution
ratifying the actions of Mr. Rubin, and authorizing the execution of the
Agreement by Mr. Astor, as Vice President, and the recommendation of the sale to
the shareholders. The Board of Directors has not retained an independent
financial advisor to pass upon the fairness of the Agreement.
Obtaining the approval of the holders of not less than 66 2/3% of the
issued and outstanding shares of capital stock of the Company at the Company's
upcoming Special Meeting of Shareholders is a condition precedent to the closing
of the Asset Sale contemplated by the Agreement. The Company is currently
preparing the requisite solicitation/disclosure documentation and will call a
special meeting of the shareholders as soon as possible to obtain such approval.
In addition, as the Agreement requires Mr. and Mrs. Astor to resign as officers
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and directors of the Company, in the event that the transaction is approved by
the shareholders, the Company will also request that the shareholders elect
Messrs. Rubin, Romano and Lawrence Kaplan as directors of the Company.
Consummation of the Asset Sale does not require the Company to satisfy
any Federal or state regulatory requirements or to obtain any government
approvals.
ADDITIONAL LOANS FROM AFFILIATES OF THE COMPANY
In February and March 1995, the Company received loans in the
aggregate amount of $143,333 from three directors of the Company and the father
of a principal shareholder of the Company: (i) Lawrence E. Kaplan - $ 24,416;
(ii) Stanley Kaplan (the father of Andrew Kaplan) - $20,417; (iii) Fred
Jaroslow - $40,500; and (iv) Robert Rubin - $62,000. The lenders have verbally
agreed to accept an aggregate of 3,278,890 (163,945 shares subsequent to the
reverse stock split) shares of Common Stock as payment in full for such loans.
Such shares will be issued simultaneously upon receipt of the shares to be
delivered to the Company by Mr. and Mrs. Astor.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
3.1 Certificate of Incorporation, as amended - incorporated by reference to
Exhibit 3.1 to Registration Statement on Form S-18 (SEC File No. 33-29561-
NY)
3.2 By-Laws - incorporated by reference to Exhibit 3.2 to Registration
Statement on Form S-18 (SEC File No. 33-29561-NY)
4 1989 Incentive Stock Option Plan - incorporated by reference to Exhibit
4.3 to Registration Statement on Form S-18 (SEC File No. 33-29561-NY)
10.1 Amended and Restated Employment Agreement between Company and Fred
Jaroslow - incorporated by reference to Exhibit 10.1 to Registration
Statement on Form S-18 (SEC File No. 33-29561-NY)
10.2 Amended and Restated Employment Agreement between Company and Susan Astor
- incorporated by reference to Exhibit 10.2 to Registration Statement on
Form S-18 (SEC File No. 33-29561-NY)
10.2(a) Amendment to Employment Agreement between Company and Susan Astor
(Annual Report on Form 10-KSB for fiscal year ended 11/30/93)
10.3 Amended and Restated Employment Agreement between Company and Michael
Astor - incorporated by reference to Exhibit 10.3 to Registration
Statement on Form S-18 (SEC File No. 33-29561-NY)
10.3(a) Amendment to Employment Agreement between Company and Michael Astor
(Annual Report on Form 10-KSB for fiscal year ended 11/30/93)
10.4 Office Lease (Annual Report on Form 10-KSB for fiscal year ended 11/30/93)
10.5 Form of Franchise Agreement - incorporated by reference to Exhibit 10.6 to
Registration Statement on Form S-18 (SEC File No. 33-29561-NY)
10.6 Master Franchise Agreement dated as of November 30, 1989, between the
Company and Horikawa Sangyo Kabushiki Kaisha - incorporated by reference
to Exhibit 10.8 to Registration Statement on Form S-18 (SEC File No.
33-29561-NY)
10.7 Consulting Agreement dated December 16, 1991 between the Company and
Palmer & Moore Ltd. - incorporated by reference to Exhibit 10.8 to 1991
Annual Report on Form 10-K (SEC File No. 0-18412)
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10.8 Revolving 10% Promissory Note (Annual Report on Form 10-KSB for fiscal
year ended 11/30/93)
10.9 Form of Agreement and Plan of Reorganization between the Company and Kids
'N Things' Inc. (Annual Report on Form 10-KSB for fiscal year ended
11/30/93)
10.10 Management Agreement, dated November 9, 1993 between the Company and
Bernard Tessler (Annual Report on Form 10-KSB for fiscal year ended
11/30/93)
10.10(a) Amendment to Management Agreement, dated January 20, 1994 between the
Company and Bernard Tessler (Annual Report on Form 10-KSB for fiscal year
ended 11/30/93)
10.11 Letter Agreement dated November 18, 1994 (Annual Report on Form 10-KSB for
fiscal year ended 11/30/94).
10.11(a) Amendment to Letter Agreement dated April 10, 1995 (Annual Report on
Form 10-KSB for fiscal year ended 11/30/95).
10.12 Asset Purchase Agreement, dated as of March 31, 1995 (Quarterly Report on
Form 10- QSB for fiscal quarter ended February 28, 1995).
(b) REPORTS ON FORM 8-K.
The Company did not file any Current Reports on Form 8-K during the first
fiscal quarter of 1996.
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SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PLAYORENA INC.
July 30, 1996 By:/s/ MICHAEL ASTOR
--------------------------------
Michael Astor
Vice President, Chief Operating
Officer, Chief Financial Officer
and Treasurer (as both a duly
authorized officer of the
registrant and the principal
financial officer or chief
accounting officer of the
registrant)
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