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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File number 0-18412
PLAYORENA INC.
(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
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 (Expired January 1996)
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(Title of class)
Check whether 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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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. [X]
State issuer's revenues for its most recent fiscal year: $117,866 .
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was
sold, or the average bid and asked prices of such stock, as of a specified
date within the
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past 60 days: As of June 9, 1998 the average bid price of common stock was
$.001 and the average asked price was $.05.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: As of June 5, 1998 the
number of shares of common stock outstanding was 12,762,910.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Playorena Inc. (the "Company") was incorporated in the State of New York
in 1981 and currently owns and operates centers that offer recreational play
and exercise programs for children between three months and four years of
age, but as indicated below, the Company will shortly consummate the sale of
the assets comprising this business. The Company was founded by Susan Astor
based upon a similar program developed, in substantial part, by Ms. Astor at
a community center in Marin County, California in 1974. The programs bring
together children and their parents in recreational activities organized
according to developmental stages providing children an opportunity to
practice age-appropriate skills through play and providing an opportunity for
a positive social experience for parents.
RECENT EVENTS
ASSET PURCHASE AGREEMENT WITH MICHAEL ASTOR
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 $584,110.
Since the Company had been unable to raise the required capital to continue
operating in its present form, the Company decided to divest all of its
operations.
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 formed by Mr. and Mrs. Astor (the
"Purchaser") agreed to 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 (the "Playorena Assets"), 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. 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 was a condition
precedent (the "Asset Sale"). The assets to be transferred and the
liabilities to be assumed had an approximate value of $277,000 and $478,000,
respectively, at November 30, 1995 and $131,000 (which the Company has
written off as of November 30, 1996) and $481,000, respectively, at November
30, 1996. At November 30, 1997 liabilities of the discontinued business
consisting of accounts payable and accrued expenses aggregated $496,583. As
of November 30, 1997 the Company's total liabilities were
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$1,827,395. As indicated below, this shareholder approval was obtained in
February 1997 and the Asset Sale is expected to be consummated in July 1998.
The terms of the Agreement were negotiated on behalf of the Company by
Robert M. Rubin beginning in April 1995. Mr. Rubin currently 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 has not had 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. Pursuant to the terms of the Agreement,
Mr. Rubin is 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 only other secured creditors, certain individuals and
entities who purchased certain securities of the Company in 1994, will
release their liens in exchange for 1,381,136 shares of Common Stock (after
the reverse split described herein). See "Private Placement of Equity and
Debt" below.
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. Without future profits by the Company such tax losses are of
limit or no value. As of November 30, 1997, the Company has net operating
loss carry forwards of approximately $5,700,000 that expire between 1998 and
2011, 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 $875,333 in the aggregate (including $143,333 loaned
to the Company since January 1995) plus accrued interest, estimated at
$296,956 at November 30, 1996 (these liabilities are expected to be converted
into equity of the Company);
(ii) liabilities owed to certain professionals who have provided services
to the Company, plus other liabilities all aggregating approximately $158,524
at November 30, 1997;
(iii) claims made against the Company by shareholders of the Company, none
of which are presently pending or, to the Company's knowledge, threatened;
(iv) certain fees incurred in connection with compliance with applicable
securities laws; and
(v) all liabilities and obligations of the Company arising after the
closing of the Asset Sale.
The financial statements included in this report indicate that based
upon the proposed
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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 $952,062 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 business should be
offered to the Company, any such transaction is likely to result in immediate
and substantial dilution to the present shareholders of the Company.
The Company has written off all the remaining assets of the discontinued
business, consisting mainly of the undepreciated cost of play equipment, at
November 30, 1996. Such write off totaled approximately $131,000. Liabilities
of the discontinued business consist of accounts payable and accrued expenses
aggregating $496,583. The Company will remain contingently liable to the
extent that assumed liabilities are not satisfied. In this regard, the
Company has not recognized any gain at November 30, 1997 for the impending
assumption of these liabilities. Revenues of discontinued business were
$117,866 and $340,439 in the fiscal years ended November 30, 1997 and 1996,
respectively.
Although the Agreement provides for the assumption by the Purchaser and,
indirectly, by Mr. and Mrs. Astor personally, of significant liabilities of
the Company, the Company will remain contingently responsible for the
satisfaction of such liabilities and there can be no assurance that such
liabilities will be satisfied. The Purchaser was formed by Mr. and Mrs. Astor
for the purpose of acquiring the Playorena Assets and continuing the business
on a significantly smaller scale. Neither the Purchaser nor Mr. Astor will
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 believed it to be in the Company's best interest to reverse
split the 15,000,000 shares of Common Stock to be outstanding immediately
subsequent to the Asset Sale (including 3,278,890 pre-split shares to be
issued prior to the closing to Messrs. Rubin, Lawrence Kaplan and Jaroslow in
consideration for their lending the Company an aggregate of $140,333, see
"Additional Loans From Affiliates of the Company") on a one share for twenty
share basis so that the number of shares of Common Stock outstanding
immediately subsequent to the reverse stock split will be 750,000. 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. Except as
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disclosed herein, the Company currently has no understandings, agreements,
plans or commitments that would involve the issuance of additional shares of
Common Stock. This reverse split also was approved by the shareholders of the
Company in February 1997.
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 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 did not retain an independent
financial advisor to pass upon the fairness of the Agreement.
On February 7, 1997, a meeting of shareholders of the Company was held
at which the Agreement and the reverse stock split were approved by a vote of
the Company's shareholders. The aforementioned conditions to the Agreement
have been approved and ratified.
Consummation of the Asset Sale does not require the Company to satisfy
any Federal or state regulatory requirements or to obtain any government
approvals.
The Company is currently in the process of consummating the Asset Sale,
which is expected to be completed in July 1998.
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. As indicated above,
the loan is secured by a continuing security interest in all of the assets of
the Company.
Advances made pursuant to the Note were due to be repaid on September
30, 1995 and were not paid. The Company is in default of this Note as of
November 30, 1995. 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. As part of the Asset
Sale, Mr. Rubin will release this security interest. Mr. Rubin has verbally
agreed to accept an aggregate of 1,905,922 shares (subsequent to the reverse
stock split) of Common Stock as payment in full for such indebtedness to be
issued upon consummation of the Asset Sale.
ADDITIONAL LOANS FROM AFFILIATES OF THE COMPANY
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In February and March 1995, the Company received loans in the aggregate
amount of $143,333 from three then directors of the Company and the father of
a principal shareholder of the Company in the following amounts: (i) Lawrence
E. Kaplan - $ 20,426; (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 at the closing of the Asset Sale.
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 secured 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 was 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 then
director (and current nominee for 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.
The Company has offered and as of the date hereof most of these lenders
have verbally agreed to accept an aggregate of 1,381,136 shares (subsequent to
the reverse stock split) of Common Stock as full payment for such indebtedness,
and the release of the security interest in the Company's assets, to be issued
upon consummation of the Asset Sale.
LIQUIDITY AND CAPITAL RESOURCES
At November 30, 1997, the Company had a working capital deficit of
$1,827,395 compared to a working capital deficit of $1,718,375 at November
30, 1996.
Based upon the 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 $952,062 (all of
which shall be converted into shares of Common Stock as indicated above),
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
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shareholders of the Company.
TERMINATION OF PLAN OF REORGANIZATION, ISSUANCE OF SHARES AND
LINE OF CREDIT
As a condition to Mr. Rubin's agreement to make the above described loan
to the Company pursuant to the Note, on April 13, 1994 the Company entered
into an Agreement and Plan of Reorganization (the "Reorganization Agreement")
with Kids `N Things, Inc., a newly formed Delaware corporation wholly-owned
by Messrs. Rubin, Bernard Tessler and Jerome Feldman and formed for the sole
purpose of facilitating a merger of such entity with the Company ("Kids `N
Things"). In accordance with the terms of the Reorganization Agreement, Alan
Goldberg, Kent Q. Kreh, Mark Levine and Richard A. Samber resigned as
directors of the Company and Bernard Tessler, Philip Baird and Louis Horvitz
were appointed to the Board as designees of Kids `N Things.
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 directors of the Company), in their individual
capacities, and Lawrence E. Kaplan, Stanley Kaplan and Mr. Rubin (the
"Investors"), the Company agreed to: (i) cause the Board of Directors of each
of the Company and Kid `N Things to terminate the Reorganization Agreement;
(ii) issue 1,500,000 shares of Common Stock to Bernard Tessler in
consideration of the payment of $2,000 and past services rendered to the
Company; (iii) elect each of Messrs. Lawrence E. Kaplan, Rubin and Andrew
Kaplan (the son of Stanley Kaplan) to fill three vacancies on the Board of
Directors caused by the resignations of Messrs. Tessler, Baird and Horvitz;
(iv) issue an aggregate of 100,000 shares of Common Stock to Jerry Feldman in
consideration of the payment of $100 and past services rendered to the
Company, (v) issue an aggregate of 3,249,996 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 agreement
among the Investors to make available to the Company a $275,000 line of
credit (the "Line of Credit"); and (vi) issue 400,000 shares of Common Stock
to Mr. Rubin in consideration of the payment of $400 and his agreement to
waive any and all defaults by the Company to make current interest payments
through the maturity date arising under the Note. The 5,250,000 shares of
Common Stock to be issued to Mr. Tessler pursuant to the Letter Agreement
were reduced by 750,000 shares pursuant to a subsequent letter agreement
between the Company and Mr. Tessler dated April 10, 1995 (the "Second Letter
Agreement"), wherein Mr. Tessler agreed, among other things, to reduce the
total number of shares of Common Stock to be issued to him from 1,500,000 to
750,000. The total number of shares required to be issued pursuant to the
Letter Agreement is 4,500,000. These shares were issued in September 1996.
On October 26, 1994, Messrs. Lawrence E. Kaplan, Rubin and Andrew Kaplan
were
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elected to the Board of Directors. Each of Mr. and Mrs. Astor, the current
directors of the Company, agreed to vote to elect three designees of the
Investors to the Board of Directors of the Company until such time as the
Line of Credit is repaid or the Investors default on their obligations
arising under the Line of Credit. Each of the Investor's designees to serve
on the Board of Directors had agreed to resign upon the earlier of repayment
of all outstanding amounts of principal and accrued interest under the Line
of Credit or a material breach of the Line of Credit by any of the Investors,
unless such designees have previously been elected to the Board of Directors
by vote of the Company's shareholders. Messrs. Lawrence E. Kaplan, Rubin and
Andrew Kaplan subsequently resigned as directors and no replacements have as
yet been designated by the Investors.
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). No portion of the Line of Credit has been repaid and the
Company does not at the present time have the resources to repay the Line of
Credit. These lenders have verbally agreed to accept an aggregate of
5,555,965 shares (subsequent to the reverse stock split) of Common Stock as
full payment for such indebtedness and certain services which have been
provided by such individuals, to be issued upon consummation of the Asset
Sale.
MANAGEMENT AGREEMENT WITH BERNARD TESSLER .
On November 9, 1993, the Company entered into a Management Agreement
with Bernard Tessler, as amended by a letter agreement dated January 20, 1994
(collectively, the "Management Agreement"), whereby the Company agreed to
engage Mr. Tessler to manage its business for a period of one year. In
addition to the fee payable to Mr. Tessler pursuant to the Management
Agreement, the Company agreed that in the event that the merger with Kids `N
Things was not completed before February 28, 1995, the Company would issue an
aggregate of 2,600,000 shares of common stock to Messrs. Tessler, Rubin and
Feldman in recognition and consideration of Mr. Tessler entering into and the
services to be rendered pursuant to the Management Agreement, the credit to
be extended by Mr. Rubin pursuant to the Note and the services to be rendered
and costs to be incurred by Messrs. Tessler, Rubin and Feldman in connection
with the merger. Pursuant to the terms of the Letter Agreement, the Company
and Mr. Tessler agreed to terminate the Management Agreement, thereby
relieving the Company of any future obligation to issue any shares
thereunder. Mr. Tessler and the Company further agreed to enter into a
Consulting Agreement effective January 1, 1995, pursuant to which Mr. Tessler
agreed to provide consulting services during 75% of his full working time for
a fee of $75,000 per annum through February 28, 1995 and to provide
consulting services during 20% of his full working time for a fee of $25,000
per annum from March 1, 1995 through December 31, 1997. Pursuant to the terms
of the Second Letter Agreement, Mr. Tessler agreed, among other things, to
release the Company from all payment obligations arising under the Consulting
Agreement in
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consideration for a payment of $6,200, which payment has been made.
OPERATIONS DISCONTINUED
THE PLAYORENA CENTERS
The Company opened its first two centers in 1982 and, as of the date of
this Annual Report, operates 9 centers in New York. The Company did not add
any centers in fiscal 1997. Revenues from classroom fees generated by
Company-owned centers were $345,402 in fiscal 1997, representing a decrease
from $340,439 classroom fees generated in fiscal 1996.
In addition to the 9 Company-operated centers, the Company began a
franchise sales program in December 1984 and has sold franchises for the
operation of 28 centers, 5 of which are now being operated by 2 franchisees
- -- 4 in Japan, and 1 in Korea. The initial franchise fee charged by the
Company ranged from $7,000 to $14,000 per center. Thereafter each franchisee
pays the Company a royalty fee equal to 6% of gross sales. In addition, each
franchisee may be required to pay additional amounts to the Company for
advertising. In light of the Company's belief that it was more economically
advantageous to expand through Company-owned centers, in 1989 the Company
elected not to renew its franchise registrations with the proper government
authorities and is therefore unable to offer additional franchises in the
United States at this time.
During the recent years certain of the Company's current franchisees
have withheld required royalty payments asserting the Company has failed to
provide certain services. The Company estimates that the amounts being
withheld are between $10,000 and $15,000. Although management is discussing
the accusations with such franchisees in an attempt to resolve the dispute,
the Company does not believe that a significant amount of the royalty
payments will be collected. Upon the closing of the Asset Sale, the Company's
rights under agreements with the franchisees will be transferred to the
acquiring entity, including the amounts owed to the Company by the
franchisees.
THE PLAYORENA PROGRAM
The Playorena program is specifically designed to provide a positive
age-appropriate play and exercise environment for children from three months
to four years of age who are accompanied by a parent or guardian. Through a
combination of structured activities and play, each child's natural tendency
to explore and to develop physical and mental skills is encouraged. By
providing opportunities for successful experiences and adult approval, the
Playorena program is designed to foster self-esteem and a sense of
accomplishment, and the relaxed non-competitive atmosphere of the Playorena
class can often serve as a child's first socialization experience.
Each Playorena center appears as a brightly colored indoor playground
and is equipped
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with a variety of pieces of special, age-appropriate equipment such as small
slides, foam steps, barrels, tunnels, mini-climbers, bouncers, rocking boats,
mats, balls and foam inclines, all arranged in a pre-set format. Centers are
typically located in large rooms of at least 1,200 square feet rented from
religious organizations, community centers and other similar entities. The
room is typically rented on a per-diem basis and the equipment is stored on
the premises when not in use. As the Playorena program does not require any
renovations or improvements to be made to the room housing the center, and as
the rooms are typically rented on a per-diem basis, the Company has the
ability to relocate any center at a minimal cost. Historically, the Company
has not encountered any difficulties in locating suitable locations for its
centers.
Each Playorena class is led and supervised by a "facilitator".
Facilitators are fully trained by the Company and are provided with a
detailed manual which describes each class for each developmental stage,
includes a tape of songs used in the program and sets forth other essential
background material written and reviewed specifically for the Playorena
program. In addition, each child is accompanied by a parent or guardian. As
such, the centers also serve as a social activity for parents who are sharing
similar experiences. In addition to affording parents the opportunity to
provide their children with positive attention, the centers provide parents,
especially mothers with their first child who have changed their life styles
after having a baby, with contact with peers who have similar interests and
concerns.
The Playorena program is sold by the Company as a series of 8 to 13
weekly sessions which primarily operate in the Spring, Fall and Winter. All
sessions are paid for in advance upon enrollment and the Company accepts Visa
and MasterCard to facilitate payments. Classes are 45 minutes in length and
each center operates from one to three days per week, conducting between
three and eight classes per day. Class sizes are limited to a maximum of 20
children, depending upon the size of the center, and are offered to four
different developmental stages at different class times. Each age group is
offered activities specifically designed to be appropriate for that stage of
development.
Since its inception, the Company and its franchisees have registered
more than 190,000 enrollments in its programs and during the fiscal year
ended November 30, 1997, the Company registered approximately 3,000
enrollments in its programs. During its last three sessions (Spring 1997,
Fall 1997 and Winter 1997/98) the Company's 9 owned centers averaged an
enrollment of approximately 80 children per session. An "enrollment" is one
child's participation in one 8 to 13 week session. Children who participate
in more than one session per year are counted as more than one "enrollment"
during such year. Since September 1991, the Company has experienced a decline
in the average number of enrollments per center and believes that such a
decline is attributable to the continuing economic downturn in the New York
metropolitan area and increased competition. The Company cannot predict how
long this decline will continue.
OPERATING CONTROLS AND PROCEDURES
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For purposes of management and marketing, the Company had previously
implemented a system whereby the centers outside of the New York metropolitan
area were grouped in clusters of up to 8 centers, each of which was supervised
by a local manager. Franchisee-operated centers were not included in the
clusters. Local managers typically operated out of their homes using a telephone
installed at the Company's expense. Their primary responsibilities included
locating potential centers, hiring and training facilitators and processing
registrations which were forwarded to the main office. This program was
terminated in Spring 1995.
COMPETITION
The Company's major competitor in the exercise/play program market is
Gymboree Corp. ("Gymboree"), a publicly traded company. Although Playorena
and Gymboree evolved directly from the prototype developed, in substantial
part, by Ms. Astor, Gymboree has been operating for approximately five years
longer than the Company and is substantially larger with greater resources.
Both Gymboree and Playorena are similar in concept, purpose and pricing.
Playorena's programs are currently operating in several of the same markets
in which Gymboree operates. In addition, new indoor exercise/play centers
have recently been established by various operators which provide classes for
a wider age range than that for which the Company provides and allows
participants to "drop in" for individual programs without making a commitment
for a full session. Such centers have begun to create some competition for
the Company. Other small companies and local organizations such as YMCA
programs, church-affiliated or non-profit groups also compete with the
Company as part of their overall programs. Management believes that the
Company competes by offering a trained facilitator and a
professionally-planned and specialized program in well-equipped facilities.
TRADEMARKS
The Company registered the trademarks "Playorena" in 1984 and
"Playercise" in 1986, in the principal register of the United States Patent
and Trademark Office. A federally registered trademark is effective for 20
years and may be renewed for additional terms of 20 years subject only to
continued use by the registrant. A federally-registered trademark provides
presumption of ownership of the mark by the registrant in connection with its
goods and services and is constructive notice throughout the United States of
such ownership. The Company has also received, or applied for, registrations
of such trademarks for various categories of uses in Japan. The trademarks
and registrations will be assigned to the acquiror as part of the Asset Sale.
INSURANCE
The Company's insurance coverage currently includes the following types
of policies: property; general liability and medical payments; excess
umbrella liability; workers compensation; New York disability benefits and
group life and medical. The liability policy
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includes a medical payment provision for accidents which applies to each
child enrolled in a program and is subject to various limits. There can be no
assurance that claims in excess of or not included within the Company's
coverage will not be asserted.
EMPLOYEES
In addition to the Company's two executive officers, the Company
currently employs an office manager and 10 part-time facilitators working at
the Company's 9 centers.
Each class is conducted by a trained facilitator. Facilitators are
recruited through newspaper advertisements and are typically former teachers
who desire a part-time position. None of the Company's employees is
represented by a union or collective bargaining unit and the Company believes
that its relations with its employees are good.
GOVERNMENT REGULATION
Although the Company's current exercise/play programs are not currently
subject to government regulations, it is possible that government regulations
will be enacted in the future that will subject the Company's present
operations to regulations or standards.
INITIAL PUBLIC OFFERING
On March 30, 1990, the Company completed an initial public offering (the
"Initial Public Offering") of 2,500,000 units, each unit consisting of one
share of Common Stock and one Common Stock purchase warrant (the Common Stock
purchase warrants of the Company are referred to herein as the "Warrants").
The Warrants were immediately separable and transferrable and originally
entitled the registered holder thereof to purchase one share of Common Stock
at a price of $1.25 per share from such date until January 16, 1993. The
Company extended the expiration date of the Warrants to January 16, 1996, at
which time the Warrants expired.
The Company received approximately $2,085,305 of net proceeds resulting
from the Initial Public Offering. Such proceeds were used to open additional
centers in 1990 and 1991 and were also applied to repayment of indebtedness,
marketing, merchandise inventory and expenses incurred in connection with the
Initial Public Offering.
ITEM 2. DESCRIPTION OF PROPERTY.
In August 1993, the Company relocated its executive offices from Roslyn
Heights, New York to a 5,000 square foot space in Port Washington, New York
that is leased from an unaffiliated landlord. The leased premises are used by
the Company for its executive offices, storage and a training facility. The
Company's annual rent for such leased premises was $38,000
13
<PAGE>
from December 1995 through September 30, 1996, when the lease expired. The
lease was renewed for three years at an annual rental equal to $45,600 from
October 1, 1997 through September 30, 1998 and $4,800 from October 1, 1998
through September 30, 1999. The Lease will be assigned to the acquiring
entity as part of the Asset Sale.
The Company's centers are typically rented on a per-diem basis pursuant
to letter agreements. The centers are located in large rooms rented from
religious institutions, community centers and other public organizations.
Each center has a full complement of equipment which is stored on the
premises when not in use.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not currently involved in any material pending legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
In the fourth quarter of the fiscal year ended November 30, 1997 there
was no submission of matters to a vote of security holders.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter market.
Price quotations are available through the OTC Bulletin Board, an electronic
screen-based service of the National Association of Securities Dealers, Inc.
("NASD"). The quotation of the Common Stock on the OTC Bulletin Board does
not assure that a meaningful, consistent and liquid trading market for such
securities currently exists and, in fact, management believes that at the
present time such a market does not exist. The Asset Sale will not affect the
Company's inclusion on the OTC Bulletin Board.
The Company's Common Stock and Warrants were originally quoted on the
NASDAQ system (known as the "NASDAQ Stock Market") upon the closing of the
Initial Public Offering on March 30, 1990. However, beginning in December
1992, such securities were no longer eligible for quotation on the NASDAQ
Stock Market due to the Company's inability to meet certain then newly
established criteria imposed by the NASD for continued inclusion in the
NASDAQ Stock Market. Specifically, the Company did not meet the requirement
of shareholders' equity of $1,000,000.
Upon the NASD's determination of the Company's ineligibility, the
Company's securities began quotation on the OTC Bulletin Board. Quotation on
the OTC Bulletin Board has had a
14
<PAGE>
substantial negative effect on the liquidity of the market for the Company's
securities and, consequently, the price at which such securities are quoted.
The Company's Warrants expired on January 16, 1996 and, consequently, were
delisted from the OTC Bulletin Board on February 20, 1996.
On June 9, 1998, the quoted bid price of the Company's Common Stock was
$.001 per share and the asked price was $.05 per share. On the day
immediately preceding the Company's public announcement of its intention to
proceed with the Asset Sale, the quoted bid price of the Company's Common
Stock was $.001 and the asked price was $.05 per share.
The following tables set forth the high and low closing bid and ask
quotations for each fiscal quarter of 1997 and for each fiscal quarter of
1996 and 1995, with respect to the Common Stock and Warrants as reported by
NASD and quoted on the NASDAQ Stock Market. The prices shown in the tables
reflect inter-dealer prices, and do not include retail mark-up, mark-down or
commissions, and may not represent actual transactions. The Company has not
paid cash dividends on its Common Stock.
As of June 9, 1998, there were approximately 94 holders of record and
the Company believes that there are in excess of 700 beneficial holders of
the Common Stock.
<TABLE>
<CAPTION>
Common Stock,
.001 par value
Bid Ask
--- ---
Period High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
1997
- ------
First Quarter .001 .001 .05 .05
(December 1996
through February)
Second Quarter .001 .001 .05 .05
(March through May)
Third Quarter .001 .001 .05 .05
(June through August)
Fourth Quarter .001 .001 .05 .05
(September through
</TABLE>
15
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
November)
1996
- ------
First Quarter $.001 $.001 $.05 $.05
(December 1995
through February)
Second Quarter $.001 $.001 $.05 $.05
(March through May)
Third Quarter $.01 $.001 $.05 $.05
(June through August)
Fourth Quarter $.001 $.001 $.05 $.05
September through
November)
1995
- ------
First Quarter $.125 $.01 $.5 $.06
(December 1994
through February)
Second Quarter $.02 $.01 $.10 $.06
(March through May)
Third Quarter $.02 $.01 $.10 $.05
(June through August)
Fourth Quarter $.02 $.001 $.05 $.04
(September through
November)
</TABLE>
Warrants
--------
Closing Bid Closing Ask
------------ -----------
16
<PAGE>
<TABLE>
<CAPTION>
Period High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
1997
- ------
Not applicable.
1996
- ------
First Quarter $.01 $.001 $.20 $.02
(December 1995
through
February 20, 1996)
1995
- ------
First Quarter
(December 1994
through February) $.01 $.001 $.20 $.02
Second Quarter $.001 $.001 $.05 $.02
(March through May)
Third Quarter $.001 $.001 $.05 $.02
(June through August)
</TABLE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
In light of the fact that the Company has decided to divest all of its
operations and has agreed to sell all of its assets pursuant to the
Agreement, the Company is accounting for the historical results of the
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 of 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.
17
<PAGE>
RESULTS OF OPERATIONS -
COMPARISON OF FISCAL 1996 AND FISCAL 1995
During the fiscal year ended November 30, 1996, revenues of discontinued
business decreased to $340,439 from $453,458 in fiscal 1995.
The Company has significantly decreased the number of locations by
terminating many locations in the United States.
COMPARISON OF FISCAL 1997 AND FISCAL 1996
During the fiscal year ended November 30, 1997, revenues of discontinued
business decreased to $117,866 from $340,439 in fiscal 1996.
The Company has significantly decreased the number of locations by
terminating many locations in the United States.
LIQUIDITY AND CAPITAL RESOURCES
At November 30, 1997, the Company had a working capital deficit of
$1,827,395, as compared to $1,718,375 at November 30, 1996. In its operation
of the discontinued operations, 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.
MANAGEMENT'S PLAN OF OPERATION
Management of the operations to be sold continues to believe that the
Playorena program can operate more profitably within a different form of
environment than that in which its program 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 enjoy more promotional benefits from cross-marketing with the host, and
that relationship could enable each party to provide mutually beneficial
services to the other. Fixed, established locations could provide a more
conducive environment and greater visibility than the current placement of
the program within school, religious and other community based locations on a
floating basis (e.g., different classes being offered in different locations
and on changing schedules). 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.
Following the Asset Sale, the Company intends to seek financing to fund
its operations
18
<PAGE>
going forward and to seek to acquire or merge with another operating
business. There can be no assurance that the Company will be successful in
its efforts. Without such additional capital or an acquisition or merger, it
is unlikely the Company will be able to fund its operations after the Asset
Sale.
ITEM 7. FINANCIAL STATEMENTS
See attached.
[Remainder of page intentionally left blank.]
19
<PAGE>
PLAYORENA, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Auditor's report on financial statements........................................................................F-2
Balance sheet as of November 30, 1997...........................................................................F-3
Statements of operations for the years
ended November 30, 1997 and 1996.............................................................................F-4
Statement of changes in shareholders'
equity (deficiency) for the years ended
November 30, 1997 and 1996...................................................................................F-5
Statements of cash flows for the years
ended November 30, 1997 and 1996.............................................................................F-6
Notes to financial statements...................................................................................F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Playorena, Inc.
We have audited the accompanying balance sheet of Playorena, Inc. as of
November 30, 1997, and the related statements of operations, shareholders'
deficiency and cash flows for the years ended November 30, 1997 and 1996.
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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Playorena, Inc.
as of November 30, 1997, and the results of its operations and cash flows for
the years ended November 30, 1997 and 1996, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from
operations and has a net capital deficiency that raises substantial doubt
about its ability to continue as a going concern. Management's plans in
regard to these matters are described in Note 1. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Feldman Sherb Ehrlich & Co., P.C.
Feldman Sherb Ehrlich & Co., P.C.
(Formely Feldman Radin & Co., P.C.)
Certified Public Accountants
New York, New York
May 31, 1998
F-2
<PAGE>
PLAYORENA INC.
BALANCE SHEET
NOVEMBER 30, 1997
ASSETS
<TABLE>
<S> <C>
$ -
----------------
----------------
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<S> <C>
CURRENT LIABILITIES:
Notes payable $ 875,333
Liabilities of discontinued operations 496,582
Accrued expenses 455,480
----------------
TOTAL CURRENT LIABILITIES 1,827,395
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIENCY):
Common stock, $ .001 par value;
15,000,000 shares authorized,
12,762,910 shares issued and outstanding 12,763
Additional paid-in-capital 4,130,283
Accumulated deficit (5,970,441)
----------------
TOTAL SHAREHOLDERS' DEFICIENCY (1,827,395)
----------------
$ -
----------------
----------------
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
PLAYORENA INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Years ended November 30,
-------------------------------------------------
1997 1996
---------------------- ---------------------
<S> <C> <C>
EXPENSES:
General and administrative $ 27,241 $ 51,301
Non-cash stock compensation - 45,000
Interest expense 87,536 91,704
---------------------- ---------------------
TOTAL EXPENSES 114,777 188,005
---------------------- ---------------------
LOSS FROM CONTINUING OPERATIONS (114,777) (188,005)
---------------------- ---------------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS:
Income (Loss) from discontinued operations 5,756 -
Income (Loss) on disposal - (184,653)
---------------------- ---------------------
TOTAL INCOME (LOSS) FROM DISCONTINUED OPERATIONS 5,756 (184,653)
---------------------- ---------------------
NET LOSS $ (109,021) $ (372,658)
---------------------- ---------------------
---------------------- ---------------------
NET LOSS PER SHARE:
Continuing operations $ (0.01) $ (0.02)
Discontinued operations - (0.06)
---------------------- ---------------------
NET LOSS PER SHARE $ (0.01) $ (0.08)
---------------------- ---------------------
---------------------- ---------------------
WEIGHTED AVERAGE SHARES USED IN COMPUTATION 12,762,910 9,762,910
---------------------- ---------------------
---------------------- ---------------------
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE>
PLAYORENA INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Common Stock
----------------------------------- Additional Accumulated
Shares Amount Paid-in Capital Deficit Total
----------------------------------- -------------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance, November 30, 1995 8,262,910 8,263 4,089,783 (5,488,762) (1,390,716)
Stock issued for services 4,500,000 4,500 40,500 - 45,000
Net loss - - - (372,658) (372,658)
--------------- ---------------- -------------------- ---------------- ----------------
Balance , November 30, 1996 12,762,910 12,763 4,130,283 (5,861,420) (1,718,374)
Net loss - - - (109,021) (109,021)
--------------- ---------------- -------------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance , November 30, 1997 $ 12,762,910 $ 12,763 $ 4,130,283 $ (5,970,441) $ (1,827,395)
--------------- ---------------- -------------------- ---------------- ----------------
--------------- ---------------- -------------------- ---------------- ----------------
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
PLAYORENA INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended November 30,
-------------------------------------------------
1997 1996
--------------------- ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (109,021) $ (372,658)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization - 61,292
Non-cash stock compensation - 45,000
Gain (loss) on sale of equipment - (84,079)
Change in operating assets and liabilities 109,021 271,037
--------------------- ---------------------
CASH USED IN OPERATING ACTIVITIES - (79,408)
--------------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of equipment - 84,079
--------------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES - 84,079
--------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of) debt financing - (6,000)
Decrease of capital lease obligations - -
--------------------- ---------------------
CASH PROVIDED BY FINANCING ACTIVITIES - (6,000)
--------------------- ---------------------
NET INCREASE (DECREASE) IN CASH - (1,329)
CASH AT BEGINNING OF YEAR - 1,329
--------------------- ---------------------
CASH AT END OF YEAR $ - $ -
--------------------- ---------------------
--------------------- ---------------------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Interest $ - $ 2,489
--------------------- ---------------------
--------------------- ---------------------
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE>
PLAYORENA, INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1997
1. DISCONTINUED OPERATIONS
Playorena, Inc. (the "Company") was incorporated on December 4, 1981,
under the laws of the State of New York. The Company formely operated
recreational play and exercise programs specifically designed for
children between three months and four years of age. During the fiscal
year ended 11/30/97, the Company discontinued those operations.
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. and Mrs. Astor agreed to 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 assumption of certain liabilities of the Company and
the transfer to the Company of 1,041,800 shares of Common Stock of the
Company, representing all of the Common Stock of the Company owned by
Mr. and Mrs. Astor. 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 is a condition precedent to the closing of the Asset Sale
contemplated by the Agreement.
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 to the Company.
Pursuant to the terms of the Agreement, Mr. Rubin and certain other
secured lenders will be required to release their respective security
interest so that Mr. Astor, or his designee, will obtain title to the
Company's assets free and clear of any liens or encumbrances.
F-7
<PAGE>
The Agreement specifically provides that the Company shall retain "all
claims for tax refunds, tax loss carry forwards or carrybacks of tax
credits or any kind" applicable to the Company's business prior to the
closing of the Asset Sale. 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) loans owed to certain affiliates of the Company, including
Mr. Rubin, in the aggregate principal amount of $875,333 plus
accrued interest, estimated at $296,956 at November 30, 1997;
(ii) liabilities owed to certain legal and accounting
professionals who have provided services to the Company, plus
sundry other liabilities, all aggregating approximately
$158,524 at November 30, 1997;
(iii) claims made against the Company by shareholders of the
Company;
(iv) all liabilities and obligations of the Company arising
after the closing of the Asset Sale.
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 $952,062 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 business should be offered to the Company, any such transaction
is likely to result in immediate and substantial dilution to the
present shareholders of the Company.
On February 7, 1997, a meeting was held at which the Agreement was
approved by the vote of the Company's shareholders.
The Company has written off all the remaining assets of the
discontinued business, consisting mainly of the undepreciated cost of
play equipment, at November 30, 1996. Such write off totaled
approximately $131,000 and is included with the loss on disposal of the
discontinued operations. Liabilities of the discontinued business
consist of accounts payable and accrued expenses aggregating $496,583.
The Company will remain contingently liable to the extent that assumed
liabilities are not satisfied. In this regard, the Company has not
recognized any gain at November 30, 1997 for the impending assumption
of these liabilities.
F-8
<PAGE>
Revenues of the discontinued business were $117,866 and $340,439 in the
fiscal years ended November 30, 1997 and 1996, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation - Going Concern - The Company's
financial statements have been presented on the basis that it
is a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal
course of business.
The Company's viability as a going concern is dependent upon
the restructuring of its obligations and a return to
profitability.
There was negative working capital of $1,827,395 at November
30, 1997.
Accordingly, the financial statements do not include any
adjustments relating to the recoverability of assets and
classification of liabilities or any other adjustments that
might be necessary should the Company be unable to continue as
a going concern in its present form.
(b) Earnings (Loss) Per Share - The computation of earnings (loss)
per common share is based on the weighted average number of
common shares outstanding during the period.
(c) Accounting Estimates - The preparation of financial statements
in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that
effect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amount of
revenues and expenses during the period. Actual results could
differ from those estimates.
(d) Stock Based Compensation - The Company accounts for stock
transactions in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees". In accordance with
Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation", the Company has
adopted the pro forma disclosure requirements of this
statement. Such adoption did not have a material effect on the
financial statements.
F-9
<PAGE>
3. ACCRUED EXPENSES
Following is a summary at November 30, 1997:
<TABLE>
<S> <C>
Interest $ 296,956
Other 158,524
----------------
$ 455,480
----------------
----------------
</TABLE>
4. NOTES PAYABLE
Following is a summary of the balance of notes payable at November 30,
1997:
<TABLE>
<S> <C>
a. Environmental Resources and Disposal, Ltd. $ 10,000
b. Private Placement 250,000
c. Robert M. Rubin 200,000
d. Revolving line of credit 275,000
e. Bridge loans 140,333
-----------------
$ 875,333
-----------------
-----------------
</TABLE>
a. The note originated November 18, 1993, bearing interest at 10% per
annum. The principal and interest were due on February 6, 1994,
and is currently in default. The noteholder has not taken action
to enforce payment.
b. In May 1994, the Company commenced and completed a private
placement of five units, each unit costing $50,000 consisted of a
$50,000 promissory note and 22,222 shares of common stock offered
at $.001 per share. The terms of the promissory notes are interest
at 10% per annum with principal and interest due at the earlier of
(i) the closing of any debt or equity offering of the Company's
securities, the gross proceeds of which is not less than
$1,500,000, or (ii) September 30, 1995. The notes are currently in
default.
c. On January 19, 1994 the Company entered into an agreement with Mr.
Robert M. Rubin, a stockholder/director of the Company, under
which Mr. Rubin loaned the Company $200,000 in exchange for a
promissory note, with interest at 10% per annum payable monthly,
and 200,000 shares of the Company's common stock. In addition, the
Company must accelerate the repayment of principal at any time at
which the cash balance of the Company exceeds a certain dollar
amount over a certain time period. The promissory note, which was
due on September 30, 1995, and is secured
F-10
<PAGE>
by a general lien in all of the assets of the Company. The Company
is currently in default of this note.
d. On November 18, 1994, the Company entered into a preliminary
agreement with the following stockholders: Mr. Rubin, Mr. Lawrence
E. Kaplan (also a director) and Stanley Kaplan (the "Investors")
regarding $270,000 that had previously been advanced to the
Company. The investors agreed to lend to the Company up to
$275,000 inclusive of previous advances. Interest is payable at
the rate of 10% per annum, with principal and interest due on
September 30, 1995. The Company is currently in default of these
loans.
e. In February through April 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. Interest
is being accrued at 10% per annum. In connection with the proposed
Asset Purchase Agreement, the lenders have agreed to accept
3,278,890 shares of common stock in full payment of these loans,
simultaneously with shares to be delivered to the Company by Mr.
and Mrs. Astor.
5. INCOME TAXES
The Company has available net operating loss carry forwards for federal
income tax purposes of approximately $5,700,000 that expire from 1998
through 2011. In addition, the Company has investment tax credit carry
forwards of approximately $16,000 that expire in 1998. The Company has
applied a valuation allowance, eliminating entirely only tax benefits
or tax assets that may arise from these favorable tax attributes.
Furthermore, annual utilization of net operating losses can be subject
to limitations due to "equity structure shifts" or "owner shifts"
involving 5% stockholders (as these terms are defined in Section 382 of
the Internal Revenue Code), which result in a more than 50% change in
ownership.
6. EMPLOYEE INCENTIVE STOCK OPTION PLAN
The Company's Employee Incentive Stock Option Plan was adopted and
approved as of June 1, 1989. The plan provides for the grant to key
employees, officers and directors of both "incentive stock options"
within the meaning of Section 422A of the Internal Revenue Code of 1986
and non-statutory stock options. The plan provides for the issuance of
up to 600,000 shares of common stock. Each option granted under the
plan has a term of up to five years, is exercisable only at such times
as the board of directors determine at the time of grant for a price at
least equal to the fair market value of the common stock on the date of
the option is granted, will terminate under certain circumstances if
the holder ceases to be an employee of the Company and requires that
the exercise price be paid, in the discretion of the board of
directors, in cash, shares (valued at
F-11
<PAGE>
the fair market value thereof on the date of exercise) or a combination
thereof. The exercise price of "incentive stock options" granted to 10%
or greater shareholders of the Company must be equal to at least 110%
of the fair market value of the Company's shares of common stock on the
date of grant.
On March 7, 1991, the Board of Directors authorized the grant of
options to purchase an aggregate of 267,500 shares of common stock
under the plan to eight employees of the Company, including Messrs.
Jaroslow, Astor and Ms. Astor. Such options shall vest from periods of
three to five years from the date of grant, are exercisable at a price
per share of $.8938 - .8125 and expire five years from the date of
grant.
At November 30, 1995, there were options to purchase 200,000 shares of
common stock remaining, which are fully vested and have an exercise
price of $.8938 per share, expiring March 7, 1996. The remaining
options were canceled and no options have been exercised to date.
On January 31, 1994, the Board of Directors authorized the grant of
options to purchase an aggregate of 362,500 shares of common stock
under the plan as follows: Fred Jaroslow-100,000 shares, Michael
Astor-131,250 shares, and Susan Astor-131,250 shares. Such options will
vest on December 31, 1996. As of November 30, 1997, the options had not
been issued.
7. EMPLOYMENT AGREEMENTS
In December 1988, the Company entered into separate five-year
employment agreements with Fred Jaroslow, Susan Astor and Michael Astor
which became effective upon the closing of the Initial Public Offering
in March 1990.
On October 22, 1993, the employment agreements of Michael and Susan
Astor (also directors of the Company) were amended to provide that
their employment shall continue until December 31, 1996. The terms of
such agreements are renewable for one year periods subject to the
approval of the board of directors of the Company. During the first two
years of their agreements, the officers were entitled to receive
salaries at a combined amount of $245,000. Each officer is to receive a
ten percent increase during the third year.
All such employment agreements provide for payments to the respective
officers upon the termination of their employment by the Company
without cause. While such officers are not currently receiving salaries
at the rates provided in the employment agreements, to the extent not
paid, Mr. and Mrs. Astor's salaries are currently being accrued. Mr.
Jaroslow has agreed to waive his unpaid salary and accrued vacation as
of November 30, 1994. Mr. and Mrs. Astor have agreed to waive accrued
vacation as of November 30, 1995. Such employment agreements will
terminate upon closing of the Asset Sale and, to the extent
F-12
<PAGE>
not paid prior to closing, all accrued salaries and vacations shall be
waived.
A consulting agreement has been entered into with Mr. Fred Jaroslow
which becomes effective upon the termination of his employment
agreement. The consulting agreement will continue for a period of
one-half the length of his services under his employment agreement,
described above which period, however, will not exceed five (5) years.
The maximum amount payable under the consulting agreement will be
$56,000 annually. Mr. Jaroslow has agreed to waive all unpaid salary
and accrued vacation under this agreement.
8. CONSULTING AGREEMENTS
On December 16, 1991, the Company entered into a consulting agreement
with Palmer & Moore Ltd., a New York corporation, in which Robert M.
Rubin is the sole shareholder. The consulting services were to assist
the Company in formulating an acquisition strategy, seek out potential
acquisition candidates, negotiate the transaction and assist in the
financing associated with it. The agreement terminated December 16,
1994.
As full compensation for the services, the Company issued 200,000
common shares to be held in escrow in the year ended November 30, 1992.
The shares were released from escrow, as agreed upon, 100,000 on
December 16, 1992 and 100,000 on December 16, 1993. The consultant
agreed to pay $200 for these shares. Pursuant to valuation regulations
promulgated by the Securities and Exchange Commission, the fair market
value of such shares was determined to be $200,000 and was charged to
operations on a quarterly basis over a two year period ending November
30, 1994.
Pursuant to the terms of the Letter Agreement (as defined in footnote
11), the Company entered into a consulting agreement with Bernard
Tessler, effective January 1, 1995, pursuant to which Mr. Tessler
agreed to provide consulting services during 75% of his full working
time for a fee of $75,000 per annum through February 28, 1995 and to
provide consulting services during 20% of his full working time for a
fee of $25,000 per annum from March 1, 1995 through December 31, 1997.
Pursuant to the terms of the Second Letter Agreement, Mr. Tessler
agreed, among other things, to release the Company from all payment
obligations arising under this consulting agreement in consideration
for a payment of $6,200.
9. WARRANTS
In March 1990, the Company closed its initial public offering of
2,500,000 units, each consisting of one common share and one common
share purchase warrant. Each common share purchase warrant entitles the
warrant holder to purchase one common share at $1.25 per share until
January 16, 1993. In addition, the Company received $40 from the
Underwriter for the Underwriter's purchase of 40,000 shares of common
stock of the
F-13
<PAGE>
Company. The Board of Directors has extended the expiration date of the
outstanding warrants until January 16, 1996 with all original terms of
exercise in effect.
10. COMMITMENTS AND CONTINGENCIES
As a condition to Mr. Rubin's agreement to make a previously described
loan to the Company, on April 13, 1994 the Company entered into an
Agreement and Plan of Reorganization (the "Reorganization Agreement")
with Kids 'N Things, Inc., a newly formed Delaware corporation
wholly-owned by Mr.. Rubin, Bernard Tessler and Jerome Feldman for the
sole purpose of facilitating the merger.
Pursuant to the terms of a letter of agreement dated November 18, 1994
(the "Letter Agreement") among the Company and each of Michael Astor,
Susan Astor and Fred Jaroslow, in their individual capacities, and
Lawrence E. Kaplan, Stanley Kaplan and Mr.. Rubin (the "Investors"),
the Company agreed to: (i) cause the Board of Directors of each of the
Company and Kid 'N Things to terminate the Reorganization Agreement;
(ii) issue 1,500,000 shares of Common Stock to Bernard Tessler in
consideration of the payment of $2,000 and past services rendered to
the Company (reduced to 750,000 shares in April 1995); (iii) elect each
of Messrs. Lawrence E. Kaplan, Rubin and Andrew Kaplan (the son of
Stanley Kaplan) to fill three vacancies on the Board of Directors
caused by the resignations of Messrs. Tessler, Baird and Horovitz; (iv)
issue an aggregate of 100,000 shares of Common Stock to Jerry Feldman
in consideration of the payment of $100 and past services rendered to
the Company, (v) issue an aggregate of 3,249,996 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 agreement among the Investors to make available to the Company
a $275,000 line of credit (the "Line of Credit"); and (vi) 400,000
shares of Common Stock to Mr. Rubin in consideration of the payment of
$400 and his agreement to waive any and all defaults by Playorena to
make current interest payments through the maturity date arising under
the Note. The 5,250,000 shares of common stock to be issued to Mr.
Tessler pursuant to the Letter Agreement were reduced by 750,000 shares
pursuant to a subsequent letter agreement between the Company and Mr.
Tessler dated April 10, 1995, wherein Mr. Tessler agreed, among other
things, to reduce the total number of shares of common stock to be
issued to him from 1,500,000 to 750,000. Pursuant to the Letter
Agreement, on September 6, 1996, the Company issued 4,500,000 shares.
Such shares were valued at $45,000, the estimated fair value, resulting
in non-cash compensation of this amount.
F-14
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
As disclosed in the Company's Current Reports on Form 8-K dated
September 16, 1994, and December 16, 1994, in September 1994 Gerstein,
Metelka, Minkow & Co. ("GMM") resigned as the Company's independent
accountants. In December 1994, the Company engaged Eichler Bergsman & Co.,
LLP ("EB"). The resignation of GMM was not a result of any disagreements with
GMM on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure.
On March 11, 1996, EB was dismissed as the Company's independent
accountants. For the year ended November 30, 1994, the audit report of EB was
qualified concerning the Company's ability to continue as a going concern.
During the Company's two most recent fiscal years, and the subsequent interim
period up to the date of the change of accountants, the Company did not have
any disagreements with EB on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure.
On March 12, 1996, the Company engaged its current independent
accountants, Feldman Radin & Co., P.C. ("FRC"). The Company's decision to
engage FRC was made by the executive officers of the Company and approved by
the Board of Directors. At no time during the Company's two most recent
fiscal years has the Company (or anyone on its behalf) consulted FRC
regarding the application of accounting principles to a specified
transaction, the type of audit opinion that might be rendered on the
Company's financial statements or any other matter.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
OFFICERS AND DIRECTORS
The present executive officers and directors of the Company, and
nominees for election to the Board of Directors of the Company, as of July
30, 1996 are as follows:
<TABLE>
<CAPTION>
Year First
Name Age Position Elected
- ------------ ---- ---------------------- ----------
<S> <C> <C> <C>
Susan Astor 49 President and Director 1981
Michael Astor 53 Vice President, Chief 1983
Operating Officer, Chief
Financial Officer, Treasurer
and Director
</TABLE>
20
<PAGE>
<TABLE>
<S> <C> <C> <C>
Lawrence E. Kaplan 55 Nominee (Director) N/A
Robert Rubin 58 Nominee (Director) N/A
Alfred Romano 60 Nominee (Director) N/A
</TABLE>
SUSAN ASTOR. Ms. Astor is one of the Company's co-founders and has been
its President since its organization in 1981. From 1974 to 1978 Ms. Astor
developed "kindergym", a parent/toddler program in Marin County, California,
which served as the prototype for the Company's program. In response to the
success of the "kindergym" program, in 1979 Ms. Astor co-authored a book
entitled "Gymboree: Giving Your Child Physical, Mental and Social Confidence
Through Play" with the founder of the Gymboree program. Ms. Astor served as
the Director of Preschool Camp at the Marin County Jewish Community Center in
1974, taught at the Atypical Infant Center of Marin County in 1973 and was
Director of Outdoor Pre-School Programs at the Marin County YMCA in 1972. Ms.
Astor has been recognized as an innovator in the toddler play program field,
has made numerous appearances on national and local television and has
frequently been quoted on play programs in newspaper and magazine articles.
Ms. Astor was a director of the Company from November, 1981 to October, 1990.
Ms. Astor was again elected as a director in August, 1993 and will remain a
director until consummation of the Asset Sale.
MICHAEL ASTOR. Mr. Astor is one of the Company's co-founders and became
Chief Operating Officer and Vice President of the Company in December 1983.
Mr. Astor, who is the husband of Susan Astor, was the principal owner and
President of Astor Sales, Inc., a company specializing in sales of private
label garment programs to clothing chain and department stores, from 1979 to
1984. From 1970 to 1979, Mr. Astor was a marriage, family and child counselor
in Marin County, California. Mr. Astor was a director of the Company from
November, 1981 to October, 1990. Mr. Astor was again elected as a director in
August, 1993 and will remain a director until consummation of the Asset Sale.
LAWRENCE E. KAPLAN. Lawrence E. Kaplan became a director of the Company
in October 1994 as a condition of the Letter Agreement and resigned as a
director on March 27, 1995. Mr. Kaplan is a director of American United
Global, Inc. He is also a director of Andover Equities, Inc. and the Park
Group, Ltd., both of which are public shell companies. He also is a
registered representative and sole shareholder, officer and director of G-V
Capital Corp., an NASD and SEC-registered broker/dealer engaged in private
placements and other offerings.
ROBERT M. RUBIN. Robert M. Rubin became a director of the Company in
October 1994 as a condition of the Letter Agreement and resigned as a
director on March 27, 1995. Between October, 1990 and January 1, 1994, Mr.
Rubin served as the Chairman of the Board and Chief Executive Officer of
American United Global, Inc. ("AUG") and its subsidiaries; from January 1,
1994 to January 19, 1996, he served only as Chairman of the Board of AUG and
its subsidiaries. Mr. Rubin was the founder, President, Chief Executive
Officer and a Director of Superior Care, Inc. ("SCI") from its inception in
1976 until May 1986. Mr. Rubin continued as a
21
<PAGE>
director of SCI, now known as Olsten Corporation ("Olsten"), until the latter
part of 1987. Olsten, a New York Stock Exchange listed company, is engaged in
providing home care and institutional staffing services and health care
management services. Mr. Rubin is Chairman of the Board, Chief Executive
Officer and a stockholder of ERD Waste Technology, Inc. ("ERD"), a
diversified waste management public company specializing in the management
and disposal of municipal solid waste, industrial and commercial
non-hazardous waste and hazardous waste. In September 1997, ERD filed for
protection under the provisions of Chapter 11 of the federal bankruptcy act.
Mr. Rubin is a former director and Vice Chairman, and currently a minority
stockholder of American Complex Care, Incorporated, a public company formerly
engaged in providing on-site health care services, including intra-dermal
infusion therapies. In April 1995, American Complex Care, Incorporated's
operating subsidiaries made assignments of their assets for the benefit of
creditors without resort to bankruptcy proceedings. Mr. Rubin is also a
minority stockholder of Universal Self Care, Inc., a public company engaged
in the sale of products used by diabetics. Mr. Rubin is also the Chairman of
the Board of both Western Power and Equipment Corp. and IDF International,
Inc. Mr. Rubin is also a director and a minority stockholder of Response USA,
Inc., a public company engaged in the sale and distribution of personal
emergency response systems; Diplomatic Corporation, a public company engaged
in the manufacture and distribution of baby products; and Medi-Merg, Inc., a
Canadian management company for hospital emergency rooms and out-patient
facilities.
ALFRED ROMANO. Alfred Romano, a nominee to become a director, has been
the President, director and sole shareholder of Pope Liquors, Inc. since
1964. Pope Liquors operates a store engaged in the retail sale of alcoholic
beverages.
During the fiscal year ended November 30, 1997, the Board of Directors
held no meetings. Directors do not receive compensation for their services in
such capacity. The Board of Directors does not presently have committees.
None of the executive officers was selected as a result of any
arrangement or understanding with any person pursuant to which he or she was
selected as an executive officer, other than the directors of the Company
acting solely in their capacities as such.
Officers hold office until the first meeting of directors immediately
following the annual meeting of shareholders and until the successors are
appointed and qualified, subject to earlier removal by the Board.
Upon the closing of the Asset Sale, Mr. and Mrs. Astor will resign as
officers and directors of the Company and the newly elected Board of
Directors, comprising of Lawrence E. Kaplan, Robert M. Rubin and Alfred
Romano, will elect the following persons to the offices set forth opposite
their names:
22
<PAGE>
<TABLE>
<CAPTION>
NAME OFFICE
------ -------
<S> <C>
Robert M. Rubin Chairman of the Board
Lawrence E. Kaplan President
Alfred Romano Secretary
</TABLE>
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The Company was not furnished with copies of Form 5 (Annual Statement of
Beneficial Ownership of Securities) by any officer, director or beneficial
owner of more than ten percent of any class of equity securities of the
Company subsequent to its fiscal year ended November 30, 1997.
ITEM 10. EXECUTIVE COMPENSATION.
ANNUAL COMPENSATION
The following table sets forth the cash compensation in each of the last
three completed fiscal years to the Company's then Chief Executive Officer.
Mr. Jaroslow resigned as an officer and director of the Company effective
March 27, 1995. Since Mr. Jaroslow's resignation, the Board of Directors of
the Company has not elected a successor Chief Executive Officer. While Susan
Astor was the President and Michael Astor was the Vice President, Chief
Operating Officer, Chief Financial Officer and Treasurer of the Company at
November 30, 1995, the table below omits information as to their
compensation, because neither officer received a total annual salary and
bonus for 1997 in excess of $100,000.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
Other
Name and Annual Other
Principal Position Year Salary Comp Compensation
- ------------------ ---- ------ ------- -------------
<S> <C> <C> <C> <C>
Fred Jaroslow, 1995 -- -- --
Former
Chairman, Chief
Executive Officer,
Executive Vice
President and
Secretary*
</TABLE>
23
<PAGE>
- -----------------
* This amount does not include perquisites and other personal benefits,
securities or property because the aggregate amount thereof in each fiscal
year did not exceed $50,000 or 10% of the total annual salary and bonus
reported for the named executive officer.
During the last three completed fiscal years, the Company granted no
restricted stock awards or stock appreciation rights (whether freestanding or
in tandem with stock options). In January 1994, however, pursuant to the
Company's 1989 Incentive Stock Option Plan, Mr. Jaroslow was granted options
to purchase 100,000 shares of the Common Stock of the Company exercisable
beginning in 1996 at $.344 per share. These options will be terminated upon
the Asset Sale.
AGGREGATE OPTION EXERCISES
The following table shows stock options exercised by executive officers
during 1997, including the aggregate value of any gains on the date of
exercise. In addition, this table includes the number of shares covered by
both exercisable and non-exercisable stock options as of November 30, 1997.
Values for the options are not reported because none of the exercisable
options are "in-the-money" options which represent the positive spread
between the exercise price of outstanding stock options and the year-end
price of Company common stock.
AGGREGATED OPTION/SAR EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR END OPTION/SAR VALUES
No. of Shares Covered
by Unexercised
Options at
11/30/97
<TABLE>
<CAPTION>
Name Shares Acquired Value
Exercisable(2) on Exercise Realized Exercisable(1) Not
- -------------- --------------- -------- -------------- -----
<S> <C> <C> <C> <C>
Fred Jaroslow --- --- 100,000(3) 100,000(3)
Susan Astor --- --- 50,000 (3) 131,250(3)
Michael Astor --- --- 50,000 (3) 131,250(3)
</TABLE>
(1) Includes the grant in March 1991 pursuant to the Company's 1989 Incentive
Stock Option Plan of options to purchase shares of Common Stock exercisable
beginning in December 1993 at $.8938 per share.
(2) Includes the grant in January 1994 pursuant to the Company's 1989 Incentive
24
<PAGE>
Stock Option Plan of options, exercisable beginning in 1996 to (i) Mr.
Jaroslow to purchase 100,000 shares of Common Stock at $.344 per share. and
(ii) each of Mr. Astor and Ms. Astor to purchase 131,250 shares of Common
Stock at $.3125 per share.
(3) All of these options will be terminated upon consummation of the Asset Sale.
EMPLOYMENT AGREEMENTS
In December 1988, the Company entered into separate five-year employment
agreements with each of Fred Jaroslow, Susan Astor and Michael Astor which
became effective upon the closing of the Initial Public Offering in March
1990. Pursuant to agreements dated October 22, 1993, the employment
agreements of Michael Astor and Susan Astor were amended to provide that
employment shall continue until December 31, 1996. The terms of such
agreements are renewable for one-year periods subject to the approval of the
Board of Directors of the Company. During the first two years of their
agreements, the officers were entitled to receive salaries at a combined rate
of $245,000 and each received ten percent increases during the third year.
Thereafter, their salaries were to be negotiated, in good faith, with the
Board of Directors (with all three officers abstaining from any vote by the
Board). All of such employment agreements provide for payments to the
respective officers upon the termination of their employment by the Company
without cause. While such officers are not currently receiving salaries at
the rates provided in the employment agreements, to the extent not paid, Mr.
and Mrs. Astor's salaries are currently being accrued. Mr. Jaroslow has
agreed to waive his unpaid salary and accrued vacation as of November 30,
1994. Mr. and Mrs. Astor have agreed to waive accrued vacation as of November
30, 1997. Such employment agreements will terminate upon the closing of the
Asset Sale and, to the extent not paid prior to the closing, all accrued
salaries and vacations shall be waived.
In addition, the Company has entered into a consulting agreement with
Mr. Jaroslow which became effective upon the termination of his service under
his employment agreement in March 1995, but which Mr. Jaroslow has agreed to
terminate upon the closing of the Asset Sale. The consulting agreement has a
term of five (5) years. In his first year of the consulting agreement, Mr.
Jaroslow's salary will be equal to $56,000. His salary in successive years
will be based upon a formula provided in the consulting agreement and shall
not exceed his salary for the first year of the consulting agreement. During
the term of the consulting agreement, Mr. Jaroslow shall render services to
the Company on a part-time basis not to exceed fifty (50) days per year. Mr.
Jaroslow is not currently receiving any compensation under this agreement,
and his compensation is not being accrued. Mr. Jaroslow has agreed to waive
all unpaid compensation under this agreement as of March 1995.
Pursuant to the terms of the Letter Agreement (as defined in
"Description of Business Termination of Plan of Reorganization, Issuance of
Shares and Line of Credit"), the Company agreed to enter into a consulting
agreement with Bernard Tessler to be effective January 1, 1995
25
<PAGE>
pursuant to which Mr. Tessler shall provide consulting services to the
Company encompassing 75% of his full working time through February 28, 1995
and 20% of his full working time through December 31, 1997. In consideration
therefore, the Company agreed to pay Mr. Tessler at the rate of $75,000 per
annum for the period from January 1, 1995 through February 28, 1995 and
$25,000 per annum for the period from March 1, 1995 through December 31,
1997. Pursuant to the terms of the Second Letter Agreement (as defined in
"Description of Business Termination of Plan of Reorganization, Issuance of
Shares and Line of Credit"), Mr. Tessler agreed among other things, to
release the Company from all payment obligations arising under this
consulting agreement in consideration for a payment of $6,200.00.
1989 EMPLOYEE INCENTIVE STOCK OPTION PLAN
The Company's 1989 Employee Incentive Stock Option Plan (the "Option
Plan") was adopted by the Board of Directors and approved by the shareholders
as of June 1, 1989. The Option Plan authorizes the Stock Option Plan
Committee of the Board of Directors ("Option Committee") to recommend that
the Board grant to key employees, officers and directors both "incentive
stock options" within the meaning of Section 422A of the Internal Revenue
Code of 1986 and nonstatutory stock options. The Option Plan provides for the
issuance of up to 600,000 shares of Common Stock. Each option granted under
the Option Plan has a term of up to five years, is exercisable only at such
times as the Board of Directors determines at the time of grant for a price
at least equal to the fair market value of the Common Stock on the date the
option is granted, will terminate under certain circumstances if the holder
ceases to be an employee of the Company and requires that the exercise price
be paid, in the discretion of the Board of Directors, in cash, shares (valued
at the fair market value thereof on the date of exercise) or a combination
thereof. The option exercise price of "incentive stock options" granted to
10% or greater shareholders of the Company must be equal to at least 110% of
the fair market value of the Company's shares of Common Stock on the date of
grant.
Awards are granted in the discretion of the Option Committee. The Option
Committee awards options to key employees in order to provide an incentive
for them to expend maximum effort for the success of the Company's business.
The Committee uses no set criteria to determine amounts to be awarded under
the Plan. Factors used to determine awards in the past have included length
of service to the Company, job responsibility and achievement.
On March 7, 1991, the Board of Directors, acting upon the recommendation
of the Option Committee, authorized the grant of options to purchase an
aggregate of 267,500 shares of Common Stock under the Option Plan to eight
employees of the Company, including Messrs. Jaroslow, Astor and Ms. Astor.
Two of such employees have since left the Company, upon which options with
respect to 30,000 of such shares expired. In addition, on January 31, 1994,
the Board of Directors authorized the grant of options under the Option Plan
to purchase an aggregate of 362,500 shares to Messrs. Jaroslow and Astor, and
Ms. Astor.
26
<PAGE>
All options granted shall vest from periods of one to five years from
the date of grant. However, all options granted shall terminate upon the
closing of the Asset Sale.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of June 9, 1998, the beneficial
ownership of Common Stock by (i) each of the Company's directors and
officers, (ii) all directors and officers as a group (which ownership
constitutes in the aggregate approximately 48.8% of the outstanding Common
Stock) and (iii) by unaffiliated individuals who beneficially hold in the
aggregate more than five percent of the Common Stock.
<TABLE>
<CAPTION>
Amount and Nature Percentage of
of Beneficial Common Stock
Name and Address Ownership(1)(2) Outstanding
- ---------------- --------------- -----------
<S> <C> <C>
Susan Astor 543,400(2)(3) 4.3%
22 Manhasset Avenue
Port Washington, NY 11050
Michael Astor 498,400(2)(3) 3.9%
22 Manhasset Avenue
Port Washington, NY 11050
Fred Jaroslow 1,178,888(2) 9.2%
22 Manhasset Avenue
Port Washington, NY 11050
Lawrence E. Kaplan(4) 1,094,444 8.6%
150 Motor Parkway
Suite 311
Hauppauge, NY 11788
Robert M. Rubin(4) 2,723,334 21.3%
6060 Kings Gate Circle
Delray Beach, Florida 33484
Alan Goldberg 643,638 5.0%
170 Fifth Avenue, 6th Flr.
New York, New York 10010
</TABLE>
27
<PAGE>
<TABLE>
<S> <C> <C>
Andrew Kaplan 1,083,333 8.5%
150 Motor Parkway
Suite 311
Hauppauge, NY 11788
Mark Levine 643,638 5.0%
170 Fifth Avenue, 6th Flr.
New York, New York 10010
Bernard Tessler 750,000 5.9%
22 Manhasset Avenue
Port Washington, NY 11050
Alfred Romano(4) 11,111 *
4 Wagon Wheel Road
Dix Hills, NY 11746
All directors and officers 1,041,800 8.2%
as a group (only including
Mr. and Mrs. Astor)
</TABLE>
- --------------------
*Represents less than a 1% interest
(1) A person is considered to be the "beneficial owner" of any securities
with respect to which he has or shares, directly or indirectly, or has
the right to acquire within 60 days, (1) voting power, which includes
the power to vote, or to direct the voting of, such security and/or (2)
investment power, which includes the power to dispose, or to direct the
disposition of, such security. Each person has both voting and
investment power and considers himself to be the beneficial owner of
the securities shown following his name except as otherwise indicated.
Except as otherwise indicated, the beneficial owners listed here have
sole voting and investment power, subject to community property laws
where applicable, as to all of the shares listed as beneficially owned
by them. As of May 1, 1998, there were 12,762,910 shares of Common
Stock outstanding.
(2) Does not give effect to the grant in March 1991 of options to purchase
shares of the Company's Common Stock pursuant to the Company's 1989
Incentive Stock Option Plan. At such time, Mr. Jaroslow, Mr. Astor and
Ms. Astor were granted 100,000, 50,000 and 50,000 shares, respectively,
of such options. All such options became exercisable in December 1993
at $.8938 per share. Does not give effect to the grant in January 1994
of options, exercisable beginning in 1996, to purchase an aggregate of
362,500 shares to Messrs. Jaroslow and Astor, and Ms. Astor. Mr.
Jaroslow was granted options to purchase 100,000 shares of Common Stock
at $.344 per share and Mr. Astor and Ms. Astor were each granted
options to purchase 131,250 shares of Common Stock at $.3125
28
<PAGE>
per share. All of such options granted shall terminate upon the closing
of the Asset Sale.
(3) Mr. and Ms. Astor are husband and wife and may be expected to act in
concert with respect to the voting and disposition of their shares of
Common Stock.
(4) Messrs. Rubin, Romano and Lawrence Kaplan are nominees for election to
the Board of Directors of the Company and will be elected upon
consummation of the Asset Purchase Agreement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Pursuant to the terms of the Letter Agreement dated November 18, 1994
among the Company and each of Michael Astor, Susan Astor, Bernard Tessler and
Fred Jaroslow (then directors of the Company), in their individual
capacities, and Lawrence E. Kaplan, Stanley Kaplan and Mr. Rubin (see "Recent
Events -- Termination of Plan of Reorganization, Issuance of Shares and Line
of Credit"), the Company agreed to: (i) cause the Board of Directors of each
of the Company and Kids 'N Things to terminate the Reorganization Agreement
(see "Recent Events -- Termination of Plan of Reorganization, Issuance of
Shares and Line of Credit"); (ii) issue 1,500,000 shares of common stock to
Bernard Tessler in consideration of the payment of $2,000 and past services
rendered to the Company; (iii) elect each of Messrs. Lawrence E. Kaplan,
Rubin and Andrew Kaplan (the son of Stanley Kaplan) to fill three vacancies
on the Board of Directors caused by the resignations of Messrs. Tessler,
Baird and Horvitz; (iv) issue an aggregate of 100,000 shares of common stock
to Jerry Feldman in consideration of the payment of $100 and past services
rendered to the Company, (v) 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 in
past financial consulting services rendered and the joint and several
agreement among the Investors to make available to the Company a $275,000
Line of Credit (see "Recent Events -- Termination of Plan of Reorganization,
Issuance of Shares and Line of Credit"); and (vi) issue 400,000 shares of
common stock to Mr. Rubin in consideration of the payment of $400 and his
agreement to waive any and all defaults by Playorena to make current interest
payments through the maturity date arising under the Note. The 5,250,000
shares of Common Stock to be issued to Mr. Tessler pursuant to the Letter
Agreement were reduced by 750,000 shares pursuant to a subsequent letter
agreement between the Company and Mr. Tessler dated April 10, 1995 (the
"Second Letter Agreement"), wherein Mr. Tessler agreed, among other things,
to reduce the total number of shares of Common Stock to be issued to him from
1,500,000 to 750,000. The total number of shares now required to be issued
pursuant to the Letter Agreement is 4,500,000 (prior to the reverse stock
split). These shares were issued in September, 1996.
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 at the earlier of the closing
of any debt or equity offering of the Company's
29
<PAGE>
securities, the gross proceeds of which is not less than $1,500,000, or
September 30, 1995. To date, the Company has borrowed the maximum 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. Pursuant to the terms of the Letter Agreement, the
Company and Mr. Tessler agreed to terminate the Management Agreement, thereby
relieving the Company of any future obligation to issue any shares
thereunder. Mr. Tessler and the Company further agreed to enter into a
Consulting Agreement effective January 1, 1995, pursuant to which Mr. Tessler
agreed to provide consulting services during 75% of his full working time for
a fee of $75,000 per annum through February 28, 1995 and to provide
consulting services during 20% of his full working time for a fee of $25,000
per annum from March 1, 1995 through December 31, 1997. Under the terms of
the Second Letter Agreement, Mr. Tessler agreed, among other things, to
release the Company from all payment obligations arising under the Consulting
Agreement in consideration for a payment of $6,200. 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 -- $20,426; (ii) Stanley Kaplan (the
father of Andrew Kaplan) -- $20,417; (iii) Fred Jaroslow -- $40,500; and (iv)
Robert Rubin -- $62,000. The lenders have 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 by Mr. and Mrs.
Astor to the purchaser of the assets of the Company pursuant to the Asset
Sale Agreement. See "Description of Business -- Additional Loans from
Affiliates of the Company".
On September 6, 1996, the Board of Directors by unanimous written
consent approved the following: (i) to issue 1,500,000 shares of common stock
to Bernard Tessler in consideration of $2,000; (ii) to issue an aggregate of
100,000 shares of Common Stock to Jerry Feldman in consideration of the
payment of $100; (iii) to issue an aggregate of 3,250,000 shares of Common
Stock to Messrs. Andrew Kaplan and Lawrence Kaplan and Robert Rubin in
consideration of payment of $4,200 in past services rendered and agreement
among investors to make available to the Company $275,000 Line of Credit;
(iv) to issue 400,000 shares of common stock to Mr. Rubin in consideration of
$400 and his agreement to waive any defaults by Playorena to make current
interest payments through maturity arising from a Promissory Note; and (i)
Mr. Tessler agrees to reduce total number of shares of Common Stock to be
issued to him from 1,500,000 to 750,000; (ii) total number of shares required
to be issued to Messrs. Feldman, Tessler, Rubin, A. Kaplan and L. Kaplan is
4,500,000 (prior to the reverse stock split). The issuance of such shares
occurred in September 1996.
ITEM 13. 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)
30
<PAGE>
3.2 By-Laws - incorporated by reference to Exhibit 3.2 to
Registration Statement on Form S-18 (SEC File No.33-29561-NY)
4.0 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 (incorporated by reference to registrant's 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 (incorporated by reference to the registrant's Annual Report on
Form 10-KSB for fiscal year ended 11/30/93)
10.4 Form of Franchise Agreement - incorporated by reference to
Exhibit 10.6 to Registration Statement on Form S-18 (SEC File No. 33-29561-NY)
10.5 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)
10.6 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)
10.7 Revolving 10% Promissory Note (incorporated by reference to
the registrant's Annual Report on Form 10-KSB for fiscal year ended 11/30/93)
10.8 Form of Agreement and Plan of Reorganization between the
Company and Kids 'N Things Inc. (incorporated by reference to the
registrant's Annual Report on Form 10-KSB for fiscal year ended 11/30/93)
31
<PAGE>
10.9 Management Agreement, dated November 9, 1993 between the
Company and Bernard Tessler (incorporated by reference to the registrant's
Annual Report on Form 10-KSB for fiscal year ended 11/30/93)
10.9(a) Amendment to Management Agreement, dated January 20, 1994
between the Company and Bernard Tessler (incorporated by reference to the
registrant's Annual Report on Form 10-KSB for fiscal year ended 11/30/93)
10.10 Letter Agreement dated November 18, 1994 (incorporated by
reference to the registrant's Annual Report on Form 10-KSB for fiscal year
ended 11/30/94).
10.10(a) Amendment to Letter Agreement dated April 10, 1995
(incorporated by reference to the registrant's Annual Report on Form 10-KSB
for the fiscal year ended November 30, 1995.
10.11 Asset Purchase Agreement dated as of March 31, 1995
(incorporated by reference to the registrant's Quarterly Report on Form
10-QSB for fiscal quarter ended February 28, 1995).
27.1 Financial Data Schedule
B. Reports on Form 8-K. No reports on Form 8-K were filed by the
Registrant during the fourth quarter of its last fiscal year.
[Remainder of page intentionally left blank]
32
<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.
PLAYORENA INC.
Dated: June , 1998
By:
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)
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 dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ---------- ------ ------
<S> <C> <C>
President June , 1998
Susan Astor and Director
Director June , 1998
Michael Astor
</TABLE>
33
<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.
PLAYORENA INC.
Dated: June 20, 1998
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)
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 dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ---------- ------ -----
<S> <C> <C>
/s/ Susan Astor President June 20, 1998
- ---------------- ---
Susan Astor and Director
/s/ Michael Astor Director June 20, 1998
- ----------------- ---
</TABLE>
34
<PAGE>
EXHIBIT INDEX
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)
4.0 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 (incorporated by reference to registrant's 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 (incorporated by reference to the registrant's Annual Report on
Form 10-KSB for fiscal year ended 11/30/93)
10.4 Form of Franchise Agreement - incorporated by reference
to Exhibit 10.6 to Registration Statement on Form S-18 (SEC File No.
33-29561-NY)
10.5 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)
10.6 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)
10.7 Revolving 10% Promissory Note (incorporated by reference
to the
35
<PAGE>
registrant's Annual Report on Form 10-KSB for fiscal year ended 11/30/93)]
10.8 Form of Agreement and Plan of Reorganization between the
Company and Kids 'N Things' Inc. (incorporated by reference to the registrant's
Annual Report on Form 10-KSB for fiscal year ended 11/30/93)
10.9 Management Agreement, dated November 9, 1993 between the
Company and Bernard Tessler (incorporated by reference to the registrant's
Annual Report on Form 10-KSB for fiscal year ended 11/30/93)]
10.9(a) Amendment to Management Agreement, dated January 20,
1994 between the Company and Bernard Tessler (incorporated by reference to the
registrant's Annual Report on Form 10-KSB for fiscal year ended 11/30/93)]
10.10 Letter Agreement dated November 18, 1994 (incorporated
by reference to the registrant's Annual Report on Form 10-KSB for fiscal year
ended 11/30/94).
10.10(a) Amendment to Letter Agreement dated April 10, 1995
(incorporated by reference to the registrant's Annual Report on Form 10-KSB for
the fiscal year ended November 30, 1995.
10.11 Asset Purchase Agreement dated as of March 31, 1995
(incorporated by reference to the registrant's Quarterly Report on Form 10-QSB
for fiscal quarter ended February 28, 1995).
27.1 Financial Data Schedule
35
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> NOV-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 1,827,395
<BONDS> 0
12,763
0
<COMMON> 0
<OTHER-SE> (1,840,158)
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 87,536
<INCOME-PRETAX> (114,777)
<INCOME-TAX> 0
<INCOME-CONTINUING> (114,777)
<DISCONTINUED> 5,756
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (109,021)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>