SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1997
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number O-21178
UNITED TEXTILES & TOYS CORP.
(Exact name of registrant as specified in its charter)
Delaware 13-3626613
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
448 West 16th Street, New York, New York 11368
(Address of principal executive offices)
(212) 675-6666
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of
the Act:
Title of each class Name of each exchange on which registered
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Common Stock Purchase Warrants
(Title of Class)
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that registrant was required to file such
reports); and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B 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].
The Registrant's revenues for the year ended March 31, 1997 were
$20,613,512.
The aggregate market value of the voting stock on June 30, 1997
(consisting of Common Stock, par value $.01 per share) held by non-affiliates
was approximately $452,632, based upon the average bid and asked prices for such
Common Stock on said date ($.81), as reported by a market maker. On such date,
there were 978,805 shares of Registrant's Common Stock outstanding.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
History
United Textiles & Toys Corp. (formerly Mister Jay Fashions
International, Inc.) ("the Company") is a Delaware corporation which was
organized in March 1991 and which commenced operations in October 1991. The
Company designs, manufacturers, and markets a variety of lower priced women's
dresses, gowns, and separates (blouses, camisoles, jackets, skirts, and pants)
for special occasions and formal events. All share and per share information
takes into account the 1 for 10 reverse stock split in March 1997. See
"Submission of Matter to a Vote of Securityholders."
The Company markets its products under its Mister Jay Fashions
International, Lady Helene, Mister Jay Separates, and Junior for Mister Jay
labels. The Company sells its products in the United States primarily through
specialty retail clothing stores and, to a lesser extent, to department stores.
Most of the Company's products are purchased by women for weddings, parties,
dances, and other events requiring formal attire.
Majority Ownership of Playco Toys & Entertainment Corp.
Until July 1996, the Company was the majority shareholder of American
Toys, Inc. ("American Toys," now known as U.S. Wireless Corporation.). Since
American Toys was then the majority shareholder of Playco Toys & Entertainment
Corp. ("Playco"), the Company indirectly held the majority of Playco shares. By
corporate resolution dated June 1, 1996, the Company authorized its subsidiary,
American Toys, to spin-off ("the Spin-off Distribution") the Playco common stock
owned by American Toys to American Toys' stockholders. The Spin-off Distribution
was effected in August 1996.
The Company owns 7,258,742 (2,419,581 post reverse split) shares, or
59.3%, of the Playco common stock outstanding. This amount does not include the
4,500,000 (1,350,000 after the Playco 3 for 1 reverse stock split which took
effect in July 1997) shares issuable to the Company, at any time, upon the
Company's exercise of 225,000 shares of Playco Series E Class I Preferred Stock.
It does include, however, 578,742 shares of Playco common stock issued to the
Company in August 1996 as a result of the Spin-off Distribution.
Business:
United Textiles & Toys Corp. The Company's clothing line is comprised of
different styles of women's dresses and gowns. Each of the dresses and gowns is
available in sizes 8 through 20 and 20 1/2w through 32 1/2w. The garments in the
Mister Jay Fashions International
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line are more generously cut than the Junior for Mister Jay line. Dresses and
gowns in the Company's line retails for approximately $120.
Junior for Mister Jay. The Junior for Mister Jay line is a line of
dresses and gowns which are more form fitting than the Mister Jay Fashions
International line. This line is available in sizes 3 to 16 and in sizes 16w to
24w. Approximately 25 different styles are available in the Junior for Mister
Jay line. Dresses and gowns in the Junior for Mister Jay line retail for
approximately $150.
Lady Helene. The Lady Helene line is identical to the Mister Jay
Fashions International line, except that the Lady Helene line is available in
sizes 14 to 32. Dresses and gowns in the Lady Helene line retail for
approximately $115.
Mister Jay Separates. The Mister Jay Separates line comprises blouses,
camisoles, jackets, skirts, and pants in sizes small, medium, large, x-large,
xx-large, and xxx-large. There are approximately 30 different styles of blouses,
camisoles, and jackets; 14 different styles of skirts; and 6 different styles of
pants in the Mister Jay Separates line. Blouses, camisoles, jackets, skirts, and
pants in the Mister Jay Separates line retail for approximately $100 each.
Design and Manufacturing
All of the Company's garments are designed by the Company's designers.
The garments are based on original designs and modifications and copies of
existing designs. The Company's design staff consists of two persons: one
designs the garment and one creates the patterns for, and sews samples of, the
new garments. Samples of newly designed garments are delivered to the Company's
sales personnel for introduction to the Company's existing customers and the
trade.
When the Company receives an order to supply a customer with a newly
designed garment, the Company's cutting department cuts the required material to
pattern and ships the cut material, together with any required non-fabric
sub-materials, to sewing contractors located in New York State. These
contractors then sew and assemble the garments for the Company. Upon completion,
all finished goods are delivered by the sewing contractors to the Company for
final inspection, allocation, and shipment to customers. The goods are delivered
to Company customers by independent shippers, by air or truck, depending upon
such customers' needs and cost and time considerations.
Supplies and Inventory
The Company purchases its fabrics, together with non-fabric
sub-materials (zippers, buttons, and trimmings) from New York City based
manufacturers and suppliers. The Company generally pays for fabrics and
non-fabric sub-materials upon receipt. As is customary in the industry, the
Company does not have long term formal arrangements with any of its suppliers;
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rather, it purchases its supplies based upon specific design and order
requirements. However, the Company has experienced little difficulty in
satisfying its fabric and non-fabric requirements and considers its sources of
supply adequate.
The Company's inventory of garments varies depending upon the Company's
backlog of purchase orders and its financial position.
Quality Control
The Company conducts limited quality control to ensure that finished
goods meet its standards. It employs one person to inspect samples of each
garment received from the sewing sub-contractors to ensure compliance with
Company specifications.
Marketing and Sales
The Company's products are sold primarily to retail specialty clothing
stores and, to a lesser extent, to department stores throughout the United
States. The Company's products are sold by nine independent manufacturers'
representatives on a commission basis and by management and a salaried sales
person employed by the Company at the Company's sales office. Most of the
Company's sales are made on a net 30 day basis. An 8% discount is offered if
payment is made within 10 days of purchase.
Several major retail department store chains recently have experienced
financial difficulties, and some have filed for protection under Chapter XI of
the federal bankruptcy laws. Although the Company sells its products to some of
such retail department store chains, to date, the financial difficulties of same
have not had a material adverse effect on the Company's business. The Company is
unable to predict what effect, if any, the financial difficulties encountered by
the department stores will have on the Company's business.
The Company does not sell on consignment and does not accept a return
of its products unless same are imperfect or the products were shipped in error.
Generally, imperfect goods are replaced with new, conforming goods.
To generate new business, the Company relies on sales calls made by its
representatives and exhibits created by its manufacturers' representatives for
presentation at trade shows. In addition, the Company sends catalogues and
flyers to its existing customers on a regular basis, advising same of products
newly created by the Company.
The Company believes a key feature of its business is its ability to
design, produce, and sell low cost garments which are similar in style and
appearance to more expensive garments.
Backlog
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A significant portion of the Company's sales are generated from short
term purchase orders from customers who place orders on an as-needed basis. The
Company typically manufactures its products only upon receipt of customer
orders. The Company delivers the goods ordered within four weeks of its receipt
of an order. The Company manufactures approximately 10% more goods than are
ordered by its customers in anticipation that additional orders from these
customers will be placed. Information relative to open purchase orders at any
date may be materially affected by, among other things, the timing of recording
orders and shipments. Accordingly, the Company does not believe that the amount
of its unfilled orders at any given time is meaningful.
Trademarks
The Company utilizes registered and common law trademarks for use on
its products. The Company registered the trademark "Lady Helene" in the United
States in or about September 1992. The trademarks "Mister Jay Fashions
International," "Mister Jay Separates," and "Junior for Mister Jay" are
unregistered trademarks which the Company uses on its respective lines of
clothing. The Company has not filed for registration of any of such unregistered
trademarks because of the probability that existing similar registered
trademarks will act as a bar to registration. There can be no assurance that the
Company's "Lady Helene" trademark adequately will be protected against
infringement or that the Company will not be found to, in some manner, have
infringed on another party's trademark through sales under the unregistered
"Mister Jay Fashions International," "Mister Jay Separates," and "Junior for
Mister Jay" unregistered trademarks. Either of such events could adversely
affect the Company's business.
Competition
There is intense competition in the sectors of the apparel industry in
which the Company participates. The Company competes with many other
manufacturers, some of which are larger and have greater resources than the
Company.
The Company's business is highly competitive. There are relatively
insignificant barriers to entry and numerous firms competing for the same
customers. The Company is in direct competition with local, regional, and
national clothing manufacturers, many of which have greater and more extensive
distribution and marketing resources than the Company. In addition, many large
retailers have recently commenced sales of "store brand" garments which compete
with those sold by the Company. Management believes that the Company's market
share in the evening wear and special occasion garment market is insignificant.
Many of the national clothing manufacturers have extensive advertising
campaigns which develop and reinforce brand name recognition. In addition, many
of these manufacturers have executed agreements with department stores and
national retail clothing chains for the joint advertising and marketing of their
products. Since the Company does little advertising and has executed no
agreements with any department stores or national retail chains for the
advertising of
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its products, the Company competes with companies which manufacture and sell
brand name garments which are well known to the public. All other factors being
equal, it can be expected that a retail shopper will buy a "brand name" garment
before he buys a garment manufactured by an entity unknown to him.
Employees
As of August 1, 1997, the Company has approximately nine full time
employees and utilizes the services of approximately five independent sales
representatives who are compensated on a commission basis only. None of the
employees of the Company is represented by a union, and the Company considers
employee relations to be good.
Business of Playco
Playco, a Delaware corporation, was founded in 1974, at which time it
operated one store, under the name Playco Toys, in Escondido, California. Playco
now operates twenty-one1 stores throughout Southern California in the Los
Angeles, Orange, San Diego, Riverside, and San Bernadino Counties. This includes
the four stores which the Company has closed pending the earlier of (i) the
return of same to their respective landlords; or (ii) the November and December
holiday season, at which time the stores will be reopened temporarily. Prior to
its corporate restructuring in 1996 and its acquisition of Toys International
("Toys") in January 1997, Playco, which is a retailer of children's and adult
toys, games, and hobby products, operated stores which averaged approximately
10,000 square feet in size and were located in highly trafficked strip shopping
centers. These stores ("Playco Originals") sell traditional and promotional
toys.
In the beginning of 1996, Playco redefined its corporate goals and
philosophy, changing its focus from the sale of solely promotional and
traditional toys to the sale of educational, new electronic interactive, and
specialty and collectible toys and items. In light of its new focus, during
fiscal 1997, Playco redesigned three of its Playco Originals, opened a new
flagship store in Santa Clarita, and acquired three Toys stores. In conformance
with its new goals, Playco's new stores ("the Contemporaries") shall be smaller
(3,500 to 5,200 square feet in size) and shall operate in "exclusive" highly
trafficked malls rather than in strip shopping centers. Playco's Toys stores and
Contemporaries are expected to produce higher gross profits since, in addition
to carrying their historical inventory of lower margin promotional toys, they
sell educational and electronic interactive games and toys, specialty products,
and collector's toys, which generally carry higher gross margins.
Playco plans to redesign six Playco Originals into Contemporaries and
open an additional nine locations by the end of fiscal 1999. Four of the
addition locations shall be opened by the end of calendar year ended 1997. The
remaining new locations shall be opened by the end of calendar 1998. Playco
anticipates having twenty-eight locations by the end of 1999. In order to
continue to adjust to consumer preferences, Playco shall take a proactive
approach by continuously reviewing each individual store's sales history and
prospects on an individual basis to decide on the appropriate product mix.
Acquisition of Toys International
In January 1997, Playco acquired substantially all of the assets of
Toys. The acquisition, in principal, included the assignment to Playco of the
three store leases held by Toys and all of Toys' inventory. In order to ensure a
smooth transition in operations, the President of Toys, Mr. Gayle Hoepner,
continued on as a consultant to Playco for a period of ninety days. The funding
for the purchase of the stores was obtained through the exercise by Europe
America Capital
- --------
1 This number and all numbers hereafter which pertain to stores currently
operated by the Company, except where otherwise indicated, include four stores
which the Company has darkened temporarily until the November and December
holiday season.
<PAGE>
Corporation ("EACC") of its option to purchase 1,200,000 shares of Playco's
Series E Preferred Stock. These shares were issued to an assignee of EACC. The
funding obtained from the exercise was $1,200,000.
Recent Developments
On February 1, 1996, Playco entered into a Loan and Security Agreement
("the Loan Agreement") with Congress Financial Corporation (Western)
("Congress") to replace its then existing credit line with Imperial Bank. The
Loan Agreement provides Playco with a secured line of credit of up to 60% of the
value of all of its inventory, not to exceed $7,000,000 ("the Congress
Financing"). The Congress Financing is secured by all of Playco's assets and a
$2,000,000 letter of credit ("L/C") provided by EACC, an affiliate of Ilan
Arbel, the President and Chief Executive Officer of the Company and a former
director of Playco. The Congress Financing is also guaranteed by the Company.
In connection with the issuance of the L/C, on February 2, 1996, Playco
granted to EACC options (i) to purchase an aggregate of 1,250,000 shares of
Common Stock at a purchase price of 25% of the closing bid price for the Common
Stock on the last business day prior to exercise, for a period of six months
from issuance (this option expired unexercised); and (ii) to purchase an
aggregate of 20,000,000 shares of Playco's Series E Preferred Stock. To date,
EACC has exercised its option and purchased an aggregate of 2,862,070 shares of
the Series E Preferred Stock of which 2,500,570 shares are presently outstanding
after the conversion of an aggregate of 361,500 of such shares into Common
Stock. In addition, in March 1997, EACC issued an additional $1,000,000 L/C to
Congress in order for Playco to obtain additional financing from Congress. In
April and May 1997, Europe America Capital Foundation ("EACF"), European
Ventures Corp. ("EVC"), and Vermongenstreuhand G,H,M,B provided an additional
aggregate amount of $700,000 to Playco as an advance against equity.
In April 1997, Playco signed a lease to open a new store in Clairemont,
California. This facility should open during the 3rd calendar quarter of 1997.
Since March 1997, Playco also has closed, temporarily, until the November and
December holiday season, four stores. These stores were closed because they did
not generate revenues as anticipated; they were not permanently closed, however,
because the leases therefor are of considerable duration and cannot be broken
without significant potential hardship (legal and/or financial) to Playco.
Playco is searching for suitable replacement tenants to assume its lease
obligations for these stores.
In addition, Playco is now converting its Rialto location to an
off-price clearance center. Playco feels that this under-performing location is
demographically better suited for this concept. Fewer markdowns should, and
will, be taken at the other locations as slower moving inventory will be
transferred to the Rialto location for faster turnover.
Merchandising Strategy; Refocusing of Corporate Direction
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Traditionally, Playco's merchandising strategy was to offer an alternative,
less intimidating environment than that provided by Toys R Us, a competitor of
the Company. In particular, Playco stocks all of its items at eye level (not
vertically, as other stores often do), provides clerks to assist customers, and
implements a policy of treating its customers with courtesy and respect. Playco
has augmented its product lines in its Contemporaries and will continue to
provide these quality services to its patrons at all of its stores. As discussed
herein, in the beginning of 1996, management of the Company realized the
inherent value in, and thus the demand for, a retail outlet which provides a
combination of (i) educational, new electronic interactive, and specialty and
collectible toys and items; and (ii) traditional and promotional toys.
Accordingly, it refocused its corporate objectives and changed its business plan
to emphasize the marketing and sale of such goods. To achieve its goals, Playco
developed a new store design and marketing format which provides an interactive
setting together with a retail operation. This format and design will form the
foundation for Playco's future direction and growth plans, thereby allowing
Playco to meet the demand mentioned above. Playco has thus far (i) remodeled
three Playco Originals as Contemporaries during fiscal year 1997; and (ii)
opened its first Contemporary as its flagship store in Santa Clarita,
California. By the end of calendar year 1997, Playco intends to open four
Contemporaries in upscale malls rather than in strip centers where most of its
Playco Originals are located. By the end of fiscal 1999, Playco expects to have
opened nine new stores and to have redesigned six Playco Originals as
Contemporaries, thereby continuing the implementation of Playco's redirection
and new business plan. Playco shall periodically review each individual store's
sales history and prospects on an individual basis to decide on the appropriate
product mix. Playco views its new corporate goals with excitement and shall
continue to refocus its product lines and strategies for the future. Presently,
the majority of its stores, Playco Originals, will continue to offer a broad
in-stock selection of products at competitive prices and with an emphasis on
customer service. Playco generally prices its promotional items to be
competitive with Toys R Us, using Toys R Us prices as a guideline. While Playco
does not stock the depth or breadth of selection of toys for its Playco
Originals, as Toys R Us does, Playco does strive to stock all basic categories
of toys and all television promotional items. Playco also offers a special order
program for many items and offers this service free to its customers. Financing
for Playco's operations, including (i) the acquisition of substantially all of
the assets of Toys; (ii) the opening of the Santa Clarita store; (iii) the
remodeling of the three Playco Originals; and (iv) the financing of Playco's
losses, has come primarily from the proceeds of EACC's exercise of its option to
purchase shares of Playco's Series E Class I Preferred Stock and from the
additional financing received from Congress based upon an additional $1,000,000
L/C received from EACC. During the limited time that has passed since the Toys
acquisition and the opening and remodeling of the various stores aforementioned,
Playco has shown increased same store sales and higher profit margins in these
stores. Thus, management is optimistic that its attempt in fiscal year 1998 to
open three new stores and renovate/redesign five existing stores will succeed.
See "Financing."
<PAGE>
Wholesale Operations Since June 1994, Playco has sold toy and hobby items on a
wholesale basis to military bases located in Southern California. Playco
presently sells toys and hobby items on a wholesale basis to the following
military bases: (i) Camp Pendleton Marine Corp. Recruit Depot; (ii) Miramar
Naval Base; (iii) Marine Base, Barstow, California; (iv) Marine Corp. Air
Station, El Toro, California; (v) Marine Corp. Air Station at Yuma, Arizona; and
(vi) 29 Palms Marine Base in 29 Palms, California. With four of six military
bases to which it sells, Playco has agreements which provide that Playco shall
sell to such purchasers, on a wholesale basis, those items requested and shall
give credit for those items which are not sold and are returned to it.
Though the profit margin obtained from selling wholesale is low, the
costs incurred in selling wholesale are minimal since Playco already has
inventory, trucks, and warehouse space. Playco intends to attempt to expand its
sales through additional wholesale sales of toy and hobby items to additional
military bases, although there can be no assurance that it will be successful in
selling such items on a wholesale basis or in expanding its wholesale sales from
present levels. The plan to increase wholesale sales is solely intended to
augment Playco's retail operation. Wholesale sales to military bases totaled
approximately $619,000 or 3% of sales for the year ended March 31, 1997 as
compared to $911,400 (or 4%) of sales for the year ended March 31, 1996.Products
Playco carries most major brand name toy and hobby products. The Playco
Originals sell children's and adult toys, games, bicycles, and other wheel
goods, sporting goods, puzzles, Nintendo, and Sega electronic game systems and
cartridges for such game systems, cassettes, and books. They offer over 15,000
items for sale. The Contemporaries and two of the Toys stores also sell some of
these toys and, in addition, sell educational toys, Beanie Babies, Steiff and
North America Bears, Small World toys, LBG trains, CD-ROMs, electronic software
games, and Learning Curve products. The third Toys store, Tutti Animali, is a
unique store which sells only stuffed animals.
Inventory
Until recently, Playco's stores were serviced from two adjacent
distribution facilities (one 43,000 square feet in size, the other 18,000 square
feet in size) encompassing an aggregate of approximately 61,000 square feet.
However, as of April 15, 1997, Playco returned 12,800 feet of the 18,000 square
foot warehouse space to the landlord. Playco continues to purchase approximately
95% of its products directly from manufacturers and ships the products to its
stores from its distribution center. Inventory and shipment of products
continues to be monitored by a computerized point-of-sale system which was
installed during fiscal years 1990 and 1991 at an approximate cost to Playco of
$1,000,000. The point-of-sale system is a sophisticated
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scanning, inventory control, purchasing, and warehouse system which allows each
store manager to monitor sales activity and inventory at each store. It monitors
sales at all store locations and automatically notifies the warehouse and
shipping department each time stock of a particular item is low or out,
depending upon the item and the instructions programmed into it. Playco's stores
generally are restocked with products on a weekly basis, although certain stores
and certain items may be restocked at different intervals. In addition,
restocking of products is generally increased during the fourth calendar, during
the November and December holiday season: some stores and some items are
restocked on a daily basis during such period.
All shipments to stores are made by Company owned or leased vehicles.
Each store employs a store manager, an assistant manager, and between fifteen to
twenty-five full time and part time employees. Each of Playco's store managers
reports to Playco's Director of Operations and Director of Merchandising who in
turn report directly to Playco's Executive Officers.
Seasonality
Playco's business is highly seasonal, with the majority of its sales
and profits being generated in the fourth quarter of the calendar year,
particularly during the November and December holiday season. Even after the
introduction of educational products described herein, Playco expects that the
majority of its sales will continue to be generated in the fourth quarter of the
calendar year, particularly in November and December. While Playco expects that
sales in the remaining three quarters will increase as a result of its refocus
and the opening of three Contemporaries, the remodeling of three Playco
Originals, and the acquisition of three Toys stores, there can nonetheless be no
assurance that Playco is correct in such opinion.
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Research and Development
In determining the appropriate site at which to open new store
locations, Playco utilizes a site evaluation model based upon demographics. The
model was originally developed in 1990 by National Decision Systems, Encinitas,
California, at a cost to Playco of approximately $10,000. It is based upon
approximately 400 census variables which were originally derived from the
variables surrounding Playco's then existing eighteen stores. Whenever Playco
contemplates opening a Playco Original or a Contemporary, it compares the
demographic variables of the contemplated location against those of its model.
(This model is not used for Toys stores.) Positive factors and negative factors
are given certain ratings, and a score is derived from such ratings. The
strength of the score guides management of Playco as to whether or not to
proceed with the contemplated store location.
Demographic variables which are examined by the site evaluation model
include income level, number of children per household, age groups of such
children, number of wage earners per household, proximity of other toy stores,
and the percentage of home ownership within a one, three, and five mile radius
of the contemplated store location.
Playco continues its practice of typically not opening stores within a
three mile radius of a Toys R Us store. Management's policy is based on its
understanding of Toys R Us' policy of not opening a new Toys R Us store within a
ten mile radius of an existing Toys R Us location. Such policy generally has
allowed Playco to open new stores in between Toys R Us locations, with the
assurance that a new Toys R Us store, in all likelihood, would not be opened
within a three mile radius of any Playco stores. This policy is consistent with
the parameters of its site evaluation model, and management believes that
reliance on the model significantly increases the probability that a new store
will be successful. There can be no assurance, however, that management is
correct in such opinion.
Trademarks
In 1976, Playco received a federal registration for the trademark
"Playco Toys," which trademark is utilized by Playco in connection with its
marketing and sales of toy and hobby items. In addition, Playco applied for, and
was granted in 1994, a federal registration for the trademark "TKO."
Financing
As mentioned previously, on February 1, 1996, Playco entered into a
Loan Agreement with Congress to replace its credit line with Imperial Bank. The
Loan Agreement provides Playco with a line of credit of up to 60% of the value
of all of its inventory, not to exceed $7,000,000. This financing is secured by
all of Playco's assets and a $2,000,000 L/C provided by EACC. Additionally, the
Congress Financing is guaranteed by the Company, Playco's majority stockholder.
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In connection with the issuance of the L/C, on February 2, 1996, Playco
granted to EACC options (i) to purchase up to an aggregate of 1,250,000 shares
of Common Stock at a purchase price of 25% of the closing bid price for the
Common Stock on the last business day prior to exercise, for a period of six
months from issuance (this option expired unexercised); and (ii) to purchase up
to an aggregate of 20,000,000 shares of Playco's Series E Preferred Stock.
The opening of Contemporaries, the remodeling of Playco Originals, and
the acquisition of Toys was financed primarily by EACC's exercise of its option
to purchase shares of the Series E Preferred Stock. Since February, 1996, EACC
has invested $6,000,000 in Playco, inclusive of two L/C's in the aggregate
amount of $3,000,000, which it issued to Congress in order to increase the
usable portion of Playco's credit lines, and $3,000,000 as a result of its
exercise of options to purchase Playco's Series E Preferred Stock. In April and
May 1997, EACF, EVC, and Vermongenstreuhand G,H,M,B provided an additional
aggregate amount of $700,000 to Playco as an advance against equity.
Playco relies on credit terms from manufacturers to purchase nearly all
of its inventory. While 90% of accounts payable to vendors are current as of the
date of this document, there can be no assurance that Playco will be able to
keep such payables current in the future. Such credit arrangements vary for
reasons both within and outside the control of Playco.
Competition
The toy and hobby products market is highly competitive. Though
Playco's Contemporary and Toys stores, unlike other toy stores, offer a
combination of promotional, traditional, educational, new electronic
interactive, specialty, and collectible toys and items, Playco remains in direct
competition with local, regional, and national toy retailers, including Toys R
Us (considered to be the dominant toy retailer in the United States) with
respect to its traditional toy items. In order to combat the competition,
Playco's Contemporary and Toys stores offer specialty items such as Beanie
Babies and Steiff and North American bears, etc. Since Playco's prices are in
part based upon Toys R Us' prices, the aggressive pricing policy of Toys R Us
has resulted in Playco's lowering its prices on many items, thereby reducing
Playco's profits.
The toy and hobby products market is particularly characterized by
large retailers and discounters with intensive advertising and marketing
campaigns and with deeply discounted pricing of such products. Playco faces
competition from hobby vendors that market through direct sales forces and from
distributors that rely on mail order and telemarketing. Playco competes as to
price, personnel, service, speed of delivery, and breadth of product line. Many
of Playco's competitors have greater financial and marketing resources than
Playco. Both Toys R Us and Kay Bee dominate the retail toy industry in Southern
California. Although both Playco and Toys R Us have been in the retail toy
industry in Southern California for approximately twenty years, Toys R Us has
increased its market share at a significantly faster rate than Playco. The
domination of Toys R Us and Kay Bee, the weak Southern California economy, and
<PAGE>
Playco's policy of not opening Playco Originals and Contemporaries store within
three miles of an existing Toys R Us store may inhibit Playco's ability to
compete effectively in the retail toy industry or to establish new stores in
favorable locations.
Playco feels that the unfulfilled need in the marketplace is a retail
outlet which offers a combination of the traditional, name brand, quality
promotional toy items and educational, electronic interactive, and collector's
items and products. Combining the promotional and educational toy segments of
the market into one retail location is believed to be a unique concept that
should prove to differentiate Playco's stores from those of any of its larger or
similar size competitors. Management has been unable to locate any other
retailer currently using this combined marketing concept. Playco will compete
for the educational toy customer with other specialty stores such as Disney
Stores, Warner Bros. Stores, Imaginarium, Learning Smith, Lake Shore, Zainy
Brainy, and Noodle Kidoodle.
Employees
As of August 1, 1997, Playco has one executive office, approximately 70
full time employees, and approximately 280 part time employees. None of the
employees of Playco is represented by a union, and Playco considers employee
relations to be good.
1997 Annual Meeting of Playco
On March 3, 1997, Playco held its annual meeting during which it
proposed to elect three Directors to the Board. The proposal was adopted, and
the following were elected Directors of the Board for a term of one year: Ilan
Arbel, Harold Rashbaum, and Sheikhar Boodram. On April 29, 1997, Mr. Arbel
resigned as Director. On May 23, 1997, in order to fill the vacancy left by Mr.
Arbel, Playco's Board of Directors appointed Richard Brady as a Director.
1997 Special Meeting of Playco
On June 10, 1997, Playco mailed a Notice of Special Meeting of
Stockholders and Proxy Statement to its shareholders advising of a June 30, 1997
special meeting wherein the following proposals were voted on: (i) a reverse
split of Playco's outstanding shares on a 3 for 1 basis; (ii) an amendment to
Playco's Certificate of Incorporation which will effect an amendment to the
rights and preferences of the Series E Preferred Stock to (a) eliminate the
Series E Class I Preferred Stock, (b) eliminate the dividend, and (c) change the
conversion ratio from 20 to 1 to 6 to 1; and (iii) authorization for the
issuance of up to 1,000,000 shares of Playco's Series E Class II Preferred Stock
by Playco for sale in an initial public offering. All of the aforesaid proposals
were approved by a vote of the majority of Playco's stockholders.
ITEM 2. DESCRIPTION OF PROPERTY
The Company subleases 20,000 square feet of industrial space at 448
West 16th Street,
<PAGE>
New York, New York, at an approximate rate of $12,500 per annum. It is at this
location that the Company houses its administrative offices, factory, and
warehouse. The sublease expires on December 31, 1998. Until January 31, 1997,
the Company also subleased an 858 square foot showroom at 1400 Broadway, New
York, New York. In order to reduce expenses, however, the Company chose not to
renew the sublease when it expired on January 31, 1997.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material litigation, and is not aware
of any threatened litigation that would have a material adverse effect on the
business of either. Playco is not a party to any material litigation and is not
aware of any threatened litigation that would have a material adverse effect on
its business, except for (i) three litigation matters involving three of the
four stores Playco has temporarily closed; (ii) an action commenced in
bankruptcy court by one of Playco's former distributors; and (iii) two personal
injury matters commenced in July against Toys International.
From March 1997 through May 1997, Playco temporarily closed four of its
locations due to non-profitable operations. Playco is seeking to sublease such
locations or return the locations to the landlords pursuant to a settlement;
however, in the event that Playco is unable to obtain subleases, it will reopen
the stores for the holiday season in October. In June 1997, the landlords for
three of the four locations filed lawsuits against Playco seeking, in one of the
suits, the full value of the lease payments for the term of the leases. Playco
has filed answers to these lawsuits and intends to defend against the actions
unless resolutions between the parties thereto can be reached. Management
expects that these actions will settle before trial and that there will be no
material effect on Playco's operations.
The action in bankruptcy court was commenced also in June 1997 by one
of Playco's former distributors. Plaintiff in said action seeks $10,163.55 which
it alleges Playco owes for goods sold to Playco. Playco is preparing a motion to
dismiss this action and intends to defend against same should its motion be
denied. Management expects that this matter will settle before trial and that
there will be no material effect on Playco's operations.
The two actions commenced in July 1997 against Toys International, Inc.
allege that unrelated plaintiffs each sustained personal injury in 1996 in the
Toys store located in the Century City shopping center. These actions were
improperly commenced against Toys International, Inc., however, and management
expects that both actions will be discontinued voluntarily or dismissed by the
court.
No Director, Officer, or affiliate of the Company or Playco, nor any
associate of either, is a party to, or has a material interest in, any
proceeding adverse to the Company or Playco.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 3, 1997, the Company held its annual meeting during which it
proposed (i) to
<PAGE>
elect four Directors to the Company's Board of Directors to hold office for a
period of one year or until their successors are duly elected and qualified;
(ii) to amend the Company's Certificate of Incorporation to effect a change of
the Company's name from Mister Jay Fashions International, Inc. to United
Textiles & Toys Corporation; and (iii) to reverse split the Company's
outstanding shares on a 10 for 1 basis.
The votes cast for or withheld with respect to the election of the
Directors are set forth as follows:
<TABLE>
<CAPTION>
Nominees Votes For Votes Withheld
-------- --------- --------------
<S> <C> <C>
Ilan Arbel 5,055,801 103,100
Sheikhar Boodram 5,055,801 103,100
Allean Goode 5,055,801 103,100
Rivka Arbel 5,055,801 103,100
</TABLE>
The votes cast for, against, or abstained with respect to the proposal
to amend the Company's Certificate of Incorporation to effect a change of the
Company's name from Mister Jay Fashions International, Inc. to United Textiles &
Toys Corporation are as follows:
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C> <C>
5,103,991 23,480 4,430
</TABLE>
<PAGE>
The votes cast for, against, or abstained with respect to the proposal
to reverse split the Company's outstanding shares on a 10 for 1 basis are as
follows:
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C> <C>
4,866,711 120,410 74,780
</TABLE>
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Units are currently listed on the SmallCap Market of the
Nasdaq Stock Market. The following table sets forth representative high and low
closing bid quotes as reported by a market maker, during the period from
February 8, 1993 (the date the Company's Units started trading on the SmallCap
Market of the Nasdaq Stock Market) through August 5, 1996. Bid quotations
reflect prices between dealers, do not include resale mark-ups, mark-downs, or
other fees or commissions, and do not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Common Stock (1) Public Warrants (2) Units (3)
Calendar Period Low High Low High Low High
- --------------- --- ---- --- ---- --- ----
1995
<S> <C> <C> <C> <C> <C> <C>
01/01/95 - 03/31/95 5 3/4 18 1/8 1 1/2 11
04/01/95 - 06/30/95 2 4 7/8 1/8 1
07/01/95 - 09/30/95 4 1/2 4 7/8 1/8 1/8
10/01/95 - 12/31/95 1 5/8 5 3/4
1996
01/01/96 - 03/31/96 2 1/4 2 7/8
04/01/96 - 06/30/96 5/8 2
07/01/96 - 09/30/96 1 2 2/8
10/01/96 - 12/31/96 1/4 29/32
1997
01/01/97 - 03/31/97(4) 5/32 1
04/01/97 - 06/30/97 13/16 1
07/01/97 - 08/05/97 5/16 13/16
</TABLE>
(1) The Company's Common Stock and Public Warrants began trading on
February 11, 1993.
(2) The Company's Public Warrants traded from February 11, 1993 through
August 11, 1995.
(3) The Company's Units traded from February 11, 1993 through March 15,
1993.
(4) Reflects the 1 for 10 reverse stock split in March, 1997. See
"Submission of Matter to a Vote of Securityholders."
As of August 5, 1997, there were approximately 42 holders of record of
the Company's Common Stock, although the Company believes that there are
approximately 864 additional beneficial owners of shares of Common Stock held in
street name. As of August 5, 1997, 978,805 of the Company's shares of Common
Stock were outstanding.
<PAGE>
ITEM 6. - MANGEMENTS' DISUCUSSION AND ANALYSIS OF FINANICAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations - Years Ended March 31, 1997 and 1996
Consolidated net sales decreased from $22,492,857 to
$20,613,512, a decrease of $1,879,345 or 8.4% when comparing the year
ended March 31, 1997 to March 31, 1996. This decrease was primarily due
to a decrease in Playco's sales $(1,606,577) which was attributed to
decreased sales in a certain toy game product which management believes
was due to it being a passing fad. Women's apparel sales also decreased
from 1996 to 1997 $(272,768) which management attributes to increased
competition in the garment industry.
Consolidated cost of sales decreased from $16,774,352 for the
fiscal year ended March 31, 1996 to $16,030,785 for the fiscal year
ended March 31, 1997. This decrease of $743,567 or 4.4% was due to
management's efforts to better control manufacturing costs.
Consolidated overhead costs for the year ended March 31, 1997
aggregated $9,062,876 as compared to $10,273,167 for the year ended
March 31, 1996, a decrease of $1,210,291 or 11.8%. Consolidated
interest costs however, increased to $663,018 from $616,849 when
comparing the year ended March 31, 1997 to the corresponding period of
the prior year, an increase of $46,169 or 7.5%. Management attributes
this increase to higher average borrowings.
For the year ended March 31, 1997, subsequent to the
adjustment for the minority interest in the net loss of consolidated
subsidiaries, the Company reflected a consolidated net loss of
$3,648,607 or $.43 per share. For the year ended March 31, 1996,
subsequent to the minority interest adjustment, the Company reflected a
net loss of $2,608,224 or $1.27 per share. Management attributes the
increased loss to the lower net sales and the lower gross margin on net
sales as described above.
Liquidity and Capital Resources
At March 31, 1997 the Company's consolidated balance sheet
reflected cash of $144,668, negative working capital of $1,386,836 and
a current ratio of .85:1. At March 31, 1996 the Company reflected cash
of $75,573, working capital of $1,792,042 and a current ratio of 1.3:1.
Management attributes these decreases to the approximate $3,600,000 net
loss incurred during the fiscal year ended March 31, 1997.
For the year ended March 31, 1997, the Companies used cash of
$2,945,000 for operations as compared to cash used for operations of
$1,850,000 for the prior
<PAGE>
year. The decreased use of cash was primarily a result of a reduction
in inventories of $1,149,190 for the year ended March 31, 1997 as
compared to the year ended March 31, 1996. Cash used for investing
purposes for the year ended March 31, 1997 aggregated $1,024,000 as
compared to $457,000 for the prior year and this was primarily for the
purchase of property and equipment for both years. Cash generated from
financing activities for the year ended March 31, 1997 was $4,037,549
as compared to $1,975,000 for the prior year.
For the years ended March 31, 1997 and 1996, Playco reflected
net losses of approximately $3,600,000 and $3,500,000, respectively,
which amounts include the minority shareholders pro rata share.
In November 1995, Europe American Capital corp. ("EACC"), an
affiliate, provided a $2,000,000 letter of credit to Playco for
financing purposes in connection with a bank line of credit agreement.
In connection therewith, Playco granted an option to purchase 350,000
shares of common stock. Playco estimated the value of the option to be
$224,000 and recorded such amount as additional paid-in capital. For
the years ended March 31, 1997 and March 31, 1996, amortization of the
value of the option aggregated $97,740 and $44,800, respectively and is
included in interest expense. The unamortized value of the option at
March 31, 1997 and March 31, 1996 was $81,640 and $179,200 at March 31,
1996, and is included in other assets. The exercise period expired
April 16, 1996 and no options had been exercised.
On February 7, 1996, Playco obtained alternative financing and
the entire balance due under the bank line of credit was repaid and
the agreement was terminated. The letter of credit was transferred as
collateral under the new financing agreement.
On February 7, 1996, Playco borrowed, under an agreement with
a financing company, approximately $2,243,000, which proceeds were used
to repay the then outstanding borrowings under the bank line of credit
agreement (Note 6). The financing agreement provides for maximum
borrowings up to $7,000,000 based upon a percentage of the cost value
of eligible inventory, as defined. Outstanding borrowings bear interest
at 1.5% above the prime rate, as defined (the prime rate at March 31,
1997 was 8.5%). The agreement matures February 1, 1998 and can be
renewed for one additional year at the lender's option.
The agreement includes a financial covenant requiring Playco
to maintain, at all times, adjusted net worth, as defined, of $500,000.
At March 31, 1997, Playco was in compliance with this financial
covenant.
The financing agreement is secured by substantially all assets
of Playco, is guaranteed by United Textiles and collateralized by a
$2,000,000 letter of credit provided by EACC. In connection with the
letter of credit provided by EACC, Playco
<PAGE>
granted to EACC (i) an option to purchase up to an aggregate of
1,250,000 shares of Playco's common stock at a purchase price of 25% of
the closing bid price for Playco's common stock on the last business
day prior to exercise, for a period of six months commencing February
7, 1996, such option having expired, and (ii) an option to purchase up
to an aggregate of 20,000,000 shares of Playco's Series E preferred
stock at a purchase price of $1.00 per share during the period from May
9, 1996 through January 30, 1998. Playco's estimated value of the
option described in (i) above is insignificant to the accompanying
financial statements. Playco estimated the value of the option
described in (ii) above to be $234,000 and recorded such amount as
additional paid-in capital. For the years ended March 31, 1997 and
1996, amortization of the value of the option aggregated $117,000 and
$19,500, respectively, and is included in interest expense. The
unamortized value of the option aggregates $97,500 at March 31, 1997
and $214,500 at March 31, 1996, is included in other assets
In March 1997, the agreement was amended during the year to
allow Playco to execute a Note payable to the stockholder of Toys
International Inc. for $265,000. The financing company continues to
hold a senior interest in the assets of Playco. In addition, United
Textiles was substituted for American Toys as the guarantor due to the
spin-off of the Playco ownership. Further, the agreement was amended to
increase the borrowing ratios on inventory and increase special loan
advances provided EACC issue an additional letter of credit in the
amount of $1,000,000 which was provided by letters of credit
aggregating $3,000,000.
New Accounting Standards
Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of," requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed
for impairments whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The
Companies are in the process of analyzing the impact of this statement
and do not believe it will have a material impact on the Companies'
financial position or results of operations. The Companies anticipate
adopting the provision of this statement for the fiscal year 1998.
Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," established financial
accounting and reporting standards for stock-based employee
compensation plans and certain other transactions involving the
issuance of stock. The Companies will continue to apply the current
accounting policy under Accounting Principles Board Opinion No. 25 and
will include the necessary disclosures in its fiscal 1998 financial
statements.
Trends Affecting Liquidity, Capital Resources and Operation
<PAGE>
Playco's sales efforts are focused primarily on a defined
geographic segment, consisting of individuals in the Southern
California area. Playco's future financial performance will depend upon
continued demand for the toys and hobby items by individuals in
Southern California, general economic conditions within such geographic
market area. Playco's ability to choose locations for new stores,
Playco's ability to purchase products at favorable prices in favorable
items as well as increased competition and changes in consumer
preferences.
The toy and hobby retail industry currently faces a number of
potentially adverse business conditions including price and gross
margin pressures and market consolidation and domination. The
domination of the retail toy industry by Toys R Us has resulted in
increased price competition among various toy retailers and declining
gross margins for such retailers. Moreover, the domination of Toys R Us
has resulted in liquidation or bankruptcy of many toy retailers
throughout the United States, including the Southern California market.
There can be no assurance that Playco's business strategy will enable
it to compete effectively in the retail toy industry.
Management knows of no other trends reasonably expected to
have a material impact upon Playco's operations or liquidity in the
foreseeable future. Playco's operating history has been characterized
by narrow profit margins and, accordingly, Playco's earnings will
depend significantly on its ability to purchase its product on
favorable terms, retail a large volume and variety of products
efficiently and to provide quality support services. Playco's prices
are, in part, based on market surveys of its competitors' prices,
primarily those of Toy R Us. As a result, aggressive pricing policies,
such as those used by Toys R Us, have resulted in Playco reducing its
retail prices on many items, thereby reducing the available profit
margin. Moreover, increases in expenses or other charges to income may
have a material adverse effect on Playco's results of operations. There
can be no assurance that Playco will be able to generate sufficient
revenues or have sufficient controls over expenses and other charges to
increase profitability.
Immediately after the Christmas season, Playco begins
purchasing inventory, which has been depleted as a result. Thus,
although significant reductions in accounts payable are made in
January, accounts payable and inventory levels are expected to
immediately increase as a result of new inventory purchases
Inflation and Seasonality
During the past few years inflation in the United States has
been relatively stable. In management's opinion, this is expected to
continue for the foreseeable future. However, should the American
economy again experience double digit inflation
<PAGE>
rates, as was the case in the past, the impact upon prices could
adversely affect Playco's operations.
Playco's toy business is highly seasonal with a large portion
of its revenues and profits being derived during the months of November
and December. United Textiles' business is not seasonal with women's
apparel being sold throughout the year.
Subsequent Events
TERMINATION OF WAREHOUSE LEASE:
In April 1997. Playco negotiated a settlement with a landlord
for an excess warehouse facility, whereby Playco was released from the
lease obligation for a settlement of $60,000. This early lease
termination will result in annual savings of approximately $235,000
based on the original scheduled lease term through 2000.
b. ADDITIONAL FINANCING:
On various dates subsequent to March 31, 1997, an additional
700,000 shares of Playco's Series E Preferred Stock were issued for
$700,000.
Additionally, the individual, beneficial, majority stockholder
of United Textiles has represented his intent and ability to provide
additional working capital to Playco, should such be necessary, through
September 1998.
ITEM 7. FINANCIAL STATEMENTS
See attached Financial Statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On May 14, 1997, the Company and Lazar, Levine & Company LLP mutually
agreed that Lazar, Levine & Company LLP would no longer be the Company's
auditors. The resignation of Lazar, Levine & Company LLP was not due to any
discrepancies or disagreements between the Company and Lazar, Levine & Company
LLP on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure as there were no such discrepancies
or disagreements.
There were no disagreements on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure during
the two fiscal years ended March 31, 1996 and 1995 through the date of
resignation, May 14, 1997. The Company's Board of Directors approved the
acceptance of the accountant's resignation.
<PAGE>
On July 1, 1997, the Company's Board of Directors authorized the
Company's Executive Officers to engage Jerome Rosenberg, CPA, P.C. as the
Company's new auditing firm for the year ending March 31, 1997. Prior to
engaging Jerome Rosenberg, CPA, P.C. such accounting firm was not consulted on
any matters relative to the application of accounting principles on specified
transactions or in any matter that was the subject of a disagreement with the
prior accountants.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT
Directors and Executive Officers.
The executive Officers and Directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Ilan Arbel 42 Chief Executive Officer,
President, and Director
Sheikhar Boodram 34 Vice President and Director
Allean Goode 62 Secretary, Treasurer, and
Director
Rivka Arbel 43 Director
</TABLE>
All Directors hold office until the next annual meeting of stockholders
or until their successors are duly elected and qualified. Officers are elected
annually by, and serve at the discretion of, the Board of Directors. There are
no family relationships between or among any Officers or Directors of the
Company, except that Rivka Arbel is the sister-in-law of Ilan Arbel.
Ilan Arbel has been President, Chief Executive Officer, and a Director of
the Company since 1991. Mr. Arbel was the President, Chief Executive Officer,
and a Director of American Toys from its inception in February 1993 until July
1996. American Toys is a research and development company specializing in
wireless communications. In May 1993, Mr. Arbel became a Director of Playco, and
from June 1994 until his resignation in April 1997, he was Chairman of the Board
of Playco. Since August 1995, Mr. Arbel has been a
<PAGE>
Director of Multimedia Concepts International, Inc. Since 1989, he has been
the sole Officer and Director of Europe America Capital Corp., a company
involved in investments and finance in the United States and Europe. Mr. Arbel
is also the sole Officer and Director of European Ventures Corp., a company
involved in investments and finance in the United States and Europe. Mr. Arbel
is a graduate of the University Bar Ilan in Israel and has B.A. degrees in
Economics, Business, and Finance.
Sheikhar Boodram has been the Vice President and a Director of the Company
since September 1992. Prior thereto, from October 1991 until September 1992, he
was employed by the Company as Production Manager, performing most of the
functions which he presently performs as Vice President. Mr. Boodram is
responsible for the design and the coordination of the manufacturing of the
Company's garments. Mr. Boodram has been a Director of Playco since February
1996. Since June 1995, he has been the President and Secretary of Multimedia
Concepts International, Inc. Mr. Boodram was a Director of American Toys from
May 1993 to July 1996. Mr. Boodram is the sole Officer and Director of American
Eagle Industries Corp. and Match II, Inc., which companies engage in the
manufacture of women's clothing. From 1979 until October 1991, Mr. Boodram was
the production manager for Lady Helene Sophisticates, Ltd., a manufacturer of
ladies garments which ceased operations in 1991.
Allean Goode has been Secretary, Treasurer, and a Director of the
Company since September 1992. She was Assistant Secretary of Playco from May
1993 until approximately May 1995. From 1991 until September 1992, Ms. Goode
acted as an independent contractor performing bookkeeping services for the
Company. Ms. Goode was Secretary, Treasurer, and a Director of American Toys
from February 1993 until July 1996. From 1981 until 1991, Ms. Goode was employed
as Office Manager and Bookkeeper of Via West Sportswear, a New York based
manufacturer of sportswear.
Rivka Arbel has been a Director of the Company since September 29, 1992.
From 1986 to present, Ms. Arbel has been President and a Director of Amigal,
Ltd., a producer of men's and women's wear in Israel. Ms. Arbel is the
sister-in-law of Ilan Arbel, the Company's President and Chief Executive
Officer.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's Officers, Directors, and persons who beneficially own
more than ten percent of a registered class of the Company's equity securities
to file reports of securities ownership and changes in such ownership with the
Securities and Exchange Commission ("SEC"). Officers, Directors, and greater
than ten percent beneficial owners also are required by rules promulgated by the
SEC to furnish the Company with copies of all Section 16(a) forms they file.
Based solely upon requests for information of the Company's Officers, Directors,
and greater than ten percent shareholders, during fiscal 1997, the Company has
been informed that all Officers, Directors, or greater than ten percent
shareholders have stated that they have filed such reports as are required
<PAGE>
pursuant to Section 16(a) during the 1996 fiscal year. The Company has no basis
to believe that any required filing by any of the above indicated individuals
has not been made.
ITEM 10. EXECUTIVE COMPENSATION
Executive Compensation
Summary of Cash and Certain Other Compensation
The following provides certain information concerning all Plan and
Non-Plan (as defined in Item 402 (a)(ii) of Regulation S-B) compensation awarded
to, earned by, or paid by the Company during the years ended March 31, 1997,
1996, and 1995 to each of the named Executive Officers of the Company.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
(a) (b) (c) (d) (e)
Name and Principal Other Annual
Position Year Salary($) Bonus($)(1) Compensation($)
<S> <C> <C> <C> <C>
Ilan Arbel(2)(3) 1997 - - -
Chief Executive Officer 1996 - - -
of the Company 1995 - - -
</TABLE>
(1) No bonuses were paid during the periods herein stated.
(2) Mr. Arbel became the Chief Executive Officer of the Company in February
1991. Mr. Arbel does not receive any compensation from the Company for being an
Officer or Director.
(3) In June 1995, pursuant to the terms of an agreement, the Company
granted Mr. Arbel an option to purchase 150,000 shares of Common Stock at an
exercise price of $2.00. These options were exercised, and the shares purchased
were sold pursuant to an S-8 Registration Statement. See "Employment Agreements"
and "Certain Relationships and Related Transactions."
Employment Agreements
In May 1996, the Company entered into five year employment agreements
with each of Mr. Arbel and Rivka Arbel. Pursuant to such agreements, Mr. Arbel
and Ms. Arbel were granted options to purchase an aggregate of 3,000,000 shares
and 400,000 shares, respectively, of the Company's Common Stock at a purchase
price equal to the average bid price for the Company's Common Stock as reported
on the Nasdaq SmallCap Stock Market, for a period of ninety days ending five
days prior to exercise. See "Executive Compensation."
<PAGE>
1992 Stock Option Plan
During 1992, the Company adopted the Company's 1992 Stock Option Plan
("the Plan"). The Board believes that the Plan is desirable to attract and
retain executives and other key employees of outstanding ability. Under the
Plan, options to purchase an aggregate of not more than 15,000 shares of Common
Stock may be granted from time to time to key employees, Officers, Directors,
advisors, and independent consultants to the Company and its subsidiaries. As of
the date hereof, options to purchase an aggregate of 7,000 shares of Common
Stock have been granted under the Plan.
The Board of Directors is charged with administration of the Plan. The
Board is generally empowered to interpret the Plan, prescribe rules and
regulations relating thereto, determine the terms of the option agreements,
amend them with the consent of the optionee, determine the employees to whom
options are to be granted, and determine the number of shares subject to each
option and the exercise price thereof. The per share exercise price for
incentive stock options ("ISOs") will not be less than 100% of the fair market
value of a share of the Common Stock on the date the option is granted (110% of
fair market value on the date of grant of an ISO if the optionee owns more than
10% of the Common Stock of the Company).
Options will be exercisable for a term determined by the Board which
will not be less than one year. Options may be exercised only while the original
grantee has a relationship with the Company or a subsidiary of the Company which
confers eligibility to be granted options or up to ninety (90) days after
termination at the sole discretion of the Board. In the event of termination due
to retirement, the Optionee, with the consent of the Board, shall have the right
to exercise his option at any time during the thirty-six (36) month period after
such retirement. Options may be exercised up to thirty-six (36) months after
death or total and permanent disability. In the event of certain basic changes
in the Company, including a change in control of the Company (as defined in the
Plan) in the discretion of the Board, each option may become fully and
immediately exercisable. ISOs are not transferable other than by will or the
laws of descent and distribution. Options may be exercised during the holder's
lifetime only by the holder, his or her guardian or legal representative.
Options granted pursuant to the Plan may be designated as ISOs, with the
attendant tax benefits provided under Section 421 and 422A of the Internal
Revenue Code of 1986. Accordingly, the Plan provides that the aggregate fair
market value (determined at the time an ISO is granted) of the Common Stock
subject to ISOs exercisable for the first time by an employee during any
calendar year (under all plans of the Company and its subsidiaries) may not
exceed $100,000. The Board may modify, suspend or terminate the Plan; provided,
however, that certain material modifications affecting the Plan must be approved
by the shareholders, and any change in the Plan that may adversely affect an
optionee's rights under an option previously granted under the Plan requires the
consent of the optionee.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information at August 5, 1997,
with respect to the beneficial ownership of Common Stock by (i) each person
known by the Company to be the owner of 5% or more of the outstanding Common
Stock; (ii) by each Director; (iii) and by all Officers and Directors as a
group. Except as otherwise indicated below, each named beneficial owner has sole
voting and investment power with respect to the shares of Common Stock listed.
<TABLE>
<CAPTION>
Name and Address Amount and Number
of Beneficial Owner of Beneficial Owner Percentage of Outstanding
<S> <C> <C>
Ilan Arbel (1),(2) 0 __
c/o Mister Jay Fashions
International, Inc.
448 West 16th Street
New York, NY 10011
Allean Goode 0 __
c/o Mister Jay Fashions
International, Inc.
448 West 16th Street
New York, NY 10011
Sheikhar Boodram 0 __
c/o Mister Jay Fashions
International, Inc.
448 West 16th Street
New York, NY 10011
Rivka Arbel 0 __
c/o Mister Jay Fashions
International, Inc.
448 West 16th Street
New York, NY 10011
Europe American (1)
Capital Foundation 420,000 4.2%
Box 47
Tortola British Virgin Islands
Officers and Directors
as a Group 0 __
(4 persons)
</TABLE>
<PAGE>
(footnotes from previous page)
* Less than 1%.
(1) Represents shares beneficially owned by the Arbel family. See "Certain
Relationships and Related Transactions."
(2) Does not include shares underlying options granted on June 19, 1995.
Pursuant to the terms of a compensation agreement dated June 10, 1995, the
Company granted Ilan Arbel an option to purchase 350,000 shares of Common Stock
at an exercise price of $2.00. The number of stock options granted to Ilan Arbel
reflects a revision of the compensation agreement. The earlier version of the
compensation agreement provided that the Board of Directors would grant an
option to purchase 150,000 shares, exercisable at $2.00 per share, to Ilan
Arbel. 150,000 shares were issued on June 26, 1995 upon the exercise of such
option. In September 1995, Ilan Arbel exercised his option and purchased an
additional 100,000 shares. The shares purchased were sold pursuant to an
Registration Statement on form S-8 filed by the Company on June 21, 1995 and as
amended on August 14, 1995. Does not include an aggregate of 3,000,000 shares
purchased pursuant to the exercise of options granted in January 1996 and June
1996, which were exercised and the shares purchased thereunder resold pursuant
to an S-8 registration statement. See "Certain Relationships and Related
Transactions."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 19, 1995, pursuant to a compensation agreement dated June 10,
1995, the Company's board of Directors granted 150,000 and 100,000 stock options
(does not reflect reverse stock split in March 1997) exercisable at $2.00 per
share, to Mr. Arbel and Rivka Arbel, respectively. These options were exercised,
and the shares of Common Stock issued thereby were sold pursuant to a Form S-8
registration statement, filed by the Company, registering the sale of such
shares.
On September 29, 1995, the Company exercised its Special Warrant and
purchased 275,000 shares of American Toys common stock at $2.00 per share. As a
result, the Company retained approximately 50.1% of the outstanding shares of
common stock of American Toys. This Special Warrant has expired and the Company
is no longer the majority stockholder of American Toys.
On June 1, 1996 American Toys entered into a five year employment
agreement with Mr. Arbel. Pursuant to the terms of the employment agreement, Mr.
Arbel received options to purchase 1,000,000 shares at $1.00 and 2,250,000
shares at $1.33 exercisable until December 31, 1996. In June 1996, Mr. Arbel
exercised his option to purchase 1,000,000 shares of common stock at $1.00 per
share pursuant to the terms of the Labyrinth Agreement. Mr. Arbel exercised an
option to purchase an additional 750,000 shares at $1.33 in August 1996.
American Toys registered the shares underlying the options in a registration
statement, thus, there are no restrictions pursuant to a lock up agreement on
any shares issued pursuant to the exercise of such options.
In June 1996, American Toys, pursuant to the consent of its majority
shareholder, at which time was the Company, authorized the spin-off of the
shares of Playco's common stock owned by American Toys to the shareholders of
American Toys. Additionally, American Toys authorized the conversion of its
share of Series D Preferred Stock into 1,157,028 shares of Playco's common stock
based upon the average closing bid price ($1.21) of Playco's shares for the
period from March 1, 1996 to May 31, 1996. Playco amended its Certificate of
Incorporation to reflect the conversion provisions referenced herein.
<PAGE>
In July 1996, the Company authorized the cancellation of an American
Toys stock certificate for 275,000 shares in exchange for American Toys'
cancellation of a $550,000 promissory note issued by the Company to American
Toys.
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) See annexed financial statements
(b) During the last quarter of the period covered by this report, the
Company filed a Form 8- K, dated March 25, 1997, in which it reported the
results of the Company's annual meeting of March 3, 1997. The Company also filed
a Form 8-K and a Form 8-K/A, both dated May 14, 1997, in which it reported the
termination of Lazar Levine & Company LLP s its certifying accountants. The
Company filed a third Form 8-K, dated July 21, 1997, in which it reported the
retention of Jerome Rosenberg, CPA, P.C. as its certifying accountant.
(c) The following exhibits (except those marked with an "*," which are
filed herewith) were filed with the Commission with the Company's registration
statement on form SB-2, File No. 33- 55548-NY. Pursuant to 17 C.F.R. ss.230.411,
all exhibits previously filed are incorporated by reference herein.
<TABLE>
<CAPTION>
<S> <C>
3.1 - Certificate of Incorporation of the Company filed
March 19, 1991.
3.2 - Amendment to Certificate of Incorporation of the Company, filed
in December, 1992.
3.3 - By-Laws of the Company.
3.5 - Amended and Restated Certificate of Incorporation of Play
Co. Toys, filed on June 15, 1994.
3.6 - By-Laws of Playco.
3.9* - Certificate of Amendment to Certificate of Incorporation of
the Company, filed in March 1997
4.1 - Specimen Common Stock Certificate.
4.2 - Specimen Warrant Certificate.
10.1 - The Company Incentive Stock Option Plan.
10.2 - Sublease at 448 West 16th Street, New York, New York
10.3 - Lease for 1400 Broadway, New York, New York
10.12 - Stock Purchase Agreement between Playco and American
Toys
10.14 - Non-Competition Agreement between Playco and Rich
Brady
10.16 - Lease Agreement for Store-Escondido
10.17 - Lease Agreement for Store-Convoy
10.18 - Lease Agreement for Store-Oceanside
10.19 - Lease Agreement for Store-El Toro
10.20 - Lease Agreement for Store-Chula Vista
10.21 - Lease Agreement for Store-El Cajon
<PAGE>
10.22 - Lease Agreement for Store-Ontario
10.23 - Lease Agreement for Store-Simi Valley
10.24 - Lease Agreement for Store-Encinitas
10.25 - Lease Agreement for Store-San Dimas
10.26 - Lease Agreement for Store-Anaheim
10.27 - Lease Agreement for Store-Rialto
10.28 - Lease Agreement for Store-Redlands
10.29 - Lease Agreement for Store-Rancho Cucamonga
10.30 - Lease Agreement for Store-Woodland Hills
10.31 - Lease Agreement for Warehouse-Executive Offices
10.32 - Lease Agreement for Store-Pasadena
10.36 - Lease Agreement for Store-Lakewood
10.37 - Lease Agreement for Store-Corona Plaza
10.41 - Extension of Warehouse Lease
10.57 - Direct delivery Purchase Agreement between Playco and Camp
Pendleton
10.58 - Director delivery Purchase Agreement between Playco and
MCRD, San Diego.
10.59 - Waiver of Playco's right to call shares of Messrs. Brady and
Davidson.
10.60 - Lease extension - El Toro Store
10.65 - Compensation agreement between the Company, Ilan Arbel
and Rivka Arbel.
16.01 - Letter on change in certifying accountant (filed as an exhibit to Form
8-K/A, dated May 14, 1997 and incorporated herein by reference)
16.02 - Letter on change in certifying accountant (filed as an exhibit to Form
8-K, dated July 21, 1997 and incorporated herein by reference)
27.01* - Financial Data Schedule
</TABLE>
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized this 30th day of August, 1997.
United Textiles & Toys Corp.
By: /s/ Ilan Arbel
Ilan Arbel, President,
Chief Executive Officer, and Director
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant, in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Ilan Arbel Chief Executive Officer, 8/20/97
Ilan Arbel President, and Director Date
/s/ Allean Goode Secretary, Treasurer, and 8/20/97
Allean Goode Director Date
/s/ Sheikhar Boodram Vice President and Director 8/20/97
Sheikhar Boodram Date
/s/ Rivka Arbel Director 8/20/97
Rivka Arbel Date
</TABLE>
<PAGE>
- INDEX TO CONSOLIDATED FINANCIAL STATEMENTS -
<TABLE>
<CAPTION>
Page(s)
Financial Statements:
<S> <C>
Independent Auditor's Report, for the Year Ended March 31, 1997 ........ F-2
Independent Auditor's Report, for the Year Ended March 31. 1996 ........ F-3
Consolidated Balance Sheets as of March 31, 1997 and 1996 .............. F-4
Consolidated Statements of Operations for the Years Ended March 31,
1997 and 1996 ..................................................... F-6
Consolidated Statement of Changes in Shareholders' Equity for the Two
Years in the Period Ended March 31, 1997 .......................... F-7
Consolidated Statements of Cash Flows for the Years Ended March 31,
1997 and 1996 ..................................................... F-8
Notes to Consolidated Financial Statements ............................. F-10
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
United Textiles & Toys Corp.
New York, New York
We have audited the consolidated balance sheet of United Textiles & Toys Corp.
and subsidiaries as of March 31, 1997 and the related consolidated statements of
operations, cash flows and changes in stockholders' equity for the year ended
March 31, 1997. 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 did not audit the financial
statements of Playco Toys & Entertainment Corp., a 59.3% owned subsidiary which
statements reflect total assets of $9,378,618 and $9,213,104 as of March 31,
1997 and 1996, respectively and total revenues of $19,624,276 and $21,230,853
for the years ended March 31, 1997 and 1996, respectively. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Playco Toys &
Entertainment Corp. is based solely on the report of the other auditors.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audits 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 and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of United Textiles & Toys Corp. and
subsidiaries as of March 31, 1997 and the results of its operations and its cash
flow for the year ended March 31, 1997, in conformity with generally accepted
accounting principles.
The financial statements for the year ended March 31, 1996 and March 31, 1995
were audited by other accountants whose report dated June 18, 1996, expressed an
unqualified opinion on those statements.
JEROME ROSENBERG CPA, P.C.
Syosset, New York
August 14, 1997
F-3
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
United Textiles & Toys Corp.
formerly Mister Jay Fashions International, Inc.
New York, New York
We have audited the consolidated balance sheet of Mister Jay Fashions
International, Inc. and subsidiaries as of March 31, 1996 and the related
consolidated statements of operations, cash flows and changes in shareholders'
equity for the year then ended. 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 did not audit the
consolidated financial statements of American Toys, Inc., a 50.06% owned
subsidiary, and its subsidiary (Play Co. Toys, Inc.), which statements reflect
total assets of $9,320,749 as of March 31, 1996 and total revenues of
$21,230,853 for the year ended March 31, 1996. Those statements were audited by
other auditors whose report has been furnished to us, and our opinion, insofar
as it relates to the amounts included for American Toys, Inc. and subsidiary, is
based solely on the report of the other auditors.
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 and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Mister Jay Fashions International,
Inc. and subsidiaries as of March 31, 1996 and the results of its operations and
its cash flows for the year then ended, in conformity with generally accepted
accounting principles.
LAZAR, LEVINE & COMPANY LLP
New York, New York
August 20, 1997
F-4
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS
March 31, March 31,
1997 1996
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents ...................................... $ 144,668 $ 75,573
Accounts receivable - net of allowances for doubtful accounts of
$32,013 for 1997 and 1996, respectively ...................... 181,420 313,068
Inventories (Notes 2f and 7) ................................... 7,124,035 8,273,225
Prepaid expenses and other current assets ...................... 252,901 338,844
Loans and advances - officer (Note 4) .......................... 123,600 88,105
TOTAL CURRENT ASSETS ............................................. 7,826,624 9,088,815
PROPERTY AND EQUIPMENT - NET (Notes 2g, 5) ....................... 2,478,706 1,866,169
OTHER ASSETS:
Security deposits .............................................. 7,220 64,504
Deferred financing costs (Notes 2h, 6 and 7) ................... 324,797 393,700
Costs in excess of net assets acquired ......................... -- 6,542
332,017 464,746
TOTAL ASSETS ..................................................... $10,637,347 $11,419,730
</TABLE>
The independent auditors' report and accompanying notes are an integral
part of the consolidated financial statements.
F-5
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, March 31,
1997 1996
CURRENT LIABILITIES:
<S> <C> <C>
Borrowings under financing agreement (Note 7) ...................... $ 4,438,875 $ 3,403,025
Accounts Payable ................................................... 3,318,472 2,926,827
Accrued expenses and other current liabilities (Note 10) ........... 510,447 548,360
Due to affiliates (Note 11) ........................................ 804,000 418,561
Current portion of notes payable (Note 9) .......................... 141,666 --
TOTAL CURRENT LIABILITIES ............................................ 9,213,460 7,296,773
LONG-TERM LIABILITES:
Notes payable, net of current portion (Note 9) ..................... 100,000 --
Deferred rent liability ............................................ 126,925 197,935
226,925 197,935
MINORITY INTERESTS IN SUBSIDIARIES (Note 14): ........................ 2,007,180 2,501,653
COMMITMENTS AND CONTINGENCIES (Notes 3, 6, 7, 15, 16,
and 18)
SHAREHOLDERS' EQUITY (Note 15):
Common stock, $.01 par value, 10,000,000 shares authorized: and
9,788,050 and 2,188,050 shares issued and outstanding for 1997 and
1996, respectively ............................................... 97,881 21,881
Additional paid-in capital ......................................... 7,048,950 5,709,930
Common stock subscribed ............................................ 150,000 150,000
Retained earnings (deficit) ........................................ (8,107,049) (4,458,442)
(810,218) 1,423,369
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........................... $ 10,637,347 $ 11,419,730
</TABLE>
The independent auditors' report and accompanying notes are an integral
part of the consolidated financial statements.
F-6
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARIES
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended March 31,
1997 1996
---- ----
<S> <C> <C>
NET SALES (Note 2j): .................................................. $ 20,613,512 $ 22,492,587
COSTS AND EXPENSES:
Cost of sales (Note 16c) ............................................ 16,030,785 16,774,352
Operating expenses .................................................. 9,062,876 10,273,167
Interest and other income ........................................... (35,513) (42,605)
Costs associated with closure of retail stores (Note 12) ............ -- 129,577
Interest expenses ................................................... 663,018 616,848
25,721,166 27,751,339
(LOSS) BEFORE MINORITY INTERESTS ...................................... (5,107,654) (5,258,752)
Minority interests in net loss of consolidated subsidiaries (Note 14) 1,459,047 2,650,528
(LOSS) BEFORE PROVISION (CREDIT) FOR INCOME TAXES ..................... (3,648,607) (2,608,224)
(Credit) provision for income taxes (Notes 2i and 13) ............... -- --
(NET LOSS) ............................................................ (3,648,607) $ (2,608,224)
(LOSS) EARNINGS PER COMMON AND DILUTIVE COMMON
EQUIVALENT SHARE (Note 2l):
Net loss before minority interest and income tax benefit ............ $ (.60) $ (2.56)
Minority interest in net loss ....................................... .17 1.29
Income tax benefit .................................................. -- --
Net loss ............................................................ $ (.43) $ (1.27)
WEIGHTED AVERAGE NUMBER OF COMMON AND DILUTIVE
SHARES OUTSTANDING (Note 2l) ........................................ 8,402,725 2,052,434
</TABLE>
The independent auditors' report and accompanying notes are an integral
part of the consolidated financial statements.
F-7
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARIES
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Common Total
Common Paid-in Stock Retained Shareholders'
Shares Stock Capital Subscribed Earnings Equity
<S> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1995 .... 1,638,050 $ 16,381 4,615,430 -- $(1,850,218) $ 2,781,593
Shares issued in repayment
of debt ................... 550,000 5,500 1,094,500 -- -- 1,100,000
Stock subscription received . -- -- -- 150,000 -- 150,000
Net loss for the year ended
March 31, 1996 ............ -- -- -- -- (2,608,224) (2,608,224)
Balance at March 31, 1996 ... 2,188,050 21,881 5,709,930 150,000 (4,458,442) 1,423,369
Issuance of shares in lieu of
compensation (Note 15a) ... 3,400,000 34,000 1,339,020 -- -- 1,373,020
Issuance of shares to
affiliate (Note 15c) ..... 4,200,000 42,000 -- -- -- 42,000
Net loss for the year ended
March 31, 1997 ............ -- -- -- -- (3,648,607) (3,648,607)
Balance at March 31, 1997 ... 9,788,050 $ 97,881 $ 7,048,950 $150,000 $(8,107,049) $ (810,218)
</TABLE>
The independent auditors' report and accompanying notes are an integral
part of the consolidated financial statements.
F-8
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARIES
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended
March 31
1997 1996
----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net (loss) .......................................................... $(3,648,607) $(2,608,224)
Adjustments to reconcile net (loss) to net cash (used for ) operating
activities:
Depreciation and amortization ................................... 451,120 493,910
Minority interest in net loss of subsidiaries ................... (1,459,047) (2.650,528)
Allowance for doubtful accounts ................................. -- 2,680
Deferred rent ................................................... (71,010) 57,717
Compensatory stock and options issued by subsidiaries ........... -- 267,401
Change in assets and liabilities:
Decrease (increase) in accounts receivable ...................... 131,648 532,658
Decrease (increase) in merchandise inventories .................. 1,149,190 2,357,713
Decrease in prepaid expenses and other current assets ........... 85,943 122,887
Decrease in deposits ............................................ 57,284 33,388
(Decrease) increase in accounts payable ......................... 391,645 (439,287)
(Decrease) in accrued expenses .................................. (32,913) (20,115)
Net cash (used for) operating activities ...................... (2,944,747) (1,849,800)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets ............................................ (988,212) (340,311)
Loans (made to) officer ............................................. (35,495) (116,674)
Net cash (used for) investing activities ...................... (1,023,707) (456,985)
</TABLE>
The independent auditors' report and accompanying notes are an integral
part of the consolidated financial statements.
F-9
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARIES
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended March 31,
1997 1996
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C>
Notes Payable .......................................... $ 241,666 $ --
Net borrowings (repayments) under line of credit ....... -- (2,374,491)
Net borrowings under financing agreement ............... 1,035,850 3,403,026
Loans and advances from affiliates ..................... 385,439 66,676
Payments of long-term debt and capital lease obligations -- (42,045)
Proceeds from sale of common stock ..................... -- 150,000
Increase in minority interest in subsidiaries .......... 2,374,594 772,150
4,037,549 1,975,316
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS ............................................ 69,095 (331,469)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ........... 75,573 407,042
CASH AND CASH EQUIVALENTS AT END OF YEAR ................. $ 144,668 $ 75,573
SUPPLEMENTAL DEISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid ........................................ $ 663,018 $ 533,058
Taxes paid ........................................... -- 15,821
</TABLE>
The independent auditors' report and accompanying notes are an integral
part of the consolidated financial statements.
F-10
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF COMPANY:
United Textiles & Toys Corp. (the "Company" or "United
Textiles") is a Delaware corporation which was organized in
March 1991 and commenced operations in October 1991. The
Company designs, manufactures and markets a variety of lower
priced women's dresses, gowns and separates for special
occasions and formal events. The Company's products are sold
primarily in retail clothing and department stores throughout
the United States.
Until July 1996, the Company was the majority shareholder of
American Toys, Inc. ("American Toys," now known as U.S.
Wireless Corporation.). Since American Toys was then the
majority shareholder of Playco Toys & Entertainment Corp.
("Playco"), the Company indirectly held the majority of Playco
shares. By corporate resolution dated June 1, 1996, the
Company authorized its subsidiary, American Toys, to spin-off
("the Spin-off Distribution") the Playco common stock owned by
American Toys to American Toys' stockholders. The Spin-off
Distribution was effected in August 1996.
The Company owned 7,258,742 shares (or 2,419,581 shares after
Playco's 3-1 reverse split), or 59.3%, of the Playco common
stock outstanding including 578,742 shares of Playco common
stock issued to the Company in August 1996 as a result of the
Spin-off Distribution.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a. PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of
United Textiles, and Playco All material inter-company
balances and transactions have been eliminated in
consolidation.
b. USE OF ESTIMATES:
In preparing financial statements in accordance with generally
accepted accounting principles, management makes certain
estimates and assumptions, where applicable, that affect the
reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial
statements, as well as reported amounts of revenues and
expenses during the reporting period. While actual results
could differ from those estimates, management does not expect
such variances, if any to have a material effect on
F-11
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the financial statements.
CONCENTRATION OF CREDIT RISK:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and
accounts receivable.
The Company maintains at times, deposits in federally insured
financial institutions in excess of federally insured limits.
Management attempts to monitor the soundness of the financial
institution and believes the Company's risk is negligible.
Concentrations with regard to accounts receivable are limited
due to the Company's large customer base.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying value of the Company's financial instruments,
consisting of accounts receivable, accounts payable and
borrowings approximate their fair value.
CASH AND CASH EQUIVALENTS:
For purposes of the statements of cash flows, the Company
considers all highly liquid investments purchased with a
remaining maturity of three months or less to be equivalents.
INVENTORIES:
Inventories are stated at the lower of cost (first-in,
first-out (FIFO) method) or market. Finished goods and
work-in-process of United Textiles are valued at average cost
of production which includes material, labor and manufacturing
expenses. At March 31, 1997 and March 31, 1996, inventories
consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
United Textiles
<S> <C> <C>
Raw Materials ....... $ 154,407 $ 696,526
Work-in-process ..... 57,022 132,107
Finished goods ...... 819,676 1,185,508
1,031,105 2,014,141
Playco
Merchandise inventories 6,092,930 6,259,084
Total ................... $7,124,035 $8,273,225
</TABLE>
F-12
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
g. FIXED ASSETS AND DEPRECIATION:
Property and equipment is recorded at cost. Depreciation and
amortization are provided using the straight-line method over the
estimated useful lives (3 - 15 years) of the related assets.
Leasehold improvements are amortized over the lesser of the
related lease terms or the estimated useful lives of the
improvements. Maintenance and repairs are charged to operations
as incurred.
DEFERRED FINANCING COSTS:
Deferred financing costs are associated with notes payable
(see Notes 6 and 7). Such costs will be amortized on a
straight-line basis over the life of the financing agreement
which expires on January 30, 1998.
i. INCOME TAXES:
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" which requires the use of the
"liability method" of accounting for income taxes.
Accordingly, deferred tax liabilities and assets are
determined based on the difference between the financial
statement and tax bases of assets and liabilities, using
enacted tax rates in effect for the year in which the
differences are expected to reverse. See also Note 13.
j. REVENUE RECOGNITION:
United Textiles recognizes revenues when finished goods are
shipped to customers. Playco, a retailer of toys, reflects
revenues at the time of sale of said toys.
k. STORE OPENING AND CLOSING COSTS:
Costs incurred by Playco to open a new retail location such as
advertising, training expenses and salaries of newly hired
employees are expensed as incurred and improvements to leased
facilities are capitalized. Upon closing a retail location,
the cost to relocate fixtures, terminate employees and other
related costs are expensed as incurred. In addition, the
remaining balance of any abandoned leasehold improvements are
expensed. If significant, the remaining payments are due under
lease agreements are discounted to present value and recorded
as an expense and a liability to the extent such are not
offset by rental income generated through existing subleases
of the property.
F-13
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
l. NEW ACCOUNTING PRONOUNCEMENTS:
In February 1997, the Financial Accounting Standards Board
("FASB") issued SFAS No. 128, Earning Per Share ("EPS"). SFAS No. 128
requires all companies to present "basic " EPS and, if they have a
complex capital structure, "diluted" EPS. Under SFAS No. 128, "basic"
EPS is computed by dividing income (adjusted for any preferred stock
dividends) by the weighted average number of common shares outstanding
during the period. "Diluted" EPS is computed by dividing income
(adjusted for any preferred stock or convertible stock dividends and
any potential income or loss from convertible securities) by the
weighted average number of common shares outstanding during the period
plus any dilutive potential common stock had been issued. The issuance
of antidilutive potential common stock should not be considered in the
calculation. In addition, SFAS No. 128 requires certain additional
disclosures relating to EPS. SFAS No. 128 is effective for financial
statements issued for period ending after December 15, 1997. Thus, the
Company expects to adopt the provisions of this statement in fiscal
year 1998
m. ACCOUNTING CHANGES:
As permitted by SFAS 123, Accounting for Stock-Based
Compensation, which becomes effective for the Company as of
April 1, 1996, and which encourages companies to record
expense for stock options and other stock-based employee
compensation awards based on their fair value at date of
grant, the Company will continue to apply its current
accounting policy under Accounting Principles Board Opinion
No. 25 and will include the necessary disclosures in its
fiscal 1997 financial statements.
n. IMPAIRMENT OF LONG-LIVED ASSETS:
Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of," requires that long-lived
assets and certain identifiable intangibles to be held and
used by an entity be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. The Company adopted SFAS
121 effective April 1, 1996. There was no impact of such
adoption on the Company's financial condition and results of
operations.
F-14
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - WORKING CAPITAL GUARANTEE OF MAJORITY
SHAREHOLDER:
For the years ended March 31, 1997 and 1996, the Company's
Playco subsidiary reflected net losses of approximately
$3,584,881 and $3,542,715, respectively, which amounts include
the minority shareholders pro-rata share. The Company has also
reflected substantial losses.
The individual, beneficial, majority shareholder of the
Company has represented his intent and ability to provide
additional working capital to the Company and its
subsidiaries, should such be necessary, through at least
September 30, 1997.
NOTE 4 - LOANS AND ADVANCES - OFFICER:
As of March 31, 1997 and 1996, loans and advances - officer,
aggregating $123,600 and $88,105, respectively, consisted of
funds advanced by the Company to an officer, bearing interest
at a rate approximately the prime lending rate.
NOTE 5 - FIXED ASSETS:
As of March 31, 1997 and 1996, fixed assets consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Furniture, fixtures and equipment $3,269,313 $2,956,773
Leasehold improvements ........... 1,220,246 542,785
Computerized inventory management
system ......................... 468,210 484,074
Signs ............................ 280,034 265,959
Vehicles ......................... 104,912 104,912
5,342,715 4,354,503
Less: accumulated depreciation and
amortization ................... 2,864,009 2,488,334
$2,478,706 $1,866,169
</TABLE>
NOTE 6 - BANK LINE OF CREDIT:
In November 1995, Europe American Capital corp. ("EACC"), an
affiliate, provided a $2,000,000 letter of credit to Playco for
financing purposes in
F-15
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
connection with a bank line of credit agreement. In connection
therewith, Playco granted an option to purchase 350,000 shares
of common stock. Playco estimated the value of the option to
be $224,000 and recorded such amount as additional paid-in
capital. For the years ended March 31, 1997 and March 31,
1996, amortization of the value of the option aggregated
$97,740 and $44,800, respectively and is included in interest
expense. The unamortized value of the option at March 31, 1997
and March 31, 1996 was $81,640 and $179,200 at March 31, 1996,
and is included in other assets. The exercise period expired
April 16, 1996 and no options had been exercised.
On February 7, 1996, Playco obtained alternative financing and
the entire balance due under the bank line of credit was
repaid and the agreement was terminated. The letter of credit
was transferred as collateral under the new financing
agreement (Note 7).
NOTE 7 - FINANCING AGREEMENT:
On February 7, 1996, Playco borrowed, under an agreement with
a financing company, approximately $2,243,000, which proceeds
were used to repay the then outstanding borrowings under the
bank line of credit agreement (Note 6). The financing
agreement provides for maximum borrowings up to $7,000,000
based upon a percentage of the cost value of eligible
inventory, as defined. Outstanding borrowings bear interest at
1.5% above the prime rate, as defined (the prime rate at March
31, 1997 was 8.5%). The agreement matures February 1, 1998 and
can be renewed for one additional year at the lender's option.
The agreement includes a financial covenant requiring Playco
to maintain, at all times, adjusted net worth, as defined, of
$500,000. At March 31, 1997, Playco was in compliance with
this financial covenant.
The financing agreement is secured by substantially all assets
of Playco, is guaranteed by United Textiles and collateralized
by a $2,000,000 letter of credit provided by EACC. In
connection with the letter of credit provided by EACC, Playco
granted to EACC (i) an option to purchase up to an aggregate
of 1,250,000 shares of Playco's common stock at a purchase
price of 25% of the closing bid price for Playco's common
stock on the last business day prior to exercise, for a period
of six months commencing February 7, 1996, such option having
expired, and (ii) an option to purchase up to an aggregate of
20,000,000 shares of Playco's Series E preferred stock at a
purchase price of $1.00 per share during the period from May
9, 1996 through January 30, 1998. Playco's estimated value of
the option described in (i) above is insignificant to the
accompanying financial
F-16
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
statements. Playco estimated the value of the option described
in (ii) above to be $234,000 and recorded such amount as
additional paid-in capital. For the years ended March 31, 1997
and 1996, amortization of the value of the option aggregated
$117,000 and $19,500, respectively, and is included in
interest expense. The unamortized value of the option
aggregates $97,500 at March 31, 1997 and $214,500 at March 31,
1996, is included in other assets.
In Mach 1997, the agreement was amended during the year to
allow Playco to execute a Note payable to the stockholder of
Toys International Inc. for $265,000 (Notes 8 and 9). The
financing company continues to hold a senior interest in the
assets of Playco In addition, United Textiles was substituted
for American Toys as the guarantor due to the spin-off of the
Playco ownership. Further, the agreement was amended to
increase the borrowing ratios on inventory and increase
special loan advances provided EACC issue an additional letter
of credit in the amount of $1,000,000 which was provided by
letters of credit aggregating $3,000,000.
NOTE 8 - ASSET PURCHASE AGREEMENT:
On January 16, 1997 the board of directors of Playco approved
the purchase of the assets and assumption of certain existing
liabilities of Toys International. Toys International is a
high-end retailer of toys which operated three mall locations
in Southern California. As part of the purchase agreement,
Playco obtained the rights to the Toys International and Tutti
Animali operating name trademarks and also assumed the
existing leases at the three locations. The total purchase
price was $1,024,184 which consisted mainly of inventory and
certain prepaid expenses and deposits. The purchase price was
paid in the form of a cash payment of $759,184 in January 1997
and the execution of two promissory Notes aggregating $265,000
(Note 9).
F-17
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - NOTES PAYABLE:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
March 31,
1997 1996
---- ----
Note payable to stockholder of Toys International, non-interest bearing,
guaranteed by United Textiles, payable in five
installments
ranging from $11,667 to $15,000 through
maturity, on June 16, 1997. Note is
subordinate to the financing agreement with a
financial institution (Note 7). $ 41,666 $ -
Note payable to stockholder of Toys International non-interest bearing,
guaranteed by United Textiles, payable in quarterly installments of $25,000
through maturity, on January 16, 1999. Note is subordinate to the financing
agreement with a financial
institution (Note 7). 200,000 -
Total long-term debt 241,666 -
Less current portion (141,666) -
Long-term debt $ 100,000 $ -
</TABLE>
Future obligations under these promissory Notes as of March
31, 1997 are as follows:
Year
March 31, Amount
1998 $141,666
1999 100,000
$241,666
F-18
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - ACCRUED EXPENSES:
At March 31, 1997 and 1996 accrued expenses and other current
liabilities consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Wages, bonuses and employee benefits $161,118 $123,642
Sales, payroll and occupancy taxes . 221,164 112,069
Interest costs ..................... 84,206 19,803
Other costs ........................ 103,959 292,846
$510,447 $548,360
</TABLE>
NOTE 11 - DUE TO AFFILIATES:
As of March 31, 1997 due to affiliates consisted of advances
from related entities received on an unsecured basis and
payable on demand. Interest charges are based on the prime
lending rate.
NOTE 12 - COSTS ASSOCIATED WITH CLOSURE OF RETAIL STORES:
During the year ended March 31, 1996, Playco permanently
closed four of its retail stores which were not meeting the
objectives of the Company. The costs associated with the
permanent closure of these stores, which included the
write-off of leasehold improvements, were accrued as of March
31, 1996. During the year ended March 31, 1996, those stores
generated sales of approximately $3,069,000 and operating
losses of approximately $309,000 before allocation of certain
corporate charges, interest and income taxes.
As a result of Playco permanently closing one of its retail
locations in June 1995, Playco recorded an expense during the
year ended March 31, 1996 of $85,000 as a settlement with the
landlord for the early termination of the lease. The
settlement required six quarterly installments of $14,167
through August 1, 1997, of which $28,332 was outstanding at
March 31, 1997 and is included in accrued expenses and other
liabilities in the accompanying balance sheet.
In March, April, and May 1997, Playco vacated four locations
with the intent of temporarily closing the stores and
reopening the locations during the Christmas 1997 peak season.
Playco may consider temporarily closing the stores again
thereafter. In the meantime, Playco and certain of the
landlords are attempting to find suitable sub-tenants to
occupy the locations and to assume the lease responsibilities.
F-19
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - COSTS ASSOCIATED WITH CLOSURE OF RETAIL STORES:
In June 1997, landlords for three of the four locations filed
lawsuits against Playco to collect unpaid rent on the stores,
which has been accrued to date by the Company; as well as
rental obligations due on the balance of the lease terms.
Management expects that these suits will ultimately be settled
with the landlords without a material effect on the financial
statements.
NOTE 13 - INCOME TAXES:
The provision (benefit) for income taxes is comprised of the
following:
<TABLE>
<CAPTION>
For the Year Ended
March 31
1997 1996
---- ----
Current tax expense:
<S> <C> <C>
Federal ........................ -- --
State and local ................ -- --
--- ---
Deferred tax expense (benefit):
Federal ........................ -- --
State and local ................ -- --
--- ---
Total income tax (benefit) expense $-- $--
</TABLE>
F-20
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - INCOME TAXES:
The tax effects of significant items comprising the Company's
deferred tax assets (liabilities) as of March 31, 1997 and
1996 are as follows:
For the Year
Ended
March 31
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Inventories $224,180 $73,996
AMT tax credits 23,260 23,260
Accrued expenses 21,815 17,816
Valuation allowance (289,255) (115,072)
Current portion of deferred tax assets $ - $ -
Depreciation ........................... $ (230,925) $ (246,185)
Net operating loss carryforwards ....... 3,584,820 2,451,855
Deferred rent liability ................ 50,945 79,447
Valuation allowance .................... (3,404,840) (2,285,117)
Long-term portion of deferred tax assets $ -- $ --
Net deferred tax assets ................ $ -- $ --
</TABLE>
The Company and its subsidiary, Playco, each have available
net operating loss carryforwards, which expire in years
through March 31, 2012.
The net operating losses as discussed above may result in
deferred tax assets. The Company and its subsidiary have
recognized these assets but have provided valuation allowances
to reduce the net deferred tax asset since management could
not determine that it was "more likely than not" that the
benefits of the deferred tax assets would be realized. This
allowance will be evaluated at the end of each
F-21
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
year, considering both positive and negative evidence
concerning the realization of the assets, and will be adjusted
accordingly.
NOTE 14 - MINORTIY INTERESTS IN SUBSIDIARIES:
The Company owns a majority interest (59.3%) in Playco Toys &
Entertainment Corp. The minority interest liability represents
the minority shareholders' portion (40.7%) of Playco's equity
at March 31, 1997. The minority interest as reflected in the
consolidated balance sheet consists of Playco's Series E
Preferred Stock only. Due to operating losses of Playco, the
minority interest in its common stock has been written down to
zero.
NOTE 15 - EQUITY TRANSACTIONS:
a. In May 1996, the Company entered into employment
agreements with two executive officers, whereby such officers
were granted options to purchase 3,400,000 shares of the
Company's stock in lieu of compensation. As per the agreement,
these shares could be purchased for cash, other securities
(valued at 50% of the bid price, as defined) or a combination of
thereof. During the quarter ended June 30, 1996, such options
were exercised and the 3,400,000 shares were acquired by these
officers at current market value, which approximated $5,781,000
at the acquisition date. The capitalization of these shares on
the books of the Company has been discounted from market value to
fair value based upon such factors as dilution, lack of
marketability, etc. Payment for these shares was partially
accomplished by the transfer of 334,000 shares of Series E
convertible preferred stock in Playco (a then subsidiary of
Wireless). These preferred shares were convertible to common
shares of Playco at a rate of 20 common shares to each preferred
share. As of December 31, 1996, the preferred shares were
converted into 6,680,000 shares of Playco's common stock. As per
the employment agreements, these converted shares were valued at
50% of the average bid price of such securities for a period, as
defined of $4,342,000. The balance is reflected as a receivable
from the officers, see Note 4. This transaction, together with
the spin-off transaction described in (b) below, resulted in
Playco becoming a majority owned subsidiary of the Company.
b. In August 1996, the board of directors of Wireless, pursuant
to the consent of the Company, authorized the spin-off of the
shares of common stock of Playco owned by Wireless to the
Wireless shareholders. The total shares of Playco owned by
Wireless as of the spin-off date aggregated 3,705,958 of which
the Company received 578,770. These shares, together with the
shares of Playco acquired as described in (a) above, resulted
in Playco becoming a majority owned subsidiary
F-22
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of United Textiles. The Company presently owns
7,258,742 shares or 59.3% of Playco's common stock
outstanding.
c. In December 1996, European American Capital Foundation
("EACF"), an affiliate of the Company, acquired 4,200,000
shares of the Company's common stock at the current market
price for an aggregate of $1,050,000. Payment for these shares
was accomplished through the transfer of 225,000 shares of
Series E convertible preferred stock in Playco
NOTE 16 - COMMITMENTS AND CONTINGENCIES:
a. 1994 STOCK OPTION PLAN:
In June 1994, Playco adopted the 1994 Stock Option Plan (the
"Plan") which provides for options to purchase an aggregate of
not more than 50,000 post-reverse split shares of common stock
as may by granted from time to time by Playco's Board of
Directors.
Concurrent with the adoption of the Plan, an option to
purchase 3,334 post-reverse split shares of common stock at $6.30
per shares; as adjusted for the one-for-three reverse split (Note
) was granted to Playco's Secretary/Treasurer. As of March 31,
1997, no options to purchase common stock had been exercised.
401(k) EMPLOYEE STOCK OWNERSHIP PLAN
In August 1994, Playco adopted a 401(k) Employee Stock
Ownership Plan ("the Plan") which covers substantially all
employees of Playco. The Plan includes provisions for both an
Employee Stock Ownership Plan ("ESOP") and a 401(k) Plan. The
ESOP allows only contributions by Playco which can be made
annually at the discretion of Playco's Board of Directors. The
ESOP is designed to invest primarily in Playco's stock. As of
March 31, 1997, there had been no transaction with regard to
the ESOP. The 401(k) portion of the Plan is contributed to by
the employees of Playco through payroll deductions. Playco
makes no matching contributions to this Plan.
b. OPERATING LEASES:
Playco leases its retail store properties under non-cancelable
operating lease agreements which expire through September 2005
and require various minimum annual rentals. Several of the
leases provide for renewal options to extend the leases for
additional five or ten-year periods. Certain store leases also
require the
F-23
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
payment of property taxes, normal maintenance and insurance on
the properties and additional rents based on percentages of
sales in excess of various specified retail sales levels.
During the years ended March 31, 1997 and 1996, Playco
incurred rental expense under all operating leases of
$2,681,728 and $2,841,215, respectively. Contingent rent
expense was insignificant during the years ended March 31,
1997 and 1996.
During the years ended March 31, 1997 and 1996, Playco
sub-leased portions of its warehouse building and a portion of
one of its retail locations under noncancelable operating
leases. Sub-lease income during the years ended March 31, 1997
and 1996 was $134,093 and $93,822 (Note 17).
At March 31, 1997 the aggregate future minimum lease payments
(receipts) due under these noncancelable leases are as
follows:
<TABLE>
<CAPTION>
Year Ending Operating Operating
March 31, Leases Sub-leases
<S> <C> <C>
1998 $2,099,491 $ (67,066)
1999 1,776,806 (65,937)
2000 1,641,013 (67,153)
2001 1,014,003 --
2002 774,325 --
Thereafter 1,968,345 --
Total minimum
lease payments
(receipts) $ 9,273,983 $ (200,156)
</TABLE>
NOTE 16 - COMMITMENTS AND CONTINGENCIES:
b. OPERATING LEASES:
United Textile sub-leases 20,000 square feet of industrial
space at 448 West 16th Street, New York, New York, at an
approximate rate of $12,500 per annum. It is at this location
that the Company maintains its administrative offices, factory
and warehouse. The sub-lease expires on December 31, 1998.
Until January 31, 1997, the Company also sub-leased a showroom
at 1400 Broadway, New York, New York. In order to reduce
expenses, however, the Company chose not to renew the
sub-lease when it expired on January 31, 1997.
F-25
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
c. DEPENDENCE ON SUPPLIERS:
Approximately thirty-one percent (31%) of Playco's inventory
purchases are made directly from five (5) manufacturers.
Playco typically purchases products from its suppliers on
credit arrangements provided by the manufacturers. The
termination of a credit line or the loss of a major supplier
or the deterioration of Playco's relationship with a major
supplier could have a material adverse effect on Playco's
business.
For the years ended March 31, 1997 and 1996, the Company
(United Textiles) purchased approximately 50% of its fabric
from one vendor. In addition, two subcontractors accounted for
approximately 25% each of labor costs incurred by the Company
for sewing and completion of its garments.
d. SEASONALITY:
Playco's business (toys) is highly seasonal with a large
portion of its revenues and profits being derived during the
months of November and December. Accordingly, in order for
Playco to operate, it must obtain substantial short-term
borrowings from lenders and Playco's suppliers during the
first three quarters of each fiscal year to purchase inventory
and for operating expenditures. Historically, Playco has been
able to obtain such credit arrangements and substantially
repay the amounts borrowed from suppliers and reduce
outstanding borrowings from its lender during the fourth
quarter of its fiscal year..
e. JOINT VENTURES:
On March 14, 1995, Playco entered into an agreement (the
"Agreement") with an individual to form a Limited Liability
Company (the "LLC") to engage in the distribution of toy
products. Profits, losses and distributions of the LLC were to
be allocated pursuant to the above percentage interests. On
December 31, 1995, Playco and the individual entered into a
termination agreement whereby the Playco withdrew form the
LLC. In connection therewith, Playco received am aggregate of
$32,000 representing Playco's share of net profits earned by
the LLC through December 31, 1995 and return Playco's initial
investment in the LLC totaling $800.
Playco made purchases from the LLC at five percent above the
LLC's cost which aggregated approximately$263,000 during the
year ended March 31, 996. Due to termination of this venture
in December 31, 1996, such agreement had no impact on Playco's
operations for the year ended March 31, 1997.
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - RELATED PARTY TRANSACTIONS:
OFFICE AND WAREHOUSE LEASE:
Playco leases an office and warehouse building from a
partnership which one of the partners is a officer,
stockholder and director of Playco. Rent expense under this
lease for the years ended March 31, 1997 and 1996 totaled
$227,546 and $227,916, respectively. The lease expires in
April 2000.
During the years ended March 31, 1997 and 1996, sub-lease
rental income included $68,173 and $54,422, from an entity in
which stockholders and employees of Playco have an ownership
interest.
CONSULTING AGREEMENT:
During the year ended March 31, 1997 Playco entered into a
consulting agreement with the stockholder of Toys
International. The term of the agreement commenced on January
16, 1997, expired on April 16, 1997 and called for three
monthly payments of $10,000 each. Expenses related to the
agreement totaled $6,666 for the year ended March 31, 1997.
NOTE 18 - BUSINESS SEGMENT INFORMATION:
The Company's operations have been classified into two
business segments: Women's apparel and retail toys. The
women's apparel segment includes the design, manufacture and
sale of women's formal wear. The retail toy segment consists
solely of the sale of toys by 17 retail outlets.
F-25
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - SUBSEQUENT EVENTS:
TERMINATION OF WAREHOUSE LEASE:
In April 1997. Playco negotiated a settlement with a landlord
for an excess warehouse facility, whereby Playco was released
from the lease obligation for a settlement of $60,000. This
early lease termination will result in annual savings of
approximately $235,000 based on the original scheduled lease
term through 2000.
b. ADDITIONAL FINANCING:
On various dates subsequent to March 31, 1997, affiliates of
the majority stockholder of United Textiles advanced amounts
aggregating $700,000 to Playco
Such advances have been represented by the providers to be
advances against the future issuance of equity securities, the
exact form and number of shares of which is yet to be
determined. The providers of such funds have further
represented that such advances are not a loan and Playco has
no obligation to repay such funds. Additionally, the
individual, beneficial, majority stockholder of United
Textiles has represented his intent and ability to provide
additional working capital to Playco, should such be
necessary, through September 1998.
CHANGES IN CAPITAL STRUCTURE:
On June 10, 1997, Playco mailed a Proxy Statement to its
shareholders announcing a special meeting of Playco's
stockholders to be held on June 30, 1997. The issues being
presented to stockholders' approval would have the following
effect on Playco's capital structure. In the Proxy Statement,
Playco has informed the stockholders that directors and
officers and other principal stockholders owning of record,
beneficially, directly and indirectly, an aggregate of
approximately 59.9% of the outstanding shares on the record
date, have agreed to vote in favor of approval of the
proposals.
A one-for-three reverse split of Playco's common stock.
Effects of such reverse split have been retroactively adjusted to
per share amounts in the financial statements. The elimination of
Series E Class I preferred stock. There are no shares of Series E
Class I preferred stock outstanding. The elimination of the
dividend provisions on the Series E preferred stock.
F-28
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. The reduction of the ration for Series E
preferred stock conversion to shares of common
stock from 20 to 1 to a ratio of 6 to 1.
5. The authorization for the issuance of up to
1,000,000 shares of Playco's Series E Class II
preferred stock by Playco for sale in an Initial
Public Offering. All of the aforementioned
proposals were approved by a majority of
Playco's stockholders.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARIES
EXHIBIT
FINANCIAL DATA SCHEDULE
ARTICLE 5 OF REGULATION S-X
The schedule contains summary financial information extracted from the
financial statements for the year ended March 31, 1997 and is qualified in its
entirety by reference to such statements.
</LEGEND>
<CAPTION>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> mar-31-1997
<PERIOD-END> mar-31-1997
<CASH> 144,668
<SECURITIES> 0
<RECEIVABLES> 213,433
<ALLOWANCES> 32,013
<INVENTORY> 7,124,035
<CURRENT-ASSETS> 7,826,624
<PP&E> 5,342,715
<DEPRECIATION> 2,864,009
<TOTAL-ASSETS> 10,637,347
<CURRENT-LIABILITIES> 9,213,460
<BONDS> 0
0
0
<COMMON> 97,881
<OTHER-SE> (908,099)
<TOTAL-LIABILITY-AND-EQUITY> 10,637,347
<SALES> 20,613,512
<TOTAL-REVENUES> 20,649,025
<CGS> 16,030,785
<TOTAL-COSTS> 16,030,785
<OTHER-EXPENSES> 9,062,876
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 663,018
<INCOME-PRETAX> (3,648,607)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,648,607)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,648,607)
<EPS-PRIMARY> (.43)
<EPS-DILUTED> (.43)
</TABLE>
