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, 1998
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 (IRS Employer Identification No.)
of Incorporation or Organization)
1410 Broadway, Suite 1602, New York, New York 10018
(Address of Principal Executive Offices)
(212) 391-1111
(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)
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, 1998 were
$23,019,748.
The aggregate market value of the voting stock on June 29, 1998 (consisting
of Common Stock, par value $.01 per share) held by non-affiliates was
approximately $167,642, based upon the average bid and asked prices for such
Common Stock on said date ($0.30), as reported by a market maker. On such date,
there were 4,550,236 shares of Registrant's Common Stock outstanding.
<PAGE>
Statements contained in this report which are not historical facts may
be considered forward looking information with respect to plans, projections, or
future performance of the company as defined under the private securities
litigation reform act of 1995. These forward looking statements are subject to
risks and uncertainties which could cause actual results to differ materially
from those projected.
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 commenced operations in October 1991. The Company formerly designed,
manufactured, and marketed a variety of lower priced women's dresses, gowns, and
separates (blouses, camisoles, jackets, skirts, and pants) for special occasions
and formal events. In April 1998, the Company ceased all operating activities;
it now operates solely as a holding company. All share and per share information
takes into account the 1 for 10 reverse stock split effective in March 1997.
On January 2, 1998, the Company issued 3,571,429 shares of common stock,
par value $0.01 per share (the "Common Stock"), to Multimedia Concepts
International, Inc. ("Multimedia"), at a price of $0.28 per share ($.01 above
the closing price on December 31, 1997) as payment for $1,000,000 loaned by
Multimedia to the Company. Multimedia is a company of which Ilan Arbel (the
Company's President) is President and a Director. As a result of the
transaction, the Company became a subsidiary of Multimedia, which owns 78.5% of
the outstanding shares of the Company's Common Stock.
Cessation of Business Operations
On April 15, 1998, the Company ceased operating its textile business. Since
that date, the Company has operated solely as a holding company for its
subsidiary Play Co. Toys & Entertainment Corp. ("Play Co.").
Prior to the cessation of its textile business, the Company designed,
manufactured, and marketed a variety of lower priced women's dresses, gowns, and
separates (blouses, camisoles, jackets, skirts, and pants) for special occasions
and formal events. The Company marketed its products under its Mister Jay
Fashions International, Lady Helene, Mister Jay Separates, and Junior for Mister
Jay labels. The Company sold 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 were purchased by women for weddings, parties,
dances, and other events requiring formal attire.
Ownership of Play Co. Toys & Entertainment Corp.
Until July 1996, the Company was the majority shareholder of American Toys,
Inc. ("American Toys"), the then majority shareholder of Play Co. By corporate
resolution dated June 1, 1996, the Company authorized American Toys to spin-off
(the "Spin-off Distribution") to its stockholders the Play Co. shares of common
stock owned by American Toys. The Spin-off Distribution was effected in August
1996.
The Company owns 2,486,247 of the outstanding shares, or 59.1%, of Play
Co.'s common stock, 578,742 of which shares were issued in August 1996 as a
result of the Spin-off Distribution. All of the Company's holdings of Play Co.
securities are subject to a two-year lock up on transfer commencing December
1997, in accordance with a lock up agreement executed in connection with Play
Co.'s Series E Preferred Stock offering.
<PAGE>
Business of Play Co. Toys & Entertainment Corp.
Play Co. Toys & Entertainment Corp. was founded in 1974, at which time it
operated one store under the name Play Co. Toys in Escondido, California. Play
Co. now operates 20 stores: 18 are located throughout Southern California in the
Los Angeles, Orange, San Diego, Riverside, and San Bernardino Counties, one is
located in Tempe, Arizona and one is located in Las Vegas, Nevada. Play Co. has
executed leases to build and open five additional stores during calendar 1998.
Play Co. expects that by the end of calendar 1998 it shall have 25 stores, 18 of
which (the "New Stores") shall follow Play Co.'s new concept and seven of which
(the "Original Stores") shall follow its old format.
In 1996, Play Co. redefined its corporate goals and philosophy, changing
its focus from the sale of traditional toys in stores located in strip shopping
centers to the sale of educational, new electronic interactive, and specialty
and collectible toys and items in high traffic malls. In light of its new focus,
Play Co. has redesigned four of its Original Stores to Play Co.'s new format,
opened five new locations, and acquired three stores in its acquisition of Toys
International, Inc. ("Toys"). Two of the five New Stores operate under the
tradename Toy Co. In conformance with its new goals, Play Co.'s New Stores shall
be smaller (5,000 to 10,000 square feet in size) and shall operate exclusively
in high traffic malls rather than in strip shopping centers.
Play Co.'s New Stores have and are expected to continue to produce higher
gross profits since they focus on the sale of educational and electronic
interactive games and toys, specialty products, and collector's toys, which
generally carry higher gross margins than traditional toys.
Acquisition of Toys International
In January 1997, Play Co. acquired substantially all of the assets of Toys
International, Inc. ("Toys"). The acquisition, in principal, included the
assignment to Play Co. of the three store leases held by Toys and Toys' entire
inventory. As part of the purchase agreement, Play Co. obtained the rights to
the Toys International and Tutti Animali tradenames and assumed the leases at
three store locations: two of such locations operate under the tradename Toys
International, and the third operate under the Tutti Animali tradename. The
total purchase price was $1,024,184, which consisted mainly of inventory and
certain prepaid expenses and deposits. The purchase price was tendered in the
form of a $759,184 cash payment remitted in January 1997 and the execution of
two promissory notes, aggregating $265,000, payable over a two year period. In
order to ensure a smooth transition in operations, the former president of Toys,
Mr. Gayle Hoepner, continued his relationship as a consultant to Play Co. for a
period of ninety days.
Series E Preferred Offering
On December 29, 1997, through West America Securities Corp. as agent, Play
Co. completed a public offering of its Series E Preferred Stock and Redeemable
Series E Stock Purchase Warrants. The offering raised $3,150,000 in gross
proceeds from which Play Co. realized net proceeds of $2,303,441 after
discounts, commissions, and expenses of the offering. The proceeds were
apportioned as follows: (i) $500,000 was placed in a restricted certificate of
deposit to secure a stand-by letter of credit in favor of FINOVA Capital
Corporation ("FINOVA"), Play Co.'s working capital lender (see "-- Financing");
(ii) approximately $140,000 has been expended for the relocation and enlargement
of Play Co.'s Toys store located in the Century City shopping center (Play Co.
expects to expend an additional $100,000 to complete the renovation)' (iii)
$250,000 was placed in a restricted short-term certificate of deposit as
collateral for a facility to issue letters of credit; (iv) approximately
$1,050,000 was used to pay down the FINOVA credit line to reduce interest
expenses; and (v) approximately $363,000 was used to reduce trade accounts
payable or to opportunistically purchase inventory from vendors on advantageous
terms.
<PAGE>
Merchandising Strategy; Refocusing of Corporate Direction
Traditionally, Play Co.'s merchandising strategy was to offer an
alternative, less intimidating environment than that provided by the larger toy
retailers who are in competition with Play Co. In particular, Play Co. 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. Play Co.'s merchandise is stacked from the
ground to the eye level of an adult, no more than six feet high. Play Co. has
augmented its product lines in its New Stores and will continue to provide these
quality services to patrons of all its stores. Beginning in 1996, management of
Play Co. 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
toys. In addition, Play Co. determined that it should place its stores in high
traffic malls, rather than in strip shopping centers where most of its Original
Stores have operated. To achieve its goals, Play Co. developed a new store
design and marketing format, which provides an interactive setting together with
a retail operation. This format and design has formed the foundation for Play
Co.'s future direction and growth plans, thereby allowing Play Co. to meet what
it believes are the industry's current and future demands. Play Co. has thus far
remodeled four Original Stores to fit its New Store design, opened six New
Stores, and acquired three New Stores (Toys stores). By the end of calendar year
1998, Play Co. intends to open five additional New Stores, the leases for which
were executed in the first calendar quarter of 1998, and thereby operate a total
of twenty-five stores. In calendar 1999, Play Co. expects to open an additional
six stores, bringing its total to 31. Play Co. shall continue to operate its
Original Stores until their leases expire, except with respect to certain stores
for which it is negotiating lease extensions, which stores it may redesign to
fit the New Store concept. Play Co. periodically reviews each individual store's
sales history and prospects on an individual basis to decide on the appropriate
product mix. As part of its business plan, Play Co. shall continue to assess
current and future trends and demands in the industry, refine its new format,
and analyze and evaluate markets for future store openings, product lines, and
marketing strategies. Play Co. shall continue to operate its stores under the
names it currently utilizes - Play Co. Toys, Toys International, Toy Co., and
Tutti Animali - and shall continue to open stores with such names contingent
upon the product mix and location of the store.
To a certain extent, mostly with respect to its Original Stores, Play Co.
offers a broad in-stock selection of products at prices generally competitive
within the industry. While Play Co. does not stock the depth or breadth of
selection of toys for its Original Stores as some of its larger competitors do,
Play Co. does strive to stock all basic categories of toys and all television
advertised items. Play Co. also offers a special order program for many items;
this program is free to its customers In June 1994, Play Co. began to sell toy
and hobby items on a wholesale basis to military bases located in Southern
California. In accordance with its new corporate focus, and given that wholesale
sales to military bases were minimal in fiscal 1998 (approximating $444,000, or
2% of sales), whereas they totaled approximately $619,000, or 3% of sales for
the year ended March 31, 1997, Play Co. has decided to cease such sales as of
July 1998.
Product Lines
The Original Stores sell children's and adult toys, games, bicycles, and
other wheel goods, sporting goods, puzzles, Nintendo and Sony electronic game
systems and cartridges for such game systems, cassettes, and books. They offer
over 15,000 items for sale, most of which are major brand name toys and hobby
products.
The New Stores also carry some of the items found in the Original Stores;
however, they focus on selling educational toys, Steiff and North America Bears,
Small World toys, LBG trains, CD-ROMs, electronic software games, Learning Curve
and Ty products. Play Co.'s Tutti Animali store, located in the Crystal Court
Mall in Costa Mesa, California, is a unique store which sells only stuffed
animals.
<PAGE>
Warehousing, Shipping and Inventory Systems
Until recently, Play Co.'s stores were serviced from two adjacent
distribution facilities (one 43,000 square feet in size, the other 5,200 square
feet in size) encompassing an aggregate of approximately 48,200 square feet.
Inventory and shipment of products continues to be monitored by a computerized
point-of-sale system. The point-of-sale system is a sophisticated scanning,
inventory control, purchasing, and warehouse system which allows each store
manager to monitor sales activity and inventory at each store and enables Play
Co.'s Officers to obtain reports on all stores. 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. Though this system, management continuously
analyzes the sales of its product lines and adjusts product mix in order to
maximize return and effectively manage its retail space. Play Co.'s stores
generally are restocked on a weekly basis, although certain stores and certain
items may be restocked at more frequent intervals. In addition, restocking of
products is increased during the fourth quarter, during the holiday season.
During the holiday season some stores and some items are restocked on a daily
basis. All shipments to stores in California are made by vehicles owned or
leased by Play Co.
Suppliers and Manufacturers
Play Co. purchases all of its products from manufacturers and wholesalers
and ships them to its stores from its distribution center. There are no written
contracts and/or agreements with any individual manufacturer or supplier;
rather, all orders are on a purchase order basis only. Play Co. relies on credit
terms from suppliers and manufacturers to purchase nearly all of its inventory.
Credit terms vary from company to company and are based upon many factors,
including the ordering company's financial condition, account history, type of
product and the time of year the order is placed. Such credit arrangements vary
for reasons both within and outside the control of Play Co. In past years Play
Co.'s credit lines decreased due to Play Co.'s then poor financial condition.
Recently, Play Co. has seen a significant increase in its credit lines based on
its improved financial condition and its ability to remain current with its
accounts payable.
Seasonality
Since inception, Play Co.'s business has been 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.
However, during fiscal 1998 and during the first quarter of fiscal 1999, Play
Co. has seen a significant increase in sales during the remaining three
quarters, giving a lesser effect to the fourth quarter holiday season, although
Play Co. does expect that the holiday season shall continue to represent a
significant (30-40%) portion of Play Co.'s annual sales. This adjustment in
revenues is due to Play Co.'s new store design and refocused product lines.
Trademarks
In 1976 and 1994, Play Co. received federal registrations for the
trademarks "Play Co. Toys" and "TKO." Play Co. Toys is a trademark utilized by
Play Co. in connection with its marketing and sales; TKO was used for certain
items Play Co. previously manufactured. In addition, Play Co. has applied for
the federal registration of the name "Toy Co." as a tradename of Play Co.: this
application is pending. Three of Play Co.'s New Stores, those located in Arizona
Mills, Ontario Mills, and Las Vegas operate under this name. In accordance with
its acquisition of Toys, Play Co. acquired the rights to the tradenames "Toys
International" and "Tutti Animali."
<PAGE>
Financing
On January 21, 1998, Play Co. entered into a $7.1 million secured,
revolving Loan and Security Agreement (the "FINOVA Agreement") with FINOVA. The
credit line offered under the FINOVA Agreement replaced the $7 million credit
line Play Co. had with Congress Financial Corporation (Western) ("Congress").
Play Co. paid off the Congress loan on February 3, 1998. Play Co. believes that
its credit availability against the cost value of its inventory under the FINOVA
Agreement will be comparable to its availability under the Congress loan. The
FINOVA credit line is secured by substantially all Play Co.'s assets and expires
on August 3, 2000. It accrues interest at a rate of floating prime plus one and
one-half percent.
Under the FINOVA Agreement, Play Co. is able to borrow against the cost
value of eligible inventory and is able to borrow up to $2.4 million against a
combination of $3 million in standby letters of credit in favor of FINOVA and
restricted cash provided by a subordinated loan compared to a $2 million advance
against $3 million in standby letters of credit under the Congress Arrangement.
$1.5 million of the $3 million in additional borrowing support from the standby
letters of credit was provided by an institutional investor in the form of a
subordinated loan; $1.0 million was provided in the form of a standby letter of
credit issued by Multimedia, an affiliate of Play Co.; the other $500,000 was
provided by Play Co.
Play Co. relies on credit terms from its suppliers and manufacturers to
purchase nearly all of its inventory. While its accounts payable to vendors is
current as of March 31, 1998, there can be no assurance that Play Co. will be
able to keep such payable current in the future. Credit arrangements vary for
reasons both within and outside the control of Play Co. See "-- Suppliers and
Manufacturers."
Play Co. has entered into one fixture financing agreement, with Pacifica
Capital, for the leasing of fixtures for its remodeled store in the Century City
Shopping Center located in west Los Angeles. The agreement is for a term of five
years and provides fixture financing in the approximate amount of $85,000. The
financing is secured by the store fixtures. Play Co. is negotiating two
additional fixture financing arrangements which it hopes to consummate by August
1998. There can be no assurance, however, that either such financing will be
consummated.
Competition
The toy and hobby products market is highly competitive. Though Play Co.'s
New Stores offer a combination of traditional, educational, new electronic
interactive, specialty, and collectible toys and items, Play Co. remains in
direct competition with local, regional, and national toy retailers and
department stores, including Toys R Us (considered to be the dominant toy
retailer in the United States), Kay Bee Toy Stores, K-Mart, and Wal Mart. Most
of Play Co.'s larger competitors are located in free-standing stores, not malls.
Kay Bee stores however, are located in malls, though their product line is
different than Play Co.'s. In addition, the toy and hobby products market is
particularly characterized by large retailers and discount stores with intensive
advertising and marketing campaigns and with deeply discounted pricing of such
products. Play Co. competes as to price, personnel, service, speed of delivery,
and breadth of product line. Many of Play Co.'s competitors have greater
financial and marketing resources than those of Play Co.
As a result of the continual changing nature of children's consumer
preferences and tastes, the success of Play Co. is dependent on its ability to
change and adapt to such changing tastes and preferences. Children's
entertainment products are often characterized by fads of limited life cycles.
Combining the traditional and educational toy segments of the market into one
retail location is believed to be a unique concept that should prove to
differentiate Play Co.'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. Play Co. will compete for the educational
toy customer with other specialty stores such as Disney Stores, Warner Bros.
Stores, Learning Smith, Lake Shore, Zainy Brainy, and Noodle Kidoodle.
<PAGE>
Most of the companies with which Play Co. compete have more extensive
research and development, marketing, and customer support capabilities and
greater financial, technological and other resources than that of Play Co. There
can be no assurance that Play Co. will be successful or that it can distinguish
itself from such larger, more well known entities. In addition, Play Co. does
not believe there are any significant barriers to entry to discourage new
companies from entering into this industry.
Employees
As of March 31, 1998, the Company had three executive officers and no other
employees. Play Co. has three executive officers, approximately 65 full time
employees, and approximately 259 part time employees. None of the employees of
Play Co. is represented by a union, and Play Co. considers employee relations to
be good. Each store employs a store manager, an assistant manager, and between
fifteen to twenty-five full-time and part-time employees. Each of Play Co.'s
store managers reports to Play Co.'s Director of Operations and Director of
Merchandising who in turn report directly to Play Co.'s Executive Officers.
ITEM 2. DESCRIPTION OF PROPERTY
Until April 1998, Company subleased 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 housed its administrative
offices, factory, and warehouse. 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 this sublease
when it expired on January 31, 1997.
In April 1998, in connection with the Company's cessation of its textile
operations, the Company moved its administrative offices to 1410 Broadway, Suite
1602, New York, New York 10018 and vacated its former office, factory, and
warehouse space at 448 West 16th Street. Its office space at this location is
leased to U.S. Apparel Corp., a subsidiary of Multimedia, the Company's parent
corporation, both of which have Mr. Arbel as their president. Pursuant to an
oral agreement with U.S. Apparel Corp., the Company pays no remuneration for its
use of the premises.
Play Co. maintains approximately 3,500 square feet of executive office
space and until recently, Play Co.'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, at
550 Rancheros Drive, San Marcos, California. As of April 15, 1997, however, Play
Co. returned 12,800 feet of the 18,000 square foot warehouse space to the
landlord. The combined 51,700 square foot office and warehouse space are leased
at an approximate annual cost of $281,000, the lease expiring on April 30, 2000.
The office and warehouse are leased from a company owned in part by Richard
Brady, the President and a Director of Play Co. Play Co. believes that the lease
is on terms no more or less favorable than terms it might otherwise have
negotiated with an unaffiliated party. In addition, Play Co. currently leases 18
stores in southern California and one store in Arizona. During the last calendar
quarter of 1997, Play Co. opened a temporary short-term seasonal store (in
Crystal Court Mall in Costa Mesa, California) and three new stores in high
traffic shopping malls: one in South Bay Galleria in Redondo Beach, California;
one in Ontario Mills in Ontario, California; and one in Arizona Mills in Tempe,
Arizona (Play Co.'s first store outside of southern California). In addition, in
1998, Play Co. has opened one store in Las Vegas, Nevada and has executed five
additional leases to open additional locations within the remainder of the 1998
calendar year.
Play Co. has recently completed the enlargement of one of its 19 stores,
the Toys store located in Los Angeles, California. The lease for this store
expired in January 1998 and was extended, at a new location within the same
mall, through and until March 31, 2001. Three of Play Co.'s other stores are
operating under leases that either also have expired or will expire in 1998, the
fate of such stores to depend upon Play Co.'s intentions and concomitant lease
negotiations with the landlords of same
<PAGE>
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 its
business. Play Co. 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 as described below.
In June 1997, in the Superior Court of the State of California, Los Angeles
County, Shook Development Corp. commenced suit against Play Co. for breach of
contract pertaining to premises leased by Play Co. from South San Dimas, a
California Limited Partnership. In addition, in the Superior Court of the State
of California, Orange County, Prudential Insurance Company of America commenced
suit against Play Co. for breach of contract pertaining to premises leased by
Play Co. In May 1997, in the Superior Court of the State of California, Los
Angeles County, PNS Stores, Inc. commenced suit against Play Co. and its former
guarantor for breach of contract pertaining to premises leased by Play Co. These
actions settled for an aggregate of $469,600 during fiscal year 1998.
In October 1997, in the Superior Court of the State of California, County
of San Bernardino, Foothill Marketplace commenced suit against Play Co. and its
former guarantor for breach of contract pertaining to premises leased by Play
Co. in Rialto, California. The lease for the premises has a term from February
1987 through November 2003. Play Co. vacated the premises in August 1997. Under
California State law and the provisions of the lease, plaintiff has a duty to
mitigate its damages. Plaintiff seeks damages, of a continuing nature, for
unpaid rent, proximate damages, costs, and attorneys' fees. This action is in
the discovery phase.
No Director, Officer, or affiliate of the Company or Play Co., nor any
associate of either, is a party to, or has a material interest in, any
proceeding adverse to the Company or Play Co.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Units were quoted on the Nasdaq SmallCap Stock Market until
August 28, 1997, at which time Nasdaq delisted the Company's securities. The
Company's Units are currently quoted on the OTC Bulletin Board. The following
table sets forth representative high and low closing bid quotes as reported by a
market maker for the Company's Units during the period February 8, 1993 through
August 28, 1997 when the Company's securities were listed on the Nasdaq SmallCap
Market. Thereafter, from August 29, 1998 through June 30, 1998, the chart
represents high and low closing prices as reported by a market maker for the
Company's securities during the period which the Company's securities were
listed on the OTC Bulletin Board. Bid and price 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
Calendar Period Low High
1996
<S> <C> <C>
04/01/96 - 06/30/96 0.63 2.00
07/01/96 - 09/30/96 1.00 2.25
10/01/96 - 12/31/96 0.25 0.91
1997
01/01/97 - 03/31/97(1) 0.156 1.00
04/01/97 - 06/30/97 0.81 1.00
07/01/97 - 08/28/97(2) 0.13 10.81
08/29/97 - 09/30/97 0.22 0.22
10/01/97 - 12/31/97 0.01 0.75
1998
01/01/98 - 03/31/98 0.27 0.75
04/01/98 - 06/30/98 0.25 0.30
</TABLE>
(1) Reflects the 1 for 10 reverse stock split in March, 1997.
(2) The Company was delisted from the Nasdaq SmallCap Stock Market on
August 28, 1998.
As of June 29, 1998, there were approximately 50 holders of record of the
Company's Common Stock, although the Company believes that there are
approximately 800 additional beneficial owners of shares of Common Stock held in
street name. As of June 29, 1998, 4,550,236 of the Company's shares of Common
Stock were outstanding.
3
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table summarizes certain selected financial data and is
qualified in its entirety by the more detailed financial statements contained
elsewhere in this document:
<TABLE>
<CAPTION>
1998 1997
------------------ -------
Balance Sheet Data:
<S> <C> <C>
Working capital (deficiency) $ 477,340 $ (1,386,836)
Total assets 14,359,762 10,637,347
Total current liabilities 8,769,627 9,213,460
Long-term obligations 7,055,549 226,925
Stockholders' equity (2,623,928) (810,218)
Operating Data:
Net sales $23,019,748 $20,613,512
Cost of sales 15,222,746 16,030,785
Total operating expenses 10,493,858 8,756,265
Net income (loss) (2,663,710) (3,648,607)
Income (loss) per common share (1) $( 2.09) $(3.73)
Weighted average shares outstanding (1) 1,276,424 978,805
- ---------------------------
</TABLE>
(1) adjusted for effects of 1 for 10 reverse stock split in March 1997
Results of Operations
Statements contained in this report which are not historical facts may be
considered forward looking information with respect to plans, projections, or
future performance of the Company as defined under the Private Securities
Litigation Reform Act of 1995. These forward looking statements are subject to
risks and uncertainties which could cause actual results to differ materially
from those projected.
The Company's Board of Directors voted to cease all manufacturing
activities as of March 31, 1998, due to continuing losses. The consolidated
financial statements contained herein in this document reflect the continuing
operations of the Company's subsidiary, Play Co.
For the year ended March 31, 1998 compared to the year ended March 31, 1997
Consolidated net sales for the year ended March 31, 1998 were $23,019,748.
This represented an increase of $2,406,236, or 11.7% over net sales of
$20,613,512 for the year ended March 31, 1997. The net increase was comprised of
an increase in Play Co.'s net sales of $2,944,251 and a decrease of $538,015 in
United Textiles & Toys Corp.'s net sales for the comparable period. United
Textiles & Toys Corp. reported net sales of $451,221 for the year ended March
31, 1998.
Approximately 2.46 million of Play Co.'s increase came from new stores
(including the three Toys International, Inc. stores) and the remaining $480,000
was attributed to a 3.7% increase in same store sales.
At the end of March 1998, Play Co. had 19 retail locations, compared to 21
retail locations at the end of March 1997. During fiscal 1998 Play Co. opened
four New Stores and closed six Old Stores.
<PAGE>
Consolidated cost of sales were $15,222,746 for the year ended March 31,
1998 as compared to $16,030,785 for the year ended March 31, 1997. This
represented a decrease of $808,039 or 5%. The decrease can be attributed again
to increased sales volume as well as a change in Play Co.'s merchandising mix to
augment its historical product base of lower marginal toys with educational and
specialty toys which generally produce better margins than traditional toys.
Consolidated operating expenses (total operating expenses less litigation
related expenses and depreciation and amortization) were $9,235,979 for the year
ended March 31, 1998 as compared to $8,305,145 for the year ended March 31,
1997. This represented an increase of $930,834 or 11%. The increase can be
attributed to a growth in rent expense, payroll, and related costs associated
with new store openings by Play Co. The remaining increase was due to shutdown
expenses by the Company.
Play Co. incurred $583,541 of litigation related expenses in the year ended
March 31, 1998. The expenses were associated with the closure of five store
locations and related subsequent litigation. This expense includes settlement
amounts relating to four of the five closed locations and the related legal fees
and costs. Play Co. remains in litigation regarding the fifth closed store.
Depreciation and amortization expense in the year ended March 31, 1998 was
$674,338 as compared to $451,120 in the year ended March 31, 1997. This
represented an increase of $223,218 or 49%. The primary reason for this increase
was the resultant depreciation on fixed assets purchased for four new stores
opened by Play Co. during the year ended March 31, 1998.
Total interest expense amounted to $815,520 for the year ended March 31,
1998. This represented a decrease of $154,109 of 16%. The decrease can be
attributed to lower borrowing by the Company.
For the year ended March 31, 1998, subsequent to the adjustment for the
minority interest in the net loss of Play Co., the Company reported a
consolidated net loss of $2,663,710 or $2.09 per common share. For the year
ended March 31, 1997, subsequent to the minority interest adjustment, the
Company reported a consolidated net loss of $3.73 which was adjusted for the
effect of a 1 for 10 reverse stock split in March 1997. Management attributes
the decrease in net loss per share to increased sales performance of the Play
Co. retail units.
4
<PAGE>
Liquidity and Capital Resources
At March 31, 1998, consolidated working capital was $477,340 as compared to
a working capital deficit of $1,386,836 as of March 31, 1997. This change in
consolidated working capital was largely due to the classification of Play Co.
borrowings under Play Co.'s new financing agreement as a long-term liability at
March 31, 1998 as compared to the borrowings under its previous financing
agreement that were classified as a current liability at March 31, 1997.
For the year ended March 31, 1998, consolidated operating activities
provided funds of $423,408 as compared to the year ended March 31, 1997 in which
$2,944,747 was used in operating activities. The decrease was due primarily to
the increase in accounts payable at March 31, 1998.
The Company used $3,288,529 in investing activities for the year ended
March 31, 1998 as compared to a usage of $1,023,707 for the year ended March 31,
1997. The increase is due to primarily to $2,250,000 used for the purchase of
restricted certificates of deposit, with the remainder related primarily to the
purchase of property and equipment primarily at four new stores opened by Play
Co. in the year ended March 31, 1998.
Consolidated financing activities generated funds of $3,379,831 during the
year ended March 31, 1997 as compared to a generation of $4,037,549 in funds
during the year ended March 31, 1997. The primary elements in the generation of
financing funds were net borrowings under a new financing agreement by Play Co.,
issuance of additional common shares by United Textiles and net proceeds
received by Play Co. from notes payable.
For the years ended March 31, 1998 and 1997, Play Co. generated losses of
$2,054,470 and $3,584,881 respectively, which amounts include the minority
shareholders pro rata share. As a result, consolidated net cash increased from
$144,668 at March 31, 1997 to $514,710 at March 31, 1998.
Trends Affecting Liquidity, Capital Resources and Operations
As a result of its planned merchandise mix change to emphasize specialty
and educational toys, Play Co. enjoyed significant increases in sales and gross
profits in the year ended March 31, 1998. While Play Co. believes that its new
product mix will remain popular with the consumer market for the remainder of
1998, there can be no assurance that this growth will continue. The history of
the toy industry indicates that there is generally at least one highly popular
toy every year.
Play Co.'s sales efforts are focused primarily on a defined geographic
segment consisting of the Southern California area and the Southwestern United
States. Play Co.'s future financial performance will depend upon continued
demand for toys and hobby items and on the general economic conditions within
that geographic market area, its ability to choose locations for new stores, its
ability to purchase product at favorable prices and on favorable terms, and the
effects of increased competition and changes in customer preferences.
5
<PAGE>
The toy and hobby retail industry faces a number of potentially adverse
business conditions including price and gross margin pressures and market
consolidation. Play Co. competes with a variety of mass merchandisers,
superstores and other toy retailers, including Toys R Us and Kay Bee Toy Stores.
Competitors that emphasize specialty and educational toys include Disney Stores,
Warner Bros. Stores, Learning Smith, Lake Shore, Zainy Brainy, and Noodle
Kidoodle. There can be no assurance that Play Co.'s business strategy will
enable it to compete effectively in the toy industry.
Seasonality
Play Co.'s operations are highly seasonal with approximately 30-40% of its
sales falling within the third quarter which encompasses the Christmas selling
season. Play Co. intends to open new stores throughout the year, but generally
before the Christmas selling season, which will make third quarter sales an even
greater percentage of the total year's sales.
Impact of Inflation
The impact on consolidated results of operations has not been significant.
Play Co. attempts to pass on increased costs by increasing product prices over
time.
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.
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.
6
<PAGE>
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 43 Chief Executive Officer,
President, and Director
Moses Mika 78 Director
Allean Goode 63 Secretary, Treasurer, and
Director
Rivka Arbel 44 Vice President and 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. He was the President, Secretary and a Director of Multimedia from
inception until June 12, 1995 upon the election of Sheikhar Boodram. Mr. Arbel
was re-elected as President of Multimedia in May 1996. In August 1995 Mr. Arbel
was re-elected as a Director of Multimedia. In May 1993, Mr. Arbel became a
Director of Play Co., and from June 1994 until his resignation in April 1997, he
was Chairman of the Board of Play Co. Since August 1995, Mr. Arbel has been a
Director of Multimedia. 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.
Moses Mika was appointed Director of the Company in March 1998. Mr. Mika
has been retired since 1989.
Allean Goode has been Secretary, Treasurer, and a Director of the Company
since September 1992. Ms. Goode was appointed Secretary and Treasurer of
Multimedia in March 1998. Ms. Goode was Assistant Secretary of Play Co. 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 March, 1996 to present she has been a Vice President of the Company. 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.
<PAGE>
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 1998, 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
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.
Summary Compensation Table
Annual Compensation
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e) (g)
Securities
Name and Principal Other Annual Underlying
Position Year Salary($) Bonus($)(1) Compensation($) Options/ SARs(#)
<S> <C> <C> <C> <C> <C>
Ilan Arbel(2) 1998 - - - -
Chief Executive Officer 1997 - - - 3,000,000
of the Company 1996 - - - -
</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.
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 and 400,000
pre-reverse split 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 "Certain Relationships and Related
Transactions"
<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.
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 or the guardian or legal representative of the
holder.
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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information at June 29, 1998, 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.
8
<PAGE>
<TABLE>
<CAPTION>
Name and Address Amount and Number
of Beneficial Owner of Beneficial Owner Percentage of Outstanding
<S> <C> <C>
Multimedia Concepts 3,571,429 78.5%
International, Inc.
1410 Broadway, Suite 1602
New York, NY 10018
Ilan Arbel (1) 0 --
c/o United Textiles &
Toys Corp.
1410 Broadway, Suite 1602
New York, NY 10018
Allean Goode 0 --
c/o United Textiles &
Toys Corp.
1410 Broadway, Suite 1602
New York, NY 10018
Moses Mika 0 --
c/o United Textiles &
Toys Corp.
1410 Broadway, Suite 1602
New York, NY 10018
Rivka Arbel (1) 0 --
c/o United Textiles &
Toys Corp.
1410 Broadway, Suite 1602
New York, NY 10018
Europe American 420,000 9.2%
Capital Foundation
Box 47
Tortola British Virgin Islands
Officers and Directors
as a Group 0 --
(4 persons)
- ---------------------------------------------------------
</TABLE>
(1) Does not include an aggregate of 3,000,000 and 400,000 shares purchased
pursuant to the exercise of options granted in May 1996 to Ilan Arbel and Rivka
Arbel, all of which were exercised and the underlying shares sold pursuant to an
S-8 registration statement. See "Certain Relationships and Related
Transactions."
9
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 and 400,000
pre-reverse split shares, respectively. Of the aggregate of 3,400,000 shares,
1,350,000 were exercised at a purchase price of $1.63 per share and 2,050,000
were exercised at a purchase price of $1.75. The price was 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.
Such options were exercised in May and June 1996, and the shares were
subsequently sold in June 1996.
On January 2, 1998, the Company issued 3,571,429 shares of its Common Stock
to Multimedia Concepts International, Inc. ("Multimedia"), a company of which
Ilan Arbel is President and a Director, at a price of $.28 per share ($.01 above
the closing price on December 31, 1997) as payment for $1,000,000 loaned by
Multimedia to the Company. As a result of the transaction, the Company became a
subsidiary of Multimedia, which owns 78.5% of the outstanding shares of Common
Stock of the Company.
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 31, 1998, in which it reported the
resignation of Sheikhar Boodram as Director.
(c) The following exhibits (except those marked with an "*," which are
filed herewith) were previously filed with the Commission and are incorporated
by reference herein, either (i) pursuant to the Company's registration statement
on form SB-2, File No. 33-55548-NY (the "SB-2) or as referenced. Pursuant to 17
C.F.R. '230.411 all exhibits are incorporated 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 (filed as an
exhibit to Form 10-KSB for the year ended March 31, 1994 and incorporated herein by reference).
3.6 - By-Laws of Play Co. (filed as an exhibit to Form 10-KSB for the year ended March 31, 1994 and
incorporated herein by reference).
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's Incentive Stock Option Plan.
10.2 - Sublease at 448 West 16th Street, New York, New York.
10.12 - Stock Purchase Agreement between Play Co. and American Toys (filed as an exhibit to Form 10-KSB for the
year ended March 31, 1994 and incorporated herein by reference)..
10.14 - Non-Competition Agreement between Play Co. and Rich Brady (filed as an exhibit to Form 10-KSB for the
year ended March 31, 1994 and incorporated herein by reference).
10.41 - Extension of Warehouse Lease (filed as an exhibit to Form 10-KSB for the year ended March 31, 1994 and
incorporated herein by reference).
10.59 - Waiver of Play Co.'s right to call shares of Messrs. Brady and Davidson. (filed as an exhibit to Form
10-KSB for the year ended March 31, 1994 and incorporated herein by reference).
10.65 - Compensation agreement between the Company, Ilan Arbel and Rivka Arbel. (filed as an exhibit to Form
10-KSB for the transition period of October 1, 1994 to March 31, 1995 and incorporated herein by
reference).
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>
10
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of MultiMedia Concepts International Inc.)
TABLE OF CONTENTS
March 31, 1998 and March 31, 1997
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Certified Public Accountant F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of March 31, 1998 and March 31, 1997 F-3
Consolidated Statements of Operations for the years ended March 31, 1998
and March 31, 1997 F-5
Consolidated Statement of Changes in Stockholders' Equity for the two years
in the period ended March 31, 1998 F-6
Consolidated Statements of Cash Flows for the years ended March 31, 1998
and March 31, 1997 F-7
Notes to Financial Statements F-9
</TABLE>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
Board of Directors United Textiles & Toys Corp.
We have audited the accompanying consolidated balance sheets of United
Textiles & Toys Corp. ( A subsidiary of MultiMedia Concepts International, Inc.)
as of March 31, 1998 and 1997 and the related statements of operations,
stockholders' equity, and cash flows for each of the two years in the period
ended March 31, 1998 and 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based upon our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of United Textiles & Toys Corp.
at March 31, 1998 and March 31, 1997, and the result of its operations and its
cash flows for each of the two years in the period ended March 31, 1998 and 1997
in conformity with generally accepted accounting principles.
JEROME ROSENBERG, CPA,P.C.
Syosset, New York
June 10, 1998
2
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of MultiMedia Concepts International, Inc.)
CONSOLIDATED BALANCE SHEETS
As of March 31, 1998 and March 31, 1997
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
ASSETS (Note 8)
CURRENT ASSETS:
<S> <C> <C>
Cash ............................................ $ 659,378 $ 144,668
Restricted certificate of deposit (Notes 4 and 8) 250,000 --
Accounts receivable ............................. 136,413 181,420
Inventories (Notes 2d and 8 ..................... 7,872,804 7,124,035
Prepaid expenses and other current assets ....... 189,516 252,901
Loans and advances-officer ...................... 138,856 123,600
----------- -----------
Total current assets .......................... 9,246,967 7,826,624
----------- -----------
PROPERTY AND EQUIPMENT-NET(Notes 2f and 7) ....... 2,782,386 2,478,706
----------- -----------
OTHER ASSETS:
Restricted certificate of deposit (Notes 4 and 8) 2,000,000 --
Deposits and other assets (Note 8 ................ 330,409 332,017
----------- -----------
Total assets .................................. $14,359,762 $10,637,347
=========== ===========
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of MultiMedia Concepts International, Inc.)
CONSOLIDATED BALANCE SHEETS
As of March 31, 1998 and March 31, 1997
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
<S> <C> <C>
Borrowings under financing agreement .................................... $ -- $ 4,438,875
Accounts payable ........................................................ 6,882,665 3,318,472
Accrued expenses and other current liabilities .......................... 817,788 510,447
Due to affiliates ....................................................... 719,174 804,000
Current portion of notes payable (Note 10 ) ............................. 350,000 141,666
------------ ------------
Total current liabilities ............................................. 8,769,627 9,213,460
------------ ------------
LONG-TERM LIABILITIES:
Borrowings under financing agreement (Note 8 ) ........................... 5,445,198 --
Note payable, net of current portion (Note 10) ........................... 1,500,000 100,000
Deferred rent liability .................................................. 110,351 126,925
------------ ------------
Total long-term liabilities ........................................... 7,055,549 226,925
------------ ------------
Total liabilities ..................................................... 15,825,176 9,440,385
------------ ------------
MINORITY INTEREST IN SUBSIDIARY .......................................... 1,158,514 2,007,180
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 4,8,9,10,11 AND 13)
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value; 10,000,000 shares authorized; 4,550,234
shares issued and outstanding at March 31, 1998 and 978,805 shares
issued and
and outstanding at March 31, 1997 ................................... 4,550 979
Additional paid-in capital ............................................. 8,142,281 7,145,852
Common stock subscribed ................................................. -- 150,000
Retained earnings (Deficit) ............................................. (10,770,759) (8,107,049)
------------ ------------
Total stockholders' equity ......................................... (2,623,928) (810,218)
Total liabilities and stockholders' equity $ 14,359,762 $ 10,637,347
------------ ------------
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of MultiMedia Concepts International, Inc.)
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended March 31,
1998 1997
<S> <C> <C>
Net sales ...................................................... $ 23,019,748 $ 20,613,512
------------ ------------
Cost of sales .................................................. 15,222,746 16,030,785
------------ ------------
Gross profit ................................................... 7,797,002 4,582,727
Operating expenses:
Operating expenses (Notes 14 and 15) ........................... 9,235,979 8,305,145
Litigation related expenses ( Note 11) ...................... 583,541 --
Depreciation and amortization ............................... 674,338 451,120
------------ ------------
Total operating expenses ........................... 10,493,858 8,756,265
------------ ------------
Operating (loss) ............................................ (2,696,856) (4,173,538)
------------ ------------
Other income:
Interest and other income .......................... -- 35,513
------------ ------------
(2,696,856) (4,138,025)
Interest expense: ( Note 8 )
Interest and finance charges ................................ 526,875 663,018
Amortization of debt issuance costs ......................... 288,645 306,611
------------ ------------
Total interest expense ...................................... 815,520 969,629
------------ ------------
(Loss) before Minority interest ................................ $ (3,512,376) (5,107,654)
Minority interest in net (loss)
of consolidated subsidiary (Note13) ........................ 848,666 1,459,047
------------ ------------
Net (loss) ..................................................... $ (2,663,710) $ (3,648,607)
============ ============
(Loss) per basic and diluted common share and share equivalents:
Net loss before minority interest ........................... $ ( 2.75) $ ( 5.22)
Minority interest in net loss ............................... .66 1.49
------------ ------------
Net (loss) ..................................................... $ (2.09) $ ( 3.73)
============ ============
Weighted average number
of common shares outstanding ................................. 1,276,424 978,805
============ ============
</TABLE>
See accompanying notes to financial statements
5
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of MultiMedia Concepts International, Inc.)
STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
Years Ended March 31, 1998 and March 31, 1997
<TABLE>
<CAPTION>
Additional Common
Common Stock Paid-in Stock Accumulated
Shares Amount Capital Subscribed Deficit
<S> <C> <C> <C> <C> <C> <C>
Balance, April 1, 1996 ....... 2,188,050 $ 21,881 $ 5,709,930 $ 150,000 $ (4,458,442)
Issuance of shares in lieu of
compensation ............... 3,400,000 34,000 1,339,020 -- --
Issuance of shares to
affiliate .................. 4,200,000 42,000 -- -- --
Reverse 1:10 stock split ..... (8,809,245) (96,902) 96,902
Net loss for the year ended
March 31, 1997 ............. -- -- -- -- (3,648,607)
------------ ------------ ------------ ------------ ------------
Balance, March 31, 1997 ...... 978,805 $ 979 $ 7,145,852 $ 150,000 $ (8,107,049)
Issuance of shares to
Multimedia ................. 3,571,429 3,571 996,429
Reversal of stock subscription (150,000)
Net loss for the year ended
March 31, 1998 ............. -- -- -- -- (2,663,710)
------------ ------------ ------------ ------------ ------------
Balance, March 31, 1998 ...... 4,550,234 $ 4,550 $ 8,142,281 -- $(10,770,759)
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of MultiMedia Concepts International, Inc.)
CONSOLIDATED STATEMENT OF CASH FLOWS
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
Year Ended
March 31, March 31,
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss ..................................................... $(2,663,710) $(3,648,607)
----------- -----------
Adjustments to reconcile net loss to cash (used)
provided for operating activities:
Depreciation and amortization .............................. 674,338 451,120
Deferred rent .............................................. (16,574) (71,010)
Minority interest in net loss of subsidiary ................ (848,666) (1,459,047)
Loss on abandonment of assets .............................. 45,255 --
Changes in assets and liabilities:
Decrease in Accounts receivable ............................. 45,007 131,648
(Increase) decrease in Merchandise inventories (748,769) 1,149,190
Decrease in prepaid expenses and other current assets ....... 63,385 85,943
Decrease in deposits and other assets ....................... 1,608 57,284
Increase in accounts payable ................................ 3,564,193 391,645
Increase (decrease) in accrued expenses and other liabilities 307,341 (32,913)
----------- -----------
Total adjustments ......................................... 3,087,118 703,860
----------- -----------
Net cash provided by operating activities ................. 423,408 (2,944,747)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of restricted certificates of deposit ............... (2,250,000) --
Purchases of property and equipment .......................... (1,023,273) (998,212)
Loans (made to) officer ..................................... (15,256) (35,495)
----------- -----------
Net cash (used for) investing activities .................. (3,288,529) (1,023,707)
----------- -----------
</TABLE>
See accompanying notes to financial statements
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of MultiMedia Concepts International, Inc.)
CONSOLIDATED STATEMENT OF CASH FLOWS
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C>
Net borrowings under financing agreement ..... 1,006,323 1,035,850
Loans and advances-affiliates ................ (84,826) 385,439
Issuance of common stock ..................... 1,000,000 --
Investment by minority shareholders .......... -- 2,374,594
Proceeds from notes payable .................. 1,750,000 241,666
Repayment of notes payable ................... (141,666)
Reversal of stock subscription ................ (150,000) --
----------- -----------
Net cash provided by investing activit 3,379,831 4,037,549
----------- -----------
NET INCREASE (DECREASE) IN CASH ............... 514,710 69,095
Cash, beginning of period ..................... 144,668 75,573
----------- -----------
Cash, end of period ........................... $ 659,378 $ 144,668
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid ................................. $ 526,875 $ 663,018
Taxes paid .................................... $ 800 $ 800
</TABLE>
See accompanying notes to financial statements
<PAGE>
UNITED TEXTILE & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of MultiMedia Concepts International, Inc.)
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 was engaged in the design, manufacturing and
marketing of a variety of lower priced women's dresses, gowns and separates for
special occasions and formal events. The Company's products were sold primarily
in retail clothing and department stores throughout the United States.
As a result of continuing losses, the Company's Board of Directors voted to
discontinue operating activities as of March 31, 1998.
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 Play Co. Toys & Entertainment Corp.
("Play Co."), the Company indirectly held the majority of Play Co. shares. By
corporate resolution dated June 1, 1996, the Company authorized its subsidiary,
American Toys to spin-off ("The Spin-off Distribution") the Play Co. common
shares owned by American Toys to American Toy's stockholders. The Spin-off
Distribution was affected in August 1996.
Note 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation:
The consolidated financial statements include the accounts of United
Textiles & Toys Corp. and its subsidiary Play Co. Toys and Entertainment Corp.
All material intercompany balances and transactions have been eliminated in
consolidation.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, revenues
and expenses and disclosure of contingent assets and liabilities at the date of
the financial statements. Actual amounts could differ from those estimates.
6
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of MultiMedia Concepts International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued)
c. Concentration of Credit Risk:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily 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.
d. Merchandise Inventories:
Merchandise inventories are stated at the lower of cost (first-in,
first-out method- "FIFO") or market.
Fair value of Financial Instruments:
The carrying amount of the Company's financial instruments, consisting
of accounts receivable, accounts payable and borrowings approximate their fair
value.
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.
g. Statements of Cash Flows:
For purpose of the statements of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three months or
less to be cash equivalents.
7
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of MultiMedia Concepts International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued)
h. Income Taxes:
The Company accounts for income taxes in accordance with Statement of
Financial Standards (SFAS) No. 109, Accounting for Income Taxes. Deferred income
taxes are recognized based upon the differences between financial statement and
income tax bases of assets and liabilities using enacted rates in effect for the
year in which the differences are expected to reverse. Valuation allowances are
established, when necessary, to reduce the deferred tax assets to the amount
expected to be realized. The provision for income taxes represents the tax
payable for the period and the change during the period in deferred tax assets
and liabilities, including the effect of change in the valuation allowance, if
any.
i. Net Loss Per Share:
During the three-month period ended December 31, 1997, the Company adopted
the provisions of SFAS No. 128, Earnings Per Share, which requires the
disclosure of "basic" and "diluted" earnings (loss) per share. Basic earnings
(loss) per share is computed by dividing net income (loss), by the weighted
average number of common shares outstanding. Diluted earnings (loss) per share
is similar in calculation except that the weighted average number of common
shares is increased to reflect the effects of potential additional shares that
would result from the exercise of stock options or other convertible
instruments.
j. Store Openings and Closing Costs:
Costs incurred by Play Co. to open a new retail location such as
advertising, training expenses, and salaries of newly hired employees are
generally expensed as incurred and improvements to leased facilities are
capitalized. Upon permanently closing a retail location, the costs to relocate
fixtures, terminate employees and other related costs are expensed as incurred.
In addition, the unamortized balance of any abandoned leasehold improvements are
expensed.
k. Impairment of Long-Lived Assets:
SFAS 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 No.
121 effective April 1, 1997. There was no impact of such adoption on the
Company's financial condition and results of operations.
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
A Subsidiary of MultiMedia Concepts International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued)
l. Stock-Based Compensation:
SFAS 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 Company adopted the disclosure requirements of SFAS No. 123 for
stock-based employee compensation effective April 1, 1996. However, the Company
continues to use the intrinsic value method for recording compensation expenses
as prescribed by Accounting Principles Board Opinion (APB) No. 125, Accounting
for Stock Issued to Employees.
The fair value method prescribed by SFAS No. 123 is used to record
stock-based compensation to non-employees.
m. Effect of New Accounting Pronouncements:
In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of an
Enterprise and Related Information. This statement requires public enterprises
to report financial and descriptive information about its reportable operating
segments and establishes standards for related disclosures about product and
services, geographic areas, and major customers. This pronouncement is effective
for fiscal years beginning after December 15, 1997 and the Company expects to
adopt the provisions of this statement in the fiscal year 1999. Management does
not expect this statement to significantly impact the Company's financial
statements.
In April 1998, the American Institute of Certified Public Accountant's
Accounting Standards Executive Committee issued Statement of Position (SOP)
98-5, Reporting on the Costs of Start-Up Activities. The SOP, which is effective
for fiscal years beginning after December 15, 1998 with earlier application
encouraged, requires entities to expense start-up and organization costs for
establishing new operations. Management does not expect this statement to
significantly impact the Company's financial statements.
n. Reclassification of Prior Year Amounts:
To enhanced comparability, certain reclassifications have been made to the
1997 financial statements, where appropriate, to conform with the financial
statement presentation used in 1998.
8
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of MultiMedia Concepts International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3- INVESTMENT BY MULTIMEDIA CONCEPTS INTERNATIONAL INC:
On January 2, 1998, The issued 3,571,429 shares of its common stock to
Multimedia Concepts International, Inc. ("Multimedia") a company of which the
Company's President is also President, Chief Executive Officer, and a Director.
The issuance of these common shares at a price of $.28 per share ($.01 above the
closing price on December 31, 1997) represented payment for $1,000,000 loaned to
the Company by Multimedia.
As a result of this transaction, Multimedia owns 78.5% of the outstanding
shares of common stock of the Company, effectively making the Company a
subsidiary of Multimedia. As the Company owns 59.1% of the outstanding shares of
common stock of Play Co., thus Multimedia and its management have obtained
beneficial vesting control of Play Co.
On January 20, 1998, U.S. Stores Corp. ("U.S. Stores") acquired 1,465,000
shares of Multimedia's of common stock. U.S. Stores was incorporated on November
10, 1997. The Company's president is also President and Director of U.S. Stores.
After this transaction, U.S. Stores held an aggregate of 1,868,000 shares of
Multimedia's common stock or 63% of the outstanding shares, effectively making
Multimedia a subsidiary of U.S. Stores.
On February 28, 1998, American Telecom Corporation ("American Telecom")
acquired 100% of the outstanding common shares of U.S. Stores. American Telecom
was incorporated on November 10, 1997. The Company's President is also President
and Director of U.S. Stores.
After this transaction, American Telecom effectively obtained beneficial
vesting control of the Company and its subsidiary, Play Co.
Note 4- RESTRICTED CERTIFICATE OF DEPOSIT:
At March 31, 1998, Play Co. has two certificates of deposit which are
restricted as to their nature. The first, in the amount of $2,000,000 represents
collateral against a letter of credit securing the FINOVA Financing ( Note 8)
and is classified as a non-current asset, as the funds in the certificate of
deposit will remain restricted until the letter of credit expires or is released
by FINOVA Capital Corporation. The second, in the amount of $250,000, is
collateral for a facility for letters of credit.
9
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
( A Subsidiary of MultiMedia Concepts International, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5- WORKING CAPITAL GUARANTEE OF MAJORITY SHAREHOLDER:
For the years ended March 31, 1998 and 1997, the Company's Play Co.
subsidiary reflected net losses of $2,054,470 and $3,584,881 respectively, which
amounts include minority shareholders' pro-rata share. The Company has also
reflected substantial losses, which reflects the Board of Directors' decision to
cease operating activities.
The individual, beneficial, majority shareholder of the Company has
represented his intent and ability to provide additional working capital to the
Company and its subsidiary, should such be necessary.
Note 6- LOANS AND ADVANCES-OFFICER:
As of March 31, 1998 and 1997, loans and advances to an officer,
aggregated $138,856 and $123,600, respectively, consisted of funds advanced by
the Company to an officer.
Note 7- FIXED ASSETS:
<TABLE>
<CAPTION>
Fixed assets consisted of the following:
March 31,
-------------------------
1998 1997
<S> <C> <C>
Furniture, fixtures and equipment $4,260,738 $3,737,523
Leasehold improvements 1,551,760 1,220,246
Signs 317,363 280,314
Vehicles 104,912 104,912
------- -------
6,234,773 $5,342,715
Less: Accumulated depreciation and amortization (3,452,387) (2,864,009)
---------- -----------
$2,782,386 $2,478,706
========= ==========
</TABLE>
10
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
( A Subsidiary of MultiMedia Concepts International, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8- FINANCING AGREEMENTS:
On February 7, 1996, Play Co. borrowed, under an agreement with Congress
Financial Corporation (Western) (the "Congress Financing"), approximately
$2,243,000, the proceeds of which were used to repay the then outstanding
borrowings under a bank line of credit agreement. The Congress Financing
provided for maximum borrowings up to $7,000,000 based upon a percentage of the
cost value of eligible inventory, as defined. Outstanding borrowings bore
interest at 1.5% above the prime rate, as defined.
In connection with the Congress Financing, and the previous bank line of
credit agreement, European American Capital Corp. ("EACC"), an affiliate,
provided a $2,000,000 letter of credit for collateral. As compensation to EACC,
the Play Co. granted EACC options to acquire shares of common stock, the value
of such options estimated at $224,000 by Play Co.; and options to acquire
additional shares of common stock and shares of Play Co.'s Series E preferred
stock, the value of these options estimated at $234,000 by Play Co. The
aggregate $458,000 was initially included in other assets, as debt issuance
costs, and additional paid-in capital. The option values were amortized into
interest expense through the February 1, 1998 maturity of the Congress
Financing, resulting in aggregate interest charges of $196,849 and $214,743 for
the years ended March 31, 1998 and 1997 respectively. No options to acquire
shares of common stock were exercised before the termination of the exercise
period.
The exercise of options to acquire shares of Series E preferred stock by
EACC, before the options terminated in December 1997 upon consummation by Play
Co.'s Series E preferred stock offering.
In March 1997, the Congress Financing was amended to provide or, among
other things, increased borrowing ratios and an additional $1,000,000 letter of
credit as collateral from EACC. Thereafter, the Congress Financing was
collateralized by an aggregate $3,000,000 in letters of credit through its
maturity on February 1, 1998.
On February 3, 1998, Play Co. borrowed , under an agreement with FINOVA
Capital Corporation (the "FINOVA Financing") $4,866,324, the proceeds of which
were used primarily to repay the then outstanding borrowings under the Congress
Financing, and to pay fees related to the FINOVA Financing. The FINOVA Financing
provides for maximum borrowings up to $7,100,000 based on 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,
1998 was 8.5%). The agreement matures on August 3, 2000 and can be renewed for
one additional year at the lender's option.
11
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
( A subsidiary of MultiMedia Concepts International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8- FINANCING AGREEMENTS (continued)
Total fees related to the FINOVA Financing aggregated $272,000 and are
being amortized over the 30-month term of the agreement. The unamortized portion
of these debt issuance costs, $353,858 is included in "deposits and other
assets" at March 31, 1998.
The FINOVA Financing includes a financial covenant requiring Play Co. to
maintain, at all times, net worth, as defined, of $750,000. At March 31, 1998,
Play Co. was in compliance with this financial covenant.
The FINOVA Financing is guaranteed by the Company and is secured by
substantially all of the assets of Play Co. and $3,000,000 in letters of credit.
Of the $3,000,000 in letters of credit, $2,000,000 is collateralized by amounts
held in a restricted certificate of deposit (Note 4). The remaining $1,000,000
letter of credit, has been provided by Multimedia the parent of the Company.
Note 9- ASSET PURCHASE AGREEMENT:
On January 16, 1997, the Board of Directors of Play Co. 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,
Play Co. 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 10).
12
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
( A Subsidiary of MultiMedia Concepts International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Note 10- NOTES PAYABLE:
March 31,
1998 1997
<S> <C> <C>
Note payable to ABC Fund, Ltd., an affiliate, bearing interest at 5%
per annum, principal due on August 15, 2000, accrued interest due on
May 10, 1998, and quarterly until debt paid
in full or converted( Note 13) $1,500,000
Note payable to Breaking Waves, Inc. , an
affiliate, bearing interest at 15% per annum,
payable in ten monthly installments of $25,000
plus accrued interest through maturity on
December 31, 1998. Note is subordinate
to the FINOVA Financing ( Note 8) 250,000
Note payable to stockholder of Toys International, non-interest
bearing, guaranteed by the Company, payable in quarterly installments
of $25,000 through maturity, on January 6, 1999. Note is subordinate to
FINOVA Financing
(Note 8) 100,000 200,000
Note payable to stockholder of Toys International, non-interest
bearing, guaranteed by the Company, payable in five installments
ranging from $11,667
to $15,000 through maturity, on June 16, 1997 - 41,666
------- --------
Total notes payable 1,850,000 241,666
Less: current portion (350,000) (141,666)
--------- ---------
Long-term portion $1,500,000 $100,000
========== ========
</TABLE>
13
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
( A subsidiary of MultiMedia Concepts International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11- CLOSURE OF RETAIL STORES-LITIGATION:
During the year ended March 31, 1998, Play Co. closed, and ultimately
vacated, five retail locations prior to the end of their lease terms. As a
result, four of the five landlords filed lawsuits against the Company to collect
unpaid rent as well as rental obligations remaining under the terms of the
respective leases.
Subsequent to the filing of actions by the landlords and through May 1998,
Play Co., with the assistance of outside counsel, reached settlement agreements
with the various landlords. These settlements aggregated $469,600.
The statement of operations for the year ended March 31, 1998 includes
$583,541 of "litigation related expenses" which comprise the settlement costs on
the aforementioned leases, legal fees associated with the negotiations and
monthly rentals for the locations since vacating the premises.
Play Co. currently has one remaining landlord/tenant matter which has yet
to be resolved. Play Co.'s management expects this matter to be resolved without
further material effects on the financial statements.
14
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of MultiMedia Concepts International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12- INCOME TAXES:
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The tax effects
of significant items comprising the Company's net deferred income tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
March 31,
-------------------------
1998 1997
----------------- -------
<S> <C> <C>
Inventories $(227,696) $(224,180)
AMT tax credits (23,260) (23,260)
Accrued expenses (24,534) (21,815)
-------- ---------
Current portion of net deferred
income tax (assets) liabilities (275,490) (269,255)
--------- --------
Depreciation and amortization (26,974) (230,925)
Loss on disposal of assets 25,926 -
Net operating loss carryforwards (3,877,473) (3,584,820)
Deferred rent liability (43,891) (50,945)
Income taxes 508 -
--- ----------
Long-term portion of net deferred
income tax (assets) liabilities (3,921,904) (3,866,690)
------------ -----------
Total net deferred income tax
(assets) liabilities (4,197,394) (4,135,945)
------------ -----------
Valuation allowance 4,197,394 4,135,945
---------- ----------
Net deferred income taxes $ - $ -
============= =============
</TABLE>
At March 31, 1998 and 1997, a 100% valuation allowance has been
provided on the net deferred income tax assets since the Company cannot
determine that it is "more likely than not" to be realized.
The reconciliation of income taxes computed at the federal statutory
tax rate to income taxes at the effective income tax rate in the statements of
operations is as follows:
<PAGE>
<TABLE>
<CAPTION>
March 31,
1998 1997
----------------- -------
<S> <C> <C>
Federal statutory income tax (benefit) rate (34.0)% (34.0)%
State income taxes, net of federal benefit 0.1 0.1
Change in valuation allowance 33.9 33.9
----- ----
Effective income tax rate -% -%
</TABLE>
15
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of MultiMedia Concepts International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12- INCOME TAXES: (continued)
At March 31, 1998, the Company has net operating loss (NOL)
carryforwards of approximately $4,000,000 for federal purposes and approximately
$3,800,000 for state purposes. The federal and state NOLs are available to
offset future taxable income and expire at various dates through September 30,
2015.
A portion of the NOLs described above are subject to provisions of the
Internal Revenue Code , Section 382, which limits use of net operating loss
carryforwards when changes in ownership of more than 50% occur during a three
year testing period.
Note 13- MINORITY INTERESTS IN SUBSIDIARY:
The Company owns a majority interest (59.1%) in Play Co.. The minority
interest liability represents the minority shareholders' portion (40.9%) of Play
Co.'s equity at March 31, 1998. The minority interest as reflected in the
consolidated balance sheet consists of Play Co.'s Series E preferred stock only.
Due to operating losses of Play Co., the minority interest in its common stock
has been written down to zero.
Note 14- COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Company until March 31, 1998 occupied space at 448 West 16th
Street, New York, NY, where it maintained its administrative offices, showroom ,
factory and warehouse. It vacated these premises and relocated to 1410 Broadway,
New York, NY where it occupies office space with its parent, Multimedia.
Multimedia (through its wholly owned subsidiary, U.S. Apparel Corp.) is the
prime tenant on the lease and has allowed the Company to occupy space on a rent
free basis.
Play Co. leases its retail store properties under noncancelable
operating lease agreements which expire through October 2007 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 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, 1998 and 1997, Play Co. incurred
rental expense under all operating leases of $3,112,822 and $2,681,728
respectively. Contingent rent expense was insignificant during the years ended
March 31, 1998 and 1997.
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
( A Subsidiary of MultiMedia Concepts International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14- COMMITMENTS AND CONTINGENCIES: (continued)
During the year ended March 31, 1997, Play Co. subleased portions of
its warehouse building and a portion of one of its retail locations under
noncancelable operating leases. Sub lease income for the year ended March 31,
1997 was $93,822. (Note 15)
At March 31, 1998, the aggregate future minimum lease payments due
under these noncancelable leases are as follows:
<TABLE>
<CAPTION>
Year Ending
March 31, Amount
<S> <C> <C>
1999 $2,541,123
2000 2,583,314
2001 2,103,669
2002 1,788,302
2003 1,665,152
Thereafter 3,919,531
---------
Total minimum lease payments $14,601,091
===========
</TABLE>
Termination of Warehouse Lease
In April 1997, Play Co. negotiated a settlement with a landlord for an
excess warehouse facility, whereby Play Co. 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 April 2000.
Convertible Debt Agreement
As discussed in Note 10, Play Co. has a $1.5 million note payable to
ABC Fund, an affiliate. Prior to the August 15, 2000 maturity date, the note
payable is convertible into the common stock of a subsidiary of Play Co. ABC
Fund may, at its option, convert all or a portion of the note and accrued unpaid
interest thereon into up to 25% of the common stock of the subsidiary at an
exercise price equal to the net book value of the subsidiary's shares.
16
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of MultiMedia Concepts International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14- COMMITMENTS AND CONTINGENCIES: (continued)
Dependence on Suppliers
For the year ended March 31, 1998, the Company (United Textiles) ceased
manufacturing activities. All remaining inventory has been disposed of.
Approximately thirty-one percent (31%) of Play Co.'s inventory purchases
are made directly from five (5) manufacturers. Play Co. typically purchases
products from it 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 Play Co.'s relationship with a major supplier could have a
material adverse effect on Play Co.'s business.
Seasonality
Play Co.'s business 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 Play Co. to operate, it must obtain substantial
short-term borrowings from lenders and its suppliers during the first
three-quarters of each fiscal year to purchase inventory and for operating
expenditures. Historically, Play Co. 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.
Note 15- RELATED PARTY TRANSACTIONS:
Office and warehouse lease
Play Co. leases an office and warehouse building from a partnership of
which one of the partners is a Company officer, stockholder, and director. Rent
expense under this lease for the years ended March 31, 1998 and 1997 totaled
$247,289 and $227,546, respectively. The lease expires in April 2000.
Sub-Lease
During the year ended March 31, 1997, sub-lease rental income included
$54,422 from an entity in which stockholders and employees of Play Co. have an
ownership interest. Sub-lease income was insignificant for the year ended March
31, 1998.
17
<PAGE>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARY
(A Subsidiary of MultiMedia Concepts International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15- RELATED PARTY TRANSACTIONS (continued)
Consulting Agreement
In January 1997, Play Co. entered into a consulting agreement with the
stockholder of Toys International as part of the purchase agreement with 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. As a
result, the expenses related to the agreement totaled $23,334 and $6,666 for the
years ended March 31, 1998 and 1997, respectively.
Consulting Fees
Play Co. made payments aggregating $25,000 and $7,000 to the Chairman of
the Board of Directors for various consulting services during the years ended
March 31, 1998 and 1997, respectively.
Commitment of Financing
The individual, beneficial majority stockholder of the Company, in a letter
dated May 15, 1998, has represented his intent and ability to provide additional
working capital to Play Co., should such be necessary, through September 1999.
Note 16- SUBSEQUENT EVENTS:
In April 1998, American Telecom in transaction in which shares were
exchanged, exchanged all its outstanding common shares with American Telecom,
PLC, a publicly traded company in Great Britain. After this transaction,
American Telecom effectively became a subsidiary of American Telecom PLC.
18
<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 22nd day of July, 1998.
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, 7/22/97
Ilan Arbel President, and Director Date
/s/Allean Goode Secretary, Treasurer, and 7/22/97
Allean Goode Director Date
/s/Moses Mika Director 7/22/97
Moses Mika Date
/s/Rivka Arbel Vice President and Director 7/22/97
Rivka Arbel Date
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
UNITED TEXTILES & TOYS CORP. AND SUBSIDIARIES
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, 1998 and is qualified in its entirety by
reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> mar-31-1998
<PERIOD-END> mar-31-1998
<CASH> 659,378
<SECURITIES> 0
<RECEIVABLES> 136,413
<ALLOWANCES> 0
<INVENTORY> 7,872,804
<CURRENT-ASSETS> 9,246,967
<PP&E> 6,243,773
<DEPRECIATION> (3,452,387)
<TOTAL-ASSETS> 14,359,762
<CURRENT-LIABILITIES> 8,769,627
<BONDS> 0
0
0
<COMMON> 4,550
<OTHER-SE> (2,628,478)
<TOTAL-LIABILITY-AND-EQUITY> 14,359,762
<SALES> 23,019,748
<TOTAL-REVENUES> 23,019,748
<CGS> 15,222,746
<TOTAL-COSTS> 15,222,746
<OTHER-EXPENSES> 10,493,858
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 815,520
<INCOME-PRETAX> (2,663,710)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,663,710)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,663,710)
<EPS-PRIMARY> (2.09)
<EPS-DILUTED> (2.09)
</TABLE>
